Principal Issues: [TaxInterpretations translation]
Can the annual lump sums described in an ancillary agreement qualify as support under subsection 56.1(4) of the Act?
Position:
Yes.
Reasons:
Lump sums are paid annually and represent a certain % of a variable remuneration paid annually in the period before the payer retires. The lump sums are paid to support the recipient and ensure a certain degree of financial independence.
June 21, 2005
Jonquière Tax Centre Headquarters Danielle Bouffard Attention: Mr. Robin Plourde (613) 957-8953
2005-012355
Lump sum maintenance payment
This is further to your fax of April 4, 2005 in which you requested our opinion on the above subject. We have taken into account the additional information you sent us by fax on April 8, 2005.
The Facts
On XXXXXXXXXX, a divorce judgment endorsed an agreement on ancillary measures (the "Agreement") in which the taxpayer (the “husband") undertook to pay support to the recipient (the “wife"). Paragraphs 3, 4 and 5 of the Agreement read as follows:
3. XXXXXXXXXX;
4. XXXXXXXXXX;
5. XXXXXXXXXX;
Question
Can the lump sums described in paragraph 4 of the Agreement qualify as support amounts under subsection 56.1(4) of the Income Tax Act (the "Act")?
Taxpayer's Comments
The Agreement provides that the support will be adjusted in accordance with the remuneration he receives from his employer, i.e. a portion payable bi-monthly (fixed indexed payments) and a portion payable annually upon receipt of the variable remuneration. The latter corresponds to approximately XXXXXXXXXX% of the fixed part of his annual salary and is an integral part of his compensation.
According to the taxpayer, this Agreement represents an understanding between the parties that takes into account the reality of each party's earnings and needs over time. The support is higher for a period of XXXXXXXXXX years, which should be sufficient for the recipient to have achieved a certain degree of independence. These considerations are reflected, in part, in paragraph 7 of the Agreement.
Our Comments
The definition of "support amount" in subsection 56.1(4) reads as follows:
support amount means an amount payable or receivable as an allowance on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient and children of the recipient, if the recipient has discretion as to the use of the amount, and …
In order to treat the amounts described in paragraph 4 of the Agreement as a periodic allowance, reference should be made to the comments in paragraphs 21 and 22 of IT-530 R. Considering each of the criteria set out in paragraph 21 of IT-530 R and taking into account only the facts submitted, it appears to us that the intention of the parties, with respect to the annual lump sums, is to provide for the financial needs of the wife and to enable her to become financially independent. It appears to us that they would qualify as periodic allowances and they would be support amounts for the following reasons:
- These are annual payments representing a certain portion of the variable compensation that is paid to the spouse in XXXXXXXXXX of each year.
- The payments are time-limited as they are calculated on the basis of the additional variable remuneration received by the husband in the period before his planned retirement.
- The Agreement states that the income and financial circumstances of each party were taken into account in determining the amount of the payments. The only facts we have indicate that the fixed monthly payments and annual lump sums would allow the wife to maintain an acceptable lifestyle and meet her presently greater needs. Furthermore, the difference between the total amount the wife received in 2004 from the husband and the amount she should receive in 2005 is not significant.
- When he retires, the husband will continue to pay monthly support based on his pension fund and other accumulated retirement income.
In our view, it seems reasonable that the annual lump sums, described in paragraph 4 of the Agreement, should qualify as support for the purposes of subsection 56.1(4). Our opinion is based on the documents you have submitted to us, but if there are other orders or agreements, our position may vary.
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 you find these comments of assistance. Should you require any additional information regarding the content of this document, please do not hesitate to contact us.
Milled Azzi, CA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate
Directorate General for Policy and Planning