Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Taxpayer entitled to receive child support payments under XXXXXXXXXX court order. Child support payments fall into arrears and the parties agree in XXXXXXXXXX that the arrears would be paid by way of a lump sum plus monthly payments. The agreement also includes an increase in the ongoing child support for one child.
Are the arrears payments received according to the XXXXXXXXXX agreement taxable/deductible?
Position TAKEN:
Yes, as long as the total of child support arrears remains unchanged from the XXXXXXXXXX court order. Alternatively, if the lump sum and monthly payments represent payments to obtain a release from a liability imposed under the XXXXXXXXXX order, they are not taxable/deductible.
Reasons FOR POSITION TAKEN:
Position taken in other files. Consistent with paragraph 22 of IT-530.
XXXXXXXXXX 2000-001477
T. Young
June 9, 2000
Dear XXXXXXXXXX:
Re: Child Support Arrears
This is in reply to your letter of March 16, 2000, requesting our opinion on the tax consequences of arrears of child support payments.
In your letter, you indicated that your client was entitled to receive child support payments totalling $XXXXXXXXXX per month for two children under a XXXXXXXXXX, court order (the "Original Order"). Subsequently, the support payer fell into arrears. The support payer brought an application before the Ontario Court (General Division) to have the child support arrears reduced or rescinded. In an XXXXXXXXXX, agreement (the "Second Order"), the parties agreed that the child support arrears would be paid by way of a lump sum payment and payments of $XXXXXXXXXX per month until the arrears were paid. The agreement also changed the amount of ongoing child support with respect to one child.
Your question was whether or not the support recipient is required to include the child support arrears in income.
Confirmation of the tax consequences associated with completed transactions are provided by the relevant tax services office. Also, it would be necessary to review all relevant documentation (including all court orders) before a determination of the tax implications could be made. Therefore, we can only provide you with the following general comments.
As you know, the basic thrust of the new child support provisions is to eliminate both the requirement to include child support in the custodial or recipient parent's income and the deduction available to payers of child support. That is, in general terms, child support amounts payable and receivable pursuant to a written agreement or court order on or after its "commencement day", as defined in subsection 56.1(4) of the Income Tax Act (the "Act"), are subject to the new rules and, as such, are not deductible by the payer and are not required to be included in the income of the recipient. Child support payments made pursuant to an agreement or order that has no "commencement day" will, generally, be subject to the old rules.
Paragraph (a) of the definition of "commencement day" states that an agreement or order made after April 1997 will have a "commencement day" on the day the agreement or order is made. However, by virtue of paragraph (b) of the definition of "commencement day", an agreement or order made before May 1997 will also have a "commencement day", and fall under the new rules, if:
(i) the parties both sign and file an election with the Canada Customs and Revenue Agency agreeing that the new tax rules will apply to the existing agreement or order as of a specified date (no earlier than May 1, 1997),
(ii) the agreement or order is varied after April 1997 to change the child support amounts payable to the recipient,
(iii) another agreement or order is made after April 1997 and the effect of the subsequent agreement or order is to change the total child support amounts payable to the recipient by the payer, or
(iv) the agreement or order specifically provides that the new tax rules will apply as of a specific date (no earlier than May 1, 1997).
In the above situation, to determine whether the Second Order triggers the application of the new child support rules, it would therefore be necessary to review both orders as such a determination is dependent, inter alia, on the legal relationship between these orders. For instance, it would be necessary to establish whether the Second Order supersedes the Original Order, and whether child support amounts have become payable under the Second Order (i.e., whether a legal obligation to pay child support exists under the Second Order). As a general rule, if it is established that the Second Order replaces the Original Order, such that the obligation to pay child support is under the Second Order, the Second Order will trigger the application of the new child support rules by virtue of paragraph (a) of the definition of "commencement day" in subsection 56.1(4) of the Act. On the other hand, if the Original Order remains effective, while the Second Order varies certain provisions of the Original Order, or is over and above the Original Order, in determining whether the new rules apply, we would need to consider the effect of the Second Order on the legal obligation to pay child support and whether the Second Order changes in any way child support amounts. In either case, since the Second Order changes the amount of child support payable, it would appear that there will be a "commencement day" and that all child support payments (other than arrears - see comments below) made after XXXXXXXXXX, will be subject to the new rules (i.e., non-taxable/non-deductible).
As regards the tax treatment of arrears, we would also add that we cannot provide an answer to your enquiry as, based on the information provided, it is unclear whether the amount to be paid on account of arrears is less than the amount which had fallen into arrears and is being paid to obtain a release from the liability imposed under the Original Order. In this regard, we would note that it is our general position that where arrears are settled for an amount which is less than the total periodic amounts that had fallen into arrears, the amount paid and received pursuant to the settlement, whether as a lump sum or by way of instalments, would not be deductible to the payer or required to be included in the recipient's income. By virtue of the definition of "support amount" in subsection 56.1(4) of the Act, for a payment of arrears to be deductible and required to be included in income it must, inter alia, be identified with the payment of periodic amounts required by a written agreement or court order. Accordingly, when a reduced amount is paid to obtain a release from a liability imposed by an agreement or order, the payment is not deductible or required to be included in income because it was not made in accordance with the agreement or order. The Agency's position on this issue is set out in paragraph 22 of IT-530.
We also note that interest in respect of the arrears or the reduced amount is subject to tax.
As a final comment, when non-deductible child support under the new regime and deductible child support arrears are payable in a calendar year, payments made in the year are considered to have been made first toward the child support payable under the new regime. The result is that required child support payable under the new regime for current and previous years has to be fully paid before payments for arrears are deductible/taxable.
We trust our comments will be of assistance to you.
Yours truly,
J. Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
- 3 -
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2000
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2000
Email this Content