Principal Issues: Where there was an addition, after April 1997, of a Cost of Living Adjustment (COLA) clause to a pre-May 1997 agreement would this be considered to be a variation of the agreement such that the agreement would have a commencement day?
Position: Yes.
Reasons: The COLA clause was not built into the pre-May 1997 agreement but was added to the agreement after April 1997 and an increase in child support would result.
October 14, 2008
Dave Larsen HEADQUARTERS Acting Resource Officer Charles Rafuse Appeals Division, Sudbury TC/TSO 613-247-9237
2008-027857
Child Support
This is in reply to your email of May 14, 2008, asking whether the addition, after April 1997, of a Cost of Living Adjustment (COLA) clause to a finalized pre-May 1997 agreement would result in the pre-May 1997 agreement having a commencement day, as this expression is defined in subsection 56.1(4) of the Income Tax Act ("Act").
Our Comments
Payments of child support amounts (defined in subsection 56.1(4) of the Act) made pursuant to an agreement or order of a competent tribunal that has a commencement day are not deductible by the payer and are not required to be included in the income of the recipient. Subparagraph (b)(ii) of the definition of commencement day in subsection 56.1(4) provides that where an agreement or order is varied after April 1997 to change the child support amounts payable to the recipient, the day on which the first payment of the varied amount is required to be made is the commencement day of the order or agreement.
It is our opinion that the insertion of a COLA clause in a pre-exiting finalized agreement or order would result in a variation of the agreement or order. If an agreement or order is varied because of the insertion of a COLA clause, presumably the variation is "to change the support amounts payable to the recipient", within the meaning of this wording in paragraph (b)(ii) of the definition of commencement day in subsection 56.1(4). Accordingly, the addition of a COLA clause to a pre-May 1997 agreement after April 1997 would result in the agreement having a commencement day on the day the first payment of the varied amount is required to be made. As a result, the varied child support amounts would no longer be deductible to the payor and required to be included in income by the recipient.
Since the effect of the agreement having a commencement day is to change the tax treatment of the varied child support amounts in the hands of both the payor and recipient of support, you may wish to consider the application of the provisions of section 174 of the Act. In your email you referred to our document 9812665 dealing with the application of the retroactive provisions of paragraphs 56.1(3)(b) and 60.1(3)(b) of the Act. The document suggests that the insertion of a COLA clause in a post-April 1997 order would not, in itself, be considered to be a variation of a child support amount payable. The comment in document 9812665 was made in the context of a live factual situation involving transforming an interim court order into a final one as agreed by the parties and accordingly should be restricted to that case.
We trust this information is helpful.
Yours sincerely,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch