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How to Calculate Lump Sum Spousal Tax Payment

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  • #16
    As an accountant and well versed in tax accounting, I feel I am qualified to answer this post. This is a classic case of what I have complained about for years. Lawyers and Judges do not understand financial implications and therefore give bad advice to the public. Your first post clearly demonstrates that your lawyer and you do not understand it. Here is the relevant quote "We both believe that all I need to indemnify her from is the tax that is owed ONLY on the lump sum amount. In other words, take her average overall tax rate and multiply the lump sum payment by the tax rate and I have the tax amount owing...which is considerably less."

    That is not the way our tax system works...

    Lets take an example. I don't have my tax spreadsheets with me so the figures I give you are approximate

    On a 100,000 income, an average tax rate is about 25%. However the marginal tax rate (the amount of tax you pay on every additional dollar of income) would be about 40%. This is because of our progressive tax system. You act like you are paying a flat tax. Without being disrespectful, it sounds like none of the 5 of you (you, your lawyer, her, her lawyer and above all the Judge) did not understand the tax implications. Based on the wording of the clause, the additional tax payable should be calculated on her marginal tax rate not the average tax rate. Your last post is what you should do.

    Just pay it and be done with it. It will cost you more in legal fees than its worth and there is a good chance you could lose.

    Accountant.

    Comment


    • #17
      Originally posted by Desperate_Dad View Post
      As an accountant and well versed in tax accounting, I feel I am qualified to answer this post. This is a classic case of what I have complained about for years. Lawyers and Judges do not understand financial implications and therefore give bad advice to the public. Your first post clearly demonstrates that your lawyer and you do not understand it. Here is the relevant quote "We both believe that all I need to indemnify her from is the tax that is owed ONLY on the lump sum amount. In other words, take her average overall tax rate and multiply the lump sum payment by the tax rate and I have the tax amount owing...which is considerably less."

      That is not the way our tax system works...

      Lets take an example. I don't have my tax spreadsheets with me so the figures I give you are approximate

      On a 100,000 income, an average tax rate is about 25%. However the marginal tax rate (the amount of tax you pay on every additional dollar of income) would be about 40%. This is because of our progressive tax system. You act like you are paying a flat tax. Without being disrespectful, it sounds like none of the 5 of you (you, your lawyer, her, her lawyer and above all the Judge) did not understand the tax implications. Based on the wording of the clause, the additional tax payable should be calculated on her marginal tax rate not the average tax rate. Your last post is what you should do.

      Just pay it and be done with it. It will cost you more in legal fees than its worth and there is a good chance you could lose.

      Accountant.
      I agree with how tax is calculated. This is a lump sum, one time, SS payment. Surely that would have been taken into consideration prior to making the order?

      Comment


      • #18
        I am well aware of our graduated tax system here in Canada and how this affects every dollar earned and what tax amount is owed.

        Arabian, I think your point is spot on when we are dealing with a single lump sum payment of retroactive spousal support. The challenge here is to determine what tax rate to apply to this single payment.

        From my lawyer's standpoint (and he consulted with their in house tax counsel), he said there are other sources of income (including spousal support already paid to her with appropriate tax treatments applied), along with other incomes that I have no control over that would increase her marginal tax rate. For this, I should not be penalized in terms of having to indemnify her for all of that tax impact also.

        So it was suggested to use the blended (or average) tax rate based on her taxable income and use that amount to calculate the tax indemnification amount for that single, one time lump sum payment.

        I heard from my lawyer again on this issue and he stands by his advice and direction.

        Comment


        • #19
          I would wager any amount of money that it wasn't taken into account. His first post suggests they took the average tax rate which is wrong.

          Stupid lawyers
          Stupid judges

          When Bonkalo asked the public to comment how to improve Family Court, I recommended there be a complete ban on lawyers and judges in court till they learn how to analyze financial information (and I wasn't kidding either) and to bring in accountants.

          My recommendation wasn't heeded and they instead decided to bring in cheaper incompetents (paralegals) which will make things worse.

          Comment


          • #20
            KW - Yes of course there are other income payments and deductions that could affect her marginal tax rate. We don't know what was agreed to but clearly your ex did not understand it and your agreement does say you will indemnify her for the tax she has to pay. And clearly she is paying a higher marginal tax rate than was calculated otherwise she wouldn't complain.

            Did nobody explain this to her?????

            Comment


            • #21
              Hi Desperate_Dad,

              The agreement was that I could claim the lump sum payment as tax deductible to me and taxable to her. I agreed to indemnify her for her tax obligation on the lump sum amount only, not her entire tax obligation for other sources of income.

              I do not know what was explained to her in that regard, it was during a very acrimonious and stressful period trying to avoid arbitration that she invoked, so we were not even in the same town when this was happening.

              So she thinks I need to cover the entire tax amount, including all other sources of income (employment, investments, spousal support, etc.)

              Comment


              • #22
                If she wasn't getting the lump sum what would she pay in taxes that year? Now look at what she has to pay in taxes when the Lump Sum is added in - that increase is the amount you have to pay. She wouldn't have to pay that tax if it weren't for the lump sum amount. "indemnify and save the Applicant harmless with respect to *any* income tax that she is obligated to pay as a result of the spousal support payment" And because the lump sum is pushing her into another bracket you have to pay the higher marginal tax on that amount. You aren't paying got taxes on any of her other income, she is. You are only paying the tax on the lump sum payment. It would have been worded entirely different if you were meant to only pay the average of her tax rate that year.

                Comment


                • #23
                  Presumably your ex had legal and financial counsel.
                  She is an educated woman.
                  She is merely having a sort of "buyer's remorse" I think.
                  Good for you for managing to effect the one-time SS.

                  If this is not the case then perhaps I am missing something?

                  Comment


                  • #24
                    Yes, she had legal counsel for sure on this, and also agreed to the tax liability issue that this lump sum payment would have, whereas I would get the tax deduction.

                    The issue I am having is that the full amount she is demanding I indemnify her from is a higher amount than my tax deduction, so to me, something isn't right here.

                    Comment


                    • #25
                      Originally posted by arabian View Post
                      Presumably your ex had legal and financial counsel.
                      She is an educated woman.
                      She is merely having a sort of "buyer's remorse" I think.
                      Good for you for managing to effect the one-time SS.

                      If this is not the case then perhaps I am missing something?
                      Sorry Arabian, I missed this part of your post...

                      No, I pay monthly SS to her and have since separation 7 years ago. During the settlement process (5 years after original agreement signed) as part of med/arb process (she hated the deal she signed almost right from the get to), I agreed to pay an additional lump sum SS payment to deal with retro SS, as she claimed I needed to pay more given higher incomes I earned in those earlier years.

                      I continue to pay the monthly SS, and it is this single lump sum payments and its tax implications she is having issues with. I paid over $125K last year in just monthly SS, and add this lump sum on top of that.

                      Comment


                      • #26
                        My ex pays me monthly ongoing indefinite SS. My ex also owes me money in arrears. The amount owing was determined by the court and is registered with MEP Alberta. If my ex were, to my surprise, pay me the amount of arrears owing in lump sum I would be pleased and surprised. This one-time payment is his prerogative. My tax position for 2019 would have to show the payment and reported in my taxes as income. OF course I would have to pay additional taxes, particularly if I wasn't employed and without ability to max out RRSP contribution. Fortunately I am not in that position.

                        How, when, why I pay my taxes certainly is of no relevance to my ex, nor should it be.

                        Comment


                        • #27
                          Getting back to your original post, the sentence ""The Applicant and Respondent shall exchange any supporting documentation necessary to substantiate the tax amount owing by the Respondent to the Applicant" - I am a bit confused by this.

                          What is the intent of this process? Why do you give a rat's ass what her tax position will be? How can you know what she will owe in taxes?
                          Last edited by arabian; 07-07-2019, 07:11 AM.

                          Comment


                          • #28
                            Originally posted by KW_Divorced View Post
                            So she thinks I need to cover the entire tax amount, including all other sources of income (employment, investments, spousal support, etc.)

                            If your agreement provides "The Respondent shall indemnify and save the Applicant harmless with respect to any income tax that she is obligated to pay as a result of the spousal support payment of $XX,XXX as set out in section (above)." than I don't understand why she would think you need to pay her entire tax bill.


                            You owe her marginal tax rate on the lump sum amount. You don't owe on her employment income etc. The way the agreement is worded, it sounds like they expected the tax on the lump sum to be a wash between you and your ex, or slightly in your benefit if you are at a higher marginal rate.


                            As for the need for the ex to provide the OP her tax information, it may be in order for him/his people to accurately determine the amount of relief he owes his ex. The ex may argue for more, but than it is between their respective experts to rationalize their positions.

                            Comment


                            • #29
                              ^ I agree but should the "rationalization" not have been completed prior to an Order? Seems like a case of regret more than anything to me.

                              Comment


                              • #30
                                She sent me her tax return without the lump sum and one with. She then looked at the tax differences between her two returns and claims I owe that amount...rather sizable portion.]

                                The ex is NOT asking for the OP to pay her entire tax bill, just the part that is the result of the lump sum. If she didn’t get the lump sum, she would be paying a lower amount - she is paying that lower amount on her own earnings and the Op is “topping up” the tax incurred solely because of the lump sum payment.

                                Comment

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