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MARRIAGE BREAKDOWN

81(7)

ARREARS

In a September 24, 2007 Tax Court of Canada case, the Appellant was required to pay monthly support payments of $2,000 and fell behind after losing his job. A February, 2003 Final Court Order noted that the spousal support payments in arrears were $25,000 however, the total arrears were reset at $7,500 which was paid by the taxpayer. CRA argued that the payment was a settlement of arrears and, therefore, was a non-deductible capital payment.

Taxpayer Wins!

The Court noted that the intention of the Court Order was that the $7,500 was to be paid as deductible arrears.

Editor’s Comment

If this was a settlement between the spouses without a Court Order, the payment would likely be non-deductible/non-taxable. See the following case.

ARREARS - SETTLEMENT

In an English translation of a French March 29, 2006 Tax Court of Canada case, the taxpayer paid $11,680 as a final settlement for unpaid support arrears under the 1993 Divorce Judgment. It was the Tax Court’s view that the payments were made to release the Appellant from the obligations in the 1993 Divorce Judgment and, therefore, were capital in nature and not deductible.

THIRD PARTY PAYMENTS

In a September 27, 2007 Tax Court of Canada case, the former spouse, Mrs. T, was concerned with respect to collecting the annual alimony payments of $30,800. Therefore, to allay Mrs. T’s concerns, it was agreed that the support payments would be paid by way of an annuity which was to be bought by Mr. T from Manulife Financial for $136,679.

The Court reluctantly dismissed the Appeal because the agreement to provide the annuity to the former spouse constituted a fundamental modification of the Separation Agreement.

Editor’s Comment

It appears significant that this annuity purchase was not part of a Court Ordered Separation Agreement.

HOUSE/COTTAGE

In a September 4, 2007 External Technical Interpretation, CRA reviewed a scenario where, as part of a divorce settlement, Husband (H) transfers his 50% interest in the house to Wife (W) and W transfers her 50% interest in the cottage to H. CRA noted that these transfers will be on a tax-deferred basis assuming they do not elect-out of the automatic rollover.

Also, provided that the spouses jointly elect, future gains or losses on the properties will accrue to the recipients as opposed to the transferors.

Editor’s Comment

These Principal Residence Exemption issues should be considered in the separation proceedings.

ALIMONY

It was noted in the November 7, 2007 issue of the National Post that CRA has requested the payer of spousal support for a receipt from the recipient spouse before allowing the deduction.

Editor’s Comment

Consider having the provision of a receipt as a requirement in the Agreement.

PENSION SPLITTING

In a November 7, 2007 Tax Court of Canada case, Mr. L entered into a Separation Agreement with his spouse in 2005 including an equal division of the pension from his employer. Therefore, Mr. L did not include in income the $13,802 paid by him to his wife on the pension division. The wife argued that this should not be taxable to her, or deductible to him.

Mr. L Wins!

The Court noted that it was the intention of the parties at the time the Separation Agreement was executed that each would receive 50% of the pension.

Therefore, the $13,802 paid by Mr. L to his spouse should not have been included in Mr. L’s income.

Editor’s Comment

There may be fewer arguments if the pension is divided at source.

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