2 July 1998 External T.I. 9815885 - CHILD SUPPORT PAYMENTS, COLA CLAUSE

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:

Where a court order or agreement is made before May 1997, and child support amounts are otherwise deductible, the order will be considered to have a “commencement day” (as defined in subsection 56.1(4)) if the order is varied after April 1997 to change the child support amounts payable to the recipient in accordance with subparagraph (b)(ii) of the definition of “commencement day” in subsection 56.1(4). Does subparagraph (b)(ii) of the definition of “commencement day” in subsection 56.1(4) apply where a pre-May 1997 court order includes a cost of living adjustment (COLA)?

Position:

No. Subparagraph (b)(ii) of the definition of “commencement day” in subsection 56.1(4) of the Act is not considered to be applicable.

Reasons:

See 9717155, 9718317. It is the Department’s position that an agreement or order made before May 1997 has not been varied where a change in child support amounts payable such as a COLA clause is automatic and is built into the agreement or order.

XXXXXXXXXX 			981588
G. Moore

Attention:  XXXXXXXXXX 

July 2, 1998

Dear XXXXXXXXXX:

Re: Child Support - Cost of Living Adjustment Clause

This is in reply to your letter of June 8, 1998, concerning the definition of “commencement day” in subsection 56.1(4) of the Income Tax Act (the “Act”) and a change in child support payable under a pre-May 1997 written separation agreement.

We understand your main concern to be whether a change to amounts payable for child support under a pre-May 1997 written separation agreement, pursuant to a clause providing for a cost of living adjustment (“COLA” clause) will be considered to be a variation of an agreement, for purposes of subparagraph (b)(ii) of the definition of “commencement day” in subsection 56.1(4) of the Act. It is your view that adjustments pursuant to a COLA clause already existing in a pre-May 1997 agreement would not constitute a variation in the agreement, notwithstanding that there is a variation of the child support amount payable.

Our Comments

As you know, generally, under the “new rules”, child support payments made pursuant to an agreement or court 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. Subparagraph (b)(ii) of the definition of “commencement day” in subsection 56.1(4) of the Act provides that where an agreement or order is varied after April 1997 to change the child support amounts payable to the recipient, the day on which the first payment of the varied amount is required to be made is the commencement day of the order or agreement.

It is our view that an agreement or order made before May 1997 has not been varied where there is a COLA provision in the agreement or order to automatically increase child support amounts payable. Accordingly, there would not be a commencement day as a result of a COLA clause, in itself.

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
Policy and Legislation Branch