15 February 2002 External T.I. 2002-0118755 - CHILD SUPPORT ARREARS & INTEREST

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: Deductibility of child support arrears and interest on arrears.

Position: General comments provided - 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. As regards to interest in respect of arrears (or in respect of a reduced amount), it is our view that it would not be deductible to the payer, but would be required to be included in the recipient's income.

Reasons: Limited facts provided to us (a review of all relevant court orders and agreements is required). Positions as reflected in other files and in IT-530.

2002-011875
XXXXXXXXXX M. Eisner, CA
(613) 957-8953
February 15, 2002

Dear XXXXXXXXXX:

Re: Child Support Arrears and Interest

This is in reply to your letter dated January 16, 2002, concerning the above-noted subject.

In the circumstances of your situation, a child support order, which was issued prior to 1997 and in respect of which there have been no changes, provides that interest is payable on child support that is in arrears. No amounts have been paid under the order by the payer. Assuming that child support payments under the order otherwise meet the requirements for deduction to the payer under paragraph 60(b) of the Income Tax Act (the "Act"), and for income inclusion to the recipient under paragraph 56(1)(b) of the Act, you have asked us to confirm your views that:

(A) interest in respect of the arrears is not deductible by the payer;

(B) if less than the full amount of the child support arrears is paid in exchange for a release from the remainder of the child support arrears, the amount paid in respect of the arrears would not be deductible; and

(C) in the event all of the child support arrears are paid in full in accordance with the order, the amount paid will be deductible in the year or years they are paid.

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 ruling request submitted in the manner set out in Information Circular 70-6R4. Where the transactions are completed, the enquiry should be submitted to the relevant Tax Services Office. It should also be noted that a determination with respect to the tax treatment of amounts paid and received in circumstances such as those described above requires a review of all relevant orders and agreements. However, we are prepared to provide the following comments in respect of your situation which are of a general nature and are not binding on the Canada Customs and Revenue Agency ("CCRA").

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. As regards to interest in respect of arrears (or in respect of a reduced amount), it is our view that it would not be deductible to the payer, but would be required to be included in the recipient's income.

We trust that our comments are of assistance to you.

Yours truly,

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

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