Divorce Planning Should Include Tax Mastery

New divorcees are often unaware that spousal support is taxable, and that can wrack up costly fines with CRA over time. It is important to review the rules before divorce papers are signed to understand the real value of the resulting payments. The payor will, of course, want to get the tax benefits of a deduction, however, if any portion of the spousal support payments are considered instead to be for child support, the payments will not be deductible. That can happen if child support is in arrears. The following checklist can help sort it out:

ELIGIBILITY: Spousal support is taxable to the recipient and deductible to the payor, if certain conditions are met:

• The amounts paid are pursuant to a written separation agreement, judgment, order or decree
• The parties were separated and living apart when the payments were made
• The parties continued to live apart for the remainder of the year
• The payments were made to the former spouse or a third party for the maintenance of the spouse
•  The payments were made on a periodic basis (lump sum payments are not deductible).
•  The amount deductible by the payor and taxable by the recipient is the least of
  •  The amount required to be paid under the agreement, judgment or order
  •  The amount actually paid

TRAPS: If child support payments are in arrears, all payments are deemed to be child support payments (not taxable) until all child support payments are brought up to date. Once child support payments are up-to-date, additional payments required are considered to be for spousal support, which is taxable.

It's important too that agreements define the support payments carefully. For example child support is defined as any support amount that is not identified in the agreement or court order as spousal support. Child support payments made under agreements or court orders entered into after April 30, 1997 will not be taxable to the recipient or deductible to the payor.

Court orders or written agreements should be registered with CRA using Form T1158 Registration of Family Support Payments under the following circumstances:

• The order or agreement was made after April 1997 and it specifies support payments for a spouse or common-law partner.
• The order or agreement was made before May 1997, it specifies support payments for a spouse or for a spouse and a child, and
  •  Form T1157 Election For Child Support Payments has been filed; or
  • The order or agreement was changed after April 1997 to increase or decrease the amount of child support payable.