New Rules for Child Support Tax Deductions

New Rules Now In Effect

Effective May 1st, 1997, the new child support rules, announced in the 1996 federal budget, take effect.

New Rules – No Tax Deduction for Child Support

Under the new rules, child support payments under Court Orders or Written Agreements made on or after May 1st, 1997 are generally not taxable to the recipient or deductible by the payer.

These new rules mean that if the payor is in a higher tax bracket than the recipient, the combined tax bill will usually be higher than under the old system.

Old System – Deduction Permitted

The old system permitted the paying spouse to deduct payments and required the recipient spouse to include them in income.

Taxpayers with pre-May 1st, 1997 Separation or Divorce Agreements continue to have the old rules applied to them unless the Agreement or Court Order is varied to change the amount of child support payable, or unless the parties jointly elect to have the new system apply.

In most cases, it will not be beneficial, from a tax point of view, to opt into the new system.

Old System May Still Apply

In certain limited circumstances, it may still be possible to have the old rules apply post April 1997. The old regime is applicable if the following tests are met:

• Interim support payments were made before May 1st, 1997.
• The Written Agreement or Court Order is signed before 1999.
• The Written Agreement or Court Order specifically provides that the pre-May 1997 payments are considered paid and received there under.

In that case, the Court Order or Written Agreement is deemed to have been made on the date of the first payment. If that date precedes May 1997 and the Court Order or Written Agreement is completed before the end of 1998, the old rules can apply.

It is important to realize that if the level of child support is later varied by a Court Order, Written Agreement or otherwise, then the Court Order or Written Agreement is deemed to commence on the date when the first varied payment is due and accordingly all payments then fall under the new rules. In order to ensure that you have the best tax treatment possible for your child support payments contact one of our Toronto tax lawyers for tax help.