14 November 2008 External T.I. 2008-0294511E5 - Child Support

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 lump sum payments paid in respect of child support and related legal fees are deductible.

Position: No

Reasons: The agreement has a "commencement date" as a consequence of the filing of a T1157 election. All payments made after the date specified in the election are not deductible to the payer and not taxable to the recipient. Also, retroactive support for the period preceding the court order would not be qualifying support amount (IT-530R, paragraph 22). Legal fees incurred by the payer are not deductible as they are considered to be personal or living expenses.

                                                2008-029451
XXXXXXXXXX                                      C.  Ritchie
(613) 952-1506
November 14, 2008

Dear XXXXXXXXXX :

Deductibility of Lump Sum Child Support Payment and related Legal Fees

This is in reply to your letter (undated) and our telephone conversation (Ritchie/XXXXXXXXXX ) of November 5, 2008, concerning the deductibility under the Income Tax Act (Act) of certain lump sum child support payments and legal fees paid as a consequence of a court order.

A brief summary of the facts as we understand them is as follows:

Your client, as a consequence of a court order in XXXXXXXXXX , was ordered to pay child support in the amount of $XXXXXXXXXX per month in respect of his son. In XXXXXXXXXX , he and the recipient of the child support filed an election T1157 to make the $XXXXXXXXXX per month non-taxable to the recipient.

On XXXXXXXXXX , your client was ordered by the court to pay retroactive child support for the period from XXXXXXXXXX to XXXXXXXXXX , in the amount of $XXXXXXXXXX , payable in three lump sum payments as follows:

(a) $XXXXXXXXXX on or before XXXXXXXXXX ;
(b) $XXXXXXXXXX on or before XXXXXXXXXX ; and
(c) the balance on or before XXXXXXXXXX .

In addition, your client was ordered to pay interest on the above amounts after XXXXXXXXXX , and the legal costs incurred by the recipient.

Your question concerns whether the above-mentioned lump sum amounts and the legal costs are deductible in computing the income of your client (payer).

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments.

The tax treatment of support payments is discussed in detail in Interpretation Bulletin IT-530R, Support Payments, which is available on the CRA's website at www.cra-arc.gc.ca. As a consequence of amendments to the Act applicable after April 1997, the child support provisions were changed to eliminate both the mandatory inclusion of child support in the recipient parent's income and the deduction available to the payer of child support. Generally, this new tax regime of child support applies to agreements or court orders made after April 1997.

In addition, the new tax regime also applies to child support amounts payable under the terms of a written agreement or order made before May 1997 if the agreement or order has a commencement day. "Commencement day" is defined in subsection 56.1(4) of the Act (and discussed in paragraph 7 of IT-530R) to include certain events, one of which is the filing of a joint election by the recipient and payer of child support specifying the commencement day of the pre-May 1997 order or agreement. Accordingly, if a joint election is filed, the new tax regime will apply to child support amounts payable after the commencement day specified in the joint election.

You have advised that your client and the recipient of child support filed a joint election (form T1157). As a consequence, any amount that qualifies as "child support amount" (defined in subsection 56.1(4) of the Act) and is payable by your client after the commencement day specified in this election is not taxable to the recipient or deductible to the payer.

There is another reason why your client's retroactive support payments are not deductible to him. It is to be noted that support payments are deductible if they are qualifying support amounts. As explained in paragraph 4 of IT-530R, an amount qualifies as support amount if, amongst other conditions, it is payable to the recipient as an allowance on a periodic basis. As stated in paragraph 22 of IT-530R, 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 would not be considered a qualifying support amount for purposes of subsection 56.1(4). Accordingly, in the case at hand, the retroactive child support payments for the period prior to the date of the 2008 order are not qualifying support amounts and would not be deductible even if the issue of the existence of commencement day and the filing of the joint election (T1157) were ignored.

With respect to the legal fees incurred as a consequence of the 2008 court order, there is no provision in the Act that would permit the deduction of these fees. As noted in IT- 99R5 "Legal and Accounting Fees", paragraph 21, these costs are considered to be personal or living expenses of the payer and are not deductible. This publication is also available on the CRA's website.

Any interest expenses paid in respect of the 2008 court order would not be deductible to the payer as they would also be considered personal or living expenses.

We trust our comments will be of assistance to you.

Yours truly,

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