19 June 1998 External T.I. 9806525 - CHILD SUPPORT PAYMENTS - RETROACTIVE ORDER

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:

1. Are the support payments subject to the new child support rules given that the court order issued after May 1, 1997, retroactively replaces a XXXXXXXXXX court order? Is a retroactive court order “made”, for the purposes of the definition of “commencement day” in subsection 56.1(4), at the beginning of the first time period that payments were required to be made under the new order? Does subsections 56.1(3) and 60.1(3) apply?

2. The taxpayer has asked for our technical interpretation regarding three different possible scenarios (depending on the actual wording of the court order) under which the actual amount of the support payments the taxpayer is required to make in the future is reduced and:

a) his ex-wife is ordered to repay excess support payments made since XXXXXXXXXX
b) his ex-wife is not ordered to repay the excess support payments made but the overpayments are applied to future child support payments; or
c) his ex-wife is not required to repay the excess support payments and there is no offsetting reduction of future support payments the taxpayer will make. The taxpayer will commence a separate legal action against his ex-wife to recover the amount owing.

Position:

1. Question of fact. We do not have a copy of the court order so we can only issue general comments. According to the client’s lawyer, they will be asking the court to issue a retroactive court order (after May 1, 1997), replacing a XXXXXXXXXX court order such that there will be a reduction of child support from $XXXXXXXXXX per month before tax to $XXXXXXXXXX per month with taxes to be paid by the ex-wife retroactive to XXXXXXXXXX

2. We have only provided general comments about the three scenarios.

Reasons:

See 972302. Generally, when an agreement or order, made after April 1997, varies a child support amount payable pursuant to a pre-May 1997 order, the day on which the first payment is required to be made is considered to be the “commencement day” and the new order falls under the new child support rules. Where a court order, made after April 1997, replaces and sets aside a prior pre-May 1997 court order and the new court order varies the child support amounts payable under the prior order, the new order is considered to be “made” after April 1997.

XXXXXXXXXX 973302
G. Moore

June 19, 1998

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

This is in reply to your letter of March 13, 1998, in which you requested an advance income tax ruling regarding child support payments.

We understand the situation is as follows:

XXXXXXXXXX

You have requested a ruling as to whether or not the term “commencement day,” as defined in subsection 56.1(4) of the Income Tax Act (the “Act”), applies to an order made after April 1997 by the Court of Appeal of Ontario which retroactively replaces an order for support made prior to May 1997 by a lower court. In your opinion, the order of the Court of Appeal of Ontario replaces retroactively the lower court order as if it had never been issued. It is your view that the court order to be issued by the Court of Appeal will not be a new court order. You have also asked that if the order of the Court of Appeal is subject to the new child support provisions, whether the new rules will apply only to payments made after the order of the Court of Appeal is issued or to all payments made since the initial XXXXXXXXXX variation order which is being replaced retroactively and which governs all payments required to be made on or after XXXXXXXXXX.

As indicated in our reply of February 10, 1998, we are unable to provide an advance income tax ruling since part of the transaction was completed with the issuance of the court judgment dated XXXXXXXXXX. We can, however, offer the following general comments.

Our Comments

As you know, child support payments made pursuant to a written agreement or court order that has a “commencement day,” as defined in subsection 56.1(4) of the Act, are subject to the “new rules”. Child support payments made pursuant to an agreement or order that has no defined “commencement day” will, generally, be subject to the “old rules”. Paragraph (a) of the definition of “commencement day” states that an agreement or order made after April 1997 will have a commencement day on the day the agreement or order is made. Paragraph (b) of the definition deals with the commencement day for an agreement or order made before May 1997, which would occur in situations such as where the parties elect to have the new rules apply or certain terms of the agreement or order are changed.

Paragraphs 56.1(3)(b) and 60.1(3)(b) of the Act may, in certain circumstances, be used to deem an agreement or order made after April 1997 to have been made before May 1997. The paragraphs apply to payments made after 1996, where a written agreement or order of a competent tribunal made at any time in a taxation year provides that an amount paid and received before that time and in the year or the preceding taxation year is to be considered to have been paid and received thereunder (retroactive provision). Paragraphs 56.1(3)(b) and 60.1(3)(b) of the Act deem the written agreement or order with a retroactive provision to have been made on the day on which the first such amount was paid and received. Accordingly, an agreement or order made after April 1997 and before 1999 with a retroactive provision, may be deemed to have been made before May 1997 providing an amount was paid and received between January 1, 1997, and April 30, 1997. With the exception noted below, a written agreement or order deemed to have been made before May 1997 would not have a commencement day and would be subject to the old rules until, if ever, there is a commencement day pursuant to (b) of the definition “commencement day” in subsection 56.1(4) of the Act.

The exception mentioned above applies to an order or written agreement made after April 1997 that varies a child support amount payable to the recipient from the last such amount paid to the recipient before May 1997. Paragraphs 56.1(3)(b) and 60.1(3)(b) of the Act would deem such an order or written agreement to have a commencement day, which is the day on which the first payment of the varied amount is required to be made.

For a court order made after April 1997, the “commencement day” would be the day the court order is “made.” It is our view that generally, an order is “made” when it is rendered. This may not be the same date that the court order is “issued” nor the date the court order has legal force and effect (e.g., in this case, the post-April 1997 court order may have legal force and effect on XXXXXXXXXX).

We are of the opinion that the order from the Court of Appeal would be “made” after April 1997 for the purposes of the definition of “commencement day” in subsection 56.1(4). It appears that in XXXXXXXXXX situation, there would be a court order made after April 1997 that would vary the child support amount payable from the last such amount received by the recipient before May 1997. The order would be deemed to have a commencement day and child support payments made under the order would be subject to the new rules. In our opinion, “the last such amount received by the recipient before May 1997” referred to in paragraph (b) of subsection 56.1(3) of the Act is the monthly $XXXXXXXXXX payment received by the recipient immediately preceding May 1997, and this child support amount payable will be varied (changed to $XXXXXXXXXX per month) by the new order to be made by the Court of Appeal after April 1997. Accordingly, pursuant to the formula in paragraph 60(b) of the Act, in computing a payer’s income for a taxation year, the total child support amounts that became payable by the payer to the recipient on or after the commencement day of the order, and before the end of the year in respect of a period that began after its commencement day, would be excluded from the calculation of deductible support amounts paid after 1996 and before the end of the year by the payer.

You have asked for our comments regarding three possible scenarios under which the court may or may not order your ex-wife to repay the excess support payments made since XXXXXXXXXX. The issue of repayment has not been addressed in the Reasons of Judgment dated XXXXXXXXXX, issued by the Court of Appeal for Ontario.

Scenario A: Wife is ordered to repay the payer his excess payments since XXXXXXXXXX, and future payments of $XXXXXXXXXX per month are to be made in full. You have indicated that pursuant to paragraph 56.1(c.2) of the Act, the payer will be required to include in income in the year of receipt, the amount received as a reimbursement of the excess payments which were previously deducted by him under paragraph 60(b). In addition, it is your view that future payments of $XXXXXXXXXX will be deductible to the payer and previous tax returns of the payer will not need to be adjusted.

Our Comments: Paragraph 56(1)(c.2) of the Act requires an inclusion in income of an amount received by an individual in the year under a decree, order or judgment of a competent tribunal as a reimbursement of an amount deducted under paragraph 60(b), (c) or (c.1) in computing the individual’s income for the year or a preceding taxation year. Accordingly, any repayments the wife is ordered to make to the payer that meet the requirements of paragraph 56.1(c.2) would be required to be included in the payer’s income for the year of receipt.

With respect to the deductibility of future child support payments, our comments above about the date the order is “made” would apply.

Scenario B: Wife is not ordered to repay the payer his overcontributions since XXXXXXXXXX but instead, the overpayment is to be applied against future child support payments.

Our Comments: Our comments about the deductibility of future child support payments and the application of paragraph 56.1(c.2) are the same as for Scenario A. In regard to the latter, we would generally regard the netting of the overcontributions against future child support payments as “an amount received” for purposes of paragraph 56(1)(c.2) of the Act.

Scenario C: Wife is not ordered to repay the taxpayer his overcontributions and there is no set-off against future child support payments. The taxpayer will have to commence a separate action against the wife to recover the amount owing.

Our Comments: Our comments about the deductibility of future child support payments are the same as for Scenario A.

We trust our comments will be of assistance to you. Please note that these comments represent our opinion of the law as it applies generally and, as stated in Information Circular 70-6R3, are not binding on the Department.

Yours truly,

J. Wilson
for Director
Business and Publications Division
Income Tax Rulings and Interpretations Directorate

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