2014-0543931E5 Retroactive support Amount

Principal Issues: 1. Does subsection 60.1(3) apply to a particular factual situation?

Position: 1. No.

Reasons: 1. No amounts were paid between the parties.

Author: Dubis, Robert
Section: 60.1(3); 56.1(4); 56.1(3)

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                                                                                                                                                     2014-054393
                                                                                                                                                     Robert Dubis, CPA, CA

December 19, 2014

Dear XXXXXXXXXX:

We are replying to your letter of August 15, 2014, in which you asked for our views regarding the application of subsection 60.1(3) of the Income Tax Act (the “Act”) to a written agreement between two separated spouses.

Based on the information you provided, two spouses, A and B separated in XXXXXXXXXX. During the separation period, Spouse B was allowed to draw on a joint line of credit to fund living expenses. In XXXXXXXXXX, a written agreement was prepared that specifies a monthly spousal support amount of $XXXXXXXXXX from Spouse A to Spouse B. The written agreement further provides that to the extent that Spouse B had drawn on the line of credit during the negotiation period, Spouse A will assume responsibility for repaying the line of credit up to $XXXXXXXXXX per month and any amounts in excess of $XXXXXXXXXX per month are to be repaid by Spouse B. The written agreement provides that amounts paid in XXXXXXXXXX and XXXXXXXXXX are considered to have been paid thereunder.

You have asked whether the amount of $XXXXXXXXXX per month drawn on the line of credit during the negotiation period could qualify as a periodic payment for the purpose of subsection 60.1(3) of the Act under two scenarios. Under the first scenario, neither spouse has made a deposit into the line of credit prior to the formalization of the written agreement. Under the second scenario, in the period before the written agreement, Spouse A made monthly deposits of $XXXXXXXXXX or more towards the joint line of credit.

In your request, you mention rulings document E9501477, which gives consideration to the Tax Court of Canada decision in Lay v. The Queen (“Lay”) (95 DTC 272).  You also note that in both E9501477 and Lay, a joint bank account was used for disbursing monthly maintenance payments as opposed to a line of credit.

Our comments:

This technical interpretation provides general comments about the provisions of the Act and related legislation.  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

For an amount to be deductible under paragraph 60(b) of the Act, it must be a support amount as defined in subsection 56.1(4) of the Act. For an amount to qualify as a support amount:

*     it must be payable or receivable as an allowance on a periodic basis;
*     it must be paid for the maintenance of the recipient
*     the recipient must have discretion as to the use of the amount; and

o     where the recipient of the amount is the spouse or common-law partner or former spouse or common-law partner of the payer, the parties are living separate and apart because of a breakdown of their relationship and the amount is receivable under an order of a competent tribunal or under a written agreement; or
o     where the recipient is the parent of a child of whom the payer is a legal parent, the amount is receivable under an order of a competent tribunal in accordance the laws of a province or territory.

All of these requirements must be met in respect of any payment for that amount to be a spousal support amount. The Canada Revenue Agency’s general views regarding support payments can be found in Income Tax Folio S1-F3-C3, Support Payments available at www.cra-arc.gc.ca.

Although payments made prior to the date of an order of a competent tribunal (order) or written agreement cannot be considered to be paid under the order or written agreement, they may nonetheless qualify as support amounts for the purposes of determining the amount a payer may deduct under paragraph 60(b) of the Act.  Subsection 60.1(3) of the Act provides that amounts paid in the year of (but prior to) the order or agreement or in the preceding year are deemed to be paid under the order or agreement if the document provides that they are to be so considered.  Subsection 60.1(3) also deems the order or agreement to be made, generally, on the day on which the first such payment was made.

Subsection 60.1(3) of the Act contemplates situations where amounts are paid at a time when no written agreement or order existed and then a written agreement or order is subsequently formalized and includes wording to address the taxation of prior payments.  For an amount to qualify under subsection 60.1(3), it must have been paid before the written agreement or order.

In Lay, the court was satisfied that a support amount had been paid giving weight to the written agreements under which the financial arrangement was formalized. In rulings document E9501477, there was recognition that if it could be determined, based on a review of the written agreement, that a set amount was designated for the exclusive use of the recipient, on a case-by-case basis, it might meet the requirements to be deductible as a support amount.

The two scenarios you outlined may be distinguished from the decision in Lay and rulings document E9501477 in two respects. First, there is no underlying written agreement at the time the line of credit is drawn upon to establish that the amount drawn was intended to be a support amount. Second, while funds on deposit in a joint bank account are property of the account holders, amounts drawn and paid to a line of credit are generally in respect of debt to an independent third party, a financial institution.

Under either scenario outlined, the facts provided indicate that there is no payment from Spouse A to Spouse B prior to the written agreement.  In our view, any subsequent agreement to repay the line of credit up to $XXXXXXXXXX per month appears to be in the nature of an assumption of debt and, for the purposes of subsection 60.1(3) of the Act, the subsequent assumption of debt by Spouse A is not a support payment from Spouse A to Spouse B.  

In summary, it is our view that subsection 60.1(3) of the Act would not apply to deem the amounts drawn from or paid to a joint line of credit as a support amount paid by the payer. 
We trust our comments will be of assistance.
Yours truly,

Pamela Burnley, CPA, CA
Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate

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