CANADIAN TAX ISSUES WITH ALIMONY PAYMENTS TO AND FROM NON-RESIDENTS

alimony

Under the Income Tax Act (“the Act”) alimony[1] paid by a separated or divorced spouse will generally be deductible in computing income of a Canadian resident. This assumes that it is paid pursuant to a written agreement or court order, and paid as an “allowance” on a periodic basis.

Similarly, a Canadian resident recipient of such payments will generally be required to include such payments in income.

A number of complex requirements and issues apply to this area, and it is beyond the scope of this article to explore them in any depth. For a comprehensive source of reference, Folio S1-C3-F3 published by the Canada Revenue Agency (“CRA”) would be a good place to start.

Rather, the focus of this article are the special implication that are relevant when there is an international element to the payments.

Payments by Canadian residents to non-residents

There is no requirement for the alimony to be paid to a Canadian resident in order for it to be deductible under the Act.

Furthermore, if the recipient is a non-resident, no Canadian tax would apply to the payments. In this regard, it should be noted that, at one time, Part XIII tax was applicable to such payments as a result of the application of paragraph 212(1)(f), although, in many cases, that was overridden by exemptions in tax treaties. However, paragraph 212(1)(f) was repealed in 1997. Hence even without a tax treaty, Part XIII tax will not apply.

Receipts by Canadian residents from non-residents

As a general rule, if a Canadian resident receives an alimony payment that meets the requirements in the Act for taxability, the fact that it is received from a non-resident should not be relevant. It will still be taxable.

However, where appropriate, the tax treaty between Canada and the payer’s country of residence should be reviewed to determine if there would be any basis for the payment being exempt from taxation in Canada

Payments by non-residents

What if a non-resident who makes alimony payments has income that is subject to Canadian tax? Can it be deducted in Canada? Does it make any difference whether the recipient is a Canadian resident or not?

Many advisors are surprised to learn that a non-resident who has income that is subject to tax under Part I of the Act can deduct such payments in computing income for Canadian tax purposes, assuming such payments meet the normal requirements that would apply to a Canadian resident. Furthermore, this can even apply if the payment is made to another non-resident!

This would generally be relevant in any particular year in the following three types of situations:

The non-resident has “taxable income earned in Canada”, such as income from employment in Canada; income from carrying on a business in Canada, or taxable capital gains from the disposition of “taxable Canadian property”

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The non-resident has income from the rental of Canadian real estate and is electing to pay tax in Canada under section 216 of the Act, or

The non-resident is electing to pay tax in Canada under section 217 on certain specified sources of income, including payments from RRSPs, RRIFs, and other Canadian-based pensions.

In this regard, the CRA has confirmed that non-residents who file Canadian tax returns in such circumstances are allowed to claim “subdivision e” deductions that would be available if they were Canadian residents[2]. That would encompass the alimony.

It should be noted that the special version of the T1 General return that would be used for non-residents who have “taxable income earned in Canada”, or who elect under section 217 of the Act, as well as the T1159 return for those who elect under section 216, both have lines for deducting “support amount” payments.

[1] For simplicity, the widely-used term “alimony” is being used for the purposes of this article; however, the relevant term in the Act is “support amount”, which is defined in subsection 56.1(4).

[2] See paragraphs 22 of IT-420R3; 11 of IT-163R2; and 4 of IT-393R2

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