While it is common knowledge that there are tax consequences in relation to spousal support in Canada, i.e. taxable to the recipient and tax deductible to the payor, there is some ambiguity when it comes to the tax treatment of spousal support when the recipient is Canadian but the payor is a resident of the United States.
Prior to 2018 there was effectively no difference in tax treatment for US payors and recipients in relation to their Canadian counterparts, as US payors could claim a tax deduction and Canadian recipients would still have to declare and pay tax on the spousal support they received. However, there was a tax regime change in the US tax system in 2018 and more specifically, the US tax laws as it pertains to spousal support changed in December 31, 2018 such that payors were not supposed to deduct spousal support and receivers were not to deduct it. This change resulted in a Tax Treaty, the Canada – US Tax Treaty, specifically addressing this situation.
Paragraph XVIII(6) of the Treaty states that:
“Alimony and other similar amounts (including child support payments) arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable as follows:
(a) such amounts shall be taxable only in that other State;
(b) notwithstanding the provisions of subparagraph (a), the amount that would be excluded from taxable income in the first-mentioned State if the recipient were a resident thereof shall be exempt from taxation in that other State.”
As such, following the changes in the US tax system and the language of the Treaty it would appear that if there is divorce and/or separation agreement after 2018 or before 2019 but later modified that the tax treaty would provide the Canadian recipient with the ability to claim a deduction for the spousal support they receive.
However, following the changes in how the US treats spousal support for tax purposes and the provisions of the tax treaty highlighted above, there are still some very important considerations for payors who are US residents and recipients who are Canadian.
More specifically, it would appear that even if the spousal support emanates from the US and a Canadian does not have to pay tax on it, it appears that they still must declare the funds on their tax returns every year and then receive a corresponding deduction. As such, a Canadian recipient would still have to declare the spousal support on their tax returns and cannot be silent about receiving spousal support from a US payor. In addition, spousal support received from a US payor prior to December 31, 2018 appear to still be taxable for a Canadian recipient.
In relation to payors, one could wonder, should there not be some kind of consideration for the fact that spousal support considerations under the Spousal Support Advisory Guidelines (SSAG), contemplate tax considerations in relation to the level of spousal support based on incomes, and specifically that corresponding values are traditionally assigned with the contemplation that spousal support payments are taxable to recipient and deductible to the recipient?
Fortunately, the SSAG do provide for consideration in situations where support payments are not deductible to payors and this consideration would allow for lower monthly spousal support payments to reflect the fact that the payor has no ability to deduct the spousal support payment and the recipient is paying no tax on it. And this of course is a very reasonable proposition because if a recipient were receiving spousal support set to a figure that traditionally contemplates tax implications, yet the recipient is not in fact paying tax on it, it would represent a financial windfall to the recipient with no benefit to the payor.
While the SSAG are certainly only advisory, the courts by and large do place a significant weight on them and while family law cases are quite fact specific and decided on a case by case basis, and certainly when a payors’ income is over $350,000 spousal support cases require an individualized, fact-specific analysis, there is large amount of case law that supports the aforementioned SSAG consideration in situations where spousal support payments are not deductible to the payor or taxable to the recipient, and have lowered monthly spousal support payments to reflect this. To that end the following cases of Syrette v. Syrette 2011, James v. Torrens 2007 and Boju v. Carr 2009 are highlighted and it is also important to note in some of these cases that ordinarily payable support was cut in half due the payor’s inability to deduct spousal support for tax purposes.
As such, the important thing to remember for spousal support payors residing in the US is that there are SSAG considerations that the Courts have supported which will allow you to pay less than the standard SSAG amount based on your income in the event that your spousal support payments are not tax deductible to you and payable to the Canadian recipient.
This blog post was written by Samir Nawaz, a member of the Family Law team. He can can be reached at 613-369-5497 or at [email protected].
