Principal Issues: [TaxInterpretations translation]
Does an amount payable monthly for a period of XXXXXXXXXX years represent maintenance or other support payments or are they payments on account of a lump sum or capital amount?
Position: None.
Reasons: This is a question of fact. In the agreement, it is stated that it is support. However, if the facts show that the amount is not actually paid to support the taxpayer, a contrary position could be taken.
October 19, 2000
Jonquière Tax Centre Headquarters Ghislaine Landry, CGA Attention: Ms. Martine Gautreau (613) 957-8953
2000-004726
Tax treatment of amounts paid under a settlement agreement
File: XXXXXXXXXX
This is in response to your fax of September 1, 2000, in which you requested our opinion on the above subject.
You described the situation of a taxpayer who, on XXXXXXXXXX, signed a settlement agreement with her spouse, from whom she has been living apart for some time. That agreement provides, among other things, for the following:
XXXXXXXXXX.
QUESTION
You are asking whether the amounts of $XXXXXXXXXX per month received under section XXXXXXXXXX of the above agreement should be included in Madame's income under paragraph 56(1)(b) of the Income Tax Act (the “Act”), for the years XXXXXXXXXX to date.
OUR COMMENTS
Generally speaking, paragraph 56(1)(b), as it applied to the years 1993 to 1996 inclusive or as it applies to the years 1997 to the present with the addition of the definition of “support amount” in subsection 56.1(4), provides for the inclusion in a taxpayer's income of amounts received in the year under a written agreement as support amounts or other allowances payable on a periodic basis for the maintenance of the taxpayer.
Consequently, in a situation such as the one you have presented to us, we must determine whether the amounts received represent amounts received as support amounts or other allowances payable on a periodic basis for the maintenance of the taxpayer. This question has been examined by the courts in various cases. In The Queen v. McKimmon, 90 DTC 6088 (FCA), the court set out a non-exhaustive list of criteria that should be considered when distinguishing between periodic payments received as support amounts or other allowances for the maintenance of the taxpayer and those received as payments of a lump sum or capital. Some of the most important tests are set out in paragraph 21 of Interpretation Bulletin IT-530, Support Payments. We will examine all of those criteria in light of the facts of the situation you have presented to us.
Support amounts or other allowances for the maintenance of the taxpayer
The following facts support the position that the periodic payments received under section XXXXXXXXXX of the agreement represent amounts received as support amounts or other allowances for the maintenance of the taxpayer:
- the amounts are payable monthly;
- this section indicates that the amount paid by Monsieur is a “support amount”. However, this fact is not decisive in itself. It was determined, among other cases, in Urichuk v. The Queen, 93 DTC 5120 (FCA), that an examination of all the facts relating to a particular situation could lead to the conclusion that the payments are not support payments despite an indication to that effect in the agreement between the parties. Rather, we must determine what is really being paid and not stop at the terms of the agreement alone;
- under section XXXXXXXXXX of the agreement, Madame receives an amount of $XXXXXXXXXX as a compensatory allowance for her share of the family patrimony. That could be an indication that the amount she receives under section XXXXXXXXXX of the agreement is an amount actually paid to provide for her maintenance, since she is otherwise compensated for her share of the patrimony;
- the agreement does not provide for the payment of interest on the sums due, nor does it give Monsieur the option of repaying the sums more quickly or allow Madame to demand immediate repayment of the sums due if Monsieur defaults.
Payments of a lump sum or capital
The following facts support the position that the periodic payments received under section XXXXXXXXXX of the Agreement represent amounts received as payments of a lump sum or capital:
- the payments are made for a specified period of time and there is no explanation as to why Madame's needs are no longer the same after the XXXXXXXXXX year period provided for in the Agreement;
- by virtue of article XXXXXXXXXX of the agreement, it seems that those payments have the effect of releasing Monsieur from his present, past or future obligation to pay support amounts or any other allowance for Madame's maintenance. In addition, it is indicated that Madame is self-sufficient and able to support herself.
Conclusion
As you can see, this examination of the criteria based on the facts of the situation you have presented to us does not allow us to conclude with certainty as to the nature of the periodic payments received by Madame. However, we are of the view that in order to go against what is stated in the agreement to the effect that those payments are support amounts, we must be able to clearly demonstrate this. In our view, the facts we have examined to date do not allow us to make that demonstration.
However, we propose that you examine certain additional facts that may enable you to take a position. An important question, in our view, is to determine whether the amounts were in fact paid to allow the Madame to support herself and her children when she has custody of them. This would not be the case if, for example
- the amounts received exceed an amount sufficient to allow Madame and her XXXXXXXXXX children to lead the lifestyle to which they were accustomed before the marriage broke down. Under the agreement, Monsieur becomes the sole owner of the family home. It must therefore be considered that Madame must pay an amount to live in similar conditions;
- the amounts received allow Madame to accumulate capital;
- Madame was financially independent before receiving those amounts and was able to provide for herself and her children;
- the amounts are paid to compensate Madame for the releases she gave to the corporations in which Monsieur is a shareholder under section XXXXXXXXXX of the agreement.
We are sorry not to be able to answer your question more precisely, but we remain available to assist you, if necessary, once you have obtained the additional information. Before proceeding with any reassessments, we suggest that you contact Monsieur to obtain his comments on the nature and tax treatment of the amounts paid to Madame.
For your information, a copy of this memorandum will be severed using the Access to Information Act and will be available in the Legislative Access Database (LAD) located on the mainframe of the Canada Customs and Revenue Agency. 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 Legislative Access Bank 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 Madame Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Should you require any additional information concerning this document, please do not hesitate to contact us.
Ghislain Martineau
Acting Manager
Individuals and Business Section
Business and Publications Division
Income Tax Rulings Directorate
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