Principal Issue: [TaxInterpretations translation]
Can the lump-sum payment of $XXXXXXXXXX to cover support-payment arrears be considered as an amount payable on a periodic basis, even if it is less than the amount initially anticipated?
Position:
Yes.
Reasons:
The payment of $XXXXXXXXXX represents a portion of the support-payment arrears, which was an allowance payable periodically.
October 4, 2002
Jonquière Tax Centre Headquarters
Clients services N. Deslandes, CGA
(613) 957-8961
Attention: Ms. Martine Gautreau2001-010564
Request for an opinion on the treatment of arrears of support payments
This is in response to your fax of October 12, 2001, in which you requested our opinion on the above subject. We apologize for the delay in responding to your request.
FACTS
On XXXXXXXXXX, a divorce judgment confirmed an agreement on accessory measures in which the payor (Monsieur) undertook to pay to the recipient (Madame), and her child, support of $XXXXXXXXXX per month.
On XXXXXXXXXX, a second judgment ordered the payor to pay support of $XXXXXXXXXX per month starting on XXXXXXXXXX. This judgment also dealt with the issue of arrears relating to the annual indexation of support since XXXXXXXXXX, which the recipient had requested. The judge ruled that the recipient, by her inaction, had waived the amounts to which the indexation of support entitled her.
The recipient appealed, and on XXXXXXXXXX, the Court of Appeal issued a decision ordering the payor to pay to the recipient the support-payment arrears. The total amount was calculated on the basis of a letter from the Ministère du Revenu du Québec claiming from the payor the sum of $XXXXXXXXXX in unpaid support arrears. An amount of $XXXXXXXXXX represented unpaid support for the period between XXXXXXXXXX and XXXXXXXXXX. That amount had been paid by the date of the hearing. The balance of $XXXXXXXXXX represented support arrears relating to annual indexation for the period between XXXXXXXXXX and XXXXXXXXXX.
The same judgment recognized that the portion of the arrears relating to the years before XXXXXXXXXX was prescribed under Article 2260b) of the Civil Code of Lower Canada. The parties agreed that the arrears amount amounted to $XXXXXXXXXX for the period between XXXXXXXXXX and XXXXXXXXXX.
In the XXXXXXXXXX judgment, it was stated that the evidence established that the payor covered some of the child's expenses and was therefore credited with $XXXXXXXXXX in calculating the arrears. The judge therefore ordered the payor to pay the recipient the sum of $XXXXXXXXXXX in arrears owing as a result of the indexation of the support payments.
QUESTION
You wish to know whether the payment of $XXXXXXXXXX in arrears can be considered an amount payable on a periodic basis, even if it is less than the initial amount.
OUR COMMENTS
The deductibility of support payments is governed by the wording of paragraph 60(b) of the Income Tax Act (the "Act"). However, the definition of "support amount" set out in subsection 56.1(4) indicates that one of the conditions for such payments to be considered a support amount is that the amounts must be payable as an allowance on a periodic basis. A distinction must therefore be made between the words "paid" and "payable". To be deductible, the amount paid does not necessarily have to be paid on a periodic basis as long as the allowance provided for in the judgment, order or written agreement is payable as an allowance on a periodic basis. Consequently, the position of the Canada Customs and Revenue Agency (the "CCRA"), as set out in paragraph 22 of Interpretation Bulletin IT-530, is that, generally, a lump sum paid in a taxation year is regarded as qualifying as a periodic payment where it can be identified as being the payment of amounts payable periodically that were due after the date of the order or agreement and had fallen into arrears.
The arrears of $XXXXXXXXXX paid by Monsieur represent a portion of the total arrears of $XXXXXXXXXX owed to Madame. This amount has been reduced to $XXXXXXXXXX for the reasons set out above. XXXXXXXXXX.
Consequently, on reading the two XXXXXXXXXX judgments, it appears to us that the payment of $XXXXXXXXXX in lieu of a lump sum payment can be considered to qualify as a periodic payment since it can be established that it is a payment of amounts payable on a periodic basis that were owed as a result of the first order and that constituted arrears. It is not a payment made to discharge an obligation imposed in an order. That amount will therefore be deductible by Monsieur and taxable for Madame as support.
The Court of Appeal judge decided to credit the amount of $XXXXXXXXXX, which consisted of expenses incurred by Monsieur for the benefit of the child, against the balance of the arrears owed to Madame by Monsieur. From a legal point of view, that mechanism is known as "judicial set-off". It is a method of extinguishing a debt in the same way as payment. However, as stated in S. Fisher v. The Queen, 2000 DTC 3612, there is a significant difference between a payment and a set-off. Generally speaking, where there is set-off of a debt, the debt cannot be said to have been paid unless the parties agree between themselves that the set-off constitutes payment.
In the present situation, the two parties had not agreed between themselves that the set-off could be a method of payment of the obligation. Consequently, we are of the view that the amount of $XXXXXXXXXX cannot be considered a payment. Since Monsieur did not "pay" that amount, he will not be able to deduct it as support because of the wording of paragraph 60(b), which refers to amounts paid. The reasoning is the same for Madame. Since she did not receive that amount, she will not have to include it in her income as support.
For your information, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and 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 this document, please do not hesitate to contact us.
Best regards,
Ghislaine Landry, CGA
Manager
Individuals, Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate