Principal Issues: Is a lump sum spousal support amount paid under a separation agreement, deductible by the payer?
Position: Not in this case
Reasons: Legislation and previous positions
XXXXXXXXXX 2010-039146 George A. Robertson, CMA July 4, 2011
Dear XXXXXXXXXX :
Re: Lump Sum Spousal Support
This is in response to your request for clarification whether a payment of an amount to your spouse under a separation agreement (the Agreement) is deductible as spousal support payment.
Our understanding of the facts is:
- You and your wife have lived separate and apart since XXXXXXXXXX according to the Agreement. You and your wife have XXXXXXXXXX at the date of the Agreement, which is XXXXXXXXXX .
- You have paid $XXXXXXXXXX to your wife before the Agreement was executed. You concede that this payment is not deductible.
- The Agreement states that you are to pay your wife $XXXXXXXXXX as a payment for equalization of family assets.
- XXXXXXXXXX .
- Child support payments are not an issue "because of the age and circumstance of the children, custody is not an issue."
- You have waived any claim to child support.
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular (IC) 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This IC and other Canada Revenue Agency (CRA) publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (TSO). A list of TSOs is available on the "contact us" page of CRA's website. We are however, prepared to provide the following general comments, which may be of assistance.
Our comments
An amount paid in respect of spousal support must meet the definition of "support amount" in subsection 56.1(4) of the Income Tax Act (the Act) to be tax deductible by the payer under paragraph 60(b) of the Act and included in the income for the recipient under paragraph 56(1)(b) of the Act.
According to paragraph 4 of Interpretation Bulletin IT- 530R Support Payments, an amount is a support payment if:
- the amount is payable to the recipient;
- the amount is payable as an allowance for the maintenance of the recipient, children of the recipient or both; [Emphasis added]
- the amount is payable on a periodic basis; [Emphasis added]
- the recipient has the discretion as to the use of the amount; and
- where the recipient is the payer's current or former spouse, the amount is payable under an order of a competent tribunal or under a written agreement and the payer and the recipient are living separate and apart because of a breakdown of their marriage; or where the recipient is the parent of a child of whom the payer is the natural parent, the amount is payable under an order of a competent tribunal in accordance with the laws of a province or territory.
In general, where support amounts are paid in respect of spousal support only, they are tax deductible for the payer under paragraph 60(b) of the Act if they are paid according to and after, a written agreement or an order of a competent tribunal is made.
The exception to this general rule is described in paragraph 24 of IT 530R. Subsection 60.1(3) of the Act provides for amounts paid before a written agreement or order of a competent tribunal is made. The subsection essentially stipulates that where a written agreement or order of a competent tribunal "made at any time in a taxation year" provides that amounts paid before that time and in the year or the preceding year are to be considered to have been paid and received thereunder, such prior-paid amounts are treated as having been paid pursuant to the written agreement or order. Providing the support payment qualifies this exception could relate to a component of the total $XXXXXXXXXX paid from XXXXXXXXXX to XXXXXXXXXX , however, the agreement does not reference this payment and it is not deductible.
Paragraph 22 of IT-530R states:
An amount paid as a single lump sum will generally not qualify as being payable on a periodic basis. [Emphasis added] However, there may be circumstances where a lump sum amount paid in a taxation year will be regarded as qualifying as a periodic payment where it can be identified that:
(a) the lump sum payment represents amounts payable periodically that were due after the date of the order or written agreement that had fallen into arrears, or
(b) the lump sum amount is paid pursuant to a court order and in conjunction with an existing obligation for periodic maintenance, whereby the payment represents the acceleration, or advance, of future support payable on a periodic basis, for the sole purpose of securing the funds to the recipient.
In either of the above situations, the lump sum payment will not, in and of itself, change the nature of the underlying legal obligation of periodic maintenance payments. . .
In addition, a lump sum payment required by a court order or written agreement in respect of a period prior to the date of the order or agreement would not be considered a qualifying support amount for purposes of subsection 56.1(4).
The lump sum amount under the Agreement was due immediately. The lump sum amount is not for amounts payable on a periodic basis that had fallen into arrears. Similarly, the amount that you paid under the Agreement 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 and therefore the amount paid does not meet the definition of "support amount" in subsection 56.1(4) of the Act.
The Agreement states, in part, ". . . the cheque of $XXXXXXXXXX represents a full and final payment of all claims for equalization of net family property. . ." In our view, the lump sum payment appears to be an amount paid for the purpose of equalizing family assets and is not considered to be paid on account of maintenance or support for tax purposes.
Thus the lump sum amount that you paid to your wife is not deductible under paragraph 60(b) of the Act nor should it be included in the income of your wife under the parallel paragraph 56(1)(b) of the Act.
While we trust that these comments will be of assistance, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the CRA in respect of any particular situation. A copy of IT-530R is enclosed for your convenience.
Yours truly,
Sharmini Ratnasingham
Assistant Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Encl: IT-530R