12 November 1998 Internal T.I. 9825917 - AMOUNTS DEDUCTED FROM SPOUSAL 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:

Tax implications of the following deductions made from spousal support payments:

1. In accordance with the terms of a separation agreement, the paying spouse (the “Husband”) reduced the support payments in order to repay a debt owing to him from the recipient spouse (the “Wife”) (i.e., the debt owing by the Wife to the Husband is settled by offset against the payment of spousal support).

2. The Husband makes the mortgage payments on the Wife’s residence and reduces the support payments by this amount.

Position TAKEN:

1. The mere offset does not change the nature of the gross amount of the support payment, such that the amount offset is considered paid and received by the spouses. Accordingly, the $XXXXXXXXXX which was offset against the $XXXXXXXXXX monthly spousal support, as a repayment of the Wife’s $XXXXXXXXXX debt to the Husband, in accordance with the terms of the separation agreement, qualified for deduction to the Husband and income inclusion to the Wife as alimony or maintenance.

2. The mortgage payments made by the Husband on the Wife’s residence do not qualify for the deduction or the income inclusion provided under paragraphs 60(b) and 56(1)(b), respectively.

Reasons FOR POSITION TAKEN:

1. Paragraph 10 of IT-118R3, Armstrong, 88 DTC 1015, and Gibson, 95 DTC 749.

2. A payment to a third party will only qualify for the deduction under paragraph 60(b) if, inter alia, either subsection 60.1(1) or 60.1(2) applies to the payment.

In general terms, where subsection 60.1(1) applies, an amount paid to a third party for the benefit of the recipient spouse, children of the recipient spouse or both is deemed to have been paid to and received by the recipient spouse. However, the recipient spouse must also have discretion as to the use of the amount paid in order for it to qualify for income inclusion to the recipient spouse and deduction to the payer. For an individual to have discretion as to the use of an amount paid to a third party, the individual must have the ability to redirect the payment to some other purpose at any time. Based on the limited information provided, it does not appear that, in the above circumstances, the Wife could, at her discretion, redirect the amount representing the mortgage payments at any time.

In order for subsections 56.1(2) and 60.1(2) to apply in respect of a third party payment described therein, the relevant written agreement or court order must specifically provide that these subsections apply to any amount paid or payable under the agreement or order. These provisions clearly do not apply in the above circumstances, as neither the original agreement or the amendment made reference to the application of these provisions.

		November 12, 1998

Ottawa Tax Services Office HEADQUARTERS
Client Services Division M. Azzi
Attention: Denise Belair 957-8972
Team Leader
7-982591

Spousal Support - XXXXXXXXXX

This is in reply to your memo of October 2, 1998, wherein you requested our views on the tax implications of the deductions made from the spousal support payments received by XXXXXXXXXX (the “Wife”) from XXXXXXXXXX (the “Husband”).

At the outset, we wish to note that, as discussed (Azzi/Greenberg), the facts in the documentation submitted are unclear, contradictory and, in certain instances, illegible. The comments which we will provide are based on the facts as we understand them. However, we strongly suggest that you ensure that these facts are accurate prior to replying to the taxpayer’s request.

We understand that, under a separation agreement of XXXXXXXXXX (the “Original Agreement”), the Husband is required to pay to the Wife $XXXXXXXXXX monthly for her support. Under the Original Agreement, the Husband also conveys all of his interests in the XXXXXXXXXX property, a former rental property, to the Wife, for her to occupy. The Original Agreement also provides that the Husband will lend $XXXXXXXXXX to the Wife in order to enable her to pay for the repairs required at the XXXXXXXXXX property, which loan she will repay upon the sale of the XXXXXXXXXX property, without interest. However, if this property is not sold within the XXXXXXXXXX years following the agreement, the Wife agrees to repay the loan to the Husband at the expiration of the XXXXXXXXXX year period and, if the Wife fails to repay the loan, the Original Agreement provides that “XXXXXXXXXX". It appears from your “Memo for File” dated September 18, 1998 that, in accordance with the terms of the Original Agreement, the Husband would have deducted $XXXXXXXXXX per month from the monthly support payments made to the Wife, for XXXXXXXXXX consecutive months from XXXXXXXXXX inclusive, to repay the $XXXXXXXXXX loan. You question whether the $XXXXXXXXXX withheld is spousal support and should therefore be included in the Wife’s income for the relevant years (and, accordingly, deductible to the Husband).

In a XXXXXXXXXX amendment (the “Amendment”) to the Original Agreement, the Husband and Wife agree that from the $XXXXXXXXXX payable to the Wife, the Husband “XXXXXXXXXX”. In this regard, we understand that he makes a total of $XXXXXXXXXX in mortgage payments annually to the XXXXXXXXXX for the mortgage on the Wife’s residence (XXXXXXXXXX), and reduces the Wife’s support payments by the same amount. It appears from your “Memo for File”, in reference to the XXXXXXXXXX letters between the lawyers of the Husband and the Wife, that the Husband has been making the mortgage payments since the beginning of the separation and deducting them from the Wife’s monthly payments. A second issue is therefore whether these mortgage payments made on behalf of the Wife qualify as spousal support and should be included in the Wife’s income and deductible to the Husband.

Our Comments

Repayment of $XXXXXXXXXX Loan From Husband to Wife

Paragraph 10 of IT-118R3 deals with the situation where the parties agree that a debt owing by the recipient to the payer of spousal support is settled by offset against the payment of spousal support. In these circumstances, the mere offset does not change the nature of the gross amount of the support payment, such that the amount offset is considered paid and received by the spouses. Accordingly, in our view, the $XXXXXXXXXX which was offset against the $XXXXXXXXXX monthly spousal support, as a repayment of the Wife’s $XXXXXXXXXX debt to the Husband, in accordance with the terms of the Original Agreement, qualified for deduction to the Husband and income inclusion to the Wife as alimony or maintenance. These views on the implications of offsets are consistent with the views expressed by the Tax Court of Canada in Armstrong v. MNR, 88 DTC 1015, and Gibson v. The Queen, 95 DTC 749.

Mortgage Payments

A payment to a third party (i.e., to a person other than the payer’s spouse, former spouse or the parent of a child of whom the payer is the natural parent (the “recipient spouse”)) will only qualify for the deduction under paragraph 60(b) of the Income Tax Act (the “Act”) if, inter alia, either subsection 60.1(1) or 60.1(2) of the Act applies to the payment. Similarly, subsection 56.1(1) or 56.1(2) of the Act would apply for purposes of the income inclusion to the recipient spouse.

In general terms, where subsection 60.1(1) of the Act applies, an amount paid to a third party for the benefit of the recipient spouse, children of the recipient spouse or both is deemed to have been paid to and received by the recipient spouse. However, the recipient spouse must also have discretion as to the use of the amount paid in order for it to qualify for income inclusion to the recipient spouse and deduction to the payer. For an individual to have discretion as to the use of an amount paid to a third party, the individual must have the ability to redirect the payment to some other purpose at any time. Based on the limited information provided, it does not appear that, in the above circumstances, the Wife could, at her discretion, redirect the amount representing the mortgage payments at any time (in fact, it appears that the mortgage is in the Husband’s name and that the payments are automatically drawn from his account at the XXXXXXXXXX). In our view, the Wife therefore does not have discretion as to the use of the mortgage payments and, consequently, the application of subsections 56.1(1) and 60.1(1) of the Act, in these circumstances, cannot result in an income inclusion and deduction of these amounts. We would also note that, as a general rule, the recipient spouse does not have discretion as to the use of an amount paid to a third party in respect of a mortgage on the recipient spouse’s residence; hence the existence of subsections 56.1(2) and 60.1(2) of the Act.

In order for subsections 56.1(2) and 60.1(2) of the Act to apply in respect of a third party payment described therein, the relevant written agreement or court order must specifically provide that these subsections apply to any amount paid or payable under the agreement or order. These provisions clearly do not apply in the above circumstances, as neither the Original Agreement or the Amendment made reference to the application of these provisions. It is therefore our view that the mortgage payments made by the Husband on the XXXXXXXXXX property do not qualify for the deduction or the income inclusion provided under paragraphs 60(b) and 56(1)(b) of the Act, respectively.

We would also note that in order to qualify for income inclusion and deduction the support must, inter alia, be receivable “under a written agreement” (or “pursuant to a written agreement” under former paragraphs 56(1)(b) and 60(b)). Accordingly, it is arguable that the mortgage payments made by the Husband on the XXXXXXXXXX property, prior to the Amendment, cannot be said to have been paid or received under (or pursuant to) a written agreement, as the Original Agreement did not contain any provision addressing these mortgage payments. In our view, the XXXXXXXXXX correspondence between the lawyers of the Husband and the Wife does not constitute a written agreement. In this regard, paragraph 5 of IT-118R3 provides that to qualify as a written agreement: “The agreement must be duly signed and dated by both parties...Informal writings such as correspondence and memoranda between a husband and a wife, or between their respective solicitors, will not be considered a valid written separation agreement.”

Other

Section XXXXXXXXXX of the Amendment provides that the source of the $XXXXXXXXXX/year support will be in part “XXXXXXXXXX”. It is unclear, from the information provided, how this pension entitlement has been calculated, whether the Husband severed his pension into two parts (one for himself and one for the Wife - section XXXXXXXXXX of the Original Agreement) and whether the applicable pension legislation permitted such severing. The issue in this regard is whether the $XXXXXXXXXX/year in payments are support amounts, or whether they are the Wife’s superannuation or pension benefits. While we have not been provided with sufficient information in order to make this determination, we would note, that if upon a review of the relevant facts it is established that the pension was in fact severed and that the Wife acquired an interest in the pension, then her share of the pension benefits should be included in her income as superannuation or pension benefits under subparagraph 56(1)(a)(i) of the Act, and not in the Husband’s income. In these circumstances, the Wife’s share of the pension benefits would therefore not fall within the purview of paragraphs 56(1)(b) and 60(b) of the Act. As indicated in paragraph 11 of IT-499R, this tax treatment applies even if the administrator of the pension plan issues one cheque to the plan member who is required to apportion the payments.

XXXXXXXXXX

We trust that these comments will be of assistance.

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch