2016-0643671I7 Deductibility of Support Amounts

Principal Issues: Are certain lump-sum retroactive support amounts that are paid pursuant to a court order for a specified period prior to the date of the court order considered support amounts?

Position: Question of fact and depends if the lump-sum amount is paid pursuant to a court order that establishes a clear obligation to pay retroactive periodic maintenance.

Reasons: Paragraph 3.44 of the Folio and jurisprudence.

Author: D'Angelo, Sandro
Section: 56.1(4), 60(b), 56(1)(b)

                                                                                                                                               August 10, 2016

XXXXXXXXXX                                                                                                                       HEADQUARTERS
XXXXXXXXXX Tax Centre                                                                                                     Income Tax Rulings Directorate
                                                                                                                                               Sandro D’Angelo
                                                                                                                                               (613) 410-9703

                                                                                                                                               2016-064367

      Lump-sum Support Payments

We are writing in response to your correspondence dated April 14, 2016, and our subsequent telephone conversations (D’Angelo/XXXXXXXXXX) of April 27, 2016 and May 3, 2016, regarding our views on whether certain lump-sum amounts paid by an individual are deductible as spousal support.

You have provided a Supreme Court of XXXXXXXXXX final order dated XXXXXXXXXX (the “Order”), that provides, among other matters, for payments by the “Respondent” of child and spousal support to the “Claimant.”  Certain amounts described in paragraphs XXXXXXXXXX of the Order refer to periods before the date of the Order, but were paid by the Respondent in XXXXXXXXXX.

The salient points of the Order are as follows:

*     Paragraph XXXXXXXXXX of the Order specifies that the Respondent shall pay the Claimant $XXXXXXXXXX per month for spousal support commencing XXXXXXXXXX, and continuing on the first of each and every month thereafter.

*     Paragraph XXXXXXXXXX of the Order specifies that the Respondent shall pay the Claimant, “in full and final satisfaction of retroactive periodic spousal support for the period commencing XXXXXXXXXX up to and including XXXXXXXXXX, the total sum of $XXXXXXXXXX….”

*     The Order indicates that the lump-sum amount paid pursuant to paragraph XXXXXXXXXX shall be added to the Claimant’s XXXXXXXXXX income and correspondingly deducted from the Respondent’s XXXXXXXXXX income.

*     Paragraphs XXXXXXXXXX of the Order are similar to paragraphs XXXXXXXXXX, but refer to child support instead of spousal support and reflect different dollar amounts.

The child support described in paragraph XXXXXXXXXX and the spousal support described in paragraph XXXXXXXXXX of the Order are limited to the Respondent’s share of the net sales proceeds from the sale of the Respondent’s and Claimant’s former matrimonial home.

You have specifically asked whether a lump-sum amount paid by the Respondent in XXXXXXXXXX for amounts required pursuant to the Order for a period before the date of the Order, (i.e., the total sum in paragraph XXXXXXXXXX of the Order and a lump-sum payment for the amounts in paragraph XXXXXXXXXX of the Order for the period XXXXXXXXXX) would be considered a “support amount” for purposes of subsection 56.1(4) of the Income Tax Act (“Act”) and therefore be deductible to the Respondent in XXXXXXXXXX.

Our Comments

Whether a payment for spousal support is deductible depends in part on whether the amount is 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;

*     paid for the maintenance of the recipient, the children of the recipient, or both; and

*     the recipient must have discretion as to the use of the amount; and

*     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

*     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 with the laws of a province or territory.

Paragraph 3.28 of Income Tax Folio S1-F3-C3, “Support Payments” (Folio), explains that an order of a competent tribunal is a decree, order or judgment made by a court, such as a family law court or other competent tribunal.  The term “order of a competent tribunal” is more commonly referred to as a court order and order.  Nothing less than a concrete pronouncement, decree or direction of a tribunal empowered to make an order will constitute an order as required by the definition of support amount in subsection 56.1(4) of the Act.

As noted in paragraph 3.44 of the Folio, an amount paid as a single lump sum will generally not qualify as being payable on a periodic basis for purposes of subsection 56.1(4) of the Act.  However, paragraph 3.44 of the Folio also notes certain exceptions where a lump-sum amount paid in a year may be regarded as qualifying as a periodic payment.  One of these exceptions is where the lump-sum amount is paid pursuant to a court order that establishes a clear obligation to pay retroactive periodic maintenance for a specified period prior to the date of the court order.  In this situation, the lump-sum payment will not, in and of itself, change the nature of the underlying legal obligation of periodic maintenance payments and, if all other requirements are met, the lump-sum amount paid will be deductible to the payer and included in the recipient’s income according to the formulas in paragraphs 60(b) and 56(1)(b) of the Act.

However, a lump-sum amount paid pursuant to a written agreement in respect of a period prior to the date of the written agreement would not be considered a qualifying support amount for purposes of subsection 56.1(4) of the Act.

The underlying facts of a particular situation must be analyzed to determine whether a lump-sum payment reflects an obligation to pay an amount on a periodic basis.  Based on the information provided, it is our view that the amounts required to be paid by the Respondent pursuant to paragraph XXXXXXXXXX of the Order appear to represent periodic spousal maintenance established by the Order, some of which is retroactive periodic maintenance for a specified period prior to the date of the Order.  As such, a lump-sum payment for these amounts could be considered a “support amount” as defined in subsection 56.1(4) of the Act.  Therefore, a lump-sum payment made in XXXXXXXXXX representing these amounts could be deductible as determined in accordance with the formula in paragraph 60(b) (footnote 1) of the Act.

However, based on the information provided, it is our view that a lump-sum payment in satisfaction of the amount required in paragraph XXXXXXXXXX of the Order does not appear to represent past due or retroactive periodic maintenance and, as such, this amount would likely not be considered a “support amount” as defined in subsection 56.1(4) of the Act.  Specifically, the amount in paragraph XXXXXXXXXX does not appear to represent periodic maintenance.  It seems to be more akin to a settlement or settling of assets, particularly since the child and spousal support described in paragraphs XXXXXXXXXX are limited to the Respondent’s share of the net proceeds from the sale of the former matrimonial home.

We would also point out that while court orders and written agreements may contain statements regarding the taxation of support amounts paid pursuant to the court order or written agreement, the tax treatment of support amounts will be based solely on the requirements set out in the Act.  As such, the comments made in paragraph XXXXXXXXXX of the Order that the lump-sum amount is taxable to the Claimant and deductible to the Respondent cannot alter the proper tax treatment.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library.  After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases.  You may request an extension of this 90-day period.  The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer.  The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca.  A copy will be sent to you for delivery to the taxpayer.

We trust our comments will be of assistance.

Yours truly

Pamela Burnley, CPA, CA
Manager - Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

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

1 There is a parallel income inclusion calculation for the recipient in paragraph 56(1)(b).

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2017

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2017