Periodic vs. Lump-Sum Spousal Support
When common law or married spouses separate, one party may be obligated to pay spousal support (commonly referred to as “alimony” in the United States) to the other, depending on the roles assumed by the parties during the relationship and the party’s need for support. Click here for more information on spousal support.
In Ontario, the quantum (i.e. amount) and duration of support are regularly determined in accordance with the Spousal Support Advisory Guidelines (commonly referred to as the SSAGs). The SSAGs were developed in 2008 in an effort to make support orders more predictable and consistent. Spousal support is a constantly evolving area of family law that is often challenging to predict, however, the SSAGs have made it easier for payors and recipients to anticipate outcomes where entitlement to support is demonstrated.
Spousal support is often paid periodically, but, in some cases, it may be paid as in the form of a lump-sum payment. Where spousal support is paid periodically, the payor will be entitled to deduct the payments from his or her taxable income and the payments will be tax inclusive to the recipient. As such, periodic spousal support differs from child support, as child support does not have any tax consequences.
Notwithstanding the above, the Spousal Support Advisory Guidelines account for the tax consequences of the support paid when determining the quantum (i.e. the amount) of spousal support. For payors in higher income tax brackets, the payment of periodic spousal support can offer a significant tax deduction, reducing the payor’s taxable income and income taxes owing.
As noted above, spousal support may also be paid as a lump sum. A lump-sum spousal support payment is not tax deductible to the payor nor is it tax inclusive to the recipient. That is, the payment from payor to recipient is tax free, much like an equalization payment.
Lump-sum spousal support is calculated by multiplying the monthly amount owing pursuant to the SSAGs by the duration (the number of months for which support is payable) and then discounting for tax consequences and other factors. The lump-sum may be discounted for life expectancy and to account for the time-value of money.
Prior to 2011, the case law precluded lump sum support awards except in very unusual circumstances. However, as a result of the Court of Appeal decision in Davis v Crawford, 2011 ONCA 294, the courts now have more discretion in ordering lump-sum spousal support. Nevertheless, lump-sum spousal support awards are still much less commonly ordered by courts. This is because a lump-sum payment of spousal support prevents a party from later seeking to change the amount of support paid on the basis of a material change and Courts are not in a position to predict future events or changes to the parties respective positions.
For instance, if a payor is ordered to pay support based on an income of $200,000.00 and is subsequently laid off or becomes disabled, a lump-sum award calculated on the basis that the payor should pay according to an income of $200,000.00 for 10 years may be unfair given the change in circumstances. Similarly, if a recipient of support were to remarry or begin earning a significantly higher income, this may result in an overpayment of support by the payor. As a result, courts will generally order periodic support, with a few specific exceptions
One such exception to the general principle of periodic support is in the case of short term relationships where lump-sum payments are much more common. This is because the duration of support is generally shorter, resulting in both lower lump-sum awards and a shorter period where changes in one’s income may occur. Furthermore, courts generally want to encourage a clean break between parties in short-term relationships.
Lastly, in certain instances, a hybrid award may be agreed upon or ordered. That is, an award may consist of two parts: a lump sum payment and periodic spousal support for a fixed period of time.