16 September 1999 External T.I. 9922235 - SPOUSAL SUPPORT THIRD PARTY MORTGAGE

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: What is the tax treatment of child support amounts payable and spousal amounts payable pursuant to an order made after April 1997?

Position: Child support payments made pursuant to a written agreement or court order that has a "commencement day", as defined in subsection 56.1(4) of the Act, are subject to the new rules and, as such, are not deductible by the payer and are not required to be included in the income of the recipient. Spousal support amounts made pursuant to a post-April 1997 written agreement or court order would be deductible under paragraph 60(b) and taxable under paragraph 56(1)(b) provided all the other conditions of those provisions are met.

Reasons: See 980582, E8M18459, 9825917, 9902707, 9900035, 9823157, 990941

	xxxxxxxxxx	992223
G. Moore
September 16, 1999

Dear XXXXXXXXXX:

Re: Support Payments

We are replying to your letter of August 1, 1999, regarding support payments.

You are asking for our views regarding your interim court order dated XXXXXXXXXX. The court order specifies that you are required to pay spousal support of $XXXXXXXXXX weekly to XXXXXXXXXX on account of mortgage payments on the matrimonial home. The court order also indicates that subsections 60.1(2) and 56.1(2) of the Income Tax Act (the “Act") shall apply to those payments. Interim child support of $XXXXXXXXXX per month is also required to be paid by you pursuant to this order.

Our Comments

Written confirmation of the consequences inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Where the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature,

As you may know, child support payments made pursuant to a written agreement or court order that has a " commencement day” as defined in subsection 56.1(4) of the Act, are subject to the new rules and, as such, are not deductible by the payer and are not required to be included in the income of the recipient. Child support payments made pursuant to an agreement or order that has no “commencement day" will, generally, be subject to the old rules. 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 of "commencement day" provides for a "commencement day" in respect of an agreement or order made before May 1997, and applies in certain specific situations, such as where the parties elect to have the new rules apply or certain terms of the agreement or order are changed. A "child support amount" is defined in subsection 56.1(4) of the Act as any support amount that is not identified in the agreement or order under which it is receivable as being solely for the support of a recipient who is a spouse or former spouse of the payer or who is a natural parent of a child of whom the payer is a natural parent. Spousal support amounts made pursuant to a post-April 1997 written agreement or court order would be deductible under paragraph 60(b) and taxable under paragraph 56(1)(b) provided all the other conditions of those provisions are met.

Paragraph 60(b) of the Act permits a deduction in computing a taxpayer's income for a taxation year in respect of certain support payments made (e.g., spousal support). A payment to a third party (i.e., to a person other than the payer's spouse, former spouse or 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 Act if, among other criteria, 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 the amount paid to a third party, the individual must have the ability to redirect the payment to some other purpose at any time.

Subsection 60.1(2) of the Act provides, in part, that certain payments, whether periodic or nonperiodic, made to third parties by a payer for the benefit of a former spouse for specific expenses required to be paid pursuant to an order shall be deemed to have been received by the former spouse as an allowance on a periodic basis and that the former spouse is deemed to have discretion as to the use of that amount. This deeming provision allows the payer to obtain a deduction for these payments where they otherwise meet the requirements of paragraph 60(b) of the Act. Additionally, in order for the provision to apply, the order must specifically state that subsections 60.1(2) and 56.1(2) are to apply to the payments.

A review of the interim order dated XXXXXXXXXX, you submitted indicates the order does specify that subsections 56.1(2) and 60.1(2) of the Act apply to the third party mortgage payments payable by you to XXXXXXXXXX. Generally, this would allow you to obtain a deduction for these payments as spousal support amounts if the payments otherwise meet the requirements of paragraph 60(b) of the Act. As the interim order was made after April 1997, the order has a “commencement day” and accordingly, child support amounts paid by you of $XXXXXXXXXX per month, pursuant to the order, would not be taxable or deductible.

In your letter, you are asking that we review your 1998 income tax return with respect to your disallowed spousal support claim of $XXXXXXXXXX for third party mortgage payments. In this regard, we have referred your file to Ms Louise Fortier, Problem Resolution Officer, Shawinigan Taxation Centre, for review. Should you wish to contact Ms Fortier, you may telephone her by calling (819) 537-7092 collect. Ms Fortier has been apprised of your situation and will be pleased to assist you.

We trust our comments will be of assistance to you.

Yours truly,

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