Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1. In the circumstances of the case, will a transfer of an amount from an RRSP of a former spouse of an individual to the individual's RRSP in settlement of future support payments satisfy the requirements of 146(16) of the Act, where the transfer is the consequence of a court order issued because of the former spouse's default in paying support?
2. Legal costs were incurred to obtain the above noted settlement and enforce payment of past due spousal support payments. The individual proposes to apportion the costs incurred to the enforcement of the pre-existing entitlements based on the proportion of the total award that is for arrears and interest and has requested a ruling that this amount will be deductible in the year it is paid.
Position:
1. Yes.
2. The court awarded costs are normally applied to reduce the amount that may be deducted. However, because there is little likelihood payment of the costs awarded will be received, we will allow a deduction of the amount allocated, on a pro rata basis, to enforce the existing obligations. Any amount received under the award of costs must be reported as income in the year received.
Reasons:
1. The payment will be made as a result of a series of court orders the effect of which is to vary the terms of the original divorce decree relating to the division of property between the former spouses in settlement of rights arising out of, or on the breakdown of their marriage.
2. The pro rata calculation is a reasonable method of allocating the costs incurred.
XXXXXXXXXX 2000-005434
XXXXXXXXXX, 2001
Dear Sirs:
Re: XXXXXXXXXX - Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayer.
Definitions and Abbreviations
In this letter, the following terms have the meanings specified:
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof;
(b) "Divorce Judgment" means the Decree Nisi dated XXXXXXXXXX, between XXXXXXXXXX, as submitted with your request;
(c) "Judgment" means the judgment dated XXXXXXXXXX, between XXXXXXXXXX as submitted with your request;
(d) "Order" means the court order dated XXXXXXXXXX, between XXXXXXXXXX as submitted with your request;
(e) "RRSP" means: XXXXXXXXXX, issued by XXXXXXXXXX, (the "Issuer") owned by XXXXXXXXXX and registered as a retirement savings plan with the Agency;
(f) "Client" means XXXXXXXXXX
Account number XXXXXXXXXX
Tax Services office: XXXXXXXXXX
Tax centre: XXXXXXXXXX;
(g) "Former Spouse" means XXXXXXXXXX;
(h) "Agency" means the Canada Customs and Revenue Agency;
Facts
1. The Client and the Former Spouse were divorced in XXXXXXXXXX, pursuant to the terms of the Divorce Judgment issued on XXXXXXXXXX.
2. Among other things, the terms of the Divorce Judgment required the Former Spouse to pay monthly support to the Client as set out therein.
3. In XXXXXXXXXX, the Client applied in the Superior Court of Justice to vary the Divorce Judgment as it appeared, to the Client, that the Former Spouse was disposing of all of the Former Spouse's property situated in Canada.
4. XXXXXXXXXX.
5. XXXXXXXXXX.
6. XXXXXXXXXX.
7. XXXXXXXXXX.
8. Costs of $XXXXXXXXXX were awarded to the Client.
9. Legal fees incurred in obtaining the Judgment will exceed the Costs awarded by the Court but the final billing has not been determined as of the date of this letter.
Proposed Transaction
10. The Client proposes to seek an order vesting the RRSP in the Client's name. The Client then proposes to ask the Issuer to effect a transfer of the funds from the RRSP to the Client's own RRSP with the Issuer. In order to effect this transfer, the Client proposes to file a copy of the Judgment with the Agency along with a duly executed T2220 form. The Client will not be able to secure the signature of the Former Spouse on the T2220 as there is no reasonable prospect that the Client will be able to obtain the consent or any cooperation whatsoever from the Former Spouse in this regard.
11. The Client proposes to deduct the legal fees that are incurred to enforce payment of the support payments that are in arrears which was a component of the Judgment. However, as it is difficult to apportion the legal costs between the time spent to recover arrears and the time spent to vary the order to recover a lump sum for future support, the Client proposes to apportion the legal costs on a pro-rata basis. The judgment for arrears represents XXXXXXXXXX% of the total Judgment exclusive of costs. Accordingly, it is proposed to allocate XXXXXXXXXX% of the total legal costs incurred to obtain the Judgment to the recover of arrears.
12. Similarly, it is proposed that part of any amounts received, if any, in accordance with the Judgment for Costs will be allocated to the enforcement of the arrears. Accordingly, this will amount to $XXXXXXXXXX ($XXXXXXXXXX x XXXXXXXXXX%).
Purpose of the Proposed Transaction
13. The purpose of the proposed transactions is to give effect to the Judgment.
Additional Information
14. To the best of your knowledge, none of the issues involved in this ruling:
i) relate to an earlier return of the Client or any person related to the Client;
ii) are being considered by a tax services office or tax centre in connection with a previously filed tax return of the Client or a person related to the Client;
iii) are under objection by the Client or a person related to the Client;
iv) are before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
v) are the subject of a ruling previously issued by the Directorate.
Rulings
Provided the above statement of definitions and abbreviations, facts and proposals are accurate and constitute a complete disclosure of all relevant details and provided the order and transfer are effected as proposed, we rule as follows:
A. Subsection 146(16) of the Act will apply to the transfer described in 10. above.
B. Paragraph 18(1)(c) of the Act will not apply to deny a deduction of the legal costs paid in a year to enforce payment of the arrears, to the extent calculated under 11. above.
C. Subsection 9(1) of the Act will apply to include in income of any amount received in a year in respect to the costs awarded by the court in respect to the enforcement of the payment of the arrears to the extent calculated under 12. above.
These rulings are given subject to the limitations and qualifications set forth in the Agency's Information Circular 70-6R3 dated December 30, 1996, and are binding upon the Agency provided the proposed transfer is undertaken by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch