In certain instances, the Canada Revenue Agency permits support payor spouses to deduct the spousal support paid by them from their income for the purpose of their income tax. The same is true for common-law partners paying support.
This deduction may result in significant income tax savings at tax time. Many Human Resources departments can also make an adjustment at source such that they will deduct less income tax from your gross salary throughout the year.
In order to claim the deduction, there are five criteria that must be met:
- You must demonstrate that the support payments have been made pursuant to a court order or a written agreement.
If you do not already have a court order or written agreement in place, but you have been making support payments, there is still time to take the necessary steps to seek the deduction.
The Canada Revenue Agency permits payments made before the date of the court order or agreement to be deducted if these payments are specifically recognized and acknowledged as spousal support in a later order or agreement.
In many instances, the Canada Revenue Agency is now also requesting that recipient spouses sign a specified confirmation form that they have received the support payments, so it is best practice to build this requirement into any order or agreement.
For the 2016 tax year, this new order or agreement must be in place no later than December 2017.
- The spouses must be living separate and apart because of a relationship breakdown at the time that the payments are made.
- The payment is made for the support of the former spouse or common-law partner.
- The payments must be made on a periodic basis.
In the event that you paid arrears of spousal or common-law partner support, you may still be eligible to claim the deduction even though your payments were not made on a periodic basis.
In March 2015, the Canada Revenue Agency issued an interpretation bulletin confirming that large, lump-sum, “top-up” payments could be tax deductible by the payor spouse if:
- There was an order or agreement in place specifying that periodic payments be made, and the payor spouse fell behind on the payments, and made a lump-sum payment to bring these requirements up to date; or,
- The Court grants an order “retroactively” (for a time period in the past) that the payor spouse was obligated to pay periodic support, and the payor makes a lump-sum payment to satisfy this retroactive amount.
- The payments must be made directly to the recipient.
If you meet the other four criteria to claim the deduction, but have been making specific-purpose payments for the recipient spouse in lieu of cash support, you may still qualify to seek the deduction.
Specific-purpose payments could include: mortgage or rent payments; insurance premiums; utilities and maintenance costs; educational or medical expenses; or, a portion of debt acquired in buying or renovating the recipient’s home. These payments must be made for the benefit of the recipient spouse alone (not both parties) in accordance with the third criteria.
Unlike direct payments, in order to seek the deduction for specific-purpose payments, the order or written agreement must specifically provide that the recipient spouse will include to the payments in their income for income tax purposes and the that the payor spouse will be entitled to deduct same.
If you would like more information about generating a support order or agreement, please feel free to contact one of our lawyers.
We also recommend that you seek the advice of a tax accounting professional as to how the foregoing may apply in your specific circumstances. While we as family lawyers have general knowledge as to the interplay between support payments and income tax, we are not experts in the field of income tax and this information is not intended to be relied upon.
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