13 October 1993 Internal T.I. 9311397 F - Prepaid Alimony Payments Under Ont Family Support Plan

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.

TORONTO DISTRICT OFFICE Personal and General General Enquiries Section

Attention:  Patricia Hicks

Court Ordered Maintenance Payments made in Advance

We are replying to your memorandum of April 19, 1993 concerning the December 1992 payment made by XXXXXXXXXX to his former spouse. As requested, we contacted XXXXXXXXXX and he is aware that you will be providing him with a reply. We apologize for the delay in our response.

At issue is whether XXXXXXXXXX can deduct a lump sum payment made in respect of the periodic maintenance payments which were required by a court order for maintenance for his former spouse. In his letter, XXXXXXXXXX states that he made a $XXXXXXXXXX payment to the Family Support Plan in December 1992 on account of the monthly payments which would be required for 1993 under the court order in contemplation of financial difficulty caused by a reduction in his hours of work. It is his position that a prepayment of periodic maintenance payments should be deductible in the same manner as a lump sum payment on account of arrears. In our telephone conversation of October 6, 1993 (XXXXXXXXXX/Humenuk), he stated that the Family Support Plan would hold the funds in trust and pay his former spouse the support as and when required.

Paragraph 13 of Interpretation Bulletin IT-118R3 states that a lump sum payment which is on account of future periodic payments which will become payable under a court order is not deductible by the payer. This position is derived in part, from a decision of the Supreme Court of Canada, MNR v John James Armstrong (56 DTC 1044), where it was held that Mr. Armstrong was under no obligation under the decree to make the lump sum payment in lieu of the periodic payments. While the payment was made in substitution of the periodic payments which would otherwise have been required under the decree, it could not be said that the prepayment was made under the terms of the decree.

The rationale by which a lump sum payment of arrears is allowable is based on a different line of reasoning, taken by the courts in cases such as the Queen v Sills (85 DTC 5096). In the Sills case, the Tax Review Board and the Federal Court - Trial Division held that the amounts had to have been received exactly according to the terms of the relevant order or agreement in order to be included in income under paragraph 56(1)(b) of the Act. However, the Federal Court of Appeal reversed that decision on the basis that paragraph 56(1)(b) does not require an amount to be actually paid on a periodic basis but rather that the amount be payable on a periodic basis according to the terms of the order or agreement. In the case of a payment on account of arrears, the character of the payment is not changed solely by reason of the timing of the payments. The distinction between a lump sum payment of arrears and a lump sum payment of an amount not yet due is that implicit in any agreement is the requirement that payments are still due and payable under the agreement where such payments have not been made as required by the agreement.

The other point we wish to address is XXXXXXXXXX comment that his former spouse would not have received the funds in question as a lump sum since the Family Support Plan will only pay her as the payments become due. We reviewed the Family Support Plan Act (FSP) and Regulations thereto and it is our understanding that the Director of the FSP is required to pay any money received in respect of a support order to the person entitled to that payment as it is received except in the circumstances described below.

Subsection 3.11(2) of the FSP permits the Director to hold the funds, upon the order of the court, pending a motion before the court to resolve a dispute over the amount of support or the manner in which it is to be collected. In this type of situation, the facts may indicate that the Director is holding the funds in trust for the payer. In order to determine if this is the case for XXXXXXXXXX, copies of all the relevant motions and courts orders would need to be examined.

The other situation where the Director will hold funds collected from the payer is where the payer and recipient agree to a suspension of Support Deduction Order. Under the FSP, a recipient who is entitled to maintenance under a support order (as defined in the FSP) is entitled to file the support order with the Director of the FSP so that the Director will collect the payments required under that support order and pay them to the intended recipient as the funds are received. In addition to making an order for support under the family law legislation, the court can also make a Support Deduction Order under the FSP which requires any income source (as defined in the FSP) of the payer to redirect up to 50% of the payer's net amount received from that income source to the Director. Once ordered, this Support Deduction Order will only be suspended if:

-     the court determines it would be unconscionable to require the payer to make the payments under a Support Deduction Order,

-     the payer and recipient consent to the suspension and the payer posts security with the Director to be used to make any payments in the case of default or

-     the support obligation under the support order is terminated and any arrears have been collected.

The security required under the second condition will be held by the Director until the suspension order is terminated. At that time, the Director will use the funds to make such payments as are required under the support order until full compliance is established, with any balance remaining being returned to the payer as soon as is practical. In our view, such security held by the Director is held in trust for the payer, and any payment made by the Director to the recipient upon the termination of the suspension order will be deductible by the payer at that time.

As a final point, we note that the FSP will continue to collect the payments required under a support order which has been filed with the Director even though the recipient may have assigned his or her rights to such payments to the Minister of Community and Social Services unless the Minister concurs to the withdrawal of the support order from the FSP. It is our view that no amount is deductible at any time in respect of amounts which are collected on behalf of the Minister.

In summary, it is our view that a voluntary prepayment of an amount not yet due is not deductible either in the year of the prepayment or in the year in which the payment comes due. If the facts establish that the funds are paid to the Director in trust, a deduction may be available to the payer when the Director makes the payment on the payer's behalf provided that the payment in question otherwise meets the conditions set out in paragraph 60(b) or (c) of the Act.

We trust our comments will assist you in providing a reply to XXXXXXXXXX

P.D. Fuoco Section Chief Personal and General SectionBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch

c.c.      Client Assistance Directorate

c.c.      Assessment of Returns Directorate

c.c.      Source Deductions Division