15 April 2011 External T.I. 2010-0367391E5 - 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.

Principal Issues: Whether a lump-sum support payment and arrears interest are included in income.

Position: Question of fact.

XXXXXXXXXX 							2010-036739
								K. Podor
April 15, 2011

Dear XXXXXXXXXX :

Re: Support Payments and Arrears Interest

This is in response to your request for our opinion on the taxability of a lump sum payment for arrears support and arrears interest.

You provided us with the following documentation:

• Judgment Order, dated 1988, enforcing minutes of settlement for payment of child support in the amount of $XXXXXXXXXX per month.
• Director's Statement of Arrears from the Ontario Family Responsibility Office (FRO), dated in 2008, indicating interest on arrears of periodic payments in the amount of $XXXXXXXXXX and the amount of $XXXXXXXXXX for lump-sum support in default.
• Judgment Order, dated in 2009, ordering child support payments of $XXXXXXXXXX per month with payments to continue until the arrears are discharged.
• Judgment Order - amendment to the 2009 Order, dated in 2010, ordering that arrears be paid in full.

Our Comments:

Lump Sum Support Payment

It is a question of fact whether a lump sum payment for arrears support, paid in a taxation year, is taxable to the recipient. Generally, any amount deductible by a payer under the Income Tax Act ("Act") as a support amount is required to be included in the income of the recipient. Similarly, if the payer is not entitled to an income deduction for support amounts paid, the recipient is not required to include such amounts in income.

Under the "old regime" (pre-May 1997), spouses making payments for the support of children could deduct those payments and the recipient had to include them in income. Following the Supreme Court of Canada decision in Thibaudeau v. Canada [1995] 2 S.C.R. 627, the legislation changed. Under the "new regime", if a pre-May 1997 agreement was varied or a new agreement was entered into, the deduction/inclusion regime ceased and only payments made up to the "commencement day" of the new or varied agreement will be deductible by the payer and includible by the recipient.

A review of the documentation submitted indicates that the 1988 Judgment still has legal force and effect. The 1988 Judgment does not contain a "commencement day" for purposes of the Act. It appears that the Statement of Arrears from the Ontario FRO has established the arrears arising from the 1988 Judgment. The 2009 and 2010 court orders do not vary or change the total child support amount payable to you. Essentially, the subsequent orders simply confirm the payer's obligation to pay the outstanding support arrears and interest.

As a result, you must include the lump sum support payment in income in the year of receipt.

It should be noted that if the 2009 and 2010 court orders fix as a settlement of arrears, something less than the periodic amounts that have fallen into arrears, any such settlement payment, whether lump sum or by way of a periodic payment schedule, would not be deductible or taxable.

To register your court order, you must complete Form T1158, Registration of Family Support Payments, and submit a copy of it along with a copy of the court order with your tax return. Income averaging is available to individuals who receive a lump-sum support payment, parts of which were for previous years. You can ask the Canada Revenue Agency (CRA) to tax the parts for the previous years as if they were received in those years. The CRA will do this for the amount that applies to years throughout which you were a resident of Canada, and only if it is to your advantage for tax purposes. To request income averaging, you must complete Form T1198, Statement of Qualifying Retroactive Lump-Sum Payment, and submit a copy of a breakdown of the support payment and the interest by year.

Arrears Interest

You have also asked whether arrears interest received with the lump-sum support payment must be included in income. In general, in determining taxable income, a taxpayer must include interest income either when it is received or when it is receivable.

The interest you received on arrears of support payments would be treated as income from property and required to be included in income in the taxation year received or in the taxation years in which the amounts have accrued depending on the method you have regularly followed in reporting interest income.

We trust these comments are helpful.

Steve Fron, CA
Acting Manager
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch