Is alimony (spousal support) taxable?

Alimony (“spousal support”) that is payable on a regular basis is taxable for the recipient and tax deductible for the payer, as long as there is a judgment or written separation agreement that formalizes the alimony that is being paid. If alimony is paid as a “lump sum” however, it is neither taxable for one nor deductible for the other. In cases where alimony is paid, in whole or in part, to third parties (for example, to a landlord to cover the rent), such payments are not taxable for the recipient nor deductible for the payer – unless special provisions of the Income Tax Act are invoked!

Remember, alimony remains taxable even if the payer chooses not to deduct it! There is no law obliging the payer to deduct alimony payments, but there is a clear law obliging the recipient to declare receipt of alimony. So, agreements based on both spouses not declaring alimony on their income tax returns in order to “evade” taxation rules will never work out: sooner or later, the recipient will be audited by the tax department, and have to pay penalties and interest, whereas the payer will not be punished in any way!

There may be a considerable tax saving where a high-income payer remits alimony to a lower-income recipient. Sometimes, the payer in such circumstances will agree to pay the additional income taxes the recipient will have to pay. This requires special language in a consent agreement. Saving tax dollars is always a good idea!