Principal Issue: [TaxInterpretations translation]
An agreement set up to accommodate a change in custody while avoiding the need for a new judgment, stated the following:
a. Monsieur will continue, as stipulated in the first judgment, to pay his contribution under the support collection system pursuant to the Act to Facilitate the Payment of Support [Loi facilitant le paiement des pensions alimentaires].
b. The wife will not deposit the cheques received, which she will endorse and give to the husband. She also will give him a second cheque for the same amount.
Are the payments subject to the old rules on support payments, i.e. deductible to the payor and taxable to the recipient?
Position:
No.
Reasons:
The payments made by Monsieur to Madam are not deductible or taxable because they do not meet the parameters of the definition of support (Madam cannot use the amounts at her discretion). As for the payments made by Madam to Monsieur, they are made under a new agreement established after April 1997. Consequently, the new agreement creates a "commencement day" and the new rules apply so that the amounts are neither deductible nor taxable
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October 24, 2002
Jonquière Headquarters
Tax Services Office N. Deslandes, CGA
(613) 957-8961
Attention: Ms. Martine Gautreau
2002-014052
Request for an opinion on the validity of an agreement
This is in response to your fax of May 13, 2002, in which you asked for our opinion on the above subject. We apologize for the delay in responding to your request.
FACTS
A divorce decree dated XXXXXXXXXX stated inter alia that Madame would have custody of the only child of the marriage and that Monsieur would pay Madame the sum of $XXXXXXXXXX per week in child support for the minor child. On XXXXXXXXXX, another judgment increased the child support to $XXXXXXXXXX per week.
Madame and Monsieur respectively signed an agreement on XXXXXXXXXX which they entitled "XXXXXXXXXX" (the "new agreement"). This new agreement indicated that the following modifications were made to the preceding judgments:
1) Monsieur would now have custody of the child as this responsibility had been granted to Madame under the judgments that preceded the new agreement.
2) Madame would have the access rights that Monsieur initially had.
3) With respect to the monetary arrangements between the two parties, the following undertakings were entered into in order to avoid the need for a new judgment: (a) Monsieur would continue to pay his contribution under the support payment collection plan provided for in the Act to Facilitate the Payment of Support; and (b) Madame would not deposit the cheques, which she would endorse and give to Monsieur. She also would give him a second cheque for the same amount.
QUESTION
You wish to know the tax consequences of the sums paid by Monsieur to Madame and by Madame to Monsieur as a result of the new agreement.
OUR COMMENTS
As you know, paragraph 56(1)(b) of the Income Tax Act (the "Act") provides that the amount of a support payment received must be included in a taxpayer's income except to the extent that it is child support paid under an agreement or order on or after its commencement day. Similarly, paragraph 60(b) provides that a support payment may be deducted unless it is a child support payments that became payable under an agreement or order on or after its commencement day.
To determine the tax consequences of the payments described above, it is necessary to establish under which agreement or order the payor is obliged to make them and whether that agreement or order has a commencement day.
XXXXXXXXXX. Consequently, although the order established in XXXXXXXXXX was not in itself modified by the new agreement, we will take into account all the documentation that you have submitted to us, including this new agreement, to determine the tax consequences related to the amounts exchanged on both sides by Monsieur and Madame.
First of all, with respect to the amounts paid by Monsieur we would like to point out that the facts you have brought to our attention raise several questions with respect to the definition of the term "support". In our view, before even addressing the question of whether or not there was a "commencement day", it is relevant to ask whether the payments made by Monsieur can still be considered to be support payments following the conditions imposed by the new agreement.
The term "support amount" is defined in subsection 56.1(4). According to this definition, an amount will be considered to be support if, among other things, it is an amount payable or receivable as an allowance on a periodic basis for the maintenance of the recipient or the recipient's child and the recipient has discretion as to the use of the amount. In our view, the fact that the wife is under an obligation not to deposit the cheques she receives under the support payment collection plan, but must endorse them and remit them to the husband, are restrictions that ensure that the amounts paid do not meet the parameters of the definition of "support payments". In such circumstances, it is difficult to conclude that the amounts in question are, on the one hand, paid to provide for the needs of the recipient or her child and, on the other hand, that the recipient may use the amounts at her discretion.
Consequently, since those amounts are not support amounts within the meaning of subsection 56.1(4), they are not deductible pursuant to paragraph 60(b) to Monsieur and not taxable to Madame pursuant to paragraph 56(1)(b).
As for the amounts that Monsieur receives from Madame, we are of the view that these payments result from an obligation that arose as a result of the application of a new agreement established after April 1997 that involves a new payor and a new recipient. Consequently, although those amounts meet the definition of "child support amount", they are, in our view, amounts payable under an agreement that has an execution date under paragraph (a) of the definition of that expression in subsection 56.1(4) (i.e. the date on which the new agreement was established). Those child support amounts paid on or after the commencement day are therefore neither deductible to the wife nor taxable to the husband under paragraphs 56(1)(b) and 60(b).
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 Customs and Revenue Agency's 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 CRA 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 that has been severed in accordance with the Privacy Act will be sent to you for delivery to the client.
We hope you find these comments of assistance. If you require any further information about this publication, 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
Policy and Legislation Branch
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