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Are You Paying Spousal Support? You May Risk Losing Out on a Significant Tax Deduction.
Generally, periodic spousal support payments are tax deductible for the paying spouse and are considered taxable income for the receiving spouse. However, for the paying spouse to qualify for the deduction, the parties must sign a Separation Agreement or obtain a Court Order. In situations where a Separation Agreement hasn’t been signed, or an Order hasn’t been made, the support payments do not qualify as being tax deductible by the payor.
So, what happens if you pay your spouse support periodically long before signing a Separation Agreement, or before you obtain a Court Order for support? The spouse who is receiving support may refuse to acknowledge the support being received via an interim Separation Agreement, thereby depriving the payor of potentially significant tax deductions.
The Income Tax Act [“ITA”] offers a limited solution to this problem. Section 56(1) of the ITA allows the payor spouse to deduct periodic spousal support that was paid before a Court Order or Agreement came into existence, provided that the Order or Agreement specifically states that the money has been paid and received.
However, the ITA limits the payor’s ability to deduct previous payments to as far back the year immediately preceding the Order or Agreement being made. Any support paid before January 1st of the immediately preceding year is not tax deductible and is not considered taxable income for the recipient.
Lump Sum Payments:
Generally, lump sum payments of spousal support are not deductible for tax purposes. However, there are three circumstances in which a lump sum payment will be considered deductible:
- The lump sum payment represents amounts payable periodically that were after the date of the Order or Agreement that had fallen into arrears;
- The lump sum is paid pursuant to an Order in conjunction with an existing obligation for periodic maintenance, where the payment represents an acceleration of future support payable on a periodic basis to secure the funds for the recipient; or,
- The lump sum is paid pursuant to an Order establishing an obligation to pay retroactive periodic support for a specific period prior to the date of the Order.
While these exceptions to the deductibility of lump sum spousal support may offer tax relief in some circumstances, they will not be of assistance in relation to spousal support that has already been paid and that falls outside of the immediately preceding year.
With the ITA’s time limit on the payor’s ability to claim tax deductions on previously paid support, it is important that an interim Separation Agreement is established as quickly as possible. Otherwise, the paying spouse may risk losing out on a significant tax deduction.
This article was written by Family Law Lawyer Aaron Ender and Articling Student Hannah Robins. For additional information, please do not hesitate to contact email@example.com or firstname.lastname@example.org.
If you require assistance with any Family Law matter, speak to a Family Lawyer at McKenzie Lake Lawyers LLP by calling (519) 672-5666.