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) Whether the recipient would be required to pay taxes on any part of the lump sum payment.
(2) Whether the lump sum payment made in respect of child support deductible to the payer in the year of payment?
Position: (1) No.
(2) No.
Reasons: (1) & (2) The lump sum payment is not considered a qualifying "support amount" for purposes of paragraphs 56(1)(b) and 60(b) of the Act. The proposed child support agreement indicates that the amounts be paid not as "support amounts" but as payment for a release of obligation.
XXXXXXXXXX
2012-045240
XXXXXXXXXX, 2012
Dear XXXXXXXXXX:
Re: Advance Income Tax Rulings Request
XXXXXXXXXX
We are writing in response to your letter dated XXXXXXXXXX in which you requested an advance tax ruling on a proposed lump sum child support agreement.
We understand that, to the best of your knowledge, none of the issues involved in this ruling request is:
(i) in an earlier return of yours or a person related to you;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of yours or a person related to you;
(iii) under objection by you or a related person;
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) the subject of a Ruling previously considered by the Income Tax Rulings Directorate.
Unless otherwise stated, all statutory references herein are to the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1 (the "Act") as amended.
Our understanding of the relevant definitions, the facts, the proposed transactions and the purpose of the proposed transactions is as follows.
Definitions
The following definitions have been used in this letter:
"CRA" means the Canada Revenue Agency;
"The Proposed Agreement" means the child support agreement made in XXXXXXXXXX between XXXXXXXXXX; and
"The Proposed Transactions" means the proposed transactions described in 5 to 19 herein.
Facts
1. XXXXXXXXXX ("the recipient") and XXXXXXXXXX ("the payer") had a brief relationship in XXXXXXXXXX and there are XXXXXXXXXX children born of that relationship, namely XXXXXXXXXX, hereinafter referred to as "the children".
2. The recipient and the payer have been involved in court applications and court orders have been directed pursuant to those applications with regard to matters involving child support, including claims for living expenses, tuition costs, and related expenses in attending a post-secondary education facility, income disclosure and the exchange of such income disclosure, and the collection of child support arrears that have arisen between the parties.
3. The recipient and the payer wish to enter into a Child Support Agreement ("Agreement") to formalize a child support arrangement between them which will provide certainty and finality with respect to their obligations and provide clarification of the duration of that obligation as it will exist between them.
4. The recipient and the payer represent to each other that they have disclosed their respective incomes and expenses, and the anticipated incomes and anticipated expenses of the children with respect to their anticipated attendance at university, and each acknowledges that they have relied on this information in considering and determining the provisions of the proposed Agreement.
Proposed Transactions
The following transactions are proposed at the time of the ruling request.
5. The recipient and the payer will recognize that it is fit and just that they should each be independent of the other and that the payments as provided for in the proposed agreement will adequately provide for the child support, including claims for living expenses, tuition costs, and related expenses in attending a post-secondary education facility for the children while in the recipient's care, as well as for medical and dental expenses and other incidental expenses that may arise while the said children remain dependents. Accordingly, the recipient and the payer will accept the settlement contained in the agreement in lieu of and in full and final satisfaction of any claim or right by the recipient to child support, including contributions towards living expenses, tuition costs, and related expenses in attending a post-secondary education facility, and any medical, dental, or other expenses for the children in accordance with the Federal Child Support Guidelines, the Family Maintenance Act and other legislated obligations that may otherwise allow the recipient to claim child support for the children.
6. In particular, upon payment of the amounts identified in the proposed agreement, the recipient will waive any and every claim and demand that she now or hereafter may have against the payer for child support, including claims for living expenses, tuition costs, and related expenses in attending a post-secondary education facility for the children. The recipient will fully release the payer from any obligation to pay child support, including claims for living expenses, tuition costs, and related expenses in attending a post-secondary education facility, as well as all medical and dental expenses associated with the said children, now or in the future.
7. The payer will acknowledge that the sums payable to the recipient pursuant to the proposed agreement are fair, adequate, reasonable, and satisfactory to him. Moreover, the payer will recognize that it is fit and just that each party shall conclude their financial obligations with respect to the children pursuant to the provisions of the proposed agreement and that hereafter no financial commitments or obligations shall exist between the parties with respect to child support, including for contributions towards living expenses, tuition costs, and related expenses in attending a post-secondary education facility for the children, and other expenses that may arise with respect to the said children.
8. Specifically, the payer will waive any right or claim for repayment or reimbursement of sums paid in accordance with the terms of the proposed agreement, regardless of how those sums are used and whether or not they are utilized for the living expenses of the children, for post-secondary education costs related to the children, or for any other practical or beneficial use as the recipient may determine with respect to the children and/or their future. The payer will waive any and every claim and demand which he now has or may hereafter have against the recipient for reimbursement or contribution for the benefit of the children in the event that the children or either of them shall no longer be children or dependent in the future.
9. The recipient and the payer will acknowledge and agree that, if it were not for the provisions set out in the proposed agreement, the payer would be obliged to pay child support to the recipient in accordance with the Federal Child Support Guidelines with respect to support for the children while continuing to reside with the recipient as dependent children, including contributions towards post-secondary education costs for the children while attending university or other post-secondary education institutions.
10. The recipient and the payer will agree that, according to the existing Child Support Guidelines, the payer's child support payments at an estimated income of $XXXXXXXXXX would be $XXXXXXXXXX per month for XXXXXXXXXX children and $XXXXXXXXXX per month for one child. The recipient and the payer will also acknowledge the estimated costs of the children attending university are approximately $XXXXXXXXXX per year, which amount would be in part shared by contributions by each child to their own education through employment income, student loans, and other means, as well as by contributions made by the recipient and the payer to these post-secondary education expenses.
11. The recipient and the payer will specifically agree that the payer will make a one-time lump sum payment in the amount of $XXXXXXXXXX, which will represent his contribution to child support payments for the children, including his contribution towards their living expenses, tuition costs, and related expenses in attending a post-secondary education facility, and towards all medical and dental expenses that may occur with respect to the said children, and the recipient will accept this payment as a full and total amount of child support.
12. The recipient and the payer will specifically acknowledge that the lump sum payment as provided for in the proposed agreement is intended to be in satisfaction of all past and future child support payments, including claims for living expenses, tuition costs, and related expenses in attending a post-secondary education facility, and all medical and dental expenses that may exist or that may arise between the parties for past and future child support.
13. This payment will also be in satisfaction of all arrears that may exist at the date of the execution of the proposed agreement with respect to child support, including claims for living expenses, tuition costs, and related expenses in attending a post-secondary education facility, and all medical and dental costs for the children.
14. To the extent that there may be any arrears of child support, including claims for living expenses, tuition costs, and related expenses in attending a post-secondary education facility, and any medical and dental expenses that may be owing by the payer to the recipient at the date of the execution of the proposed agreement, the parties will specifically waive any arrears in consideration for the terms of the proposed agreement.
15. The recipient and the payer will acknowledge and agree that at no time in the future will either of them seek an alteration of this Maintenance Agreement or make a claim for child support, including claims for living expenses, tuition costs, and related expenses in attending a post-secondary education facility, or for medical, dental, or other expenses or reimbursement for any such expenses that are paid pursuant to the proposed agreement, by one party against the other.
16. The recipient and the payer will acknowledge that, in their view, the said lump sum payment of child support, including contributions to living expenses, tuition costs, and related expenses in attending a post-secondary education facility provided for in the proposed agreement , is in fact fair and reasonable in the circumstances and, in particular, the parties consider that interest will accumulate on the lump sum payment during the course of the children's development and education, which will further benefit the recipient and the children.
17. In consideration for the lump sum payment of $XXXXXXXXXX as provided for in the proposed agreement, to be paid by the payer to the recipient within ten days of the execution of the proposed agreement, the recipient will agree to waive every and all claims that she may have against the taxpayer towards any contribution of child support, including claims for living expenses, tuition costs, and related expenses in attending a post-secondary education facility for the children.
18. In consideration for this lump sum payment of child support, including claims for living expenses, tuition costs, and related expenses in attending a post-secondary education facility, and medical and dental expenses for the said children to be paid by the payer to the recipient, all child support obligations, including obligations to pay living expenses, tuition costs, and related expenses in attending a post-secondary education facility by the payer to the recipient with respect to the children will be terminated and concluded.
19. The recipient and the payer will further agree that the recipient will not pay income tax on the lump sum child support payment provided for in the proposed agreement. Similarly, the payer will not be claiming a deduction on his income tax return with respect to the lump sum payment provided for in the proposed agreement.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to settle all rights, claims, demands, and causes of action which each has or may have against the other arising out of their obligation with respect to child support, including claims for living expenses, tuition costs, and related expenses in attending a post-secondary education facility for the children, as well as medical and dental expenses, and any other indebtedness or expense that may arise between the parties with respect to the children, their maintenance, care, and costs.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, we confirm that:
A. Except as noted in Ruling B, the lump sum amount of $XXXXXXXXXX to be received by the recipient from the payer for releasing the payer from all past and future child support obligations, as described in paragraphs 11 and 12 above, are not included in the income of the recipient under paragraph 56(1)(b) of the Act or any other provision of the Act.
B. Amounts that may be received by the recipient in future as interest as described in paragraph 16 above are included in income under paragraph 12(1)(c) of the Act.
Caveats
Except as expressly stated, the ruling provided does not imply acceptance, approval or confirmation of any other income tax implications of facts or proposed transactions described herein.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002 and are binding on the CRA provided that the proposed transaction is completed on or before the period that ends XXXXXXXXXX following the date of this letter.
The above noted rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
Yours truly,
XXXXXXXXXX
for Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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