9 May 1996 Internal T.I. 9608597 - PRIOR PERIOD ALIMONY & WORDING OF AGREEMENT

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:

prior period maintenance payments & phraseology required in the agreement or other document

Position:

agreement must specify that the prior period payments are made pursuant to the agreement but there is no specific wording required

Reasons:

it is 60.1(2) that requires a reference to the specific provision of the Act

				May 9, 1996

	SURREY TAX CENTRE			Headquarters
M. Jackstien			A. Humenuk
	Assistant Director			957-8953
	Enquiries & Adjustments
	Attention: Carla Fraser
	           Client Services Section
				960859

Prior Year Maintenance Payments

We are replying to your memorandum of February 27, 1996 concerning the type of wording required in a written agreement, decree, order or judgement of a competent tribunal in order for a taxpayer to deduct payments made to his or her spouse or former spouse prior to the date of the agreement, decree, order or judgement.

Paragraphs 60(b) and (c) of the Act set out the general conditions under which alimony or maintenance payments are deductible to a taxpayer who is required to pay support to his or her spouse or former spouse. One of the general conditions which must be met in order for a particular payment to be deductible is that the payment must be made pursuant to or under the order of a competent tribunal in the case of a deduction under paragraph 60(c) or under a written agreement, decree, order or judgement of a competent tribunal in the case of a deduction under paragraph 60(b) of the Act. Further references in this memorandum to "an agreement" should be construed as referring to either a written agreement, decree, order or judgement of a competent tribunal, as is applicable in a particular situation.

As explained in paragraph 11 of Interpretation Bulletin IT-118R3 "Alimony and Maintenance", payments made prior to the date of a particular agreement are not made pursuant to or under that agreement within the ordinary meaning of the phrase "paid under the agreement". However, subsection 60.1(3) of the Act provides that payments that are made in the year or the immediately preceding year of an agreement are deemed to have been made under the agreement where the agreement so specifies. As discussed with you by telephone on March 20th, (Fraser\Humenuk), you are seeking guidance as to what words or phrases should be contained in an agreement in order for subsection 60.1(3) of the Act to apply. For this purpose, you included a sample document, which was signed by

XXXXXXXXXX

There is no specific wording which must be included in an agreement in order for subsection 60.1(3) of the Act to apply. Unlike subsection 60.1(2) of the Act which only applies where the agreement specifically states that the provision applies, subsections 60.1(1) and (3) can apply even though the particular provision is not mentioned in the agreement. You will note that the comments at the end of paragraph 18 of IT-118R3, which refer only to subsections 56.1(2) and 60.1(2) are highlighted in bold text.

While the wording of the agreement can vary from agreement to agreement, it is incumbent upon the parties to make their intent clear in the agreement. Where that intent is not clear, the courts will look to other evidence for the intent, including testimony from the parties to the agreement.

In the case of Cottrell vs. M.N.R. (90 DTC 1581), the court accepted that the inclusion in the agreement of some reasonable reference to the payment of periodic support while the parties were living apart should suffice to bring into play the provision of subsection 60.1(3) of the Act for support payments made prior to the agreement. This can be contrasted with the position taken in the cases of Aceti v. M.N.R. (92 DTC 1893), and Stewart vs. M.N.R. (90 DTC 1110), in which the court found that an agreement must not only stipulate that the prior period payments have been received in the year or the previous year but it should also be clear that the parties wanted these amounts to be considered to have been paid and received pursuant to the agreement. The mere acknowledgement of the receipt of past payments is not sufficient to show that the parties intended to have those payments considered as having been paid and received pursuant to the agreement.

More problematic in determining whether subsection 60.1(3) of the Act applies is an agreement which uses an effective date for the commencement of the payments that is prior to the date the agreement is signed (i.e. an agreement dated April 1996 which is to be effective January 1, 1995). Since one of the conditions necessary for paragraph 60(b) or (c) of the Act to apply is that the amount must be "payable on a periodic basis", one could argue that the amount payable prior to the date of the agreement was not payable on a periodic basis (especially where it had not in fact been paid precisely as stated in the agreement) because the agreement could not have been enforced until such time as it was actually signed. However, where the prior payments were made in accordance with the terms of the agreement and the parties agree that the intent was for such payments to be deemed to have been paid and received pursuant to the agreement, the court may be inclined to follow the reasoning in Cottrell.

It is also relevant to note that subsection 60.1(3) of the Act does not permit the parties to an agreement to recharacterize payments made prior to that agreement in order to make an otherwise non-deductible amount deductible. In Syrier vs. M.N.R. (89 DTC 256), the Court found that subsection 60.1(3) of the Act did not assist the taxpayer in making a deduction for payments made prior to the agreement because the payments in question were not made on account of maintenance. In that case, the original agreement had required the taxpayer to pay his former spouse periodic amounts of interest in addition to other amounts which were not relevant to the issue at hand. Since the payments in question did not otherwise meet the criteria set out in paragraph 60(b), (c) or (c.1) of the Act as it then read, subsection 60.1(3) of the Act was of no assistance in making the amounts in question deductible to the payer.

In summary, the issue of whether a particular wording is sufficient for prior period payments to be deductible to the payer must be decided on a case-by-case basis. With respect to the document which you submitted as an example, it is our view that the document does not appear to be a written agreement to make periodic payments of support but rather appears to be an agreed statement of facts. There is nothing in the agreement which reflects an intent between the parties to commit the payer to make further payments of support. Since the document, which was signed on XXXXXXXXXX states that the payments in question ceased in XXXXXXXXXX it would appear that the document was not created for the purpose of establishing XXXXXXXXXX support obligations but rather as confirmation of the facts as known by both parties.

In our conversation of March 29, 1996 (Fraser\Humenuk), you advised us that you were unable to contact the taxpayers to determine whether in fact the support payments of $XXXXXXXXXX per month continued to be made after XXXXXXXXXX While we are strongly inclined to suggest that subsection 60.1(3) of the Act does not apply to this particular agreement, we would be prepared to review the situation again if additional information becomes available to suggest the contrary.

While not relevant to the claim made by XXXXXXXXXX, we would also like to point out that the portion of the commentary in paragraphs 2 and 5 of IT-118R3 which states that the agreement must specify that the parties have agreed to live separate and apart does not apply to an agreement in respect of a breakdown of marriage occurring after 1992. In applying the condition set out in paragraph 2(b) of IT-118R3 and the related portion of paragraph 5 to a breakdown of marriage occurring after 1992, it is not crucial that the agreement state that the spouses have agreed to live separate and apart. However the agreement must be duly signed and properly dated by both parties and the facts must show that they are living separate and apart at the time the payment is made and that they continue to do so for the remainder of the year. This change to the legislation was introduced in 1993 along with the extended definition of spouse.

While this memorandum only discusses the issue raised from the perspective of the deductibility of payments, it is recognized that amounts which are deductible to the payer are required to be included in the recipient spouse's income under the comparable provisions in section 56 of the Act.

J.A. Szeszycki
for Section Chief
Personal and General Section
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

c.c. Client Assistance Directorate

c.c. Individual Returns and

Payments Processing Directorate

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