Canada Revenue Agency Denies Spousal Support Payor’s Income Tax Deduction
January 25, 2023
written on behalf of Feigenbaum Law
In many cases, when spouses decide to separate or proceed with a divorce, claims are made concerning spousal support and child support payments. When dealing with these claims, it is recommended that both parties consult with an experienced family law to ensure that each spouse understands their rights and obligations if a support claim is awarded.
In a recent decision from the Tax Court of Canada, a support payor attempted to claim $42,000 in support payments on his 2018 income tax return. The Canada Revenue Agency did not allow this claim because the claimant did not make these payments in accordance with a written contract. The matter was brought to the Tax Court of Canada for a determination.
Parties Enter Into Separation Agreement
In Vohra v. The King, the claimant, and appellant, “RV”,married his former partner (hereinafter referred to as his “ex-spouse”) in 2006. The parties were married for four years before separating in December 2010. Approximately three months after their separation, the parties prepared a separation agreement independently without a lawyer’s assistance. Some of the pertinent terms in the separation agreement included:
- “Party 1 shall pay spousal support to party 2 in the amount of $3500 monthly commencing Dec 8/10 and ending Dec 8/14…”
- “In addition, the parties intend the terms of this agreement to be:…(3) Final settlement of custody, access, guardianship and support… Once signed and witnessed, this agreement may be amended or varied by a court order, or by written agreement between Party 1 and Party 2…”
3. “This is subject to approval by legal counsel.”
Payor Spouse Makes Spousal Support Payments Beyond Agreed Upon Time Period
There was no indication that RV or his ex-spouse sought independent legal advice prior to executing the agreement. Nevertheless, the parties honoured the terms of the agreement and the appellant made monthly support payments of $3,500 per month to his ex-spouse. The payments were made throughout the agreed period of time and RV continued to make ongoing payments afterwards.
In July 2019, RV and his ex-spouse obtained a consent order from the Court, which provided formal support terms.
Payor Spouse Attempts to Deduct $42,000 from Income Tax, Recipient Spouse Claims $42,000 as Income
The appellant’s ex-spouse included $42,000 as income she received as spousal support on her 2018 income tax return. Conversely, RV claimed a deduction of $42,000 for those same payments. The Canada Revenue Agency denied RV’s deduction because the payments were not made in compliance with a written agreement.
RV took the position that even though the written agreement he made with his ex-spouse had expired, an implied contract continued to exist between them. He provided the Court with a quote from a leading text on contract law titled Chitty on Contracts, which states:
“There may also be an implied contract when the parties make an express contract to last for a fixed term, and continue to act as though the contract still bound them after the term has expired. In such a case the Court may infer that the parties have agreed to renew the express contract for another term. Express and implied contracts are both contracts in the true sense of the term, for they both arise from the agreement of the parties, though in one case the agreement is manifest in words and in the other case by conduct.”
RV also claimed that while the 2011 agreement had not been updated following its expiry in 2014, it still constituted a written agreement which he continued to make payments pursuant to.
Court Finds Agreement was not Updated to Reflect Ongoing Spousal Support Obligations
Canada Revenue Agency argued that the support payments were not made pursuant to a written agreement. Further, they claimed that the agreement which was previously in place expired in 2014 and was not further updated.
In its decision, the Court wrote that the Federal Court of Appeal has already ruled on the purpose and need of having written agreements, stating:
“The rationale for not including separated spouses involved in payments made and received pursuant to a verbal understanding is readily apparent. Such a loose and indefinite structure might well open the door to colourable and fraudulent arrangements and schemes for tax avoidance.”
The Court went on to state that while it did not appear that RV was attempting to act fraudulently, the 2011 separation agreement was not updated following its expiration in 2014 to reflect RV’s ongoing support obligations to his ex-spouse.
Court Rejects Implied Contract Argument
While the appellant leaned on the notion of an implied contract, the Court wrote that the Income Tax Act requires a written agreement to be in place in order to claim spousal support payments. Nevertheless, the Court held that RV was successful in the appeal, and therefore, the payments were made pursuant to a written agreement.
The Court acknowledged that the expired separation agreement was flawed, but noted that the document did set out the support payments which the parties agreed to. In arriving at a decision, the Court also relied in part on the conduct of the parties following the expiration of the contract, during which time the spousal support payments continued according to the agreed upon schedule.
Contact Feigenbaum Consulting for Advice on Tax Considerations Related to Spousal Support Payments
The family law team at Feigenbaum Consulting, led by Mark Feigenbaum, brings our clients a unique and invaluable suite of experience. As family law lawyers with extensive experience in tax issues, we regularly work with individuals to ensure that their family law issues are considered from a strategic tax perspective as well. Please reach out to us online or by phone at 1-877-275-4792 to learn more about our services.
