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 order has a "commencement day" under ss. 56.1(4) where a subsequent agreement adds a provision for the termination of the child support obligation.
Position: No.
Reasons: The provisions of the subsequent agreement dealing with the termination of the obligation to pay child support are in effect conditional upon a further order or agreement establishing that a particular child has ceased to be "dependent" on the wife or a "child of the marriage" as defined in the Divorce Act of Canada.
December 24, 2004
Tina Doehnel HEADQUARTERS
Appeals Division P. Massicotte, CA, M.Fisc.
Vancouver Island Tax Services Office (613) 590-1116
2004-009001
Support Payments - Commencement Day
This is in response to your enquiry of August 9, 2004, in which you request our comments in connection with the tax treatment of child support amounts received by a taxpayer, pursuant to paragraph 56(1)(b) of the Income Tax Act (the "Act"). The relevant facts, as we understand them, are as follows:
1. A taxpayer (Mr. A) and his wife (Mrs. A) separated sometime before May 1997.
2. An order was issued by the Supreme Court of British Columbia sometime before May 1997 (the "Initial Order") providing inter alia that Mr.A and Mrs.A would have shared custody of the "children of the marriage". The order also provided that the family assets would not be disposed of, encumbered or dealt with in any manner without the written consent of both Mr.A and Mrs.A. Finally, although no spousal support was payable to Mrs.A at that time, the order provided that Mr.A would pay Mrs.A the amount of $XXXXXXXXXX per month per child for the support of the children, but did not explicitly provide for the termination of that obligation.
3. Sometime after April 1997, Mr.A and Mrs.A entered into mediation and, to avoid the cost of litigation, negotiated an agreement to resolve the issues outstanding between them (the "Subsequent Agreement").
4. You have provided us with a copy of the Initial Order and the Subsequent Agreement referred to above, which were all severed to remove significant information in relation to the issues at hand. We note in particular that the copy of the agreement submitted is not signed by anyone, not dated, has significant blocks of information missing and contains a number of typos. We suggest you obtain a copy of the original documents before providing any definitive answers.
5. Based on the severed copy of the Subsequent Agreement provided, the parties agreed on how the family assets should be divided between them (articles XXXXXXXXXX) and agreed that custody of the children would continue to be shared, although the parties agreed to some changes regarding the access rights of Mr.A (articles XXXXXXXXXX).
6. The Subsequent Agreement also created new spousal support obligations for Mr.A. Spousal support amounts of $XXXXXXXXXX per month were agreed to be paid by Mr.A to Mrs.A for a period of XXXXXXXXXX months, in addition to a fixed amount of $XXXXXXXXXX per month for an undisclosed period of time. Mr.A also agreed to maintain certain insurance benefits (articles XXXXXXXXXX).
7. Finally, articles XXXXXXXXXX of the Subsequent Agreement deal with the child support obligations of Mr.A. Article XXXXXXXXXX simply provides that Mr.A will continue to pay Mrs.A the amount of $XXXXXXXXXX per month per child for the support of the children, which was the amount established under the Initial Order. The parties however specified in the agreement that such amounts would be payable "for as long as the children are dependent on [Mrs.A] and are children of the marriage as defined in the Divorce Act of Canada or until further order of a court of competent jurisdiction." The latter portion was not mentioned in the Initial Order.
8. Article XXXXXXXXXX of the Subsequent Agreement states that Mr.A will continue to deduct from his income for income tax purposes the child support payments made to Mrs.A and that Mrs.A will continue to include the child support amounts received in her income for income tax purposes.
9. Mrs.A has not included in her income the child support amounts she received during one or more taxation years after the Subsequent Agreement was made ("the taxation years at issue"), and now takes the position such amounts are not required to be included in her income pursuant to paragraph 56(1)(b) of the Act.
You ask whether, in the situation described above, the Initial Order or the Subsequent Agreement can be considered to have a "commencement day", as defined in subsection 56.1(4) of the Act, such that the child support amounts that became receivable by Mrs.A during the taxation years at issue may be excluded from her income pursuant to variable B of the formula in paragraph 56(1)(b) of the Act.
The legal representatives of Mrs.A submit that the child support amounts she received during the taxation years at issue should not be included in her income for purposes of the Act because the payments were made after the "commencement day" of the Initial Order or Subsequent Agreement. More specifically, it is submitted that the Subsequent Agreement varied the child support amounts because it specifies a duration for the child support payments. As a result, it is suggested that this causes the Initial Order to have a "commencement day" that is in or prior to the taxation years at issue. We assume the representatives of Mrs.A are referring to the application of paragraph (b) of the definition of "commencement day" in subsection 56.1(4) of the Act, which applies to an order or agreement made before May 1997.
Alternatively, it is submitted that the Subsequent Agreement is an agreement contemplated in paragraph (a) of the definition of "commencement day" and has a commencement day corresponding to the day it was made, which we assume is in or prior to the taxation years at issue.
You refer to our documents #E9829185 and #E2000-0005877 and question whether they support the taxpayer's views. It was our opinion in those situations that a "commencement day" would apply to a pre-May 1997 order or agreement, pursuant to paragraph (b) of the definition of "commencement day" in subsection 56.1(4) of the Act, where provisions were added to deal with the termination of child support obligations that were not in the previous order or agreement.
As you know, the basic thrust 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.
When considering whether child support amounts are taxable to the recipient, it must therefore be determined under which order or agreement the amounts are received. If it can be determined that child support amounts are received under an order or agreement made after April 1997, such as the Subsequent Agreement in the present situation, the amounts received will not be taxable for the recipient. If, however, the amounts are received under an order or agreement made before May 1997, such as the Initial Order in the present situation, the order or agreement will not have a "commencement day" and the amounts will be taxable to the recipient, unless that order or agreement has a "commencement day", pursuant to paragraph (b) of the definition of that expression in subsection 56.1(4) of the Act.
It is our view that the issue of whether child support amounts are receivable under a pre-May 1997 order or agreement, or a post-April 1997 order or agreement, depends on the legal relationship between each order or agreement. Where a post-April 1997 order or agreement supersedes a pre-May 1997 order or agreement, the payments would be considered to be made under the subsequent order or agreement (see our documents #E9823157, #E9823445, #E9823897 and #E9824397). Similar positions have also been taken by the courts in various cases (see the decision in Samycia v. The Queen, 2002 DTC 3846; Colbert v. The Queen, 2004 DTC 3300; Mossman v. The Queen, 2002 DTC 3881, and Pieper v. The Queen, 2004 DTC 2818).
Based on the facts described above, it is our opinion that the Subsequent Agreement in the present situation did not supersede the Initial Order, at least as far as the child support provisions are concerned. Although not entirely determinative of the issue, the Subsequent Agreement does refer to the payer continuing to pay the child support amounts that were previously established by the Initial Order (see Mossman above where a similar issue was considered). As a result, in our view, the child support amounts received by Mrs.A after the Subsequent Agreement was negotiated should be considered as receivable under the Initial Order and not under the Subsequent Agreement. As the Initial Order was made before May 1997, it will not have a "commencement day" and be subject to the new rules, unless the circumstances described in any of (i) to (iv) above apply.
It is our understanding that, in the present situation, neither the Initial Order nor the Subsequent Agreement specifies a day to be the "commencement day" of the Initial Order for the purposes of the Act. Similarly, it is our understanding that the parties have not filed a joint election using form T1157 to specify a day to be the "commencement day" of the Initial Order. As a result, the rules in (i) and (iv) described above do not apply to the Initial Order and this order will have a "commencement day" only if inter alia the Subsequent Agreement changes the child support amounts payable.
In the present circumstances, it is our opinion that simply specifying that the child support amounts established under the Initial Order will continue to be payable "for as long as the children are dependent on [Mrs.A] and are children of the marriage as defined in the Divorce Act of Canada or until further order of a court of competent jurisdiction" does not, by itself, result in any change to the child support amounts payable to Mrs.A.
In our view, whether a child is a dependant or a "child of the marriage", as defined in the Divorce Act of Canada, is a question of fact that can only be resolved by a further agreement or court order to that effect. We note that the term "dependent" is not defined in the Subsequent Agreement and, as a result, it may well not be possible to determine a particular time when a particular child ceases to be a dependant. A "child of the marriage" is defined in the Divorce Act of Canada as: "a child of two spouses or former spouses who, at the material time, (a) is under the age of majority and who has not withdrawn from their charge, or (b) is the age of majority or over and under their charge but unable, by reason of illness, disability or other cause, to withdraw from their charge or to obtain the necessaries of life." As you may know, the age of majority in the province of British Columbia is 19 years, pursuant to paragraph 1(1)(a) of the Age of Majority Act of British Columbia. However, as observed in the case of Colbert v. The Queen, 2004 DTC 3300, at page 3309, determining whether a child is a "child of the marriage" is not an easy task:
"However, the issue of whether one remains 'a child of the marriage' in accordance with the Divorce Act can be a tricky issue to resolve and will - in most cases, barring consent - require a decision by a competent tribunal.
[...]
In Kovarik, supra [2001 DTC 3716], Judge Bowman expressed the opinion the Divorce Act does not support unilateral cessation of child support payments once a 'child of the marriage' as defined therein reaches the age of majority. A review of jurisprudence tends to support the view that to accomplish that end, the law requires either an agreement between the spouses or an order of a court of competent jurisdiction... It is apparent the courts will consider many factors in order to determine whether a child remains 'a child of the marriage' within the definition (see: Van de Pol v. Van de Pol, (1996) 179 A.R. 221; (1996) 20 R.F.L. (4th) 178 and Kushnir v. Kushnir, (2001) 21 R.F.L. (5th) 90)."
We assume that the child support obligations created under the Initial Order were subject to the provisions of the Family Relations Act of British Columbia (the "FRA"), which provide at subsection 88(1) that: "[e]ach parent of a child is responsible and liable for the reasonable and necessary support and maintenance of the child." A "child" is generally defined in subsection 1(1) of the FRA as "a person who is under the age of 19 years." In addition, section 87 of the FRA defines "child" for the purposes of Part 7 of the FRA, Maintenance and Support Obligations, to include "a person who is 19 years of age or older and, in relation to the parents of the person, is unable because of illness, disability or other cause, to withdraw from their charge or to obtain the necessaries of life."
As a result, it appears the provisions of the Subsequent Agreement relating to the termination of the child support obligations are very similar to those otherwise applicable under the Initial Order. In both cases, a further agreement between the parties, or a court order, would be necessary to confirm that a particular child is no longer dependent on his or her parents to obtain the necessaries of life before an obligation of Mr.A to pay child support to Mrs.A in respect of that child can be terminated. Based on the facts described above, it appears none of the children have ceased to be "dependent" on their parents or ceased to be "children of the marriage" yet. As a change to the child support amounts payable would only occur at the time such a further agreement or order is made, the Initial Order in this case does not have a "commencement day" for the purposes of the Act.
This is consistent with the comments made in our documents #E9829185 and #E2000-0005877 to which you refer. In the first document, a pre-May 1997 court order (the initial order) provided that child support was payable on a monthly basis without providing when the obligation to pay would cease. It was proposed that a subsequent order be obtained after April 1997 pursuant to which the child support payments would cease when each particular child would reach the age of 22 years. In the meantime, the same amount of child support would be paid as initially ordered. It was our opinion that where the subsequent order represented a variation to the initial order, it would trigger a "commencement day" corresponding to the day on which the first payment of the varied amount was required to be made, that is, the time at which the first child reached the age of 22 years. Similar comments were made in the second document. These situations can be distinguished from the present situation as it was possible under the terms of those arrangements to determine a particular time when child support obligations would cease. However, in the present situation, a further order or agreement would be required to establish when child support payments would cease, which would itself trigger a commencement day.
Therefore, in response to your question, it is our opinion that, based on the facts described above, the Initial Order and the Subsequent Agreement do not have a "commencement day", as defined in subsection 56.1(4) of the Act, and the child support amounts paid to Mrs.A during the taxation years at issue are required to be included in her income pursuant to paragraph 56(1)(b) of the Act. We would also note that, while not determinative of the issue, this interpretation also seems to be consistent with the intention of the parties as expressed in the Subsequent Agreement (i.e., that the child support payments remain taxable and deductible). If the parties now wish to be subject to the new child support regime, they may elect to do so under subparagraph (b)(i) of the definition of "commencement day" in subsection 56.1(4) of the Act.
We trust you will find the above to be of assistance. If you have any questions regarding the above, please do not hesitate to contact us.
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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