Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Two Individuals (Individual A and Individual B), who became divorced in XXXXXXXXXX , entered into a separation agreement dated XXXXXXXXXX (the "Agreement"). Pursuant to the Agreement, Individual B was required, commencing XXXXXXXXXX , to pay $XXXXXXXXXX a month in respect of their two children ($XXXXXXXXXX per month per child) to Individual A. Pursuant to a court order (the Order) issued on XXXXXXXXXX , the monthly support amount was reduced to $XXXXXXXXXX per month commencing on XXXXXXXXXX . On XXXXXXXXXX , a decision was rendered by the Ontario Court (General Division) concerning the arrears outstanding. With respect to the Agreement, the court determined that the outstanding arrears totalled $XXXXXXXXXX . The court in its decision reduced these arrears to $XXXXXXXXXX . In the case of the Order, the outstanding arrears totalled $XXXXXXXXXX . No part of these arrears were reduced. Can the arrears of $XXXXXXXXXX and $XXXXXXXXXX qualify as "support payments" as defined in subsection 56.1(4) of the Income Tax Act (the "Act")?
Position: The amount of $XXXXXXXXXX can qualify while this is not the case for the amount of $XXXXXXXXXX .
Reasons: It is our general position that where arrears are settled for an amount which is less than the total periodic amounts that had fallen into arrears, the amount paid and received pursuant to the settlement, whether as a lump sum or by way of instalments, would not be deductible to the payer or required to be included in the recipient's income. On the other hand, an amount paid in a taxation year is regarded as qualifying as a periodic payment where it can be identified as being the payment of amounts payable periodically that were due after the date of the order or agreement. (See paragraph 22 of IT-530).
June 13, 2001
Toronto West Tax HEADQUARTERS
Services Office M. Eisner
Dianne Spina (613) 957-2138
Problem Resolution
2001-007862
Child Support - Payment of Arrears
This is in reply to your memorandum of April 15, 2001 concerning the above-noted subject.
In the circumstances of your situation, the Ontario Court (General Division) (the "Court") issued an order on XXXXXXXXXX (the "Order") concerning XXXXXXXXXX ("Individual A") and XXXXXXXXXX ("Individual B") who became divorced in XXXXXXXXXX. The information set out below was obtained from the Order you enclosed. We note that one of the purposes of the Order was to establish the amount of the arrears owing by Individual B to Individual A in respect of a separation agreement dated XXXXXXXXXX (the "Agreement) and an interim court order dated XXXXXXXXXX (the "Interim Order").
Pursuant to the Agreement dated XXXXXXXXXX, the two children were to reside with Individual A, and Individual B was required to pay Individual A $XXXXXXXXXX per month for the maintenance of those children ($XXXXXXXXXX per month per child) commencing on XXXXXXXXXX. The amount of support was to be indexed annually on the XXXXXXXXXX of each year.
In accordance with the Interim Order, the monthly support amount was decreased to $XXXXXXXXXX per month ($XXXXXXXXXX per month per child) commencing on XXXXXXXXXX.
The Order determined that the arrears relating to the Agreement amounted to $XXXXXXXXXX. In the case of the Interim Order, the Order indicated that Individual B's arrears totalled $XXXXXXXXXX (Individual B was required to pay Individual A the amount of $XXXXXXXXXX up to XXXXXXXXXX and had paid $XXXXXXXXXX in relation to that amount).
In respect to the arrears of $XXXXXXXXXX, the Order indicated that, following a consideration of Individual B's financial condition, $XXXXXXXXXX was being rescinded with the result that Individual B was only required to pay the amount of $XXXXXXXXXX. The Court indicated that no part of the amount of the $XXXXXXXXXX (i.e., the liability outstanding in respect of the Interim Order) was rescinded. The Court also indicated that Individual B was required to pay Individual A child support of $XXXXXXXXXX per month per child from XXXXXXXXXX as well as the further sum of $XXXXXXXXXX in respect of the arrears liability of $XXXXXXXXXX.
You have requested our views on whether Individual B is entitled to deduct the arrears and whether Individual A is required to include the arrears in income.
It is our general position that where arrears are settled for an amount which is less than the total periodic amounts that had fallen into arrears, the amount paid and received pursuant to the settlement, whether as a lump sum or by way of instalments, would not be deductible to the payer or required to be included in the recipient's income. By virtue of the definition of "support amount" in subsection 56.1(4) of the Income Tax Act (the "Act"), for a payment of arrears to be deductible and required to be included in income, it must, inter alia, be identified with the payment of periodic amounts required by a written agreement or court order. Accordingly, when a reduced amount is paid to obtain a release from a liability imposed by an agreement or order, the payment is not deductible or required to be included in income because it was not made in accordance with the agreement or order. The CCRA's position on this issue is set out in paragraph 22 of Interpretation Bulletin IT-530.
In relation to the above position in paragraph 22 of IT-530, the liability of $XXXXXXXXXX is identifiable into two separate segments. One segment (i.e., $XXXXXXXXXX) relates to the Agreement while the other segment relates to the Interim Order (i.e., $XXXXXXXXXX). Based on the information provided, it is apparent that the rescinded amount of $XXXXXXXXXX related to the liability of $XXXXXXXXXX which arose under the Agreement. In our view, it follows that the payment of the remainder of the liability of $XXXXXXXXXX is not deductible by Individual B nor required to be included in Individual A's income. On the other hand, no amount was rescinded in respect of the amount of $XXXXXXXXXX that relates to the Interim Order. Accordingly, to the extent that arrears payments that can be identified, on a reasonable basis, with the liability of $XXXXXXXXXX that arises under the Interim Order, we would not object to such portion being treated as a "support amount", as defined in subsection 56.1(4) of the Act, for the purposes of paragraphs 56(1)(b) and 60(b) of the Act. This position is also consistent with comments in paragraph 22 of IT-530 which indicates that a lump sum paid in a taxation year is regarded as qualifying as a periodic payment where it can be identified as being the payment of amounts payable periodically that were due after the date of the order or agreement and had fallen into arrears.
In closing, we would note that the court order dated XXXXXXXXXX, which was also included in the documentation you submitted, refers to arrears still outstanding of $XXXXXXXXXX and to a "statement of arrears" submitted to the court. You may wish to obtain a copy of this information, and a breakdown of that arrears balance, to ensure that arrears were not subsequently (i.e., after the Order) settled for a reduced amount.
For your information, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the legislation Access Database (LAD) on the CCRA's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (613) 957-0682. The severed copy will be sent to you for delivery to the client.
We trust that these comments will be of assistance.
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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