Lump sum child support is an amount of child support parents agree to be paid in exchange for all future and (sometimes) past child support. You should never agree to lump sum child support and think that it will put an end to your obligation to pay child support. Many couples agree that one parent will let go to her/his right to child support in exchange for keeping the family home or keeping more assets after separation. However, Child Support is the right of the child and open to change at any time. In other words, you will never be out of the woods until your children are no longer ‘children of the marriage’ as per Divorce Act, Canada. Let’s look at what I mean by this:
Lump Sum Child Support is Always Open to Change
Child support is the right of the child. Let’s say you and your spouse are separating and you each make $50,000 per year. You have a family home which has an equity of $200,000. You agree to give your spouse $100,000 for her interest in the family home in addition to $100,000 in lump sum child support in satisfaction of all her past and future claims to child support. This means she keeps the family home and you don’t. After agreeing to this, you might think you never have to pay a penny to the other parent for child support because you already gave her $100,000 on the house.
Let’s say 5 years later your income goes up to $200,000 per year. This is known as a material change in circumstances of your income. Your spouse may recalculate child support based on your new income and decide that the $100,000 paid is no longer fair and you should be paying more.
It will be very easy for him/her to go to court and ask for child support over and above what you have already given to him/her. In these situations, the courts will look at the Child Support Guidelines and determine whether $100,000 is sufficient for future child support. If it isn’t child support can be easily varied and you may have to start paying a ‘top up’ child support amount in a few years.
So if you paid the $100,000, that is like a downpayment and if more needs to be paid, you will have to pay it. So why not just pay monthly and keep the lump sum amount to invest and make a comfortable living?
Lump Sum Child Support May Create More Problems Than It Solves
If you agree to pay child support based on your income, you are actually following the law to a T. You will never need to go to court and litigate why the situation should be otherwise. In lump sum child support situations, you may have to go to court and explain how letting go of $100,000 in family assets prevented you from investing and making money, and how that amount should be grossed up to include the all business or profit opportunities you lost.
It will be a messy situation. Minimum $10,000 to $30,000 in legal fees. No one wants that.
I know that many couples just want a clean break when they split, and don’t want to be connected to one another through finances. But when it comes to child support you really don’t have much of a choice and its best to keep on top of monthly payments based on your income.
Are Periodic or Lump Sum Child Support Taxable?
Child support, whether lump sum or periodic, is not taxable unfortunately. That means you can’t deduct your child support payments from your taxes, and they won’t be taxable to the parent receiving them.
In contrast periodic spousal support is taxable, meaning you can deduct the payments from your taxes and they will be taxable to the recipient.
Neither lump sum child support of spousal support are taxable so be careful when you enter in to a lump sum spousal support agreement.
Lump sum spousal support is always a good idea – I think. To learn more about it, click here.
Calculation of child support, whether periodic or lump sum can be a very complex area of BC family law. It is best to consult with a lawyer to find out your rights and obligations, specially when you are dealing with self-employed spouses or spouses that own corporations. To set up an initial consult with our award winning lawyers, click here or call us at 604-974-9529.