Our previous blog post looked at tax deductions for legal fees, and the options for spousal support recipients and payors.
While support payors are generally not able to claim a deduction for legal expenses, they are able to deduct the actual payments. This post will explore the requirements and exceptions for these kinds of deductions.
In Canada, spousal support payments must generally meet the following conditions before they can be claimed as deductions against the payor’s income:
- The payment is a specific amount made to the support recipient under a court order or written agreement;
- The recipient is the payor’s current or former spouse or common-law partner, from whom the payor is living separate and apart at the time the payment is made due to a breakdown of the relationship;
- The payments are made to the support recipient (or an agent enforcing the collection of support), to be used at the recipient’s discretion; and
- The payments are payable on a periodic basis and their timing is set out in the court order or written agreement.
The requirement that payments be made on a “periodic basis” means that a series of payments must be made under the court order or written agreement. It does not necessarily mean that such payments are “frequent”. Although most support payments are payable monthly, “periodic” can also refer to quarterly, semi-annual or annual payments.
In certain limited situations, payments can still be considered spousal support payments, even if they do not meet the above criteria. Below are three such situations:
1) Payments made before the date of the court order or written agreement
An amount paid before a court order or written agreement takes place or comes into effect may still qualify as a spousal support payment for tax purposes. The court order or written agreement must explicitly state that any amount previously paid from the support payor to the support recipient is considered to have been paid and received under the court order or written agreement. However, the payments must have been made in the same year as the order or agreement, or in the previous tax year.
2) “Specific-purpose” or “third-party” payments
Where the court order or written agreement requires the support payor to pay a certain amount to a third party for a specific purpose (for example, a specific amount per month directly to the support recipient’s landlord for rent), these payments are not considered spousal support payments for tax purposes. The exception to this is if the order or agreement states that the support recipient will include these amounts in their income and that the support payor can deduct them.
3) Lump-sum payments
An amount paid as a lump sum does not generally qualify as a support payment, as it is not paid on a periodic basis. However, if periodic payments under a court order or written agreement were overdue and one payment is made to bring them up to date, the lump-sum payment would be considered a support payment. Similarly, a lump-sum payment would be considered a support amount if it is paid under a court order clearly stating that retroactive support must be paid for a specific period before the court order.
Support payors must provide the support recipient with a completed Form T1198, “Statement of Qualifying Retroactive Lump Sum Payment”, for the recipient to file with their taxes, if these situations apply:
- The payor made a lump-sum payment of at least $3,000;
- The lump sum payment was made to bring the support payments up to date;
- The payor is otherwise entitled to deduct the support amount; and
- The recipient is required to report the support amount as income.
Priority of child support
For court orders or written agreements made after April 1997, spousal support payments are deductible to the payor and must be included in the recipient’s income. (Note that different tax rules apply to court orders and written agreements for support that were issued/entered before May 1997. For more details, see information on the Canada Revenue website here.)
Any amount that is not specifically attributed to the support of the current/former spouse or common-law partner under the court order or written agreement is considered child support, where child support is also at issue between the parties. Further, spousal support amounts are only deductible to the payor if all payments for child support have been fully paid for the current and previous year (again, where applicable).
If the court order or written agreement sets out the recipient’s entitlement to child support and spousal support, all payments to the recipient are first considered to have been made toward child support. Any amount paid over and above the child support owing is then considered spousal support for the recipient. Any overdue child support amounts are carried forward and added to the next year’s outstanding support payments.
Registering your court order or written agreement and supporting documentation
If your court order or written agreement includes a payment of spousal support, you must register it with the CRA to claim a deduction. This allows the CRA to verify the part of your support payments that is attributable to spousal support (versus child support, if applicable).
To register, follow the instructions on Form T1158, “Registration of Family Support Payments”, and send in a separate T1158 Form for each court order or written agreement that you are registering.
The CRA may also ask you for receipts to support the claimed deduction. Acceptable receipts must include your name, the date of payment and the amount that you paid, and include:
- Cancelled cheques or cheque images (copies of both sides of the cheque must be legible);
- Bank and employer statements, if they show a transfer of funds from your account or paycheque to either the recipient’s account or to a provincial agency, and the amounts are equal or less than the amounts specified in the court order or written agreement;
- Statement or letter from the maintenance enforcement program (for example, provincial agency) supporting the actual amount of support that you paid under the court order or written agreement; and
- Signed receipts from the recipient showing the total amount paid in the year.
Tax deductions can be complicated and each situation is different. If you have any further questions, please contact our Family Law Group.