27 March 1998 External T.I. 9723965 - CHILD SUPPORT

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 court order that only deals with accumulated arrears and not the amount payable on a periodic basis, would constitute a new order for the purposes of paragraph (a) of the definition of "commencement day" in subsection 56.1(4) of the Income Tax Act (the "Act").

Position:

Not a new order

Reasons:

Deals only with accumulated arrears rather than new or current changed periodic payments.

972396
XXXXXXXXXX A.M. Brake

Attention: XXXXXXXXXX

March 27, 1998

Dear Sirs:

Re: Arrears of Child Support

This is in reply to your letter of August 28, 1997 asking us to confirm your understanding that if a Court makes a declaration of arrears of child support after May 1, 1997, and a payment schedule on the declared arrears is fixed by the Court, the declaration and payment schedule is not considered to be a new order and that payments made pursuant to the declaration and payment order attract tax consequences. Our understanding of the situation to which you refer might better be demonstrated by the example set out below:

EXAMPLE

On February 1, 1995 the Court orders that child support payments of $500 per month be made to the taxpayer's former spouse. Payments were made and continue to be made but not on a regular basis, such that on June 15, 1997 the Court ordered the taxpayer to pay up the $4,000 arrears by making 20 monthly payments of $200 (there being no change to the regular $500 monthly support payment).

OUR COMMENTS

It is our general view that a court order that only deals with accumulated arrears (e.g. twenty payments of $200 each) and not the $500 amount payable on a periodic basis, would not constitute a new order for the purposes of paragraph (a) of the definition “commencement day” in subsection 56.1(4) of the Income Tax Act (the “Act”). The reference in paragraph (a) of that definition to the “agreement or order” is a reference to an agreement or order otherwise described in variable “B” in paragraph 56(1)(b) or 60(1)(b) of the Act, as the case may be. Variable “B” pertains to the child support amount that became receivable or payable, as the case may be, by the taxpayer “under an agreement or order on or after its commencement day ....”. The monthly $200 arrears payments, ordered by the Court on June 15, 1997, would not be considered, in and by themselves, to be a child support amount that became receivable or payable, as the case may be, by the taxpayer under the June 15, 1997 Court Order but rather would represent an amount in respect of periodic support payments that became receivable or payable, as the case may be, by the taxpayer under the February 1, 1995 Court Order, that had fallen into arrears. Accordingly, the issue that arises is whether the monthly $200 arrears payments will qualify as a “support amount” for purposes of variable “A” of paragraphs 56(1)(b) and 60(1)(b) of the Act.

"Support amount" is defined in subsection 56.1(4) of the Act to mean “an amount payable or receivable as an allowance on a periodic basis for the maintenance of the recipient, children of the recipient ...". According to Black's Law Dictionary , sixth edition, "payable" is defined as "...justly due; legally enforceable. A sum of money is said to be payable when a person is under the obligation to pay it". The subtlety in the wording of these paragraphs 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 order or agreement is an allowance payable on a periodic basis. Consequently, an amount may still be considered to be "payable on a periodic basis" even when the payment is made late and is in the form of 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 have fallen into arrears, would be deductible. The fact that the arrears in this situation is to be paid by a series of monthly payments ($200 per month) instead of a lump sum payment would not seem relevant. It is our general view, therefore, that the paying of pre-May 1997 arrears in this manner would be deductible/taxable as the payments related to the periodic payments ordered by the court before May 1, 1997.

The foregoing position on the payment of arrears in respect of periodic payments ordered by the court is in keeping with the comment contained in paragraph 13 of IT-118R3 which states, "a lump sum paid in a taxation year is regarded as qualifying as a periodic payment where it can be identified as being the payment of amounts payable periodically that were due after the date of the order and had fallen into arrears".

It might be noted that should the $200 payment include interest, the amount in respect of interest would not be deductible by the payor but the recipient would be taxable on any amount received in respect of interest. It should also be noted that had the Court Order on June 15, 1997 fixed, as a settlement of arrears, something less than the periodic amounts that had fallen into arrears, any such settlement payment, whether lump sum or by way of a periodic payment schedule, would not be deductible/taxable.

We trust our comments will be of assistance to you.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch