18 September 1997 Internal T.I. 9709347 - DEDUCTIBILITY OF CHILD SUPPORT 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 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 lump sum payment representing payment of "arrears of child support

Position: Deductible

Reasons:

Consistent with our position in Interpretation Bulletin 118R3.

			September 18, 1997

	Toronto West Tax Services	Headquarters
	Problem Resolution Section	Financial Industries
	2nd floor West		  Division
			970934

Alimony and child support arrears

This is in reply to your memorandum dated April 1, 1997, wherein you requested our comments with respect to the following situation:

1.XXXXXXXXXX entered into a Separation Agreement dated XXXXXXXXXX, which provided, inter alia, that the spouses would live separate and apart and that the husband would pay the wife monthly payments in respect of child support.

2.XXXXXXXXXX became unemployed and was unable to make payments for a period of time and became in arrears for approximately $XXXXXXXXXX.

3.In XXXXXXXXXX, the parties went to court and had an amendment to the original order filed. In this Judgement of Motion, the judge set the amount of arrears at $XXXXXXXXXX and ordered that it be paid by XXXXXXXXXX.

You request our views as to the deductibility of the lump sum amount paid by XXXXXXXXXX. You have advised that XXXXXXXXXX was disallowed this deduction on the basis that this was not a periodic amount.

The relevant provision authorizing the deduction of child support payments such as those described above is paragraph 60(b) of the Income Tax Act (the "Act"). One of the conditions which must be satisfied in order for an amount to be deductible under paragraph 60(b) of the Act is that the amount paid by the taxpayer must be an allowance payable on a periodic basis. The subtlety in the wording distinguishes between "paid" and "payable". The amount paid does not necessarily have to be paid periodically to be deductible as long as the allowance provided for in the agreement is an allowance payable on a periodic basis. In other words, an amount may still be considered to be "payable on a periodic basis" even where the payment is made late and that late payment is one cheque which includes several periodic payments. As a result, the Department generally takes the position that lump sum payments made on account of amounts that were payable on a periodic basis pursuant to a court order, but that has fallen into arrears, would be deductible. This position is reflected in the last sentence of paragraph 13 of Interpretation Bulletin 118R3. In this regard we note that the McNeely decision which you have cited concerned a situation whereunder the taxpayer was ordered by court, in 1975, to make a lump sum payment of $11,690 in satisfaction of arrears owing. In 1977, the taxpayer made a lump sum payment of $3,000 to obtain release from the maintenance liability of $11,690 arising from the separation agreement. The Court held that the lump sum payment was made "consequent" to the separation agreement and was not received pursuant to a separation agreement or court order. We have reviewed the Judgement on Motion dated XXXXXXXXXX, that you have appended to your memorandum and note that the Court Order explicitly states that the "arrears of child support shall be fixed at $XXXXXXXXXX and are payable in full by the XXXXXXXXXX". Consequently, in our view, the lump sum payment was on account of amounts that were payable on a periodic basis that were in arrears and should be taxable and deductible under the provisions of paragraph 60(b) of the Act.

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