28 October 1993 Internal T.I. 9312237 F - Attribution and Alimony Made in Respect of Children

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.

Ottawa District Office Business and General Mr. P. Allard, Chief Division Client Assistance

Child Support Payments

Pursuant to our telephone conversation on September 13, 1993 (M. Eisner/Ms York), we are replying to your office in respect of the enclosed facsimile submission dated April 24, 1993 for the purposes of assisting your office in responding to the letter submitted by XXXXXXXXXX (the taxpayer). The correspondence, a copy of which is attached, concerns the tax treatment of certain child support payments.

In the situation set out in the attached letter, XXXXXXXXXX the taxpayer is in the process of divorcing her spouse who has agreed to make monthly support payments of $XXXXXXXXXX to her in respect of two children. The two children are under the custody and control of the taxpayer. With respect to this arrangement, the taxpayer wishes to establish a trust under which the two children will be the two sole beneficiaries and the taxpayer will act as the trustee. The trust agreement establishing the trust will provide that the monthly support payments made for the maintenance of the children will be placed in the trust.

We have been asked for our comments on the tax consequences in respect of the above situation on the understanding that the taxpayer's spouse would be entitled to deduct the monthly support payments.

Our Comments:

At the outset, we wish to note that we have assumed that since the taxpayer is in the process of divorcing her spouse, a common-law relationship is not involved. In addition, we are also pointing out that paragraphs 56(1)(b) and (c) have recently been repealed with respect to a marriage breakdown occurring after 1992 and that revised provisions have been enacted as a consequence thereof. As the information in the attached letter suggests that a marriage breakdown occurred prior to 1993, our comments are so based. Similarly, our comments below on subsection 56.1(1) have been made in respect of circumstances that relate to this provision as it read prior to the recent revisions. However, we are also adding that the tax consequences set out below would not be any different in the situation under consideration if the recently enacted provisions were to be applicable.

To be included in income under paragraph 56(1)(b), that paragraph specifically requires that the related payments be received from the recipient's spouse or former spouse. Similarly, paragraph 56(1)(c) requires that the payments be received from the recipient's spouse. However, where alimony or maintenance payments are made to a third party rather than to a spouse or former spouse and the payments are described in subsection 56.1(1), they will also be included in income under paragraph 56(1)(b) or (c) as the case may be. This result is achieved by virtue of subsection 56.1(1) as this provision deems the payments for the purposes of paragraphs 56(1)(b) or (c) to have been paid to and received by the payer's spouse or former spouse. Accordingly, it is possible that the payments in question may be made by her spouse to the taxpayer or to the trust that is to be established for the benefit of the two children.

If the maintenance payments are made by the taxpayer's spouse to the taxpayer (rather than to the trust), they would satisfy the conditions of paragraph 56(1)(b) or (c) with the result that the taxpayer would be required to include them in her income. The fact that the taxpayer placed the payments in a trust would not alter this result.

On the other hand, if the maintenance payments are made by the taxpayer's spouse to the trust at the taxpayer's direction, subsection 56.1(1) of the Act would deem the payments to have been received by the taxpayer for the purposes of paragraphs 56(1)(b) and (c). As a consequence, the payments would be required to be included in the taxpayer's income under paragraph 56(1)(b) or (c).

There may also be income tax implications to the taxpayer in respect of the income attribution rules in the Act as a consequence of the payments being put in the trust. In this regard, if the trust earned investment income by investing the funds in respect of the payments and the income represented trust income to the children pursuant paragraph 12(1)(m) of the Act, it appears that the income would be subject to tax in the hands of the taxpayer rather than being included in the income of the children. The Department's general position on the attribution of income in respect of minors is set out in Interpretation Bulletin IT-510 "Transfers and Loans of Property made after May 22, 1985 to a Related Minor" (In particular, reference may be made to paragraph 9 to 12). As a further comment, we are mentioning that if any income is subject to tax in the hands of the trust, the trust would be subject to a flat rate of tax on its amount taxable for the year equivalent to the highest rate for individuals (See paragraphs 1 and 2 of Interpretation Bulletin IT-406R2 "Tax Payable by an Inter Vivos Trust").

As a final comment, we are mentioning that in order to make a definitive determination of the tax consequences of the situation set out above, it would be necessary to review all the relevant facts and documentation including a copy of the agreement under which the maintenance payments are to be made and a copy of the trust agreement relating to the establishment of the trust. Accordingly, it is possible that the above comments, which were based on the limited information provided to us, may not accurately reflect the tax consequences of the situation that we considered.

Should further technical assistance be required, we would be pleased to provide our views.

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