Every so often a decision is made in Tax Court that benefits the payor of support in Family Court. In James v The Queen, 2013 TCC 164, also cited as James v Canada, the Federal Tax Court dealt with an important question for all those who pay spousal support: whether a retroactive lump-sum spousal support payment qualified as a deductible "support amount" under subsection 60(b) of the Income Tax Act (ITA).
This case illuminates the intersection of family law obligations and tax law, providing valuable insight on how retroactive payments are treated for tax purposes. This decision influenced Canada Revenue Agency (CRA) to change its position and practice on certain lump sum support payments.
The Legal Issue
The central question was whether a retroactive payment of $169,775 retained the character of "periodic payments" as defined under subsection 56.1(4) of the ITA, thus qualifying as a deductible "support amount."
The Story
Craig James and his ex-spouse, Lynn Anne James, separated in December 2001 after 19 years of marriage. In March 2004, a consent order was issued, requiring Mr. James to pay monthly spousal support of $5,750. (See paragraphs 1–3.)
In 2009, the British Columbia Court of Appeal (BCCA) retroactively increased the spousal support obligation to $9,000 per month, effective January 1, 2005. This decision arose from Ms. James' successful appeal, arguing that the original support amount did not reflect Mr. James' significantly increased income. To comply, Mr. James paid a lump sum of $169,775 in July 2009, representing the retroactive adjustment from 2005 onward. (See paragraphs 5–7.)
CRA reassessed Mr. James, disallowing the deduction of the lump-sum payment as a "support amount." The CRA argued the payment was not made on a "periodic basis" as required under subsection 60(b) of the ITA. Mr. James appealed. (See paragraphs 8–9.)
Interpreting the Income Tax Act
Under subsection 60(b) of the ITA, a taxpayer may deduct spousal support payments if the payments meet the following criteria:
They are "support amounts" as defined in subsection 56.1(4).
The amounts are payable on a periodic basis for the maintenance of the recipient (spouse or children).
The payments arise from a court order or written agreement.
The definition of "support amount" in subsection 56.1(4) specifies that payments must be "payable on a periodic basis" to qualify for tax treatment as deductible.
The Decision
Justice Campbell J. Miller ruled in favour of Mr. James, holding that the payment qualified as a deductible support amount. Several key legal principles and precedents were considered:
Nature of Periodic Payments
The court emphasized that a retroactive lump-sum payment does not lose its periodic nature simply because it is paid as a lump sum. The BCCA Order explicitly increased the periodic payments to $9,000 per month retroactive to 2005, and this increase was integral to the lump-sum amount. (See paragraphs 12 and 28.)
Key Precedent and Distinguished Case
In Sills v The Queen, [1985] 2 FC 200 (CA), the Federal Court of Appeal held that payments retain their "periodic" character even when made late in a lump sum.
Conversely, in Peterson v The Queen, 2005 FCA 223, a lump sum was deemed non-deductible because it represented a new legal obligation rather than arrears of periodic payments. The court distinguished James' case from Peterson, as the BCCA explicitly increased periodic obligations retroactively, creating arrears.
Purpose of the ITA Provisions
Justice Miller interpreted subsection 60(b) purposively, stating the law's intent is to allow deductions for genuine support payments made for the recipient's maintenance, whether paid periodically or in lump sums to fulfill arrears.
Binding Nature of Court Orders
The court highlighted that the BCCA's order to increase monthly payments retroactively bound all parties, creating a legal obligation that satisfied the ITA's requirements.
Takeaway
The legal principle applied in the case is that a if a lump sum payment represents arrears of periodic support payments established retroactively by a court order, the sum retains its periodic nature under the ITA and qualifies as tax-deductible (See paragraph 29).
The court further clarified that the deductibility hinges on the court's explicit creation of retroactive obligations that correspond to periodic payments, distinguishing this from settlements or new obligations.
Conclusion
The Tax Court’s decision in James v Canada, 2013 TCC 164 provides essential clarity for taxpayers balancing spousal support obligations with tax deductions.
By recognizing the retroactive lump-sum payment as a deductible "support amount," the tax court reaffirmed that family law judgments create enforceable obligations that merit CRA recognition.
To understand whether your situation would qualify for a tax deduction, contact one of our divorce lawyers.
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