2015-0617821E5 Support amounts received from Hong Kong Resident

Principal Issues: How should spousal support amounts (or alimony) received by a Canadian taxpayer be reported when they are paid by a resident of Hong Kong subsequent to the signing of the Canada-Hong Kong Tax Agreement?

Position: Spousal support amounts received from a non-resident are to be included in income under paragraph 56(1)(b) of the Act and a deduction is permitted for that amount under subparagraph 110(1)(f)(i) as an amount exempt from income tax in Canada because of the Canada-Hong Kong Tax Agreement.

Reasons: Paragraph 4 of Article 20 in the Canada-Hong Kong Tax Agreement is the provision used for alimony and other maintenance payments. The phrase “that party” at the end of paragraph 4 of Article 20 in the Canada-Hong Kong Tax Agreement means the party where the payment originates.

Author: Robinson, Lauri
Section: 56(1)(b), 110(1)(f)(i)

XXXXXXXXXX                                                                                                                  2015-061782
                                                                                                                                          Lauri Robinson, CPA, CMA
July 29, 2016

Dear XXXXXXXXXX:

Re:   Alimony Payments Received from a Hong Kong Resident

We are writing in response to your letter dated November 9, 2015, in which you requested our views on paragraph 4 of Article 20 of the “Canada-Hong Kong Tax Agreement” (footnote 1), which was signed on November 11, 2012, and entered into force on October 29, 2013, with an effective date of January 1, 2014. We also acknowledge our May 27, 2016, conversation (Robinson / XXXXXXXXXX). We apologize for the delay in responding.

Paragraph 4 of Article 20 of the Canada-Hong Kong Tax Agreement reads as follows:

Alimony or other maintenance payment paid by a resident of a Party to a resident of the other Party shall, to the extent it is not allowable as a deduction to the payer in the first-mentioned Party, be taxable only in that Party.(emphasis added)

You asked us to confirm whether alimony payments received by a Canadian-resident taxpayer would be taxable in Canada if they are paid by a Hong Kong resident. You have advised us that the payer is not entitled to a deduction in Hong Kong in respect of the amounts paid to the Canadian resident. In addition, you requested clarification of the meaning of “that Party” at the end of paragraph 4.

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation.  It does not confirm the income tax treatment of a particular situation, but is intended to assist you in making that determination.  The income tax treatment of transactions 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-70-6R7 Advance Income Tax Rulings and Technical Interpretations.

Generally, alimony or spousal support payments (herein referred to as “support amounts”) received by a Canadian resident taxpayer are to be included in computing their income for a taxation year pursuant to paragraph 56(1)(b) of the Act. This income inclusion is not dependent on whether the payer of the support amounts receives a tax deduction in the payer’s country of residence although there is generally symmetry when both the payer and the recipient are residents of Canada.  For the purposes of your question, it is assumed that the support amounts are included in income pursuant to paragraph 56(1)(b) of the Act. (footnote 2)

In computing taxable income, a deduction may be permitted if an amount is considered exempt from income tax in Canada because of a provision contained in a tax convention or agreement.  Prior to the signing of the Canada-Hong Kong Tax Agreement, it was our view that a Canadian recipient receiving support amounts from a payer resident in Hong Kong was required to include the payment in income and was not entitled to claim a deduction for that amount (footnote 3).

In the scenario you described, the Canadian resident who receives the support amounts would be entitled to a deduction for those amounts under subparagraph 110(1)(f)(i) of the Act (footnote 4) because the support amounts are exempt from income tax in Canada pursuant to paragraph 4 of Article 20 of the Canada-Hong Kong Tax Agreement for payments received on or after January 1, 2014.

With regard to your second question, the meaning of the phrase “that Party” at the end of paragraph 4 means the party from where the payment arises.  In your example, “that Party” would be Hong Kong.

For more information on support payments please refer to pamphlet P102, Support Payments, and Income Tax Folio S1-F3-C3, Support Payments, both of which can be found on the CRA’s website. We trust our comments will be of assistance.

Yours truly,

Terry Young, CPA, CA
Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  The Agreement between the Government of Canada and the Government of the Hong Kong Special Administrative Region of the People’s Republic of China for The Avoidance of Double Taxation and The Prevention Of Fiscal Evasion With Respect To Taxes On Income.
2  Reported on lines 128 and 156 of the T1 Return.
3  Technical interpretation letter 2003-0184575.
4  Claimed on line 256 of the T1 Return.

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