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 an amount purported to be for spousal support would be deductible if that amount was paid biweekly and derived at by reference to a formula
Position: Question of fact
Reasons: It is necessary to determine if the amounts paid are for the maintenance of the spouse and not for some other purpose.
April 28, 2006
Re: Spousal Support Deduction
We are writing in reply to your letters dated November 16, 2005, December 13, 2005, February 14, 2006, and March 17, 2006, wherein you requested a technical interpretation regarding whether certain amounts paid from one spouse to another constituted a "support amount" as defined in subsection 56.1(4) of the Income Tax Act, R.S.C. 1985, (5th Supp.) as amended (the "Act").
We have the following understanding of the facts:
1. XXXXXXXXXX (the "Husband") and XXXXXXXXXX (the "Wife") have lived together for over XXXXXXXXXX years.
2. The Husband and the Wife have one child (the "Child") who is currently XXXXXXXXXX years of age.
3. The Husband's income from all sources is approximately $XXXXXXXXXX.
4. Throughout the marriage the Wife has been a homemaker.
5. With the separation the Child is to continue to live with the Wife.
6. The Husband and Wife have separated and a separation agreement (the "Agreement") has been drafted stipulating equalization payments, child support and spousal support.
7. Both the child support and the spousal support are to be paid biweekly and the amounts are to be determined with reference to formulae.
8. The child support payments are to be calculated at XXXXXXXXXX% of the Husband's net regular employment income (Net Regular Pay) and XXXXXXXXXX% of any net additional income (Net Other Income). The Agreement stipulates that regular employment income is income from employment during regular hours and does not include bonuses or overtime pay. Further, Net Regular Pay or Net Other Income is to be the amount net of federal and provincial tax, UI premiums, CPP premiums, deductions to cover the Husband's employment contributions for Extended Health, disability and/or life insurance coverage, and "deductions to a maximum of XXXXXXXXXX% of the Husband's net income (this includes the Net Regular Pay and Net Other Income) set aside for personal or spousal Savings Plan or Stock plan contributions".
9. Under the Agreement the Wife is to receive as support XXXXXXXXXX% of the Husband's Net Regular Pay and XXXXXXXXXX% of any Net Other Income. The Wife is to have complete discretion as to the use of these funds.
10. The aforementioned formulae were set up to take into consideration the facts that the Husband does not receive a steady salary throughout the year.
You are satisfied that the equalization payments represent an equal division of the family assets. Further in your letter dated, March 17, 2006, with respect to our inquiries about the child support amounts you wrote: "the Guidelines actually provide for greater payment of child support [than that which the Husband is to pay]."
Your specific concern is whether an amount based on a formula would be deductible as a spousal support amount under the Act.
As the particular circumstances outlined in your letter involve a finding of fact and appear to involve an actual taxpayer and a completed transaction, you may wish to submit all such details to the appropriate District Taxation Office for their comments. We are prepared, however, to provide the following general comments, which may be of some assistance.
The tax treatment of support payments is discussed in Interpretation Bulletin IT-530R, Support Payments. Generally, if the payor is entitled to an income deduction for payments for the maintenance of the spouse under paragraph 60(b) of the Act the recipient of that maintenance is required to include the amount as income pursuant to paragraph 56(1)(b) of the Act. This tax treatment is only available when the amount paid and received constitutes a spousal support amount.
Subsection 56.1(4) provides the definition for "support amount". The definition of support amount includes child support and spousal support. However, in respect of support amounts payable under an order of a competent tribunal or a written agreement that has a "commencement day" (also defined in subsection 56.1(4)) only what constitutes a spousal support amount continues to be deductible from income by the payor and to be included in income by the recipient. Generally, orders or written agreements made after April 1997 would be considered to have a commencement day. In general, an amount would qualify as spousal support if the amount is:
- payable to or receivable by the recipient;
- payable as an allowance (ie. on a periodic basis);
- for the maintenance of the recipient;
- available for the recipient's discretionary use; and
- receivable under an order of a competent tribunal or under a written agreement.
In determining whether an amount is for the maintenance of the recipient the courts have determined that the amount must be reflective of spousal support amounts and not representing something else. For example, in Andrews v. The Queen 2005 DTC 1546, Chief Justice Bowman determined that a support amount does not include amounts that are equalization payments even if they are paid on a periodic basis.
Thus it is our view that in determining whether or not the amounts payable on a periodic basis are in fact a deductible spousal support amount it is necessary to review the division of assets and any other amounts paid or payable to the recipient by the payor. The fact that the amounts payable are set amounts or based on a formula is not determinative one way or the other.
In determining whether the amounts in the Agreement that are designated as spousal support would qualify as a deductible support amount under the Act specific concerns would relate to whether the amounts claimed to be for spousal support include equalization payments and/or child support amounts.
In your letter dated March 17, 2006 you indicated that the amount payable by the Husband for child support is less than the amount required by the Federal Child Support Guidelines. You have also indicated that the equalization payments represent an equal division of family assets. Based on those two facts, it would appear that a portion of the spousal support actually represents child support, which is not subject to the inclusion and deduction treatment applicable to a spousal support amount.
We trust these comments are of assistance.
Business Incentives and Capital Transactions Section
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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