The article “Are spousal and child support payments taxable?” was originally published in MoneySense on February 13, 2023 . Photo by Cottonbro Studio from Pexels.
Spousal and child support payments are taxed differently. And lump-sum payments may come with their own tax implications.
“I received a lump sum payment from my ex-husband, as stated in our separation agreement. The agreement states, “this satisfies X’s spousal support obligations towards Y retroactively and going forward. After the payment outlined in this paragraph, there shall be no further spousal support paid.
Do I have to claim this as income?” Heather
Canadian tax treatment of child and spousal support payments
When a common-law relationship or legal marriage ends, there may be a separation agreement signed to document the future financial or non-financial intentions of the two parties. This may include support payments like spousal or child support.
Spousal support payments are meant to provide temporary financial support to a spouse with lower income. The payments are generally based on the difference in incomes between the two parties and the length of the relationship, as well as other factors.
Spousal support may be made as a one-time lump-sum payment or as a series of ongoing payments—typically monthly. Ongoing payments may be subject to a specific time limit, until a certain date or age, or they may be less clearly defined. A lump sum payment provides a degree of certainty for both parties, but they may not be agreed upon in some cases, especially if the higher income party does not have sufficient assets to pay the lower income party in full.
Now that we have context for spousal support, let’s get to your question.
Are spousal support payments taxable?
Spousal support paid on a periodic basis is taxable to the recipient and is tax deductible by the payer. The recipient spouse even accumulates room for registered retirement savings plan (RRSP) on the income as it is considered earned income.
In order for this taxable and tax-deductible treatment to apply, five conditions must be met, according to Canada Revenue Agency (CRA):
CRA definition of a support payment
- The payment is a specific amount made to the recipient according to a court order or written agreement.
Note: A written paternity agreement is not valid on its own, even if it is registered with the court. Paternity agreements must be a court order issued by a court or a tribunal in accordance with the laws of a province.
- If the recipient is the payer’s current or former spouse or common-law partner, the payer is living separate and apart from the recipient at the time the payment is made because of a breakdown in the relationship. Otherwise, the payer must be the legal parent of a child of the recipient.
- The payment is made to support the recipient, the child of the recipient, or both. The recipient can use the payment at their discretion.
- The payments are payable on a periodic basis. The timing of the payments must be set out in the court order or written agreement.
- The payments are made to the recipient or to an agent enforcing the collection of the amount.
Taxes on lump sum spousal support payments
A lump sum spousal support payment is tax-free to the recipient and not tax deductible by the payer. So, in your case, Heather, you would not include this payment as income. It is indeed tax-free.
Because the payment is not tax deductible by your ex-husband, and since he is also paying it all at once up-front, you probably agreed to a lower payment than the cumulative payments you may have been entitled to in the future. This is common. If a lower income spouse gets paid over time and has to pay tax on the payments, they will likely want to receive a higher dollar amount of support than the lump sum payment they might agree to taking.
What about child support payments?
Child support payments may be payable by a higher income spouse to a lower income spouse when the separation involves minor children or children who are pursuing post-secondary education. These payments are not taxable to the recipient or the child, nor are they tax deductible for the payer.
The same applies for ongoing reimbursements for a child’s expenses or activities. Child support is typically calculated every year based on the parties’ tax returns and incomes and can vary, whereas spousal support is sometimes agreed to up-front. As such, child support is not generally paid in a lump sum.
Equalization payments and other transfers
When a common-law or legally married couple splits, one of the parties may also make an equalization payment to the other. This payment may be payable if assets or debts were brought into or accumulated during the relationship, if there is a spousal support obligation to settle, or if one person is keeping an asset like real estate and needs to buy the other person out.
These payments are generally not subject to tax payable or tax deduction. Transfers between spouses’ RRSPs or other tax-deferred registered accounts generally remain tax-deferred.
Transfers of capital assets like taxable non-registered investments or real estate may be done on a tax-deferred basis as well without the typical spousal attribution rules applying (attribution can cause future income to be taxable back to the original owner for married or common-law couples). That said, a couple could agree for some or all of a deferred capital gain to be triggered on transfer so that some or all of the deferred tax is paid by the transferring spouse.
A recipient of assets or income needs to be mindful of the current or deferred tax implications to be sure they are agreeing to a fair and equitable amount. Family lawyers can help, but additional tax and financial advice should be sought, especially if in doubt.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.