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: Two Individuals (Individual A and Individual B) became divorced in XXXXXXXXXX . At the time of the divorce, Individual A and Individual B each held a 50% interest in the matrimonial home (the "Home"). Commencing on XXXXXXXXXX , Individual B was required to pay monthly child maintenance ($XXXXXXXXXX per month) to Individual A with respect to the four children of the marriage (Individual A had custody and control of them). Individual B's monthly payments were increased to $XXXXXXXXXX per month pursuant to a XXXXXXXXXX court order. Over the years, Individual B paid Individual A negligible child support. On XXXXXXXXXX , Individual B agreed to transfer his 50% interest in the Home to Individual in satisfaction of the full amount of the arrears outstanding at the end of XXXXXXXXXX . As the value of the 50% interest in the Home is less than the amount of the arrears at that time, are they deductible?
Position: No
Reasons: 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 (See paragraph 22 of IT-530).
April 26, 2001
Vancouver Island Tax HEADQUARTERS
Services Office M. Eisner
Tina Doehnel (613) 957-2138
Client Services Division
2001-007030
Child Support - Payment of Lump Sum Arrears
This is in reply to your memorandum of February 9, 2001 concerning the above-noted subject.
In the circumstances of your situation, the Supreme Court of British of Columbia (the "Court") issued an order in XXXXXXXXXX in which XXXXXXXXXX ("Individual A") became divorced from her husband ("Individual B"). Individual A was granted the custody of the four children of the marriage and Individual B was required to pay Individual A $XXXXXXXXXX per month for the maintenance of those children ($XXXXXXXXXX per month per child) commencing on XXXXXXXXXX. The order also indicated that each of Individual A and Individual B would have a 50% interest in the matrimonial home (the "Home"), and that Individual A would have exclusive possession of the Home pending sale.
In a further order issued by the Court in XXXXXXXXXX, the monthly support amount was increased to $XXXXXXXXXX per month ($XXXXXXXXXX per month per child) commencing on XXXXXXXXXX. That order also indicated that Individual B was in arrears in respect of the maintenance to the extent of $XXXXXXXXXX as at XXXXXXXXXX .
On XXXXXXXXXX, Individual A and Individual B entered into an agreement (the "Agreement") which provided the following:
(a) Schedule B of the Agreement sets out the total of the support obligations in arrears that Individual B was required to pay Individual A in the amount of XXXXXXXXXX;
(b) Individual B agreed to transfer his interest in the Home to Individual A, and as stated in "D" on page 1 of the Agreement, "XXXXXXXXXX" (the word "Payments" refers to amounts set out in Schedule B in respect of the arrears);
(c) The Agreement provides ("E" on page 2 of the Agreement) that Individual A and Individual B intend that the Agreement be a final settlement of their respective rights to property of the other and property held by them jointly (the release set out in item 14 of the Agreement is consistent with this intent);
With respect to the Agreement, you indicated to us in a telephone conversation on March 5, 2001 (Eisner/Doehnel) that the CCRA assessed Individual B's T-1 returns for the years XXXXXXXXXX on the basis that he had paid the sums set out in Schedule B in respect of each of those years (XXXXXXXXXX) and included amounts in Individual A's T-1 returns for XXXXXXXXXX on the basis that she received the amounts of arrears set out in Schedule B in respect of those years (i.e., XXXXXXXXXX). Pursuant to our telephone conversation on March 23, 2001, you also advised us that, as a result of the Agreement, Individual A remained entitled to further child support of $XXXXXXXXXX per month from Individual B for periods subsequent to XXXXXXXXXX, in accordance with the terms of the XXXXXXXXXX court order.
On the basis that the value of Individual B's interest in the Home was less than the arrears, you have requested our view on whether Individual B is entitled to deduct the arrears and Individual A is required to include the arrears in income and, if so, for which year would such amounts be deductible and required to be included in income.
Paragraphs 56(1)(b) and 60(b) of the Income Tax Act (the "Act") refer to amounts "received" and amounts "paid". In relation to this comment, where an obligation to make a payment is settled by a transfer of property, the payment is generally considered to have been made at the time of the transfer. As a result, in the above situation, assuming that Individual B's interest in the Home was transferred to Individual A in XXXXXXXXXX (see subsection 2(1) of the Agreement), then the payment and receipt can only have occurred in XXXXXXXXXX. Accordingly, based on the information provided, no support amount should be included in Individual A's income for XXXXXXXXXX, and Individual B is not entitled to deductions for support with respect to the XXXXXXXXXX taxation years.
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 CCRA's position on this issue is set out in paragraph 22 of Interpretation Bulletin IT-530.
It is our view that, as a result of the above comments, the arrears would not be required to be included in Individual A's income for the year XXXXXXXXXX , nor would individual B be entitled to a deduction in respect of the arrears for that year (i.e., assuming that the fair market value of Individual B's 50% interest in the Home was less than the arrears). However, we note that we were not in a position to comment on whether or not the fair market value of Individual B's interest in the Home was, in fact, less than the arrears.
In closing, we note that subsection 2(3) of the Agreement indicates that the parties will obtain a Consent Order in relation to the transfer contemplated in the Agreement. Before making a final decision on the above issues, we would therefore suggest that you ensure that the terms of this order are consistent with the Agreement.
For your information, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the CCRA's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (613) 957-0682. The severed copy will be sent to you for delivery to the client.
We trust that these comments will be of assistance.
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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