Is spousal support tax deductible?

Whether you’re facing a request to pay spousal support or need it to maintain your standard of living after a divorce, it’s important to have a clear understanding of the tax rules that apply. Our team of legal experts have a proven track record of success in handling spousal support cases, and we are here to help you make informed decisions and protect your financial interests.

In this article, we’ll provide you with a thorough overview of the tax implications of spousal support, covering everything from deductibility to reporting requirements.

At Onyx Law Group, our experienced spousal support attorneys understand that navigating the tax implications of spousal support can be a complex and challenging process. Contact Onyx Law Group to discuss the specifics of your case today!

Understanding support payments

After separation and divorce, there are two types of support payments: child and spousal support. 

Child support is the amount one parent pays to another parent to help support a child or children. Child support payments are determined using the Child Support Guideline tables contained within the Divorce Act. The guidelines set out monthly child support amounts in a table that is based on the paying parent’s level of income, the number of children eligible for child support, and the paying parent’s province of residence. There is very little discretion when it comes to calculating child support obligations. Judges are required to follow the guidelines to determine the amount of child support. 

Spousal support, on the other hand, is money paid by one spouse to financially support the other spouse after separation, usually under an agreement or court order. It can be claimed by a married spouse at the end of a marriage, or by a partner at the end of a common law relationship if the relationship was “marriage-like” for a continuous period of at least two years. An unmarried person can also claim for spousal support from their former partner if they lived in a marriage-like relationship for less than two years but had a child together.

Family lawyers and judges refer to the Spousal Support Advisory Guidelines (“SSAG”) to negotiate separation agreements and make spousal support orders, but the SSAG are not binding in the way that the Child Support Guidelines are. The SSAG formulas produce ranges for amount and duration of spousal support (low, mid and high). The ranges can be quite broad, especially if the relationship was long and income disparity between the former spouses is large. The mid-range is not the default; there are many factors that must be considered in determining the appropriate location within the SSAG ranges. If you would like to know more about calculating amount and duration of spousal support payments reach out to one of our family lawyers. 

Tax rules for child and spousal support

The tax rules are different depending on the type of support. For any court order or agreement made after April 1997, child support payments are never taxable in the support recipient’s hands or tax deductible by the parent paying child support.

The tax rules for spousal support are much more complex. Spousal support can be tax deductible and taxable if certain conditions are met. Let’s take a closer look at how spousal support is treated for tax purposes.

Taxation of spousal support in Canada

For spousal support to be tax deductible, certain conditions must be met. The payment must be a specific amount made to the “recipient” (i.e., the person receiving spousal support) pursuant to a court order or written agreement. Payments must be payable on a periodic basis—not in one lump sum—and the timing of the payments must be set out in the court order or written agreement. Periodic payments are those that are paid weekly, monthly, or yearly.

Tax implications for the payor and the recipient of spousal support

If the conditions above are met, spousal support is tax deductible for the “payor” (i.e., the person receiving spousal support) and considered taxable income under the Income Tax Act of Canada in the hands of the recipient. In other words, the payor of periodic spousal support is entitled to deduct the amounts paid from his or her taxable income, and the recipient must include the periodic spousal support payments as taxable income.

To claim a tax deduction, the payor enters the total amount of spousal support payments they paid under all court orders and written agreements on line 22000 of their tax return. The recipient must report taxable support payments received under a court order or written agreement on line 12800 of their tax return.

How spousal support payments can affect the calculation of income and tax liability

As you may have already noticed, the income tax rules can create tax advantages and disadvantages for the parties. Generally speaking, the payor is in a higher tax bracket than the recipient, so the tax savings are greater for the payor than the cost to the recipient. The Spousal Support Advisory Guidelines account for tax consequences of support when determining the amount of spousal support to be paid. Nevertheless, the different tax consequences can be a bargaining chip in negotiations and can also be a factor in determining whether a non-taxable lump sum payment or hybrid payments offer greater benefit given the financial picture of each party. 

The impact of spousal support payments on government benefits and credits

Caution must be exercised as spousal support payments can negatively impact entitlement to government benefits and tax credits (e.g., Canada Child Benefit, income assistance, disability assistance). If the recipient is in a low tax bracket, periodic spousal support payments may trigger a “claw back” of benefits or push them into a higher tax bracket that disentitles them to certain benefits or tax credits. Before the spousal support order or agreement is finalized, it is highly recommended that you consult with a family lawyer and a tax professional or the Canada Revenue Agency to understand how spousal support may impact you.

When isn’t spousal support tax deductible?

1. Payments made prior to a court order or agreement

As discussed above, for a periodic payment to be tax deductible, it must be paid pursuant to a court order or written agreement. In some situations, spousal support is paid to a dependent spouse after separation but before the order or agreement is finalized. Is the payor left unable to claim the tax deduction for those amounts? Not necessarily. 

The Income Tax Act recognizes amounts paid before a court order or written agreement comes into effect, provided that the order or agreement specifically states that any amount previously paid is considered paid and received under the order or agreement. To be tax deductible, the previous payments must be made during the year the order or agreement is made, or as far back as January 1st in the year before the order or agreement is made. Any amounts paid before that time period are not tax deductible by the payor and are not considered taxable income for the recipient. 

2. Lump sum payments

If spousal support is paid all at once in a lump sum, the amount is neither tax-deductible nor taxable. In other words, the payor cannot claim a tax deduction if support is paid in one lump sum, and it is not taxable income for the recipient. Instalment payments of a lump sum are not considered support payments for tax purposes. 

There are exceptions to the rule that a lump sum payment is not taxable. A retroactive lump sum payment may be tax deductible. For example, if periodic payments required by a court order or written agreement are overdue and one payment is made to bring them up to date, that lump sum payment would be considered a support payment for tax purposes. In addition, a lump sum payment can be considered support that attracts tax consequences if it is paid under a court order that clearly sets out that retroactive support must be paid for a specified period prior to the court order.

3. Specific purpose expenses

Specific purpose expense payments are amounts payable under a court order or written agreement for specific expenses to support the recipient or a child in the recipient’s custody. Examples include:

• rent, property taxes, insurance premiums; 
• educational expenses; 
• medical expenses (e.g., prescription eyeglasses or medications); 
• maintenance costs for the recipient’s home; and 
• up to 20% of the original principal amount of any debt from buying or improving the home in which the recipient lives.

Specific purpose payments can be made directly to the recipient or to a third party such as a landlord for the benefit of the recipient. 

If the recipient can use the specific purpose payments as they see fit, those payments are considered support payments and must be included on both parties’ income tax returns.  If the amount payable can’t be used by the recipient as they see fit or is paid to a third party, those amounts are excluded from both parties’ tax returns. 

That being said, there is a way to make specific-purpose expenses tax deductible: the court order or written agreement can be prepared to state that the recipient will include the specific purpose payments as income, and that the payor can deduct those payments from their taxable income. The agreement or court order must make specific reference to subsection 60.1(1) or 60.1(2) of the Income Tax Act and meet the conditions set out therein. If such payments were made prior to the order or agreement, the Income Tax Act allows those payments to be deductible and taxable, going back to no later than January 1st of the year prior to the year the order or separation agreement was made.

Find out if spousal support is tax deductible. Get trusted legal advice

The issue of spousal support is one of the most complicated family law issues. It is extremely important to seek professional legal advice and tax advice when dealing with spousal support matters. Laws, regulations, and the Canada Revenue Agency’s tax rules can and do change over time. Information you find might be outdated by the time you read it. 

The lawyers at Onyx Law Group have extensive experience in working with the Spousal Support Advisory Guidelines. Reach out to us for an initial consultation to learn more and to get the most recent and accurate information. We will give you clear and understandable advice about how spousal support tax rules apply to your post separation life.