14 December 1998 External T.I. 9824705 - 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:

A taxpayer is in arrears in respect of child support payments set out in a court order. The child support is deductible by the payer under paragraph 60(b) of the Act and is required to be included in the income of the recipient under paragraph 56(1)(b) of the Act. A new order is issued after April 1997 which varies the child support amount payable in the initial order and sets out the amount of the arrears (the “Arrears”) that is not subject to the new regime. In the alternative, the new order may set out an amount (the “Reduced Arrears”) that is less than the amount of the arrears.

If the Arrears are paid to the Recipient in a year when all child support subject to the new regime has been paid, is the recipient required to include the Arrears in income? In the alternative, if the Reduced Sum is paid in similar circumstances, is the Reduced Sum required to be included in income?

Position:

The Arrears would be required to be included in the recipient’s income. On the other hand, the Reduced Arrears would not be taxable in the hands of the recipient if it was paid to obtain a release from a liability imposed by the first order (i.e., the “Reduced Arrears” cannot be identified as amounts payable periodically under the initial order).

Reasons:

The comments are consistent with paragraph 22 of the new draft IT on “Support Payments”.

XXXXXXXXXX 982470
M. Eisner
December 14, 1998

Dear XXXXXXXXXX:

Re: Child Support

This is in reply to your letter of August 30, 1998, concerning the above-noted subject.

In the situation with which you are concerned, a taxpayer (the “Payer”), pursuant to a court order (the “First Order”) made prior to May 1, 1997, was required to make child support payments to a recipient (the “Recipient”). The payments made under the First Order were required to be included in the income of the Recipient under paragraph 56(1)(b) of the Income Tax Act (the “Act”) and were deductible by the Payer under paragraph 60(b) of the Act. However, as a result of an application that was made to the court, a new court order (the “Second Order”) was made after April 1997 which varied the child support amount payable under the First Order and set out a lump sum payment that the payer was required to pay to the recipient. The lump sum payment reflected amounts of child support (“Arrears”) in respect of the First Order that the Payer had not yet paid to the Recipient. The Second Order also sets out an interest rate that the Payer is required to pay to the Recipient in respect of the Arrears.

Lump sum amounts in respect of the Arrears, as well as interest, have now been paid by the Payer subsequent to the time of the Second Order.

One of your concerns is whether payments made by the Payer in respect of the Arrears received by the Recipient are required to be included in the Recipient’s income under paragraph 56(1)(b) of the Act. In connection with this concern you have asked us whether the fact that the Second Order sets out an interest rate in respect of the Arrears changes the nature of the payments received by the Recipient in respect of the Arrears. Your third concern is whether amounts received by the Recipient would be taxable if the Arrears had been reduced by the court with the reduced amount (the “Reduced Sum”) being set out in the Second Order.

Our Comments

In order to determine the tax consequences of a situation such as that set out above, it is necessary to review all the relevant facts and documentation including the two orders. Accordingly, the following comments on the above situation must be regarded as being general in nature rather than having been made in respect of an actual situation.

Generally, under the new regime, payments of child support amounts payable pursuant to a court order are not deductible by the payer and the payments are not required to be reported by the recipient. The new regime applies to a court order if the order has a “commencement day” which is defined in subsection 56.1(4) of the Act. Where a court order is made before May 1997 and the court order is varied by a second court order made after April 1997 to change the child support amounts payable, there would be a commencement day with respect to the initial order which is the day on which the first varied amount is required to be made. Where an order has a commencement day, child support amounts payable under the order on or after that day in respect of a period that began on or after its commencement day are non-taxable to the recipient and non-deductible by the payer. However, this would not have any effect on payments that are set out in the second order that reflect support amounts that were payable under the initial order that had fallen into arrears, notwithstanding that an interest rate in respect of the arrears was also specified in the second order.

The arrears, that are recognised by the court in the second order made after April 1997, would not be considered, in and by themselves, to be a child support amount that became payable by the payer under the post-April 1997 court order. Rather the arrears would represent an amount in respect of periodic child support payments that became payable by the payer under the initial court order, that had fallen into arrears.

Part of the definition of “support amount” in subsection 56.1(4) of the Act refers to an amount payable or receivable as an allowance on a periodic basis for the maintenance of children of the recipient. A sum of money is said to be payable when a person is under the obligation to pay it. However, the amount paid does not necessarily have to be paid periodically 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. It is our general view 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.

It would follow that in the above situation, the receipt of the Arrears would be taxable to the Recipient under paragraph 56(1)(b) of the Act. On the other hand, if the Reduced Sum is paid by the Payer to obtain a release from a liability imposed by the

First Order in respect of arrears of maintenance payments (i.e., the Reduced Sum cannot be identified as amounts payable periodically under the First Order), it would not be required to be included in the income of the Recipient. We also note that interest in respect of the Arrears or the Reduced Amount is subject to tax.

There is no alleviating provision in the Act, such as forward averaging, with respect to the taxation of the receipt of a taxable sum that represents child support arrears.

As a final comment, when non-deductible child support under the new regime and deductible child support arrears are payable in a calendar year, payments made in the year are considered to have been made first towards the child support payable under the new regime. The result is that required child support payable under the new regime, for current and previous years, has to be fully paid before payments for arrears are taxable. The above comments on Arrears are subject to these comments.

We trust that 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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