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 the total of support amounts paid in a year and permitted a deduction under par. 60(b) of the Act is considered "deductible" even though the taxpayer has insufficient income to absorb the deduction.
Position: Yes.
Reasons: Section 3 of the Act does not prohibit the deduction of a specific amount otherwise permitted under subdivision e of the Act. Where the amounts permitted a deduction equal or exceed the items of income determined under par. 3(a) plus 3(b) of the Act, the t/p's income is deemed to be nil under par. 3(f) of the Act. An amount may be deductible even though there is insufficient income to absorb the deduction, as contemplated in particular in the definition of "non-capital loss" in ss.111(8) of the Act.
October 15, 2004
Jon Lavkulich HEADQUARTERS
Client Services Division P. Massicotte, CA, M.Fisc.
Calgary Tax Services Office (613) 590-1116
2004-007420
Deductibility of Support Amounts
This is in response to your enquiry of April 27, 2004, in which you seek our comments in connection with the deductibility under paragraph 60(b) of the Income Tax Act (the "Act") of support amounts paid by XXXXXXXXXX (Mr.A) during the years 1997 and 1998.
Facts
The essential facts as we understand them are the following:
1. Mr.A was married to Mrs.B from 1988 until 1998. They do not have any children. Both have been residents of Canada at all relevant times.
2. Mr.A and Mrs.B separated prior to 1997 and have been living separate and apart by reason of the breakdown of their marriage ever since.
3. Pursuant to a court order made in XXXXXXXXXX 1998, Mr.A was required to pay an amount of $XXXXXXXXXX per month to Mrs.B as spousal support starting XXXXXXXXXX, 1997 until further order of the court.
4. Another order was made in XXXXXXXXXX 1998 requiring Mr.A to pay a reduced amount of $XXXXXXXXXX per month to Mrs.B as spousal support starting XXXXXXXXXX, 1998, until further order of the court. No further orders have been made since.
5. Mr.A made spousal support payments pursuant to these orders for a total of $XXXXXXXXXX during 1997 and $XXXXXXXXXX during 1998.
6. Mr.A filed his income tax return for 1997 and claimed a deduction of $XXXXXXXXXX pursuant to paragraph 60(b) of the Act for spousal support amounts paid to Mrs.B in 1997. These amounts qualify as support amounts for the purposes of paragraph 60(b) of the Act.
7. Mr.A also filed his income tax return for 1998 and claimed a deduction of $XXXXXXXXXX pursuant to paragraph 60(b) of the Act for spousal support amounts paid to Mrs.B in 1998. These amounts qualify as support amounts for the purposes of paragraph 60(b) of the Act.
8. The income calculated under paragraphs 3(a) and 3(b) of the Act for the 1997 and 1998 taxation years, as reported by Mr.A, was $XXXXXXXXXX and $XXXXXXXXXX respectively. As a result, Mr.A's income for both taxation years, determined under paragraph 3(c) of the Act, was nil.
9. The deductions claimed under paragraph 60(b) of the Act for the 1997 and 1998 taxation years exceeded the income of Mr.A by an amount of $XXXXXXXXXX and $XXXXXXXXXX respectively, for a total of $XXXXXXXXXX (collectively referred to as the "Excess Amounts").
10. Pursuant to subsection 111(8) of the Act, the Excess Amounts are not considered in determining Mr.A's "non-capital loss" for any taxation year.
11. Since the Excess Amounts have not reduced Mr.A's income for the 1997 and 1998 taxation years, Mr.A now wishes to deduct the Excess Amounts in calculating his income for the taxation year 2000, where Mr.A has substantial income. Mr.A also had income for the 1999 taxation year.
The taxpayer's representatives submit that paragraph 60(b) of the Act does not foreclose the opportunity to deduct spousal support payments made in a year where a taxpayer has insufficient income against which to deduct these amounts, but rather allows a taxpayer to claim such a deduction in a subsequent taxation year when the taxpayer has sufficient income to absorb it. It is submitted that the deduction of the Excess Amounts in this case should be allowed in calculating Mr.A's income for the 2000 taxation year pursuant to paragraph 60(b) of the Act because no portion of these amounts were deductible in computing Mr.A's income for the 1997 and 1998 taxation years (notwithstanding that Mr.A had income for the 1999 taxation year). Reference is made to our interpretation letter #2001-0069497 where the term "deductible" was defined as "capable of being deducted". The representatives submit that Mr.A was not capable of deducting the Excess Amounts for the 1997 and 1998 taxation years because of the limitations in section 3 of the Act. They submit that under paragraph 3(c) of the Act, Mr.A is only entitled to claim a subdivision e deduction (including paragraph 60(b) of the Act) to the extent of the total determined under paragraph 3(a) of the Act plus the amount determined under paragraph 3(b) of the Act
More specifically, when applying the formula in paragraph 60(b) of the Act for the 1997 taxation year, it is submitted that although an amount of $XXXXXXXXXX was "available for deduction" in computing Mr.A's income, only a lesser amount of $XXXXXXXXXX was actually "deductible" under paragraph 3(c) of the Act, reducing Mr.A's income to nil. Similarly, for the 1998 taxation year, it is submitted that only an amount of $XXXXXXXXXX was "deductible" under paragraph 3(c) of the Act. As a result, it is submitted that the Excess Amounts should not be included in variable C of the formula in paragraph 60(b) of the Act for any subsequent taxation year, until Mr.A has sufficient income to absorb the deduction. Finally, the representatives also raise several policy considerations as support for their views.
We do not agree with the taxpayer's submissions with respect to the interaction between section 3 and paragraph 60(b) of the Act. In our view, nothing in section 3 prohibits the deduction of a specific amount otherwise permitted by subdivision e of the Act. Subject to paragraph 3(d) of the Act, paragraph 3(c) of the Act merely provides that a taxpayer has income for a taxation year where the total determined under paragraph 3(a) of the Act plus the amount determined under paragraph 3(b) of the Act exceeds "the total of the deductions permitted by subdivision e in computing the taxpayer's income for the year (except to the extent that those deductions, if any, have been taken into account in determining the total referred to in paragraph (a))". Where, in particular, the items of income described in paragraphs 3(a) and 3(b) of the Act do not exceed the deductions permitted by subdivision e of the Act, the taxpayer shall be deemed to have income for the year in an amount equal to zero pursuant to paragraph 3(f) of the Act. Accordingly, in our view, where an amount meets the requirements for deduction of a particular provision, such as paragraph 60(b) of the Act, that amount is deductible in computing income, notwithstanding that the income may then be deemed to be nil under section 3 of the Act. As explained below, this is consistent with the scheme of the Act and, in particular, with respect to amounts deductible in computing taxable income and the calculation of a "non-capital loss" in subsection 111(8) of the Act.
The deductions permitted by subdivision e of the Act in computing a taxpayer's income for a taxation year include, among others, the amounts determined under the provisions of section 60 of the Act. The preamble of section 60 of the Act provides that there may be deducted in computing a taxpayer's income for a taxation year, among others, the amount determined under paragraph 60(b) of the Act.
As you know, paragraph 60(b) of the Act was amended in 1997 with respect to amounts paid after 1996. Under the new regime, payments of child support amounts under an agreement or court order that has a "commencement day", as defined in subsection 56.1(4) of the Act, are no longer taxable for the recipient or deductible by the payer. Because of the difficulty in some situations to determine the tax treatment of particular support payments, a formula was introduced to determine the amount to be included in the income of the recipient and deductible by the payer in a particular taxation year. As explained in the Technical Notes accompanying the 1997 amendments, the purpose of the formula was to provide that, in any year, the amount deductible would only be based on support amounts paid to the extent that these amounts exceeded all child support amounts that became payable on or after the commencement day of the order or agreement under which they are required to be made. The effect of the formula was to prohibit the deduction where the amount of support paid fell short of the amount of child support that was payable under agreements or orders on or after their commencement day. The Technical Notes indicate that the use of the formula was to be regarded as an "ordering" rule. Support amounts paid are first considered to be in respect of child support obligations, the payment of which are not deductible, while the balance is deductible. These comments are consistent with those made in paragraph 16 of IT-530R, Support Payments. As a result, the purpose of the new structure in paragraph 60(b) of the Act was not to allow for the carryover of unused support deductions.
Where an amount is determined by the formula in paragraph 60(b) of the Act for a particular taxation year, the amount so determined is permitted a deduction pursuant to the preamble of section 60 of the Act for that taxation year in computing the taxpayer's income. The amount so determined is therefore deductible for that taxation year regardless of the fact the total of the amounts determined under paragraphs 3(a) and 3(b) of the Act does not exceed the total of the deductions permitted by section 60 of the Act. In our view, an amount that "may be deducted" would not necessarily have to be deducted against positive income. Hence, provided a taxpayer is permitted to deduct an amount under paragraph 60(b) of the Act for a particular taxation year, that amount will be considered deductible for that year, notwithstanding the fact that there is insufficient income to absorb the deduction. While this will not reduce the taxpayer's income below nil, because of the application of paragraph 3(f) of the Act, the amount is nonetheless "deductible".
In our interpretation letter #2001-0069497, we indicated that the term "deductible" generally means "capable of being deducted". These comments were made in the context of the restrictions found in subsection 18(3.1) of the Act. Paragraph 18(3.1)(a) of the Act provides in part that in computing a taxpayer's income for a taxation year "no deduction shall be made in respect of any outlay or expense made or incurred by the taxpayer [...]"(emphasis added). Comments to the same effect were also made in our interpretation letter #9707385, which concerned the restrictions found in subsection 18(2) of the Act. The preamble of subsection 18(2) of the Act provides in part that in computing a taxpayer's income for a particular taxation year from a business or property "no amount shall be deductible in respect of any expense incurred by the taxpayer..." (emphasis added). In both these cases, we concluded that the amounts subject to the restrictions in those provisions were not "deductible" because the amounts were not capable of being deducted. In our opinion, there are no similar provisions prohibiting the deduction of the support amounts paid by Mr.A in the situation described above.
A similar issue was considered by this Directorate in relation to deductions permitted under Division C in computing a taxpayer's taxable income for a taxation year. The issue in that case was whether the amounts permitted under Division C of the Act were "deductible" even though they exceeded the taxpayer's income for the year. Subsection 2(2) of the Act provides that the taxable income of a taxpayer for a taxation year is the taxpayer's income for the year [...] minus the deductions permitted by Division C of the Act. Subsection 248(1) of the Act defines "taxable income" and provides that in no case may a taxpayer's taxable income be less than nil. We have consistently held that deductions permitted by Division C of the Act are "deductible" notwithstanding the fact that there is insufficient income to absorb the deduction in the taxation year. In fact, the scheme of the Act contemplates that those amounts are nonetheless deductible, such that they may be added to a taxpayer's "non-capital loss" for the particular taxation year, as defined in subsection 111(8) of the Act, to the extent provided in variable E of that definition (see in particular our documents #9700195, #9629217 and #9512837).
Based on the facts described above, it is our opinion that an amount of $XXXXXXXXXX was permitted a deduction and was therefore deductible in computing Mr.A's income for the 1997 taxation year, as determined by the application of the formula in paragraph 60(b) of the Act, that is:
Amount deductible = A - (B + C)
Where
A= The total of support amounts paid after 1996 and before the end of the year by the taxpayer. The total amount paid by Mr.A in 1997 is $XXXXXXXXXX .
B= The total child support amounts that became payable by the taxpayer under an agreement or order on or after its commencement day and before the end of the year. There were no child support amounts payable by Mr.A.
C= The total support amounts paid by the taxpayer after 1996 and deductible in computing the taxpayer's income for a preceding taxation year. No amount was deductible in a previous year in relation to the amounts paid in 1997 by Mr.A.
Furthermore an amount of $XXXXXXXXXX was permitted a deduction and was therefore deductible in computing Mr.A's income for the 1998 taxation year, as determined by the application of the formula in paragraph 60(b) of the Act, as described above, where:
A= $XXXXXXXXXX ($XXXXXXXXXX paid in 1997, plus $XXXXXXXXXX paid in 1998);
B= nil;
C= $XXXXXXXXXX deductible for the 1997 taxation year.
As the entire support amounts paid by Mr.A during the 1997 and 1998 taxation years were deductible in computing his income for those taxation years, no amount may be deducted under paragraph 60(b) of the Act for any subsequent taxation year in respect of the same support amounts paid.
Please note that the provisions of the Act dictate our conclusions. The role of the Canada Revenue Agency ("CRA") is to administer and enforce the Act as passed by Parliament. The CRA strives to carry out this role fairly and uniformly for all taxpayers. In our view, legislative amendments would be required to enable taxpayers to carry forward unused support deductions as suggested by Mr.A's representatives in the above situation.
In closing, we wish to draw your attention to the fact that for the purposes of this reply, as requested, we assumed that the amounts paid by Mr.A in the above situation qualified as "support amounts", as defined in subsection 56.1(4) of the Act. Although we have not been provided with sufficient information to make any definitive comments, we are concerned this may not be the case particularly with respect to the amounts paid in 1997 as those payments have been made prior to the date of the court order described in paragraph 3 of the facts above. As explained in paragraph 24 of Interpretation Bulletin IT-530R, Support Payments, payments made prior to the date of a court order or written agreement cannot be considered to be paid "under" the court order or written agreement. Such payments may nevertheless be deemed to be made "under" a subsequent court order where the requirements of subsection 60.1(3) of the Act are met. Generally, under subsection 60.1(3) of the Act, an order or agreement made at any time in a taxation year must provide that an amount paid before that time and in the year or the preceding taxation year is to be considered to have been paid and received thereunder for the deeming rule to apply. In addition, where amounts are paid after an order or agreement is made and the payments are in respect of a period prior to the date of the order or agreement, those would also not qualify as "support amounts" for purposes of subsection 56.1(4) of the Act, as indicated in paragraph 22 of IT-530R.
We trust you will find the above to be of assistance. If you have any questions regarding the above, please do not hesitate to contact us.
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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