Spousal Support Should Not Be Taxable!Wednesday, July 28 2010
People (mostly women) who receive spousal support payments must pay tax on it , and the payor may claim it as a deduction. This is not fair and the Advisory Council recommends that the federal Income Tax Act be changed to make spousal support payments non-taxable for the recipient and non-deductible for the payor. Spousal support is awarded to a relatively small number of separated/divorced spouses (married and common-law): about 700 New Brunswickers were receiving spousal support in 2003-04, compared to 15,400 cases involving child support payments.
(Since 1997, child support payments are not taxable/deductible.
The inequity of allowing non-custodial parents who no longer live with the family to deduct the cost of money spent to support their children - a right not granted to parents still living with their children - was one of the arguments for that change. There also appeared to be little evidence that the tax savings for the payor were passed on to the recipient through higher support awards or that the tax deduction provided an incentive to make the payments.)
In general, women - and children in their care - are much worse off financially following separation or divorce than men. During the marriage/cohabitation, many women sacrifice training and career opportunities, earnings and other benefits. Because spousal support benefits are taxable income, some recipients see their GST tax credit and Canada Child Tax Benefits reduced, since these credits decrease as income increases. Taxable income is usually earned income, and unearned income is not taxed. It is therefore unclear why spousal payments are taxed.
During a marriage, the higher income spouse can't deduct the money provided to the other spouse for subsistence. Taxation and deduction of spousal support treats two persons who are no longer spouses as one tax unit, providing for a form of income splitting that is not allowed for spouses during marriage.Many groups and scholars have called for the repeal of the spousal support tax rules : The Ontario Fair Tax Commission and some Canadian legal scholars have called for the outright repeal of the inclusion/deduction system. UBC law professor Claire Young says the elimination of the taxation/deduction of spousal support is a "logical next step" after the abolition of taxation of child support.
- Excerpt, Taxation of Spousal Support Payments, NB ACSW, www.acswcccf.nb.ca/english/documents/Taxation_of_spousal_support_payments.pdf