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 the exception in paragraph (b) of subsection 56.1(3) applies when there is a Cost of Living Adjustment (COLA) clause in a post-April 1997 order. The exception in paragraph (b) of subsection 56.1(3) provides that where an agreement or order is made after April 1997, and there is a variation of child support amount payable from the last such amount received by the recipient before May 1997, each varied amount of child support received under the agreement or order is deemed to have been receivable under an agreement or order and the commencement day of the order or agreement is the day on which the first payment of the varied amount is required to be made.
Position:
No. The exception in paragraph (b) of subsection 56.1(3) is not applicable.
Reasons:
See 9717155, 9718317 and 980131. It is the Department’s position that a COLA clause in a post-April 1997 order would not, by itself, cause an order that otherwise meets all the conditions of subsection 56.1(3) to be considered a variation of child support amount payable and therefore fall under the exception in paragraph (b) of subsection 56.1(3).
XXXXXXXXXX 981266
G. Moore
July 2, 1998
Dear XXXXXXXXXX:
Re: Child Support Payments
I am replying to your letter of May 11, 1998, concerning the income tax implications of a Cost of Living Adjustment (COLA) clause in a post-April 1997 court order .
In your letter, you have asked whether or not a COLA clause inserted into a post-April 1997 order would constitute a variation of child support amounts payable and therefore be subject to the exception in paragraph (b) of subsection 56.1(3) of the Income Tax Act (the “Act”). It is your view that a COLA clause would not constitute a variation of child support amounts payable and therefore would not trigger a commencement day of the order.
As you know, under the “new rules”, child support payments made pursuant to an agreement or order that has a “commencement day”, as defined in subsection 56.1(4) of the Act, are not deductible by the payer and are not required to be included in the income of the recipient. Under the “old rules”, child support payments made pursuant to an agreement or order that has no defined “commencement day” will, generally be deductible by the payer and are required to be included in the income of the recipient. 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.
The provisions of paragraph 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 position). Paragraphs 56.1(3)(b) and 60.1(3)(b) of the Act deem an 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 described below, an 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 paragraph (b) of the definition “commencement day” in subsection 56.1(4) of the Act.
The exception mentioned above applies to an order or 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 agreement to have a commencement day which is the day on which the first payment of the varied amount is required to be made.
The amounts paid and received in the year or the previous taxation year and before an agreement or order with a retroactive provision is made are deemed, pursuant to paragraphs 56.1(3)(a) and 60.1(3)(a) of the Act to have been paid and received under the agreement or order.
With respect to COLA clauses, it is our view that the insertion of a COLA provision in a post-April 1997 order to automatically increase child support amounts payable, would not, in itself, be considered to be a variation of a child support amount payable.
I trust my 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
Policy and Legislation Branch
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