Tax Tips & Pits
by Ron Clarke
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A common topic questioned and explained each tax season surrounds spousal support.
First and very clearly, the former spouses or partners must be “living separate and apart” for any payment between them to be considered for qualifying as spousal support by Canada Revenue Agency (CRA).
Formal signed documentation, often but not always a court order, requiring “regular periodic payments” that permits the recipient the “discretion as to the use of the amount,” must exist for CRA to allow the payer to deduct the spousal support payments as a dollar-for-dollar expense from income and consequently, CRA requires the recipient to report the spousal support payments received as income.
The term “regular” cannot be ignored.
The agreement should be indefinite in longevity and include descriptions of material lifestyle changes for either person that will provide grounds for altering or terminating the agreement.
Typically, if the agreement has an unqualified sunset clause, CRA will deny a claim of spousal support.
Likewise, the term “periodic” cannot be ignored. Spousal support that is paid in a lump sum cannot be reported as spousal support.
This includes any and all lump sum payments that release the payer from any future support obligations to the recipient.
Having said this, a lump sum arrears payment, excluding interest paid, catching up on missed regular payments, or an accelerated payment of a set of future regular payments that has been agreed upon for a reasonable purpose will be accepted by CRA as spousal support expense for the payer and consequently, as income for the recipient.
Until an agreement is in place, any payments made cannot be considered spousal support and cannot be reported to CRA by either the payer or recipient.
If a court order is involved, and if it states a retroactive reporting requirement, a lump sum catch-up payment, excluding interest paid, is reported by both the payer and recipient, but only for the time period stated in the court order.
A notable exception that qualifies payments made as spousal support, occurs when an official agreement specifies payment for identified expenses like rent, mortgage, medical, tuition, and the like.
CRA will waive the “regular periodic” and “discretion” requirements and treat this spousal support as a deductible expense for the payer and reportable income for the recipient.
If child support and spousal support are both involved in the separation, any shortfall on the total support paid is assumed by CRA to be a shortfall of spousal support – the kids’ cash comes first – is CRA’s approach.
The shortfall becomes spousal support in arrears, not child support in arrears. The amount of spousal support reported on the tax returns is only the amount paid above the required child support amount.
Further, if the two amounts are not separately stated within an agreement, the entire amount of support paid is assumed to all be child support and therefore nothing is reported to CRA on the tax returns as spousal support.
To state the obvious then, the final separation agreement should follow CRA rules and present little opportunity for misinterpretation by either party, or CRA.
To this end, the use of a law office and the court system is often the course of action, but it is not always the route undertaken.
As a footnote, CRA’s review of spousal support, and by default child support, is quite common.
Separation can involve difficult conversations sometimes, but once past the emotion, having unambiguous paperwork does move the process forward relatively simply not only in the beginning, but also down the road.
Ron Clarke is owner of JBS Business Services in Trail, providing accounting and tax services.