13 February 2007 Internal T.I. 2006-0217701I7 - Retroactive Support Arrears

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. Do the deeming rules provided in paragraph 60.1(3)(b) of the Act apply to unpaid arrears? 2. Does paragraph 60.1(3)(b) create deductible arrears support as a consequence of deeming a retroactive commencement date?

Position: 1. No - application is restricted to amounts "paid". 2. No. The deeming provisions apply only for the purposes of restating the commencement date to permit a deduction for "paid" amounts in the year or the preceding year. Payments in subsequent years must meet the conditions of 60(b).

Reasons: The Act.

									February 13, 2007

	DAVE LARSEN	HEADQUARTERS
	Appeals Division / Resource Officer			James Atkinson CGA
	Sudbury Tax Centre / Tax Services Office 		(519) 457-4832

									2006-021770

Paragraph 60.1(3)(b) - Retroactive Arrears

This is in response to your e-mail of December 11, 2006 and the additional information submitted January 16, 2007 inquiring about the deeming provisions provided in subsection 60.1(3) of the Income Tax Act ("Act").

The facts as we understand them are that:

1. A separation agreement ("Agreement") was effected on XXXXXXXXXX.

2. The Agreement acknowledged spousal support payments made in prior years, and calculated arrears as follows:

Year:			Obligation*:	Paid:			Arrears:
XXXXXXXXXX 		XXXXXXXXXX 		XXXXXXXXXX 		XXXXXXXXXX
XXXXXXXXXX 		XXXXXXXXXX 		XXXXXXXXXX 		XXXXXXXXXX
XXXXXXXXXX 		XXXXXXXXXX 		XXXXXXXXXX 		XXXXXXXXXX
XXXXXXXXXX 								XXXXXXXXXX 

* There is no prior written agreement or order requiring these amounts to be paid. The amounts were only used to compute arrears.

3. Spousal support for the XXXXXXXXXX year was set at $XXXXXXXXXX per month. Spousal support for subsequent years is to be calculated by reference to a specific formula set out in the Agreement.

4. In respect of the $XXXXXXXXXX of spousal support arrears arising in the XXXXXXXXXX years, as identified in point 2 above, the Agreement also specified that amount was to be settled for the sum of $XXXXXXXXXX, representing a forgiveness of $XXXXXXXXXX. The terms of payment require only that the amount be paid on or before XXXXXXXXXX.

5. The Agreement provided an acknowledgement that the amounts paid in XXXXXXXXXX, as identified in point 2 above, shall be included in the income of the recipient and be deductible to the payor pursuant to subsections 56.1(3) and 60.1(3) of the Act.

In these circumstances, you question how subsection 60.1(3) of the Act applies to paid and unpaid amounts. To the extent that subsection 60.1(3) deems an agreement to have been made on a prior date, you question whether this will create arrears support retroactively, which may be deductible in subsequent years when paid.

Our Comments:

Subsection 60.1(3) of the Act allows for certain spousal support payments paid prior to a written agreement or order of a competent tribunal to be eligible for deductibility in computing the income of the payor even though they do not meet, absent subsection 60.1(3), one of the conditions for deductibility, namely that the spousal support payments have to be made pursuant to a written agreement or order. Subsection 60.1(3) contemplates situations where amounts are paid at a time when no written agreement or order existed and then a written agreement or order is subsequently made with a retroactive clause therein. Paragraph 60.1(3)(a) provides that such amounts paid in the period ("Prior Period") consisting of the period prior to the time in the year when the agreement or order is made or in the preceding year, are deemed to be paid under the agreement or order if the document provides that they are to be so considered. In addition, subject to certain exceptions mainly pertaining to child support amounts that are not applicable in the case under objection, paragraph 60.1(3)(b) provides that the agreement or order is deemed to have been made on the day on which the first amount was paid in the Prior Period.

As the Agreement in the case under objection was made on XXXXXXXXXX, subsection 60.1(3) can only have application to amounts paid either in that year but before XXXXXXXXXX, or in XXXXXXXXXX being the preceding year. Based on the facts supplied, the deeming provisions of subsection 60.1(3) have application only in respect of the $XXXXXXXXXX paid in XXXXXXXXXX. The provisions of subsection 60.1(3) effectively deems the $XXXXXXXXXX to have been paid under the Agreement for the purpose of determining the deduction under paragraph 60(b) for that year.

You have questioned whether subsection 60.1(3) has any impact on arrears spousal support amounts totalling $XXXXXXXXXX that are mentioned in the Agreement and pertain to the Prior Period in respect of the Agreement. It is our view that the deeming provisions of subsection 60.1(3) have no application to amounts that are unpaid but accrued in the Prior Period in respect of the Agreement due to the express wording of the preamble of subsection 60.1(3) which refers to an amount "paid" (as opposed to an amount payable).

While the Agreement calculates support arrears of $XXXXXXXXXX by reference to a total of monthly spousal support "obligations" less certain amounts paid, we note that those "obligations" were not payable or receivable on a periodic basis under a written agreement or order of a competent tribunal, as required by the definition of "support amount" in subsection 56.1(4), and that subsection 60.1(3) only applies to amounts "paid". The Agreement only establishes, in writing, one lump-sum liability of $XXXXXXXXXX as at XXXXXXXXXX in respect of those obligations, effectively settling the so-called arrears of $XXXXXXXXXX for that lower amount. In our view, the obligation to pay $XXXXXXXXXX would not be deductible in computing the income of the payor because it does not represent amounts payable periodically that were due after the date of a written agreement or order that had fallen into arrears. As explained in paragraph 22 of Interpretation Bulletin IT-530R, Support Payments, a lump sum payment required by a court order or written agreement in respect of a period prior to the date of the order or agreement is not considered a qualifying support amount for purposes of subsection 56.1(4).

We trust that these comments will be of assistance.

Yours truly,

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch