16 January 2001 External T.I. 2000-0039415 - CHILD SUPPORT-RETROACTIVE PROV.

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 paid child support without a separation agreement beginning on XXXXXXXXXX . A written separation agreement was signed on XXXXXXXXXX ; however, it did not recognize that the payments made prior to the date of the agreement were made pursuant to the agreement. As a result, the separation agreement has a commencement day of XXXXXXXXXX , making all payments non-deductible by the taxpayer. The taxpayer inquired whether the taxpayer would have been able to deduct the child support payments had the agreement provided that the payments made prior to May 1997 were made pursuant to the agreement.

Position TAKEN:

Yes. Provided that the payments otherwise qualify as child support, all payments made after 1996 would have been deductible by the taxpayer and taxable to the recipient.

Reasons FOR POSITION TAKEN:

Position taken in other files. Consistent with paragraph 24 of IT-530.

XXXXXXXXXX 2000-003941
T. Young, CA
January 16, 2001

Dear XXXXXXXXXX:

Re: Child Support Payments

This is in reply to your letter of July 26, 2000, requesting our opinion on the tax consequences of child support payments pursuant to a separation agreement. We apologize for the delay in responding to your letter.

In your letter, you indicated that you and your wife separated on XXXXXXXXXX, and you began making biweekly payments of $XXXXXXXXXX in support of your child or children. Your separation agreement was signed on XXXXXXXXXX, but the agreement did not state that payments made prior to the date of the agreement were to be recognized as having been made pursuant to the agreement. As a result, you are not entitled to deduct your child support payments.

You are asking if you would have been able to deduct your child support payments had your separation agreement provided that the payments made prior to May 1997 be recognized as being made pursuant to the agreement.

Our Comments

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 written agreements) before a determination of the tax implications could be made. Therefore, we can only provide you with the following general comments, which are based on the information you provided above.

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 and will be deductible for the payor and taxable to the recipient.

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).

However, the provisions of paragraphs 56.1(3)(b) and 60.1(3)(b) of the Act may, in certain circumstances, be used to deem an agreement or order made after April 1997 to have been made before May 1997. These paragraphs apply to payments made after 1996, where a written agreement or order of a competent tribunal made at any time in a taxation year provides that an amount paid and received before that time, and in the year or the preceding taxation year, is to be considered to have been paid and received thereunder (a "retroactive provision"). Paragraphs 56.1(3)(b) and 60.1(3)(b) of the Act deem an agreement or order with a retroactive provision to have been made on the day on which the first such amount was paid and received. Accordingly, an agreement or order made after April 1997 and before 1999 with a retroactive provision may be deemed to have been made before May 1997, providing an amount was paid and received after 1996 and before May1997. With the exception described below, an agreement or order deemed to have been made before May 1997 would not have a commencement day and would be subject to the old rules until, if ever, there is a commencement day pursuant to paragraph (b) of the definition of commencement day in subsection 56.1(4) of the Act. Under the old rules, child support payments made pursuant to an agreement or order that has no defined commencement day are, generally, deductible by the payer and required to be included in income by the recipient.

The exception mentioned above applies to an agreement or order made after April 1997 that varies a child support amount payable to the recipient from the last such amount paid to the recipient before May 1997. Paragraphs 56.1(3)(b) and 60.1(3)(b) of the Act would deem such an agreement or order to have a commencement day which is the day on which the first payment of the varied amount is required to be made. Since your separation agreement did not vary an earlier agreement, this exception would not be applicable to your situation.

Therefore, providing that the support payments made pursuant to your separation agreement otherwise qualify as child support, any payments made after 1996 would have been deductible by you had the agreement recognised those payments as having been made pursuant to the agreement. However, since your separation agreement was silent with respect to the issue of prior payments, it would have a commencement day on the day the agreement was made (i.e., XXXXXXXXXX) pursuant to paragraph (a) of the definition of "commencement day" in subsection 56.1(4) of the Act. All payments after the commencement day would not be deductible as they fall under the new rules. All payments made prior to the commencement day would also be non-deductible since they were not payable pursuant to a written agreement or court order. The rules governing the taxability and deductibility of child support payments are described in more detail in interpretation bulletin IT-530, "Support Payments" (copy enclosed). You may find paragraph 24 of particular interest as it addresses payments made prior to the date of the order or agreement.

We trust our comments will be of assistance to you.

Yours truly,

J. Wilson, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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