22 October 1996 Internal T.I. 9627227 - ALIMONY AND OTHER ALLOWANCES

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 court ordered support payments when the consent order provides the payer with a choice between two options. One is the periodic payment of support payments over XXXXXXXXXX years while the second option is a lump sum payment in lieu of the monthly periodic support payments.

Position:

Option 1 - payments would meet the requirements of 60(b) or (c) and thus be deductible to payer. The tax payable on the allowance is also deductible.

Option 2 - lump sum payment not periodic and thus not deductible.

Reasons:

Departmental Position as outlined in IT and established by jurisprudence.

								October 22, 1996

	Charlottetown Tax Services		HEADQUARTERS
	Client Services				D. Zion
(613) 957-8953
	Attention: Sharon Bulger
								962722

Alimony and Other Allowances

This is in reply to your correspondence of August 12, 1996, wherein you request our opinion regarding the tax treatment of certain spousal support payments provided for under a XXXXXXXXXX We apologize for the delay in responding.

The facts, as we understand them based on our review of the limited documentation forwarded to us, are that, under the above noted consent order, XXXXXXXXXX is given the choice of two methods for providing spousal support to his former spouse. Under the first option, he shall pay his former spouse the amount of $XXXXXXXXXX per month over the course of certain identified time periods over XXXXXXXXXX years. The consent order of the Court provides that these support payments shall not be taxable to his former spouse and shall be treated for tax purposes as a lump sum payment. In the event that this is not the proper tax treatment, XXXXXXXXXX is obligated to compensate his former spouse the amount of income tax she paid resulting from the income inclusion of the payments. Alternatively, XXXXXXXXXX may choose the second option which allows him to pay a one-time lump sum spousal support payment to his former spouse in the amount of $XXXXXXXXXX in lieu of the previously discussed monthly spousal support payments. Once again, if it is determined that the amount paid to the former spouse is taxable, XXXXXXXXXX is responsible for the income tax paid by his former spouse which pertains to this income inclusion. At issue is whether the monthly support payments or lump sum payment payable under the two separate options would be taxable in the hands of the former spouse and deductible by XXXXXXXXXX

Our Comments

Paragraph 1 of the Interpretation Bulletin IT-118R3, Alimony and Maintenance, indicates that any amount that is deductible under paragraph 60(b) or (c) of the Act as alimony or maintenance is required to be included in the income of the recipient spouse under paragraph 56(1)(b) or (c) as the case may be. When alimony or maintenance payments are required to be included in income and are deductible pursuant to those provisions, it is the Department's position that those provisions would apply notwithstanding the express or implied intention or desire of the parties "to contract out" to agree otherwise. Accordingly, the deductibility or taxability of such a payment relies on being able to satisfy the criteria set out in the relevant income tax legislation. While the decision as to which spousal support arrangement XXXXXXXXXX chooses is voluntary, once he has made his choice, the terms of the selected option are binding. These terms should then be reviewed to determine the tax treatment of the required monthly support payments or lump sum payment respectively.

Option 1 - Payments on a Periodic Basis

Under the terms of the first option, XXXXXXXXXX is required to pay a monthly spousal support payment to his former spouse for a number of months each year over a period of XXXXXXXXXX years. We have made the assumption, based on the comment contained in clause 2 of the consent order, that option 1 is a continuation, in some form, of monthly spousal support ordered under an XXXXXXXXXX consent order which was the subject of dispute between the parties. We saw nothing in the information provided that would lead us to conclude that these monthly payments are instalments of a lump or capital sum. Pursuant to paragraphs 56(1)(b) and 60(b) of the Act, in order to be deductible to the payer and included in the recipient spouse's income, an amount must, among other things, be paid as alimony or an allowance payable on a periodic basis for the maintenance of the recipient, the children of the recipient or the recipient and the children of the recipient. In our view, these conditions have been met and the monthly support payments should be included in the income of the former spouse and would be deductible by the payer. In keeping with the comments in paragraph 14 of IT-118R3, the fact that the consent order requires XXXXXXXXXX to pay a monthly allowance for only part of the year would not disqualify the payments.

The court order further requires that, in the event that the amounts must be included in the income of the former spouse, XXXXXXXXXX is liable to compensate his former spouse the same amount she will be required to pay for income tax as a result of her receipt of the support payments. The Tax Court of Canada, in both Guerin v. The Queen (94 DTC 1356) and Monette v. M.N.R. (92 DTC 1622), has considered this type of situation in which the governing document (decree, order or judgement of a competent tribunal or a written agreement) provides that the payer must pay the tax payable on the allowance in addition to the allowance itself, and determined that the tax payable will be considered part of the allowance and will be deductible as well. We would mention that such payment(s) would be deductible even when the payer makes the payments directly to the Receiver General on the former spouse's behalf.

Option 2 - Lump Sum Payment

In The Queen v. Sills (85 DTC 5096), the Federal Court of Appeal held that paragraph 56(1)(b) does not require an amount to be actually paid on a periodic basis but rather that the amount be payable on a periodic basis according to the terms of the order or agreement. As set out in paragraph 13 of IT-118R3, it is the Department's general position that a lump sum payment will not qualify as being payable on a periodic basis and thus does not qualify for deduction. Since the lump sum payment of $XXXXXXXXXX to be paid in lieu of any future support is, in itself, neither a periodic payment nor payable on a periodic basis, it is not deductible. Consequently, the former spouse would not be required to include the amount in her income.

We trust that our comments will be of assistance in replying to your client.

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