Spousal Support and Taxation

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BY VALERIE DYE

Spousal support payments can be made in several ways. They can be made retroactive to a date before the application was brought before the court, they may be made in a lump sum or may be made periodically.  An order or agreement for payment of spousal support may be either for indefinite support or for support over a brief period. Payment of spousal support may also be binding upon the payor’s estate so that if the payor dies this does not end the recipient spouse’s entitlement to receive support.

Taxation of support payments

The Canada Revenue Agency has issued interpretation bulletins regarding the taxation of support payments. The most recent update to the bulletin is chapter S1-F3-C3. The Canada Revenue agency has determined that support payments may be taxable and tax deductible in certain cases. It should be noted that whereas child support payments ordered after 1997 are neither taxable nor tax deductible, spousal support payments are both taxable and tax deductible.  In addition, whether or not spousal support is taxable to the recipient and tax deductible to the payor depends in the manner in which the support is made and also on whether it fits the requirements stated by the Canada revenue agency.

To qualify as a support payment for the purpose of taxation the payment must be made as an allowance on a periodic basis; it must be made either for the support of the spouse or for the spouse and children; the amount must be payable under a court order or written agreement.

While these requirements seem straightforward, they have implications for whether or not there can be tax consequences from the payment.  More particularly, since the requirement for tax purposes is that the payment should be periodic, a lump sum payment may not be tax deductible by the payor or taxable to the recipient.  Furthermore, even periodic payments must be carefully applied in order to be tax deductible.  According to the Canada Revenue Agency, weekly or monthly payments easily qualify as periodic payments. However, if payments ae made over longer periods such as every six months or every year, those payments may be considered as payments of installments of a lump sum payment and may not qualify for tax deduction.

In terms of determining whether or not a payment qualifies as an allowance it is not necessary for the amount of the payment to be specified.  The amount may be stated as a percentage of the payor’s earnings or as a percentage of bonuses which the payor receives regularly.  However, if these bonuses are not received at regular intervals then the payments from such will not qualify as support for taxation purposes.

To benefit from tax consequences the payor also needs to ensure that the support payment is being made pursuant to a court order or agreement. Payments made before the date of a court order or agreement will only be tax deductible if made during the year the order or agreement was made or during the preceding year. Any payments made before the year preceding the date of the order or agreement will not be tax deductible or taxable.

Although the issues mentioned here relate more to taxation than to family law they are important considerations for parties who will be paying or receiving support payments. For instance, it is very common for support payments to be made in a lump sum and parties need to be aware that in such cases there will be no tax benefits to the payor.

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