Tax Issues on Separation And Divorce Part 2

March and April are the busiest times of the year for tax accountants. Many of the clients Thibault Jones Law works with have certain tax benefits when it comes to dealing with thier family issues. It is now tax season and a great time to discuss some of the potential tax issues relevant to family law clients.

CCH - a Wolters Kluwer business is a company that focuses on research in various areas of tax, accounting, law ect. This series will break down a great article produced by CCH entitled "Tax Issues on Separation And Divorce".  Due to the length of the article, this blog will break it down into smaller parts, however, you can read the entire article on the website of CG Jones CGA or click here and scroll down to the article.

Part 2

An order of a competent tribunal is a decree, order, or judgment made by a court or other competent tribunal. Nothing less than a concrete pronouncement, decree, or direction of a tribunal empowered to make an order will constitute the required order. An agreement deemed by a provincial court to be a court order for purposes of provincial maintenance enforcement
legislation, will not, in and of itself, result in the agreement being considered an order made by a competent tribunal for the purposes of the Act. If the spouses or common-law partners have only a written separation agreement, the alimony or other allowance will be deductible if the other requirements are met. Generally speaking, a written agreement should be a written document under which a person agrees to make regular payments to maintain his or her current or former spouse or common-law partner, children of his or her current or former spouse or  ommon-law partner, or both. The agreement should normally be duly signed and dated by both parties. The courts have held that cancelled cheques, correspondence, and agreements which do not mention agreement to live separate and apart do not constitute a “written separation  agreement”. 

However, the Canada Revenue Agency (CRA) is prepared to accept that an exchange of written correspondence between the parties or their respective solicitors may be considered to be a written agreement if:
• there was the intention to create a binding and enforceable contractual relation;
• the exchange of written correspondence outlines all of the essential terms and conditions
of the agreement in a clear and unambiguous  manner; and
• there is a clear and unequivocal acceptance in writing by both parties of all those terms and conditions

Child support payments

Effective May 1, 1997, a new system of taxation has been implemented under which separate  treatment is prescribed for payments made on account of child support (“child support payments”) and payments made on account of support of the recipient (usually but not always a former spouse or common-law partner; in any event these payments are referred to for convenience as “spousal payments”). Child support payments are not taxable to the recipient nor
deductible to the payer, whereas support payments for the benefit of the recipient will continue to be taxable to the recipient and deductible to the payer so long as they meet the criteria set out above. There is a general presumption that payments are child support payments unless otherwise identified, and new system agreements which provide for taxable/ deductible (as opposed to child support) payments must be registered with the CRA.

What is a child support payment?

A child support payment is any support payment which would be deductible under the rules set out above that is not identified in the agreement or order under which it is made as being solely for the support of a spouse or common-law partner or former spouse or common-law partner or the parent of the taxpayer’s child. In short, unless the written agreement or court order which provides for periodic payments specifies that an amount isfor the benefit of the recipient and not the child, it is presumed to be child support. Therefore, if a written agreement, for example, provides for a global amount of support to be paid in respect of a spouse and child, the whole amount is considered child support for tax purposes. The same treatment will apply to amounts that are required to be paid directly to third parties but are nevertheless potentially deductible. Such third-party payments will be treated as child support amounts unless the order or agreement under which they are made clearly identifies the payments as being solely for the support of a spouse or common-law partner, former spouse or common-law partner, or parent of the payer’s child, as the case may be.