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 written agreement dated XXXXXXXXXX , between the taxpayer and his spouse indicates that they agree that the recipient spouse will report the payments made for child and spousal support on her income tax return and that the payer will claim the payments on his income tax return. The agreement also stipulates that the payer will pay any income tax liability incurred by the recipient spouse as a result of the recipient reporting the spousal and child support payments on her tax return. Furthermore, the agreement indicates that any tax benefit resulting from this arrangement will be split evenly between the parties. However, the written agreement does not indicate how much spousal or child support amounts payable is required to be made.
A court order dated XXXXXXXXXX , requires the payer to pay $XXXXXXXXXX per month in spousal and child support effective XXXXXXXXXX . The court order also provides that, for income tax purposes, the recipient spouse will report the support payments as income on her income tax return and the payer will claim the support payments as deductions on his income tax return.
Is the court order considered to be a court order made after April 1997? Are the child support and spousal support payments made pursuant to the court order taxable and deductible under the provisions of the Act because the wording of the court order orders that they are deductible and taxable for income tax purposes.
Position: Yes, the court order dated XXXXXXXXXX , is considered to be a court order made after April 1997 and paragraph (a) of the definition of “commencement day” in subsection 56.1(4) applies. The global child support and spousal support payments of $XXXXXXXXXX per month, commencing XXXXXXXXXX , are not deductible to the payer or taxable to the recipient.
Reasons: Paragraph (a) of the definition of “commencement day” in subsection 56.1(4) states that where an agreement or order is made after April 1997, the commencement day of the agreement or order is the day it is made. The written agreement dated XXXXXXXXXX , does not require that support payments are to be made by the payer nor does it indicate the amount of the support payments that are to be made. Accordingly, any support payments made before the date of the court order are not taxable or deductible. In this particular case, subsections 56.1(3) and 60.1(3) do not apply. There is no indication from the wording of the court order that the payments made prior to the court order are deemed to be made pursuant to the court order.
The global child support and spousal support amounts payable of $XXXXXXXXXX per month is not deductible or taxable under the Income Tax Act because the court order is an order made after April 1997 and it has a commencement day of XXXXXXXXXX . See file # 9801315. The tax consequence of an amount received does not arise merely because a court order has so stipulated. A payment made pursuant to an order becomes deductible, not because the order so stipulates, but rather because it meets the criteria for deductibility set out in the relevant provisions of the Act. Similarly, a payment becomes income in the hands of the recipient if the
payment satisfies the criteria set out in the relevant provisions of the Act at the time of the payment.
October 21, 1998
W. Neil HEADQUARTERS
Client Assistance G. Moore
Halifax Taxation Services Office 952-1506
7-982376
Child Support Payments - Definition of “Commencement
Day” in Subsection 56.1(4)
We are writing in reply to your memo of September 9, 1998, 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 court order XXXXXXXXXX.
As we understand the situation, a written agreement dated XXXXXXXXXX, between the above-mentioned individuals, indicates that they agree that XXXXXXXXXX will report the payments made for child and spousal support on her income tax return and that XXXXXXXXXX will claim the payments on his income tax return. The agreement also stipulates that XXXXXXXXXX will pay any income tax liability incurred by XXXXXXXXXX as a result of the recipient reporting the spousal and child support payments on her tax return. Furthermore, the agreement indicates that any tax benefit resulting from this arrangement will be split evenly between the parties. However, the written agreement does not indicate how much spousal or child support amounts are required to be made. As discussed in a telephone conversation of October 8, 1998 (Neil/Moore), it is your understanding that there is no pre-May 1997 written agreement between XXXXXXXXXX specifying the amount of global child and spousal support amounts payable; however, XXXXXXXXXX was apparently making payments of an unspecified amount to XXXXXXXXXX on a voluntary basis before the court order dated XXXXXXXXXX, (as discussed below) was issued. It is your understanding that XXXXXXXXXX believes he should be entitled to deduct these payments to XXXXXXXXXX even though they were not made pursuant to a written agreement.
A court order dated XXXXXXXXXX, requires the payer to pay $XXXXXXXXXX per month in spousal and child support effective XXXXXXXXXX. The court order also provides that, for income tax purposes, the recipient spouse will report the support payments as income on her income tax return and the payer will claim the support payments as deductions on his income tax return.
As you know, the basic thrust of the new child support provisions is to eliminate both the requirement to include child support in the custodial or recipient parent’s income and the deduction available to payers of child support. Generally, the new rules apply to agreements or court orders made after April 1997. However, by virtue of the definition of “commencement day” in subsection 56.1(4) of the Act, the new rules apply to child support amounts paid under the terms of an agreement or order made before May 1997 if:
1. the parties both sign and file an election with the Department agreeing that the new tax rules will apply to the existing order or agreement after a specified date (no earlier than May 1, 1997),
2. the parties change the child support amounts payable to the recipient by amending the agreement or court order after April 1997,
3. another agreement or order is made after April 1997 and the effect of the subsequent agreement or order is to change the total child support amounts payable to the recipient by the payer, or
4. the order or agreement specifically provides that the new tax rules will apply after a specific date (no earlier than May 1, 1997).
For a court order made after April 1997, the “commencement day” would be the day the court order is made. Based on a review of the information you have submitted to us, since the court order dated XXXXXXXXXX, provides for spousal and child support amounts payable of $XXXXXXXXXX per month effective XXXXXXXXXX, it is our view that the court order would be regarded as being an order made after April 1997 and paragraph (a) of the definition of “commencement day” in subsection 56.1(4) of the Act applies to the court order. The commencement day of the court order isXXXXXXXXXX, and accordingly, the new child support rules apply to child support amounts payable or receivable, as the case may be, under the court order on or after its commencement day. Pursuant to paragraphs 56(1)(b) and 60(b) of the Act, the effect of this is that it eliminates both the requirement to include child support amounts receivable after the commencement day of the court order in XXXXXXXXXX income and the deduction available to XXXXXXXXXX for child support payable after the commencement day of the court order.
The XXXXXXXXXX court order states that for income tax purposes, XXXXXXXXXX will “claim the support as income” and XXXXXXXXXX shall “claim support as nontaxable income”. In addition, the court order stipulates that any additional tax debts incurred on XXXXXXXXXX tax return as a result of this arrangement will be paid for by XXXXXXXXXX and that any benefit resulting from this arrangement on XXXXXXXXXX return will be shared equally between the parties. It is our view that the tax consequence of an amount received does not arise merely because a court order has so stipulated such as in the XXXXXXXXXX court order. A payment made pursuant to an order becomes deductible, not because the order so stipulates, but rather, because it meets the criteria for deductibility set out in the relevant provisions of the Act. Similarly, a payment becomes income in the hands of the recipient if the payment satisfies the criteria set out in the relevant provisions of the Act at the time of payment. Finally, it is not clear to us what was intended by the court with respect to the statement that XXXXXXXXXX shall “claim support as nontaxable income”.
With respect to the written agreement dated XXXXXXXXXX, as it does not specify the amount of child support amounts payable to XXXXXXXXXX from XXXXXXXXXX, we are of the opinion that the agreement does not establish an obligation for XXXXXXXXXX to pay a support amount to XXXXXXXXXX. Accordingly, any global spousal and child support payments made by XXXXXXXXXX to XXXXXXXXXX would not be deductible or taxable as they were not made pursuant to a written agreement or court order (i.e. such payments appear to be voluntary). Furthermore, based on the wording of the court order dated XXXXXXXXXX, there is no indication that subsections 56.1(3) and 60.1(3) apply to these prior payments.
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 Department’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
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1998
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1998