When a legal relationship ends, certain financial requirements are imposed. Having a clear understanding of what type of support you are paying or receiving, and its tax implications is important to protect you from unexpected tax exposure.

The Core Requirements for Support Payments

For payments to qualify as support payments for tax purposes, the following conditions generally must be met:

Clear Documentation

There must be a court order or written agreement that requires financial support to be paid to current or former spouse/common-law partner. The documentation should explicitly state the amount and timing of payments.

Regular Frequency

Payments must be made on a recurring basis rather than a one-off payment.

Flexibility

The recipient of the support must be able to spend the money however they see fit.

Living Arrangements

The payer and recipient must be living separate and apart from each other due to a breakdown in the relationship when the payments are made. Otherwise, the payer must be the legal parent of a child of the recipient.

Meeting these requirements helps keep your agreement on course with CRA’s expectations of what is a support payment.

Tax Treatment & Importance

How the support agreement is structured dictates who bears the tax burden. There are two types of support payments:

1.   Spousal Support:

Designed specifically to provide financial support to the recipient (current or former spouse/common-law partner)

-         Deductible to the payer

-         Taxable income to the recipient

2.   Child Support

Designed specifically for the financialwell-being of a child, or a child and a current or former spouse or common-lawpartner. These payments are generally:

-         Not deductible for the payer

-         Tax-free for the recipient.

The difference between the spousal and child support shows the importance of understanding and determining the tax implication of your contractual requirements.

Guidance

Navigating the complexities of tax laws requires precision. At Orion Inc., we ensure your filings are accurate and your financial strategy is optimized to your needs. For more information contact Orion Inc. by email info@orioninc.ca or call 365.809.0334.

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