Income Tax Severed Letters - 2001-06-22

Principal Issues: Two Individuals (Individual A and Individual B), who became divorced in XXXXXXXXXX , entered into a separation agreement dated XXXXXXXXXX (the "Agreement"). Pursuant to the Agreement, Individual B was required, commencing XXXXXXXXXX , to pay $XXXXXXXXXX a month in respect of their two children ($XXXXXXXXXX per month per child) to Individual A. Pursuant to a court order (the Order) issued on XXXXXXXXXX , the monthly support amount was reduced to $XXXXXXXXXX per month commencing on XXXXXXXXXX . On XXXXXXXXXX , a decision was rendered by the Ontario Court (General Division) concerning the arrears outstanding. With respect to the Agreement, the court determined that the outstanding arrears totalled $XXXXXXXXXX . The court in its decision reduced these arrears to $XXXXXXXXXX . In the case of the Order, the outstanding arrears totalled $XXXXXXXXXX . No part of these arrears were reduced. Can the arrears of $XXXXXXXXXX and $XXXXXXXXXX qualify as "support payments" as defined in subsection 56.1(4) of the Income Tax Act (the "Act")?

Position: The amount of $XXXXXXXXXX can qualify while this is not the case for the amount of $XXXXXXXXXX .

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. On the other hand, an amount paid in a taxation year is regarded as qualifying as a periodic payment where it can be identified as being the payment of amounts payable periodically that were due after the date of the order or agreement. (See paragraph 22 of IT-530).

Principales Questions:
Lorsqu'une société a cessé d'exploiter son entreprise, est-ce que la perte sur une créance sans intérêt, qui est due par cette société à son actionnaire et qui est irrécouvrable, est réputée nulle étant donné que l'entreprise est maintenant exploitée par une autre société détenue par le conjoint de cet actionnaire?

Position Adoptée:
Elle ne serait pas réputée nulle.

Principal Issues: Whether a specific agreement should be bifurcated into two components, namely a sale and a loan.

Position: No.

Reasons: The agreements represent purchase and sale agreements and do not create a lender/borrower relationship with respect to the prepaid amount. Jurisprudence does not appear to lend support to the notion of bifurcating the agreements into two components, namely a forward sale and a loan.

Principal Issues:
1. Does paragraph 12(1)(g) override subsection 9(1)?
2. Does paragraph 12(1)(g) apply to accrued royalties?

Position:
1. No.
2. Yes.

Reasons:
1. Subsection 12(1) does not provide specific exceptions to the computation of income under subsection 9(1), but expands on the range of amounts that can be included in income. Therefore paragraph 12(1)(g) is not an authority for deducting an amount that has been included in income under section 9, but permits an amount that may not have been included in income under section 9, to be included in income for tax purposes.
2. In the context of computing income for tax purposes under section 9, income is computed on the accrual basis unless the Act specifically provides for another method of computation such as section 28(1).