Principal Issues: Whether arrears child support payments that are paid after a commencement day are deductible?
Position: It depends.
Reasons: If the arrears payments relate to a settlement of the arrears, for an amount that is less than the periodic amounts that have fallen into arrears, any such settlement payments would not be deductible. If the arrears payments relate to the actual periodic amounts that have fallen into arrears, the payment of arrears that were payable prior to the commencement day would be deductible.
September 24, 2019
Lyne Bourdeau HEADQUARTERS Collections and Verifications Branch Income Tax Rulings Directorate 395 Terminal Ave., 3rd Floor, 3055D Canada Revenue Agency Ottawa, ON K1A 0L5 Eric Wirag, CPA, CMA
2019-082043
Arrears child support payments
This is in reply to your request asking for our comments regarding arrears child support payments. More specifically, you have asked whether child support payments required under a court order made before May 1997 that had fallen into arrears would remain deductible by a taxpayer if subsequently paid after a commencement day occurs.
You have a described a scenario where an original court order, signed prior to May 1997, required the payment of weekly child support payments by a taxpayer to a former spouse. These child support payments were deductible to the taxpayer. You state that during the 2010 taxation year, the taxpayer and former spouse filed a T1157, Election for Child Support Payments, to have the child support payments payable on or after the date specified to be non-taxable and non-deductible. You state that a number of child support payments fell into arrears both prior to the filing of the T1157 and after its filing. Finally, you state that during the 2018 taxation year, a second court order was signed providing for the payment of child support arrears owing.
Our Comments
Where an order has a commencement day, as defined in subsection 56.1(4) of the Income Tax Act, child support amounts payable under the order on or after its commencement day are non-taxable to the recipient and non-deductible by the payer. However, this would not have any effect on payments that are set out in the second order that reflect support amounts payable under the initial order that had fallen into arrears. The arrears that are paid would still be deductible/taxable even if the arrears are paid late and as long as the payments related to periodic payments ordered by the court before May 1, 1997.
In the scenario your have provided, it is worth noting that the 2018 court order must also be considered. If the 2018 court order fixes as a settlement of arrears, something less than the actual periodic amounts that have fallen into arrears, any such settlement payment, whether lump sum or by way of a periodic payment schedule, would not be deductible or taxable. Therefore, you will need to determine whether the amount provided in the 2018 court order represents the actual amount of arrears owing under the original order. If this is the case, the amounts owing that relate to the period prior to the commencement day will remain deductible by the taxpayer. Otherwise, the full amount provided for under the 2018 court order will be non-deductible.
Where a court order or written agreement requires the payer to pay arrears (whether in full or in part), including interest in respect of the arrears, the interest is not deductible by the payer. However, the recipient is required to include the interest in income.
If the payments under the 2018 court order reflect actual amounts owing under the original order, the formula in paragraph 60(b) must be considered when determining whether payments are deductible in the year. If a payer and recipient are parties to a court order or written agreement that has a commencement day, support amounts paid by the payer to the recipient in a tax year are considered first to be for child support payable on or after the commencement day (in this case January 1, 2010) for periods that began on or after that day. Any balance paid in the year is then considered to be for child support payable for earlier periods or for support of the recipient, as the case may be. In other words, child support payable on or after the commencement day of an order or agreement and before the end of the current year, for periods that began on or after the commencement day, has to be fully paid by the end of the current year before the payer may claim a deduction for support amounts paid in the current year for:
- child support payable for earlier periods or
- support of the recipient.
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. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.
Yours truly,
Lita Krantz, CPA, CA
Manager
Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch