11 April 1997 Income Tax Severed Letter 9701097 - Retroactivity of amended court order

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.

SUMMARY: Retroactivity of amended court order—ITA-60.1(3)—Whether an amended court order for support can have a retroactive effect when the amendment provides for the deductibility of third party 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 Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

PRINCIPAL ISSUES:

whether an amended court order can have retroactivity to date of original order

POSITION:

only if the amendment is clarifying in nature only (amended to correct phrasing or which more clearly states what was the original intent of the parties) and does not represent a new agreement. As the parties appear to not agree as to the intent of the original order, recommend a section 174 reference to the Tax Court of Canada. If Tax Court option is not pursued, recommend that, pursuant to 60.1(3) and citing of 60.1(3) in the amendment, that prior payments in year of amendment and year prior to amendment, be allowed only.

REASONS:

actions of recipient spouse (objections to 1992 and 1993 returns and letter submitted in 1994) suggest that it was not the intent of both parties that the payer be allowed a deduction for third party payments

April 11, 1997

Ottawa Tax Services Office HEADQUARTERS Sandra Short Attention: Mabe Greenberg (613) 957-2136

970109

Retroactivity of amended court order

This is in reply to your memorandum of January 13, 1997, which asks if an amended court order can have a retroactive effect when the amendment provides for the deductibility of third party payments.

You have provided us with the following facts.

1. The original court order, dated XXXXXXXXXX, provided, in paragraph XXXXXXXXXX, that the petitioner spouse (the payer) was to pay interim support in the amount of $XXXXXXXXXX per month, commencing XXXXXXXXXX.

2. The original order was amended on XXXXXXXXXX. Child access conditions were clarified and paragraph XXXXXXXXXX was deleted and replaced with the following:

XXXXXXXXXX

3. On XXXXXXXXXX, the Ontario Court amended paragraph XXXXXXXXXX, amendment (reproduced in 2 above) to add that the payments

"XXXXXXXXXX"

The 1996 motion was not opposed by the recipient spouse.

The payer wishes to deduct mortgage payments made on the matrimonial home for the years 1992 to 1996. The recipient spouse's 1992 and 1993 returns were reassessed in 1995, after notices of objection were filed, to delete amounts relating to the payment of mortgage costs by the payer.

In our conversation with the client, the payer, on April 1, 1997 (XXXXXXXXXX/Short), it was indicated that the first amendment was a clarification of the original order. The payer contends that it was always the intention of both parties that the monthly support of $XXXXXXXXXX was to provide the recipient spouse with the means to pay mortgage costs. The payer noticed in XXXXXXXXXX, however, that the bank was continuing to take the mortgage payments from his account, despite the payment of $XXXXXXXXXX in each of November and December to the recipient spouse. This error was corrected by XXXXXXXXXX and the clarifying amendment was formalized in June of that year. The second amendment was made when the payer was made aware that third party payments are not deductible for tax purposes unless the order specifically states that subsections 60.1(2) and 56.1(2) are to apply. Presumably, the reference to 60.1(3) of the Act, in the second amendment, was added so that third party payments, made in prior years, could also be deducted.

Our Comments:

Generally, if the parties to an amended court order fail to agree as to the intent of the original order, thereby jeopardizing the effect of the amended order, then a section 174 reference to the Tax Court of Canada is recommended in order to determine the issue. If the parties pursue this option, the Tax Court will find whether the amending order is to be retroactive to the date of the orginal order. If, for whatever reason, a section 174 reference is not made, we recommend the following.

The 1996 amendment can operate to allow the payer a deduction for third party payments, paid in 1995 and onward. The third party payments made in 1993 and 1994 are not deductible by the payer as we do not believe that the second amendment, permitting a deduction for the mortgage payments to the bank, is retroactive to 1992. This position is explained in the next paragraph. While we understand that the 1992 return is now statute-barred, we believe that a deduction of $XXXXXXXXXX for each of November and December could have been allowed to the payer in that year (assuming that the information on file supports the payer's recollection that the $XXXXXXXXXX maintenance payments were paid in both November and December, in addition to the mortgage payments which were taken directly from the payer's bank account).

The provisions of 60.1(3) extend the deductibility of payments made prior to the date of an order only to prior payments made in the same year as the order, or the preceding taxation year. It is the Department's position that if a court order, which intends that certain amounts be taxable and deductible, is lacking in correct phrasing, an amending order which incorporates the correct phrasing and clearly indicates that it is the intent of all parties in the original order, and introduces no variations to the original order save to clarify its original intent, then the amending order can have retroactivity to the date of the original order. In the case described above, it appears that the recipient spouse does not agree that the intent of the parties was to require the recipient to include in income, the amount paid by the payer to the bank to cover mortgage costs on the matrimonial home. The recipient spouse filed notices of objection for the 1992 and 1993 years on this very point. A copy of correspondence written by the recipient spouse on XXXXXXXXXX (before the 1996 amendment), about the 1992 taxation year, clearly states that "I do not believe I should have to pay income tax on that money..." As a result, we cannot agree that the 1996 amendment is merely a clarifying order, intended by all parties, to reflect the true original intentions of the parties to the agreement.

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