The MacDonald & Partners Team, Working for You

 

ARTICLES
Gary Stuart Joseph, Partner and Firm Chair

Ontario Family Law

Endorsement - Corrick

Reasons for Decision of J. Greer

Endorsement - Spies

Family Law

Child Support / CPP Benefits

EXPLANATORY NOTE

Domestic Violence in Family Law Cases

Leave to appeal opinion

Tax Treatment of Payments of To and From Non Resident Spouses

von Czieslik v Ayuso

Challenging Arbitration Awards
and/or Removing the Arbitrator under the Arbitration Act, 1991

When Family Courts and Criminal Courts Collide: The Impact of Bail Conditions on the Adjudication of Family Law Matters



Tax Treatment of Payments of To and From Non Resident Spouses:

 

  1. Gave me this topic because I know the least about tax;
  2. Points to remember:

    a) payments to a non resident spouse or former spouse are not subject to withholding taxes;

    b) child support payments received by a Canadian recipient are in almost all cases not taxable to the recipient BUT if you have Italian or French payors, all or part of the payment may be taxable to the recipient!!

    c) Spousal support payments are generally deductible by the payor and taxable to the recipient BUT if you provide for same in SA, a US resident recipient spouse may receive the payments tax free and the Canadian payor spouse can still deduct.
  3. So, as you can see both (b) and (c) offer opportunities for negotiation on quantum given that a favourable tax arrangement can be achieved by drafting.
  4. The non resident payor, some interesting issues:

          a)  higher or lower cost of living;

          b)  higher or lower effective tax rates.
  5. Section 19(1) of the CSG’s

    Imputing income
    19.  (1)  The court may impute such amount of income to a parent or spouse as it considers appropriate in the circumstances, which circumstances include,
    ….
    (c) the parent or spouse lives in a country that has effective rates of income tax that are significantly lower than those in Canada.
  6. In addition, section 20 of the Child Support Guidelines was intended to equalize discrepancies in income levels that arise where the payor lives in a foreign jurisdiction with currency rates not comparable to the rates in Canada. On May 1, 2006, section 20 was amended to allow the court to take higher effective tax rates into account. The Section now provides as follows:

    Non-resident
    20.  (1)  Subject to subsection (2), where a parent or spouse is a non-resident of Canada, the parent’s or spouse’s annual income is determined as though the parent or spouse were a resident of Canada.
    Non-resident taxed at higher rates
    (2)  Where a parent or spouse is a non-resident of Canada and resides in a country that has effective rates of income tax that are significantly higher than those applicable in the province or territory in which the other parent or spouse ordinarily resides, the non-resident parent’s or spouse’s annual income is the amount which the court determines to be appropriate taking the higher rates into consideration.
  7. The rationale for the amendment to section 20 was to address cases where the non-resident spouse resides in a jurisdiction that has effective rates of tax that are higher than the tax rates in Canada. Section 19(1)(c) of the Guidelines allowed the courts to impute income when a spouse lives in a country with lower effective income tax rates, but there was no equivalent provision to reduce income for spouses living in countries with higher effective tax rates.
  8. In McGouran v. Connelly, 2006 CarswellOnt 1540 (Ont.C.A.), a decision of the Ontario Court of Appeal released on March 15, 2006, just prior to the statute’s amendment, the Court held that the Guidelines do not allow for a payor in a high cost jurisdiction to argue that the high cost of living in his or her jurisdiction should reduce the amount of support payable.
  9. The amendment to section 20 of the Guidelines only goes part of the way towards addressing the inequity in cases where a non-resident spouse lives in a jurisdiction with a higher cost of living. Although the issue of higher effective tax rates can now be addressed, the overall higher cost of living still cannot. The Court of Appeal in McGouran v. Connelly expressed some concern regarding the “opening of floodgates” if courts were asked to take into account the varying cost of living in different jurisdictions, noting that such discrepancies would not be limited to countries but could extend to cities and even smaller areas. Accordingly, as it stands currently, for the purposes of determining the income of non-resident spouses, higher or lower effective tax rates may be taken into account but the overall cost of living cannot.