Reciprocity far from guaranteed
I'm often approached with questions from taxpayers who feel an expense should be tax-deductible because the person they are paying is fully taxed on the receiving end.
For example, a business owner taking a key client to dinner can claim 50% of the cost as a business expense while the restaurant pays taxes on 100% of the amount it receives.
Also common are questions when it comes to the tax treatment of spousal support and child support, which are each treated differently under the Income Tax Act.
Spousal support payments are fully taxed to the recipient while the person paying the support gets the tax deduction.
With child-support payments, the person paying the amount cannot deduct those amounts from their income and no tax is paid by the recipient - the deduction is on the receiving end.
A tax case on this subject, involving an Ontario couple who had divorced, was decided this month.
The woman was required to include in her 2009 income amounts that she received as spousal support from her former husband despite the fact that he did not claim a deduction for those payments.
When the couple separated, the spousal-support amount was based on the husband's earnings at that time. When he lost his job, the payments fell into arrears. The couple then made an arrangement that he would not deduct the amount he paid as spousal support in 2009 and she would not include this amount in her income for 2009. They assumed that if he didn't claim the deduction, she wouldn't have to claim the amount on her income.
But reciprocity is not a guaranteed principle of our tax laws.
The judge concluded the woman was in receipt of "an allowance payable on a periodic basis for her maintenance" and she had full discretion as to the use of the amounts. Accordingly, the amounts received meet the definition of "support" under the Tax Act and must be included as income.
The judge stated that the Act does not give taxpayers the option of choosing whether or not to include an amount as income. "Individuals cannot agree to exclude such amounts from income any more than they can agree to exclude other amounts that would be required to be included in income under the Act," the judge wrote. "The requirement to include support amounts in income can only be changed by Parliament - it cannot be changed by an agreement."