22 February 2001 External T.I. 2000-0058645 - SPOUSAL SUPPORT-PERCENT. OF BONUSES

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:

Divorce agreement effective XXXXXXXXXX , requires that the taxpayer pay spousal support to his former spouse $XXXXXXXXXX per month in spousal support plus:

1. One-third of any bonuses the taxpayer receives in future calendar years as spousal support.

2. One third of the $XXXXXXXXXX bonus the taxpayer received in XXXXXXXXXX .

3. $XXXXXXXXXX to compensate his former spouse for her retroactive spousal support owed prior to the date of the Order granted on XXXXXXXXXX .

Do the three amounts qualify as deductible support payments pursuant to paragraph 60(b) of the Act?

Position TAKEN:

1. Question of fact. Likely, yes
2. No.

3. No.

Reasons FOR POSITION TAKEN:

1. Periodic payments. Consistent with earlier opinions. See below.

2. Lump sum payment in respect of a period prior to the date of the Agreement. See subparagraph 22(b) of IT-530.

3. Same as 2.

XXXXXXXXXX 2000-005864
T. Young, CA
February 22, 2001

Dear XXXXXXXXXX:

Re: Payments Pursuant to Your Divorce & Property Contract (the "Agreement")

This is in reply to your letter of November 7, 2000, requesting our opinion on whether certain payments made pursuant to your Agreement, which was effective XXXXXXXXXX, are tax deductible by you.

The amounts in question are as follows:

1. One-third of any bonuses that you receive in any future calendar years (paragraph XXXXXXXXXX of the Agreement);

2. One-third of the $XXXXXXXXXX bonus you received in XXXXXXXXXX (paragraph XXXXXXXXXX of the Agreement); and

3. $XXXXXXXXXX" ...XXXXXXXXX" (paragraph XXXXXXXXXX of the Agreement). (It should be noted that we have not considered the impact of this Order in offering the comments below.)

In regard to item 1, the Agreement states the payments based on the XXXXXXXXXX bonus and any future bonuses shall be considered "periodic, annual spousal support" payments and shall be taxable to your former wife and deductible to you. Paragraph XXXXXXXXXX of the Agreement states that, should the Canada Customs and Revenue Agency (CCRA) determine that the amounts described in 1 and 2 above are not deductible / taxable, your former wife shall reimburse you for your tax liability on her share of the bonuses.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R4 dated January 29, 2001.Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments, which are of a general nature and are not binding on the CCRA.

In order for the payment of one-third of any future bonuses to be deductible as alimony, they must qualify as a "support amount" as defined in subsection 56.1(4) of the Income Tax Act (the "Act"), which states in part:

"support amount" means an amount payable or receivable as an allowance on a periodic basis (our emphasis) for the maintenance of the recipient, children of the recipient or both the recipient and children of the recipient, if the recipient has discretion as to the use of the amount, and

(a) the recipient is the spouse or common-law partner or former spouse or common-law partner of the payer, the recipient and payer are living separate and apart because of the breakdown of their marriage or common-law partnership and the amount is receivable under an order of a competent tribunal or under a written agreement; or ...

In our opinion, the issue to be determined is whether the payments constitute an "allowance (payable) on a periodic basis" as the payment of one-third of future bonuses meets the rest of the definition of support amount. As stated in paragraph 10 of IT-530 "Support Payments" (copy enclosed), it is our view that a specified sum of money that is subject to adjustment in accordance with some reasonable formula or index (e.g., a percentage of payer's income or the cost of living index) may qualify as an allowance even though the exact future amounts payable are not specified in the order or agreement.

Paragraph 21 of interpretation bulletin IT-530 lists factors to consider when determining whether payments are made on a periodic basis or are made as instalments of a lump or capital sum.

In our opinion, the payments based on future bonuses have the characteristics of periodic payments as described in (b), (c) and (d) of paragraph 21 of the bulletin. That is, they are payable for an indefinite term, the amounts are relative to the income and living standards of both you and your former wife and they do not release you from any future obligations. However, it is unclear from the Agreement whether or not the bonuses in question normally occur on a regular basis. For example, if the bonuses are determined on a monthly, quarterly or annual basis based on the achievement of certain goals or performance targets, then they would likely be payments made on a periodic basis. These payments would likely still be considered periodic even if the amount of a bonus for a particular period were determined to be nil.

On the other hand, if the bonuses are determined on an irregular basis, the payments would likely not be considered to be payable on a periodic basis. If this were the case, then the payments would not qualify as support amounts and, therefore, would not be deductible by you or taxable to your former wife.

With respect to your second question on the $XXXXXXXXXX payment to your former wife relating to the bonus you received in XXXXXXXXXX, it is our opinion (as stated in subparagraph 22(b) of IT-530) that this is a lump sum payment required to be made in respect of a period prior to the date of the Agreement. Accordingly, it is neither deductible by you nor taxable to your former wife.

For the same reason, the $XXXXXXXXXX payment, noted in your third question "XXXXXXXXXX ..." would not qualify as deductible / taxable spousal support.

The Agreement also stipulates that you shall pay your former wife $XXXXXXXXXX per month in spousal support commencing XXXXXXXXXX. Although you have not requested our comments on these payments, we believe it would be helpful to do so. It is unclear from the Agreement if the support for the period prior to the date of the Agreement (XXXXXXXXXX) had been paid by you prior to that date. If the payments for the period of XXXXXXXXXX had already been made, they would be deductible and taxable pursuant to subsections 60.1(3) and 56.1(3) of the Act since the Agreement stipulates that payments made in accordance with the Agreement shall be deductible by you and taxable to your former wife. However, as described in subparagraph 22(b) of IT-530, if payment of the support for the period from XXXXXXXXXX was not made until after the Agreement was signed, it would not qualify as being payable on a periodic basis and would not be deductible / taxable spousal support.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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