Tax policy surrounding child and spousal support payments is one of the more contentious topics when it comes to helping people prepare their tax return. And considering the frequency of relationships ending in separation, this tax issue arises frequently.
Child support is reported on both parents’ returns but does not factor into tax calculations. It’s a reporting and tracking mechanism used by Canada Revenue Agency (CRA). Agreements set prior to April 1997 are exempted. For these older agreements, child support is included in tax calculations.
Spousal support is not so straight forward. In general, if there is a court order requiring “regular periodic basis payments” that permit the recipient “discretion as to the use of the amount,” then the payer deducts the spousal payments as an expense from income and the recipient claims the spousal payments as income.
An occasional lump sum spousal support payment as a rule is not reported by either party on their tax return. However, if the lump sum spousal support payment is an arrears payment to catch up a delinquent payer, or is an acceleration payment to secure future funds for a recipient, these are reported on the tax returns.
Also, regularly or irregularly timed lump sum non-discretionary directed spousal support payments as a rule are not reported by either party except in the case of a court order specifying this type of payment for identified expenses like rent, mortgage, medical, tuition, and the like.
Then CRA will waive the “periodic” and “discretion” requirements and treat this spousal support as deductible for the payer and claimable for the recipient.
It’s worthy to add, until a court order is in place, spousal support payments are not reported to CRA by either party, unless the court order once completed states a retroactive reporting requirement, and in that case, once the order is in effect, it’s applicable to the current and preceding calendar year’s payments only.
Confused? Now let’s add child support twists.
If child support payments are in the mix with spousal support, any shortfall on the total support paid is assumed to be a shortfall of spousal support. In other words, the kids’ cash comes first which means a lower than court ordered spousal support amount is reported as the actual spousal support paid and received on the two tax returns. So, the shortfall becomes spousal support in arrears, not child support in arrears.
Further, if a court order providing both spousal and child support doesn’t identify a specific amount as spousal support, all support paid is considered child support. This means the parents’ tax returns only report child support and there is no claim of spousal support expense by the payer or spousal support income by the recipient.
It’s likely abundantly clear how this area of tax policy can become an emotional quagmire for separated couples. There may be equal clarity regarding the importance of properly drafted legal paperwork so as to settle things for the parties involved ... and for CRA since a review of these documents is sometimes required to finalize tax assessments.
Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him at ron.clarke@JBSbiz.ca.Child and spousal support payments