In Canada, spousal support payments have distinct tax treatments for the payer and the recipient. For the individual paying spousal support, these payments are tax-deductible. This means that the payer can deduct the amount of spousal support from their taxable income, potentially lowering their tax burden. On the other hand, the recipient of spousal support must include these payments as taxable income, which can increase their overall tax liability.
Criteria for Spousal Support Tax Deductible in Canada
Not all spousal support payments qualify for tax deductibility. To be eligible, payments must adhere to specific criteria set by the Canada Revenue Agency (CRA). These criteria include:
- Payments must be made as per a written agreement or court order
- Payments should be periodic, not lump-sum
- The recipient must be living at a separate home address from the payer
- Payment must be paid by an individual to their ex-spouse and can’t be made through their business
- Payment is made to support the recipient’s and/or their child’s cost of living
How to Claim Spousal Support in Tax Return?
To report spousal support payments on your tax return, enter the total amount of these payments on line 22000. If you’re late on your payments, first deduct any amount that a court says isn’t deductible. After that, claim whatever’s left as spousal support, even if it’s not what you paid first.
Example of tax returns for the payor:
If you paid $24,000 in spousal support over the year and have a marginal tax rate of 30%, you can reduce your taxable income by the amount of the support paid. This reduction could save you $7,200 in taxes ($24,000 x 30%).
Can I Make a Lump-Sum Spousal Support Payment?
Unlike regular spousal support payments, a lump-sum payment is handled differently for tax purposes. When you make a lump-sum payment, it’s important to note that this amount is not tax-deductible for the payer. For the recipient, a lump-sum payment comes with a tax advantage. The amount received is not considered taxable income, so it takes away the burden of increased income tax.
However, to ensure that these payments are treated correctly by tax authorities, you will need a document that clearly states the terms of the agreement, specifying that the payment is intended as spousal support. It should also clarify that the amount is a lump-sum payment rather than a series of payments. Always consult a tax professional and your family lawyer before signing the document.
What if I am paying both child support and spousal support?
When you’re managing both child support and spousal support payments in Canada, it’s important to understand how each affects your taxes.
Child Support: Since the tax reform in May 1997, child support payments are neither deductible for the payer nor taxable for the recipient. This applies if your child support agreement was established or modified after this date.
Spousal Support: Like we discussed earlier, spousal support payments have different tax implications. For the payer, these are deductible from your taxable income, which can reduce the amount of income tax you owe. For the recipient, spousal support payments are considered taxable income and must be reported on your tax return.
If you are making both payments, keep them separate, so it’s easier for your tax professional while filing tax returns.
When drafting a spousal support document, work with a reliable family lawyer who is experienced and well-reviewed. Our family lawyers at Sterling Law are dedicated to providing you with expert guidance and personalized support. Reach out to us today for a free consultation (up to 30 minutes only).