ARCHIVED CD 1997-034

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November 6, 1997

Ottawa, Canada
K1A 0S5

SUBJECT: Income Tax Implications -Alimony and Child Support Payments Deducted at Source

1. PURPOSE

1.1 The purpose of this directive is to provide you with information concerning the income tax treatment of alimony and/or child support payments required to be deducted at source by court orders dated prior to May 1, 1997, as well as those dated on or after May 1, 1997.

2. CANCELLATION

2.1 This directive supersedes Compensation Directive 1996-010 dated February 27, 1996.

3. BACKGROUND

3.1 Bill C-92 was given royal assent by Parliament on April 25, 1997. This bill introduced changes to the tax treatment of child support (also referred to as maintenance payments) and alimony payments required to be deducted at source by a court order dated on or after May 1,1997 .

3.2 For most court orders requiring child support payments at source, dated prior to May 1, 1997, the tax implications have not changed. However, there are two exceptions to this and they are described herein.

3.3 This directive incorporates the policy that was in effect prior to Bill C-92, as well as the changes to the policy as a result of this legislation.

4. POLICY

Prior to May 1, 199

4.1 In most instances, child support and alimony payments required to be deducted at source by a court order dated prior to May 1, 1997, were tax exempt at source.

The employee had the choice to:

  1. take advantage of the tax exemption at source; or
  2. not take advantage of the tax exemption at source.

Please note that the employee continues to have the right to alter this choice.

4.2 For court orders dated prior to May 1, 1997, the authority for departments to input the tax exemption at source was the court order which specified the child support and alimony payments were to be deducted at source. Letters of authority from Revenue Canada and Revenu Quebec (for employees working and residing in Quebec) were not required, in these situations.

4.3 The two exceptions to the treatment of court orders dated prior to May 1, 1997, are:

  • Court orders which specify that on or after a particular date (May 1, 1997, or later) the tax treatment for child support payments and alimony payments will fall under the new rules as detailed in sections 4.4 and 4.5 herein.
  • Where the recipient and the payer of the child support and alimony payments jointly elect that after a particular date (May 1, 1997, or later) child support and alimony payments will fall under the new rules as detailed in sections 4.4 and 4.5 herein.

On or After May 1, 1997

4.4 For court orders dated on or after May 1, 1997, the new rules specify that child support payments required to be deducted at source by a court order are no longer exempt from income tax.

4.5 Alimony payments are not affected by these new rules and remain exempt from income tax. However, the tax exemption for these alimony payments will no longer be given automatically on receipt of court orders dated on or after May 1, 1997. Letters of authority (income tax waivers) from Revenue Canada and Revenu Quebec (for employees working and residing in Quebec) are required.

5. PROCEDURES/INSTRUCTIONS

5.1 Upon receipt of any court order requiring child support and alimony payments from an employee's salary at source, the department should commence the deduction as indicated in the court order.

5.2 For court orders dated prior to May 1, 1997, requiring that child support and alimony payments be deducted at source, the department should have consulted with the employee to determine if he wished to take advantage of the tax exemption at source.

If the employee had chosen not to take advantage of the tax exemption at source, there was no action required for tax purposes.

If the employee had chosen to take advantage of the exemption at source, the amount of the exemption should have been determined by using the calculation detailed in section 5.4 herein.

5.3 Employees who are required to make alimony payments at source by a court order dated on or after May 1, 1997, and who wish to take advantage of the tax exemption at source, must provide a letter of authority from Revenue Canada and Revenu Quebec. Departments should not initiate the tax exemption at source until the letter(s) of authority are received.

NOTE: Effective January 1,1998, Revenu Quebec will no longer issue tax exemption letters for alimony payments. In addition, letters previously provided for this purpose will no longer be valid.

Commencing in the taxation year 1998, employees will be responsible for determining the amount of the tax exemption by completing the new version of the Source Deduction Declaration, Form TP 1015.3 (formerly MR 19). This form is available from Revenu Quebec offices and at the following Internet address: Revenu Québec - Home

5.4 The department should calculate and input the tax exemption as per the following:

  1. Determine the total amount to be deducted for the year by multiplying the amount to be deducted each pay period by the number of pay periods where the deduction will apply during the year.

    Use the amount reflected on the letter of authority from Revenue Canada or Revenu Quebec.

  2. Multiply the amount in a) by the number of pay periods in the year. Divide the result by the number of remaining pay periods during the year. This will equal the amount of the tax exemption for the current year.
  3. The result in b) should be input into field 43 "Federal Hardship Exemption" and field 44 "Additional Provincial Tax Exemption" (for employees working and residing in Quebec).

5.5 Where a court order dated prior to May 1, 1997, specified that on a particular date the new rules will apply, the department should have a reminder in place to cease the tax exemption(s) for child support and/or alimony payments currently entered on the employee's account. Only when the letter of authority is received can the tax exemption for alimony payments be re-instated.

5.6 An information chart has been included as Appendix A to assist in clarifying which rules apply in various situations.

6. INQUIRIES

6.1 Any request for information regarding the foregoing should be addressed to your Public Works and Government Services Canada (PWGSC) Compensation Services Office.


Original Signed by
P. Charko

P. Charko
Director General
Compensation Sector
Government Operational Service

Reference : CJA 9007-10-8


TAX IMPLICATIONS ON CHILD SUPPORT AND ALIMONY PAYMENTS DEDUCTED AT SOURCE

COURT ORDER INFORMATION RULES TO BE FOLLOWED
DATE ON COURT ORDER ADDITIONAL INFORMATION
PRIOR TO MAY 1, 1997

Child Support Tax exempt (if employee chooses) - No letter required Court Order is authorizing document
Alimony Tax exempt (if employee chooses) - No letter required Court Order is authorizing document
Court Order specifies new rules to take effect on or after May 1, 1997. Child Support Tax exempt up to date specified on the court order (if employee chooses) No letter required - Court Order is authorizing document Not tax exempt after date specified on court order
Alimony Tax exempt up to date specified on the court order (if employee chooses) No letter required - Court Order is authorizing document Tax exemption may be re-instated upon receipt of letter of authority from Revenue Canada and Revenu Quebec (if working and residing in Quebec)
Recipient and payer jointly elect that the new tax rules will take effect on or after May 1, 1997 Child Support Tax exempt (if employee chooses) only up to date Employer notified by Employee to remove tax exemption Not tax exempt after date Employer notified by Employee to remove tax exemption
Alimony Tax exempt (if employee chooses) only up to date Employer notified by Employee to remove tax exemption Tax exemption may be re-instated upon receipt of letter of authority from Revenue Canada and Revenue Quebec (if working and residing in Quebec)
ON or AFTER MAY 1, 1997 Child Support Not tax exempt
Alimony Tax exempt only if letter is obtained from Revenue Canada and Revenu Quebec (if working and residing in Quebec)

Note : Effective January 1, 1998, Revenue Quebec will no longer issue tax exemption letters for alimony payments. Letters previously provided for this purpose will no longer be valid. Commencing for the taxation year 1998, employees will be responsible for determining the amount of the tax exemption by completing a new version of the Source Deduction Declaration, form TP 1015.3 (formerly MR 19). This pertains to the deduction of Quebec Income Tax at source only.