Tax Court Of Canada Renders Decision About Deductibility Of Spousal Support Payment
The Tax Court of Canada rendered an interesting decision on March 4, 2011 in the case of Hovasse v. R , 2011 TCC 143. The case dealt with an appeal from an ex husband to the Tax Court following CRA’s rejection of his ability to claim the entirety of his spousal support payments over a year to his ex-spouse.
The background facts of this case involve parties that were married for 22 years. Upon separation, the parties attempted to resolve their outstanding matters through the use of a mediator. Following the mediation, the parties came to an agreement that included that Mr. Hovasse would pay his ex-spouse spousal support in the amount of $1,000.00 per month for eleven month starting in September of 2006.
In his 2007 tax return, Mr. Hovasse attempted to take advantage of the subsection 56.1(4) and paragraph 60(b) of the Income Tax Act (ITA) which allows payors of spousal support to deduct such payments when certain criteria are met. Such criteria include an order of a competent tribunal (court) or a written agreement.
*As an aside, the principles are generally, if spousal support is paid on a periodic basis (most commonly monthly) it is deductible to the payor and taxable to the recipient. If spousal support is paid in lump sum form, it does not carry such tax consequences.
In this case, Mr. Hovasse had presented as a written agreement a document entitled “Summary of Mediated Agreements”. This document was not signed by the parties. The Court reviewed the relevant case law in this area and found that signatures are the most common way to evidence each parties consent to the terms of the agreement but that a court may also accept other evidence that would indicate consent of both parties.
In this case Mr. Hovasse presented evidence that indicated the requisite consent and, that although the Summary of Mediated Agreements was not signed, it was referred to later in a final agreement and reduced to writing that way.
Counsel for the ex-wife presented arguments to oppose the allowance of the deduction of these payments, including the fact that the document was not signed, but these arguments were rejected by the Court.
The Tax Court allowed Mr. Hovasse’s appeal and found that he was entitled to a deduction of $7,000.00 for his payments made in 2007.
What parties should take from this case is the importance to be aware of the requirements under the ITA with respect to the deductibility of spousal support pursuant to an agreement following the breakdown of a relationship. This goes for both married and common law spouses. If you are unsure as to the nature of the agreement that you are contemplating, it would be prudent to have it reviewed by a lawyer and an accountant.
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