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Support payments may be deducted under ss. 56.1(4) of the Income Tax Act (the “Act”) according to a formula set out in s. 60(b): see IT-530R, Support Payments. Under changes to the Act after May, 1997 a payor may not deduct child support payments but may deduct spousal support payments. Where it is unclear if the amount paid is child support or spousal support, the amount will be deemed to be child support and not deductible. The provisions relate only to current or former spouses, current or former common-law partners, and the natural parents of a child. Court orders and written agreements made prior to May, 1997 are “grandfathered” and child support will continue to be deductible by the payor, unless there is a joint election or a subsequent written agreement or court order that changes the amount of support payable. Once deductibility is lost, it is lost forever. 

Definitions 

            “Support amount” means:

(a)               an amount payable to the recipient

(b)               for the maintenance of the recipient, the recipient’s children, or both

(c)               on a periodic basis

(d)               for which the recipient has discretion as to its use, and

(e)               in the case of a current or former spouse or common-law partner

(i)                 the payment is made under a written agreement or court order, and

(ii)               the parties are living separate and apart because of a breakdown of their marriage or common-law relationship, or

(f)                 in the case of the natural parent of a child, the payment is made under a court order.

 “Child support amount” is defined in the negative. Child support amount means any support amount not identified in a written agreement or court order as solely for the support of the recipient. In other words, everything paid for support is deemed to be child support unless it is separated out under the written agreement or order. 

 Where a “commencement day” is specified in a written agreement or court order child support is not deductible on or after that date but where no commencement day is specified child support is deductible. In practical terms a written agreement or court order after April, 1997 will always have a commencement day. Equally, only support paid under a written agreement or court order dated before May, 1997 will have no commencement day. Amounts paid without a written agreement or court order do not constitute support amounts under the Act. The commencement day is normally the day the written agreement was entered or the court order was granted. However, the parties may elect under s. 60.1(3) to include prior payments by deeming the written agreement or court order as having been made on a previous date. The parties cannot elect a day that is prior to May 1, 1997.  

Deductible Amounts

            The formula in s. 60(b) subtracts from the total of all support paid in a taxation year after 1996 the total of all child support payable after the commencement day and the total of all support paid after 1996 and deductible in a preceding year. Generally, the operation of s. 60(b) leads to four results: 

(a)               for written agreements and court orders prior to May 1, 1997 support payments are deductible;

(b)               any amounts solely for spousal support are deductible;

(c)               child support is not deductible; and

(d)               all outstanding child support must be paid before a payor is eligible to deduct spousal support.

 Example 1: Where Adam pays Sue $400.00 a month for child support and $100.00 a month for spousal support for a total of $500.00 per month under a court order dated January 1, 2004, Adam may deduct $1,200.00 from his income and Sue must claim $1,200.00 on her income. This coincides with the amount Adam paid Sue for spousal support.

 Example 2: Where Adam pays Sue $400.00 a month for child support and $100.00 a month for spousal support for a total of $500.00 per month under a court order dated January 1, 2004, but Adam has only paid $3,000.00 and has arrears of $3,000.00, Adam is not eligible for a deduction until he has fully paid his child support for 2004 in the amount of $4,800.00. Every dollar he pays after his child support obligation has been satisfied generates a dollar deduction. So, if he pays $4,801.00 to Sue in 2004 he is entitled to a $1.00 deduction, if he pays $4,802.00 to Sue he is entitled to a $2.00 deduction, and so on. Consequently, for each dollar Sue received above $4,800.00 she must claim an equal amount as income.

 All child support arrears must be fully paid before the payor becomes eligible to deduct any spousal support paid in the current taxation year.

 Example 3: If we extend example 2 to 2005 so that Adam has paid $3,000.00 in 2004 and $6,000.00 in 2005, his total arrears would then be $3,000.00 in 2005, and the child support payable would be $9,600.00 since the written agreement or court order. In this example Adam is current with respect to his 2005 support obligations but has arrears for 2004. In 2004 he failed to pay up all arrears of child support, so (see example 2) Adam received no deduction in that year. Equally, he has not paid up all his arrears of child support for 2004 and 2005, so he still receives no deduction for 2005 either.

 Example 4: However, if Adam has paid $3,000.00 in 2004 and $7,000.00 in 2005, his total arrears would then be $2,000.00 in 2005, and the child support payable would be $9,600.00 since the written agreement or court order. Here, Adam is current with his 2005 support and has made up a part of his arrears of support for 2004. In 2004 he failed to pay up all arrears of child support, so (see example 2) Adam received no deduction in that year. Since he has made up arrears of child support he could claim a $400.00 deduction for 2005.

 Example 5: Conversely, if Adam has paid $6,000.00 in 2004 and $3,000.00 in 2005, his total arrears would then be $3,000.00 in 2005, and the child support payable would be $9,600.00 since the written agreement or court order. Here, Adam is current with respect to his 2004 support but he is in arrears for 2005. In 2004 he received a $1,200.00 deduction. Adam must add this amount to the child support payable ($9,600.00). The total is $10,800.00.

 Although he has made up all arrears of child support he cannot claim a deduction for 2005 as he had previously claimed $1,200.00 the previous year. This amount must be added to the amount of child support payable.

Every dollar he pays above his child support obligation for 2005 generates a dollar deduction. So, if he pays $4,801.00 to Sue in 2005 he is entitled to a $1.00 deduction, if he pays $4,802.00 to Sue he is entitled to a $2.00 deduction, and so on. Consequently, for each dollar Sue received above $4,800.00 she must claim an equal amount as income.

Periodic or Lump Sum Payments, and the Tsiaprailis Analysis 

            Only amounts paid for support on a periodic basis qualify under the Act. What is considered periodic payments made as an allowance for maintenance, which are deductible, or periodic payments made as installments of a lump sum or capital sum, which are not, was thoroughly canvassed in McKimmon v. Canada (Min. of National Revenue), [1989] F.C.J. No. 1137 (C.A.). In finding that the payments made by the husband were not deductible, Hugessen J.A. set out a list of considerations as follows:

1)                 the length of the periods at which the payments are made;

2)                 the amount of the payments in relation to the income and living standards of the payor and recipient;

3)                 whether the payments are to bear interest prior to their due date;

4)                 whether the amounts can be paid by anticipation at the option of the payor or can be accelerated as a penalty at the option of the recipient in the event of default;

5)                 whether the payments allow a significant degree of capital accumulation by the recipient;

6)                 whether the payments are stipulated to continue for an indefinite period or a fixed term;

7)                 whether the agreed payments can be assigned and whether the obligation to pay survives the lifetime of either the payor or the recipient; and

8)                 whether the payments purport to release the payor from any future obligations to pay maintenance.

A lump sum payment for future support will generally not qualify. Lump sums may not qualify because they are likely to be characterized as a transfer of capital sums rather than an allowance for maintenance. More specifically, dealing with the inclusive/exclusive nature of tax legislation, in M.N.R. v. Armstrong, [1956] S.C.R. 446 the Supreme Court of Canada found that a lump sum settlement paid to satisfy a wife’s claim to further payments was not made “pursuant to” the judgment but rather “by reason of” or “in consequence of” a legal obligation imposed by the judgment: see further Tsiaprailis v. Canada, [2005] S.C.J. No. 9. However, a lump sum payment to settle arrears of support may qualify, if ordered by the Court or agreed to in writing, as those payments would be pursuant to an existing support obligation, so long as they are calculated on a periodic basis as an allowance for maintenance.

There are circumstances where a lump sum paid for future support may be recognized as periodic payment, such as where it is a lump sum paid in advance for future support that is calculated on a periodic basis. Based on the analysis in Tsiaprailis a lump sum paid under a written agreement or court order for a period prior to the date of such agreement or court order may qualify. In such cases the underlying legal obligation remains support payable on a periodic basis. Such future support payments would be paid “pursuant to” the written agreement or Court order. The only difference being that the funds are paid today. Moreover, it should not be characterized as a transfer of capital.

 Payments Made Prior to the Date of an Agreement or Order

             Generally, an amount paid prior to a written agreement or court order is not support under the Act: see Burgess v. Canada (Min. of National Revenue), [1991] F.C.J. No. 2 (T.D.). There is some flexibility. The Act has a deeming provision in s. 60.1(3) which allows a written agreement or court order to specify that such prior payments are support for the purposes of the Act. The date chosen cannot be a day prior to May 1, 1997. While an exchange of correspondence between the parties could constitute a “written agreement”, the parties must also be living separate and apart pursuant to a “written separation agreement” under s. 60(b), and the case law is clear that even an unexecuted written separation agreement is not sufficient: Burgess.

Payments Made to Third Parties

             Support paid or payable to a third party for the benefit of the recipient, the children or both is deemed under s. 60.1(1) and (2) to have been paid to, and received by, the recipient. Subsection 60.1(1) deals with amounts paid directly to the court for support and s. 60.1(2) deals with amounts paid to a third party. The sums paid or received must otherwise qualify under the Act. It is important that the sums be at the discretion of the recipient. What matters is not the way the recipient may dispose of, or be required to dispose of, the sums, but the fact that she can dispose of them or not: see Jean-Paul Gagnon v. Her Majesty the Queen (1986), 86 D.T.C. 6179 (S.C.C.). So, for example, the payment of a former spouse’s tuition, books and rent while she is in university or college would not qualify if the recipient does not consent but would rather the sums be paid directly to her and to be used in her own discretion. However, if the tuition and rent are paid under the terms of a written agreement or court order, they qualify under the deeming provisions of s. 60.1(2) even though the recipient has no discretion and may not agree. 

            There are restrictions on what may qualify for a deduction under s. 60.1(2). The payor may not claim a deduction for his home or for most tangible property. A deduction may be granted for medical or educational costs, or the cost to buy, maintain or improve the recipient’s home. The payor may deduction up to 20% of the original principal of any loan or financing used to buy or improve the recipient’s home. 

            In some cases support will be ordered payable to a provincial authority as a subrogated claim by the government for social assistance paid to the recipient. Since the assignment by the recipient does not change the nature of the payments or the nature of the indebtedness, such payments are still deductible under s. 60(b): Pepper v. Canada, [1996] T.C.J. No. 1606 (T.C.C.). 

Reimbursement of Support Payments                                                            

             Where the court orders a reimbursement of support previously deducted, the payor must claim the reimbursement as income in the year received.

 Personal Tax Credit or Deduction for Support 

            A person is normally entitled under s. 118(1) to claim a non-refundable tax credit to reduce the amount of income tax he owes: See IT-513R, Personal Tax Credits. Under s. 118(5) a payor may not claim a personal tax credit for a spouse, common-law partner or child if he lives separate and apart from his spouse or common-law partner for the whole year because of a breakdown of the marriage or common-law relationship. He is also prevented from claiming the personal tax credit where he claims a deduction for the year for support paid to his spouse or common-law partner. He may only claim one or the other: a personal tax credit or a deduction for support. He may elect which to take.

 Payments Made after the Recipient’s Death

             Payments after the recipient’s death are not deductible even if they are paid to the estate, the children or another supporting person. In Cohen v. Canada, [1991] F.C.J. No. 108 (T.D.) the fact the payments would continue after the payor’s death was an indication that the sums were installments of lump or capital sums and not in the nature of an allowance of the maintenance of the recipient. However, the payor may be entitled to a personal tax credit for a child under s. 118(1). If the payor obtains custody of the children following the recipient’s death, the payor may also be entitled to a deduction for child care expenses under s. 63: see IT-495R3, Child Care Expenses. Under s. 63(1) child care expenses for an eligible child may be deducted by the lower income parent.

Legal Costs are Deductible by the Recipient

             Generally, legal or accounting fees are only deductible if they are incurred for the purpose of gaining or producing income from a business or a property and are not outlays of a capital nature. Legal costs incurred to obtain a divorce, a spousal support order or separation agreements are not deductible as these are considered capital expenses, or personal or living expenses.

 Some legal costs may be deductible for the recipient. A right to support that is established by a court constitutes “property” under s. 248(1) and that any income derived from that right is income from property: see Nadeau v. M.N.R., [2004] 1 F.C.J. No. 1611 (C.A.). An expenditure to create the income source is an expenditure on account of capital and is not deductible, but an expenditure to earn income from this source is considered a current expense which is deductible. See also IT-99R5 (Consolidated), Legal and Accounting Fees. For the same reason, legal costs incurred to defend against a reduction of support are also deductible, as an expense to protect the income source: see Sembinelli v. Canada, [1994] F.C.J. No. 1352 (C.A.).

These legal costs are deductible even though child support is not included in the recipient’s income. Section 248(1) specifically excluded support from exempt income, so the deduction to costs in respect of support is not excluded as being exempt income in 18(1)(c). 

          For the payor legal costs are not deductible, since they will almost always be characterized as relating to personal or living expenses and not for the purpose of producing income from a business or property. See Nadeau where the court denied a tax deduction for legal costs incurred by the payor to contest a motion for increased support. The Charter challenge failed also.

For further information please do not hesitate to contract the author of this Article, Robert Omura