2021-0919941I7 Support payments

Principal Issues: Various questions and scenarios on support amounts.

Position: See responses.

Author: Krantz, Lita
Section: 56(1)(b), 56.1(3), 56.1(4), 60(b), 60.1(3)

                                                                         December 16, 2022

Christopher Lansdell                                        Income Tax Rulings Directorate
Senior Programs Officer,                                  Business and Employment Division
CVB                                                                  Cynthia Underhill

                                                                          2021-091994

Support payments

We are writing in response to your request for our views on the tax consequences of support payments under the Income Tax Act (Act). You have also described different hypothetical scenarios and posed various questions about the tax consequences regarding those scenarios .

You referred to the Tax Court of Canada’s decision in James v. Canada, 2013 TCC 164 and Income Tax Folio S1-F3-C3, Support Payments (the “Folio”) to support your view that a court ordered lump sum retroactive top-up payment may be deducted by the payer.

Our Comments

Prior to presenting a number of hypothetical scenarios for our consideration, you requested our views on the following questions:

Question 1

Does a lump-sum amount for retroactive periodic maintenance, need to be paid pursuant to a court order, to qualify as an amount payable on a periodic basis?

Response

A lump-sum amount 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 may qualify as a support amount. 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.

You can refer to :

* Paragraph 3.44 of Income Tax Folio S1-F3-C3, Support Payments

* Page 6 of Guide P102, Support Payments

* Technical interpretation 2016-0669271E5

Question 2

Is retroactive support that is pursuant to a court order considered a “support amount” if it was paid in multiple installments and not in a lump-sum amount?

Response

Where a court order creates a clear obligation to pay retroactive periodic maintenance for a specified period prior to the order, and those amounts are paid periodically after the date of the order, the retroactive payments will constitute a support amount, as long as the nature of the underlying legal obligation of the periodic retroactive maintenance payments is unchanged. If all other requirements are met, the payment would be deductible to the payer according to the formula in paragraph 60(b) of the Act.

You can refer to :

* Technical interpretation 2022-093108

Question 3

Is retroactive child support that was paid after the commencement day, included in variable B of the formula in paragraph 60(b), if the retroactive child support amounts were in respect of a period before the commencement date of the order?

Response

There are no published Income Tax Rulings Directorate documents that address this specific issue. This question will be addressed in a technical interpretation.

Scenarios

You have presented the following hypothetical scenarios and posed various questions for our comment.

Scenario 1

* Since the couple separated in January 2017, Mr. A has been paying $10 monthly to Mrs. A in spousal support and $100 per month for child support;

* Court order dated June 1, 2020, states that Mr. A has to pay $10 per month to his former spouse and $100 per month for child support;

* The court order explicitly refers to the amounts paid before June 1, 2020, and states that they are considered to have been paid and received under the order.

Question

Are the payments made by Mr. A, prior to the court order considered to be support amounts?

Response

In this scenario, there is no pre-existing order that established an obligation to make periodic payments for either child support or spousal support.

Subsection 60.1(3) allows for certain support payments paid prior to a written agreement or court order to be deductible by the payor (subsection 56.1(3) would also require the amounts to be included in the recipient’s income). If not for these subsections, the amounts would not be considered a support amount as they would not have been payable or receivable under a court order or written agreement.

External interpretation 2016-0669271E5 explains:

“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.”

Internal interpretation 2006-021770 explains:

“Subsection 60.1(3) 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 made with a retroactive clause therein. Paragraph 60.1(3)(a) provides that such amounts paid in the period ("Prior Period") consisting of the period prior to the time in the year when the agreement or order is made or in the preceding year, are deemed to be paid under the agreement or order if the document provides that they are to be so considered. In addition, subject to certain exceptions mainly pertaining to child support amounts that are not applicable in the case under objection, paragraph 60.1(3)(b) provides that the agreement or order is deemed to have been made on the day on which the first amount was paid in the Prior Period.”

In this scenario, pursuant to subsection 60.1(3) of the Act, the order is deemed to have been made on date of the first payment made on or after January 1, 2019 and all payments made from that date until June 1, 2020, inclusive, are deemed to be made under the order. Assuming all spousal and child support payments were made, Mr. A may deduct the spousal support payments for 2019 and 2020 in the year the amounts were paid. Mrs. A will include the spousal amounts received for 2019 and 2020 in income in the year the amounts were received.

You can refer to:

* Page 5 of Guide P102, Support Payments

* Paragraph 3.36 and example 5 in Income Tax Folio S1-F3-C3, Support Payments

* Technical interpretations 2016-066927, 2006-021770

Scenario 2

* The same facts as Scenario 1, however, the court order does not explicitly refer to the amounts paid before June 1, 2020, and does not recognize that they are considered to have been made under the order.

Question

Are the payments made by Mr. A, prior to the court order, considered to be support amounts?

Response

Similar facts to Scenario 1 above. However, the current scenario states that the court order does not explicitly refer to prior payments.

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.

See response for Scenario 1 for reference documents.

Scenario 3

* Court order dated June 1, 2020, states that Mr. A has to pay $10 per month to his former spouse starting on January 1, 2017 and $100 per month for child support starting on January 1 2017, with no end date;

* As of June 1, 2020 the total retroactive spousal support is $420 and the total retroactive child support is $4,200;

* The court order states Mr. A is to pay a total lump-sum payment in the amount of $2,500 to settle his obligation to pay the retroactive support amounts.

Question

Is the lump-sum payment of $2,500, made by Mr. A, considered a support amount?

Response

As outlined in paragraphs 3.44 and 3.46 of the Folio, an amount paid as a single lump sum will generally not qualify as being payable on a periodic basis. However, there may be circumstances where a lump-sum amount paid in a tax year will be regarded as qualifying as a periodic payment where it can be identified that 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.

Whether a particular payment meets the requirements of the Act to be deductible as a spousal support amount is a question of fact. In this scenario, the lump-sum payment ordered by the court order appears to relate to a period before the date of the court order and gives consideration to further adjustments to reduce the payment from $4,200 to $2,500.   Based on this information, it is unlikely that the lump-sum payment meets all of the requirements to be a support amount as defined in the Act.

You can refer to:

* Paragraphs 3.44 and 3.46 of Income Tax Folio S1-F3-C3, Support Payments

* Technical interpretation 2014-0545611E5

Scenario 4

* The same facts as Scenario 3, however, the court order explicitly states that the retroactive support payment will be paid in a lump-sum payment of $4,620 ($4,200 child support arrears + $420 spousal support arrears).

Question

Is the lump-sum payment considered a support amount?

Response

As noted-above, paragraph 3.44 of the Folio explains that there may be circumstances where a lump-sum amount paid in a tax year will be regarded as qualifying as a periodic payment, the third bullet point states:

“• 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 scenario, the lump-sum payment would be considered a support amount because it is paid under a court order that clearly states that retroactive support has to be paid for a specific period that happened before the date of the court order.

You can refer to:

* Paragraph 3.44 of Income Tax Folio S1-F3-C3, Support Payments

Scenario 5

* Court order dated June 1, 2020, states that Mr. A is obligated to pay spousal support payments of $12,000 for the period from January 2016 to December 2019;

* The order states that the retroactive spousal support will be paid in 12 monthly payments of $1,000 from January 2021 to December 2021. This will cover all the retroactive spousal support for the period from January 2016 to December 2019. Mr. A can pay it faster if he wants;

* No child support payments were ordered by the court;

Question

Is the court ordered retroactive spousal support, in the form of 12 monthly payments considered a support amount?

Response

Paragraph 3.43 of the Folio confirms that to qualify as a support amount under subsection 56.1(4), one condition is that the amount be payable as an allowance on a periodic basis for the maintenance of the recipient, children of the recipient or both. Paragraph 3.43 outlines some of the more important criteria that should be considered in making the distinction between periodic payments made as an allowance for maintenance and payments made as instalments of a lump or capital sum. These criteria are:

a) Length of periods at which payments are to be made – Amounts payable weekly or monthly are easily characterized as allowances for maintenance. Where the amounts are payable at longer intervals the issue becomes less clear. If the amounts are to be paid at intervals of greater than one year it is unlikely that they will qualify as an allowance for maintenance.

b) Whether payments are for an indefinite period or fixed term – An allowance for maintenance will more commonly provide for its continuance either for an indefinite period or until the occurrence of an event which will cause a material change in the needs of the recipient (such as the coming of age of a child). Sums payable over a fixed term, on the other hand, may be more readily seen as being of a capital nature.

c) Amount of payments relative to the income and living standards of both the payer and recipient – Where amounts payable are in excess of an amount sufficient to maintain the recipient, children of the recipient or both, in the style to which they were accustomed prior to the breakdown of the marriage or common-law partnership, they will not likely be viewed as an allowance for maintenance. The chance of such amounts qualifying as an allowance for maintenance is even less likely where the payments are to be made over a short period of time. Where the amount is no greater than required to maintain the recipient's standard of living it is more likely to qualify as an allowance for maintenance.

d) Whether the payments purport to release the payer from any future obligations to pay maintenance – If there is such a release the payments will normally not be considered an allowance for maintenance.

The facts in scenario 5 do not clearly indicate whether the $12,000 spousal support represents an allowance on a periodic basis. The court order would need to be reviewed to determine how the judge arrived at the amount of the retroactive spousal support. If it were determined that the court order created a clear obligation to pay retroactive periodic maintenance for a specified period prior to the order, 12 monthly payments of $1,000 would constitute a support amount (refer to Question 2). If it were determined that the retroactive spousal support was not considered to represent an allowance on a periodic basis, the 12 monthly payments of $1,000
would not qualify as a support amount because the underlying obligation
would not qualify as a support amount under subsection 56.1(4).

You can refer to:

* Paragraphs 3.43 and 3.44 of Income Tax Folio S1-F3-C3, Support Payments

* Technical interpretation 2022-093108

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA’s electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases.

We trust these comments will be of assistance to you.

Yours truly,

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

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