Principal Issues: [TaxInterpretations translation] In light of the Supreme Court of Canada's decision in Tsiaprailis, what is the tax treatment of a lump sum - relating to support arrears as well as future entitlements of a support recipient - paid in order to obtain relief from a support obligation imposed by an order or agreement?
Position: The position of the Canada Revenue Agency remains unchanged. Paragraph 22 of Interpretation Bulletin IT-530R continues to be relevant.
Reasons: The Tsiaprailis judgment does not confirm the application of the surrogatum principle to support payments. Furthermore, the question of whether a lump sum is paid in lieu of an amount that would otherwise be deductible to the payer and taxable to the recipient of support payments or whether it is paid to relieve the payer of the obligation to pay support under an order or agreement is a question of fact.
2005-013919 XXXXXXXXXX François Bordeleau, Advocate August 25, 2008
Dear Sir,
Subject: Tax treatment of a lump sum payment
This is in response to your letter sent to us by fax, in which you requested a technical interpretation on the above subject.
Unless otherwise indicated, all legislative references in this document are references to the provisions of the Income Tax Act (the "Act").
Following the Supreme Court of Canada's decision in Tsiaprailis v. Canada, [2005] 1 S.C.R. 113 ("Tsiaprailis"), you are interested in the Canada Revenue Agency's ("CRA") position on the tax treatment of a lump sum - relating to support arrears and future support entitlements of the support recipient - paid by the support payor in order to obtain relief from the payor’s obligations imposed by an order or agreement.
As stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is not our practice to issue a written opinion regarding proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices. However, we can offer the following general comments that we hope may be helpful to you.
As stated in paragraph 22 of Interpretation Bulletin IT-530R, the CRA's position on lump sum payments made, in respect of support payments, in order to obtain the discharge of a support obligation imposed by an order or agreement, is that such payments are neither deductible to the payor nor taxable to the recipient of the lump sum payment. We do not believe that the Tsiaprailis decision changes the CRA's position as set out above. For one thing, the decision does not rule on the application of this principle in support cases. Indeed, this principle has traditionally been applied to determine the tax treatment of an amount received as compensation for loss of income, for expenses incurred, for property destroyed, for bodily or mental injury or to determine the tax treatment of damages. In other words, according to that principle, the tax treatment of a compensatory payment depends on what the amount is intended to replace [emphasis added].
Furthermore, whether a lump sum payment is intended to replace an amount that would otherwise have been taxable in the hands of a support recipient or whether it is intended instead to relieve a payor of the obligation to pay support under an agreement or order is a question of fact that can only be answered by examining the particular circumstances of a given situation.
These comments do not constitute an advance income tax ruling and, as stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, are not binding on us.
Best regards,
François Bordeleau, LL.B.
Manager
Business and Partnerships Section
Business and Partnerships Division.