In Sruder, 2011 TCC 322, the Tax Court dismissed the taxpayer’s argument that the child support amounts could be deductible under Article 18(2)(d) of the Canada-Switzerland Tax Convention.
In relevant part, Article 18(2)(d) of the Canada-Switzerland Tax Convention reads as follows:
18.2 Notwithstanding anything in this Convention
…
(d) alimony and other similar payments arising in a Contracting State and paid to a resident of the other Contracting State who is subject to tax therein in respect thereof, shall be taxable only in that other State.
The taxpayer relied on the following excerpt from the Canada Revenue Agency guide to argue that the payments were
Carol and Doug divorced on December 23, 2009. Doug resides in Australia. Carol is a Canadian resident. Under a court order, Doug paid Carol $500 a month in spousal support beginning January 1, 2010.
Under the terms of the Canada-Australia Income Tax Treaty, alimony and other maintenance payments are only taxable in the source country. The payment is taxable only in Australia.
Carol must report $6,000 on line 128 of her tax return and she should also enter this amount on line 156 of her tax return. Carol may also claim $6,000 as a deduction on line 256 of her tax return because of the provisions of the Canada-Australia Income Tax Treaty.
The Tax Court dismissed the analogy used by the taxpayer and pointed that Article 18(2) aims to relief taxation of the recipient. As such, the taxpayer’s argument was flawed because he was payor, and as such the taxation of such payments in his hands was not prescribed by Article 18(2).
As a matter of caution to be excerised by tax advisors, Canadian tax treaties are not consistent in respect of taxability of alimony and other support payments. For example, Canada-Australia Treaty (cited in the example provided in the CRA Guide dealing with Support Payments) provides that such payments may only be taxable in the source State:
Any alimony or other maintenance payment arising in a Contracting State and paid to a resident of the other Contracting State, shall be taxable only in the first mentioned State.