Are spousal and child support payments taxable?
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.