Divided on child support
When a marriage fails and kids are involved, the costs can be overwhelming. That's why it's important that divorcing couples maximize tax-planning opportunities.
The taxation of support payments depends on when the separation agreement was signed, as the rules changed in May, 1997. Under the old rules, still valid for separation agreements prior to May, 1997, both spousal-and child-support payments are tax-deductible for the payor and taxable for the recipient.
The new rules distinguish between spousal support and child support, with spousal support being taxable for the recipient and tax-deductible for the payor. Child-support payments, by contrast, are neither taxable for the recipient nor tax-deductible for the payor.
Under the Income Tax Act, for support to be deductible or taxable, the recipient must have "discretion" as to the use of the payments.
What is discretion? A recent tax decision has opinions divided on the matter.
In 1992, Sherry Lee Crone separated from her spouse, David Crone. The 1993 separation agreement specified that Ms. Crone was to receive, in addition to taxable child support, monthly payments of$333 for "extraordinary child-related expenses." The agreement stated this was to cover such things as private school, camp, extracurricular activities, school trips and piano lessons.
Ms. Crone paid tax on the child support received but she did not include the nearly $4,000 of annual extraordinary expenses in her income, arguing that she did not have discretion as to the use of the funds since she had to submit a proposed budget and provide receipts to her husband's accountant. Any amounts not spent could be deducted by her husband the next year.
The judge disagreed and found that since Ms. Crone had custody and decided how the $4,000 was to be spent, without pre-approval from her former husband, she did indeed have discretion over the use of the payments and had to pay tax.
Lorne Wolfson, a lawyer with Torkin Manes in Toronto, and co-editor of the Money & Family Law journal, called the decision unfair. "I do not think the facts support the conclusion that she had total discretion [as to] how the money was spent."
But Barry Corbin, of Corbin Estates Law, and Mr. Wolfson's co-editor, agreed with the decision: "Clearly, the wife had discretion as to how the amount was to be spent, even if she was accountable in the sense of having to accept a lesser sum the following year if she didn't spend the whole amount."
Two experts, two opinions. That's how things end up in court.