The answer, as always: it depends. Let’s turn to our friends Walter and Skyler for some guidance.
Spousal support can be paid in one of two ways:
1. Periodic (e.g. Walter pays $500/month to Skyler); or
2. Lump Sum (e.g. Walter makes a one-time payment of $30,000 to Skyler).
Periodic spousal support payments are tax deductible by the payor (Walter) and added to the income of the payee (Skyler). In this case, if Walter earned $75,000/year teaching chemistry and Skyler made $50,000 per year bookkeeping, Walter’s taxable income for the year would equal $75,000 – ($500 spousal support x 12), or $69,000. Skyler’s taxable income for the year would equal $50,000 + ($500 spousal support x 12), or $56,000. However, if Walter made a one-time payment $30,000 to Skyler in satisfaction of his spousal support obligations, he would not be able to deduct that payment from his income. The payment amount would not be added to Skyler’s taxable income.
The structure of the payments may not matter much in the scenario above, but it begins to matter as the income disparity between spouses grows. Suppose Walter made $300,000/year in a very seedy but lucrative profession, and his spousal support obligation was $5,000/month. Here’s how spousal support would be taxed:
Periodic (payee gets taxed): Walter’s taxable income would equal $300,000 – ($5,000 x 12), or $240,000. Skyler’s taxable income would be $50,000 + ($5,000 x 12), or $110,000. Therefore, since it is Skyler paying tax on the spousal support in this scenario, she will pay $11,134.17 in federal tax on the $60,000.00 spousal support, as it is taxed at the lowest two marginal tax rates (15% on income below $55,687, and 20.5% for income between $55,867 and $111,733 per 2024 CRA reports). She will also pay $6,458.86 in provincial tax on the $60,000 spousal support, as it is taxed at the lowest two marginal rates (10.5% on the first $52,057, and 12.5% for income between $52,057 and $96,677 per 2024 CRA reports). Skyler will pay $17,593.03 in total taxes on the $60,000 in periodic monthly spousal support received through the year.
Lump Sum (payor gets taxed): Walter’s taxable income would be $300,000. Skyler’s taxable income would be $50,000. Therefore, since Walter cannot deduct $60,000 from his taxable income due to spousal support in this scenario, he will pay $19,529.92 in federal tax on the $60,000, as it is taxed at the highest two marginal tax rates (33% on income exceeding $246,752 and 29% on income between $173,205 and $246,752 per 2024 CRA reports). He will also pay $8,700 in provincial tax on the $60,000 spousal support, as it is taxed at the highest marginal rate (14.5% on income exceeding $96,677 per 2024 CRA reports). Walter will pay $28,229.92 in total taxes on the $60,000 lump sum spousal support payment.
Therefore, between Walter and Skyler, they will save a cumulative total of $10,636.89 per year ($28,229.92 – $17,593.03 = $10,636.89) by opting for periodic spousal support payments rather than a lump sum spousal support payment. At the bottom of this page is a table that may be easier to digest. Of course, this arrangement favours Walter, as he has a longer period of time to pay his spousal support obligation in addition to $28,229.17 saved annually at tax time. Skyler has to pay an additional $17,593.03 each year under this arrangement and only receives monthly installments.
This is where the advice of a lawyer can help. Suppose the value of Walter and Skyler’s assets is $800,000. Walter and Skyler decide that Walter’s spousal support obligation is met by Skyler taking an additional $300,000 of their assets in addition to her $400,000 entitlement, resulting in $700,000 of property going to Skyler and $100,000 going to Walter. However, Skyler calls her lawyer, Saul, who reminds her of the tax consequences that she incurs by receiving lump sum spousal support. Given this advice, Skyler may decide that $300,000 is not enough to satisfy Walter’s spousal support obligation, and that her additional annual tax bill of $17,593.03 must be considered.
It should be noted that Walter and Skyler have the luxury of choosing between lump sum or periodic spousal support. The majority of people will only have the periodic option available to them—after all, not many of us have thousands and thousands of dollars lying around just waiting to change hands. Again, talk to a lawyer to discover your options.
For the record, this scenario is over-simplified. Maybe there are tax credits to be considered. Maybe it was a very long marriage and the lump sum that should be paid is ten times the amount considered in the lump sum option. It’s complicated. A lawyer can help you find options to make the most of your finances when going through a separation or divorce. Consider giving one of us a call.
RELEVANT LEGISLATION
The Divorce Act – Section 15.2
The Family Maintenance Act (Saskatchewan)– Section 3
The Income Tax Act – Sections 56(1)(a) and 60(a)
The Spousal Support Advisory Guidelines
