What qualifies as a support payment, and how it is taxed, are important issues. How support payments are defined affects your income (as defined by CRA), the amount of tax deductions you are allowed, and ultimately how much income tax you pay. Each person’s case is unique, and you should seek specific legal and accounting advice. However, there are a few general rules.
Knowing the rules about support payments, and tax implications, can help you make the most of your separation agreement and divorce settlement. This is particularly important when you are negotiating or mediating an agreement.
When it comes to Child Support:
- The RECIPIENT of child support does not pay tax on the child support payments.
- The PAYOR of child support cannot claim a tax credit for child support payments.
When it comes to Spousal Support:
- The RECIPIENT of periodic spousal support does pay tax on the spousal support payments.
- The PAYOR of periodic spousal support can claim a tax credit for spousal support payments.
Mixed or Lump Sum Payments:
- A mixed payment of child and spousal support is not taxable for the RECIPIENT nor tax deductible for the PAYOR.
- Lump sum spousal support is not taxable for the RECIPIENT, nor tax deductible for the PAYOR.
Both child support, and spousal support must be included in your T1 Tax Return. The total amount that you receive should be included in your line 156. The taxable portion of your support is recorded at Line 128. It is important to make sure these are correctly filled out.
Jack and Dana recently separated. They reached an agreement through mediation. In their Separation Agreement, made in January 2016, Jack agreed to pay Dana $1,000 per month for their two children. He also agreed to pay $500 per month in spousal support.
Dana enters the total support payments’ amount of $18,000 on line 156 of her 2016 T1 Income Tax return. On line 128, she enters the taxable part of the support payments she received, which is the spousal amount of $6,000.
For more information, contact the CRA (Canada Revenue Agency).
For spousal support to be tax deductible, a Separation Agreement is not required. In many cases, a simple document signed by both spouses is sufficient.
The document should include:
- A date for reference to the agreement;
- A date when payments begin;
- The amount of the payments;
- The purpose of the payments (spousal or child support);
- A statement indicating how often the payments are made; and
- The signatures of both spouses.
It is also worth including a date for the payments to end. Otherwise, they will continue indefinitely. Remember that if you are paying both child and spousal support, these amounts must be clearly defined. If you fail to do so, the payments are generally not tax deductible.
You should always get legal advice before you sign any agreement. Where there are tax implications, you should also consult an accountant.
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