Avoid Retroactive Spousal Support Tax Mistakes

Our highly rated Vancouver and Calgary family lawyers are often asked “How Do I Avoid Retroactive Spousal Support Tax Mistakes?” In today’s blog by Lorne MacLean, QC, we will show you how to Avoid Retroactive Spousal Support Tax Mistakes.

Many family law clients are unaware that spousal support is deductible by the paying spouse and included in the taxable income of the receiving spouse ONLY IF certain strict rules are met. One of the first tips we can give you on how to Avoid Retroactive Spousal Support Tax Mistakes is: make sure you both promptly AND properly paper the support payment so you don’t lose the substantial tax deduction benefit.

To avoid disaster, contact a good family lawyer immediately. Call 1 877 602 9900 to get the benefit of tax deductions so the standard of living for the separated family doesn’t suffer. We have attached a link to the CRA spousal support rules here.

Avoid Retroactive Spousal Support Tax Mistakes -FIVE BIG MISTAKES TO AVOID!

Delaying in properly papering spousal support can result in you paying thousands of dollars more than you should. Properly papered spousal support settlements and court orders help you pay the fair amount and save thousands by getting the tax credits you deserve. Don’t make this huge mistake.
Not using the tax deductibility of spousal support to help pay family debts by having the receiving spouse use a portion of their spousal support to pay half or some other fair share of family debt. Don’t make this huge mistake.
Not paying identifiable and set periodic payments each month. The definition of “support amount” includes a requirement that the amount be payable on a periodic basis. “Periodic” means recurring at regular intervals. A single payment made in satisfaction of all future support obligations is not periodic and will not qualify, nor will a single payment made as consideration for a release from future support obligations. Don’t make this huge mistake.
Conflicting tax court decisions exist over whether a single payment made in satisfaction of arrears of a periodic amount qualifies for tax deduction, because the test is whether the amount is payable on a periodic basis, not whether it is actually so paid. See #1 above and don’t delay!
If the spousal support payments otherwise comply with the periodic payment rules you may be entitled to a retroactive tax deduction for the year of the agreement or court order and one year prior. If support has been paid voluntarily in the current year or in the year preceding the execution of the agreement, you can seek to paper the payments as retroactive spousal support to be deducted by the payor and included in income of the recipient. Remember, you have to also consider who will pay the penalties and interest and who will pay the recipient’s taxes and whether the payor should get to keep all of the tax refund.

Avoid Retroactive Spousal Support Tax Mistakes- WHAT IF THERE IS NO RETROACTIVE TAX DEDUCTION? Call 1 877 602 9900

In spousal support cases amount the recipient receives after subtracting the tax payable on the spousal support is called the ‘after-tax benefit.’ The amount that the payor pays after the subtracting the tax deduction on the spousal support is called the ‘after-tax cost’ of support. If the retroactive support is too old to meet CRA rules or payments were made but not on a periodic basis, a Court or a support agreement won’t be able to fix things to obtain the tax deduction and inclusion regime. Potentially, in this situation there may still be a way to Avoid Retroactive Spousal Support Tax Mistakes.

A recent 2018 Ontario decision of Verhey v. Verhey considered whether a retroactive support adjustment should be adjusted so that the recipient had the same after-tax benefit as she would have had, if tax had been paid on the support, or whether the payor should only have to pay what he would have paid, after tax, had support been deductible. The Ontario Judge in Verhey took a compromise approach by averaging the after-tax benefit of the support to the recipient and the after-tax cost of the support to the payor.

However, as a cautionary tale to procrastinating or ill informed spouses, the Ontario Justice emphasized that, the test on what method to use is a subjective one that should look at all circumstances including the parties’ respective financial circumstances.

We routinely use this balancing of after tax incomes approach in crafting fair one time lump sum support payments to end future spousal support. It can also be used in retroactive spousal support cases. This approach is a last resort only!

Don’t be the person who overpays spousal support, or someone who doesn’t properly calculate fair support given all the picky and sometimes harsh CRA rules and regulations. Pick up the phone and call us when you separate, not months later to avoid a nasty surprise.