Family Law Lawyer and Mediator
Recently in Court a Judge asked a colleague and I this question and although we were all fairly sure we knew the answer, none of us knew with certainty, so here is the answer: Yes, spousal support paid to a Canadian recipient by a payor in the United States is taxable in the hands of the recipient and deductible by the payor in certain circumstances.
A US citizen (or a US resident who is not a US citizen) can deduct spousal support payment paid to a Canadian resident. Here is Article XVIII paragraph 6 of the Canada-US tax treaty (http://www.fin.gc.ca/treaties-conventions/unitedstates-etatunis-eng.asp) :
“ 6. Alimony and other similar amounts (including child support payments) arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable as follows:
(a) such amounts shall be taxable only in that other State;
(b) notwithstanding the provisions of subparagraph (a), the amount that
would be excluded from taxable income in the first-mentioned State if the recipient were a resident thereof shall be exempt from taxation in that other State.”
Therefore, yes, the spousal support income is taxable in Canada to the recipient who is a Canadian resident and the spousal support is deductible by the payor in his/her US tax return. In addition, the spousal support income is not taxable in the US for the recipient.
Having said that, please note the following, sent to me by a tax colleague:
1. In order for the US citizen to deduct the spousal support in his/her US tax return:
- The recipient must have a US tax number (US Social Security Number or Individual Taxpayer Identification Number). This may imply that the recipient must be willing to apply for the tax number.
- Without a US tax number for the recipient, the IRS will deny the spousal support deduction. In IRS’ point of view, a person who does not have a US tax number does not exist.
3. Based on the treaty table provided by the IRS (https://www.irs.gov/pub/irs-utl/Tax_Treaty_Table_1.pdf), it is silent if alimony is subject to withholding tax (see Belgium or Bulgaria where footnote f specifically mentions “include alimony”).
4. Based on IRS’ Publication 515 (https://www.irs.gov/pub/irs-pdf/p515.pdf) Page 32 and 51, the IRS now does not require any US tax withholding on alimony payment to non-resident. Here is the quote:
“Income that is exempt under a treaty is not subject to withholding at sourceunder the statutory rules discussed in this publication”