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 fixed amount, that represents the total amount of child and spousal support payable, would be considered a "child support amount" solely by virtue of the fact that a specific amount is not identified in the court order as being solely for the support of the recipient.
Position: No.
Reasons: It is not unreasonable to use a formula in an agreement to identify the amount that would be paid solely for the support of a recipient who is a spouse or common-law partner, if the intentions of the parties at the time the separation agreement was executed are clear.
XXXXXXXXXX
2011-040513
Ananthy Mahendran
March 2, 2012
Dear XXXXXXXXXX :
Re: Tax Implications on Spousal Support
We are writing in response to your correspondence dated May 2, 2011, wherein you requested our opinion on the tax implications that would arise in respect of the proposed support arrangement described in your letter.
Generally, the arrangement requires Parent A to pay Parent B a fixed amount of support per month which would represent the total amount of child and spousal support payable. The proposed agreement will specify for year 1 the monthly amount attributed to child support and the monthly amount attributed to spousal support. In each subsequent year, the split between child and spousal support could be adjusted in accordance with a formula. Under the formula, the monthly child support would be determined first according to the published Child Support Guidelines (based on Parent A's current income); the spousal support would be calculated as the difference between the fixed monthly amount and recalculated monthly child support amount.
You would like to know whether such an arrangement would preclude Parent A from deducting the spousal support component in any given year.
Our Comments:
In order for an amount to be deductible under the Income Tax Act (the "Act"), it must first qualify as a "support amount" as defined in the Act. Assuming other conditions are met, the payment must be an amount payable or receivable as an allowance on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient and children of the recipient and the recipient must have discretion as to the use of the amount. In our view, the entire payment meets the general requirements for being a support amount. Also, based on the proposed wording of the arrangement, there appears to be a clear distinction between the child and spousal support amounts payable in year 1.
However, in subsequent years, the split between child and spousal support may not be clear as it was established in year 1. For example, would the proposed methodology for allocating the entire monthly allowance between child and spousal support establish that a portion of the monthly payment is in fact solely for the support of the recipient or would the entire payment be viewed as being a "child support amount" under the Act?
The tax treatment of support payments is discussed in Interpretation Bulletin IT-530R, Support Payments. Paragraph 10 of IT-530R provides that a specified sum of money that is subject to adjustment in accordance with some reasonable formula or index (e.g., a percentage of payer's income or the cost of living index) may qualify as an allowance even though the exact future amounts payable are not specified in the order or agreement.
In our view, if the written agreement initially identifies the child and spousal support amounts in year 1, then the use of the payer's current income in conjunction with the published Child Support Guidelines as a basis for adjusting the relevant support amounts in subsequent years could meet the use of a reasonable formula as contemplated in paragraph 10 of IT-530R.
To avoid unnecessary delays and adjustments to their tax returns, support payers should register their court orders or written agreements (including any amendments) with the Canada Revenue Agency (CRA) by using Form T1158, Registration of Family Support Payments. Through this process, the CRA is advised of the portion of the payment that is spousal support and, if applicable, the portion that is child support. Since there may be variations from the registered child and spousal amounts in subsequent years, it is important that the payer and recipient establish a process for documenting any adjustments to the support payments in order to respond to any requests for supporting documentation by the CRA.
We trust that our comments will be of assistance.
Yours truly,
Sharmini Ratnasingham
Assistant Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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