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:
Whether amounts payable pursuant to a (draft) court order as maintenance are deductible to the payer and taxable to the recipient spouse as intended. Also whether legal fees incurred by spouse to negotiate this order would be deductible against any payments required to be included in income.
Position TAKEN:
Of the two lump sum payments called for in the court order, the payment made in respect of a period that pre-dates the order would not qualify and the one made in September to cover the remainder of the year would not qualify since is paid in advance of when amounts are payable. Legal fees not deductible to the recipient spouse.
Reasons FOR POSITION TAKEN:
Lump sum payments generally do not qualify. The sole exception is a payment in respect of periodic payments that have fallen into arrears. Legal fees incurred by the recipient appear to be in respect of bringing a maintenance order into existence not to enforce one already in existence.
951696
XXXXXXXXXX J.A. Szeszycki
July 19, 1995
Dear XXXXXXXXXX:
Re: Deductibility of Child Support Payments
This is in reply to your letter of June 27, 1995 in which you requested a review of a draft court order to determine whether the wording of the relevant provisions would support the deductibility and taxability of payments made under their terms. We also make reference to our telephone conversation with XXXXXXXXXX of July 14, 1995.
It is our understanding that the purpose of the draft court order you provided to us for review is to reflect your intention to support your son, XXXXXXXXXX during periods when he is in attendance at XXXXXXXXXX. The support in respect of the latter part of the year is conditional on your son being enrolled and in attendance at the college for the 1995/96 academic year. The support provision is divided into two parts:
XXXXXXXXXX
It is our understanding that the draft submitted to us was made an official order of the court on or about May 25, 1995 and that the lump sum payment referred to in (a) above was made to the former XXXXXXXXXX shortly thereafter.
You have indicated in your letter that in the course of the negotiations it was always the intent of the parties that the payments would be deductible to the payer and taxable to the recipient. The deductibility or taxability of a maintenance payment does not flow merely from the stated intentions of the parties, even if those intentions are set out in the court order. The deductibility or taxability of such a payment relies on its being able to satisfy the criteria set out in the relevant income tax legislation. In this case, the relevant provision authorizing the deduction of the maintenance payment is paragraph 60(b) of the Income Tax Act:
60(b) - an amount paid by the taxpayer in the year as alimony or other allowance payable on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient and the children, if the taxpayer, because of the breakdown of the taxpayer's marriage, was living separate and apart from the spouse or former spouse to whom the taxpayer was required to make the payment at the time the payment was made and throughout the remainder of the year and the amount was paid under a decree, order or judgement of a competent tribunal or under a written agreement.
Within the above provision there are four basic criteria that must be satisfied in order for an amount to be deductible to the payer; (1) the payment must be an allowance for the maintenance of the spouse and/or children, (2) the spouses were living separate and apart at the time that the particular payment was made and the remainder of the year and were doing so pursuant to a divorce, judicial separation agreement or a written separation agreement, (3) the amounts are paid pursuant to the document referred to in (2), and (4) the amount paid was payable on a periodic basis.
Whether the above criteria are met is a question of fact; however, it would appear that criterion (1) is met since the amounts are intended to be for the maintenance of the child when he is in full time attendance at college. It is apparant that the second criterion has also been met and that the amounts have been, and will be, paid pursuant to the specific terms of the order, satisfying the third criterion.
It is clear from the wording of the payment provision of the order that it is your intention that your son be financially maintained in the amount of $XXXXXXXXXX per month during the period in which he is a student. The amounts, however, are being paid in the form of lump sum payments, as also called for in the agreement. The first lump sum payment, which has already been made, covers a period of months that pre-date the court order itself and the second lump sum payment is scheduled to be made on September 15, 1995 to cover periods not yet due.
We have attached a copy of Interpretation Bulletin IT-118R3 "Alimony and Maintenance" which explains, at paragraph 13, the Department's position with respect to lump sum payments. Each of the payments referred to in the court order appear to be described in that paragraph. Lump sum payments generally do not qualify as being payable on a periodic basis, the exception being where the payment is in respect of amounts that have fallen into arrears. It is our conclusion, therefore, that the lump sum payments called for in the court order would not qualify as amounts payable on a periodic basis.
You also asked us to comment on the deductibility of legal fees incurred by your former spouse against taxable amounts received by her that were incurred in the course of bringing the court order into existence. We have also attached a copy of IT-99R4 "Legal and Accounting Fees" and refer you to paragraphs 16 to 18 which relate to alimony and maintenance cases. These comments make the distinction between legal fees incurred in bringing a right to taxable payments into existence (non-deductible) and those incurred to enforce an already existing right (deductible).
We trust our comments will be of assistance to you.
Yours truly,
P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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