In Canada, paying child and spousal support impacts the income on your T1 which has direct implications on your mortgage application.
Let’s say Pat makes $100,000 a year and pays $2000 a month in child support payments and $2000 a month in spousal support payments. What would be the impact on taxes, income, and any mortgage application?
In Canada, child support and spousal support payments have different tax treatments on the T1 General Income Tax and Benefit Return:
- Child Support Payments: These payments are not deductible by the payer and are not included as taxable income by the recipient.
- Spousal Support Payments: These payments are deductible by the payer and must be included as taxable income by the recipient.
Pat’s Income Tax Situation
Income
Annual Income: $100,000
Monthly Child Support Payments: $2,000
Monthly Spousal Support Payments: $2,000
Annual Support Payments Calculation
Annual Child Support Payments: $2,000 × 12 = $24,000 (not deductible)
Annual Spousal Support Payments: $2,000 × 12 = $24,000 (deductible)
Impact on Pat’s T1
Line 15000 (Total Income): $100,000
Deductible Spousal Support Payments:
Pat will claim the $24,000 of spousal support payments as a deduction.
This deduction is reported on line 22000 (Support payments made).
Line 23600 (Net Income):
Pat’s net income will be calculated as follows:
Net Income = Total Income – Deductible Spousal Support Payments
Net Income = $100,000 – $24,000 = $76,000
Summary of Pat’s T1
Line 15000 (Total Income): $100,000
Line 22000 (Deductible Support Payments): $24,000 (spousal support)
Line 23600 (Net Income): $76,000
Pat’s child support payments do not impact taxable income as they are not deductible. Only the spousal support payments reduce his taxable income on his T1 return.
Support Payments: T1 Return
On what line of Bob’s T1 return in Canada will it show the support payments Pat made?
On Pat’s T1 General Income Tax and Benefit Return in Canada, the support payments made will be reported on Line 22000 (Support payments made). This line is used to report the total amount of deductible support payments (such as spousal support) made during the tax year.
Example of Pat’s T1 Return
Total Income (Line 15000): $100,000
Support Payments Made (Line 22000): $24,000 (spousal support)
Net Income (Line 23600): This will reflect the total income minus the deductible support payments.
Since child support payments are not deductible, they will not be reported as a deduction on the T1 return. Only the deductible spousal support payments will appear on line 22000.
Line21999
For Pat’s T1 return, based on the above numbers, what would Pat put into line 21999?
Line 21999 on the T1 General Income Tax and Benefit Return is used to report the total amount of support payments made, including both deductible (spousal support) and non-deductible (child support) payments.
Based on the information provided, Pat pays $2,000 per month in child support and $2,000 per month in spousal support.
Here’s how Pat would complete these lines on his T1 return:
Annual Calculation
Annual Child Support Payments: $2,000 × 12 = $24,000
Annual Spousal Support Payments: $2,000 × 12 = $24,000
Total Support Payments: $24,000 (child support) + $24,000 (spousal support) = $48,000
Lines on T1 Return
Line 21999 (Total support payments made): This includes both child and spousal support payments.
Pat would enter $48,000 on line 21999.
Line 22000 (Deductible support payments made): This includes only the deductible spousal support payments.
Pat would enter $24,000 on line 22000.
Summary
Line 21999: $48,000 (Total support payments made, including both child and spousal support)
Line 22000: $24,000 (Deductible spousal support payments)
By completing these lines, Pat accurately reports both the total support payments made and the portion that is deductible.
Read More:
Support Payments, Canada Revenue Agency
Technical Tax Information, Support Payments: Canada Revenue Agency
Pat’s Mortgage Application
How would Pat’s support payments be treated on the mortgage application?
When applying for a mortgage, Pat’s support payments (both child support and spousal support) will impact the mortgage application in terms of debt service ratios and disposable income.
Here’s how lenders typically treat these payments:
Income Consideration
Pat’s gross annual income is $100,000.
Debt Service Ratios
- Gross Debt Service (GDS) Ratio: Measures the percentage of Pat’s income that goes toward housing costs, including mortgage payments, property taxes, heating, and 50% of condo fees (if applicable).
- Total Debt Service (TDS) Ratio: Measures the percentage of Pat’s income that goes toward all debt obligations, including housing costs and other debt payments (such as car loans, credit card payments, and support payments).
Impact of Support Payments
Monthly Child Support Payments: $2,000 (not deductible for tax purposes, but considered in TDS ratio calculation).
Monthly Spousal Support Payments: $2,000 (deductible for tax purposes, but considered in TDS ratio calculation).
Annual Calculation:
Annual Child Support Payments: $2,000 × 12 = $24,000
Annual Spousal Support Payments: $2,000 × 12 = $24,000
Total Monthly Support Payments:
Total Monthly Support Payments: $2,000 (child) + $2,000 (spousal) = $4,000
Total Annual Support Payments: $4,000 × 12 = $48,000
Calculation of Ratios:
Adjusted Annual Income: For mortgage purposes, the gross annual income remains $100,000.
Monthly Gross Income: $100,000 / 12 = $8,333.33
Monthly Obligations:
Monthly Support Payments: $4,000
Other Monthly Debts: Lenders will add these to other fixed monthly obligations (if any).
GDS and TDS Ratios:
GDS Ratio: Not directly affected by support payments, but crucial for determining housing affordability.
TDS Ratio:
TDS Ratio = (Monthly Housing Costs + Monthly Debt Obligations) / Monthly Gross Income × 100%
TDS Ratio = (Housing Costs + $4,000) / $8,333.33 × 100%
Example Calculation
Assume Pat has additional monthly housing costs (mortgage, property taxes, etc.) of $2,000.
Total Monthly Debt Obligations: $2,000 (housing) + $4,000 (support) = $6,000
TDS Ratio Calculation: ($6,000 / $8,333.33) × 100% ≈ 72%
Impact on Mortgage Application:
- Lenders typically prefer a TDS ratio below 40-44%. Pat’s high TDS ratio (72%) would make it difficult to qualify for a mortgage based on traditional lending criteria.
- Lenders may require additional documentation or may offer a smaller loan amount to ensure affordability.
- Pat may need to explore other options such as reducing monthly obligations or increasing income to improve debt service ratios.
Summary
Income: $100,000
Support Payments: $4,000 monthly
Impact: High TDS ratio (72%) will negatively affect mortgage qualification. Only a private lender would consider giving Pat a mortgage and that would not likely be in Pat’s best interest.
Pat should consider working with Allen Ehlert who can help navigate these challenges and explore potential solutions.
