This week's Supreme Court of Canada decision requiring divorced parents to
disclose any increases in their income has sparked much debate in the legal
community about the repercussions on thousands of agreements that may be
revisited.
In the context of these discussions, it's important to understand how support
payments are treated tax-wise, both for the one who pays and the one who
receives.
The Income Tax Act distinguishes between spousal support and child support,
with the tax rules differing for each.
Spousal support includes any amounts paid on a periodic basis under a court
order or agreement for the support of a former spouse or common-law partner.
Child support, on the other hand, includes any support payments that are not
specifically identified in that order or agreement as being only for the former
spouse's or partner's use.
In both cases, the former spouses or partners must be living apart after the
break down of their marriage or relationship.
To determine the appropriate tax treatment, begin by reviewing the order or
agreement. If the order or agreement provides support only for a spouse or
partner, then the payments are fully taxable to the recipient and tax deductible
to the payor. To ensure tax deductibility, the order or agreement must be
registered with the Canada Revenue Agency. To do so, you need to complete CRA
Form T1158 Registration of Family Support Payments and include a copy of the
order or agreement. The form can be found online at cra.gc.ca
If, on the other hand, the order or agreement is solely for the support of
children, then the payments are neither taxable to the recipient nor tax
deductible to the payor. Since they are not tax deductible, there is no need to
register the agreement with the CRA.
Finally, if the agreement contains both spousal and child support, and it
clearly indicates a separate amount for a spouse or partner, then this portion
of the payments will be deductible and taxable. Again, the agreement or order
must be registered with the CRA.
Divorcing or separating couples should be particularly cautious about making
any spousal support payments before the order or agreement is actually signed
and dated. These amounts would only be tax deductible (and taxable) if the
agreement specifically states that such payments were contemplated under the
terms of the order or agreement being signed.
Clearly, the wording of the agreement or court order is paramount. Lorne
Wolfson, a partner at the Toronto law firm of Torkin Manes Cohen Arbus LLP, and
chair of the Family Law Specialty Committee of The Law Society of Upper Canada,
cautions that both the drafting of these agreements, as well as the taxability
or non-taxability of support payments, are very complex matters. "No client
should attempt to do this on their own," he says.
But how would these rules impact the payment of retroactive child-support
payments, which may become the norm in light of the Supreme Court's recent
decision? Since child-support payments are neither taxable nor deductible, there
shouldn't be any major tax concerns.