Child support for many years, is neither tax deductible on the part of the payor nor subject to tax in the hands of the recipient. However, spousal support payments have always and continue to attract this tax treatment. Specifically, if you are paying spousal support, you get to deduct that and if you are receiving spousal support, you must declare it as income and is subject accordingly to taxation. This is only fair and often can free net tax dollars between the spouses and make the payment of spousal ever so slightly less painful.
However, for a very long time, catch up arrears payments have not enjoyed such treatment. As an example, if one has failed to make the periodic spousal support payments they are required to, and then catches up in one lump sum, often the lump sum payments does not enjoy the same tax treatment. The recipient was not required to declare these lump sum payments as support and the payor was not able to deduct them.
In 2013, the tax court, in the case of James v. R. decided that such a payment was indeed subject to tax. However, CRA continued to ignore that decision and had continued to apply its original view of a lack of deductibility of such payments. However, CRA in various recent tax bulletins has now accepted the tax court’s decision.
However, a single lump sum payment not attributed to retroactive support or the payment of arrears, continues not to attract such treatment, ie. no tax. This is often taken into account when the parties negotiate the resolution of the quantification of such arrears or often the court will take this into account when calculating such a payment. The specific CRA income tax folio S1-F3-C3, updated effective March 5th, 2015, replaces interpretation bulletin IT-530R. An important change in tax law on must be cognizant of.