6 December 2004 External T.I. 2004-0075571E5 - Equalization of Property Payment - Marriage Break.

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.

Principal Issues: 1. Whether an equalization of property payment pursuant to a court order on the marriage breakdown is deductible by the payer spouse.

2. Whether a reimbursement by the taxpayer of his former spouse's legal fees which were incurred to enforce the spouse's right to the taxpayer's pension on the dissolution of their marriage is deductible for the purposes of the Act?

3. Whether the interest paid on an obligation arising from a court order for an equalization of matrimonial property falling under the jurisdiction of the Family Law Act of Ontario is deductible under paragraph 20(1)(c)?

Position: 1. No.

2. No.

3. No.

Reasons: 1. Payments made to a former spouse in satisfaction of property rights arising from marriage are of a capital nature. As such, these payments cannot be considered to be "support" for purposes of the Act, which means that there is no deduction available to the payer spouse under the Act.

2. A taxpayer may deduct eligible legal expenses paid to collect or establish a right to a pension benefit. Eligible legal expenses under paragraph 60(o.1) do not include legal expenses relating to a division or settlement of property arising out of, or on a breakdown of, a marriage.

3. Interest is simply payable in respect of an amount owed to the former spouse and the amount is neither "borrowed money" for the purposes of subparagraph 20(1)(c)(i) nor an amount payable for property acquired for the purposes of subparagraph 20(1)(c)(ii).

XXXXXXXXXX 2004-007557
C. Lalonde
December 6, 2004

Dear XXXXXXXXXX:

Re: Equalization of Property Payment on Marriage Breakdown

This is in response to your letter of May 7, 2004 and our subsequent phone conversations (XXXXXXXXXX/Lalonde), wherein you enquired about the deductibility under the Income Tax Act ("Act") of a lump sum amount of $XXXXXXXXXX that you paid to your former spouse, pursuant to an order from the Superior Court of Justice of Ontario, as equalization of the net matrimonial property following the breakdown of your marriage.

The lump sum payment consisted of approximately one half of the value, after income taxes, of your pension benefits that have accumulated over the course of your marriage, and a reimbursement of your former spouse's legal fees plus post-judgment interest.

We have reviewed the information you sent to us and must note that only a portion of the documents pertaining to the separation were provided and also that there are certain discrepancies in the amounts in the documents and the amounts quoted in your letter. Thus, we caution that our conclusions below must be read in light of these limitations.

Comments

In your letter, you have outlined what is an actual fact situation related to completed transactions. As noted in Information Circular 70-6R5 (available at your local tax services office or on the internet at www.ccra-adrc.gc.ca/formspubs/menu-e.html), this directorate can only provide an opinion concerning the tax consequences associated with specific proposed transactions in the form of an advance income tax ruling. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. Consequently, we can only provide you with the following general comments.

The court order makes it reasonably clear that the pension is considered matrimonial property, the value of which must be considered in arriving at the equalization of property payment. Payments made to a former spouse in satisfaction of property rights arising from marriage are of a capital nature. As such, these payments cannot be considered to be "support" for purposes of the Act, which means that there is no deduction available to the payer spouse under the Act.

We note, however, that the fact that you bear the responsibility for the income taxes on the pension benefits appears to have been taken into account by the court in the division of your pension. The actuarial report, on which the court decision is based, shows the accumulated value of your pension during the course of your marriage after income taxes. Therefore, the equalization amount owed to your wife, as determined by the court, is lower than it would have been otherwise had your liability for the income taxes on the pension benefits not been taken into consideration.

With regard to the reimbursement of your former wife's legal fees, the Canada Revenue Agency's (CRA's) general views on the deductibility of legal fees can be found in Interpretation Bulletin IT-99R5 entitled "Legal and Accounting Fees". Paragraph 25 states that a taxpayer is allowed to deduct eligible legal expenses paid to collect or establish a right to a pension benefit. Eligible legal expenses do not include legal expenses relating to a division or settlement of property arising out of, or on a breakdown of, a marriage. Consequently, legal fees incurred by your former spouse to enforce her right to an equalization of property payment, the property of which includes the value of your pension, are not deductible by her. Similarly, you are not entitled to a deduction for the reimbursement of her legal fees.

Thirdly, the Act allows the deduction of interest payments under certain circumstances including, among other things, amounts paid pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from a business or property. Unfortunately, there is no provision allowing for the deduction of the post-judgment interest you were required to pay to your wife pursuant to the court order.

Finally, you commented on the fact that, as a result of the court order establishing the equalization of your pension and support payments, you find yourself in a "double-dipping" or "double recovery" situation similar to the case of Boston v. Boston (neutral citation 2001 SCC 43) which was heard by the Supreme Court of Canada ("SCC") in 2001. In that case, the court ruled as follows:

"The retired payer spouse was entitled in this case to reduce his support obligation to his former wife on the basis that the pension now being received was previously considered in the distribution of matrimonial property."

This matter involves Family Law which is a legal issue which does not fall under the purview of the CRA. Therefore, we are unable to comment except to say that whether or not this is the case in your situation has no bearing on the deductibility of the lump sum payment you made to your former wife. We attached a copy of the SCC judgment for your convenience, as it may provide some insights on the "double recovery" issue you raised.

We trust that these comments will be of assistance.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch

Encl.