18 May 1995 Internal T.I. 9501477 - SEPARATION AGREEMENT - JOINT ACCOUNT

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether amounts placed by former husband in a joint account and earmarked as being for the maintenance of the spouse are deductible to the payer under paragraph 60(b) of the Act

Position TAKEN:

Technically, such a joint account arrangement does not preclude deductibility but onus on payer to show that amounts were delivered and made available for the exclusive use of the spouse pursuant to the requirements of the separation agreement.

Reasons FOR POSITION TAKEN:

Where the agreement clearly shows that the provision for maintenance is there and the evidence supports that the amounts are used by, or continue to be available to, the spouse then a court would likely enforce such payments by order

		May 18, 1995

	Newfoundland and Labrador	HEADQUARTERS
	    Tax Services			J.A. Szeszycki
	Attention: Ernest Weir	(613) 957-8953
	           Client Assistance
		950147

Separation Agreement - XXXXXXXXXX

This is in reply to your memorandum of January 19, 1995 in which you requested our views on the application of the alimony and maintenance provisions of the Income Tax Act (the "Act") to the circumstances surrounding the separation of XXXXXXXXXX in the 1991 and subsequent taxation years. We also acknowledge our telephone conversation (Szeszycki/Weir) of May 15, 1995 in which we clarified certain facts. We regret the delay in responding to your enquiry.

You submitted with your enquiry a copy of two separation agreements;

XXXXXXXXXX

In the initial agreement there are three statements which are relevant to this issue:

XXXXXXXXXX

The second agreement is substantially the same as the initial one except that the third statement cited above is replaced with:

XXXXXXXXXX

The issue is whether the words used in the agreement are sufficient to satisfy the provisions of paragraph 60(b) and 56(1)(b) of the Act in respect of the deduction claim and the income inclusion, respectively.

It is our understanding from the telephone discussion that there is some uncertainty as to the extent to which XXXXXXXXXX has been able to access the deposited funds.

Our Comments

Under paragraph 60(b) of the Act, in order for amounts claimed to be deductible they must be paid as an allowance that is payable on a periodic basis for the maintenance for the (former) spouse and/or children, pursuant to a decree, order, judgement or written agreement, following a breakdown in the taxpayer's marriage and paid to the (former) spouse at a time when the parties where living separate and apart.

As noted above, the agreements appear to have been prepared by the parties themselves. In such cases, the courts are inclined to make allowances for the imprecision of the language used in the agreement. Also, the use of a joint bank account for the deposit and withdrawal of amounts designated as maintenance for the spouse and children does not by itself disqualify the amounts from deductibility.

In a recently reported judgement, Lay v. The Queen 95 DTC 272, the Tax Court of Canada accepted an arrangement whereby the recipient spouse was permitted to withdraw amounts from, or write cheques upon, a joint account up to a specified limit each month. The recipient spouse was not restricted as to the use of the funds. The court found that even though the payer (depositor) of the funds also had access to the account, the provisions were sufficiently clear that, if need be, a court would likely be sympathetic in issuing an order for its enforcement up to the amounts specified.

XXXXXXXXXX

We note in the Lay case cited above that the court was satisfied from a review of evidence, including the testimony of the taxpayer, that the specified amounts were being deposited into the joint account and that withdrawals and cheques written on the account by the "recipient" spouse did not exceed the specified monthly limit.

Generally, an amount that is agreed as being payable on a periodic basis, in accordance with a valid separation agreement, does not become deductible to the payer until it is actually paid to the recipient. When utilising a joint account for the delivery of the maintenance payments, an account to which by its nature the payer has equal access, care must be taken to ensure that the specified amounts that, according to the agreement, are required to be deposited and made available for the spouse's exclusive use are so deposited. In addition, it must be determined that the amounts that are designated for the spouse's exclusive use have either been used by the spouse or continue to be available for her use.

Accordingly, it is our view that in assessing the deductibility of amounts placed in the joint account, pursuant to the separation agreements, as maintenance payments under paragraph 60(b) of the Act, the onus should be placed on XXXXXXXXXX to show that amounts were in fact deposited as required by the agreement and that XXXXXXXXXX has used the funds allocated to her or, if not used, still has the funds available to her.

It is our understanding of the circumstances surrounding this case that
XXXXXXXXXX

both returns should be reassessed to remove both the claim for deduction and the income inclusion.

P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch