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.
whether an amount may be deducted under 60(c) of the Act. Order is dated November but requires that maintenance "arrears" from the previous May through to the date of the Order be paid within about six weeks from the date of the Order
Reasons FOR POSITION TAKEN:
the amount was not capable of being paid "on a periodic basis", which is a requirement under 60(c)
January 12, 1996
Winnipeg Tax Services Office HEADQUARTERS
Interim Order pursuant to the (Manitoba) Family Maintenance Act
This is in reply to your memorandum of December 12, 1995 which queries whether an amount of $XXXXXXXXXX is deductible to the payor in the following situation:
You have disallowed maintenance of $XXXXXXXXXX as it does not meet the conditions of section 60.3 (we assume that you intend this reference to be 60.1(3) and which refers to prior payments). You have also made reference to paragraph 13 of Interpretation Bulletin IT-118R3 which states that:
...An amount paid as a single lump sum will generally not qualify as being payable on a periodic basis and hence not be deductible. for example,...(b) an amount paid pursuant to an order or agreement requiring that a payment be made in respect of a period prior to the date of that order or agreement, would not qualify as periodic payments. However, 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.
The client is of the opinion that 60.1(3) is not applicable as the payment was not made prior to the date of the order but pursuant to it - in fact the payment was not due until a month and a half after the date of the order. He is of the view that the amount should be deductible under section 60.1 of the Act. Further, the client believes that the payment is not in respect of arrears at all but simply pursuant to the order which made the payments effective from May of 1994 but not due until February 1995.
We agree with the position that 60.1(3) is not applicable to the situation described above as no amount was paid prior to the date of the interim order. Subsection 60.1(1) is a deeming provision for the purposes of paragraphs 60(b) and (c) of the Act. The relevant provision authorizing the deduction of maintenance payments such as those described by you is paragraph 60(c) of the Act.
One of the conditions which must be satisfied in order for an amount to be deductible under paragraph 60(c) of the Act is that the amount paid by the taxpayer must be an allowance 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. In other words, an amount may still be considered to be "payable on a periodic basis" even where the payment is made late and that late payment is one cheque which includes several periodic payments. 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. This position is reflected in the last sentence of paragraph 13 of IT-118R3 (cited above).
The situation described by you appears to correspond with the example in paragraph 13(b) of IT-118R3. It is our opinion that the lump sum payment of $XXXXXXXXXX is not deductible because the amount was not capable of being paid on a periodic basis. In a case involving retroactive maintenance payments, Brooks v. MNR (77 DTC 38), the court decided that a lump sum payment was not deductible for two reasons, the first of which was that the lump sum amount was not in respect of amounts that were payable on a periodic basis. The Tax Review Board commented (at pages 44-45) that:
An Order might also be obtained, as in this appeal, requiring that payments be made for a period prior to the date of the Order, but this would not create of itself the condition of such payments "being in arrears" when no earlier obligation or agreement existed requiring that they be made. Even though in the Order such payments are stated to relate to specified intervals in the past, no periodic basis could have existed prior to the granting of the Order. The wording used in section 60(c) of the Income Tax Act is "payable on a periodic basis" and in "The Living Webster, Encyclopedic Dictionary of the English Language", 1973-74 Edition, ..."payable" is defined as "Justly owed and unpaid; capable of being paid; suitable for payment". No such condition existed allowing for the amounts to be payable "on a periodic basis" prior to the date of this Order, and it is irrelevant that the amount involved was a payment of one month, as in this appeal, or that it might have been a greater amount calculated by some stated formula over a longer period of time, as in some of the other cases cited...
In Flett v. MNR (65 DTC 761), a separation agreement signed on or about November 28, 1963 provided for weekly payments which predated the separation agreement, the parties consenting to an order for interim alimony being pronounced nunc pro tunc. Subsequently, a Court order was obtained on December 6, 1963 ordering the payment of interim alimony in the amount of $60.00 per week on Friday of each and every week from and including the 9th day of March, 1962 to and including the 29th day of November 1963. In satisfaction of his obligation, the husband paid to his taxpayer wife on November 29, 1963 the sum of $5,460.00, representing the total of $60 per week for 91 weeks being the period embraced in both the separation agreement and the Master's order. It was held that the recipient was not taxable in respect of the $5,460.00 receipt. Mr. Fordham commented at 762:
...It is only sums "payable on a periodic basis" that are to be treated as income. Here, both the separation agreement and the order, under the former of which the said payment primarily was made, were retroactive in their wording and effect, all the payments mentioned therein having fallen due before the Master's order was even made and one day short of the separation agreement's date. Hence, there was never a possibility that the payments mentioned in either document could be made weekly. Instead these were overdue at the start and thus became arrears ab initio. In such circumstances, about all that the husband could do was issue a cheque for the full balance owing, which he did, although neither the agreement nor the order so provided or directed.
This is not the kind of payment envisaged in section 6(1)(d) and, consequently, the appeal should succeed. It may well be, as it happens, that the payment is one of those that are neither deductible from income by the payer nor taxable in the hands of the payee...
Personal and General Section
Business and General Division
Income Tax Rulings and Interpretations
Policy and Legislation Branch
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