Alimony is the amount given by one spouse to another in case of a divorce or separation. Alimony is also known as spousal support. This amount is paid to compensate for living expenses of the recipient spouse. Typically, the amount is paid by the spouse with higher earnings.
For the calculation of income tax, the payor spouse can deduct this payment from his or her income and reduce their tax deduction at source. Similarly, the receiving spouse needs to show this amount as income and should pay tax on the value.
Let's look at how the payor and recipient need to approach these payments.
Suppose your annual income is $20,000, and you need to pay $2000 as spousal support. As such, your taxable income is only $18,000.
In order to claim tax benefits, the payment should be backed by a written separation agreement or court order. CRA won't accept informal agreements.
Please note that the amount paid for child support is not eligible for any tax deductions. That is why the written court order should have a clear differentiation between the amounts for spousal support and child support.
Example: Your annual income is $20,000, and you are paying $2000 as spousal support, and $1000 as child support. In such cases, your taxable income is reduced to $18,000 because child support expenses are not eligible for tax deductions.
Note that the tax benefit is only for periodic or regular payments and not one-time or lump sum payments. Also, to avail this benefit, you need to make payments directly. You cannot claim this deduction for indirect payments such as mortgage payments.
Your annual income is $20,000, and you are paying $2000 as spousal support, along with a mortgage of $1000. In such cases, your taxable income is reduced to $18,000 and not $17,000 as the indirect expenses of mortgage payment do not qualify.
As mentioned above, the recipient of spousal support needs to declare this amount as income and is liable to pay income tax.
Your annual income is $5,000, and you receive $2000 as spousal support. In this case, the full income of $7,000 is taxable.
As in the case of payor, income received as child support is not taxable.
Say your annual income is $5,000, and you receive $2000 as spousal support and $1000 for child support. Here your taxable income is only $7,000.
In case you are incurring any legal expenses either to enforce or increase spousal support, this amount is tax deductible.
Your annual income is $5,000, and you receive $2000 as spousal support, and in that particular financial year, you have incurred $1000 as legal fees for claiming spousal support. So for that year, your taxable income is only $6,000.
Alimony payments are considered as part of your holistic tax calculation. You can calculate how alimony affect your take home pay on the Canadian income tax calculator