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. In light of the decision in Salzmann v The Queen, is a lump sum paid after an order or agreement to settle previous arrears of spousal support deductible? 2. What if the taxpayer was also ordered to pay retroactive child support in addition to retroactive spousal support? Would the child support have to be fully paid before the spousal support would be deductible? 3. What if at a later date there was a second court order/written agreement that ordered the taxpayer to pay retroactive increases to the periodic spousal payments ordered in the previous court order/agreement? Would a lump sum paid to settle the retroactive increases be eligible for the support deduction?
Position: 1. No. 2. Neither amount would be deductible. 3. The portion of the lump sum attributable to the retroactive increase would not be deductible.
Reasons: 1. As stated in paragraph 22 of IT-530R, a lump sum payment required by a court order or written agreement in respect of a period prior to the date of the order or agreement would not be considered a qualifying support amount for purposes of subsection 56.1(4) and would not be reflected in the formula in paragraph 60(b) for the purpose of computing the deduction. This view is supported by the FCA case in Tossell v The Queen [2005 FCA 223]. 2. & 3. Same reason.
Janik P. Laliberté
Individual Returns Directorate
Assessment and Benefit Services Branch 2010-037556
25 McArthur Road, Tower C, 5th Floor T. Posadovsky, CMA
Ottawa ON K1A 0L5 (613) 952-8283
September 20, 2010
Dear Mr. Laliberté:
Re: Support Payments - Salzmann v. the Queen.
We are writing in response to your correspondence dated July 21, 2010, in which you requested our views on the deductibility of spousal support amounts paid as a lump sum in respect of a period prior to the date of a written agreement or court order. Specifically, you wish clarification on the following issues:
1) In light of the decision reached in Salzmann v. The Queen [2009] 1 CTC 2367 and similar Tax Court of Canada ("TCC") decisions relating to the deductibility of support payments: if a taxpayer did not pay anything prior to a court order and written agreement and was ordered to pay a lump sum to settle previous arrears of spousal support, would the lump sum be deductible?
2) What if the taxpayer was also ordered to pay retroactive child support? The Commencement date under subsection 56.1(4) of the Income Tax Act (the "Act") for the child support would be the date of the written agreement or court order. Would the child support have to be fully paid before the spousal support would be deductible? How would it be possible if the commencement date for the child support could be years after the start date for the spousal support?
3) What if at a later date there was a second written agreement or court order that ordered the taxpayer to pay retroactive increases to the periodic spousal payments ordered in the previous written agreement or court order? The taxpayer then pays a lump sum to settle the retroactive increases. Would this lump sum be eligible for the support deduction?
Background
The definition of a "support amount" in subsection 56.1(4) of the Income Tax Act (the "Act") requires that an allowance payable to a recipient must, inter alia, be payable on a periodic basis in order to be deductible to the payer under paragraph 60(b) of the Act. Paragraph 22 of Interpretation Bulletin IT-530R, Support Payments, explains that a lump sum payment required by a court order or written agreement in respect of a period prior to the date of the order or agreement would not be considered a qualifying support amount for purposes of subsection 56.1(4) of the Act.
As you have pointed out, this view has been scrutinized in a number of tax court cases, most notably in Salzmann v The Queen [2009] 1 CTC 2367 held under the general procedure, and others including Bayliss v The Queen [2007] 5 CTC 2337 held under the informal procedure.
In Salzmann v The Queen, the Minister denied the appellant's deduction of a $90,000 lump sum payment made to his former spouse in respect of retroactive spousal support pursuant to a court order. The order was issued by the Ontario Superior Court and stated that all interim spousal support payments for the period prior to the effective date of the court order would be deductible to the appellant and taxable to the former spouse pursuant to subsections 56.1(3) and 60.1(3) of the Act. The judge allowed the appeal and ruled that the support payments came within the provisions of the Act.
It has been the long-standing position of the Canada Revenue Agency that a lump sum payment required by a court order or written agreement in respect of a period prior to the date of the order or agreement is not considered a qualifying "support amount" as defined in subsection 56.1(4) of the Act. Thus, notwithstanding Salzmann, the lump sum payment described in your first question would not be reflected in the formula in paragraph 60(b) for the purpose of computing a deduction from the payer's income. This would be the case even if a court order or written agreement referred to a lump sum payment as "retroactive" and/or calculated the sum as a product of a set monthly amount over a period of time.
Our position is supported by the Federal Court of Appeal ("FCA") decision in Tossell v The Queen [2005] 3 CTC 277. The FCA in Tossell held that a lump sum would not qualify as being payable on a periodic basis if no such obligation to make periodic payments existed prior to the order or agreement. Further, the court indicated that agreeing or stating in an order or agreement that a payment is either taxable or deductible, as the case may be, cannot alter the proper tax treatment. It is our view that the FCA decision in Tossell accurately reflects the correct interpretation of the Act and legislative policy on this issue. We would also point out that a decision of the FCA carries more precedential value than a decision of the TCC.
Your second question concerns a lump sum payment required by a court order or written agreement in respect of a period prior to the date of the order or agreement that includes amounts attributed to both child and spousal maintenance. As stated above, a lump sum payment required by a court order or written agreement in respect of a period prior to the date of the order or agreement would not be considered a qualifying "support amount" as defined in subsection 56.1(4) of the Act. Therefore, if a lump-sum payment made after the court order or written agreement was in respect of both child and spousal maintenance, neither amount would be deductible to the payer under paragraph 60(b) of the Act.
Your third question concerns a the scenario where a second court order or written agreement requires a taxpayer to pay a lump sum for a retroactive increase to the periodic spousal payments ordered in a previous court order or written agreement. Again, for the reasons stated above, such an amount would not qualify as a "support amount" as defined in subsection 56.1(4) of the Act and is not deductible.
Please note that there may be a situation where a lump sum in respect of a subsequent court order or written agreement includes arrears in respect of periodic support amounts from a previous court order or written agreement. In such cases, the non-qualifying portion of the retroactive lump sum would be the excess of the total periodic amounts the subsequent order or agreement concluded should have been payable in the prior period less the periodic amounts that can be traced as qualifying support arrears payable pursuant to the prior order or agreement.
I trust that the foregoing comments are of assistance.
Yours truly,
Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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