Qualifying Payments for Spousal Support during and after separation

by Jennie Weeks

For many couples’ separation is a financial wake up call. Dividing income and assets and funding two households usually means there are less resources to go around. As a Financial Specialist, I try to find ways to help families retain as much their family resources as possible. Understanding how separation changes your tax status can save you money and can even impact how you decide to divide your assets.

Here is one helpful tip especially for a family with a large income differential between two spouses. Spousal support is an income splitting tool and creates an opportunity to increase a family’s overall after-tax cash flow. For a family where two working spouses have similar incomes this is less relevant.

Spousal support is usually tax deductible to the payor and taxable to the receiver of the support. However, there are a few additional rules if the payor wants to claim this deduction. For example: you need to have a signed written agreement or court order; it must be paid on a periodic basis not as a lump sum; must be actually paid in the current year or the year prior for the CRA to award this tax status to the payments. Sometimes a year or more can go by without having this valuable income splitting tool and a family may miss out on this tax savings. The sooner you have an agreement the sooner your spousal support payments can reduce your family’s overall tax burden.

This insight is particularly important for the interim time period when a family is in the process of separating but has not finalized their agreement.

There is often a period of time when one spouse is providing support to another spouse but it has yet to be defined by law. This is usually a kitchen table discussion between spouses as they try to figure out how to separate their finances and one spouse has moved to a new residence. Even after a more formal process is chosen like collaborative divorce, it can still be many months before an interim agreement or separation agreement is signed that lays out the child and/or spousal support obligations.

There is a possibility to make some of these payments tax deductible after the fact. There are a few ways prepare this but what’s most important is that you consider engaging a financial specialist early on with tax experience and retain proof of payments.

For more information about the tax treatment of spousal support, please reach out to a financial specialist from our team at Collaborative Divorce Vancouver.

For more information about spousal support entitlement and payments or assistance with the drafting of an agreement respecting spousal support, please reach out to a lawyer from our team at Collaborative Divorce Vancouver.