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:
Whether a particular court order triggers the application of the new child support rules and whether arrears payments are taxable to the recipient and deductible to the payer.
Position TAKEN:
General comments provided.
Reasons FOR POSITION TAKEN:
Insufficient and confusing facts submitted.
June 2, 2000
Charlottetown Tax Services HEADQUARTERS
Client Services Division M. Azzi
957-8972
Attention: Sharon Bulger
2000-001645
Child Support
This is in reply to your memo of March 24, 2000, wherein you requested our views on the tax treatment of child support payable in a particular situation.
You indicate that XXXXXXXXXX was required to pay child support to his former spouse, XXXXXXXXXX pursuant to a court order made before May 1997 (the "Original Order"). You also state that, in XXXXXXXXXX Ontario Maintenance took XXXXXXXXXX back to court to collect arrears owed to XXXXXXXXXX, and a second court order was made on XXXXXXXXXX (the "Second Order") which also changed the Original Order to remove the oldest daughter and add the youngest. You indicate that the amount of child support did not change. However, you further state that, in XXXXXXXXXX received an arrears payment of $XXXXXXXXXX and that the monthly payments are now $XXXXXXXXXX, of which approximately $XXXXXXXXXX is on account of arrears. You enquire whether the Second Order triggers the application of the new child support rules and whether the arrears payments are taxable to the recipient and deductible to the payer. We understand that none of the previously noted orders were submitted to you.
The determination of the tax treatment of child support and any arrears payments requires a review of all relevant documentation including, in the above-situation, the Original Order, the Second Order and any relevant statement of claims and settlement. Accordingly, we are not in a position to provide you with a definite answer to your enquiry. We would also note that the facts submitted are somewhat confusing. However, we can provide the following general comments which may be of assistance.
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, as this is not clear from the information provided.
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 Second Order addresses the arrears, and whether the amount to be paid on account of arrears is lesser than the amount which had fallen into arrears and is being paid to obtain a release from the liability imposed under the Original Order. However, 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.
We trust that these comments will be of assistance.
Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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