Affluent clients who find themselves making retroactive support payments in one lump sum may be able to take some comfort from a May decision of the Tax Court of Canada.
The case, James v. The Queen, was launched by a former husband who initially paid his former wife $5,750 per month in spousal support following their separation. That reflected his annual income of about $500,000. A year after making those payments, the wife sought a large increase based on an increase in the husband’s income. After several years of litigation, including a trip to the British Columbia Court of Appeal, the husband was ordered to increase his monthly obligation to $9,000.
In addition, he was ordered to pay the difference between the old and the new amounts for the period between January 1, 2005 and July 30, 2009 (the period of the litigation). That sum, paid all at once, came to $169,775.
The issue was whether the husband could deduct that amount. The Canada Revenue Agency disallowed the deduction, claiming it was a lump sum payment in the nature of a settlement; generally, “support amounts” can only be deducted under the Income Tax Act if they are made on a “periodic basis” (s.56.1(4); s.60(b)).
The tax court disagreed. There have been cases holding that payments for support relating to periods in the past — but paid in one amount — cannot be deducted. But the tax court in the James case held that it is crucial to assess the nature of the payments in dispute. If they retain the character of periodic payments, but are paid all at once because there was no way to pay them in the past, they should be deductible, the decision concludes.
In holding for the husband, Justice Campbell Miller suggested that a lump-sum payment to fulfill the new court order would not transform a periodic obligation into a one-time settlement. (Such amounts are generally not deductible.)
Noted Justice Miller: “Mr. James was ordered to pay $9,000 a month back to Day 1 and going forward. These are all periodic payments. The fact that the concept of time has not been lassoed by science so that one can travel back in time, making it impossible to physically make 54 $3,250 payments from 2005 to 2009, does not strip the support from maintaining its periodic nature. This is not a situation where the purpose of the one‑time lump sum payment is to settle all future support entitlements once and for all.”
Justice Miller also noted that, even if the obligation for the higher payments, in the past and going forward, was made only recently, it remained a periodic obligation. “The legal obligation, even if considered to be created currently, is an obligation to make good the periodic payments,” the decision adds.