Relationship Breakdowns Can Be Taxing

Saul lost his job and was not able to keep up with his required support payments to his estranged family. He was required to pay $500 per month in spousal support and $1,000 per month in child support. He did not begin to know how to claim his arrears payments on his tax return. Fortunately his Tax Services Specialist could help.

Separation and divorce are among the many of life’s major milestones that I discussed with Pat Foran, CTV Consumer Reporter, this week. There are all kinds of reasons for relationship breakdown: communications breakdowns, infidelity, a midlife crisis, abuse and financial issues. Those financial problems can be exasperated when there is trouble with CRA, which, unfortunately, is common. That’s why a relationship with a pro is important, even for do-it-yourself tax filers.

According to Statistics Canada, there are approximately 71,000 divorces in Canada each year. Over 40% of marriages will end up in divorce (lower than the divorce rates of 46% in the U.S., and 55% in Sweden, the highest globally).

However, a couple need not be legally or formally separated for their tax status to change. A couple is considered by CRA to be separated if they cease co-habitation for a period of at least 90 days. When a couple separates, each person will be taxed as an individual and income and assets will be separated. There are many expensive consequenses that can follow relationship breakdown; common ones are discussed below:

Support for Spouses. Alimony or support payments made to a spouse or common-law partner pursuant to a written agreement or order of a competent tribunal are taxable to the recipient and deductible by the payor. In the year of separation or divorce, however, the payor may claim either the deduction for support or the spousal amount, but not both. The only way for the recipient to avoid this tax status is to receive a lump sum, in which case the payment is neither deductible nor taxable.

The spouse who receives the taxable amount will often be unprepared for the tax consequences when a large balance is due on April 30. In addition he or she may need to make quarterly instalment payments on this income in the year after it is first paid and reported. This should be discussed before the separation or divorce papers are finalized to ensure that the required amount after tax is received.

Support for Children. For all agreements or court orders after May 1997, child support payments are not taxable to the recipient or deductible by the payor. For income tax purposes, any support stipulated in an agreement or court order is deemed to be child support if it is not identified as spousal support.

Complications can arise when support payments are in arrears. All arrears payments are deemed to be child support payments until child support is up to date. Subsequent payments, if any, are considered to be spousal support payments that are taxable to the recipient and deductible to the payor.

So here is what Saul needed to do to properly file his return: Remember, he was required to pay $500 per month in spousal support and $1,000 per month in child support for a total of $18,000 annually. But, for the year in question, he paid only $15,000. For the purposes of filing his income tax return, the payments are deemed to be non-deductible child support in the amount of $12,000 (the required amount) and $3,000 in spousal support. Saul may deduct only $3,000 of the $15,000 he paid and his ex-wife is required to report only $3,000 as income from spousal support. When, and if, Saul pays the additional outstanding spousal support (in addition to the required payments) he can deduct them and his ex will have to pay tax on them.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services and author of 52 books on family tax preparation and planning. 

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