Do You Pay Taxes on Spousal or Child Support?

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I received a lump-sum payment from my ex-husband, as stated in our separation agreement. The agreement states, “this satisfies X’s spousal support obligations towards Y retroactively and going forward. After the payment outlined in this paragraph, there shall be no further spousal support paid.”

Do I have to claim this as income?

—Heather

Canadian tax treatment of child and spousal support payments

When a marriage or common-law relationship ends, the parties often sign a separation agreement to set out how financial and practical matters will be handled going forward. These agreements frequently address support payments — including spousal and child support — and can specify payments as ongoing instalments or as a single lump sum.

Spousal support is intended to help the lower-income partner bridge a financial gap after separation. The amount and duration typically reflect factors such as income differences, length of the relationship and other relevant circumstances. Payments can be structured as a series of periodic payments (often monthly) or as one lump-sum payment. Lump-sum settlements can give both parties certainty, while periodic payments spread the obligation over time. Depending on each spouse’s finances, a lump-sum option may be lower in nominal terms than the total of future periodic payments.

With that background, here’s a clear answer to your question.

Are spousal support payments taxable?

Periodic spousal support payments are taxable to the recipient and are tax-deductible for the payer. For tax purposes, the recipient can also claim the payments as earned income when determining registered retirement savings plan (RRSP) contribution room.

For this tax treatment to apply, the Canada Revenue Agency (CRA) sets out five conditions that must be satisfied:

CRA definition of a support payment

The payment must be a specific amount set out in a court order or written agreement.
Note: A standalone written paternity agreement does not meet this requirement unless it is converted into a court order under provincial law.
The recipient must be the payer’s current or former spouse or common-law partner, and the parties must be living separate and apart because of the relationship breakdown at the time the payment is made; otherwise, the payer must be the legal parent of a child of the recipient.
The payment must be intended to support the recipient, the recipient’s child, or both, and the recipient must be free to use the funds at their discretion.
The payments must be payable on a periodic basis, with the timing specified in the court order or written agreement.
The payments must be made to the recipient or to an agent responsible for enforcing collection.

Taxes on lump-sum spousal support payments

A lump-sum spousal support payment is treated differently: it is tax-free to the recipient and not tax-deductible for the payer. In your situation, Heather, the one-time payout you received under the separation agreement would not be reported as taxable income.

Because lump-sum payments are not deductible for the payer, the payer often negotiates a lower total amount compared with the sum of periodic payments that would otherwise be taxable to the recipient. Conversely, recipients who receive periodic taxable payments typically expect a higher dollar amount over time to compensate for the tax liability. These trade-offs are common in settlement negotiations.

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What about child support payments?

Child support is handled differently from spousal support. Child support payments paid to the parent with custody are not taxable to the recipient and are not tax-deductible by the payer. The same tax treatment applies to reimbursements for a child’s eligible expenses or activities when they are properly characterized as child support.

Child support is often calculated and adjusted year to year based on each parent’s income and the applicable child support tables. It is generally not paid as a lump sum; instead it is structured to provide ongoing support while the child is a minor or as otherwise specified for post-secondary situations.

Equalization payments and other transfers

When couples split, there may also be equalization payments to settle differences in the net family property or to compensate one partner who keeps a family asset such as the marital home. These transfers are typically not taxable as income, nor are they tax-deductible. Transfers between spouses’ registered plans (for example, RRSPs) generally remain tax-deferred when done under the appropriate rollover rules.

Transfers of capital assets — such as non-registered investments or real estate — can often be completed on a tax-deferred basis between spouses on separation, avoiding immediate capital gains. However, couples can agree to trigger a portion or all of a deferred capital gain on transfer so the transferring spouse pays some or all of the deferred tax. Any recipient of assets should consider the present and future tax consequences when evaluating a settlement to ensure the overall division is fair and equitable.

Family law counsel can help structure agreements, but when tax or financial complexity exists it’s wise to get separate tax and financial planning advice before finalizing any settlement.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products.