3 April 2002 Internal T.I. 2001-0116267 - RETROACTIVE ORDER - DATE MADE

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: (1) Whether a written agreement was made before May 1997 for purposes of the definition of "support amount" in ss. 56.1(4). (2) Alternatively, whether the retroactive effect given to a court order affects the day it is made for the purposes of the definition of "commencement day" in ss. 56.1(4).

Position: (1) No. (2) No.

Reasons: (1) The documentation submitted does not allow to conclude that a written agreement was made before May 1997. (2) For the purposes of the definition of "commencement day" in ss. 56.1(4), the day an order is made is generally the day it is rendered, which may not be the same day it is given legal effect.

April 3, 2002

Ms. Barb Sanders HEADQUARTERS

Winnipeg Tax Centre Patrick Massicotte
Minister's Mail (613) 957-9232

2002-011626
Commencement day of a child support order
XXXXXXXXXX

This is in reply to your memorandum of December 20, 2001 regarding the application of the provisions of the Income Tax Act ("Act") in respect of child support payments. More specifically, you inquire whether child support payments can be considered to have become payable under an agreement or order on or after its commencement day, for the purposes of paragraph 60(b) of the Act.

Facts

At some point in time before 1997, XXXXXXXXXX ("the taxpayer") and XXXXXXXXXX severed their common-law relationship. Negotiations between the parties resulted in some kind of settlement, on or about XXXXXXXXXX, in respect of child support obligations in particular. In an effort to obtain a consent order from XXXXXXXXXX, the taxpayer's lawyer confirmed in a letter dated XXXXXXXXXX their understanding of the basis for such settlement. It provided inter alia for the payment by the taxpayer of maintenance in the sum of $XXXXXXXXXX per month for the support of the child of the relationship.

On the basis of these discussions, the taxpayer made two weekly payments of $XXXXXXXXXX each payable to Maintenance Enforcement. You confirmed that these payments were held "in trust" by XXXXXXXXXX lawyer but never accepted by her and later returned to the taxpayer. No further documents were submitted to confirm whether XXXXXXXXXX or her lawyers have accepted the terms proposed in the XXXXXXXXXX letter from the taxpayer's lawyer.

However, in XXXXXXXXXX, a letter from the taxpayer's lawyer confirms that XXXXXXXXXX refused to consent to an order based on the terms of the XXXXXXXXXX letter. Although we do not know of any further exchange of correspondence between the parties, we understand the specific issue of child support was not resolved as legal proceedings were required.

An initial order was rendered on XXXXXXXXXX. As the court noted that the parties had negotiated a settlement of the issue of maintenance on or about XXXXXXXXXX, it issued the initial order based on the terms of the letter of XXXXXXXXXX to confirm that settlement. The taxpayer was therefore ordered to pay child support of $XXXXXXXXXX per month beginning XXXXXXXXXX, except that the payments otherwise required for the months of XXXXXXXXXX were stayed. The remaining amounts were ordered payable immediately.

For greater certainty, the taxpayer went back to court and obtained an amended court order on XXXXXXXXXX which provides that the XXXXXXXXXX order is effective as of XXXXXXXXXX, although the XXXXXXXXXX payments are stayed.

For each of the XXXXXXXXXX taxation years, the taxpayer claimed a deduction under paragraph 60(b) of the Act for the child support payments made during those years. These are proposed to be disallowed on the basis that the amounts became payable under an order on or after its commencement day.

Taxpayer's position

Although the taxpayer was ordered to pay child support by order of the Queen's Bench of XXXXXXXXXX, his representative submits the amounts actually became payable under an agreement reached on or about XXXXXXXXXX (i.e. prior to the coming into force of the Federal child support guidelines and the new child support rules in the Act) and that the court merely enforced the terms of that agreement. As there were no changes after April 1997 to that agreement, it does not have a commencement date for the purposes of paragraph 60(b) of the Act.

Alternatively, it is submitted that because of the retroactive effect of the amended order of XXXXXXXXXX, it should be considered "made" the date it has been given legal force and effect, that is XXXXXXXXXX.

Your position

In your opinion, the payments in question became payable under the order of XXXXXXXXXX and not under an agreement made on or about XXXXXXXXXX. Pursuant to paragraph (a) of the definition of "commencement day" in subsection 56.1(4) of the Act, such order has a commencement day, which is the day it was made. Although a retroactive effect must be given to the XXXXXXXXXX order pursuant to the amended order issued on XXXXXXXXXX, the order is nonetheless "made" after May 1997. As a result, the child support amounts paid are not deductible under paragraph 60(b) of the Act, as described in element B of the formula in that paragraph.

Alternatively, you submit the payments did not become payable under a written agreement made prior to the court order and cannot therefore be considered support amounts, as defined in subsection 56.1(4) of the Act.

Our Comments

Paragraph 60(b) of the Act allows a deduction for all amounts each of which is a support amount paid after 1996 in specific circumstances. The term "support amount" is defined in subsection 56.1(4) of the Act as an amount receivable inter alia under a court order or written agreement. An amount paid under a verbal agreement does not qualify for a deduction (see Hodson v. MNR, 88 DTC 6001 (FCA) at p. 6003).

It is generally the CCRA's position (see paragraph 13 of IT-530) that informal writings such as correspondence and memoranda between spouses, or between their respective solicitors, will not be considered a valid written agreement. A number of recent court decisions have examined whether a written agreement existed for purposes of the definition of "support amount" in subsection 56.1(4) of the Act in circumstances involving correspondence between solicitors. In the case of Foley v. The Queen, [2000] 4 CTC 2016, the Tax Court of Canada suggested a written agreement could result from an exchange of letters between solicitors, in the same way that contracts are often formed through an exchange of letters.

In our opinion, a written agreement requires a mutual assent of the parties involved about their relative rights and duties, reduced to writing. The express terms of the understanding and its acceptance must be clear. Our review of the documentation submitted reveals that a settlement or understanding of some kind may have been reached between the parties at some time before XXXXXXXXXX, however, we have not seen any documentation indicating that XXXXXXXXXX or her legal representatives have assented in writing to any of the terms found in the XXXXXXXXXX correspondence from the taxpayer's lawyer. Such an arrangement therefore lacks the written manifestation of mutual assent by both parties required to form a written agreement. In fact, as noted above, the XXXXXXXXXX letter indicates that XXXXXXXXXX had not assented to the terms of the XXXXXXXXXX letter. As a result, we agree that child support amounts cannot be considered to have become payable under a written agreement in the above situation.

Alternatively, it is suggested that the child support amounts became payable under the order of the Queen's Bench of XXXXXXXXXX. This order was amended on XXXXXXXXXX to provide that it is effective as of XXXXXXXXXX.

The taxpayer's representatives have submitted references to the Alberta Rules of Court which authorizes a court to give retroactive effect to a judgment. In addition, references to court decisions recognising the validity of retroactive court orders were provided. However, as the wording of paragraph (a) of the definition of "commencement day" is clear and unambiguous, it should in our opinion be given its plain meaning. Where an agreement or order is made after April 1997, it provides that its commencement day is "the day it is made", as opposed to "the day it has effect".

It is our view that a specific legislative reference to the day an order is made, as opposed to the day it becomes effective, generally means we must consider the day the order is rendered and not the day it becomes legally enforceable, which may be different. As the initial and amended court orders were both rendered after April 1997 in this case, we agree that the child support amounts paid would not be deductible under paragraph 60(b) of the Act.

We trust that these comments will be of assistance to you.

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 Canada Customs and Revenue Agency'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 Mrs. Jackie Page at (819) 994-2898.

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