5 March 1997 External T.I. 9701395 - DEDUCTIBILITY OF PAYMENT

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:

Whether a lump sum equalization payment made pursuant to a separation agreement is deductible at a corporate or individual level

Position:

No

Reasons:

Not deductible under 18(1)(a) and (h) does not meet the criteria under 60(b), (c) or (c.1)

XXXXXXXXXX 970139

Attention: XXXXXXXXXX

March 5, 1997

Dear Sirs:

This is in reply to your letter of January 13, 1997, wherein you requested our views as to whether a lump sum payment to a former spouse, under a separation agreement, which represents the proportionate value of a corporation owned by you would be a deductible expense under the Income Tax Act (the "Act").

As noted in Information Circular 70-6R3 issued on December 30, 1996, we do not issue opinions with respect to completed factual transactions. Consequently, we will only offer the following general comments.

Paragraph 18(1)(a) of the Act provides a general restraint on the deductions permitted in the computation of income of a taxpayer from a business or property by prohibiting the deduction of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business of the taxpayer. Therefore, a payment under a separation agreement would not be considered a deductible expense of a corporation.

We also direct your attention to the comments contained in Interpretation Bulletin 118R3 (enclosed) with respect to alimony and maintenance payments deductible under paragraphs 60(b) and (c) of the Act. As noted in paragraph 12 of the aforementioned Interpretation Bulletin, in order for amounts to be deductible to the payor under paragraph 60(b), (c) or (c.1), they must be payable on a periodic basis for the maintenance of the recipient and/or a child of the recipient. Accordingly, lump-sum payments made in respect of the division of property under a separation agreement would not be deductible under paragraphs 60(b), (c) or (c.1) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch