Introduction – Spousal and Child Support Payments and How they Affect Your Taxes
Paying or receiving spousal or child support payments generally results in tax implications. A support payment payer may be entitled to deduct the paid amounts from his/her income, while a recipient may have to include the amounts in his/her income. Both spousal support payments and child support payments are subject to different rules to determine whether they're deductible/included in income or not.
Tax treatment of Spousal Support
Generally, to be eligible to deduct or be obligated to include spousal support in computing your taxable income, there must be
- A Court order or written spousal agreement that clearly states the amount paid from one spouse or common-law partner to the other and mentions that the payment is for spousal support;
- No outstanding child support payments for the current and previous years; and
- A separation between you and your spouse with respect to living accommodations
As the payer, if you're employed, you can fill out a T1213 form to request a tax deduction at source. This would reduce what your employer deducts from your pay. As the recipient, you can fill out and provide to your employer a TD1 to increase the amount of tax paid from your salary. Both the payer and payee can further deduct from their taxable income any legal fees associated with arranging the spousal support payment.
These rules only apply to monthly spousal support payments. A one-time lump sum spousal support payment is not tax deductible from the payer's income tax calculations and is not required to be included in the payee's taxable income. Legal fees associated with the lump-sum support payment are also not tax deductible.
An exception to the non-deductibility of lump sum support payments is if it was made to satisfy amounts owing from prior years. In this case, the amount is deductible by the payor and included by the payee in the years where the payment should have been made. A T1198 statement would also have to be submitted to the Canada Revenue Agency (CRA). If the payee is making a lump sum payment as security for future payments, this lump sum is also tax deductible for the payee and must be included in the tax calculations of the payor.
As the payee, if you're receiving payments from your former spouse's estate, you do not need to include the payment in your taxable income. Advice from an experienced Canadian tax lawyer is very important in determining the tax treatment of lump-sum support payments.
Taxation of Child Support Payments
Child support payments are generally not deductible by the payer or included in taxable income by the payee if a written agreement or Court order was made after April 1997. Payments made pursuant to a Court order or agreement made before May 1997 are deductible by the payor and included into the payee's income, unless they elect to follow the post-April-1997 rules. To do this, both spouses must agree to this election by signing a Form T1157.
Tax Tips from an Experienced Canadian Tax Lawyer on the tax Deductibility and Non-Deductibility of Spousal and Child Support
One inherent condition of spousal and child support payments being deductible or included in income for tax purposes is that they must actually be paid. It's important to keep records of the support payment made from one spouse to another if the payor is going to tax deduct the amount and the payee is going to include it in income. Ideally, the payee should not make the support payments in cash. Electronic money transfers, bank draft, old-fashioned chance and other recorded methods of transactions are a better alternative. If the Canada Revenue Agency decides to audit the payee or the payor, electronic money transfers or bank drafts or checks are evidence that the money was paid, while cash payments cannot provide a tax audit trail.
Further, it's not advised that child support payments and spousal support payments be combined or amended and paid together. For example, if spouse A owes spouse B $600 for spousal support and B owes A $300 for child support, it's not ideal to net the total and have A only pay B $300. This could make payments unclear and cause the Canada Revenue Agency to deny valuable deductions on tax audit. Instead, the best practice is for A to pay B the $600 then have B pay A the $300.
Spousal support payments and child support payments can commonly lead to tax audits by the Canada Revenue Agency due to their overlooked tax implications. Consult a Canadian tax lawyer to clarify whether you may be entitled to a tax deduction or whether you may be obligated to include your support payments as part of your taxable income.