Deductibility of Periodic Support Payments Challenged

Separation and divorce are expensive life events; they can be much more financially damaging when tax rules are not taken into account. The recent case of Blue v. the Queen in the Tax Court of Canada, although successful for the appellant, shows how easily the terms of a well-intentioned separation agreement may be ruled ineligible for tax relief.

This decision canvasses the leading case law on the topic and is a good example of how the Court analyzes separation agreements with reference to the circumstances of the parties in order to determine if certain spousal support payments are deductible under the Income Tax Act (the Act).

Blue v. The Queen concerned the deduction of spousal support payments for the 2013 taxation year. Pursuant to a separation agreement, the appellant was obligated to pay his former spouse $12,000 per annum over the course of five years. Although this arrangement had been agreed upon by the separated spouses and their advisors, CRA questioned whether the $12,000 should be considered eligible as a deduction.

The relevant provisions of the Act in this case were paragraph 60(b), which allows the deduction with respect to a “support amount”; subsection 56.1(4), which defines “support amount”; and subsection 60.1(4), which imports the definition of “support amount” into section 60. The interplay of these sections is complex, but essentially support payments will be deductible if:

1. An allowance is paid on a periodic basis for the maintenance of the recipient.
2. The recipient has the discretion to use the amount as he or she wishes.
3. The recipient and the payer are living separate and apart.
4. The amount is receivable under an order of a competent tribunal.

Only the first condition was in dispute. The decision turned on whether the support payments were capital in nature or whether they were in fact paid for the maintenance of the appellant’s ex-spouse.

The leading case in this regard is The Queen v. McKimmon [1990] wherein the Honourable Justice Hugessen stated, “The Court is required to look at all the circumstances surrounding the payment and to determine what, in light of those circumstances, is its proper characterization.” He provided eight non-exhaustive factors to consider when making this analysis.

Next Time:  Eight Factors in Deductibility of Support Payments and the outcomes of the case.

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