Cross-Border Tax Savings on Spousal Support Between Canada and the United States

Significant tax advantages may be available when a Canadian resident pays spousal support to a recipient spouse residing in the United States. When properly structured, these payments may be tax deductible for the Canadian payor while not constituting taxable income for the U.S. recipient, resulting in substantial tax savings, potentially exceeding 53% for the Canadian payor, depending on applicable tax rates.

1. Eligibility Criteria

To access this preferential tax treatment, the following conditions must generally be satisfied:

• Residency:
  The payor spouse must be ordinarily resident in Canada, and the recipient spouse must be ordinarily resident in the United States.
• Formal Documentation:
  The obligation to pay spousal support must be set out in a valid Separation Agreement or Court Order, drafted in compliance with Canadian tax and family law requirements.
• Nature of Payments:
  Spousal support must be paid periodically (e.g., weekly, monthly, or bi-monthly) and designated specifically for the maintenance and support of the recipient spouse. Payments may be made:
• Directly to the recipient spouse; or
• To an approved third-party supplier of services (such as a landlord), provided such payments meet the requirements established by the Canada Revenue Agency (CRA).
• Separation Requirement:
  The spouses must be living separate and apart at the time the support payments are made.

2. Tax Treatment

• Canadian Payor:
  Periodic spousal support payments that meet the above criteria are generally deductible from the payor’s income for Canadian tax purposes.
• U.S. Recipient:
  Under current U.S. tax law, such payments are not included in the recipient’s taxable income. This asymmetrical tax treatment creates a significant opportunity for tax savings.

3. Additional Considerations

• Tax implications should be carefully reviewed prior to finalizing any support amount or executing an agreement.
• The agreement must clearly identify the payments as spousal support, as different rules apply to child support.
• Both heterosexual and same-sex spouses are eligible for this treatment under Canadian tax law.
• Payments made by a U.S. payor to a Canadian recipient are not deductible to the U.S. payor but are also not taxable to the Canadian recipient (as of 2019).

4. Professional Guidance

Given the technical nature of cross-border tax rules, parties are strongly encouraged to seek specialized legal and tax advice before finalizing their agreements. Proper drafting and structuring of the support arrangement are essential to preserve deductibility and avoid future disputes with tax authorities.

Credit is extended to Andrew Freedman of Verity Valuation Group for their annual publication “The Tax Principles of Family Law,” (32^nd edition) a valuable resource for the Canadian Family law bar.