5 June 1995 Ministerial Letter 9508858 - MAINTENANCE AND SUPPORT PAYMENTS

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 payment of orthodontic costs pursuant to an amended maintenance court order is deductible on a retroactive basis.

Position TAKEN:

Under existing conditions the payments are not considered to meet the criteria for deductibility set out in paragraph 60(b) and subsection 60.1(2) of the Act. A referral to the Tax Court under section 174 of the Act may be warranted to determine the issue.

Reasons FOR POSITION TAKEN:

The amended order does not stipulate that the provisions of 56.1(2) and 60.1(2) of the Act apply to the payments and if a further order amended the phrasing to so stipulate it is unclear whether it could apply retroactively.

								June 5, 1995

	Client Services Division			HEADQUARTERS
Ministerial Correspondence		J.A. Szeszycki
	Sue Blais						(613) 957-8953

								950885

XXXXXXXXXX - Amended Court Order

This is in reply to your memorandum of March 30, 1995 in which you requested our comments on the deductibility of payments made by XXXXXXXXXX in respect of the orthodontic costs of the taxpayer's child. We have completed our review of the circumstances and

XXXXXXXXXX

Facts

The situation, as we understand it, can be summarized as follows:

XXXXXXXXXX

Taxpayer's Position

It is the taxpayer's position that the 1993 amendment merely clarifies the original order of 1990 and that the amendment clearly provides that the amounts were meant to be deductible in computing his income and included in his spouse's income.

Our Comments

It is our understanding from your account of the conversation that you had with XXXXXXXXXX that the preparation of the amended order did not receive the cooperation or approval of the recipient spouse prior to it being made an order of the Court. As a result, the spouse has not requested adjustments to her 1990 and 1991 returns to include the orthodontic payments into income. Subsequent to that conversation, XXXXXXXXXX forwarded another letter to which was attached a letter from XXXXXXXXXX representative indicating that, subject to being advised of the proper wording required, he was prepared to discuss the matter with his client.

In our view, there are two issues that arise from the circumstances of this case:

1.Whether the words used to make the clarification are sufficient to effect their intent.

2.Whether or not a court order which purports to clarify the intended meaning of a provision contained in an earlier order should be treated as a new order, to have effect from the date it is issued or whether it can co-exist with the earlier order and have a retroactive application to payments that have already been made.

With regard to the first issue, the taxability of an amount received does not arise merely from a court order having so stipulated. A payment made pursuant to an agreement or court order becomes income in the hands of the recipient if the payment satisfies the criteria set out in the relevant provisions of the Income Tax Act at the time the payment is made. Similarly, a payment becomes deductible not because the order so stipulates but rather because it meets the criteria for deductibility set out in the relevant provision of the Act.

In order for the payment to a third party in respect of the orthodontic costs to be considered an allowance payable on a periodic basis, as required by 56(1)(b) and 60(b) of the Act, it must meet the conditions set out in subsections 56.1(2) and 60.1(2) of the Act. One of those conditions requires that the court order or written agreement stipulate that the provisions of subsections 56.1(2) and 60.1(2) of the Act apply to the payments. In our view, that condition has not been satisfied by the wording used in the amended court order. The Department has taken a position, however, that where a court order which intends that certain amounts be taxable and deductible is lacking in the correct phrasing a further written agreement between the parties that incorporates the correct phrasing would be sufficient to effect the order's intent. In the absence of such an agreement no request for a reassessment could be considered.

With regard to the second issue, it is our view that the determination of whether a subsequent order replaces or merely clarifies a previous order depends on two things; (1) the stated purpose of the order, which should be indicated on the order itself, and (2) the nature of the amendments themselves; that is, whether the amendment puts in writing, for greater certainty, a clarification of an existing provision or whether it introduces a substantive new element.

In this case, the 1993 order states that its purpose is to clarify the original order. The original order dealt with the payment of orthodontic costs and assigned the liability for those costs as XXXXXXXXXX. The second order did not change that provision. It did, however, add a clarification implying that the original intent of the provision was that the payments in respect of the orthodontics be deductible to XXXXXXXXXX. It can be argued, on the one hand, that none of the substantive payment provisions found in the original order were altered and, therefore, no substantive changes were made. On the other hand, it may be equally argued that an amendment which introduces a tax liability to the recipient, that was not evident in the previous order, reduces the disposable income portion of amounts received under the terms of the order and that constitutes a substantive change.

If the correct wording were to be used, the question would remain as to whether that clarification could be done on a retroactive basis. If it were shown that XXXXXXXXXX had agreed to the taxation of the amount of the orthodontic payments and had reported these amounts as income, these actions would support the contention that the amendment merely clarifies what was previously agreed upon or discussed. Since XXXXXXXXXX has not volunteered to declare these amounts as income, it suggests that the tax treatment was not part of the original settlement and that a tax liability for the recipient in respect of these payments represents a substantive change to the arrangement.

The question of retroactivity has been before the courts on several occasions.

XXXXXXXXXX

We would therefore recommend in this case that if the parties agree to the tax treatment of the orthodontic payments then the Department should accept the claim. Since the payments in question are not ongoing payments but rather one time costs already having taken place, we do not see a need to require the parties to obtain an amended court order that would incorporate the proper wording clearly invoking subsections 60.1(2) and 56.1(2) of the Act with respect to the payments. If, on the other hand, the parties do not agree to the tax treatment and XXXXXXXXXX declines to sign an agreement that confirms the application of subsections 56.1(2) and 60.1(2) of the Act to the payments then, in order for XXXXXXXXXX claim to be allowed he would have to petition the court for an amended court order incorporating the proper wording and a section 174 referral to the Tax Court of Canada should be made in order to determine whether the new order can retroactively apply to the 1990 and 1991 payments at issue.

We hope our comments will assist you in responding to XXXXXXXXXX.

B.W. Dath
Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch