Principal Issues: [TaxInterpretations translation]
Can a retroactive agreement allow a taxpayer to claim a lesser amount of support than the court judgment and claim a wholly dependent person credit for the child for whom he or she has decided to stop paying support for joint custody reasons?
Position:
We consider the retroactive agreement invalid. Only the last court judgment is valid and enforceable. As a result, only the support payments actually paid are allowed as a deduction and by virtue of 118(5), no wholly dependent person credit is allowed for the child for whom support should have been paid.
Reasons:
This could be retroactive tax planning to accommodate ex-spouses. Several previous decisions and court cases confirm the non-recognition of retroactive agreements.
February 25, 2008
Jonquière Tax Centre Headquarters Income Tax Rulings Directorate Attention: Renée Roy Nancy Turgeon, CGA
2007-023042
Support payments and wholly dependent person credit
This is further to your fax of April 10, 2007 requesting our opinion on the validity of a retroactive agreement relating to support payments and the wholly dependent person credit under paragraphs 60(b) and 118(1)(b), respectively, of the Income Tax Act (the "Act").
Specifically, you described a situation where the taxpayer is a party to a 1994 Ontario divorce court judgment that sets out the terms of custody and support payments for the two children of the marriage. The judgment states that the two children will be primarily in the custody of the mother and that the father will be required to pay child support of $XXXXXXXXXX/month/child, or $XXXXXXXXXX annually for both children.
During the review of the father's tax file, he produced a letter signed by both parties on XXXXXXXXXX 2006 informing you that since XXXXXXXXXX 2001, the children had been living periodically with both their mother and father and that the father was now paying support for only one of the two children. You wish to know whether the taxpayer can pay support for one child and claim the deduction pursuant to paragraph 60(b) while claiming the wholly dependent person credit pursuant to paragraph 118(1)(b) for the other child who lived with him occasionally for the 2001 to 2006 taxation years.
Our Comments
First of all, the validity of the letter submitted by the taxpayer must be examined to determine its tax implications.
A written agreement subsequent to an order could, in some circumstances, be valid if such an agreement reflected the reality of a situation of shared financial and parenting responsibility and the agreement was a valid contract between two parties that had the effect of creating mutual obligations. That would mean not only recognition of changes in support payments, and the possible application of paragraph 60(b), but also changes in custody of a child or children and the possible receipt of the wholly dependent person credit under paragraph 118(1)(b), if the requirements of subsection 118(5) were otherwise satisfied.
In the case you have submitted, for the years in question between the original 1994 judgment and the signed agreement of XXXXXXXXXX 2006, the taxpayer cannot rely on an informal or oral agreement. This is because, in order to satisfy the provisions of paragraph 60(b), an amendment must be made in writing in the taxation year in which the changes occur.
The changes in the letter of XXXXXXXXXX 2006 are retroactive in nature as it states that the father has been paying support for one of his sons since XXXXXXXXXX 2001 and that both children have been alternately supported by both parents since that date. It is CRA policy not to accept retroactive agreements.
Based on the documentation you have submitted to us, we believe that the child support payments made are pursuant to the Ontario (1994) divorce court judgment dated XXXXXXXXXX 1994 giving effect to the proposed agreement between the parties on XXXXXXXXXX 1994 (i.e. prior to May 1997). We consider the 1994 judgment to be the only valid judgment up to the date of the letter of XXXXXXXXXX 2006. That has the effect of allowing a deduction for the support payments actually paid for one of the children, pursuant to paragraph 60(b), for the 2001 to 2005 taxation years. On the other hand, the father cannot claim the wholly dependent person credit for those same taxation years for the other child. Subsection 118(5) of the Act provides that where an individual is required to pay support to the individual’s former spouse for a child and lives separate and apart from her throughout the year, no amount may be claimed as a wholly dependent tax credit under paragraph 118(1)(b) for that child. This is because even if the taxpayer is only paying for one child, the agreement requires payment for both children. And once the taxpayer is required to pay, whether or not this has been done, subsection 118(5) precludes the taxpayer from taking advantage of the wholly dependent tax credit.
The new written agreement between the former spouses dated XXXXXXXXXX 2006 now prevails in light of the new tax rules regarding the non-deductibility of child support payments. That is because there is now a "commencement day" by virtue of subsection 56.1(4). Consequently, that agreement is considered valid as of the 2006 taxation year, until both parties correct it in writing. In addition, if all other conditions are satisfied, we acknowledge that one of the two children would qualify as a wholly dependent person pursuant to paragraph 118(1)(b) for the same taxation year.
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. 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, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope these comments are of assistance.
Randy Hewlett
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.