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 Wife's expenses paid by the Taxpayer may be deductible under paragraph 60(b). 2. Whether a one-time payment to the Receiver General by the Taxpayer for income taxes owed by the Wife is deductible under paragraph 60(b). 3. Whether payments made by the Taxpayer to his credit card for expenses incurred by the Daughter is deductible under paragraph 60(b).
Position: 1. Yes. 2. No. 3. No.
Reasons: 1. Application of 60.1(1), the Wife having discretion with respect to the amount. 2. The Wife has no discretion and Subsection 60.1(2) is not met. 3. Child support payments are not deductible to the payer under the post-April 1997 rules.
February 19, 2009
XXXXXXXXXX Tax Services Office HEADQUARTERS
Appeals Division André M. Gallant
(613) 957-8961
Attention: XXXXXXXXXX
2008-030227
Support Amount - Third-Party Payments
This is in response to your email of December 1, 2008, regarding the deductibility of payments made in 2005 pursuant to an interim support agreement (the "Support Agreement").
Our understanding of the facts is as follows:
1. The Taxpayer and his Wife have lived separate and apart since about mid-2004.
2. The Taxpayer filed his 2005 tax return claiming an income deduction for $XXXXXXXXXX in support payments made over the course of his 2005 taxation year, pursuant to paragraph 60(b) of the Income Tax Act (the "Act").
3. In the original assessment of the Taxpayer for his 2005 taxation year, the Canada Revenue Agency (the "CRA") disallowed $XXXXXXXXXX out of the $XXXXXXXXXX claimed as being not deductible pursuant to paragraph 60(b) of the Act because this amount was child support. The CRA did however allow a deduction for the remainder ($XXXXXXXXXX ) as spousal support.
4. The Taxpayer filed a notice of objection increasing his deduction claim for support payments to $XXXXXXXXXX from the $XXXXXXXXXX claimed upon filing.
5. The Wife did include $XXXXXXXXXX as spousal support amounts received in 2005 in her 2005 tax return.
6. While the Support Agreement only took effect XXXXXXXXXX , there was a prior agreement in place which justified allowing support payments for the month of XXXXXXXXXX . This prior agreement was in effect from XXXXXXXXXX to XXXXXXXXXX
7. Article XXXXXXXXXX of the Support Agreement provides the following obligations under the heading "Spousal Support":
The Taxpayer shall pay $XXXXXXXXXX spousal support monthly to his Wife ($XXXXXXXXXX per year). These payments "shall be deducted by the [Taxpayer] and included by the [Wife] in the calculation of their respective income taxes..." (article XXXXXXXXXX )
a. The Wife is responsible for all her expenses, such as her car lease payments, car insurance and housing costs (article XXXXXXXXXX ).
The Taxpayer "shall be entitled to deduct from the monthly support any [such] expenses paid by him that the Wife is responsible for..." (article XXXXXXXXXX )
b. The Taxpayer and his Wife acknowledge that the Taxpayer made periodic payments from XXXXXXXXXX to XXXXXXXXXX to the Wife or on her behalf and also acknowledge that the payments are deemed to have been made pursuant to the Support Agreement, and "shall be included in the Wife's income in 2004 for tax purposes and deductible by the [Taxpayer] pursuant to subsection 60.1(2) and 56.1(2) of the Income Tax Act." The Taxpayer is required to pay to the Receiver General the Wife's income tax that becomes due as a result of this 2004 inclusion into the Wife's income (article XXXXXXXXXX ).
8. Article XXXXXXXXXX of the Support Agreement provides the following obligations under the heading "Child Support":
a. The Taxpayer will pay $XXXXXXXXXX child support monthly to his Wife for the benefit of their Daughter ($XXXXXXXXXX per year) (article XXXXXXXXXX ).
b. The Taxpayer will deduct from the monthly child support any amount paid to the credit card company resulting from the use by the Daughter of the Taxpayer's credit card (article XXXXXXXXXX ).
Your questions concern whether the spousal support payments and the child support payments made in 2005 are deductible pursuant to paragraph 60(b) of the Act.
Position of the XXXXXXXXXX TSO
As the Support Agreement contains no provision allowing the Wife to change the arrangement and require any of the 2005 third-party amounts to be paid directly to her to do with as she wishes, the Wife is not considered to have discretion as to the use of the amounts. Furthermore, in regards to the one-time payment to the Receiver General, it would also not qualify as being a periodic payment.
The one-time payment to the Receiver General paid in 2004 and any payment in respect to any use of the credit card by the Daughter in 2005 are not "allowance[s] [payable or receivable] on a periodic basis for the maintenance of the recipient ... if the recipient has discretion as to the use of the amount", as required in the definition of "support amount" in subsection 56.1(4) of the Act.
We are of the view that the Taxpayer's payment to the Receiver General of the Wife's 2004 income tax and any child support, including payments in respect to the use by the Daughter of the Taxpayer's credit card, are not deductible pursuant to paragraph 60(b) of the Act.
However, the $XXXXXXXXXX monthly spousal support amounts, to the extent they are paid by the Taxpayer to the Wife or to third-parties for the benefit of his Wife pursuant to the Support Agreement as described in Fact 7(b) above are deductible under paragraph 60(b).
The tax treatment of child and spousal support payments is discussed in detail in Interpretation Bulletin IT-530R, Support Payments.
Child support amounts that are paid pursuant to a written agreement or court order that has a "commencement day", as defined in subsection 56.1(4) of the Act, are not deductible by the payer and are not required to be included in the income of the recipient. Child support payments made pursuant to an agreement or order that has no commencement day will, generally, be taxable to the recipient and deductible to the payor.
As discussed in paragraph 7 of IT-530R, for a court order or written agreement made after April 1997, the commencement day is generally the day the order or agreement is made. In this case, the Support Agreement has a commencement day because it was made after April 1997, as the separation of the Taxpayer from his Wife occurred in 2004. Accordingly, any amount that qualifies as child support amount and is paid by the Taxpayer under the Support Agreement is not deductible in computing the Taxpayer's income.
As explained in paragraph 6 of IT-530R, a "child support amount" is defined in subsection 56.1(4) of the Act as any support amount that is not identified in the agreement or order under which it is receivable as being solely for the support of a recipient who is a spouse or common-law partner or former spouse or common-law partner of the payer or who is a parent of a child of whom the payer is a legal parent. Voluntary payments (i.e., not made pursuant to a written agreement or order) do not qualify as child support amounts.
The $XXXXXXXXXX monthly amounts identified in the Support Agreement as being payable by the Taxpayer for the support of his Daughter (Fact 8 above) meet the definition of child support amount and are not deductible in computing the Taxpayer's income, whether paid directly to the Wife or to the credit card company for the benefit of the Daughter.
Spousal support amounts made pursuant to a written agreement or court order are deductible in computing the income of the payor under paragraph 60(b) and are included in the income of the recipient under paragraph 56(1)(b), provided they meet the definition of "support amount" in subsection 56.1(4).
As discussed in paragraph 4 of IT-530R, a support amount is, generally speaking, an amount that is payable or receivable as an allowance on a periodic basis, if the recipient has discretion as to the use of the amount. In addition, the amount must be payable or receivable under a written agreement or order, with the result that voluntary payments do not qualify as support amounts.
Article XXXXXXXXXX of the Support Agreement (Fact 7(a)) imposes an obligation on the Taxpayer to pay $XXXXXXXXXX in monthly spousal support to his Wife. As we understand it, there is no disagreement that these $XXXXXXXXXX monthly payments would qualify as spousal support amounts, as explained above, and that to the extent that the Taxpayer makes the $XXXXXXXXXX monthly payments to the Wife, the amounts so paid are deductible in computing the Taxpayer's income and are required to be included in the income of the Wife.
However, confusion arises because the Taxpayer is treating third-party payments as spousal support amounts and claiming them as an income deduction in 2005. Your concern is that these third-party payments are amounts in respect of which the Wife has no discretion and therefore do not qualify as support amounts, as explained above. We presume that these third-party payments are for expenses (such as car lease payments, car insurance and housing costs) that, as stipulated in article XXXXXXXXXX of the Support Agreement, the Wife is responsible to pay and that the Taxpayer is entitled to deduct, under article XXXXXXXXXX of the Support Agreement, from the $XXXXXXXXXX monthly support if and to the extent the expenses are paid by him.
In our view, a reading of the different parts of article XXXXXXXXXX of the Support Agreement leads to the reasonable conclusion that the Wife has discretion in respect of the amounts referred to in article XXXXXXXXXX that the Taxpayer pays and subtracts from the $XXXXXXXXXX monthly spousal support stipulated in article XXXXXXXXXX . The obligation is on the Wife to pay such amounts and if they are paid by the Taxpayer they are paid with the implied (if not explicit) concurrence of the Wife. Such third-party amounts when paid by the Taxpayer are deemed to be received by the Wife pursuant to subsection 60.1(1) of the Act.
Payments to third-parties are discussed in paragraphs 26 to 32 of IT-530R. In our view, the situation at hand and the conclusion are akin to the situation and conclusion in example 2 in paragraph 27 of IT-530R.
Paragraph 27 of IT-530R explains as follows:
"Where a third-party amount is not payable at the discretion of the recipient, it would not qualify as a support amount. This is because the recipient does not have discretion as to the use of the amount. Third-party amounts may only be used in determining the amount deductible under paragraph 60(b) if they are deducted from the support amounts otherwise payable with the express or implied concurrence (discretion) of the recipient."
Since under the Support Agreement the Taxpayer's obligation is to pay monthly spousal support of $XXXXXXXXXX , the total eligible for deduction from XXXXXXXXXX to XXXXXXXXXX is $XXXXXXXXXX (i.e., 11 months x $XXXXXXXXXX ). In this regard we note that the Wife has reported in her 2005 tax return $XXXXXXXXXX in spousal support. The $XXXXXXXXXX is presumably the total of $XXXXXXXXXX for each of the 11 months from XXXXXXXXXX to XXXXXXXXXX covered by the Support Agreement.
With respect to the month of XXXXXXXXXX , we are unable to comment what amount, if any, would constitute spousal support that the Taxpayer is able to deduct and his Wife is required to include in computing income because XXXXXXXXXX is not covered by the Support Agreement. Although you have indicated that the Taxpayer's support obligations for XXXXXXXXXX are covered by a previous written agreement, we have no details of its terms.
You also asked whether the Taxpayer can deduct in computing his income the amount he paid to the Receiver General for the Wife's income tax arising from the inclusion of spousal support in her 2004 income as stipulated in article XXXXXXXXXX of the Support Agreement.
As explained below, the amount paid by the Taxpayer for the Wife's 2004 income tax is not deductible in computing his income.
In our view, the amount of the Wife's 2004 income tax paid by the Taxpayer does not qualify as a support amount because it is not an amount that is periodic and in respect of which the Wife has discretion as to its use. This tax payment is not similar to an expense that the Taxpayer pays in accordance with article XXXXXXXXXX of the Support Agreement. While article XXXXXXXXXX imposes an obligation on the Taxpayer to make the tax payment, the obligation is on the Wife to pay her (other) expenses under article XXXXXXXXXX of the Support Agreement.
A third-party payment made under a written agreement or order may be deemed to be an allowance payable on a periodic basis in respect of which the recipient has discretion if the provisions of subsection 60.1(2) of the Act apply. However, in our view, subsection 60.1(2) does not apply to the payment of the Wife's 2004 tax made by the Taxpayer.
As more fully explained in paragraphs 29 to 32 of IT-530R, where a written agreement or order provides for the payment to third-parties of certain specific expenses incurred for the maintenance of the recipient (the Wife in this case), subsection 60.1(2) of the Act deems such amounts to be payable to and receivable by the recipient as an allowance payable on a periodic basis and deems the recipient to have discretion as to the use of the amounts. This deeming provision allows such third-party payments to qualify for a deduction under paragraph 60(b), provided they otherwise qualify.
Subsection 60.1(2) of the Act is an elective provision and will apply only if the written agreement or order states that subsections 60.1(2) and 56.1(2) of the Act are to apply to the third-party payments, or there is a clear and unambiguous clause in the agreement or order stating the parties' understanding that the third-party payments will be taxable to the recipient and deductible to the payer. Although article XXXXXXXXXX of the Support Agreement states that periodic payments made in 2004 are to be included in the Wife's income and are deductible in computing the Taxpayer's income, pursuant to subsections 56.1(2) and 60.1(2), respectively, the Support Agreement is silent with respect to the tax treatment of the payment to the Receiver General of the Wife's 2004 income tax. We trust that these comments will be of assistance.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA's electronic library. 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 electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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