You have gone through separation and divorce. You have sorted out important issues including property division, parenting time, child support and spousal support. Next up: taxes. When it comes time to file your annual tax return, how is spousal support dealt with? Here is what you need to know about the income tax implications of spousal support payments.
What is spousal support?
Spousal support, which is also sometimes called “alimony” or spousal maintenance, is financial support paid by one ex-spouse or common-law partner to the other. It is usually paid on a monthly basis but can also be in the form of a one-time lump-sum payment. Once the spouse who is claiming spousal support establishes that they are entitled to it, the Spousal Support Advisory Guidelines are used to determine the amount and duration of spousal support payments. See here for more on how spousal support is calculated.
Is spousal support treated at tax time?
The Canada Revenue Agency treats spousal support as taxable income for the spouse who receives it. So, if you are receiving monthly spousal support payments under a court order or written agreement, you must report these amounts as income on your annual tax return and pay the according amount of income tax. Legal fees associated with getting and enforcing spousal support can be deducted. The spousal support order or written agreement must be registered with the CRA. This is done with a T1158-21 form.
On the flip side, spousal support counts as an income tax deduction for the spouse who is paying it. If you are paying monthly spousal support under a court order or written agreement, you report those payments as deductions from your income on your annual tax return. A paying spouse can’t deduct legal fees associated with defending a spousal support claim or enforcement steps.
Are there exceptions?
There are several exceptions to the general tax implications discussed above. Here are some of the more common exceptions:
Spousal support payments that are not paid pursuant to a court order or written agreement are not taxable. For example, if you are paying cash to support your former spouse pursuant to an oral agreement you’ve made, you can’t claim a tax deduction for those payments. The amount payable must be clearly stated in a court order or agreement and must be paid on a periodic basis (usually monthly) to attract tax consequences.
Lump-sum spousal support payments are not considered taxable or deductible for either spouse. However, if monthly payments required by a court order or written agreement were overdue and one payment is made to bring them up to date, that lump-sum payment is considered a taxable support payment.
Spousal support that is paid indirectly (for example, by paying your former spouse’s rent or mortgage) may not be taxable or deductible.
A spouse who is paying both child support and spousal support is not allowed to claim a tax deduction for the support payments if they are behind on child support payments for current or previous years.
Spousal support payments are only taxable and deductible if they are actually paid by a spouse to a spouse or former spouse. Avoid paying spousal support in cash unless you get a signed receipt for each payment. Payment by e-transfer, cheque, etc. creates a record of payments made.
Spousal support may not attract tax consequences if not paid directly. The paying spouse should avoid having someone else make the payments on their behalf and should not pay spousal support out of a joint account.
The bottom line is that the tax rules are complicated and there can be serious tax consequences depending on how spousal support payments are structured and paid. You want to ensure that the CRA will treat spousal support payments in a way that works best given your financial situation. It is highly recommended that you get advice from our family law firm and a tax professional before support arrangements are finalized.
Is child support taxable?
There are no income tax implications for child support payments. The general rule is that child support is not taxable or deductible. The parent who is paying can’t deduct the payments, and the parent who receives child support payments does not claim the payments as income on their annual return.
Prince George’s Dick Byl is here to help with spousal support tax issues
Spousal support can have serious tax consequences for both spouses. You need to know your rights and responsibilities when it comes to spousal support. For that, you should consult with a lawyer who specializes in family law. Prince George’s Dick Byl Law Corporation provides trusted legal advice and handles all aspects of family law and divorce. We offer flexible legal consultation, customized solutions and work diligently to ensure that our clients receive an outcome that is fair. Call us today at 250-564-3400 or toll-free at 1-800-835-0088 or use our eForm to get in touch with our Prince George family law office.