15 October 1998 External T.I. 9825065 - SPOUSAL SUPPORT AND LUMP SUM SETTLEMENT

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether payments to be made according to a court order qualify for a deduction under paragraph 60(b); i.e., whether the payments are payable on a “periodic basis” or whether the payments are made as instalments of a lump sum or capital sum.

Position TAKEN:

General comments provided, and reflected in paragraph 12 of IT-118R3.

Reasons FOR POSITION TAKEN:

Insufficient information provided by the taxpayer.

XXXXXXXXXX 5-982506
M. Azzi
Attention: XXXXXXXXXX

October 15, 1998

Dear Sirs:

Re: Spousal Support and Lump Sum Settlements

This is in reply to your letter of September 17, 1998, wherein you requested our views on the deductibility of amounts to be paid according to a court order which relates to a divorce settlement.

You indicate that the court order includes a term that a taxpayer must pay “lump sum spousal support in the amount of $XXX payable in equal semi-annual instalments of $X each on the first days of January and July...for 10 years”, and that interest shall apply to any such payment in default. You question whether the reference to “lump sum” is determinative of the nature of the payments, or whether they can be viewed as payable on a “periodic basis”, in order for such a payment to qualify as a “support amount”, for purposes of the deduction under paragraph 60(b) of the Income Tax Act (the “Act”).

Our Comments

The reference in an agreement or court order to a lump sum payment payable by instalments is not, in and by itself, determinative of the nature of the payments, as such a determination is a question of fact which requires a review of all the relevant facts of each particular case. We are therefore not in a position to determine whether the above-noted payments are deductible under paragraph 60(b) of the Act. Such a determination would, inter alia, require a review of all the provisions of the above-noted court order and any other relevant past or current agreement or order. In this regard, we note that the analysis in your letter seems to focus on lump sum payments being made in settlement of an existing obligation to make periodic payments and, therefore, it is unclear whether, in the above circumstances, there were any other agreements or orders. We are, however, prepared to offer the following general comments which may be of assistance.

The term “support amount” is defined in subsection 56.1(4) of the Act, and applies to paragraph 60(b) of the Act by virtue of subsection 60.1(4) of the Act. In order to qualify as a support amount, one of the requirements is that the amount be payable as an allowance on a periodic basis for the maintenance of the recipient, children of the recipient or both. In The Queen v. McKimmon, 90 DTC 6088, the Federal Court of Appeal listed criteria that should be considered in making the distinction between periodic payments made as an allowance for maintenance, and payments made as instalments of a lump sum or capital sum. As indicated in paragraph 12 of IT-118R3, some of the more important criteria are:

(a) Length of periods at which payments are made - Amounts paid weekly or monthly are easily characterized as allowances for maintenance. Where the payments are at longer intervals the issue becomes less clear. If payments are made at intervals of greater than one year it is unlikely that the payment will qualify as an allowance for maintenance.

(b) Whether payments are for an indefinite period or fixed term - An allowance for maintenance will more commonly provide for its continuance either for an indefinite period or to some event (such as the coming of age of a child) which will cause a material change in the needs of the recipient. Sums payable over a fixed term, on the other hand, may be more readily seen as being of a capital nature.

(c) Amount of payments relative to the income and living standards of both the payer and recipient - Where payments are in excess of an amount sufficient to maintain the recipient and/or children in the style to which they were accustomed prior to the breakdown of the marriage, they will not likely be viewed as an allowance for maintenance. The chance of such amounts qualifying as an allowance for maintenance is even less likely where the payments are made over a short period of time. Where the payment is no greater than required to maintain the recipient's standard of living it is more likely to qualify as an allowance for maintenance.

(d) Whether the payments purport to release the payer from any future obligations to pay maintenance - If there is such a release the payments will normally not be considered an allowance for maintenance.

As can be seen from the above criteria, the determination of whether an amount is a periodic payment or an instalment of a lump sum is highly dependant on all the facts of the particular case. While we were not provided with sufficient information to provide you with a definite answer to your enquiry, we trust that the above comments will be of assistance.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch