When parties decide to separate, there are a number of decisions that need to be made. Often, the parties are focused on making life-changing decisions such as making new living arrangements, settling on custody and access rights, figuring out what their new lives will look like, taking into account support payments and the division of marital assets. However, the same decisions and agreements made following a separation can affect the tax and financial well being of both parties for years to come.
Accessing Tax Rules for Support Payments
Having a written agreement or court order is instrumental in ensuring that support payments are subject to the tax rules that apply to support payments. Without either, parties are not able to deduct any of the regular support payments made and do not have to report the payments received on their tax return.
A written agreement should be a written document outlining which party will be making regular payments, whether they are for spousal support, child support, or both. The agreement should be normally be duly signed by both parties and dated.[1] The Courts have held that a "written separation agreement" must mention an agreement to live separate and apart. Any agreements, correspondence, and canceled cheques that do not meet the standard do not constitute a "written separation agreement"[2]. On the other hand, the CRA is prepared to accept that an exchange of written correspondence between the parties or their respective solicitors may be considered to be a written agreement if:
- There was an intention to create a binding and enforceable contractual relation;
- The exchange of written correspondence clearly outlines all the essential terms and conditions of the agreement in an unambiguous and clear manner; and
- There is a clear and unequivocal acceptance in writing of all those terms and conditions by both parties.[3]
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