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: Clarification regarding our position concerning retroactive support payments.
Position: See details of letter.
Reasons: See details of letter.
June 6, 2014
XXXXXXXXXX HEADQUARTERS
Income Tax Rulings
Directorate
Maryann Hikspoors
(613) 952-1506
2013-048320
Clarification of Retroactive Support Payments
We are writing in response to your correspondence dated March 21, 2013, regarding our views on the deductibility of a lump-sum payment pursuant to a court order for retroactive spousal support payments concerning a particular taxpayer (the "Taxpayer") as well as some clarification regarding our position on this matter.
On August 15, 2013, we communicated with XXXXXXXXXX, the representative for the Taxpayer, and were told that the Taxpayer's notice of objection was allowed in full. The payments made were treated as retroactive support payments and consequently deductible. This was resolved by Appeals.
Unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision of the Income Tax Act ("Act").
Background
The definition of "support amount" in subsection 56.1(4) requires that an allowance payable to a recipient must, inter alia, be payable on a periodic basis in order to be deductible to the payer under paragraph 60(b). Paragraph 22 of Interpretation Bulletin IT-530R, Support Payments, indicates that an amount paid as a single lump sum will generally not qualify as being payable on a periodic basis for purposes of subsection 56.1(4).
For spousal support payments to be deductible for Canadian income tax purposes, the criteria listed in subsection 56.1(4) must be satisfied. For an amount to qualify as a support amount, it must be
- Payable or receivable as an allowance on a periodic basis;
- Paid for the maintenance of the recipient, the children of the recipient, or both; and
- The recipient must have discretion as to the use of the amount; and
- Where the recipient of the amount is the spouse or common-law partner or former spouse or common-law partner of the payer, the parties are living separate and apart because of a breakdown of their relationship and the amount is receivable under an order of a competent tribunal or under a written agreement; or
- Where the recipient is the parent of a child of whom the payer is a legal parent, the amount is receivable under an order of a competent tribunal in accordance with the laws of a province or territory.
We would like to clarify our position with respect to retroactive lump-sum payments and their deductibility following the decision in James v. The Queen (footnote 1) ("James"). In that decision, since the payments were required to be made at regular intervals and for an indefinite period, the Tax Court of Canada concluded that the payments retained their initial character as being periodic in nature.
The underlying facts of a particular situation must be analyzed to determine whether a lump-sum payment reflects an obligation to pay an amount on a periodic basis or is better viewed as a settlement to resolve a dispute.
Where there is a lump-sum payment made pursuant to a court order that creates a clear obligation to pay retroactive periodic maintenance for a specified period, the retroactive payment will constitute a support amount. If all other requirements are met, it would be deductible to the payer and included in the recipient's income. A lump-sum payment that is a settlement to resolve a dispute is not a support amount.
We trust our comments will be of assistance.
Yours truly
Stéphane Charette CPA, CMA, MBA
Acting Manager
Business & Employment Income Section I
Income Tax Rulings Directorate
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 TCC 2011-1748(IT)G.
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