For starters it’s worth mentioning this discussion focuses on spousal support payments, it does not apply to child support payments which are subject to different rules. It’s also worth noting if a court order or written agreement has not been formed, the Canada Revenue Agency (CRA) will not grant a tax break on payments made.
In order for an amount to be deductible as a support payment it must meet the follow CRA requirements:
- Amounts are paid on a periodic basis for maintenance of the recipient
- The recipient has the discretion to use the amounts as he or she wishes*
- The recipient and the payer are living apart and separate
- The amount is receivable under a court order or written agreement
*There are circumstances when this condition does not need to be met.
The first condition is one that rears its ugly head often when spouses agree to make lump sum payments over a period of time (i.e. $300,000 paid in $100,000 payments over 3 years). The CRA has a habit of denying any lump sum payments on the basis that they are capital in nature (i.e. for splitting assets) and not for maintenance of the recipient. A recent case in the Tax Court of Canada overruled the CRA on this issue and provided additional clarity on this matter.
In determining whether a payment is for the maintenance of the recipient the following factors are considered
- How often are payments made, is there over a year in between payments?
- Does the amount received represent most or all of the taxable income of the recipient? This factor can be argued by both sides, if the recipient is at home looking after kids, it would difficult for the CRA to argue the payment is capital in nature. Standard of living is a strong consideration for the point
- Is interest payable on the payments (i.e. on missed or late payments)?
- Can the payments be prepaid or accelerate in any fashion
- Do the payments allow the recipient to accumulate money over a period of time or are most of the funds used fairly quickly (tied to standard of living)
- Do the payments last indefinitely or set for a fixed period of time
- Can the payments be assigned to someone else, can the payments survive either spouse’s death?
- Do the payments release the payer from future obligations towards the maintenance of the recipient?
It is important to consider the points above when structuring a spousal agreement as well as seeking the counsel of a professional. Far too often people will attempt to form a written agreement themselves only to learn the legal and tax ramifications may not be as they intended. Please click here for further information from the Canada Revenue Agency on support payments.
This blog post was written by Geoff Smethurst, CPA, CGA, LPA
Edelkoort | Smethurst | Schein CPAs LLP is located in Burlington Ontario servicing the Golden Horseshoe and Greater Toronto Area. The firm is fully licensed with CPA Ontario to provide assurance, tax and accounting services as well as registered as tax preparers with the Canada Revenue Agency (CRA) & Internal Revenue Service (IRS).
All blog posts published on this site are for informational purposes only and do not constitute professional advice. Readers should contact a professional to discuss their individual situation. Neither the author or the accounting firm shall accept any liability for any reliance placed on the information posted.