2016-0669271E5 support amount

Principal Issues: Does a lump-sum amount paid for retroactive spousal support in respect of periods prior to the date of a written agreement qualify for a deduction under paragraph 60(b) of the Income Tax Act (the "Act")?

Position: No.

Reasons: A lump-sum payment for retroactive spousal support is not for amounts that were payable on a periodic basis that were due after the date of a written agreement that had fallen into arrears. Therefore the amount paid does not meet the definition of a support amount in subsection 56.1(4) of the Act.

Author: Shea-Farrow, Nancy
Section: 56.1(4), 60(b), 56(1)(b)

XXXXXXXXXX                                                                                                                           2016-066927
                                                                                                                                                   N. Shea-Farrow
March 24, 2017

Dear XXXXXXXXXX

Re: Lump-Sum Retroactive Payment

We are responding to your email of October 3, 2016, concerning the income tax treatment of a lump-sum payment for retroactive spousal support.

You have told us that:

*     you and your ex-spouse are separated;
*     there is a written separation agreement (the “Agreement”) dated XXXXXXXXXX;
*     the Agreement requires you to pay spousal support of $XXXXXXXXXX per month and child support of $XXXXXXXXXX per month;
*     the Agreement stated that after your daughter graduated from university, you and your ex-spouse would renegotiate as your spousal support amount would likely increase as you would no longer be required to pay child support;
*     your daughter graduated on XXXXXXXXXX, and on XXXXXXXXXX, you stopped paying child support but continued paying spousal support of $XXXXXXXXXX per month; and
*     on XXXXXXXXXX, you started paying $XXXXXXXXXX per month for spousal support to reduce the total retroactive amount (the amount that you will ultimately have to pay as per a written agreement but for the period before the written agreement was in place) as you and your ex-spouse have established that the new spousal support amount would be $XXXXXXXXXX per month retroactive to XXXXXXXXXX.  However, there is no new written agreement yet.

You would like to know whether an amount paid as a lump sum in 2016 or 2017 for retroactive spousal support (that is, a lump-sum payment made in respect of spousal support for a period before the date of the written agreement) will be deductible for income tax purposes.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (“Act”) and related legislation (where referenced). 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 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Support amount

Income Tax Folio S1-F2-C3, Support Payments (the “Folio”), available on the Canada Revenue Agency’s (CRA) website, explains the CRA’s position concerning support amounts.  Among other criteria, an amount paid in respect of spousal support must meet the definition of a “support amount” in subsection 56.1(4) of the Act to be deductible by the payer under paragraph 60(b) of the Act and included in income of the recipient under paragraph 56(1)(b) of the Act.

As explained in paragraph 3.10 of the Folio, an amount is a support amount if,

*     it is payable or receivable as an allowance on a periodic basis;
*     it is paid for the maintenance of the recipient, the children of the recipient, or both;
*     the recipient has 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 (“court order”) 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.

As noted in paragraph 3.38 of the Folio, for the purposes of a support amount, an allowance is a specified sum of money which has been established in advance of payment by the court or the parties as being the required payment to be made by the payer to the recipient for the maintenance of the recipient, children of the recipient or both.

Generally speaking, support amounts paid by the payer to the recipient in a tax year are considered to be first for child support payable, where applicable, before any deduction is allowed for spousal support. In general, where a spousal support amount is paid according to, and after a written agreement or court order is made, and any child support payable has been fully paid, a tax deduction is allowed for the payer under paragraph 60(b) of the Act.

Payments made before the date of the court order or written agreement

Although payments made before the date of a court order or written agreement cannot be considered to be paid under the order or agreement, in some situations, they may nevertheless qualify as support amounts to be used in determining the amount the payer may deduct under paragraph 60(b) of the Act. Subsection 60.1(3) of the Act provides that where a written agreement or court order is “made at any time in a taxation year,” amounts paid before that time and in the year or the preceding year are to be considered to have been paid and received pursuant to the agreement or order.  The court order or written agreement must explicitly refer to the payments that have been made and state that they are considered to have been made under the order or agreement.

While subsections 60.1(3) and 56.1(3) of the Act could apply to payments that were actually made in the preceding year or in the year that the written agreement or court order was made, but before the date of the agreement or order, these provisions do not apply to a lump-sum payment made after the date of the agreement or order.

Lump-sum payments made after the date of the court order or written agreement

As explained in paragraph 3.44 of the Folio, an amount paid as a single lump sum will generally not qualify as a support amount because it is not payable on a periodic basis. However, there are certain exceptions where a lump-sum payment will be regarded as qualifying as a periodic payment.

One exception is if the lump-sum payment represents amounts payable periodically that were due after the date of the court order or written agreement that had fallen into arrears. Another exception is if 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.

However, a lump-sum payment made pursuant to a written agreement in respect of a period prior to the date of the written agreement is not considered a qualifying support amount for purposes of subsection 56.1(4) of the Act.  Thus, if a lump-sum amount paid to a recipient is in respect of a period prior to the date of a written agreement, it is not deductible under paragraph 60(b) of the Act by the payer nor should it be included in the income of the recipient under the parallel paragraph of 56(1)(b) of the Act.

Retroactive support - written agreement versus court order

In a prior conversation, you asked why a lump-sum payment for retroactive support pursuant to a court order may be considered to be for amounts payable on periodic basis and thus a qualifying support amount, whereas a lump-sum payment for retroactive support pursuant to a written agreement would not be so considered.  When interpreting tax legislation, the CRA must consider case law.  With respect to a lump-sum payment for retroactive spousal support ordered by a court, the Tax Court of Canada pronounced, in James v. The Queen, 2013 TCC 164, at paragraph 17:

“…The combination of the Sills concept, the authority of the British Columbia Court of appeal to make an order for payment of support “in respect of any period before the order is made”, the binding nature of such an order on all the world (“Dale”), leads me to conclude that given how the British Columbia Court of Appeal framed its order, it was ordering increased payments for each of the preceding 54 month periods, and as such, the requirement for payable on a periodic basis is met. The legal obligation, even if considered to be created currently, is an obligation to make good the periodic payments …”

The court noted the difference between a court order and a written agreement with respect to retroactive support in paragraphs 6 and 7 of Bayliss v. The Queen, 2007 TCC 387:

“[6] Counsel referred me to the cases of Aceti v. The Queen and Stoikos v. The Queen but in my view, they have no application here. Both those cases were concerned with separation agreements that purported to provide that the taxpayer was to make periodic payments during a period beginning before the contract had been entered into. …

[7] This case, in my opinion, is materially different in that the retroactive obligation to make the payments from August 1, 2001 to August 1, 2002 is created by the order of the Superior Court of Justice, not simply by an agreement between the parties. The authority invoked by Wood J. to make such an order is specifically given by the Family Law Act:

33(1) A court may, on application, order a person to provide support for his or her dependants and determine the amount of support.

34(1) In an application under section 33, the court may make an interim or final order,
(f) requiring that support be paid in respect of any period before the date of the order;”

Therefore, it is our understanding that the courts are provided with legislative authority to make an order for support for periods before the date of the order and to frame the order such that the amounts are payable on a periodic basis.

We trust our comments will be of assistance.

Yours truly,

Pamela Burnley, CPA, CA
A/Director
Business and Employment Division
Income Tax Rulings Directorate

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