Canadian tax remedy of kid and spousal assist funds
When a common-law relationship or authorized marriage ends, there could also be a separation settlement signed to doc the long run monetary or non-financial intentions of the 2 events. This will embody assist funds like spousal or baby assist.
Spousal assist funds are supposed to present momentary monetary assist to a partner with decrease revenue. The funds are usually primarily based on the distinction in incomes between the 2 events and the size of the connection, in addition to different elements.
Spousal assist could also be made as a one-time lump-sum fee or as a sequence of ongoing funds—usually month-to-month. Ongoing funds could also be topic to a particular time restrict, till a sure date or age, or they might be much less clearly outlined. A lump sum fee offers a level of certainty for each events, however they is probably not agreed upon in some instances, particularly if the upper revenue celebration doesn’t have ample belongings to pay the decrease revenue celebration in full.
Now that we have now context for spousal assist, let’s get to your query.
Are spousal assist funds taxable?
Spousal assist paid on a periodic foundation is taxable to the recipient and is tax deductible by the payer. The recipient partner even accumulates room for registered retirement financial savings plan (RRSP) on the revenue as it’s thought-about earned revenue.
To ensure that this taxable and tax-deductible remedy to use, 5 situations should be met, in keeping with Canada Income Company (CRA):
CRA definition of a assist fee
- The fee is a certain amount made to the recipient in keeping with a courtroom order or written settlement.
Word: A written paternity settlement shouldn’t be legitimate by itself, even whether it is registered with the courtroom. Paternity agreements should be a courtroom order issued by a courtroom or a tribunal in accordance with the legal guidelines of a province. - If the recipient is the payer’s present or former partner or common-law associate, the payer resides separate and other than the recipient on the time the fee is made due to a breakdown within the relationship. In any other case, the payer should be the authorized father or mother of a kid of the recipient.
- The fee is made to assist the recipient, the kid of the recipient, or each. The recipient can use the fee at their discretion.
- The funds are payable on a periodic foundation. The timing of the funds should be set out within the courtroom order or written settlement.
- The funds are made to the recipient or to an agent implementing the gathering of the quantity.
Taxes on lump sum spousal assist funds
A lump sum spousal assist fee is tax-free to the recipient and never tax deductible by the payer. So, in your case, Heather, you wouldn’t embody this fee as revenue. It’s certainly tax-free.
As a result of the fee shouldn’t be tax deductible by your ex-husband, and since he’s additionally paying it abruptly up-front, you in all probability agreed to a decrease fee than the cumulative funds you could have been entitled to sooner or later. That is widespread. If a decrease revenue partner will get paid over time and has to pay tax on the funds, they’ll seemingly need to obtain the next greenback quantity of assist than the lump sum fee they may comply with taking.