Eight Factors in Deductibility of Support Payments

Last week, KBR took a look at the case of Blue v. the Queen in the Tax Court of Canada, in which the deductibility of support payments was challenged by the CRA. The leading case on the matter of deductible support payments is The Queen v. McKimmon [1990]. The following commentary summarizing the criteria was submitted by Greer Jacks.

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. These considerations are:

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 both the payer and the recipient.
3. Whether the payments are to bear interest prior to their due date.
4. Whether the amounts envisaged can be paid by anticipation at the option of the payer 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 whether they are for a fixed term.
7. Whether the agreed payments can be assigned and whether the obligation to pay survives the lifetime of either the payer or the recipient.
8. Whether the payments purport to release the payer from any future obligations to pay maintenance.

With the exception of the eighth factor, the Tax Court found in Blue v. the Queen that most of the factors favoured the appellant in this appeal; the sixth factor was found to be neutral. Therefore, it was held that the support payments were indeed for the maintenance of the appellant and were properly deductible under the Act. The appeal was allowed.

A decision in the Tax Court of Canada regarding deductibility of support payments could just as easily go the other way if all of these criteria are not taken into account at the time a separation agreement is drafted. Remember that the separation agreement and structure of payments must pass muster not only with the parties involved and with their lawyers and other advisors, but also with CRA.

In short, great care must be taken when structuring separation agreements because there can be unintended tax ramifications if the circumstances of the parties are not thoroughly considered against these criteria prior to drafting the agreement. Lawyers need to know this; a trusting relationship with an astute tax specialist can help.

Additional Educational Resources:  DAW January, where this topic will be covered in depth.

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