Lump Sum Spousal Support

5 points to ponder when considering lump sum spousal support (not in order of importance - the level of importance of each of these points will depend on the particular circumstances of your case):

1. Lump sum spousal support is generally a one-time payment, as opposed to "periodic" (for example, monthly) payments;
2. A true lump sum support payment is neither taxable in the hands of the recipient nor tax-deductible to the payor;
3. Is is generally accompanied by a comprehensive release of spousal support, which is meant to make this payment final and non-variable;
4. It should be calculated with care and be based on factors including the length of the relationship (not just marriage), the parties' roles in relationship, whether child support is paid and in what amount, and the life expectancy of the payor and recipient;
5. When calculating the right amount of the lump sum, do not forget to consider the unique tax treatment of these payments  - ie: take into account that the sum will have no tax consequences for either party. The payor will make the payment using net dollars (money on which he or she has already paid tax) and the recipient will receive the payment on a tax-neutral basis as well. For example, when calculating what lump sum three years of periodic payments would represent, it is not appropriate to simply multiply the amount of support payable per month by 36 months. This is because periodic payments have different tax consequnces to both the payor and recipient.

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Child/Spousal Support and CRA

Periodic child support payments, unlike spousal support, are made in Ontario on a tax-neutral basis. This means that they do not form part of the income of the recipient and are not deductible to the payor. 

The preceding statement must be approached with some caution because there are some payments made by parents, effectively being child support, which do have tax consequences. For example, daycare expenses can have tax consequences to the payor, and favourably so. Depending on the age of the child, either all or some of those expenses may be deductible for tax purposes. Again, depending on the child's residential arrangements, a parent may deduct those expenses (while the other parent does not) and in such a case, the deduction may affect the way the amount owing by the non-deducting spouse is calculated in the first place. By way of a simple example, if the annual cost of daycare is $5,000, in calculating at what proportion the parents will share the expense, one must consider which parent will take the tax deduction and in what amount.

Periodic spousal support, on the other hand, is taxable as income in the hands of the recipient and tax-deductible to the payor. A different tax treatment applies to lump sum spousal support payments.