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Spousal Support and the Tax Department

Generally speaking, spousal support payments either agreed to or ordered by a Court are tax deductible to the payor and tax payable by the recipient.  There are certain prerequisites of course to qualify - the payments have to be periodic in nature (as opposed to lump sum payments) and there must be some form of written agreement or Order between the parties confirming the arrangement.

Typically these agreements or Orders are fairly straightforward, however, the tax department (Canada Customs and Revenue Agency - or CCRA) are looking at these arrangements a little more closely.  For example, they appear to demand that any written agreements be done with the aid of legal counsel and have Certificates of Independent Legal Advice attached indicating that the parties understand the full nature and effect of the document.  Further, they are becoming increasingly particular regarding the terminology used when evidencing these agreements.  The applicable sections of the Income Tax Act need to be referred to (Sections 56.1 and 60.1 in particular).

Of more concern lately however is the tax department's characterization of spousal support that is being paid to a third party instead of the spouse.  An example of this would be where the payor pays the mortgage directly but the parties want to have it characterized as spousal support.  In a recent tax case, the Tax Court held that where an agreement provided that certain payments had to be made by the payor to a third party on behalf of their former spouse (e.g. a mortgage payment), that the recipient spouse could not be taxed on these amounts as she had no discretion as to the expenditure of these funds.  This meant that the payor was not able to deduct these amounts from his income.  This was clearly not what the parties intended.

To avoid such unnecessary and unwanted results, much care has to be placed in drafting these agreements.  Arguably, this would apply to Court Orders as well.  Parties should ensure that the wording of the agreement or order be explicit in describing what the parties intentions are.  Stating the intended tax results would not be inappropriate.  Definitely referring to the appropriate sections of the Income Tax Act is important as well.

Frequently these agreements are arrived at in the context of a global settlement of the party's affairs.  Sometimes it will be difficult to explain with precision as to the "how" an agreement was reached.  What is important however is that sufficient detail be included in any agreement as to the "why" an agreement was arrived at and some explanation as to the parties expectations as to the agreement.

All situations are different and are fact driven in most matrimonial causes.  To ensure that you achieve the results that you and your former spouse are intending, it is important that both of you consult with legal counsel to place any agreement into affect.

By Jim Glass
October 16, 2002