13 June 2012 External T.I. 2011-0420971E5 - support payments

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: Is there any tax relief for a Canadian resident (the “Payer”) working in Japan that pays spousal support to a former spouse who is a Canadian resident (the “Recipient”)? Is there any tax relief in respect of the spousal support payments if the Payer was a non-resident for Canadian tax purposes?

Position: It appears that there is no specific tax relief provision provided for in the Canada-Japan Income Tax Convention in respect of spousal support.

Reasons: Canada-Japan Income Tax Convention

XXXXXXXXXX
						2011-042097
						N. Shea-Farrow

June 13, 2012

Dear Mr. XXXXXXXXXX:

Re: Technical Interpretation Request – Spousal Support from a Canadian Residence

We are writing in response to your letter of September 6, 2011 requesting our comments on whether there is any tax relief for a Canadian resident (the “Payer”) that pays spousal support to a former spouse who is a Canadian resident (the “Recipient”). In addition you would like to know if there is any tax relief in respect of the spousal support payments if the Payer was a non-resident for Canadian tax purposes.

The Payer has been working in Japan since XXXXXXXXXX and commencing XXXXXXXXXX the Payer is required to report worldwide income on his Japanese personal income tax returns. According to you Japan’s tax laws do not allow a deduction or tax credit for spousal support payments or any deductions or credits related to a former spouse.

Our Comments

Under paragraph 56(1)(b) of the Income Tax Act (the “Act”), the general rule is that a taxpayer must include any support amount received in a taxation year in computing his or her income for that taxation year, other than certain child support amounts. The expressions “support amount” and “child support amount” are defined in subsection 56.1(4) of the Act and are discussed in Interpretation Bulletin IT-530, Support Payments.

The income inclusion pursuant to paragraph 56(1)(b) is not dependent on the payer of support receiving a tax deduction in Canada or in the payer’s country of residence, although there is generally symmetry when both the payer and recipient are residents of Canada. Consequently, any amount received by the Recipient that qualifies as a “support amount” but not as a “child support amount” referred to in the description of parameter B in paragraph 56(1)(b), must be included in computing the Recipient’s income, pursuant to paragraph 56(1)(b) of the Act, regardless of the tax treatment accorded to its payment in the hands of the Payer by Japan.

As a Canadian resident, the Recipient’s income is the amount commonly referred to as “worldwide income” which includes incomes from sources both inside and outside Canada. The Recipient’s worldwide income would encompass support amounts that are required to be included in income by virtue of paragraph 56(1)(b) of the Act.

Pursuant to paragraph 60(b) of the Act the Payer is allowed a deduction in computing his worldwide income for the spousal support payments made to the Recipient. The Payer is also entitled to deduct a foreign tax credit as provided for in section 126 of the Act from the Canadian tax otherwise payable that may be claimed in respect of foreign income or profits tax paid by him for the year in Japan. A foreign tax credit applicable to a particular foreign country for a full-year resident of Canada can provide relief from double taxation on certain income and is equal to the lesser of the applicable foreign income or profits tax paid for the year and the amount of Canadian tax otherwise payable for the year that pertains to the applicable foreign income. You can refer to Interpretation Bulletin IT-270R3, Foreign Tax Credit for more specific details on how the credit is calculated.

For Canadian tax purposes there is symmetry in the tax treatment of the spousal support. For Japanese tax purposes according to you, the Payer is not allowed a deduction for spousal payments and Japanese taxes are higher than in Canada. The result being that the Payer does not get full relief for the Japanese taxes that the Payer paid for spousal support. Canada does not interfere with domestic tax laws of a foreign country. Canada as explained above and provided for in article 21 of the Canada-Japan Income Tax Convention (the “Convention”) only provides relief up to the lesser of the two amounts described above and in this case it appears to be limited to the Canadian taxes otherwise payable.

If the Payer was a resident of Japan the Recipient’s tax position with respect to the support payments received would be the same as that described above and the Payer would be subject to Japan’s tax laws which according to you does not provide a deduction for spousal support payments.

It appears that there is no specific tax relief provision provided for in the Convention in respect of spousal support.

We trust that our comments will be of assistance to you.

Yours truly,

Sharmini Ratnasingham
Assistant Director
For Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch