Posted on

How Do Child/Spousal Support Affect My Income Tax? – Top 6 Tips

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.

  1. 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.

  2. 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.

  3. “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).

  4. 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.

  5. 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.

  6. 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.

Posted on

Divorce Process – You Decided to Separate, Now What?

In this blog, we will discuss the following:

  • What constitutes a spouse, are you married or common law?
  • Limitation Periods – do you have the right to ask for support or property division?
  • You decided to separate – what does this mean?
  • So many options – Lawyers, mediators, arbitrators, courts…

Who is a Spouse?

In British Columbia, you are a spouse under the Family Law Act if:

  • You are or were married
  • You have lived with another person in a marriage-like relationship, sometimes called common-law, for a certain period of time

If you are common-law, you must have lived together for a minimum period of time to qualify as a spouse. In order to be considered a spouse for the purposes of dividing property or debt you must have lived together in a marriage-like relationship for at least two years.

But if you are applying for spousal support, you are considered a spouse if you have lived together in a marriage-like relationship for less than two years and have a child together.

Under the law, the start date of a spousal relationship is the day two individuals begin living together in a marriage-like relationship, or the day they were married, whichever is first.

Limitation Periods

If you fit within the meaning of a “spouse”, then do not forget about the Limitation Periods! Pursuant to section 195 of the Family Law Act, you must remember that a spouse can start a proceeding for an order for property division, pension division, or child and spousal support:

  1. No later than two (2) years after either divorce (if you were married) or;
  2. No later than two (2) years after you have seized leaving in a marriage-like relationship (two years since the separation).

Of course, these are serious rules, but sometimes not necessarily as stringent as they sound. For example, the running of the time limits set out above are suspended during any period in which you and your spouse have engaged in a family dispute resolution with a family dispute resolution professional. For example, if you and your spouse were involved in negotiations with your Family Justice Counsellor or there has been discussions between lawyers, the time limits have been suspended. If you are not sure whether your time limits are running out, we would suggest seeing a lawyer immediately for a consultation! It is worth it to find out about your rights and options and you do not necessarily have to hire that lawyer right away, you can leave and think about it!

Separation

Number one question newly separated clients ask is “what is legal separation and how do I do it?”. Should you draft a separation note and sign it? Should you agree on a date? In fact, no, you do not need to do any of this. You do not even have to move out of the house to be separated! The terminology used for separation is “being separate and apart”. Considering the cost of living reality in British Columbia, you can remain living in the same physical space, but still be separate and apart. Of course, if the living arrangements are not a practicable possibility due to conflict, then you should consider actually moving out. If you are amicable, perhaps you can stay in the home until you resolve your separation process! Once you decide to separate, then that is it. You can have a discussion about it and approximate the date of the separation. The date of separation is most important when it comes to time limits (see above), so again, do not hesitate to contact us for a consultation to discuss your options!

Options

This is the part of the consultation that depends heavily on your circumstances. A good lawyer will be able to quickly tell you what options seem good and which option should be avoided. For example, if you have already been served with a legal document filed in court, “wait and see” option hardly seems reasonable to suggest. However, if you have not even discussed your separation with your spouse, then “wait and see” option becomes viable and, in fact, rather sensible option (again, in cases when there are no conflicts or issues of violence). You do not have to go the route of lawyers and court should be the last resort in family law cases. You can consider discussing resolution with your spouse alone and drafting a separation agreement with the help of a lawyer or go through Family Justice Counsellors. However, when the issues become more complex, and you have to deal with parenting issues, division of debts and assets, figuring out business structure and incomes of parties, among many other issues, then you should seek consultation of a lawyer who will gladly guide you toward an option that is right for you!

Call us to make an appointment today at 604-477-1077 and we will gladly meet with you to discuss your particular situation!