Spousal support payments are normally deductible if they meet certain conditions, such as being required under a Court Order or written separation agreement, and being “periodic” payments. They must also be made to the spouse (or ex-spouse) in a way that that person has discretion over how to use the funds. Generally the same conditions that allow a support payment to be deducted mean that it will be included in the recipient’s income.
In limited cases, payments to third parties can qualify for deduction or tax credit. Possible ways for such payments to be deductible are as follows:
- The payor is directed by the recipient to pay a third party, so that the recipient is still considered to have “discretion” as to the use of the funds. Thus, for example, where a wife directed that her husband make cheques payable to her landlord for rent and he delivered the cheques to her, they were held to qualify since she retained discretion over the use of the funds (Arsenault case, Federal Court of Appeal, 1999)
- Where the Court Order or agreement provides for periodic payment of an amount that would otherwise qualify for deducibility as spousal support, and provides for it to be “for the benefit of” the recipient and/or that person’s children who are living with them, the payment is deemed to be a payment to the recipient (Income Tax Act subsection 60.1(1)). This rule can allow certain payments to third parties to qualify, though the recipient may still need to have discretion over how the funds are used.
- Where the Court Order or agreement specifies the particular third-party expense, and specifically states that it is to be deductible under Income Tax Act subsection 60.1(2) and included in the other person’s income under subsection 56.1(2), it can be deductible. There are certain restrictions. For example, it can include mortgage payments, but only 1/5 of the original principal is deductible in any one year. It cannot be for the cost of acquiring any tangible property (unless for medical or educational purposes). It cannot be related to the cost of a home in which the payor resides.
- Expenses paid for children’s programs can qualify for credit under the Children’s Fitness Tax Credit (up to $250 in expenses in 2016) and/or the Children’s Arts Tax Credit (also up to $250 in expenses in 2016), even if the child does not live with the parent claiming the credit. This can be a way for limited payments to third parties to qualify for tax relief. The credit is only 15 % federally, but there is no income inclusion for the other spouse. Note that these credits are eliminated after 2016, though some provinces and territories have similar credits that may continue.