In late 2017, the US Congress passed the Tax Cuts and Jobs Act.
While some aspects of the bill, such as the reduction in corporate income tax, received wide-spread press coverage, other aspects did not, such as the change to how spousal support (called alimony in the US) is taxed, and how this impacts the payment of support across the 49th parallel.
Until the Act was passed, the United States and Canada treated spousal support very similar to one another – payments would be deductible from the income of the payor and be counted as taxable income to the recipient. In this way, the tax burden for the income was on the recipient, who actually receives the benefit of the funds and the funds were only taxed once.
As of January 1, 2019, alimony payments made pursuant to an agreement or court order made after December 31, 2018 (or a varying order or agreement made after that date) are no longer deductible for the payor, nor are they included in the income of the recipient, according to US tax law. Alimony payments made pursuant to an agreement or court order made before that date are not affected and continue to be taxable and deductible to the recipient and payor, respectively.
For former spouses paying or receiving spousal support across the border, this can now create some issues. In deciding the amount of spousal support to be paid, most Canadian courts and lawyers use the Spousal Support Advisory Guidelines. While the SSAGs are not binding, they are the starting point to determining spousal support. The SSAGs, as a creature of Canadian invention, presume that spousal support payor is able to deduct the payments from their taxes in determining the amount of support paid. If one of the parties is resident in the United States, but spousal support is being decided in Canada, then adjustments will have to be made to the SSAG calculations to account for the differing tax treatment across the border.
What about a situation where the order or agreement is made in the United States? Imagine a situation where a payor is in New York and a recipient is in Ontario – the recipient would have to include the support payments in their income (as it is taxable under Canadian law), but the payor would also have to pay tax on this amount (as they can’t deduct it). This would create a situation of double-taxation, which would be inappropriate.
Thankfully, the US and Canada have a treaty – the US-Canada Income Tax Convention, that may provide some relief. Paragraph XVIII(6) of the Treaty states that:
“Alimony and other similar amounts (including child support payments) arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable as follows:
(a) such amounts shall be taxable only in that other State;
(b) notwithstanding the provisions of subparagraph (a), the amount that would be excluded from taxable income in the first-mentioned State if the recipient were a resident thereof shall be exempt from taxation in that other State.”
The effect of paragraph (b) is that if spousal support/alimony is payable pursuant to an American court order or separation agreement by a person resident in America to a person resident in Canada, the recipient will not have to declare the support payments as taxable income. In this way, the income is only taxed once (in the hands of the payor) and thus consistency is maintained between the taxing authorities.
Cross-border issues in family law are complicated and it is important to speak with an experienced family law lawyer before finalizing any agreement with international implications. If you are a payor or recipient of cross-border support or have any questions related to this, contact one of our experienced family law lawyers.