By Chantal M. Cattermole and Sarah Tradewell
Just one big gain of getting a professionally-geared up family legislation arrangement is the possibility that, with advance setting up and careful drafting, obligations beneath the agreement can be structured to reduce the tax liabilities of one particular or each get-togethers.
A recent circumstance from the Tax Court of Canada illustrates the diploma to which these kinds of family members regulation agreements can be customized to take into account the one of a kind circumstances of your relatives, when nevertheless taking benefit of tax deductions drafted in extra common terms.
A single of the most typical tax problems arising from the end of a romantic relationship is the payment of spousal and child assist, which could have the effect of substantially cutting down a payor spouse’s take-property pay out. Below subsections 56.1(4) and 60.1(4) of the Profits Tax Act,[1] payments “paid out as an allowance on a periodic foundation for the servicing of a previous spouse” are deductible from the payor spouse’s earnings. Even so, this deduction arrives with Canada Revenue Company (“CRA”) strings attached.
For illustration, the payments ought to be made according to the terms of a “Written Agreement” signed and dated by both of those get-togethers. Payments rendered in the two decades ahead of these types of an agreement has been executed might be deducted, but only if the settlement is drafted so as to accept the quantities compensated.
In addition, the CRA imposes five problems on the kind and structure of payment right before it will allow a deduction to be claimed:
- The payment is a precise amount designed to the recipient according to a court docket buy or written agreement.
- If the recipient is the payer’s latest or previous spouse or widespread-legislation associate, the payer is living different and aside from the receiver at the time the payment is built due to the fact of a breakdown in the romantic relationship. Normally, the payer ought to be the lawful parent of a baby of the recipient.
- The payment is built to support the recipient, the child of the recipient, or both equally. The receiver can use the payment at their discretion.
- The payments are payable on a periodic basis. The timing of the payments will have to be set out in the court get or written settlement.
- The payments are manufactured to the recipient or to an agent imposing the assortment of the quantity.[2]
Nonetheless, there is still space for versatility inside of these circumstances. In Ross v. The Queen,[3] the payor was a lobster fisherman, a hugely seasonal line of do the job. He and his spouse, each represented by counsel, entered into a separation agreement in which the husband’s guidance obligation, alternatively of the more traditional month-to-month payment schedule, took the following variety:
The Spousal help shall be designed on the subsequent agenda:
- A lump sum of $20,000 to be paid out on the spouse signing this arrangement in fantastic religion
- The [family’s] 2011 Jeep and title shall be sent to the spouse by the husband no later on than 5 (five) times after this settlement is signed by each events
- A lump sum of $10,000 to be compensated no later on than January 1, 2017. (at para 3)
When the husband attempted to deduct these payments from his profits taxes, a CRA agent refused the deduction. The taxpayer appealed this refusal to the Tax Courtroom of Canada.
The Tax Court docket reasoned that, although the payment structure was unconventional, the greatest problem of no matter whether he skilled for the deduction essential to be resolved in light-weight of “particularity of the… circumstances of the spouses.”(at para 18). It was distinct to the Court that the parties experienced regarded the hugely seasonal character of the husband’s get the job done and profits, and experienced for that reason structured their agreement “specifically to accommodate the seasonal means of Mr. Ross, the payor, to spend without the need of default or tardiness” (at para 19). In other phrases, the arrangement showed that the parties experienced negotiated the timing of the aid payment obligation to fit their individual economical and existence instances, rather than to disguise transfers of cash as spousal guidance payments. The Tax Court docket allowed the husband to claim the deduction and awarded him enchantment fees.
The higher than case illustrates the variety of solutions which could be accessible to functions negotiating spouse and children regulation agreements, as perfectly as the worth of ensuring an agreement is professionally geared up so as to maximize tax advantages. If you have any issues about tax agreements in household legislation issues, or about family members legislation agreements in normal, remember to speak to a member of the Family Law Team.
If you have (or anyone you know has) issues about tax agreements in relatives regulation matters, or even family members legislation agreements in typical, you are encouraged to get to out straight to any person in our Loved ones Legislation team for far more information and facts. With about 85 a long time of blended knowledge, family members rely on us to enable them navigate the complex legal framework and procedures involved with separation and divorce, including little one and spousal assistance, and how to greatest situate you monetarily at the end of the method.
This piece seems as component of a distinctive 4-section posting collection the place our experienced Family Law team will examine some of the most critical facets of taxation for BC families when it will come to legal service fees, structuring relatives agreements, optimizing tax obligations, as nicely as navigating separation and divorce. Understand extra about this restricted sequence and what matters are coming up next HERE.
[1] RSC 1985, c 1 (5th Supp), ss 56.1(4) and 60.1(4).
[2] See “Support Payment Circumstances,” Government of Canada.
[3] Ross v. The Queen, 2018 TCC 215.
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