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: Whether a pre-May 1997 agreement will have a "commencement day" in the following situations: (1) if child support amounts continue to be paid after the children reach the age of majority and pursue post-secondary education; (2) if the agreement is varied to change only third party payments, but not the fixed monthly support payments; (3) if an additional agreement is made to provide for additional third party payments, such as post-secondary education costs, without changing the terms of the initial agreement, and (4) if child support amounts cease in respect of one of the two children but continue in respect of the other child.
Position: (1) No (2) No (3) No (4) Yes.
Reasons: (1) In this case, the agreement does not provide for the payments to cease when the children reach the age of 18 years old. (2) and (3) In this case, the third party payments do not constitute "child support amounts" as defined in ss. 56.1(4) of the Act. (4) The Initial Agreement did not provide for the termination of the obligation to pay child support.
XXXXXXXXXX 2004-008352
P. Massicotte, CA, M.Fisc.
January 31, 2005
Dear XXXXXXXXXX:
Re: Child Support
We are writing in reply to your enquiry of June 30, 2004, requesting our comments in connection with the deductibility of child support amounts pursuant to paragraph 60(b) of the Income Tax Act of Canada (the "Act").
The relevant facts as we understand them are as follows:
1. Under an agreement made on XXXXXXXXXX with your former spouse (the "Initial Agreement") you are required to pay to your former spouse an amount of $XXXXXXXXXX per month (the "Fixed Child Support Amounts") for the support of your two children (i.e. $XXXXXXXXXX per child per month).
2. The Initial Agreement also provides that you are required to pay specific expenses directly to third parties (the "Third Party Payments") for the benefit of the children, such as life insurance premiums, camp costs, etc, in addition to the Fixed Child Support Amounts described above.
3. The Initial Agreement does not provide that subsections 56.1(2) and 60.1(2) of the Act shall apply to the Third Party Payments, nor are there any statements in the agreement that such payments will be taxable to the recipient or deductible to the payer.
4. The Third Party Payments do not constitute an allowance payable to your former spouse on a periodic basis and your former spouse does not have discretion as to the use of those amounts.
5. You have never deducted the Third Party Payments in computing your income for purposes of the Act, and your former spouse has never included these amounts in her income for purposes of the Act.
6. Since the time the Initial Agreement was made, you have deducted only the Fixed Child Support Amounts of $XXXXXXXXXX per month, and your former spouse has included in her income the same amount of $XXXXXXXXXX per month.
7. The Initial Agreement is silent as to what happens when a child reaches the age of 18 years and the post-secondary education costs. The youngest child has reached the age of 18 years in XXXXXXXXXX and the oldest child will become 18 years old in XXXXXXXXXX.
8. A joint election using Form T1157, Election for Child Support Payments, has never been filed in respect of any of the amounts payable under the Initial Agreement and there are no provisions in the Initial Agreement specifying a date as the agreement's "commencement day" for purposes of the Act. For purposes of this reply, we have assumed that the Initial Agreement is still in effect (i.e. it has not been superseded by any other agreement or order, including a divorce order), it has not been varied and there have been no subsequent orders or agreements relating to child support. If there are any other orders, agreements or variations our response with respect to the questions you raise below may differ.
As your children intend to pursue post-secondary education and will continue to depend on you and your former spouse for support, you have the following questions regarding the deductibility of the child support payments:
(A) Whether a "commencement day", as defined in subsection 56.1(4) of the Act, would apply to the Initial Agreement if you continue to pay the Fixed Child Support Amounts for both children, as provided in that agreement, even though the oldest child has reached the age of 18 years.
(B) Whether any changes or amendments to the Initial Agreement regarding the Third Party Payments (insurance, etc) would result in the Initial Agreement having a "commencement day", even though there are no changes to the Fixed Child Support Amounts of $XXXXXXXXXX per month.
(C) Whether the negotiation of an additional agreement (the "Additional Agreement") that provides for the obligation to pay specified post-secondary education costs directly to third parties for the benefit of your children, without changing the Initial Agreement and the Fixed Child Support Amounts provided thereunder, would result in the Initial Agreement having a "commencement day". You indicate that your former spouse would not have discretion as to the use of these third party payments or to any of the amounts referred to in (B).
(D) Finally, as the Initial Agreement provides for the payment of a fixed support amount in respect of each child, you ask whether ceasing to pay support for the oldest child would result in the support payments made pursuant to the Initial Agreement for the younger child being no longer deductible.
The situation outlined in your request appears to be a factual one, involving specific taxpayers. As explained in Information Circular 70-6R5, 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 situation involve a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to provide you with the following general comments.
As you know, the purpose of the new child support provisions in the Act is to eliminate both the requirement to include child support in the recipient's income and the deduction available to the payer of child support. Generally, the new rules will apply to child support amounts received under court orders and agreements made after April 1997. However, as explained in paragraph 7 of IT-530R, Support Payments, the new rules may also apply to child support amounts received under the terms of an order or agreement made before May 1997 in certain circumstances. Those circumstances are described in paragraph (b) of the definition of "commencement day" in subsection 56.1(4) of the Act. An order or agreement made before May 1997 will have a "commencement day" if:
(i) The payer and the recipient elect, using Form T1157, Election for Child Support Payments, to have the child support payable on and after a specified date be not taxable and not deductible. In this situation, the "commencement day" of the order or agreement is the specified date.
(ii) The order or agreement is varied after April 1997 to increase or decrease the child support amounts payable. In this situation, the "commencement day" of the order or agreement is the date on which the first payment of the varied amount is required to be made.
(iii) The order or agreement remains valid, but after April 1997 the same payer and same recipient become party to a subsequent order or agreement, the result being a change in the total child support amounts payable. In this situation, the "commencement day" of the order or agreement is the "commencement day" of the first such subsequent order or agreement.
(iv) The order or agreement, or any variation thereof, specifies a date as the "commencement day" of the order or agreement for the purposes of the Act, or provides that child support amounts payable on and after a specified date will no longer be taxable or deductible. In this situation, the "commencement day" of the order or agreement is the specified date.
Only by a careful review of the Initial Agreement, any subsequent agreement, and the surrounding circumstances of your particular situation would it be possible to provide a conclusive opinion regarding the deductibility of child support amounts paid in a year. As you have not provided us with a copy of the Initial Agreement, any variation thereof, nor any subsequent agreement, we are unable to provide you with definitive comments. Nevertheless, we will offer the following general comments, which may be of assistance to you.
In response to your first enquiry, it would have to be determined under which agreement the child support amounts are payable. If it could be determined that child support amounts are payable under an agreement made after April 1997, such amounts would not be deductible as the agreement would have a "commencement day" corresponding to the day the agreement was made. If, however, the child support amounts are payable under the Initial Agreement, which was made before May 1997, the amounts provided therein would be deductible if that agreement does not have a "commencement day" pursuant to paragraph (b) of the definition in subsection 56.1(4) of the Act, as explained above. The issue of whether child support amounts are payable under a pre-May 1997 agreement or a post-April 1997 agreement depends on the legal relationship between each agreement.
It appears the Initial Agreement does not contain any provision for the termination of the child support obligations when a child reaches the age of 18 years, and it is our understanding that the applicable law does not provide for the automatic termination of your obligations in such a situation. Accordingly, continuing to pay the Fixed Child Support Amounts after the time your children reach the age of 18 years pursuant to the terms of the Initial Agreement would not appear to trigger a "commencement day". Based on those facts, such payments would continue to be deductible under paragraph 60(b) of the Act.
Your second enquiry also depends on the legal relationship between each agreement. However, a pre-May 1997 agreement that is varied after April 1997 to change the "child support amounts" will trigger a "commencement day", corresponding to the date on which the first payment of the varied amount is required to be made, as outlined in (ii) above. The term "child support amount" is defined in subsection 56.1(4) of the Act as "any support amount that is not identified in the agreement or order under which it is receivable as being solely for the support of a recipient who is a spouse or common-law partner or former spouse or common-law partner of the payer or who is a parent of a child of whom the payer is a natural parent."
The term "support amount" is also defined in subsection 56.1(4) of the Act. An amount is a support amount if, inter alia:
- the amount is payable to the payer's spouse or common-law partner, or former spouse or common-law partner, or the parent of a child of whom the payer is the natural parent (hereinafter the "recipient");
- the amount is payable as an allowance for the maintenance of the recipient, children of the recipient or both;
- the amount is payable on a periodic basis, and
- the recipient has discretion as to the use of the amount.
Based on the limited facts provided, it does not appear that in the above situation the provisions of subsection 60.1(1) of the Act result in the Third Party Payments qualifying as "support amounts" as, inter alia, you indicate that your former spouse does not have discretion as to the use of these amounts. See paragraphs 26 to 28 of IT-530R for a discussion on subsection 60.1(1) of the Act.
As explained in paragraphs 29 to 32 of IT-530R, where an agreement provides for the payment to third parties of specific expenses incurred for the maintenance of the children in the recipient's custody, subsection 60.1(2) of the Act deems such amounts to be payable to and receivable by the recipient as an allowance payable on a periodic basis and deems the recipient to have discretion as to the use of the amounts (as explained in paragraph 29 of IT-530R, certain expenses are excluded from the application of subsection 60.1(2)). This deeming provision allows such third party payments to qualify for a deduction under paragraph 60(b), provided they otherwise qualify.
However, subsection 60.1(2) of the Act is an elective provision and will apply only if the agreement states that subsections 60.1(2) and 56.1(2) of the Act are to apply to the third-party payments, or there is a clear and unambiguous clause in the agreement stating the parties' understanding that the third party payments will be taxable to the recipient and deductible to the payer.
Based on the facts provided above, it does not appear that subsection 60.1(2) of the Act applies in respect of the Third Party Payments described above, such that they would not be considered "support amounts" for the purposes of sections 56, 56.1, 60 and 60.1 of the Act. Accordingly, any variation or amendment to the Initial Agreement to change only the Third Party Payments would not, in itself, result in a variation contemplated in subparagraph (b)(ii) of the definition of "commencement day" in subsection 56.1(4) of the Act, assuming subsection 60.1(2) still does not apply. The payment of the Fixed Child Support Amounts pursuant to the Initial Agreement would continue to be deductible under paragraph 60(b) of the Act.
Similarly, with respect to your third enquiry, if an additional agreement is negotiated with your former spouse to provide only for the payment to third parties of additional post-secondary education costs incurred in respect of your children and subsections 56.1(2) and 60.1(2) of the Act are not applicable in respect thereof, the payment of such costs would not be considered the payment of "child support amounts". Consequently, provided the Fixed Child Support Amounts payable under the Initial Agreement are not changed, the negotiation of the Additional Agreement would not, in itself, have the effect of changing the total "child support amounts" payable to your former spouse (the recipient) and the Initial Agreement would not have a "commencement day".
Please note however that the above comments relating to subsections 60.1(1) and 60.1(2) of the Act are based on the given fact that the Third Party Payments and the additional post-secondary education costs do not otherwise constitute an allowance payable to your former spouse on a periodic basis and that your former spouse does not otherwise have discretion as to the use of those amounts. These are all questions of fact that can only be resolved upon examination of all the relevant facts and circumstances surrounding the situation.
With respect to your final enquiry, it is generally our view that where a pre-May 1997 agreement is clear as to when child support for a particular child is to cease, the cessation of such payments in accordance with the date set out in that agreement would not trigger a "commencement day" pursuant to subsection 56.1(4) of the Act. However, where a pre-May 1997 agreement is varied, or a subsequent agreement is made, authorizing the payer to cease making support payments in respect of a child, subparagraph (b)(ii) or (iii) of the definition of "commencement day" in subsection 56.1(4) of the Act would apply, depending on the circumstances, and trigger a "commencement day" for the Initial Agreement. If however child support amounts cease to be paid in respect of a child as a result of a subsequent agreement that replaces the Initial Agreement, such that the Initial Agreement no longer has legal force and effect, paragraph (a) of the definition of "commencement day" would apply.
A review of the terms and conditions of the Initial Agreement and any subsequent agreement, or variation, would be necessary to provide any conclusive opinion. However, as it appears the Initial Agreement described above does not contain any provision for the termination of the child support obligations, it would be our opinion that a subsequent agreement or variation would be required to authorize you to cease making support payments for the oldest child, which would trigger a "commencement day", as explained above.
We trust the above comments are of assistance to you.
Yours truly,
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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