Principal Issues: 1. Is an arrears collection in respect of pre-May 1997 child support taxable?
Position: 1. Yes.
Reasons: 1. Collection of an amount by a provincial maintenance enforcement office did not result in a new commencement date.
November 7, 2012
XXXXXXXXXX
Dear XXXXXXXXXX:
Your member of Parliament, XXXXXXXXXX, wrote to me on your behalf and sent me a copy of your correspondence about the taxation of child support payments you received in 1999. I apologize for the delay in replying.
You are dissatisfied that you were required to include in your taxable income the child support payments you received for 1999 while current recipients are no longer required to include child support payments in their income.
Although I have not reviewed your specific case in detail, based on the information you provided, I can confirm that the explanation your accountant gave you is correct. The Income Tax Act changed in 1997 with respect to the taxability of child support payments. As a result of those legislative changes, payments of child support amounts made under an agreement or a court order after April 1997 are no longer deductible by the payer or included in the recipients income. The new legislation applies to an agreement or court order if it has a commencement day as defined in subsection 56.1(4) of the Act and is a day after April 1997. Based on the general information you provided, the Canada Revenue Agency (CRA) applied the terms of the Act correctly in your case, as your child support payments were made under a 1985 court order.
The tax payable on a lump-sum payment for arrears support amounts may be significantly higher than what it would have been if you received the payments at the time you were entitled to them. You can ask the CRA to tax the parts for previous years as if they were received in those years if the total of all principal amounts that relate to previous years after 1977 from all qualifying retroactive lump-sum payments is $3,000 or more.
To ask for income averaging for years in which you received an arrears amount which is more than $3,000, you must complete Form T1198, Statement of Qualifying Retroactive Lump-Sum Payment, and send it to the CRA, along with a copy of the breakdown of the support payment and interest, if any, by year. Form T1198 is available on the CRA Web site at www.cra.gc.ca/E/pbg/tf/t1198. Although the form states that the payer of the lump-sum payment should complete the form, there is no legislated requirement in the Act or in the Income Tax Regulations that requires a payer to complete Form T1198. However, if the British Columbia Family Maintenance Enforcement Program completes the form, you will benefit from the income averaging.
Once you have completed Form T1198, please send it for review to the XXXXXXXXXX Tax Centre, XXXXXXXXXX. The CRA will apply the special tax calculation only if it receives a complete form and if the calculation benefits you.
I trust that the information I have provided is helpful.
Yours sincerely,
Gail Shea, P.C., M.P.
Robert Dubis
(905) 721-5191
2012-046101