10 February 1994 Internal T.I. 9321867 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.

February 10, 1994

Deductibility of a Lump Sum Payment

This is in reply to your memorandum of July 26, 1993 and further to our telephone conversations (Szeszycki/White) of October 15 and November 1, 1993, in which you requested our opinion on the deductibility of a lump sum maintenance payment made by XXXXXXXXXX to his former spouse pursuant to an amended court order. We apologize for the delay in responding.

The circumstances, as we understand them, can be summarized as follows:

XXXXXXXXXX

XXXXXXXXXX

Client's Position

It is XXXXXXXXXX view that the amendment to increase the monthly payments on a retroactive basis had the effect of placing him immediately in arrears of those monthly payments. As a result, the lump sum payment of the "arrears" should be treated in the manner described in the last sentence of paragraph 13 of IT-118R3 which advises that "...a lump sum paid in a taxation year is regarded as qualifying as a periodic payment where it can be identified as being the payment of amounts payable periodically that were due after the date of the order and had fallen into arrears.". It is also our understanding that the recipient, XXXXXXXXXX is not in agreement with XXXXXXXXXX view of the tax consequences of the payment.

District Office Position

It is your view that the amount was paid in respect of a period prior to the court order which required its payment and was therefore not periodic and thus not deductible under the provisions of paragraph 60(b) or (c) of the Act.

Our Comments:

The deductibility of payments made in respect of alimony or maintenance is governed by the precise wording of paragraphs 60(b) and (c) of the Act. In each of those provisions one of the requirements for deductibility is that the amounts must be payable on a periodic basis.

The subtlety in the wording distinguishes between "paid" and "payable".

The amount paid does not necessarily have to be paid periodically to be deductible as long as the allowance provided for in the order or agreement is an allowance payable on a periodic basis. As a result, the Department generally takes the position that lump sum payments made on account of amounts that were payable on a periodic basis pursuant to a court order, but that have fallen into arrears, would be deductible.

Similar lump sum payments in respect of amounts that will become payable in the future are not deductible because the payer has not yet become liable for those amounts.

It would appear that XXXXXXXXXX argument places particular emphasis on the fact that the payment is, in effect, being made pursuant to the initial order (as amended by the subsequent orders) and that the subsequent orders merely settled on the amount that should have been paid periodically pursuant to the initial order leaving him in a position of being in arrears of his required periodic payments. The relevant clause in the XXXXXXXXXX

In other words, it does not specifically order XXXXXXXXXX to pay a lump sum payment but rather it amends the clause in the original order in which periodic maintenance payments were first set out.

Legal Opinion

XXXXXXXXXX

Recommendation

Under the circumstances, since the issue affects both XXXXXXXXXX it is recommended that a Section 174 reference to the Tax Court of Canada be undertaken in order to determine the issue.

P.D. FuocoSection ChiefPersonal and General SectionBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch