“Are spousal and child support taxable in Canada? If so, is there any way to structure support payments to my ex to lower my taxes?”
The good news is that alimony and child support payments are not taxable to you. However, you may be entitled to deduct these payments and reduce your personal taxes. Let’s take a closer look at each separately:
Spousal support payments are tax-deductible by the payer (you) and taxable to the recipient (your ex-spouse). You may claim the alimony deduction providing it meets the rules. The payment must be considered an allowance. It must have been established in advance of your claim, by written agreement. It must be a recurring payment, not a one-time settlement. Whether or not your ex-spouse declares the income, you may go ahead and claim the deduction. If the payment is not included on the recipient’s tax return, it will then be up to CCRA to take action.
Child support payments can be deductible under one condition. The separation agreement or divorce must have been entered into before May 1, 1997. Under that rule, the payment can be deductible by the payer (you) and taxable to the recipient (ex-spouse), just as above.
In either case, if a tax deduction is claimed, significant tax savings can be had by the payer, who is generally in the higher tax bracket than the recipient. The recipient will then pay the taxes on the payment at his or her lower tax rate. Here, the tax refund benefit is to the payer. Therefore, it is often recommended that this tax refund be contributed to education plans for the children. The new Registered Education Plan can provide a government grant of 20% of your contribution, as much as $400 per child. Everyone wins!
Child support agreements entered into after May 1, 1997 are no longer taxed as income to the recipient spouse or deducted from income by the paying parent. Therefore, keeping the pre-May 1st, 1997 agreement intact can benefit both you and the children.
Dixie Allen is a senior financial advisor and vice-president with Assante Capital Management Ltd. in Toronto. She is the author of Happy New Milliennium: Financial Food for Thought (Turnerbooks, 1999) and appears regularly on national television and radio. The opinions expressed here by Ms. Allen are not necessarily those of Assante Capital Management.