4 June 2010 External T.I. 2010-0356151E5 - Deductibility of payment to former spouse

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether an amount representing a share of the taxpayer's pension value and severance amount paid to the taxpayer's former spouse in accordance with a Change Order to their Divorce Order is deductible to the taxpayer.

Position: No.

Reasons: A payment in satisfaction of property rights arising from marriage is considered to be capital in nature. Such a payment does not qualify as a "support amount" for the purposes of paragraph 60(b) of the Act and therefore is not deductible in calculating the taxpayer's income.

XXXXXXXXXX
						2010-035615

June 4, 2010

Dear XXXXXXXXXX :

Re: Deductibility of Payment to Former Spouse

We are writing in response to your letter dated January 25, 2010. You have asked for our views regarding the deductibility of an amount paid by you to your former spouse in XXXXXXXXXX pursuant to a Change Order.

In your letter, you advise that you and your former spouse signed a Change Order on XXXXXXXXXX . The Change Order referenced paragraph XXXXXXXXXX of your Divorce Order dated XXXXXXXXXX , which dealt with your severance package. Pursuant to the Change Order, you agreed to make a one-time payment of $XXXXXXXXXX to your former spouse and that the Change Order would finalize all legal dealings between you and your former spouse. You note that the payment represents a share of your pension value and a share of the severance pay you received in XXXXXXXXXX plus interest for XXXXXXXXXX years. The amount was paid on XXXXXXXXXX and you would like to know if you can claim a deduction for the payment in your XXXXXXXXXX tax return.

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following general comments, which may be of assistance.

Our Comments

For a spousal support payment to be deductible by the payer under paragraph 60(b) of the Income Tax Act (the "Act") and includable in the recipient's income under paragraph 56(1)(b) of the Act, the payment must meet the definition of "support amount" in subsection 56.1(4) of the Act.

The definition of "support amount" includes both child support and spousal support. In general, an amount is a spousal support amount if the amount is:

• payable to or receivable by the recipient;
• payable as an allowance on a periodic basis;
• for the maintenance of the recipient;
• available for the recipient's discretionary use; and
• payable under an order of a competent tribunal or under a written agreement and the payer and the recipient are living separate and apart because of a breakdown of their marriage or common-law partnership.

As noted in paragraph 21 of Interpretation Bulletin IT-530R, Support Payments, where a payment is made to release the payer from any future obligations to pay maintenance, the payment will not be considered an allowance for maintenance and therefore will not qualify as a "support amount". Further, when a payment to a spouse or former spouse is in satisfaction of property rights arising from the marriage, the payment is of a capital nature and thus cannot be considered to be an allowance for maintenance.

Whether a particular payment constitutes a spousal support amount is a question of fact requiring a review of all relevant facts and documentation (such as the Divorce Order). Based on the information provided in your letter, the payment representing a share of your pension value and a share of your severance pay does not appear to meet the definition of "support payment" in subsection 56.1(4) of the Act. The amount is not payable on a periodic basis. It appears to be a payment in satisfaction of property rights arising from a marriage, rather than an allowance for the maintenance of your former spouse. Also, by making the payment, all legal dealings between you and your wife have been finalized according to the Change Order. Accordingly, it is our view that the payment is not deductible under paragraph 60(b) of the Act.

For more information on what constitutes a support payment, please refer to IT-530R and Guide P102, Support Payments.

We trust the above comments address your concerns.

Yours truly,

Jenie Leigh
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch