In most cases, current rules provide that child support payments made to an ex-spouse or common-law partner are not deductible for the payer and are not included in the income of the recipient. An exception applies if the applicable court order or agreement was made before May 1997, was not amended or replaced by another order or agreement after April 1997, and the parties did not elect to have the current rules apply. In these rare cases (where child support is still being paid for a child who is at least 22, given that 22 years have passed since 1997), the payer may deduct the child support payment and the recipient will include them in income.
On the other hand, spousal support payments are deductible for the payer and included in the recipient’s income, as long as certain conditions are met.
General conditions for deduction of spousal support
The general conditions are as follows. Exceptions, where the general conditions may be waived, are discussed under the next subheading (“Exceptions to general rules”).
First, the support payment must be an “allowance on a periodic basis”, rather than a lump-sum or amount that is not periodic. The courts have held that the following factors are relevant in determining the issue (the leading case is the 1989 Federal Court of Appeal decision in McKimmon):
- The length of the periods in which the payments are made. Amounts that are paid weekly or monthly are more easily characterized as allowances for maintenance. Where the payments are at longer intervals, the matter is less clear. If the payments are made at intervals of greater than one year, it is arguable that they are not “periodic” allowances.
- The amount of the payments in relation to the income and living standards of both payer and recipient. Where a payment represents a very substantial portion of a taxpayer’s annual income or even exceeds it, the payment is unlikely to be a “periodic” allowance. On the other hand, where the payment is no greater than might be expected to be required to maintain the recipient’s standard of living, it is more likely to qualify as an allowance.
- Whether the payments are to bear interest prior to their due date. A lump sum payable by instalments is more likely to bear interest than a periodic allowance.
- Whether the payments are stipulated to continue for an indefinite period or whether they are for a fixed term. An allowance for maintenance will more commonly provide for its continuance either for an indefinite period or to some event (such as the coming of age of a child or the re-marriage of the recipient) which will cause a material change in the needs of the recipient. Sums payable over a fixed term, on the other hand, may be more readily seen as a non-deductible capital payment.
- Whether the payments purport to release the payer from any future obligations to pay maintenance. Where there is such a release, it is easier to view the payments as being the commutation or purchase of the capital price of an allowance for maintenance.
Second, the payments must be for the maintenance of the recipient ex-spouse or common-law partner.
Third, the recipient must have discretion over the use of the payment, meaning that the recipient, rather than the payer, will determine what to do with the funds.
Fourth, the recipient and payer must be living separate and apart because of the breakdown of their marriage or common-law partnership.
Fifth, the payment must be pursuant to a court order or a written agreement between the parties.
Exceptions to general rules
A lump-sum payment can be deductible for the payer and included for the recipient, even though it is not periodic, the recipient does not have discretion over the use of the funds, and even if the payment is made to a third party instead of directly to the recipient. This rule applies only if the court order or agreement states that the rule will apply. It can apply to expenses such as medical expenses, tuition, rent, and mortgage payments made by the payer to the recipient or to the third party (the medical facility, school, landlord, bank, and so on). In the case of mortgage payments (principal and interest) made for the recipient’s home, the deduction in each year is generally limited to 1/5th of the principal amount of the original mortgage loan.
Furthermore, the CRA generally accepts that a lump-sum payment may be deductible for the payer and included for the recipient if the lump-sum:
- represents periodic amounts payable that were due after the court order or written agreement and that had fallen into arrears;
- is paid pursuant to a court order and in conjunction with an existing obligation for periodic maintenance, whereby the payment represents the acceleration, or advance, of future support payable on a periodic basis, for the sole purpose of securing the funds to the recipient, or
- is paid pursuant to a court order that establishes a clear obligation to pay retroactive periodic maintenance for a specified period prior to the date of the court order.
Since the spousal support payment must be made under a court order or written agreement between the parties, payments made before the court order or agreement are normally not deductible for the payer or included for the recipient. However, a special rule in the Act provides that prior payments made in the year of the court order or agreement and the preceding calendar year can be deductible for the payer and included for the recipient, if the court order or agreement states that this rule applies.
Ordering rule when both spousal and child support
If both spousal support and child support are paid each year on a timely basis, the ordering rule is of little significance. However, the rule can apply if payments are not made in full in any year. In general terms, the support payments will be applied towards child support until it is paid in full before they are applied towards spousal support.
You are required to pay $30,000 in child support and $20,000 in spousal support annually. In year 1, you pay a total of $40,000. Only $10,000 will be deductible as spousal support (rather than $20,000) because the first $30,000 will be applied towards the non-deductible child support.
If you pay $50,000 in year 2, you will be entitled to deduct $20,000 as spousal support but will not be able to deduct the $10,000 shortfall from year 1. You would be able to deduct the $10,000 shortfall and the other $20,000 of spousal support due in year 2 if you paid $60,000 in year 2.