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:
There are a series of 11 statements and questions which required confirmation or response involving the taxability/deductibility of amounts received/paid pursuant to a child maintenance order, the taxablility of interest accumulating on unpaid child support payments, the deductibility of certain interest payments and legal fees against interest income and, the tax consequences of amounts paid as a result of a child support suit brought by the child (now an adult) against the parents.
Position:
The taxability/deductibility of payments varied depending on the actual terms of the court order. Interest received under the terms of the maintenance order is considered taxable as interest income. Amounts incurred as legal or interest carrying charges are deductible to the extent incurred for the purpose of earning income. No apparent tax consequences to the child'slaw suit, either as to amounts received or as to deductibility of expenses.
Reasons:
Provision in the maintenance order calling for payment of school fees do not qualify as maintenance payments under paragraph 56(1)(b) or 60(b) of the Act. Payments of arrears of school fees also do not qualify. Maintenance order is considered a property so interest is considered as income from property. No provision in the Act to tax child support settlement amounts received by adult child.
961450
XXXXXXXXXX J.A. Szeszycki
May 16, 1996
Dear Sir:
Re: Tax Treatment of Support Payments
This is in reply to your urgent request dated April 24, 1996, for an opinion as to the proper tax treatment applicable to amounts received or expected to be received on account of child support. We refer also to our telephone conversation (Szeszycki/XXXXXXXXXX) of April 29, 1996, in which we provided some verbal guidance in respect of the series of questions you had asked.
XXXXXXXXXX
In XXXXXXXXXX the child entered private school, thus invoking paragraph XXXXXXXXXX of the Order. You indicate that XXXXXXXXXX did not pay her share of the school fees when required. Consequently, you undertook to pay the fees. XXXXXXXXXX opted instead to continue making $XXXXXXXXXX monthly payments to you until XXXXXXXXXX, when she was able to get the court to revise the order to require that she pay $XXXXXXXXXX per month towards amounts in arrears. The XXXXXXXXXX Order was not submitted with this enquiry.
XXXXXXXXXX
Confirmations/Questions
With respect to the circumstances outlined above, you have made a series of statements and asked questions concerning the treatment of payments made and those which you anticipate may be made pursuant to a settlement presently being negotiated. We have dealt with your concerns in the order presented.
1.The child support payment of XXXXXXXXXX as per the Judgement (Order) was taxable to the father and deductible to the mother because the periodic payment was an allowance and the father did not have to account for its use.
Yes, but more generally, because they met all the criteria set out in paragraphs 60(b) and 56(1)(b) of the Act.
2.The child support stopped when the child entered private school in XXXXXXXXXX and the school fees provided in the Judgement do not qualify as an allowance, a specific purpose payment, a third party payment or an other payment that may be taxable or deductible under the rules governing child support for income tax purposes.
Being third party payments for a specific purpose, they must meet the conditions described in subsections 60.1(2) and 56.1(2) of the Act in order to be deductible to the payer and taxable to the recipient. One of the conditions is a specific reference, within the court order itself, to the application of these provisions. No such reference appears in the Order. Therefore, the amounts in respect of school fees would not have been deductible to the payer or taxable in the hands of the recipient. This point is covered in paragraph 18 of interpretation bulletin IT-118R3 "Alimony and Maintenance," which we have enclosed for your information.
3.The payment of $XXXXXXXXXX per month, which the mother paid to the father from XXXXXXXXXX was not paid in accordance with the Judgement and was not taxable to the father nor deductible by the mother because it was a payment applied toward the school fees which were in arrears.
The $XXXXXXXXXX monthly payments, once the child enters a private school, are not provided for in the court order. They cannot, therefore, be considered to have been made pursuant to the Order, as required by paragraphs 60(b) and 56(1)(b) of the Act, in order to be deductible to the payer and taxable in the hands of the recipient.
4.The payment of $XXXXXXXXXX per month which the mother has paid to the father since the court order effective XXXXXXXXXX was not taxable to the father nor deductible by the mother because it was a payment applied toward the school fees which were in arrears.
On the presumption that the wording of the XXXXXXXXXX Order provides that the payments were in fact in respect of amounts owing as unpaid school fees, then the amounts would not qualify as deductible payments under paragraph 60(b) nor would they be taxable under paragraph 56(1)(b) of the Act. If, however, the XXXXXXXXXX Order merely revises the support arrangements to provide for child support of $XXXXXXXXXX per month then the payment would qualify regardless of how the payments are actually applied by the recipient.
5.If the balance of the school fees which are in arrears under the 1989 Judgement are paid as a lump sum at some point in the future, they will not be taxable to the father nor deductible by the mother.
That is correct. Since the payments on account of the school fees were not considered as qualifying payments (see item #3 above) the payment of those amounts that have fallen into arrears will also not qualify.
6.If the Judgement interest that has accrued on the school fees which are in arrears under the 1989 Judgement is collected, is it taxable to the father and deductible by the mother?
The interest collected by the father with respect to the outstanding debt would be treated as income from property and required to be included in income. The interest expense on the part of the mother would not be deductible as it would be a personal expense, not an expense laid out to earn income.
If taxable to the father, can the father deduct the interest carrying charges over the years and the legal fees to collect the interest? Is the amount of interest included in income in the year received or the year accrued? (the latter question was raised in the course of the telephone discussion.)
Interest income may be included in income either in the taxation year received or in the taxation years in which the amounts have accrued depending on the method regularly followed in reporting interest income. The T1 Guide may be consulted regarding the different methods of reporting investment income.
Interest carrying charges and legal fees laid out for the purpose of earning income from property are deductible against that income but only in the year expended. You clarified in the telephone conversation that the interest carrying charges referred to are the interest charges that relate to money borrowed by you in order to pay the portion of school fees that were payable by XXXXXXXXXX under the Order. Since those interest charges were incurred in relation to a personal expense such as school fees and were not incurred for the purpose of earning income from a business or property, they would not be deductible.
Legal fees are generally only deductible to the extent that they are incurred for the purpose of gaining or producing income from a business or property. As indicated earlier, any income arising out of the execution of the terms of a maintenance agreement, that is not otherwise required to be included in income under the maintenance provisions of section 56 of the Act, would be considered as income from property. To the extent that the legal fees are related to the collection of interest income receivable under the terms of the Order, they would be considered deductible against the interest income reported. In addition, legal fees that are incurred for the purpose of enforcing a pre-existing right to amounts, which when received would be included in income under paragraphs 56(1)(b) or (c) of the Act, are also deductible. Please refer to comments set out in the enclosed interpretation bulletin IT-99R4 "Legal and Accounting Fees," for additional information. Where a settlement includes both amounts that are required to be included in income and amounts that are not, the legal fees incurred in order to achieve the settlement should be apportioned appropriately, limiting the deductible portion to that which was incurred for the purpose of gaining or producing taxable income.
7.If the father makes a claim for child support from the mother in 1996 for the period of time from 1988 to 1994, the payments would not be taxable to the father nor deductible to the mother if ordered in the form of a lump sum payment or instalments because the amount applies for a period before the date of the order or agreement in 1996.
We cannot respond specifically to proposed or hypothetical transactions. Generally, in order for amounts paid as child support to be deductible and taxable, they must meet the conditions described in paragraph 3 of interpretation bulletin IT-118R3. It would appear that the amounts paid would be made on account of a debt owing by the payer that is comprised of amounts that would not have been deductible had they been paid pursuant to the terms of the Order. Paragraph 13 of IT-118R3 explains the conditions under which lump sum payments may be deducted. For the same reasons, the amounts received would not be required to be included in the income of the recipient.
8.The child support payments ordered by the Judge in the child's action, that are paid by each parent directly to the child are not taxable to the child nor are they deductible by either parent. These terms will also apply to any lump sum ordered by the court to be paid by either parent directly to the child to cover the period from his 18th birthday in 1994, when the 1989 Judgement was no longer in effect, up to the date of any future agreement or court order to be made in 1996.
We cannot respond specifically to proposed or hypothetical transactions. Generally, there is no provision in the Act which requires the inclusion of capital payments such as the ones described above between parents and an adult child. However, if amounts paid by the parents include interest accruing on the settlement amount such interest would be required to be included in the income of the recipient.
9.Are legal fees 100% deductible to get a court order when suing your former spouse for child support in a Family Court even if you are not successful or if the legal fees exceed the amount of support received?
As explained in interpretation bulletin IT-99R4, at paragraphs 16 and 17, legal fees incurred in establishing a right to maintenance are not deductible as they are considered a capital or personal expense. In contrast, legal fees incurred to enforce the payment of amounts ordered in a pre-existing agreement, which amounts are required to be included in the income of the recipient, would be deductible.
10.Are the legal fees paid by the child to sue the parents for child support deductible to the child?
The legal fees would not be deductible, for the reasons explained in 9 above and, generally, amounts that are not incurred for the purpose of earning income are not deductible by reason of paragraph 18(1)(a) of the Act.
11.In what taxation year do the legal fees have to be claimed if eligible for a deduction?
The legal fees expended under the circumstances of this enquiry, to the extent that they are deductible at all, would be claimed in the year paid.
We hope that the comments provided above and those contained in the enclosed interpretation bulletins will be of some assistance to you.
Yours truly,
John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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