Many separating families do not know that spousal support payments in Canada (sometimes called “alimony”) can have real tax consequences for both the person who pays it and the person who receives it. Lots of people also do not know that child support is treated differently than spousal support on their income taxes. With that in mind, here are our top 6 tips about how child and spousal support can affect your taxes.
- Child Support is Typically Not Taxable for the Person Receiving It (Or Tax-Deductible for the Person Paying It)
This means that parents receiving child support do not have to pay tax on that income, and parents paying child support do not get to deduct it from their income. The exception to this rule is if the child support is paid under a court order or written agreement which was made before May 1997, and which has not been changed to adjust the amount being paid – very rare in 2018.
- Monthly Spousal Support May Count as Taxable Income for the Person Receiving It, and May Be Tax-Deductible for the Person Paying It
Under certain conditions, “periodic” spousal support can count as taxable income for the person receiving it, and can be tax-deductible for the person paying. “Periodic” means that it is paid out according to a regular schedule, such as once a month. To be tax-deductible/taxable, spousal support generally needs to be paid under a court order or a written agreement.There are some other conditions and exceptions affecting how spousal support may be treated on your income taxes. For example, it can depend on the nature of the payments being made (such as whether they are paid to a third party – like making mortgage payments on your spouse’s behalf) and the specific wording of the order or agreement which says why and how the payments are made.
- “Lump Sum” Spousal Support is Generally Not Taxable for the Person Receiving It, and Not Tax-Deductible for the Person Paying It
“Lump sum” spousal support is a large one-time payment meant to satisfy the paying spouse’s entire support obligation at once. Spousal support paid out as a “lump sum” is generally not taxed as income by the person receiving it, and is not tax-deductible for the person paying it. This can mean that lump sum spousal support is potentially worth more than monthly support to person who receives it (who doesn’t pay tax) and less to the person who pays it (who doesn’t get the deduction each year).
- Periodic Spousal Support is Taxable/Tax-Deductible in the Calendar Year It Was Paid/Received
People who receive spousal support pay tax according to the amount of support they actually receive each year, plus their other income and any deductions. This determines their “tax bracket”. The higher a person’s tax bracket, the more income tax they will have to pay on the spousal support they receive. People who pay spousal support get to deduct the spousal support they pay each year from their income. This can potentially lower their tax bracket, meaning they have to pay less income tax on whatever they earned during the year.Spouses may therefore wish to work out a payment schedule that lets them reduce the tax that will be paid by the person receiving spousal support (ex: “front-loading” a payment schedule if he or she will be going to school/retraining for the first few years and earning less income during that period, putting them in a lower tax bracket) and/or maximize the tax break for the person paying spousal support.
- If an Order or Agreement Does Not Say Whether a Payment is Child Support or Spousal Support, it Will Probably Not Be Tax-Deductible
If child and spousal support payments are lumped together as one monthly payment, the person who pays may not be able to deduct it on their income taxes. This is because they will not be able to prove how much of the payment is non-deductible child support and how much is tax-deductible spousal support.
- Parents Who Owe Child Support Do Not Get to Deduct Spousal Support from their Income Taxes
Parents who pay both child and spousal support cannot choose to pay only the spousal support and then deduct that from their Canadian income taxes. That is because of a concept called “priority of child support”. Priority of child support means that, whenever a court order or agreement says that someone should pay both child and spousal support, any amounts paid by that spouse will be first considered to have been paid towards the child support they owe, and then the leftover amount (if any) will be considered spousal support.
So, if an agreement says that you will pay $500 per month in child support and $300 per month in spousal support, and you only pay $300 that month, the Canada Revenue Agency (CRA) will say that the $300 was actually for child support – even if you told your spouse it was for spousal support. The CRA will not let you deduct that $300 from your income taxes because, to them, it does not count as spousal support.
From the CRA’s point of view, you are now actually $200 behind in child support, and you did not pay any spousal support that month.If you owe child support in one tax year, the CRA will carry that forward to all following years until the child support is paid. That means that you won’t get to deduct any spousal support for any further years until you no longer owe that child support.
How you pursue and receive spousal support out can have real tax consequences for you and your family. That’s why it is important to have a lawyer’s help when you negotiate and write up an agreement for support with your spouse, or when you go to court to ask a judge for an order. The best solution for you will depend on your own particular circumstances. Make an appointment to find out how our team of knowledgeable and experienced family lawyers can help.