6 July 2001 External T.I. 2001-0073385 - CHILD SUPPORT

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:

1. Deductibility of legal fees incurred to obtain spousal support, to obtain or vary an agreement or court order for child support, or to make child support fall under the Federal Child Support Guidelines.

2. Eligibility to claim the equivalent-to-spouse amount for a child in a variety of custody and child support arrangements.

3. Determination of existence of 'commencement day' (defined in ITA 56.1(4)) when a variation agreement or order to vary a pre-May 1997 arrangement keeps the pre-May 1997 child support amount the same but adds a reimbursement provision for specific child expenses such as medical expenses.

Position:

1. Referred to position in paragraph 17 of IT-99R5

2. Comment on the application of ITA 118(5).

3. Discussion of ITA 60.1 and of application of 'commencement day' in ITA 56.1(4).

Reasons:

IT-99R5, IT-530; E9824397; E9825676; E9926375; E9828805; E9719215; E9733435; F2000-0058152; F2001-0076157; E2001-0080252; F2000-0014412; E2000-0061574; E2000-0014955

XXXXXXXXXX                                      2001-007338
S. Parnanzone
July 6, 2001

Dear XXXXXXXXXX:

Re: Child support

We are replying to your letter of March 6, 2001, concerning the equivalent-to-spouse amount in a variety of custody arrangements, the deduction of legal fees incurred to obtain or vary a support order or agreement, and the tax consequences that apply in the case of a variation of a pre-May 1997 child support arrangement.

As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situations involve specific taxpayers and completed transactions, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments, which may be of assistance.

Legal fees

Your question concerns the deduction of legal fees incurred to obtain spousal support and to vary a child support arrangement. With respect to spousal support, you referred to the Gallien case (2000 DTC 2514) in which the judge of the Tax Court of Canada - Informal Procedure allowed the taxpayer to deduct legal fees to obtain spousal support on the basis that the right to spousal support exists under the Divorce Act and the provincial laws implementing it. You asked whether in view of this recent jurisprudence the Canada Customs and Revenue Agency (CCRA) will now accept that legal fees incurred to obtain an agreement or order for spousal support under the Divorce Act are deductible for income tax purposes.

With respect to child support, you referred to section 14 of the Federal Child Support Guidelines (the "Guidelines") which provides that the coming into force of the Guidelines constitutes a change in circumstances entitling the parties to a child support order or agreement to vary it so as to make the support amounts non-taxable and conform with the Guidelines. You asked whether the legal fees incurred to vary the order or agreement are deductible in computing income. Furthermore, in connection with your questions on the eligibility to the equivalent-to-spouse amount in the variety of custody arrangements we refer to below, you enquired about the deduction of legal fees incurred to obtain a child support order or agreement.

The CCRA's position concerning the deduction of legal fees to obtain spousal support and child support and to vary a child support order or agreement to conform with the Guidelines is set out in paragraph 17 of Interpretation Bulletin IT-99R5 (Consolidated), Legal and Accounting Fees, which states:

Legal costs incurred in establishing the right to spousal support amounts, such as the costs of obtaining a divorce, a support order for spousal support under the Divorce Act or a separation agreement, are not deductible as these costs are on account of capital or are personal or living expenses. However, since children have a pre-existing right, arising from legislation, to support or maintenance, legal costs to obtain an order for child support are deductible. Legal costs of seeking to obtain an increase in spousal or child support, or to make child support non- taxable under the Federal Child Support Guidelines, are non-deductible.

The CCRA has undertaken a general study of the deductibility of legal fees relating to support. If the study results in a revision of the bulletin's position, we expect that there will be a public announcement.

Equivalent-to-spouse amount

Your enquiry is with respect to the entitlement to the equivalent-to-spouse amount in a variety of child custody scenarios involving two individuals, Mom and Dad, who are separated and divorced from each other throughout the relevant year, and their two minor children, Jane and Dave. Mom and Dad remain unmarried and are otherwise uninvolved in a common-law partnership at all relevant times.

As your concerns relate to the application of subsection 118(5) of the Income Tax Act (the "Act"), which generally denies the equivalent-to-spouse amount in respect of an individual to a payor of child support for that individual, our comments are restricted accordingly and, as requested, assume that all other requirements to claim the equivalent-to-spouse amount are otherwise satisfied (e.g., the amount is claimed by only one person and is not shared). Concerning the deduction of legal fees, please refer to our comments above.

In respect of scenario 1A, which involves sole custody of both children by Mom and an agreement or order that requires Dad to pay child support for both children, in our view, Mom is entitled to the equivalent-to-spouse amount and Dad is not.

In scenario 1B, which involves sole custody of both children by Mom, the agreement or order requires Dad to pay child support only for Dave and does not provide for child support for Jane. As it is unclear how in the circumstances only one child would be entitled to support and whether the "wholly dependent" requirement in paragraph 118(1)(b) of the Act is met, we are unable to comment.

In scenario 2, which involves sole custody of Dave by Mom and sole custody of Jane by Dad (split custody), the agreement or order requires Dad to pay child support to Mom for Dave and requires Mom to pay support to Dad for Jane, with the support payments being offset and the difference being paid by the parent with the liability for the higher support amount to the other parent. In our view, both Mom and Dad may be entitled to claim the equivalent-to-spouse amount, Mom for Dave and Dad for Jane.

In scenario 3A, which involves each of Mom and Dad having each child for more than 40% but less than 60% of the time (shared custody), the agreement or order requires Mom to pay a specified amount of child support for both children and Dad to pay a higher specified amount of child support again for both children. The payment of these two support amounts is effected by Dad, whose liability for support is higher, having to pay Mom the difference (i.e., net amount) between the two support amounts. In our view, assuming that the order or agreement imposes a liability on Mom and Dad for their respective specified child support amount (as opposed to one liability being imposed on Dad for the net amount), neither Mom nor Dad would be entitled to claim the equivalent-to-spouse amount.

In scenario 3B, which involves the same custody arrangement as in scenario 3A, the agreement or order simply requires Dad to pay a specified child support amount (which is equal to the net amount paid by Dad in scenario 3A) for both children and does not require Mom to pay any child support. In our view, Mom may be entitled to claim the equivalent-to-spouse amount for either Dave or Jane while Dad cannot claim it for either child.

In scenario 3C, in which, as you stated, the "custody arrangements are identical to scenario 3A above, except that the agreement or order provides that, although custody is shared, Dad shall have primary custody of Jane and Mom shall have primary custody of Dave," the order or agreement provides for payment arrangements as in scenario 3A, except that the specified amount of child support to be paid by Dad is specifically for Dave and that to be paid by Mom is specifically for Jane. We presume that your reference to "primary custody" is to the amount of time spent by the child with a particular parent, as opposed to that parent's right to make major decisions affecting the child. In our view, assuming that the order or agreement imposes a liability on Mom and Dad for their respective specified child support amount (as opposed to one liability being imposed on Dad for the net amount), Mom may be entitled to claim the equivalent-to-spouse amount for Dave and Dad, for Jane.

Variance of child support order

You described a situation where a pre-May 1997 agreement or order, which provided for Mom to pay Dad a specific monthly child support amount, is varied in 2001 by agreement or court order, as applicable, to stipulate that Mom continue to pay the specific child support amount in the pre-May 1997 agreement or order and that, in addition, she reimburse Dad a fixed percentage of certain costs, such as medical expenses, incurred for the children.

In your view, the result of the variation is that the reimbursement of the child expenses does not qualify as "support amount" or "child support amount" as these terms are defined in subsection 56.1(4) of the Act because Dad lacks discretion concerning the use of the reimbursed funds; that the child support amount has not changed and continues to be paid under the pre-May 1997 agreement or order; that there is no "commencement day" as defined in subsection 56.1(4) of the Act and, finally, that the pre-May 1997 child support amount continues to be deductible in computing Mom's income, pursuant to paragraph 60(b) of the Act, and included in Dad's income, pursuant to paragraph 56(1)(b) of the Act. You asked for our views.

Only by a careful review of the pre-May 1997 agreement or order, their subsequent variation, and the surrounding circumstances of the particular case is it possible to provide a conclusive opinion regarding the tax consequences of the variation agreement or order. Nevertheless, we will offer the following general comments, which are restricted to expenses paid for the benefit of children in the custody of the former spouse, as described in your situation.

Whether the child support amount under the variation agreement or order falls under the "old" tax regime (i.e., taxable to Dad and deductible to Mom) or under the "new" tax regime (i.e., non-taxable to Dad and non-deductible to Mom) depends on whether there is a "commencement day" as defined in subsection 56.1(4). In turn, whether there is a commencement day depends on whether the variation agreement or order supersedes the pre-May 1997 agreement or order, whether an obligation to pay child support exists in the post-April 1997 agreement or order, the nature and the type of arrangement for the payment of add-on child expenses, and the application of section 60.1 (and the similar provisions of section 56.1) of the Act.

Paragraphs 26-32 of Interpretation Bulletin IT-530, Support Payments, discuss payments for specific expenses and the application of section 60.1 of the Act.

Subsection 60.1(1) provides, inter alia, that amounts paid to a third party for the benefit of the children are deemed to be paid (payable) and received (receivable) by the custodial parent. These amounts must meet the definition of "support amount" in subsection 56.1(4) to qualify as such (e.g., must be an allowance payable on a periodic basis and the recipient must have discretion as to the use of funds).

On the other hand, subsection 60.1(2) deems certain amounts payable for certain expenses to be allowances on a periodic basis payable to and receivable by the custodial parent and in respect of which the custodial parent has discretion as to their use, provided the order or agreement indicates that subsections 60.1(2) and 56.1(2) apply to the said amounts. Thus, amounts which otherwise would not qualify as support amount may qualify as such if subsection 60.1(2) applies to them.

Taking into account the above observations, whether there is a commencement day in the situation you described appears to rest on the following:

If the variation agreement or order supersedes the pre-May 1997 agreement or order or otherwise provides for the obligation to pay the monthly child support amount, there is a commencement day and that is the date the variation agreement or order is made, pursuant to paragraph (a) of the definition of "commencement day" in subsection 56.1(4). Whether the variation agreement or order supersedes the prior agreement or order is a determination of fact.

If the variation agreement or order does not supersede the prior agreement of order, but in fact the monthly child support amount continues to be payable under the pre-May 1997 agreement or order (assuming that paragraph (b) of the definition of "commencement day" in subsection 56.1(4) does not apply), whether the variation triggers a commencement day depends on whether the amounts for the child expenses covered by the variation agreement or order qualify within the meaning of "support amount", taking into account the deeming provisions in section 60.1 and our comments above.

On the other hand, in a situation where a reimbursement is made if and when a child expense is incurred and neither constitutes an allowance nor is statutorily deemed to be one, the reimbursement would not itself qualify within the meaning of "support amount" and "child support amount". Consequently, in this situation there would not be a commencement day because the original child support amount did not change, assuming it continues to be payable under the pre-May 1997 agreement or order.

However, it is possible for certain child expenses to which subsection 60.1(2) does not apply to qualify within the meaning of "support amount" and "child support amount". For instance, child expenses expected to recur during the years the child is a child of the marriage which are estimated and spread over the support years and then paid by means of equal periodic monthly amounts (i.e., as an allowance) may, depending on the circumstances, qualify as support amount and child support amount and trigger a commencement day.

We trust that the foregoing comments are of assistance.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate