Income Tax Rules for Family Law

Overview
In this pamphlet, we explain the income tax rules applicable to situations of child support, spousal support, property transfers, separation and divorce. Income tax laws are extremely complex. This pamphlet is intended to be a practical and simple guide. This is not a substitute for the use of the Income Tax Act. You should talk to us if you are seeking specific advice on your circumstances.

Current Child Support Rules
Currently child support payments are:
i) not deductible from income by the payer (not deductible), and
ii) not included in the income of the recipient (not taxable)
The current rules apply to child support payments that became payable under a court order or written agreement made after April 30, 1997
If such an order or agreement provides for both child and spousal support, payments made will be treated for tax purposes first as child support and then as spousal support. Therefore, all child support has to be paid before the payer can claim a deduction for spousal support
A court order or written agreement requiring payment of spousal support must be registered with CCRA (Canada Customs and Revenue) by completing and filing form T1158, Registration of Family Support Payments, with CCRA. An Order or agreement providing only for child support payments does not have the registered with CCRA
The parties to a pre-existing court order or written agreement may elect that child support payments are not taxable and not deductible by signing and filing Form T1157, Election for Child Support Payments with CCRA

Taxable Support Rules
Support is deductible by the payer and has to be included in the income of the recipient if the payment is:
Spousal support made pursuant to the court order or written agreement
Child support made pursuant to a court order or written agreement dated prior to May 1, 1997
Payments made prior to the date of the court order or the written agreement can be deducted if:
the payments were made in the year of the court order or written agreement, or in the year before; and
the court order or written agreement states that these payments were considered to have been made under that order or agreement
The Income Tax Act applies to spousal support payments for same sex partners after January 1, 2001. Support payments made between same sex partners can now be deducted.

Miscellaneous Support Rules
Lump-sum amounts paid are not considered to be support payments because they are not periodic payments. If you make a lump sum payment to satisfy any and all future claims for support, the payment will not be deductible.

Deductibility of payment of support arrears is a difficult issue. A tax payor can only declare as a deduction or as income the amount actually paid or received. A single catch-up payment of all the arrears is deductible when paid and taxable when received. When the catch-up payment is not equal to the total sum of the delinquent payments, there is some ambiguity as to the tax treatment as it may be viewed as a lump sum. Great care should be taken in this area to preserve the tax treatment you wish to have.

Some third party payments are taxable income for the recipient and deductible for the payor if several conditions are met. You should seek specific advice on this issue.

Support payments to and from non-residents have additional considerations, forms to file and possibly a foreign tax credit. If you are making support payments to a non-resident, you have to file an NR4 Summary Form, Return of Amounts Paid or Credited to Non-Residents of Canada.

Other Credits, Deductions and Benefits
Spousal Tax Credit - If you pay spousal support you cannot claim a spousal tax credit for that person. If you were separated, divorced, or reconciled during the year, you have the choice of claiming the spousal tax credit or the support payments made, but not both
Equivalent to Spouse Tax Credit - You may be able to claim the equivalent to spouse amount if, at any time in the year, you were single, separated, divorced, or widowed, and you supported a relative. However, you cannot claim an equivalent to spouse amount for a child for whom you pay support
Canada Child Tax Benefit - When you separate or divorce, CCRA will recalculate your Canada Child Tax Benefit so that it is based only on your income. To recalculate your Canada Child Tax Benefit, call CCRA at 1-800-387-1193
Changing the Income Tax Deducted From Your Pay - If you are employed and want to change the amount of tax that is deducted from your pay, you should file an updated Form TD1, Personal Tax Credits Return with your employer
Child Care Expenses - Child care expenses are amounts you pay to have someone look after your children while you earn income or attend school and with certain limits are deductible. For more information on child care expenses, obtain a copy of Form T778, Child Care Expenses Deduction for 1998
Education Tax Credits - The student must claim his or her tuition fees and education credits to the extent necessary to eliminate his or her tax liability. Any unused credit can be transferred to a spouse, parent or grandparent

Transferring Property
The Ontario Family Law Act recognizes that marriage is a form of economic partnership. On separation or divorce, a unique set of family law, economic, financial and income tax problems arises. In equalizing property on the breakdown of a marriage, spouses frequently divide assets, such as a family home, furniture, car, registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs), registered pension plans (RPPs), and Canada Pension Plan (CPP) credits.

Transfer of RRSP, RPP and RRIF funds
You can transfer funds from your RRIF , your RRP or non-matured RRSP to your spouse's or former spouse's RRSP or RRIF without tax consequences if certain conditions are met. The transfer has to be made directly from one plan issuer or carrier or administrator to another using specific forms.

Canada Pension Plan (CPP) credits
If your relationship ended in divorce or separation, the CPP credits that one or both of you earned during your marriage can be divided equally between former spouses. This is intended to provide financial protection for the spouse who worked in the home and could not contribute to the plan, or who had lower earnings during the marriage. If you have questions about the division of CPP credits, contact the nearest Income Security Programs office of HRDC.

Property transfers
When you transfer property to your spouse, whether by sale or gift, both of you may have to pay certain taxes under the Income Tax Act. This issue is very complex because of the potential for capital gains, attribution rules, recapture of capital cost allowance etc. For information on this subject, obtain a copy of Interpretation Bulletin IT-325, Property Transfers After Separation, Divorce and Annulment, from CCRA.

You Can Contact Canada Customs and Revenue with Questions. To find the address and telephone numbers of CCRA, check the Government of Canada section of your telephone book. Your income tax guide provides information on how to complete your tax return. In Kitchener, CCRA is located at 166 Frederick Street, Kitchener Ontario. You may also wish to use T.I.P.S. (Tax Information Phone Service) for general and personal income tax information ; 1-800-267-6999. Most of the CCRA publications can be found at www.rc.gc.ca on the Internet. If you have a hearing or speech impairment and use a teletypewriter (TTY), you can call their toll-free, bilingual TTY enquiry service at 1-800-665-0354 during regular and evening hours of service.

Revision Date: Oct. 30, 2001

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NOTE: This brochure provides general information and is not intended to be a legal opinion. Readers are cautioned not to rely on this information without obtaining legal advice with respect to their own circumstances.