23 December 1999 Internal T.I. 9917277 - RETROACTIVITY - SUPPORT PAYMENTS

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) Court Order dated XXXXXXXXXX awarding retroactive payments from XXXXXXXXXX What is the tax treatment?

Position: 1) Commencement day is XXXXXXXXXX .

Taxed under new regime
Problems with retroactivity and statute barred issues

Reasons: 1) 56 (4) Commencement day
Intent is to apply the new rules

		December 23, 1999

St. Catherines TSO	HEADQUARTERS
	VECR	C. Tremblay
		957-2139
	Attention:  Sharon Frydendahl
		991727

Retroactivity of a court order for child support

This is in reply to your facsimile of June 9, 1999, to Louis Garneau of Client Services Directorate who forwarded it to us for response. In the situation described, you ask whether a court order dated XXXXXXXXXX changing the child support amounts retroactively from XXXXXXXXXX has a commencement date. Our understanding of the facts is as follows:

1. The divorce of XXXXXXXXXX became effective on XXXXXXXXXX was given custody of the children in a XXXXXXXXXX court order.

2. In a XXXXXXXXXX court order XXXXXXXXXX is required to pay child support of $XXXXXXXXXX a month commencing XXXXXXXXXX.

3. A XXXXXXXXXX court order sets a new child support amount of $XXXXXXXXXX per month retroactive to XXXXXXXXXX.

4. An XXXXXXXXXX court order (the "1997 Court Order") confirms custody of the children as outlined in the XXXXXXXXXX order and dismisses a claim by XXXXXXXXXX for an equalization payment. The court further orders that the previous orders be suspended and replaced with new access entitlements. Child support is ordered in the amount of $XXXXXXXXXX per month retroactive to XXXXXXXXXX is given credit for all court ordered support paid by him from XXXXXXXXXX.

5. On XXXXXXXXXX files an affidavit in Ontario court outlining child support arrears taking into account the 1997 Court Order.

6. On XXXXXXXXXX property standing as security for child support is vested in XXXXXXXXXX absolutely and XXXXXXXXXX sells the property for $XXXXXXXXXX , and after a $XXXXXXXXXX mortgage payout, a balance of $XXXXXXXXXX is left of which $XXXXXXXXXX is paid to XXXXXXXXXX and the remainder to another creditor.

You have provided us with a copy of the 1997 Court Order ordering XXXXXXXXXX to pay XXXXXXXXXX support for their two children for the sum of $XXXXXXXXXX a month commencing XXXXXXXXXX.

Our Comments:

Generally, the new child support rules apply to agreements and court orders "made" after April 1997. Paragraph (a) of the definition of "commencement day" in subsection 56.1(4) of the Income Tax Act (the "Act") states that an agreement or order made after April 1997 will have a commencement day on the day the agreement or order is made. It is our view that generally, an order is "made" when it is rendered. Since the 1997 Court Order has legal force and effect with respect to the amount of child support payable and is simply not a clarification of, or an amendment to, a previous order, we would consider this a new order and not a variance order. Accordingly, pursuant to paragraph (a) of the definition of "commencement day", we are of the opinion that the 1997 Court Order has a "commencement day" as of XXXXXXXXXX.

Paragraph 60(b) provides the formula for determining the amount a payer may deduct for support amounts paid in a taxation year and, in general, the effects of the formula are that if the court order has a commencement day, child support amounts paid on or after the commencement day of the order for a period that began on or after that day are not deductible by the payer.

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 (the "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 such first amount was paid and received. Accordingly, an agreement or order made after April 1997 with a retroactive provision, may be deemed to have been made before May 1997.

It is our view that subsections 56.1(3) and 60.1(3) of the Act would not apply to the 1997 Court Order. The purpose of subsection 56.1(3) and 60.1(3) of the Act is to permit tax relief to the parties involved (for the year in which the agreement or order is made and the immediately preceding year) where support payments have been made before a written agreement or court order is made. Accordingly, XXXXXXXXXX, the better view is that subsections 56.1(3) and 60.1(3) of the Act are not applicable to this particular case.

We do not have sufficient information to determine if the $XXXXXXXXXX lump sum payment of arrears would be taxable/deductible. Generally, as indicated in paragraph 22 of IT-530, Support Payments, a lump sum payment that a court order or written agreement requires to be made in respect of a prior period to the date of that order or agreement, would not qualify as periodic payments. However, a lump sum paid in a taxation year is regarded as qualifying as a periodic payment where it can be identified as being the payment of amounts payable periodically that were due after the date of the order or agreement and had fallen into arrears. In the case at hand, if the client can show that he did in fact fall into arrears with respect to child support amounts payable pursuant to the XXXXXXXXXX court order and the XXXXXXXXXX court order, then we would be inclined to accept that the portion of the lump sum payment of $XXXXXXXXXX that relates to arrears from those previous mentioned court orders as deductible/taxable. However, the portion of the lump sum payment of $XXXXXXXXXX that relates to arrears arising from the $XXXXXXXXXX per month retroactive provision as set out in the 1997 Court Order would not constitute a support amount for those reasons explained above.

Should the client or his representative submit an argument with respect to the application of paragraphs 56.1(3) and 60.1(3) of the Act, we would be glad to review the matter again at that time.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Custom and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Request for this latter version should be made by you to Jackie Page at (819) 994-2898. The severed copy will be sent to you for delivery to the client.

Jim Wilson
Manager
Business, Property and Employment Section
Business and Publications Division
Policy and Legislation Branch
Income Tax Rulings and
Interpretations Directorate

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