Tax on orders of child and spousal support made before May 1, 1997

Payments of support pursuant to an agreement or court order that was properly made - that is, one which met the criteria set out in the Income Tax Act and which was entered before May 1, 1997 - are tax deductible from the income of the payor and included as income for tax purposes in the hands of the recipient.  This changed on May 1, 1997.

Typically, in Manitoba, before May 1, 1997, when the courts made an order of support or the parties negotiated a written agreement, the tax implications were taken into account. The tax structure was such that a person in a higher income tax bracket, usually the payor, would save more than it would cost the recipient who was typically in a lower tax bracket. This had the effect of making more money available for the payment of support, and meant that divorced families were paying less income tax overall than intact families.

Susan Thibodeau, in her famous case, challenged the taxability of child support payments, which case, although she lost, was one of the main political reasons for the change in the tax law and the imposition of child support tables. The change in the law benefits the government by creating more tax revenue.

The change in the law does not affect "old" orders or agreements, that is, those consummated before May 1, 1997.  Orders or agreements which contain provision for automatic increases (e.g. cost of living) will remain covered by the old rules.

The parties may elect to change the taxable status of the pre-May 1, 1997 order (CRA Form T1157 - Election for Child Support Payments), that is, so that the payments are not deductible by the payor or taxable in the hands of the recipient.  This election is a one-time filing and cannot be rescinded or varied to return to the old rules.

Taxation of child support orders made after May 1, 1997

Child support payments made pursuant to agreements or court orders made after May 1, 1997 are "tax free". The payor has no right to deduct the payments from his or her income and the recipient does not have to pay tax on the moneys received.  Because spousal support remains affected by the old regime, that is, they are deductible by the payor and included as taxable income in the hands of the recipient, where the order or agreement provides for a combined payment or separate payments for child and spousal support, but only part of the total amount due is paid, the payments for child support are deemed to have been paid first.

Child Care Expenses

Day-care or child care expenses incurred to allow the parent to work, pursue a business activity or obtain education are deductible subject to limitations and maximums. 

Where the parents are cohabiting, CRA requires the deduction to be taken by the lower income parent.  Where the parents have separated or divorced, the deduction is available only to the custodial parent. 

Parents who share custody the parties may share the deduction to the extent that they each pay.  Child care expenses will usually qualify as "special or extraordinary expenses" under Section 7 of the Guidelines and therefore the tax implications of such payments should be factored into the amount agreed or ordered to be paid, as the responsibility should only apply to the net amount payable.

Child Tax Benefits

The Canada Child Tax Benefit ("CCTB") which combines a number of programs intended to benefit children  is available upon application.  The amount payable is subject to income limitations, the number of children and is gradually reduced from the current maximum to zero where the combined family income exceeds $95,400.

The government requires that each parent file a tax return, whether or not there is income to declare.  The amount is payable based on the income reported and is subject to annual adjustment in July. 

Where the parties have separated, CRA looks only to the income of the custodial parent

Education and Tuition Credits

A student may be eligible to claim a credit for tuition for university or college.  In addition the student may be able to claim an education credit depending on the province in which the student resides (approximately $100 per month) for each month of enrolment.

This credit, to the extent unused by the student to eliminate his or her liability for tax, subject to maximums  may be transferred to a spouse parent or grandparent as the student may choose.

Tax Deductibility of Legal Fees

In certain circumstances legal fees associated with marriage/relationship breakdown are deductible, namely, where the fees are incurred:

• To establish a right to child or spousal support under the divorce act or provincial legislation

• To increase the amount payable

• To enforce an existing court order or agreement to collect arrears

• To resist an attempt to  reduce spousal or child support

• To make child support non-taxable

Legal fees incurred for custody litigation, to obtain a divorce, relating to the division of property or to establish, enforce or collect payment of a lump sum amount instead of periodic support are not deductible.