1993 External T.I. 9319705 F - Alimony and Maintenance

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.

931970 XXXXXXXXXX  M. Eisner (613) 957-2138

Attention:  XXXXXXXXXX

December 8, 1993

Dear Sirs:

RE:  Alimony and Maintenance

Your letter of June 8, 1993 in which you requested the Department's position on the tax treatment of certain payments that may be made between two individuals as a consequence of a marriage breakdown, has been referred to us for reply by the Sudbury District Taxation Office. We apologize for the delay in replying.

You have enclosed a copy of an agreement which concerns support payments that are in arrears and are owed by one of the individuals to the other. A determination of the tax consequences of such a situation involves a finding of fact which can only be ascertained from a review of all the relevant information including the documentation that initially provided for the payment of the support and all subsidiary documentation relating to the transactions. While all the necessary information has not been provided, we are, pursuant to our telephone conversation on November 15, 1993 (Eisner/XXXXXXXXXX), providing general comments which should not be regarded as relating to any particular fact situation.

Our Comments:

You are concerned with the type of situation where two spouses separated as a result of a breakdown of their marriage. As a consequence of the separation, one spouse (the Taxpayer) was required to make monthly maintenance payments to the other spouse (the Individual) in respect of the Individual and children in the custody of the Individual. The monthly support payments required to be made are described in paragraph 60(b) or (c) of the Income Tax Act (the Act).

As the Taxpayer fell into arrears with respect to the support payments, the Individual and the Taxpayer now wish to settle the arrears which will involve the issuance of a court order. The order will require the Taxpayer to make a lump sum payment with respect to the arrears and reduced monthly support payments. The order will also indicate that the desire of the Individual and the Taxpayer is that the payments made pursuant to the court order not give rise to any tax consequences.

In commenting on the above situation, we note that, with respect to a marriage breakdown occurring after 1992, paragraphs 56(1)(b) and 60(b) of the Act have recently been amended and paragraphs 56(1)(c) and 60(c) were repealed. The comments below have been made on the assumption that the marriage breakdown in the above situation occurred prior to 1992 with the result that paragraphs 56(1)(b) and (c) and paragraphs 60(b) and (c) are applicable as they read prior to those legislative changes.

The concerns with the above situation are whether the lump sum payment and the monthly support payments would be taxable in the hands of the recipient and deductible by the payer. In this regard, we are making the following comments:

(a)     (i) The rationale for denying a deduction for a lump sum payment is that the courts have generally viewed settlements in lieu of (as opposed to payments on account of) maintenance arrears to be payments on account of capital that do not qualify for deduction under paragraph 60(b) or (c) of the Act. In this regard, we refer you to the McNeely (81 DTC 796), McGuire (82 DTC 1813), and Burnes (83 DTC 338) cases as relevant examples. We also note that it is the Department's general position that a commuted lump sum payment to obtain a release from a liability imposed by an order or agreement whether such liability be in respect of arrears of maintenance payments, future payments, or both, does not qualify for deduction because it was not made in accordance with the agreement or order as the case may be.

Of course, where the lump sum is not deductible under paragraph 60(b) or (c) of the Act, it is not required to be included in the recipient's income under paragraph 56(1)(b) or (c).

(ii)      In contrast to the comments set out in (i) above, the rationale for allowing a lump sum payment of arrears is based on a line of reasoning taken by the courts in cases such as Federal Court of Appeal decision in the Sills case (85 DTC 5096). In this case, the Federal Court of Appeal held 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. Accordingly, the character of three lump sum payments on account of arrears was not considered to have changed by reason of the timing of the payments where they were made for the purposes of carrying out the terms of the agreement.

(b)      It is also our general view that the lump sum payment made in the above situation will not be considered to include an interest element where the amount of the arrears does not include any interest element, the lump sum payment is less than the arrears and the lump sum payment has also been determined without reference to an interest element; and

(c)      The Department's general position on the deductibility of alimony and maintenance under paragraph 60(b) of (c) of the Act is set out in paragraphs 2 and 3 of Interpretation Bulletin IT-118R3 "Alimony and Maintenance". In addition, paragraph 1 of that bulletin indicates that any amount that is deductible under paragraph 60(b) or (c) of the Act as alimony or maintenance is required to be included in the income of the recipient spouse under paragraph 56(1)(b) or (c) as the case may be. Where alimony or maintenance payments are required to be included in income and are deductible pursuant to those provisions, it is the Department's position that those provisions would apply notwithstanding the express or implied intention or desire of the parties "to contract out" of the application of those provisions.

These comments represent our opinions of the law as it applies generally. As indicated in paragraph 21 of Information Circular 70-6R2 which has been enclosed, these opinions do not constitute an advance income tax ruling and are not binding on the Department.

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

Yours truly,

P.D. Fuocofor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch

cc: Sudbury District Office