From: dave@lsuc.on.ca (David Sherman)
Subject: Re: 1993 income tax rates (combined federal/Ontario)
Organization: The Law Society of Upper Canada
Date: Fri, 22 Jan 93 05:16:22 GMT

In article <iq0oXB1w165w@oneb2.almanac.bc.ca> lisa@oneb2.almanac.bc.ca writes:
>I'm wondering if you could explain to me the
>differences (if any) there are to cases of lump sum maintenance payments
>being made to former spouses, from say, non-custodial spouses?
>
>My ex owes as part of our Divorce Order a lump sum payment to me for
>maintenance.  I understand that should he ever actually pay it, I will
>not have to declare it as income.  Questions:
>
>a) Would that payment be tax-deductible for him?

If it's not taxable to you, then no.  The rules are completely parallel:
payments that are deductible to the payer are taxable to the recipient,
and vice versa.  (Whether it's actually deducted by the payer or reported
by the recipient is irrelevant to the other, however.)

However, your understanding that the payment is non-taxable may
not be correct.  It depends on whether the amount is really a lump sum,
or an accrued collection of periodic payments.  If the latter, it's likely
deductible and taxable.  However, in some circumstances an
argument might be made that it's not paid "pursuant to" the court order
(since it's paid late) and thus loses that status.

>b) A girlfriend who is recently separated from her husband is under
>   the impression that if her ex were to pay her child support in *annual*
>   lump sum payments, he would not be able to declare those lump sum
>   payments for child support deductions.  Is this true?  (He would of course,
>   be able to declare deductions for child support payments made on a monthly
>   basis.)

It's correct if it's clear that these are lump sum payments and not support.
That will require interpreting the agreement or court order.  Generally,
if payments are "periodic" they take on the deductible/taxable status.

>c) If the answers to both of the questions above are yes, what is the
>   rationale for the difference?  (one is deductible, one isn't)

Lump sum payments are a one-time adjustment normally reflecting property
division.  They're the cash equivalent of saying, "She gets the house,
he gets the cottage and boat".  They relate, at least in theory, to assets
rather than income.

Support payments are an ongoing series of payments relating to income.
They come out of the payer's income stream and are used to raise the
recipient's income on an ongoing basis.  Making them taxable and deductible
is a benefit to the couple, since the payer is normally in a higher tax
bracket.  The theory is that the level of support (whether negotiated by
agreement or set by the court) will be adjusted to reflect the tax
deduction available to the payer and the taxation of the income in the
hands of the recipient.  If the payer is in a higher bracket, the result
will then be a saving.  The theory also recognizes that, if the payer
does not get a deduction, the effective tax rate on the payer's income
after making this mandatory payment may be very high.  It could exceed 100%,
making payment of tax impossible.

>Lisa Lambeth                             lisa@oneb2.almanac.bc.ca
>Founder, P.E.R.C.S. (Parents for Enforcing Regular Child Support)
>Vancouver Island, B.C.

I assume you'd like to see something in B.C. such as we now have in
Ontario, where support payments are registered with the Child Support
Plan and are automatically deducted at source by employers, much
like income tax, CPP and UIC.  The Plan isn't perfect, but my understanding
is that it's gone a long way towards solving the problem.

David Sherman
Co-author, "Tax Aspects of Family Law" (Law Society of Upper Canada, CAI)
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