2022-0931081I7 Retroactive support payments

Principal Issues: 1) Can a court order create retroactive periodic support obligations? 2) If so, can those retroactive support obligations be deductible, if paid after or before the date of the order?

Position: 1) Yes, a court order can create retroactive periodic support obligations. 2) Yes, in certain circumstances.

Reasons: 1) 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. 2) Payments for spousal support that are made before the date of a court order or written agreement cannot be considered to be paid under the order or agreement, but can be deductible if they meet the requirements of 60.1(3). Amounts paid after the court order can be deductible if they meet the requirements of the definition of a "support amount"

Author: Wirag, Eric
Section: 56.1(4) "support amount"; 60.1(3);

                                                                                September 7, 2022


Validation Policies and Procedures Section           HEADQUARTERS
Collections and Verification Branch                       Income Tax Rulings Directorate
                                                                               E. Wirag, CPA, CMA


Attention: Chris Lansdell 2022-093108

Retroactive support payments

This is in reply to your email of March 21, 2022 asking a number of questions related to retroactive support payments required under a court order.

You have described a scenario where a 2018 court order (the Order) requires retroactive child support and spousal support payments to be made by an individual to a former spouse. These child support and spousal support payments were each calculated by the Order on a monthly basis for the period from 2013 until the date of the Order in 2018. You state that voluntary monthly child support payments were made by the individual to the former spouse during this period, that were, in total, more than the total child support required under the Order. You also state that the Order requires an equalization amount to be paid by the former spouse to the individual in satisfaction of the division of matrimonial property. It also states that the overpayment for child support and the equalization amount are to offset the total retroactive spousal support required and owing by the individual.

We understand that the Order calculates the total outstanding retroactive spousal support for the period from 2013 until the date of the Order. This total outstanding retroactive spousal support equals:

The total of all monthly spousal support payments required for the period,

Less:

The equalization amount required by the former spouse, and
The overpayment of child support that has been made for the period.

Finally, you state that the Order requires regular monthly child support and spousal support payments to be paid by the individual to the former spouse beginning after the date of the Order. An additional amount will be added to each of these monthly payments, representing a portion of the outstanding retroactive spousal support required to be paid. This additional amount will be paid on a monthly basis until the total of the outstanding retroactive spousal support has been paid in full, at which time, only the regular monthly child and spousal support payments will be required.

You have asked for our comments regarding the following questions related to the scenario described above:

1) Can a court order create a retroactive periodic support obligation so that it is deductible for the payer?

2) If an order can create a retroactive periodic support obligation, would the payments be deductible even if they are paid after the date of the order? If so, would it be the case regardless of whether the payments are made periodically or as a single lump sum payment?

3) Which of the amounts are deductible by the payer? Will the equalization payment required by the former spouse impact the amount deductible by the payer? Will the amounts paid in prior years and applied against the total spousal support amounts owing by the Order be deductible?

Our comments:

Income Tax Folio S1-F3-C3, Support Payments (the Folio) explains the Canada Revenue Agency’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 Income Tax Act (the Act) to be deductible by the payer under paragraph 60(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 the 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.

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 for the spousal support amount paid under paragraph 60(b) of the Act.

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. In the scenario you described, it appears that the Order requires periodic amounts that are payable on a monthly basis for both child and spousal support for a period before the date of the Order. Therefore, it appears the Order requires amounts that are payable as an allowance on a periodic basis for that period.

Payments made before the Order for amounts payable before the Order:

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) provides that such payments made in the year of the order or agreement or in the preceding year are deemed to be paid under the order or agreement if the document explicitly refers to the payments that have been made and states that they are considered to have been made under the order or agreement. 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. Knowing this date is necessary for purposes of determining whether there is a commencement day of the order or agreement. This will, in turn, determine the deductibility of the support amounts under paragraph 60(b).

In the scenario that you have described, where the Order is dated in 2018, subsection 60.1(3) of the Act would deem the Order to have been made as of the first payment that was made in 2017. As a result, any of the support payments made from the first payment that was made in 2017 to the date of the Order would be deemed to be made under the Order and could be considered “support amounts”, assuming all of the other requirements of the definition are met. As the Order suggests that all retroactive child support payments have been paid in full, any support payments made in 2017 and 2018 (up to the date of the Order) in excess of the child support amounts payable for those years, could be deductible by the individual in those years.

While subsection 60.1(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, this provision does not apply to payments made after the date of the agreement or order.

Payments made after the Order for amounts payable before the Order:

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.

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 the definition of a support amount in 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 according to the formula in paragraph 60(b) of the Act.

A recipient might owe the payer an equalization amount, the payment of which is to be effected by a partial or full offset of the allowance payable for an applicable period of time. In this situation, the amount of the allowance which would qualify as a support amount is the gross amount of the allowance with no adjustment for the amount of offset because the equalization amount is not a support payment.

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.

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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