Spousal support (or “alimony”) calculations are often one of the most keenly contested elements of a divorce settlement.
This type of support is not an automatic right and needs to be ordered by the court to come into effect.
Most of the discussions between couples beforehand centre around whether any spousal support is due and, if so, how much should be paid, how often, and for how long.
However, the tax implications of spousal support are also important and should never be overlooked. They can greatly affect your financial situation after you divorce and go your separate ways.
Unless your divorce agreement is in the hands of experienced divorce lawyers who understand the tax implications, an important element of the calculations can be missed.
The information below should clear up most of your questions regarding this matter.
What are the tax rules for spousal support?
The first thing to note is that the tax rules for spousal support are different from the tax rules for child support.
Child support – another major element of any divorce agreement – is treated completely separately from the spousal support matter.
Secondly, the tax implications of spousal support are different depending on if you are the recipient of the support or the payor of it (see below).
Thirdly, note that only the support payments paid according to a court order or a written agreement are taken into account for tax purposes. If extra money is gifted for any reason, this is not considered as taxable income and is not tax-deductible.
Tax implications for spousal support recipients
If you are the spouse who receives regular spousal support payments, the income is taxable and must be declared on your tax returns each year.
However, if you receive spousal support as a lump sum, you do not pay tax on the payment.
In the vast majority of cases in Ontario, spousal support is paid as an ongoing amount each month, which means that you, as the recipient, would be liable for tax on the income over the course of each year you receive it.
There are specific spousal support guidelines used by judges to determine both the amount and duration of payments that you will receive. This will vary from one couple to the next.
Note also that you can claim a tax deduction on the legal fees you spend to arrange monthly spousal support – but not if you receive one lump-sum payment.
Additionally, in order to be eligible for tax consideration, payments must be made directly to the other ex-spouse on a regular and periodic basis, with no third-party involvement.
Tax implications for spousal support payors
If you are the spouse who pays spousal support, you receive an income tax deduction for the total spousal support paid each year.
However, if you pay spousal support as a single lump-sum payment, the tax deduction does not apply.
Unlike the recipient of spousal support, a payor cannot claim a tax deduction on legal fees spent to defend a claim for spousal support.
Consult a divorce lawyer before settling on child support
While spousal support guidelines exist for judges, they are only guidelines.
It is rarely a simple decision and judges can exert a great deal of discretion when deciding on this matter.
If the court considers that there is a financial need for support or an entitlement due to financial losses experienced, it will order spousal support to be paid according to the length of the marriage and other factors.
However, an experienced lawyer will make a persuasive argument with your best interests in mind.
At Amiri Family Law, we are adept at helping our clients reach agreeable spousal support arrangements that consider the tax implications and are enforceable by law.
Call us at 647-792-2961 to arrange a consultation.