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 separation agreement dated XXXXXXXXXX , provides that XXXXXXXXXX . shall pay to his wife $XXXXXXXXXX per month as spousal support and $XXXXXXXXXX per month for child support, commencing XXXXXXXXXX . The taxpayers were divorced on XXXXXXXXXX . A verbal agreement between the taxpayers changed the child support to $XXXXXXXXXX per month and eliminated spousal support commencing XXXXXXXXXX . A written agreement dated XXXXXXXXXX provides that the XXXXXXXXXX written agreement continues to have legal force and effect except as varied by the XXXXXXXXXX agreement. The XXXXXXXXXX agreement provides that the parties agree that the Schedule A separation agreement be amended retroactive to XXXXXXXXXX , to provide for monthly child support payable of $XXXXXXXXXX per month. The XXXXXXXXXX agreement provides that the Schedule A separation agreement is amended to rescind all spousal support effective XXXXXXXXXX and that XXXXXXXXXX is required to pay to his former spouse $XXXXXXXXXX plus interest in satisfaction of all child and spousal support arrears and all claims for future spousal support and all interest accrued on the arrears of support. The XXXXXXXXXX agreement also states that XXXXXXXXXX has paid to his former spouse $XXXXXXXXXX per month for child support from XXXXXXXXXX , to XXXXXXXXXX ; and $XXXXXXXXXX per month for child support since XXXXXXXXXX ; and $XXXXXXXXXX per month for spousal support up to XXXXXXXXXX and no spousal support is payable after that date.
1) Is subparagraph (b)(ii) of the definition of "commencement day" in subsection 56.1(4) of the Act applicable to the XXXXXXXXXX separation agreement? 2) Do subsections 56.1(3) and 60.1(3) of the Act apply? 3) Is the $XXXXXXXXXX lump sum payment in satisfaction of all child and spousal support arrears and all claims for future spousal support and all interest accrued on the arrears of support taxable and deductible?
Position:
1) Yes, subparagraph (b)(ii) of the definition of "commencement day" in subsection 56.1(4) of the Act applies such that there is a commencement day for the XXXXXXXXXX written agreement.
2) XXXXXXXXXX , it is our view that subsections 56.1(3) and 60.1(3) of the Act are not applicable in this particular case.
3) Insufficient information to determine if the $XXXXXXXXXX lump sum payment is taxable/deductible. General comments provided.
Reasons: See 9804967, 9812307, 9731995, 9824705, 981266, 9806525, 9801315, 9823445, 9829345, 9922586, 9909419, 9907417, 9832235, 9910845
November 29, 1999
Northern B.C. and Yukon T.S.O HEADQUARTERS
G. Moore
Attention: Diane Cook 952-1506
Problem Resolution
7-992509
Child Support Payments - Definition of "Commencement Day" in Subsection 56.1(4)
We are writing in reply to your memo of September 15, 1999, in which you asked for our opinion concerning whether there is a commencement day (as defined in subsection 56.1(4) of the Income Tax Act (the "Act")) for the written agreement dated XXXXXXXXXX, as varied by the written agreement dated XXXXXXXXXX, between XXXXXXXXXX.
As we understand the situation, a separation agreement dated XXXXXXXXXX, between the above-mentioned taxpayers provides that XXXXXXXXXX shall pay to his wife $XXXXXXXXXX per month as spousal support until she remarries or begins cohabitation with an adult male other than a relative, and $XXXXXXXXXX per month for their minor child, XXXXXXXXXX, as child support, commencing XXXXXXXXXX. The taxpayers were divorced on XXXXXXXXXX. A verbal agreement between the taxpayers changed the child support to $XXXXXXXXXX per month and eliminated spousal support commencing XXXXXXXXXX. A written agreement dated XXXXXXXXXX provides that the XXXXXXXXXX written agreement continues to have legal force and effect except as varied by the XXXXXXXXXX agreement. Paragraph XXXXXXXXXX of the XXXXXXXXXX written agreement provides that the parties agree that the Schedule A separation agreement be amended retroactive to XXXXXXXXXX, to provide for monthly child support payable of $XXXXXXXXXX per month. Paragraph XXXXXXXXXX of the XXXXXXXXXX written agreement provides that the Schedule A separation agreement is amended to rescind all spousal support effective XXXXXXXXXX. Pursuant to paragraph XXXXXXXXXX of the XXXXXXXXXX written agreement, XXXXXXXXXX is required to pay to his former spouse $XXXXXXXXXX plus interest in satisfaction of all child and spousal support arrears and all claims for future spousal support and all interest accrued on the arrears of support. The XXXXXXXXXX written agreement also states that XXXXXXXXXX has paid to his former spouse $XXXXXXXXXX per month for child support from XXXXXXXXXX; and $XXXXXXXXXX per month for child support since XXXXXXXXXX. The XXXXXXXXXX written agreement also states that XXXXXXXXXX has paid to his former spouse $XXXXXXXXXX per month for spousal support up to XXXXXXXXXX and no spousal support is payable after that date.
A review of the documentation submitted indicates that the XXXXXXXXXX written agreement still has legal force and effect except as varied by the XXXXXXXXXX written agreement. Accordingly, it is our view that subparagraph (b)(ii) of the definition of "commencement day" in subsection 56.1(4) of the Income Tax Act (the "Act") would apply since the XXXXXXXXXX written agreement is varied after April 1997 to change the child support amounts payable to the recipient. The commencement day of the XXXXXXXXXX agreement isXXXXXXXXXX, which is the "day, if any, that is after April 1997 and the day on which the first payment of the varied amount ($XXXXXXXXXX) is required to be made". In our view, the first day on which the varied amount is required to be made, that is after April 1997, would be XXXXXXXXXX, and consequently, any child support payments made on or after XXXXXXXXXX , the commencement day of the XXXXXXXXXX written agreement, would not be taxable in the hands of the recipient or deductible by the payer. Any verbal agreement made between XXXXXXXXXX to reduce the child support amount payable from $XXXXXXXXXX to $XXXXXXXXXX is not recognized for purposes of the maintenance and alimony provisions of the Act.
It is also our view that subsections 56.1(3) and 60.1(3) of the Act would not apply to the XXXXXXXXXX variation of the XXXXXXXXXX written agreement. The purpose of subsections 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) are not applicable to this particular case.
Paragraph XXXXXXXXXX of the XXXXXXXXXX written agreement requires that XXXXXXXXXX make a lump sum payment of $XXXXXXXXXX plus interest in satisfaction of all child and spousal support arrears and all claims for future spousal support and all interest accrued on the arrears of support. We do not have sufficient information to determine if this lump sum payment of arrears would be taxable/deductible. A lump sum payment in settlement of a debt for an amount that is less than the amount of the accumulated arrears of child and spousal support payments does not represent a payment in respect of periodic payments required by a written agreement or court order. If a lump sum payment is being paid in accordance with an agreement that provides for an amount that is less than the accumulated arrears set out in the agreement on the condition that the right to collect the balance of the arrears would be waived, then the lump sum payment would not be deductible to the payer or taxable to the recipient. A lump sum payment that represents accumulated arrears in respect of support payments payable on a periodic basis that is recognized in a post-April 1997 written agreement or court order would not be considered, in and by itself, to be a child support amount that became payable under a post-April 1997 written agreement or court order, but rather would represent an amount in respect of periodic support payments that became payable under a pre-May 1997 written agreement or court order that had fallen into arrears. "Support amount" is defined in subsection 56.1(4) of the Act to mean an amount payable or receivable as an allowance on a periodic basis for the maintenance of the recipient, children of the recipient or both if the recipient has discretion as to the use of the amount... . According to Black's Law Dictionary, Sixth Edition, "payable" means justly due; legally enforceable. A sum of money is said to be payable when a person is under the obligation to pay it. The subtlety in the wording of these paragraphs distinguishes between paid and payable. 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 lump sum payment of pre-May 1997 arrears in this manner would be deductible/taxable as long as the lump sum payments related to the periodic payments ordered by an agreement or order before May 1, 1997. We note that, in this particular case, the lump sum payment of $XXXXXXXXXX is not only for child support and spousal support arrears but is also in satisfaction of future spousal support and therefore, does not appear to be deductible/taxable, based on the limited information available.
Lastly, it is not clear whether XXXXXXXXXX actually paid to his former spouse $XXXXXXXXXX per month for child support and $XXXXXXXXXX per month for spousal support from XXXXXXXXXX to XXXXXXXXXX and deducted this amount as support payments on his XXXXXXXXXX returns and whether XXXXXXXXXX included these amounts as income on her XXXXXXXXXX returns. The XXXXXXXXXX agreement indicates that XXXXXXXXXX has paid the monthly child support of $XXXXXXXXXX since XXXXXXXXXX, and monthly child support of $XXXXXXXXXX from XXXXXXXXXX, up to and including XXXXXXXXXX. In addition, the XXXXXXXXXX agreement also indicates that XXXXXXXXXX has paid to XXXXXXXXXX monthly spousal support of $XXXXXXXXXX up to and including XXXXXXXXXX and no spousal support is payable after that. If XXXXXXXXXX has, in fact, paid these amounts to XXXXXXXXXX in those years as the XXXXXXXXXX agreement suggests, then it is not clear why the XXXXXXXXXX agreement requires XXXXXXXXXX to pay a lump sum of $XXXXXXXXXX in respect of child support and spousal support arrears. You may need to obtain additional information such as receipts or post-dated cheques from the client to resolve this matter.
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 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. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.
We trust our reply will be of assistance in this matter.
J. Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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