12 December 2011 External T.I. 2011-0407661E5 - Lump-Sum Child 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: 1) Whether the interest portion of a lump-sum payment for arrears would be taxable? 2) Whether the principal portion of a lump-sum payment for child support arrears is taxable?

Position: 1) Yes, pursuant to 12(1)(c). 2) Question of fact. Yes, pursuant to 56(1)(b).

Reasons: 1) Interest income is included in income either when received or when it is receivable. 2) The arrears that have been paid reflect the amounts payable under the initial order which have fallen into arrears. The initial order is dated before May 1997.

XXXXXXXXXX
								2011-040766

W. Doiron
December 12, 2011

Dear XXXXXXXXXX :

Re: Support Payments and Arrears Interest

This is in response to your letter wherein you requested an additional review of the taxability of a lump-sum payment for arrears support and arrears interest received from the Family Responsibility Office.

We reiterate that it is a question of fact whether a lump-sum payment for arrears support and arrears interest paid in a taxation year is taxable to the recipient. However, based on the information provided in your letters, it is our position that:

• the principal portion of the lump-sum payment for arrears support would be included in your taxable income in the year of receipt under paragraph 56(1)(b) of the Income Tax Act ("the Act"), and
• the interest portion of the lump-sum payment for arrears interest would be included in your taxable income in the year of receipt under paragraph 12(1)(c) of the Act.

In the examples you quoted from paragraph 19 of Interpretation Bulletin IT-530R Support Payments the particular child support amounts are not deductible since both the total amount of the child support payable changed and a subsequent agreement was made after April 1997. In your factual situation, your agreement has not changed and neither has the amount of the total child support payable. Although you state that a "new order" was issued, we are of the view that a new order has not been issued. The 2010 order reinforces the initial order that was dated pre-May 1997, sets out the support amounts payable that have fallen into arrears and provides for interest on the arrears. As a result, the arrears support payment and the arrears interest that you received are taxable.

The tax payable on the lump-sum payment for the arrears support may be significantly higher than what it would have been had you received the payments at the time you were entitled to them. Income averaging may be available under section 110.2 of the Act which will permit you to deduct the arrears support payment amounts received in 2010 that relate to prior years.

Where an amount is deducted in computing an individual's taxable income under subsection 110.2(2) of the Act, section 120.31 of the Act adds an amount to income tax payable equal to the "notional tax payable" calculated for each eligible taxation year less the tax actually payable for that year. The "notional tax payable" for each eligible taxation year is the total of two amounts. The first amount is the total of the amount of tax that would have been payable in each preceding eligible taxation year if the applicable portion of the lump-sum payment been received in that year. The second amount is a notional amount of interest that is computed for each relevant preceding taxation year to take into account the fact that this additional notional amount of Part I income tax was not paid during those preceding taxation years.

To request income averaging, you must complete Form T1198, Statement of Qualifying Retroactive Lump-Sum Payment. Although Form T1198 states that the payer of the lump-sum payment should complete the form, there is no legislated requirement in the Act or in the Income Tax Regulations that requires a payor to issue a Form T1198. However, it would seem appropriate for the Family Responsibility Office to complete the form to allow you to benefit from the above provisions.

Once you have a completed Form T1198, we recommend that you contact the Red Deer Tax Services Office at 1-800-959-8281 and request a meeting so they can assist you with the proper treatment of your specific situation. The CRA will only apply the special tax calculation above if they receive the completed form and if the calculation is beneficial to you.

We trust these comments will be of some assistance.

Yours truly,

Lita Krantz
Assistant Director
International Division/ Division des operationes internationales
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch