Updated: Mar 3, 2022
You may be the payer or recipient of spousal or child support payments. Generally, spousal support payments are deductible to the payer and taxable to the recipient. Child support payments may be deductible to the payer depending on the date they came into effect. There are many additional rules that impact the taxation of support payments.
The following conditions must be met for a payment to be considered a support payment:
The payment is a specific amount made to the recipient according to a court order or written agreement.
If the recipient is the payer’s current or former spouse or common-law partner, the payer is living separate and apart from the recipient at the time the payment is made because of a breakdown in the relationship. Otherwise, the payer must be the legal parent of a child of the recipient.
The payment is made to support the recipient, the child of the recipient, or both. The recipient can use the payment at their discretion.
The payments are payable on a periodic basis. The timing of the payments must be set out in the court order or written agreement.
The payments are made to the recipient or to an agent enforcing the collection of the amount.
The payments must be paid as an allowance per the terms of the court order or written agreement. While the payments must be for a specific amount, they can be adjusted over time if done so in a reasonable manner, such as if they are calculated as a percentage of the payer’s income or indexed to inflation.
The payments also need to be periodic which does not necessarily mean frequent. Monthly payments are very common, but an annual payment would be considered periodic as well. Lump-sum payments typically will not qualify unless the lump-sum amount represents periodic payments that had fallen into arrears, an advance of future periodic payments, or the court order establishes an obligation to make a retroactive payment to cover a specified period prior to the order.
There are two additional exceptions to the conditions listed above. Payments made prior to the court order or written agreement may qualify as support payments if the order or agreement states that any amounts previously paid or received is considered a payment made under the agreement. These payments must be made in the year of the order or agreement, or the previous year. Specific-purpose or third-party payments may also qualify under certain circumstances if they are required under the order or agreement and meet conditions one to four above. These payments include rent, property taxes or insurance; educational or medical expenses; maintenance costs for the home the individual lives; or up to 20% of the original principal amount of the loan used to purchase or renovate the home in which the individual lives.
The rules regarding the taxation of child support changed in 1997. Support payments required under a court order or agreement that came into effect prior to May 1997 are generally taxable to the recipient and deductible by the payer. Payments are not taxable to the recipient and deductible by the payer if paid under an order or agreement that came into effect after April 1997. Agreements that were in existence prior to May 1997 but modified at a later date will be subject to the new rules. For agreements prior to May 1997, both parties can also elect to follow the new rules.
A court order or written agreement that includes spousal support must be registered with CRA. This must be done so CRA can verify the taxability and deductibility of the payments. If the order or agreement includes both child and spousal support, priority will be given to child support. All payments are first considered to be made towards child support.
Support payments must be made in accordance with a court order or a duly signed written agreement. Ensuring the payments are consistent with the order or agreement and meet all of the required conditions will prevent issues when filing your income tax return. Please contact me if you would like to discuss further.
For more information, please contact firstname.lastname@example.org or 1 844-GYTD-CPA