Hello, my name is Andrew Feldstein and I am the principal of the Feldstein Family Law Group.
Today, I would like to talk to you about how changes to U.S. tax law can affect spousal support payments in Ontario.
On December 22, 2017, the U.S. Congress passed large-scale tax reform through what is known as the Tax Cuts and Jobs Act. Among other things, the Act eliminated alimony (here known as spousal support) as taxable income. What this means is that under the old U.S. tax code, alimony paid by a payor was deductible from their gross, or total, income. Alimony received by a recipient was included in their gross, and taxable, income. For example, under the old tax code if John paid Jane $10,000 a year in alimony, John could deduct that amount from his taxes whereas Jane would have to include it in her taxable income. Under the new U.S. tax code, John has to include the $10,000 in his taxable income whereas Jane does not.
These amendments will take effect after December 31, 2018 for any new support orders or agreements, as well as for any modifications to existing orders or agreements that explicitly provide that they will be subject to the new amendments. This means that while support orders or agreements made after December 31 will automatically be subject to the new amendments, existing ones will not. Existing orders or agreements would only be subject to the new amendments where they are changed, and the change explicitly mentions that the order or agreement is subject to the new tax code.
Under the Canadian federal Income Tax Act, spousal support is treated similarly to alimony under the old U.S. tax code. Namely, spousal support paid by a payor is deductible from their taxable income, and spousal support received by a recipient is included in their taxable income.
While this may seem like just a tax issue, it can also influence the amount of spousal support. In deciding the amount of spousal support, many judges and lawyers look to the Spousal Support Advisory Guidelines, or SSAG. While not legally binding, many judges and lawyers use the formulas in the SSAG as a starting point in calculating the amount of spousal support. Both formulas under the SSAG, namely spousal support calculated with and without child support, assume that the payor can deduct the support amount from their taxes and that the recipient must include the amount in their taxable income. In essence, the SSAG assumes that the Canadian income tax rules apply.
Where the support paid is not deductible, the SSAG provides for exceptions to the regular calculated amount. In doing so, the SSAG are primarily concerned with the payor’s ability to pay if the support amount is not deductible. For example, if the payor receives a non-taxable disability pension they would not be able to deduct the amount of support paid and may have a harder time paying the higher amount. The exceptions under the SSAG lower the cap for spousal support without child support and lower the range of payable spousal support with child support. For example, the exceptions may place a cap of $1,200 on spousal support without child support ordinarily calculated between $1,000-1,500 per month, or reduce the ordinary range of spousal support with child support from $500-800 to $400-700 per month.
What this means is that if the payor is earning income in the U.S. and is subject to the new tax code, and the recipient is in Ontario their support payments would not be deductible and would potentially attract an exception under the SSAG. Therefore, for couples separating after December 31, 2018, where the payor lives and works in the U.S., the new amendments to the U.S. tax code may result in a lower initial calculation of spousal support under the SSAG.
Regarding changing an existing order, courts in Ontario may vary a spousal support order under the Divorce Act where they are satisfied there has been “a change in the condition, means, needs or other circumstances of either former spouse” and under the Family Law Act where there has been a “a material change in the dependant’s or respondent’s circumstances.”
While taxes may not be the first thing on people’s minds, especially taxes across the border, they may have a profound impact on how much spousal support is paid. Therefore, it is important to make sure that you know how any changes can affect your rights and obligations under a support order or agreement.
Thank you for taking the time to listen today. For more information about how taxes can affect spousal support payments, and to schedule a consultation, visit our website at www.separation.ca or contact our office at (905) 415-1636.