Tax and Support:
When a relationship breaks down, you may find yourself dealing with spousal support and/or child support. Issues of entitlement and quantum for each are complex and will not be addressed in this blog. Assuming you are entitled to monthly spousal support, CRA considers these amounts taxable as income, provided certain criteria are met. The support must be paid periodically (generally monthly) and it must be paid pursuant to a written agreement or court order. CRA also prescribes the form of agreement or court order that is needed to properly characterize the support as includible and deductible. If done properly, spousal support is included as income to the recipient spouse. Conversely, the payor spouse will get to deduct the payments. A SupportMate calculation will show you the tax savings and tax costs associated with support payments.
If payments are being made voluntarily, they are not taxable and deductible. CRA does allow for some prior payments to be addressed by a subsequently written agreement or court order. Again, the form of the agreement or court order is very specific to qualify to the tax treatment.
Another type of payment that can be tax deductible to the payor and tax includible to the recipient is something we call Third Party Payments. These are payments that a payor spouse would make on behalf of the recipient spouse directly. These could be mortgage payments, car payments or some other type of payment. Again, CRA has very particular clauses with respect to these agreements as well.
Finally, lump sum spousal support payments are tax neutral, meaning they are not deductible to the payor and not taxable to the recipient provided they are paid in full and final satisfaction of a periodic entitlement. CRA has very specific guidelines for the wording of a lump sum spousal support payment.
Individuals can run a very basic spousal support calculation through mysupportcalculator.ca but anything more than a basic calculation is difficult with the free calculation. With an unbundled services retainer, you can have a lawyer prepare and explain the calculations (including the tax implications) to you for a limited cost.
Child support, on the other hand, is always tax neutral. The calculations reference above have been developed to take into account the differential tax treatment. Tax issues come into play in the sharing of special por extraordinary expenses. These expenses are a whole blog post on their own. Assuming you have agreed on which expenses are to be shared, the Court is directed to take into account any subsidies, benefits, income tax deductions or credits relating to the expense as well as any subsidies, benefit or income tax deduction associated with the expense (think tax deductibility of child care or university).
Tax and Property:
The payment made to divide your property (‘the equalization payment’) is non-taxable, however, there are some taxation issues that must be considered before the equalization payment is determined. For example, disposition costs on RRSPS, investments or pensions and the net value of a business. If you own more than one property, how will you deal with the tax implications of either transferring these between spouses or selling them?
The focus of this blog has been to alert to reader to the fact that family law lawyers have specialized knowledge and skills in dealing with these matters to protect you from costly mistakes. If you have any questions or need assistance, contact a lawyer or make an appointment for a consultation. It is money well spent.