Support Payments as Deductible Expenses and Taxable Income
By Martina Caunedo
This memorandum is intended to provide information regarding the deductibility of support payments as expenses for the payor and their taxation as income for the recipient.
Support payments are deductible expenses for the payor and taxable income for the recipient when the following requirements outlined in Section 60(b) of the Income Tax Act (the “ITA”) are complied with.
1. The Law
Allowed deductions = A – (B + C) where
- A is the support amount paid within a year by the taxpayer to a particular person, where the taxpayer and the particular person were living separate and apart
- B is the child support amounts that became payable by the taxpayer to the particular person under an agreement or order on or after its commencement day and before the end of the year in respect of a period that began on or after its commencement day, and
- C is the total of all amounts each of which is a support amount paid by the taxpayer to the particular person after 1996 and deductible in computing the taxpayer’s income for a preceding taxation year
2. Definition of Support Amount
“Support amount” is defined by Subsection 56.1(4) of the ITA as an amount that:
· is payable or receivable as an allowance on a periodic basis, excluding lump sums
o Lump sums are not deductible as they are not paid on a periodic basis, except when there are outstanding payments and this payment is made to pay such debt. See below detailed distinction between lump sum payments and allowances.
· is paid for the maintenance of the recipient, the children of the recipient, or both;
· the recipient has discretion as to the use of the amount, with specific purposes stated in the terms of the agreement:
o amounts paid for specific purposes (e.g. rent) would not be deductible; and
· where the recipient of the amount is the spouse or common-law partner or former spouse or common-law partner of the payer, the parties are living separate and apart because of a breakdown of their relationship and the amount must be receivable under an order of a competent tribunal or under a written agreement:
o the agreement or court order must be registered with the Canada Revenue Agency (the “CRA”), unless limited to child support payments. For details on the written agreement requirement see below.
· where the recipient is the parent of a child of whom the payer is a legal parent, the amount is receivable under an order of a competent tribunal in accordance with the laws of a province or territory.
3. Periodic Payments
In The Queen v Mc Kimmon, the Federal Court of Appeal established the criteria to distinguish periodic payments from lump sum instalments. Among others, the principal variables are:
· Length of periods at which payments are to be made (long intervals seem to be closer to instalments).
· Fixed term vs. indefinite period (an allowance is usually provided indefinitely or until the occurrence of a specific event changing the circumstances that gave rise to the payment).
· Agreements that release the payer from future maintenance obligations are not considered allowances.
· the relation between the payment amount and the recipient’s standard of living (excessive amounts beyond ordinary expenses may indicate a non-allowance payment).
4. Written and Verbal Agreements
Since the act requires payments to be agreed under a written agreement or an order of a competent tribunal, it has been discussed whether a written agreement executed after certain payments were made would suffice the requirement of having a written agreement. In Milburn v. Minister of National Revenue the Tax Review Board (the “Board”) addressed the matter and ruled that such later written agreement only proves the existence of a contract and does not retroactively change the nature of the verbal agreement.
In this sense, Guy Tremblay writing for the Board indicated that:
(…) a verbal agreement becomes a written agreement only when it is signed by the parties.
If persons have participated in written but unsigned agreement and have complied with it, the document may serve to prove a verbal contract but that is all. Moreover, a verbal contract is not a written contract. (…)
In the Board’s opinion, the retroactivity to a former date stipulated in a written agreement generally means that the written agreement confirms the existence of a former verbal agreement which substantially contained the same conditions as those stipulated in the written agreement.
As a result, payments made under a verbal agreement do not qualify for deduction under Section 60(b) of the ITA.
6. Exceptions to the Written Rule:
Two exceptions exist under Sections 56.1(3) and S. 60.1(3) of the ITA. These sections stipulate that when a written agreement or court order identifies amounts paid prior to the creation of the written agreement or to the court order, and such agreement or court order designates that such amounts should be considered to have been paid and receive thereunder, the amounts are deemed to have been received thereunder and the agreement or order is deemed to have been made on the date of the first payment.
To qualify under this exception, the payments must have been made within the same or previous tax year of the written agreement.
Based on the stipulations outlined in Section 60(b) of the ITA, it is clear that support payments are considered deductible expenses for the payor and taxable income for the recipient, assuming specific conditions are met. These conditions include the nature of the payment (whether it’s periodic or a lump sum), the recipient’s discretionary use of the amount, and the legal status of the payer and recipient.
The definition of a “support amount” as per Subsection 56.1(4) of the ITA, as well as the case of The Queen v Mc Kimmon, help to discern the periodicity of payments and the differentiation between lump sum payments and allowances.
The significance of a written agreement, as outlined in various case law, is essential for a payment to qualify for deduction under Section 60(b) of the ITA. A verbal agreement, even if followed by a written agreement, does not retroactively alter the nature of the payments made under the verbal agreement.
Exceptions to this rule exist in Sections 56.1(3) and 60.1(3) of the ITA, where payments made prior to a written agreement or court order can be considered deductible, provided they have been designated as such in the agreement or order, and the payments were made within the same or previous tax year of the written agreement.
In conclusion, support payments’ deductibility depends on several factors, such as the nature of payment, the establishment of a written agreement, and the timing of such payments. It is essential to meet the conditions outlined in the ITA to ensure these payments are classified correctly and taxed appropriately.
 The Queen v Mc Kimmon  1 FC 600 90 DTC 6088 (Federal Court of Appeal)
 1978 CarswellNat 469,  C.T.C. 2007, 79 D.T.C. 24 at paras 13-14, 16