How Does Spousal Support Work if One is a US Resident and the Other is a Canadian resident?
In the past, the United States and Canada treated spousal support the same way with regard to the tax treatment. The support payor deducted and the support recipient included the payment in her income. Simple.
The United States brought in changes with respect to all orders made anywhere in the world to the effect that spousal support received or paid by a U.S. citizen after 31 December 2017 is no longer deductible to the U.S. payor or taxable to the U.S. recipient.
After 31 December 2017, a Canadian resident pays spousal support paid to a U.S. resident. (Some sources that we have considered tell us that the ‘date’ is 1 January 2019.) The U.S. resident will not pay tax on the spousal support receipt received. There is therefore an opportunity for the Canadian spousal support payor to deduct the support payments as before. There is room to negotiate a different arrangement and a different amount but the wording of any deal will need to be carefully crafted so that the CRA will accept the arrangement.
A Tax Treaty Addresses the Complex Taxation Issues
There is a tax treaty between the United States and Canada that states that the tax treatment of alimony (spousal support) is 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.
What Happens Depends on Where the Divorce Order Is Entered
In practical terms, this means that the actual amount of the support would be determined by where the order was entered. If a United States resident is paying spousal support to a Canadian resident pursuant to a court order entered in the U.S., there would be consistency in the tax treatment of the spousal support. The U.S. support payor will not be able to deduct the payments on their income taxes. The Canadian support recipient, under the tax treaty, will not have to include the support payments in her income.
To be a little more technical re how this is done, I have turned to the Andrew Freedman et al text, Financial Principles of Family Law. The authors state:
The spousal support amount received in Canada pursuant to an order or agreement made in the United States is reported as income in the Canadian’s return and a deduction for an equivalent amount would be taken at line 25600 on the Canadian income tax return. This will undoubtedly attract the attention of the CRA and if CRA does not apply the treaty, then an improper assessment is possible. It will be up to the recipient as to how to reflect this in their personal tax return.
Under Canadian law, courts will use Spousal Support Advisory Guidelines as a double check against the amount and duration of spousal support to be paid. Inherent in the model is the assumption that the payor deducts and the recipient includes the payments in her tax. So we see that the SSAG are of more limited help in this situation.
What do we do? We must adjust the calculations under the SSAG to factor out the tax angle. Presumably, the amount of spousal support would need to be reduced to compensate the paying spouse for the fact that they cannot deduct their payments on their tax return. The exact amount of the deduction may be somewhat difficult to figure out, leading to potential complications. It’s all a matter of patient and reasonable negotiation.
Contact an Ontario Family Law Lawyer Today
Any time that you are going through a cross-border divorce, there may be a multitude of legal issues that could make your case more complex. You should always seek help from a family law lawyer when you have a divorce in Canada, no matter where you live. The Gene C. Colman Family Law Centre helps you with difficult legal issues, counseling you and advocating on your behalf every step of the way. To schedule an in-depth consultation with a lawyer, you can send us a message online or call us today at 1-888-389-3099.
