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 certain mortgage payments may be deducted under 60.1(2) of the Act.
Position:
In this case, the facts support that the husband agreed to pay the amount in question in exchange for the wife transferring all of her right, title and interest in and to the matrimonial home to the husband and her vacating said home. The amount is also referred to as the amount determined by the parties to accomplish a division of all assets. The mortgage which the client takes out on the home and the mortgage payments which he agrees to pay on the first mortgage secured by the wife on her second residence is for the purpose of (partially) satisfying his obligation to pay her $XXXXXXXXXX The amending agreement clearly states this hence, the payments are deductible as they represent instalments against a capital sum and not "maintenance".
Reasons:
"A" in 60.1(2) is zero as "A" refers to an amount or amounts incurred in the year or the preceding taxation year for maintenance of a person who is...the taxpayer's spouse or former spouse...
November 24, 1995
Appeals & Referrals Division HEADQUARTERS
L. C. Tremblay Sandra Short
Director (613) 957-8953
952722
XXXXXXXXXX subsection 60.1(2) of the Act
This Directorate recently received an enquiry, dated October 11, 1995, authored by T. Kreuger of the Appeals Division of the Vancouver Tax Services office, which asks whether the above noted client may deduct certain mortgage payments under subsection 60.1(2) of the Act. As it is our understanding that such enquiries would perhaps be better routed to your Division for consideration and action, we are directing our response to you. We have enclosed a copy of the original request and subsequent follow-up received. We have taken the liberty of reviewing the information submitted and offer the following comments which we hope will be of assistance to you.
A husband and wife commence to live separate and apart in 1990. A separation agreement dated XXXXXXXXXX states, among other things, that:
XXXXXXXXXX
On XXXXXXXXXX the parties signed an amending agreement. It states that the husband will use a current fair market value appraisal of the matrimonial home to obtain funds to pay the wife a portion of the $XXXXXXXXXX The wife will use these funds as a down payment for the purchase of a new residence. The husband will be responsible for the repayment of the loan (mortgage) taken out on the matrimonial home. The wife will secure additional financing by way of a first mortgage against the new residence and the husband agrees to pay the principal and interest on this first mortgage to the mortgagee. The husband agrees to pay the wife any unpaid balance of the $XXXXXXXXXX after deducting the amount of funds obtained by refinancing the matrimonial home and the funds obtained by way of a first mortgage on the wife's new residence no later than XXXXXXXXXX without interest. Both parties agree that subsections 60.1(2) and 56.1(2) of the Act will apply to the mortgage payments.
Audit disallowed these mortgage or loan payments as they do not constitute maintenance or allowance payments. The client has filed a notice of objection.
Representation has been made that the deeming provision in the post-amble to subsection 60.1(2) makes these types of payments automatically deductible, providing all other criteria have been met. It is the view of Vancouver's Appeals Division that the facts indicate that all other criteria have been met and that while the amending agreement does not state that the payments are an "allowance" or "for the maintenance of" the spouse, the omission of these words has no bearing on any conclusion reached. That is, their opinion would not vary even if the amended agreement used the words "allowance" or "maintenance". Their position is that the payments have been made to settle a division of family assets and are not payments for the maintenance of the spouse and, despite the provision of subsection 60.1(2), not all mortgage payments made pursuant to an agreement are automatically deemed to be an allowance. The client's representative has enquired which mortgage payments may qualify under subsection 60.1(2) of the Act.
It was noted that the client appears to have used the article written by R. Ian Niven in the Canadian Tax Journal (November/December 1989 issue) to order his affairs. We reviewed this material and have enclosed a copy for you.
We agree with the finding that the mortgage payments paid by the client pursuant to the agreement dated XXXXXXXXXX are not deductible under paragraph 60(b) or subsection 60.1(2) of the Act as the loan or mortgage payments are merely instalments against a capital sum of $XXXXXXXXXX owing to the wife. The original agreement provided that this debt would survive the husband (see Cohen 91 DTC 5239). The husband agreed to pay this amount to his wife in exchange for the wife transferring all of her right, title and interest in and to the matrimonial home to the husband and her vacating said home. This sum is also referred to as the amount determined by the parties to accomplish a division of all assets. The mortgage that the client takes out on the matrimonial home and the mortgage payments which he agrees to pay on the first mortgage secured by his wife on the second residence is for the purpose of (partially) satisfying his obligation to pay his wife $XXXXXXXXXX
Subsection 60.1(2) provides that for the purposes of paragraphs 60(b) and (c), the amount determined by the formula A - B "shall, where the decree, ...or written agreement...provides that this subsection and subsection 56.1(2) shall apply to any payment made thereunder, be deemed to be an amount paid by the taxpayer and received by that person as an allowance payable on a periodic basis". In the case at hand, "A" is zero as "A" refers to an amount or amounts "incurred in the year or the preceding taxation year for maintenance of a person who is...the taxpayer's spouse or former spouse...". Not only is the Act clear in specifically mentioning "maintenance" in subsection 60.1(2), the 1984 Technical Notes introducing the provision are also clear that a third party payment must be in respect of an expense for "maintenance".
While the client may have ordered his affairs to mirror the example used by R. Ian Niven as cited above, we note that Table 1 contained in his article would clearly deny a deduction to the client in the circumstances as the payment is not "an amount paid to or for the benefit of a spouse, former, spouse...and for his or her maintenance".
We are of the opinion that the fact that neither the original nor amended agreement make reference to the above amounts (the mortgage or loan payments) as "maintenance" indicates prima facie that the payments are not and were not intended to be in the nature of maintenance to the spouse. We note that the agreements have been voluntarily signed by both parties after receiving independent legal advice.
In our view, the original agreement is clear, unambiguous and telling of the intention of the parties: the husband agreed to pay his wife maintenance for a two year period only, with such allowance being higher during the period that she continued to reside in the matrimonial home and a lesser amount thereafter (the agreement requiring him to pay her $XXXXXXXXXX in and around the time that she must vacate the matrimonial home). The same written agreement also provided for the splitting of family assets in the amount and timing as outlined. The amended agreement specifies that the husband shall deduct all principal and interest payments with respect to the refinancing of the matrimonial home and the first mortgage on the wife's new residence from his $XXXXXXXXXX obligation. While the original agreement required him to pay this amount as a lump sum on or before XXXXXXXXXX, the amended agreement permits him to satisfy this obligation, in part, through regular instalments.
We agree with the statement that not all mortgage payments made pursuant to a written agreement are automatically deemed to be an allowance payable on a periodic basis. While we are not prepared to attempt to list all hypothetical circumstances under which a mortgage may not qualify, we are satisfied that if any of the conditions in subsection 60.1(2) are not met (such as the condition in "A" that an amount be incurred for "maintenance"), then the mortgage payments cannot be deemed an allowance payable on a periodic basis.
As an additional comment, we note that The Family Relations Act, 1979 for British Columbia provides that a spouse is entitled to an undivided one-half interest in the family assets pursuant to section 43 when one of a number events occurs, including a separation agreement. While not necessarily reflecting the entitlement which the spouse would have been entitled to under The Family Relations Act, 1978, we note that the reference to $XXXXXXXXXX represents approximately one-half of the net assets (net worth of $XXXXXXXXXX) in this case. In our view, the settlement of $XXXXXXXXXX upon the wife is in no way for her maintenance but in fact, and as reflected in the agreement(s), is an agreed upon settlement of her entitlement to a fair share in the assets.
R.C. Shultis
Acting Director General
Income Tax Rulings and Interpretations
Directorate
Policy and Legislation Branch
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