Lump-Sum Spousal Support Arrears Should Not be “Netted Down” under Tax Policy

Mark Feigenbaum

A recent Ontario case dealt with whether a lump-sum gross amount of spousal support arrears should be “netted down” to account for the taxation of support payments. Spousal support is normally taxed as income. “Netting down” is an accounting term meaning to reduce an amount by subtracting tax and other costs.

Facts

 After the parents separated, they agreed to the terms of a court order that the father would pay child support to the mother in accordance with the Ontario Child Support Guidelines (the “Guidelines”) starting in 2004 and every subsequent year. They also agreed that he would pay an additional amount for spousal support to provide the wife with 60% of the family’s net disposable income in the previous year. The parents also agreed that the mother would be responsible for the children’s section 7 expenses but that the parents would share their children’s post-secondary education expenses according to their incomes.

In 2014, the father filed a motion to change the order to reduce spousal support to $2,000 per month and to terminate child support for their oldest child. The mother then filed a response asking that arrears of support be paid before his motion was considered, given that the father had not contributed towards the children’s costs of attending post-secondary school.

In 2018, the judge ordered that the parents provide their submissions regarding the amount of arrears for support owed if they were not able to agree on the amount owed.

Issues

The parents’ submissions raised various issues regarding the calculation of arrears.

One of the main issues was the tax considerations for the spousal support order.

The mother submitted that the father owed her the amount of $102,944 for the period from 2009 to 2017; this was the sum of $52,484 in overpayment of child support and $155,428 in underpayment in spousal support.

The father submitted that the gross amount of spousal support payable during the period of 2009-2017 should be “netted down” to account for the different tax treatment of a lump sum of spousal support as compared to an order for periodic spousal support.

The mother responded by arguing that there was no need to “net down” the amount of spousal support because the policy of the Canada Revenue Agency (the “CRA”) permits such a non-retroactive lump sum spousal support payment to be deducted by the payor.

Decision

At the outset, the judge stated that the general rule for the tax treatment for retroactive awards of spousal support is that:

“[A]n award of retroactive spousal support should be reduced to take into account the benefit of the income tax deduction that the payor would have been able to claim using the mid-point of the parties’ respective marginal tax rates when such evidence is available.”

However, the judge found that in this case any lump sum award of spousal support did not represent a retroactive award, but rather the payment of spousal support under an existing order.

The court then cited the CRA’s Income Tax Folio S1-F3-C3, which states, in part:

“3.2  Generally speaking, spousal support payments are taxable to the recipient and deductible by the payer. […]

3.44     An amount paid as a single lump sum will generally not qualify as being payable on a periodic basis. However, there may be circumstances where a lump-sum amount paid in a tax year will be regarded as qualifying as a periodic payment where it can be identified that:

•  the lump-sum payment represents amounts payable periodically that were due after the date of the order or written agreement that had fallen into arrears […]

3.45   Where all the requirements of a support amount are otherwise met, the amount is deductible by the payer and included in the recipient’s income.  Where the amounts paid are attributable to amounts owing in prior years, the amount may be a qualifying retroactive lump-sum payment and a special tax calculation may be available […]”

After reviewing the CRA’s policy, the court agreed with the mother’s submission that it was unnecessary to “net down” the arrears of spousal support owed by the father because such a lump sum payment “represents the amount of spousal support payable periodically that were due after the date of the order or written agreement that had fallen into arrears”.

Get Advice

At Feigenbaum Law, our goal is to help you move forward following the breakdown of a relationship while retaining as much financial stability as possible and ensuring your children are provided for. Mark Feigenbaum is able to counsel his clients on all potential risks that may result from a family law dispute, not just those related strictly to the breakdown of a marriage. Additionally, Mark can assist you with your legal or tax matters and provide you with comfort in knowing that you are in highly experienced hands. Prior to forming his law firm, Mark worked in the cross-border tax department of an international Big 4 firm and held accounting management positions in a range of sectors in both Canada and the US. Contact Mark online or call him at (416) 777-8433 or toll-free at (877) 275-4792 to book a consultation.