May 1994 CEN-TAPEDE - No escape from US Taxation, Canada Mexico Tax Treaty, IRS agents in Canada, Child Support Payment Taxation

May 1994


david ingram's US/Canadian Newsletter


NO ESCAPE (from Page D8, Vancouver Sun, Monday, May 9, 1994)


"The US Internal Revenue Service wants readers of The Sun to know it has apprehended fugitive Larry (Irish) Murphy in Puerto Rico for failing to file returns while residing in Colorado.


Presumably, the part of the press release supposed to get our attention was that the IRS has a bureau devoted to the pursuit of "US citizens living abroad and non-resident aliens subject to filing requirements in the US."


Let's hope heavy-handed Elliot Ness impersonators who cross the 49th parallel in pursuit of elderly snowbirds will be prosecuted for trespassing."


The above is a direct quote from "Column One". Unfortunately, we all have to recognize that an IRS agent in Canada will not be arrested for trespassing. In fact, Canadian Revenue Canada employees must give them any information they request under the terms of Article XXVII of the US / CANADA tax treaty and Section 3 of the Tax Convention Act. (Section 231.2 of the Canadian Income Tax Act empowers the Minister of National Revenue to pass on the information to the US authorities.)


And do not try and hide any money in Mexico. Article 4 of the Canada / Mexico Tax Treaty is pro-active and requires the relevant authorities to supply the information to each other even if there is no request. In other words, if the Mexican Taxation authorities find a Canadian involved in something, they are to notify the Canadian authorities of the involvement (and vice versa). In the case of the US and Canada, the relevant authorities have to ask for the information.



The following should be posted on your Company Bulletin Board. Any parent receiving child support from a divorced or separated parent of their child should read this and is welcome to make a copy and pass it on.


5 BILLION DOLLAR ($5,000,000,000) REFUNDS



On Tuesday, May 2, 1994, The Federal Court Of Canada found the taxation of "CHILD SUPPORT" payments to be discriminatory in the Susan Thibadeau Case.


Some reports implied that this only applies to the 1989 income tax year. That is simply not true.


Federal Government FAIRNESS LEGISLATION passed in March, 1992 allows a taxpayer to refile his or her tax return back to 1985 when he or she discovers a missed deduction.


Our own computer system has searched our records back to 1985 and we are presently amending some 800 returns for CEN-TA clients in Vancouver and Toronto.


This newsletter is for the benefit of those who received child support and wish to amend their own returns. When originally written, The decision had not been appealed. The decision was appealed on May 18, 94 and it is now written with the knowledge of the appeal being in existence.


Individuals involved should file a T1-ADJ (adjustment) for each year involved from 1985 to 1992 and a T400A (NOTICE of OBJECTION) for the 1993 tax year. This will not result in an immediate refund but will put your request and file "in line", if the Supreme Court should rule against Revenue Canada in favour of Susan Thibadeau.


The amendment process is complicated by the fact that some line numbers changed from 1985 to 1993.


It is further complicated by the fact that the child support can be removed (made non-taxable) in two or even three different ways.


There are three methods that might work to remove this Child Support from your income. The preferable method for the taxpayer would be to remove the support amount on line 130 for 1985 and line 128 for years 1986 to 1993.


The second best method for the taxpayer would be to remove it at line 222 for 1985, 1986 and 1987 or line 232 in 1988 to 1993. Both of these methods would increase your Child Tax Credits, Federal Sales Tax Credits, and Goods and Services Tax Credits and affect the 3% figure for medical amounts.


However, because the treatment for Child Support from an American Resident is already put in on line 128 and removed on line 256, I expect that Revenue Canada will use this third method and your various tax credits will remain the same. (See 1993 guide "tax tip", page 16, bottom left hand corner of page).


Please note that there is no equivalent to line 256 on the 1985, 1986 and 1987 returns.


If Revenue Canada agrees to accept the deduction for 1989 to 1993, but moves it to line 256, your net income would not be changed and GST, CTC, FST credits would remain the same and your taxable income would go down.


Your next question might well be: "why include the support at all?" Why not just remove the amount from line 128 (1986 to 1993) or line 130 in 1985? The answer is that it is still income. Worker's Compensation, Welfare, and payments to Status Indians are also not "taxable" but have to be put on the return and then deducted. The question Revenue Canada has to decide is: "What line to use for the deduction?" Their decision will affect all other tax factors.


For instance, let me use an example of a woman receiving $9,000 child support. She is married to another man and that is her only income. If the money is removed from line 130 in 1985 and line 128 from 1986 to 1993, her net income would be zero, and her new husband could claim her as a dependent. The same situation exists if the money is left in income but deducted at line 222 from 1985 to 1988 or line 232 for 1988 to 1993. These lines are before Net Income and allow the husband to claim the wife as a dependent. However, line 256 was introduced in 1988. If the support is removed on line 256 (as it is now for child support from the US), Net Income would remain at $9,000 and the husband could not deduct his wife as a dependent. I can imagine that this will be the next appeal.


The enclosed T1-adj sample covers all three situations. (if samples are not enclosed, with this copy of your newsletter, please call our office).


BC residents should send the forms to:


Revenue Canada, Customs, Excise, and Taxation

9755 King George Highway

Surrey, BC V3T 5E6


or your local office and wait and see what happens.




In a similar situation involving 117 members of the Vancouver City Police Force and their special clothing allowances, we waited over four years for a final ruling because Revenue Canada appealed the first decision. So, please do not get overly excited about the possibilities of an immediate refund cheque.


The NOTICE OF OBJECTION for 1993 should be filed within 90 days of the date of mailing of your assessment notice OR by April 30, 1995.


PLEASE ALSO NOTE: This newsletter only applies to CHILD SUPPORT amounts. It does NOT apply to spousal support or to alimony received.


Yours truly







david ingram



PS: The question of the deducibility of the child support by the other parent was not addressed in this decision. However, it is expected that many payers will be going to court to try and reduce the amount they pay because the amount paid was based upon the necessity of the recipient's having to pay income tax on the amount received and the payer's ability to claim a deduction. i.e., the amount of required support was grossed up to cover the tax and give a tax free "net" amount to the parent.


I will use an example of an individual earning $50,000 a year and paying $20,000 of child support to a mother with $10,000 a year of part time earnings.


In this instance, father is getting a tax refund of 40% of the $20,000 or $8,000. It is therefore costing him a net of $12,000 or $1,000 a month.


Mother is adding the $20,000 to her existing $10,000 for a total of $30,000. And because she is in a 25% tax bracket, she is only paying $5,000 tax on the $20,000 she received and she has $15,000 left over to feed the kids.


In this case, father is having trouble paying the $20,000 ($12,000 net) as it is. If father loses the deduction (it is not deductible in the US now), he is going to go back to court and ask for a reduction in the payments. (This happens quite often when circumstances change.)


If the judge makes the decision to reduce the payments to the former NET "out of pocket" payment of $12,000 a year, mother is only going to get $12,000 net instead of the $15,000 she had before. (If former husband has remarried and has a wife and two more children to feed, the judge will not likely take money away from the new family.)


And this in the long run is likely fairer for society as a whole. As it presently stands, in many situations, the general taxpaying public is paying 10, 20 or even 30 % of the child support through this archaic tax system.


Whenever someone has complained to me about paying tax on the child support, I have been able to show them that they receive MORE actual cash under this system. It is a budgeting question for both sides.


With all due respect to the women who have fought for non taxable child support, the final solution will result in LESS money for child support for higher income families. The people who have had to rely on the welfare system will see no changes.


Many people profess to admire the US tax system. In the US, child support is not deductible for the payer and is not taxable to the recipient in any circumstances. I would prefer to see that situation true in Canada. It certainly levels the playing field for everyone concerned and is easier to administer for everyone involved.

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