6 May 1996 Internal T.I. 9608307 - PRIOR YEAR MAINTENANCE 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:

Deductibility of payments under subsection 60.1, 60(b) or (c) where there are a number of court orders in effect.

Position:

Payments in question did not meet the provisions

Reasons:

Requirements of 60.1(2) not met in the case of the third party payments and the direct payments could not be considered an allowance.

		May 6, 1996

	Surrey Taxation Centre	HEADQUARTERS
	Client Services Section	D. Zion
(613) 957-8953
	Attention: Carla Fraser
		960830

Deductibility of Prior Year Maintenance Payments
XXXXXXXXXX

This is in response to your memorandum of February 28, 1996, and our subsequent discussions (Zion/Fraser) regarding the deductibility of prior year maintenance payments by XXXXXXXXXX in the circumstances outlined below.

Facts:

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

XXXXXXXXXX

Our Comments

The taxability of an amount received does not arise merely because a court order has 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 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 provisions of the Act.

In order to determine if the payments made by XXXXXXXXXX prior to the XXXXXXXXXX, consent order are deductible, it is necessary to initially ensure that the provisions of subsection 60.1(3) of the Act are applicable to the payments. Once this has been established, we can then proceed to examine the deductibility of the direct payments of $XXXXXXXXXX and the third party payments of $XXXXXXXXXX.

Pursuant to subsection 60.1(3) of the Act, for the purposes of sections 60 and 60.1, where a decree, order or judgement of a competent tribunal or a written agreement made at any time in a taxation year provides that an amount paid before the time of the agreement and in the year, or the preceding taxation year is to be considered to have been paid and received thereunder, the amount shall be deemed to have been paid under the agreement. In William Cottrell v. M.N.R. (90 DTC 1581), The Tax Court of Canada accepted the view of the Court in Syrier v. M.N.R. (89 DTC 256) that the inclusion in the "written agreement" of some reasonable reference to "support" while the parties were living apart should suffice to bring into play the provision of subsection 60.1(3) of the Act and accordingly, allowed the Appellant's appeal. Although the paragraph contained in the XXXXXXXXXX Consent Order between XXXXXXXXXX and his former spouse, which contains reference to subsection 60.1(3) of the Act, is rather vague and poorly drafted, the fact remains that it refers to subsection 60.1(3) as well as to amounts paid to and on behalf of the former spouse and was ordered by consent of both parties. Thus, generally, the provisions of 60.1(3) of the Act appear to have been met. However, the question remains whether or not the payments would otherwise qualify as a deduction for the purposes of section 60 or 60.1 of the Act.

Subsection 60.1(1) provides that where a periodic payment of an amount pursuant to a court order or written agreement described in paragraph 60(b) or (c), or any variation thereof, is made by a taxpayer to or for the benefit of the taxpayer's spouse, former spouse, or children in the custody of such a person, the amount shall be deemed, for the purposes of paragraphs 60(b) and (c) to have been paid to and received by that person. XXXXXXXXXX payments prior to XXXXXXXXXX made directly to his former spouse or for the benefit of his former spouse or the Child in the custody of his former spouse such as the cash for groceries or other incidental maintenance expenses, are deductible through the qualifying provisions of subsection 60.1(1) only if they qualify as an allowance for the purposes of paragraphs 60(b). Paragraph 60(b) of the Act requires that, to be deductible the amount must be paid as alimony or other allowance that is payable on a periodic basis for the maintenance of 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. An allowance is a specified or determinable amount of money which has been established in advance of payment by the court or the parties as being the required payment to be made by the payer to a spouse or former spouse. It was recently upheld by the Tax Court of Canada in McMillan v. The Queen (95 DTC 791) that when a taxpayer was not committed to any specific amount, and there was no means of allowing a court to determine the amount that the recipient was entitled to, the amount in question could not be considered an allowance and the Appellant was not entitled to the deduction in question. In the situation at hand, since XXXXXXXXXX was not committed to any specific amount and as there is no means of determining what amount his former spouse was entitled to, we are of the view, that the amounts totalling $XXXXXXXXXX paid directly to his former spouse prior to XXXXXXXXXX cannot be considered an allowance and, accordingly, are not deductible.

In order for payments to a third party such as mortgage payments or other household bills, to be considered an allowance payable on a periodic basis, as required by 56(1)(b) and 60(b) of the Act, they 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. Thus, we are in agreement with your view that the third party payments totalling $XXXXXXXXXX are not deductible as this condition has not been satisfied by the wording used in the XXXXXXXXXX Consent Order. Interim child and spousal maintenance payments made pursuant to the terms of the XXXXXXXXXX Court Order and those child and spousal maintenance payments made pursuant to the terms of the XXXXXXXXXX Court Order would be deductible for the purposes of paragraph 60(b) of the Act in the applicable taxation years.

XXXXXXXXXX

We would also like to bring to your attention that the Department has taken a position that when 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. It may be possible for the parties involved to come to some agreement as to the intent of the XXXXXXXXXX Consent Order and draft a clarifying court order or written agreement. In the absence of such a document, no request for a reassessment could be considered.

We trust that our comments will be of assistance.

John F. Oulton
Section Chief
Business, Property & Personal Section
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch