Q. Income Tax and Retroactive Orders

Author:Julien D. Payne - Marilyn A. Payne

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Sections 56 and 60 of the Income Tax Act376 provide that periodic spousal support payments made pursuant to an order of a competent tribunal or a written agreement after marriage breakdown are tax deductible by the payor and are taxable in the hands of the payee. Sections 56.1(3) and 60.1(3) of the Income Tax Act permit agreements for periodic payments of spousal support or an order for periodic spousal support to go back one prior calendar year but no farther.377However, a court cannot order that a retroactive support order be taxable/deductible even if the order relates to the current year and immediately preceding year, where the payments have not in fact been made in those years.378In contrast, lump sum spousal support payments are paid in after-tax dollars and are tax-free in the hands of the recipient. These basic principles are easy to state but not always easy to apply. For example, courts may order lump sum support to be payable in installments or alternatively may order periodic payments for a fixed period of time; or arrears of periodic support may be discharged by a lump sum that may or may not correspond to the aggregate of the arrears. The difference between lump sum and periodic support payments can, therefore, give rise to elusive distinctions with respect to income tax consequences. The particular language adopted in a separation agreement or court order may be important but is not decisive. In R v McKimmon,379

Hugessen JA, of the Federal Court of Appeal, sets out a non-exhaustive list of eight factors to be taken into account for the purpose of differentiating between periodic spousal support payments and lump sum spousal support payable by instalments:

  1. the length of the periods at which the payments are made;

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  2. the amount of payments in relation to the income and living standards of both payor and 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 payor 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 payor or recipient;

  8. whether the...

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