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:
Situation 1 - H is required to make periodic child support payments under a pre-May 1997 order (the First Order). H is in arrears with respect to the payments. Subsequent to April 1997, an order was issued (the Second Order) that reduced the arrears but did not change the periodic amount payable for child support which would continue under the First Order. H Then paid the reduced arrears. The issues are whether (a) the arrears are deductible and (b) whether there is a commencement day in respect of the second order. A third issue (c) concerns the tax consequences if the third order had changed (reduced) the child support payable on a retroactive basis that still resulted in the payment of arrears.
Situation 2 - H is required to pay child support in respect of two children to W under a December 1993 court order. Under an October variation order, child support ceased to be payable for one child. As a result of a January consent variation order, H obtained custody of the two children and was not required to pay any child support. The January, 1997 order also provided that, in the event that custody of the children reverted to W, the terms of the original December 1993 order, as varied by the October 1996 order, would be applicable. In July, 1997, the two children were placed in W's custody and H was again required to make child support payments to W commencing on July 1, 1997. The issue is whether there is a commencement day (i.e., July 1, 1997).
Position:
Situation 1 - (a) The payment of the arrears are not deductible. (b) There is no commencement day. (c) The payment of lump sum arrears would not be deductible and that the commencement day would be the first day that the varied amount is required to be paid.
Situation 2 - There is no commencement day.
Reasons:
Situation 1 - (a) It is the Department's longstanding position that a lump sum payment to obtain a release from a liability imposed by an order or agreement in respect of arrears of maintenance payable is a non-deductible outlay. (b) There is no commencement day as the Second Order does not vary the child support amount payable (subparagraph (b)(ii) of the definition of commencement day in subsection 56.1(4) of the Act). (c) H would still be considered to be making a lump sum payment and be released from a previous liability pursuant to the First Order. It is also considered that the Second Order varies the First Order and that the commencement day would be "the day on which the first varied amount is required to be made" (subparagraph (b)(ii) of the definition of commencement day).
Situation 2 - The order made before May 1997 is not considered to have been "varied after May 1997" under b(ii) of the definition of commencement day.
July 30, 1997
Benefits Program Directorate HEADQUARTERS
Sharon Yetts M. Eisner
(613) 957-8953
971789
Child Support Payments- New Regime
This is in reply to your correspondence of June 26, 1997 concerning the above-noted subject.
You have requested our view on two examples, which are set out below:
Example 1
(a) H is required to make periodic child support payments under a pre-May 1997 court order (the First Order). The arrears in respect of the First Order were significant. Subsequent to April 1997, a judge issued a variance order (the Second Order) that reduced the amount of the arrears but did not change the periodic amount payable for child support, which would continue to be made under the First Order. Subsequently, H paid the reduced liability.
With respect to the above example, it is your view that the amount paid by H to obtain a release from the liability in respect of arrears imposed by the Second Order does not qualify for deduction (and is not required to be included in the income of the recipient), as it was not paid in accordance with the First Order. However, payments of continuing child support under the First Order will be deductible by H and subject to tax in the hands of the recipient.
(b) You have also expressed the view that, if the Second Order had reduced the periodic amount payable in respect of the First Order on a retroactive basis, the lump sum payment made by H in respect of arrears would have been deductible by that individual and be subject to tax in the hands of the recipient. However, the payment of the periodic amounts arising subsequent to the date of the Second Order would have been non-deductible by H and non-taxable in the hands of the recipient.
With respect to part (a), we agree that the payment under the Second Order would be non-taxable and non-deductible, as the payment is not considered to be "an amount payable or receivable as an allowance on a periodic basis," for the purposes of the definition of "support amount" in subsection 56.1(4) of the Act. It is our view that a lump sum payment to obtain a release from a liability imposed by an order or agreement in respect of arrears of maintenance payable is a non-deductible outlay. It is also our view that the Second Order would not trigger a "commencement day," as defined in subsection 56.1(4) of the Act in respect of the First Order. Thus, the periodic amounts would continue to be deductible by H and subject to tax in the hands of the recipient.
In general terms, we do not feel the results in (b) would be any different from (a), if the Second Order had retroactively reduced the periodic payments under the First Order. Under this scenario, the Second Order is effectively a new order in which H would be required to make a lump sum payment in order to be released from a previous liability pursuant to the First Order. In this case, the amounts paid will be non-deductible to the payer and non-taxable to the recipient.
In (b), however, it is our view that the Second Order varies the First Order and that the commencement day of the Second Order would be "the day on which the first varied amount is required to be made," pursuant to subparagraph (b)(ii) of the definition of "commencement day" in subsection 56.1(4) of the Act.
Example 2
In the second example, H is required to pay child support in respect of two children to W pursuant to a December 1993 consent order. Under an October 1996 consent variation order, child support ceased to be payable for one of the two children. As a result of a January 1997 consent variation order, H obtained custody of the two children and was not required to pay any child support. The January, 1997 order also provided that, in the event that custody of the children reverted to W, the terms of the original December 1993 order, as varied by the October 1996 order, would be applicable. In July, 1997, the two children were placed in W's custody. As a result, H was again required to make child support payments to W commencing on July 1, 1997.
You have indicated that, by virtue of the subparagraph (b)(ii) of the definition of "commencement day" in subsection 56.1(4) of the Act, the child support amount payable from July, 1997 would be non-taxable to W and non-deductible by H as it has been changed from 0$ to the child support amount payable in July.
Subparagraph (b)(ii) of the definition of "commencement day" in subsection 56.1(4) of the Act refers to an "agreement or order" made before May 1997 "that is varied after April 1997 to change the child supports amount payable." In relating this wording to the above circumstances, it is our view that, while the child support amount payable has varied as a result of the change in custody, no change has been made to the December, 1993 order (as varied in January of 1997). Therefore, after April, 1997, there would be no "commencement day" in respect of the order with the result that the payments of child support made in July, 1997 and subsequent months would continue to be deductible by H and subject to tax in the hands of W.
If you require further technical assistance, we would be pleased to provide our views.
John F. Oulton
Section Chief
Business, Property & Employment Section II
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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