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 lump sum payment of $XXXXXXXXXX in settlement of $XXXXXXXXXX of accumulated arrears of periodic payments resulting from a court order is deductible/taxable.
Position:
Not deductible/taxable
Reasons:
Cannot be identified as being the payment of amounts payable periodically.
973199
XXXXXXXXXX A.M. Brake
March 11, 1998
Dear XXXXXXXXXX:
Re: Child Support
This is in reply to your letter of November 28, 1997 wherein you asked us to confirm the income tax consequences with respect to the payment and receipt of a lump sum payment to settle arrears of child support payments under circumstances in the fact scenario set out below. It is your view, based on the comments contained in paragraph 13 of Interpretation Bulletin IT-118R3, Alimony and Maintenance, that the lump sum payment would not be deductible to the payor, your former spouse, and, therefore, would not be taxable to you, the recipient.
1.Pursuant to a court order dated XXXXXXXXXX, your former spouse was required to make child support/maintenance payments to you in the amount of $XXXXXXXXXX per month. Pursuant to another court order dated XXXXXXXXXX, your former spouse was required to make increased child support/maintenance payments to you in the amount of $XXXXXXXXXX per month.
2.These payments were subject to an annual cost of living adjustment, the determination of which was set out in the XXXXXXXXXX court order.
3.The latest court order has not been amended and remains in effect and no election has been made that would change the tax consequences of the payments.
4.Payments since both court orders were issued have been sporadic with the result that your former spouse is presently $XXXXXXXXXX in arrears of support/maintenance payments.
5.A proposal has been made to you by your former spouse that, in exchange for a one time lump sum payment in the amount of $XXXXXXXXXX, you would agree to waive your right to enforce collection of the entire amount of the arrears. This proposal will not release your former spouse of any ongoing obligations imposed under the terms of the most recent court order.
Where there is no ambiguity in the proposed agreement described in paragraph 5 above with respect to the intentions of both parties and the agreement accurately reflects the actual situation which you, alone, have described, we agree with your view that a lump sum payment in settlement of a debt for an amount less than the amount of the accumulated arrears of maintenance or support payments does not represent a payment in respect of periodic payments required by a court order. The lump sum payment, in our view, is being paid in accordance with a new separate agreement that provides for an amount that is less than the accumulated arrears set out in the court order, on the condition that the right to collect the balance of the arrears would be waived. Accordingly, the lump sum payment would not be deductible to the payor nor taxable to the recipient.
The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 22 of Information Circular 70-6R3 (copy enclosed), this is not an advance income tax ruling and is therefore not binding on Revenue Canada.
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
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