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Difference between revisions of "Spousal Support"
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→Spousal support and income tax
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A spouse who pays support on a periodic basis is entitled to claim the whole amount of his or her payments as a deduction against his or her taxable income, just like an RRSP contribution. The recipient is obliged to claim the support he or she has received as taxable income, just like employment income, and the recipient will wind up owing money to the government at tax time each year. | A spouse who pays support on a periodic basis is entitled to claim the whole amount of his or her payments as a deduction against his or her taxable income, just like an RRSP contribution. The recipient is obliged to claim the support he or she has received as taxable income, just like employment income, and the recipient will wind up owing money to the government at tax time each year. | ||
To claim spousal support payments as a tax deduction, the order or agreement | To claim spousal support payments as a tax deduction, the order or agreement that obliges the payor to make the spousal support payments must clearly state that the payments are for ''spousal support'' and the payments must be ''periodic'' in nature rather than paid as a lump sum. Without these clear statements, the federal ''Income Tax Act'' requires the payments to be treated as child support payments, and child support payments are neither tax deductible for the payor nor taxable income for the recipient. | ||
Lump-sum spousal support payments are neither deductible for the payor nor taxable for the recipient. | Lump-sum spousal support payments are neither deductible for the payor nor taxable for the recipient. | ||
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If you want to ensure that the money you are paying as spousal support is deductible, there are a couple of important points you must pay attention to in order to satisfy the tax man: | If you want to ensure that the money you are paying as spousal support is deductible, there are a couple of important points you must pay attention to in order to satisfy the tax man: | ||
*'''Court Orders:''' The order must clearly state a fixed, periodic sum | *'''Court Orders:''' The order must clearly state a fixed, periodic sum that is being paid, and this fixed sum must be described as "spousal support". | ||
*'''Separation Agreements:''' In addition to a term describing a fixed, periodic sum as "spousal support", the agreement must also | *'''Separation Agreements:''' In addition to a term describing a fixed, periodic sum as "spousal support", the agreement must also state that the parties have been separated since a certain date and intend to continue to live separate from each other. Payments for child support and spousal support should never be expressed as a single amount. | ||
*'''Unwritten Agreements:''' In general, the tax man will not recognize anything other than a written separation agreement or a court order. There are some exceptions to this rule, but you really should arrange your support payments in a formal fashion. | *'''Unwritten Agreements:''' In general, the tax man will not recognize anything other than a written separation agreement or a court order. There are some exceptions to this rule, but you really should arrange your support payments in a formal fashion. | ||
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The payment of spousal support will require the recipient to pay additional taxes each year since the payments received must be reported as income. | The payment of spousal support will require the recipient to pay additional taxes each year since the payments received must be reported as income. | ||
A recipient of support may also be subject to other tax consequences that aren't so obvious. One of the more common ways this can happen is if the payor is making the payments indirectly, through a company he or she owns. For example, say that Bob, the owner of Bob's Brewery, writes his spousal support cheques on the company bank account of Bob's Brewery instead of from his personal chequing account. In a case like this, the recipient risks having the payor declare the money to have been paid as a corporate dividend or as salary as if the recipient | A recipient of support may also be subject to other tax consequences that aren't so obvious. One of the more common ways this can happen is if the payor is making the payments indirectly, through a company he or she owns. For example, say that Bob, the owner of Bob's Brewery, writes his spousal support cheques on the company bank account of Bob's Brewery instead of from his personal chequing account. In a case like this, the recipient risks having the payor declare the money to have been paid as a corporate dividend or as salary as if the recipient were a shareholder or employee of the company. | ||
In the case of support declared as salary, the recipient might also face an unexpected bill from EI or CPP for missed payments, as well as for underpaid tax from the Canada Revenue Agency. In the case of support paid as a dividend, the payments might be taxed at the corporate tax rate, which may be higher than the recipient's personal tax rate. | In the case of support declared as salary, the recipient might also face an unexpected bill from EI or CPP for missed payments, as well as for underpaid tax from the Canada Revenue Agency. In the case of support paid as a dividend, the payments might be taxed at the corporate tax rate, which may be higher than the recipient's personal tax rate. | ||