Difference between revisions of "Tax Implications of Support Payments"

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{{REVIEWEDPLS | reviewer = [http://bhmlawyers.ca/team-2/samantha-de-wit/ Samantha de Wit], Brown Henderson Melbye|date= April 2020}} {{Dial-A-Law TOC|expanded = divorce}}
{{REVIEWEDPLS | reviewer = [http://bhmlawyers.ca/team-2/samantha-de-wit/ Samantha de Wit], Brown Henderson Melbye|date= April 2020}} {{Dial-A-Law TOC|expanded = divorce}}
Different income tax rules apply to spousal support and child support. Spousal support payments are handled one way, and child support payments another. Learn how the tax rules affect you.
Many parents and spouses make support payments they owe under a support order or agreement. Unfortunately, some don’t make their payments. Learn what steps to take to enforce payments owed under a support order or agreement.
 
{{PLSStorybox
| image = [[File:IrenaPLS.png.png|link=]]
| text      = “Melina and I were arguing a lot. Last week she told me I had to move out. I didn’t know what to do. We bought our home together; it’s in both of our names! (Plus I’ve helped with the renos, the mortgage and the bill payments.) A lawyer told me I had just as much right to be in our home as Melina. The lawyer also told me that we can be separated while living in the same home. Now, I live downstairs and Melina lives upstairs while we figure out how to deal with our family issues.” <br>– Sergio, Maple Ridge, BC
}}


==What you should know==
==What you should know==


===Different tax rules apply to spousal support and child support===
===Court orders for support are different from agreements===
After a couple separates, one spouse may be obligated to pay the other '''spousal support''' to help with living expenses. If they have children, one parent may be obligated to pay the other '''child support''' to help cover the costs of raising them. (Or, both parents may be obligated to pay the other in a shared parenting arrangement).
After separation, one spouse may pay the other '''spousal support''' to help with living expenses. If the couple has children, one parent may pay the other '''child support''' to help with the costs of raising them.


Different tax rules apply to each of these types of support payments.
Spousal support or child support payments can be set out in a court order or a separation agreement.


Spousal support is considered '''taxable income''' for the spouse who receives it. It counts as a '''tax deduction''' for the spouse paying it.
A '''court order''' for support is a court’s decision that one person (the payor) pay the other person (the recipient) a certain amount, usually on a monthly basis. If support isn’t paid, the recipient can take steps to enforce a court order right away.


Child support, however, is generally '''not''' taxable or deductible.
A '''separation agreement''', on the other hand, is a private contract between partners who have separated. It can be enforced in the courts under the law of contracts. But it’s simpler to '''file''' the separation agreement in court. This allows it to be enforced as if it were a court order.


We explain these general rules and what these terms mean below.
===If child or spousal support is not paid===
If a payor doesn’t pay support under a court order or agreement, they owe money.


===Spousal support is usually taxable and deductible===
This is called '''arrears''' or '''arrears of support'''.
Spousal support payments are like any other kind of income. The spouse who receives them (the recipient) must report the support payments as taxable income to the Canada Revenue Agency. And they must pay '''income tax''' on the payments.


The spouse who pays the support (the payor) can claim it as a '''deduction'''. (It’s like deducting contributions to registered retirement plans or child care expenses). These deductions reduce the amount of income tax the payor has to pay.
There are two ways a recipient can collect arrears. They can:


===When spousal support payments are taxable and deductible===
# take steps '''themselves''' to enforce the support order or agreement in court, or
For spousal support payments to be taxable and deductible, all child support payments must be fully paid in the current and previous years. Also, the spousal support payments must be:
# get help from a '''free''' government program called the Family Maintenance Enforcement Program.


# Paid because of a written agreement or a court order. The written agreement or court order must clearly state the amount to be paid to the recipient as spousal support.
===Taking enforcement steps on your own===
# Paid on a periodic basis, such as once a month or once every two weeks. (Spousal support paid in a one-off lump sum is generally ''not'' taxable or deductible.)
If a payor hasn’t made support payments to you, you have many options to enforce payment. As long as a support order or a separation agreement has been filed in court, some things you can do include:
# Actually paid by the payor.


Spousal support that’s paid indirectly, such as by paying the mortgage, may not be taxable or deductible. If you are considering such an arrangement, you should get legal advice.
* Apply for a court order to '''garnish''' the payor's wages or bank accounts. This means that money from a payor’s wages or bank account is taken and redirected to you. Up to a maximum of 50% of the payor’s wages can be garnished. But, there is no limit on how much money can be garnished from a bank account.
* Apply for an order '''to sell''' some of their property to pay the arrears.


{| class="wikitable"
You can also force the payor to disclose information about their finances. Doing so can help you figure out how to best collect the arrears. For example, you can ask the payor to:
|align="left"|'''Tip'''
 
Spousal support decisions have serious tax consequences for both spouses. You should get advice from a family lawyer or tax advisor before signing a support agreement.
* Attend a '''default hearing'''. This is a court hearing where the payor has to explain why they aren’t paying support. They also have to provide a statement of their finances.
|}
* Attend an '''examination hearing'''. In this court hearing, you can question the payor under oath about their finances.
 
For any of these steps, you must apply to court and explain to a judge why the order you’re asking for should be granted. The process of applying to court can be complicated. It’s a good idea to speak with a lawyer first.
 
====Registering with the Family Maintenance Enforcement Program====
The Family Maintenance Enforcement Program (FMEP) is a free service provided by the provincial government. FMEP enforces support orders and agreements. The program collects support owed from a payor and sends it to the recipient.


====There must be a written agreement or a court order====
====How to enroll in the program====
For spousal support payments to be taxable and deductible, there has to be a '''written support agreement or court order'''. A couple can agree between themselves that spousal support will be paid. But the payor won’t be able to claim a deduction on their taxable income unless they have a written agreement or court order confirming the periodic spousal support.
Either a payor or recipient can enroll in FMEP as long as a support order or separation agreement has been filed in court. [http://www.fmep.gov.bc.ca/ The enrollment package is online]. Or you can request that FMEP mail you the package.


If the parties have a written separation agreement, it must state the separation date. It should also set out the terms of the spousal support payments to be made, including:
====After you’re enrolled in the program====
Once a case is enrolled, the payor sends all support payments to the program. FMEP processes them and then sends them on to the recipient. It tracks when payments are due, and how and when payments are made. If a payor misses payments and arrears add up, there are several steps FMEP can take. We explain this shortly.


* the date the support payments begin,
To withdraw from the program, the person who enrolled the support order or agreement with FMEP needs to send a request in writing.
* when the payments are due, and,
* the amount payable.


A spousal support order or written agreement must be registered with the Canada Revenue Agency. (You don’t need to register an order or agreement if it’s for child support only.) To register your spousal support order or agreement, you need to [https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1158.html fill out the '''registration of family support payments''' form]. Then submit it to the Canada Revenue Agency.
If it was the recipient who enrolled, they can withdraw at any time. If it was the payor who enrolled, the recipient has to agree to the payor’s withdrawal from the program.


{| class="wikitable"
{| class="wikitable"
|align="left"|'''Tip'''
|align="left"|'''Tip'''
Spousal support payments are tax deductible and child support payments aren’t. Because of this, an agreement or order must be clear about what kind of support is being paid and how much. If the agreement says one sum is to be paid for both spousal support and child support, the Canada Revenue Agency will treat the whole amount as child support. In that circumstance, the spouse paying support will not get a tax deduction.
After enrollment, a payor or recipient may want to '''change''' the support order or agreement. If they start any negotiations or legal action to make a change, they must let FMEP know.  
|}
|}


====The spousal support must be paid by a spouse to their spouse====
====What enforcement steps FMEP can take====
Generally speaking, spousal support payments are only taxable and deductible if they’re made by a spouse to a spouse or former spouse.
To enforce a support order or agreement, the Family Maintenance Enforcement Program can take all legal steps the support recipient could take on their own — and more. For example, FMEP can restrict the payor’s driver’s licence or take away their passport. We explain several steps here. [https://www.fmep.gov.bc.ca/paying-or-receiving-maintenance/enforcement-actions/ See the FMEP website for a full list of enforcement steps the program can take].


The payor shouldn’t have someone else make the support payments on their behalf, or pay them out of a joint account.
If support payments are missed and arrears are owed, the enforcement steps the program can take depend on:


Support payments aren’t usually deductible if they’re paid to someone else. A spouse might, for example, pay a smaller amount of spousal support. But, they may make up the difference by covering the mortgage on the family home. Before agreeing to this kind of payment arrangement, it’s important to get the advice of a lawyer or accountant. You want to be sure that Canada Revenue Agency will treat the support payments in the way that works best for your financial situation.
* how much money is owed,
* the current situation of the payor, and
* the actions the program thinks have the best chance of success in the circumstances.


====Proving that the spousal support payments were actually paid====
====Notice of attachment====
For spousal support payments to be taxable and deductible, the payments must be '''actually paid'''.
FMEP can issue a '''notice of attachment''' to any person or institution that owes money to the payor. The notice requires that the funds be redirected to the recipient through the program. Sources that can be attached include employers, banks, and WorkSafeBC. Federal government payments — such as income tax refunds and employment insurance benefits — can also be attached.


Problems can come up when support is paid in cash. One spouse might say they made a payment while the other spouse denies receiving it.
====Lien against property====
 
FMEP can file the support order against any property owned by the payor. This could include a car, manufactured home, or land. Doing so means the property can’t be sold or re-mortgaged without the support arrears being dealt with first.
It’s a good idea to make support payments by cheque, electronic money transfer, bank draft, or money order. These are ways that prove you paid. If a payment is made in cash, it’s important to get a signed receipt from the spouse. It should clearly state the amount, the date, and the purpose of the payment.
 
{| class="wikitable"
|align="left"|'''Tip'''
Keep a record of every spousal support payment. Keep copies of cancelled cheques or receipts of electronic money transfers. Make a note on each cheque or receipt what time period the payment covered.
|}


===Child support is usually not taxable or deductible===
====Cancelling or restricting the payor’s passport or driver’s licence====
For child support orders or agreements made '''after 1997''', there are no tax implications for child support payments. That is, the recipient can’t claim them and the payor can’t deduct them.
When a payor falls $3,000 or more behind in support payments and FMEP has been unable to collect the support, the program has additional steps it can take. FMEP can ask the federal government to suspend or deny a payor’s passport. As well, FMEP can tell ICBC to cancel or refuse to renew a payor’s current driver’s licence, or refuse to give or renew a payor’s [https://www.icbc.com/vehicle-registration/buy-vehicle/Pages/Registering-a-vehicle-in-B-C-.aspx motor vehicle licence] (without a vehicle licence, a payor can’t buy vehicle insurance).


====Parents with a child support order or agreement made before 1997==== 
These are serious steps. FMEP takes them only after having tried unsuccessfully to collect the support payments in other ways.
Up until 1997, child-support payments ''were'' taxable and deductible. So if child support is being paid under a written agreement or court order made '''before 1997''', those '''older rules apply'''. That is, in those cases, child support is taxable income for the recipient and is deductible from the payor’s taxable income.


{| class="wikitable"
====Court enforcement====
|align="left"|'''Tip'''
Ultimately, if a payor still doesn’t pay, FMEP can bring the case to court. In court, the payor has to explain why they didn’t pay support. The court can decide to take further action to enforce payment of the arrears — including putting the payor in jail.
Parents with an agreement or order made ''before'' 1997 can, legally, “grandfather in” the old rules which ''allowed'' tax credits and deductions for child support payments. But the couple can also agree '''not''' to. That is, they can agree that they will follow the ''current tax'' rules (so child support would not be taxable and deductible). If they do decide to go that route, they must file a form with the Canada Revenue Agency. Once they do this, they can’t go back to the old rules.
|}


===Some legal fees and expenses are tax deductible===
==Common questions==
For the support '''recipient''', the cost of '''getting or enforcing''' support is deductible from their income. That is, [https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-1-individuals/folio-3-family-unit-issues/income-tax-folio-s1-f3-c3-support-payments.html#toc9 legal fees for these actions ''can'' be deducted]. (Though only the fees relating to the support amount.)
===How successful is FMEP in collecting arrears?===
In most cases, support recipients enrolled with the program get some or all of the support that is due to them each year. However, some payors make it very difficult for FMEP to collect — even leaving the country to avoid paying support. Others may have no income or assets, or may be receiving income assistance. So it can take a long time to collect what’s owed to recipients. But FMEP will continue to pursue payments as long as the support recipient is enrolled with them.


The cost of defending a claim for support or payment of support is ''not'' deductible.
===When should I enroll with FMEP?===
It’s always a good idea to be proactive and enroll with the program if there are problems around support payments. If you’re a support recipient and the payor misses a payment, you should enroll immediately.


{| class="wikitable"
===Can I take enforcement steps on my own while I’m enrolled with FMEP?===
|align="left"|'''Tip'''
No. You need to contact the program to get permission before you can take enforcement action on your own.
Ask your lawyer for a letter estimating how much of their time on your file went towards the spousal support or child support claim. That will help you know how much you can deduct on your taxes.
|}


==Who can help==
==Who can help==


===With more information===
===With more information===
'''Canada Revenue Agency''' has information on their website about how taxes affect support payments.
The '''Family Maintenance Enforcement Program''' website explains how to enroll in the program. It also has information about the steps FMEP can take to enforce a support order or agreement. FMEP also has three client offices throughout BC.
 
* [https://www.fmep.gov.bc.ca/ Visit website]
 
The '''BC government''' website has information about enforcing a support order or agreement through FMEP.


* [https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/p102/support-payments.html Visit website]
* [https://www2.gov.bc.ca/gov/content/life-events/divorce/family-justice/who-can-help/family-maintenance-enforcement-program Visit website]


The '''Canadian Bar Association''' has an online resource called the ''Tax Matters Toolkit''. It explains the rules that apply when you separate or divorce, including child support rules.
The wikibook ''JP Boyd on Family Law'', hosted by Courthouse Libraries BC, has [http://wiki.clicklaw.bc.ca/index.php/Child_Support_Arrears information on arrears of child support] and [http://wiki.clicklaw.bc.ca/index.php/Spousal_Support_Arrears arrears of spousal support]. It also has information about enforcing child and spousal support orders.


* [https://www.cba.org/CBAMediaLibrary/cba_na/PDFs/Sections/taxMattersToolkitClients_Eng.pdf Visit website]
* [https://wiki.clicklaw.bc.ca/index.php/Enforcing_Orders_in_Family_Matters#Enforcing_orders_for_child_support_and_spousal_support Visit website]


===Free and low-cost legal help===
===Free and low-cost legal help===

Revision as of 02:12, 30 April 2021

This information applies to British Columbia, Canada. Last reviewed for legal accuracy by Samantha de Wit, Brown Henderson Melbye in April 2020.
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Many parents and spouses make support payments they owe under a support order or agreement. Unfortunately, some don’t make their payments. Learn what steps to take to enforce payments owed under a support order or agreement.

File:IrenaPLS.png.png
“Melina and I were arguing a lot. Last week she told me I had to move out. I didn’t know what to do. We bought our home together; it’s in both of our names! (Plus I’ve helped with the renos, the mortgage and the bill payments.) A lawyer told me I had just as much right to be in our home as Melina. The lawyer also told me that we can be separated while living in the same home. Now, I live downstairs and Melina lives upstairs while we figure out how to deal with our family issues.”
– Sergio, Maple Ridge, BC

What you should know

Court orders for support are different from agreements

After separation, one spouse may pay the other spousal support to help with living expenses. If the couple has children, one parent may pay the other child support to help with the costs of raising them.

Spousal support or child support payments can be set out in a court order or a separation agreement.

A court order for support is a court’s decision that one person (the payor) pay the other person (the recipient) a certain amount, usually on a monthly basis. If support isn’t paid, the recipient can take steps to enforce a court order right away.

A separation agreement, on the other hand, is a private contract between partners who have separated. It can be enforced in the courts under the law of contracts. But it’s simpler to file the separation agreement in court. This allows it to be enforced as if it were a court order.

If child or spousal support is not paid

If a payor doesn’t pay support under a court order or agreement, they owe money.

This is called arrears or arrears of support.

There are two ways a recipient can collect arrears. They can:

  1. take steps themselves to enforce the support order or agreement in court, or
  2. get help from a free government program called the Family Maintenance Enforcement Program.

Taking enforcement steps on your own

If a payor hasn’t made support payments to you, you have many options to enforce payment. As long as a support order or a separation agreement has been filed in court, some things you can do include:

  • Apply for a court order to garnish the payor's wages or bank accounts. This means that money from a payor’s wages or bank account is taken and redirected to you. Up to a maximum of 50% of the payor’s wages can be garnished. But, there is no limit on how much money can be garnished from a bank account.
  • Apply for an order to sell some of their property to pay the arrears.

You can also force the payor to disclose information about their finances. Doing so can help you figure out how to best collect the arrears. For example, you can ask the payor to:

  • Attend a default hearing. This is a court hearing where the payor has to explain why they aren’t paying support. They also have to provide a statement of their finances.
  • Attend an examination hearing. In this court hearing, you can question the payor under oath about their finances.

For any of these steps, you must apply to court and explain to a judge why the order you’re asking for should be granted. The process of applying to court can be complicated. It’s a good idea to speak with a lawyer first.

Registering with the Family Maintenance Enforcement Program

The Family Maintenance Enforcement Program (FMEP) is a free service provided by the provincial government. FMEP enforces support orders and agreements. The program collects support owed from a payor and sends it to the recipient.

How to enroll in the program

Either a payor or recipient can enroll in FMEP as long as a support order or separation agreement has been filed in court. The enrollment package is online. Or you can request that FMEP mail you the package.

After you’re enrolled in the program

Once a case is enrolled, the payor sends all support payments to the program. FMEP processes them and then sends them on to the recipient. It tracks when payments are due, and how and when payments are made. If a payor misses payments and arrears add up, there are several steps FMEP can take. We explain this shortly.

To withdraw from the program, the person who enrolled the support order or agreement with FMEP needs to send a request in writing.

If it was the recipient who enrolled, they can withdraw at any time. If it was the payor who enrolled, the recipient has to agree to the payor’s withdrawal from the program.

Tip

After enrollment, a payor or recipient may want to change the support order or agreement. If they start any negotiations or legal action to make a change, they must let FMEP know.

What enforcement steps FMEP can take

To enforce a support order or agreement, the Family Maintenance Enforcement Program can take all legal steps the support recipient could take on their own — and more. For example, FMEP can restrict the payor’s driver’s licence or take away their passport. We explain several steps here. See the FMEP website for a full list of enforcement steps the program can take.

If support payments are missed and arrears are owed, the enforcement steps the program can take depend on:

  • how much money is owed,
  • the current situation of the payor, and
  • the actions the program thinks have the best chance of success in the circumstances.

Notice of attachment

FMEP can issue a notice of attachment to any person or institution that owes money to the payor. The notice requires that the funds be redirected to the recipient through the program. Sources that can be attached include employers, banks, and WorkSafeBC. Federal government payments — such as income tax refunds and employment insurance benefits — can also be attached.

Lien against property

FMEP can file the support order against any property owned by the payor. This could include a car, manufactured home, or land. Doing so means the property can’t be sold or re-mortgaged without the support arrears being dealt with first.

Cancelling or restricting the payor’s passport or driver’s licence

When a payor falls $3,000 or more behind in support payments and FMEP has been unable to collect the support, the program has additional steps it can take. FMEP can ask the federal government to suspend or deny a payor’s passport. As well, FMEP can tell ICBC to cancel or refuse to renew a payor’s current driver’s licence, or refuse to give or renew a payor’s motor vehicle licence (without a vehicle licence, a payor can’t buy vehicle insurance).

These are serious steps. FMEP takes them only after having tried unsuccessfully to collect the support payments in other ways.

Court enforcement

Ultimately, if a payor still doesn’t pay, FMEP can bring the case to court. In court, the payor has to explain why they didn’t pay support. The court can decide to take further action to enforce payment of the arrears — including putting the payor in jail.

Common questions

How successful is FMEP in collecting arrears?

In most cases, support recipients enrolled with the program get some or all of the support that is due to them each year. However, some payors make it very difficult for FMEP to collect — even leaving the country to avoid paying support. Others may have no income or assets, or may be receiving income assistance. So it can take a long time to collect what’s owed to recipients. But FMEP will continue to pursue payments as long as the support recipient is enrolled with them.

When should I enroll with FMEP?

It’s always a good idea to be proactive and enroll with the program if there are problems around support payments. If you’re a support recipient and the payor misses a payment, you should enroll immediately.

Can I take enforcement steps on my own while I’m enrolled with FMEP?

No. You need to contact the program to get permission before you can take enforcement action on your own.

Who can help

With more information

The Family Maintenance Enforcement Program website explains how to enroll in the program. It also has information about the steps FMEP can take to enforce a support order or agreement. FMEP also has three client offices throughout BC.

The BC government website has information about enforcing a support order or agreement through FMEP.

The wikibook JP Boyd on Family Law, hosted by Courthouse Libraries BC, has information on arrears of child support and arrears of spousal support. It also has information about enforcing child and spousal support orders.

Free and low-cost legal help

Options for legal help include legal aid, pro bono services, legal clinics, and advocates. See our information on free and low-cost legal help.

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