Date: 20020125
Docket: 2001-112-IT-I
BETWEEN:
CAROL JENNINGS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Rowe, D.J.T.C.C.
[1] The appellant appeals from an assessment of income tax for the 1997 taxation year. The Minister of National Revenue (the "Minister") included into the appellant's income the sum of $16,000 received from her ex-husband pursuant to provisions of a Court Order under circumstances requiring said sum to be regarded as arrears paid in respect of an existing Order and not as a lump sum.
[2] The appellant's position is that the payment of the amount by her ex-husband did not constitute a receipt of an amount that was payable on a periodic basis for the benefit of herself and her children because the payment was made in commutation of the periodic sums payable under the original Order and to secure a release from future obligations or liabilities.
[3] The issue is whether the Minister properly assessed the appellant to include into income the $16,000 payment pursuant to paragraph 56(1)(b) of the Income Tax Act (the "Act").
[4] The appellant testified she resides in West Vancouver and is employed as a realtor. As Carol Ann Henderson, she petitioned her husband - Gregg MacDonald Henderson (Henderson) - for interim maintenance of herself and the two children of the marriage. A Court Order was issued by a Court of competent jurisdiction in which Henderson was required to pay the sum of $2,000 per month commencing on August 1, 1991 and continuing thereafter until further order of the Court. The appellant stated her former husband was so seriously in arrears in respect of his liability pursuant to said Order, that - in 1997 - he owed the sum of $102,000. He had paid her the amounts, as required, for only one year and had then ceased to make any payments whatsoever. The appellant pursued Henderson through the auspices of a provincially-operated maintenance enforcement program and a lien was filed against his house in order to secure the outstanding amount owed to her. In mid-1997, the appellant entered into discussions with her former husband concerning the arrears owed to her. She agreed to forego any future claim for spousal support and to accept a payment of $16,000 in return for consenting to a cancellation of arrears that had arisen as a consequence of Henderson's ongoing failure to comply with the Order dated July 12, 1991. In order to resolve the matter, they sought ratification of said agreement by obtaining approval of the Court in the form of an Order. On July 18, 1997, Master Doolan approved a Consent Order that was subsequently filed at the Vancouver Registry of the Supreme Court of British Columbia on July 23, 1997. The Consent Order - Exhibit A-1 - varied the previous order of Master Doolan - made July 12, 1991 - by cancelling the spousal maintenance to be paid to the appellant and further ordering Henderson to pay maintenance to the appellant for the support of the two children of the marriage, in the sum of $200 per month - per child - beginning July 1, 1997 and continuing each and every month thereafter until certain specified conditions pertaining to their education and/or obtaining self-supporting status were met. In addition, the Consent Order reduced the arrears accrued pursuant to the previous Order - dated July 12, 1991 - to the sum of $16,000 and ordered Henderson to pay said sum forthwith to the appellant to cancel the arrears. In addition, the Court ordered that the appellant remove the lien she had filed against Henderson's house in order to secure the arrears of maintenance. The appellant stated she was aware the sum of $400 per month paid to her for maintenance of the children would not be taxable in her hands and her former husband had been of the same opinion except he later claimed a child maintenance deduction when filing his income tax return.
[5] The parties were requested to submit written submissions and I set forth a summary of the arguments contained therein.
[6] The appellant submitted that an amount cannot be included in income pursuant to the Act unless it meets the definition of a "support amount" under subsection 56.1(4) which is an allowance payable on a periodic basis for the maintenance of the spouse, child or both, if the spouse has discretion as to the use of the amount and the amount is receivable under a court order or written agreement. The position of the appellant is that although the sum of $16,000 was received by her pursuant to an Order issued by a competent tribunal, it was not an amount payable on a periodic basis. The appellant submitted the Consent Order - dated July 18, 1997 - had cancelled or rescinded the arrears owing pursuant to the previous Order and the payment by her former husband was an amount paid in return for a release from future obligations and liabilities and, as a consequence, was non-taxable. The appellant contended the payment of the lump sum at issue was not in relation to any periodic payments but - instead - was purely and simply a payment made pursuant to a new agreement by the parties, later ratified by an Order based on the terms of their consent. While the appellant acknowledged the 1997 Order did require her former husband to make ongoing monthly child support payments, she pointed out that the $16,000 lump sum payment did - in fact - release Mr. Henderson from all future obligations to pay anything more in respect of his liability in the amount of $102,000 that had accumulated as a consequence of his default under the 1991 Order. The appellant referred to certain Interpretation Bulletins - issued by the Minister in 1990 and 1999 - which supported her position concerning the appropriate treatment - for tax purposes - of the lump sum payment received by her in the 1997 taxation year.
[7] Counsel for the respondent took the position that the Interpretation Bulletins were not binding and in any event ran counter to established jurisprudence on the point in issue. Counsel submitted that since it was perfectly clear the payments required to be made pursuant to the first Order - dated July 12, 1991 - were periodic in nature and constituted alimony within the meaning of paragraph 56(1)(b) of the Act, then it necessarily followed that arrears - even if paid in a lump sum - were still derived from said Order and the characterization or nature of the payment was not altered by that circumstance. Counsel's further submissions concerned the absence of consideration in return for a release from future obligations or future liabilities on the part of Henderson which could have had the effect of rendering the amount paid to the appellant as non-taxable; however, the Order - dated July 18, 1997 - continued to impose liability on him since he was ordered to make ongoing payments in the total sum of $400 per month commencing July 1, 1997 and continuing each and every month thereafter. The position taken by counsel for the respondent is that the proper interpretation of the payment of the sum of $16,000 to the appellant is to regard it as having been paid - not to cancel any future liability - but merely to cancel outstanding arrears pursuant to the 1991 Order.
[8] The relevant legislation is paragraph 56(1)(b) of the Act which states:
(b) Support - the total of all amounts each of which is an amount determined by the formula
A- (B + C)
where
A is the total of all amounts each of which is a support amount received after 1996 and before the end of the year by the taxpayer from a particular person where the taxpayer and the particular person were living separate and apart at the time the amount was received,
B is the total of all amounts each of which is a child support amount that became receivable by the taxpayer from the particular person under an agreement or order on or after its commencement day and before the end of the year in respect of a period that began after its commencement day, and
C is the total of all amounts each of which is a support amount received after 1996 by the taxpayer from the particular person and included in the taxpayer's income for a preceding taxation year;
[9] During the course of her evidence and oral argument, the appellant referred to Interpretation Bulletin IT-118R3 - Alimony and Maintenance - dated December 21, 1990 and an updated version - IT-530 - Support Payments - dated January 11, 1999. Paragraph 12(d) of IT-118R3 dealing with certain indicia was quoted by the appellant as follows:
Whether the payments purport to release the payer from any future obligations to pay maintenance - If there is such a release the payments will normally not be considered an allowance for maintenance.
[10] The appellant also referred to paragraph 22 of IT-530 which states:
...A lump sum payment to obtain a release from a liability imposed by an order or agreement whether such liability be in respect of arrears of maintenance payments, future payments or both, does not qualify because it was not made in accordance with the agreement.
[11] The appellant referred to a statement at the beginning of the above IT regarding its use by the public, as follows:
While the ITs do not have the force of law, they can generally be relied upon as reflecting the Department's interpretation of the law to be applied on a consistent basis by departmental staff ...
An interpretation described in an IT applies as of the date the IT is published, unless otherwise specified. When there is a change in previous interpretation and the change is beneficial to taxpayers, it is usually effective for all future assessments and reassessments. If the change is not favourable to taxpayers, it will normally be effective for the current and subsequent taxation years or for transactions entered into after the date of the IT.
[12] The Federal Court of Appeal in the case of The Queen v. Sills, 85 DTC 5096 decided that periodic payments are to be included into income even if in arrears and paid in a lump sum. Heald J.A. - speaking for the Court - at page 5098 and following - of reasons for judgment - delivered orally - stated:
I have no hesitation in concluding that both the Tax Review Board and the learned Trial Judge were in error in their interpretation and application of the provisions of paragraph 56(1)(b) to the facts in this case. An analysis of the subsection reveals following requirements (when applied to these facts):
(A) the amounts received by the taxpayer in the year under review must be received pursuant to the terms of the separation agreement;
(B) they must be received as alimony or other allowance payable on a periodic basis;
(C) they must be payable for the maintenance of the recipient thereof, children of the marriage or both the recipient and the children; and
(D) the recipient must be living apart from and be separated pursuant to a divorce, judicial separation or written separation agreement from the spouse or former spouse required to make the payment at the time the payment was received and throughout the remainder of the year.
I am satisfied that all of the requirements of the subsection, as enumerated supra, were met on the facts of this case. Dealing now with the four essential requirements set forth supra:
Requirements (A) and (B)
The Shorter Oxford dictionary defines "pursuant", inter alia, as "in accordance with". The Fifth Edition of Black's Law Dictionary defines "pursuant", inter alia, as "To execute or carry out in accordance with or by reason of something." It also defines "pursuant to" inter alia, as follows: "Pursuant to" means "in the course of carrying out: in conformance to or agreement with: according to". On these facts, the $3,000 received by the respondent from LaBrash was clearly paid by him and received by her to carry out the terms of the separation agreement. Some of the money was payable to the respondent as alimony, the remainder was payable to her as maintenance for the dependant children. All of it was payable on a monthly basis as stipulated in the separation agreement. Where the Trial judge erred, in my view, was in not having due regard to the use of the word "payable" in the subsection. So long as the agreement provides that the monies are payable on a periodic basis, the requirement of the subsection is met. The payments do not change in character merely because they are not made on time. The learned Tax Review Board member made the same error, in my view, when he said that the amounts to be included in income "must be received exactly according to the terms of the agreement". The subsection does not say that. If the learned Tax Review Board member and the learned Trial Judge are right, then any monthly payment made to the respondent on the second day of the month for which it is due, for example, would not be taxable in the hands of the respondent. This is surely not a reasonable or a proper interpretation of the subsection.
Requirements (C) and (D)
There can be no argument that the monies paid in 1976 were, under the agreement, payable partially in satisfaction of her alimony claim prior to July of 1975 and partially in satisfaction of the claim for maintenance of the dependant children. Likewise, it is agreed that the respondent was, in 1976, living apart from her spouse under the terms of a separation agreement which agreement required her spouse to make the payments at the time she received them and throughout the remainder of 1976. However, respondent's counsel relies on the Armstrong case supra, a decision of the Supreme Court of Canada (56 DTC 1044). She cites from the reasons of the Chief Justice at p. 1045 where he stated the proper test for the application of the predecessor section to subsection 56(1)(b) to be as follows:
The test is whether it was paid in pursuance of a decree, order or judgment and not whether it was paid by reason of a legal obligation imposed or undertaken. There was no obligation on the part of the respondent to pay, under the decree, a lump sum in lieu of the monthly sums directed thereby to be paid.
(Emphasis added)
There is a clear distinction between the facts in Armstrong and those in the present case. In Armstrong the Respondent was divorced by his wife in 1948. The divorce decree provided for monthly $100 payments to the wife for maintenance of their daughter until she became sixteen. The payments so ordered were made until the summer of 1950 when the wife accepted a lump sum settlement of $4,000 in full settlement of all amounts payable in the future. Thus clearly the $,4000 was not paid pursuant to the divorce decree but in lieu thereof. However, in the case at bar, all monies were paid to carry out the terms of the separation agreement. The consequence and result of these payments was not to finally release the husband from his liabilities to his wife and children under the separation agreement as was the case in Armstrong and in Trottier, (68 DTC 5216, at 5219), another decision of the Supreme Court of Canada where the principle enunciated in Armstrong was followed.
Counsel for the Respondent also submitted that since the payments received in 1976 were on account of the arrears owing, they could not be said to be an "allowance ... for the maintenance of...", the Respondent and her children as referred to in subsection 56(1)(b) and therefore they should be treated as payments reimbursing the Respondent for the maintenance of herself and the children for the earlier period when the payments were due. One of the problems with this submission is that there is no evidence on this record of any re-imbursement for actual expenses. Furthermore, it seems clear that the kind of allowance contemplated by subsection 56(1)(b) would include any and all amounts paid under the agreement whenever they are paid and received since the amount is determined in advance and, once paid, it is at the complete disposition of the recipient who is not required to account for it. (For a similar view - see The Queen v. Pascoe, 75 DTC 5427 at 5428). Accordingly I see no merit in this submission.
[13] In the case of Widmer v. Canada, [1995] T.C.J. NO. 1115, Judge Mogan - Tax Court of Canada - considered the appeal of a woman who had received the sum of $15,000 from her former husband who had been in arrears on a court Order requiring him to pay support for three children of the marriage. The issue before Judge Mogan was the same as the one in the within appeal namely: was the amount taxable pursuant to paragraph 56(1)(b) of the Act as alimony or other allowance payable on a periodic basis. In Widmer, the taxpayer had informed her husband that she was going to make an application to enforce the maintenance payments because he had frequently been in arrears and she had needed to borrow money in order to meet obligations in respect of their sons. Her husband requested that an arrangement be worked out whereby he would give her a lump sum and would make reduced payments in the future for the ongoing maintenance of the children. After some further discussions were held, the taxpayer agreed to accept $15,000 in settlement of her entire claim - which had grown to the sum of $50,590 - representing the arrears arising from her former husband's obligation pursuant to an Order issued by the Supreme Court of British Columbia. At paragraphs 7 to 10, inclusive, of his oral reasons for judgment, Judge Mogan stated:
7. David retained a lawyer who drafted the appropriate documents. The Appellant did not retain a lawyer but signed a Waiver of Independent Legal Advice. Filed as Exhibit A-1 is a Consent Variation Order issued by the Supreme Court of the Yukon Territory which has a number of provisions. I will quote only the relevant parts:
1. The Judgment by Way of Decree Absolute granted by Judge Washington of the Supreme Court of British Columbia pronounced on the 12th day of September, 1984 is varied to reduce the monthly child support obligation to $200.00 per month per child for a total payment of $600.00 per month commencing January 1, 1992 and payable on the 1st day of each month thereafter.
3. The arrears of maintenance under the Judgment by Way of Decree Absolute of Judge Washington dated September 12, 1984 be fixed at $15,000.00.
4. The Respondent be ordered to pay $15,000.00 in arrears of child support to the Petitioner forthwith.
And then later, in the same Exhibit A-1, there is a Waiver of Independent Legal Advice signed by the Appellant.
8. The Appellant is under a misunderstanding with respect to independent legal advice. In Exhibit A-1 which was filed by her, a man named "W. John Andresen" certifies that he gave independent legal advice to the Appellant. He states that: "I explained ... the provisions and effect of the attached Consent Variation Order ...". Although she appears in the same document to have signed a Waiver of Independent Legal Advice, on the same page there is an indication that she did receive independent legal advice from Mr. Andresen. In any event, the document was signed by the Appellant and by a person named "Shayne Fairman", counsel for David. It is the operative document for the purpose of this appeal.
9. Immediately after this document was signed, she received a single cheque for $15,000.00. Also, David has maintained the adjusted reduced monthly payments of $200 per child per month since January 1992.
10. The issue, as stated, is whether the $15,000.00 amount is income to the Appellant. She acknowledged that in all of her income tax returns from and after 1984 she had included any monthly amounts she received from David as they were received on a periodic basis representing payments for the children. And in 1992, she included in her income tax return the monthly payments of $600 she received from David on the basis of $200 per child per month throughout that year. She did not, however, include the $15,000 because she takes the position that it was not a periodic payment; that it was not a maintenance payment; and that it was only a lump-sum settlement.
[14] Judge Mogan - at paragraphs 15 and 16 continued as follows:
15. The Appellant made a statement in argument which I find most persuasive. She said that the consent order makes the amount of $15,000 appear to be something that it was not. One would think, reading it, that $15,000 was in the range of what was really owed. I should think that a Consent Variation Order, if it had been jointly drafted by lawyers for both the Appellant and David, would have recited the fact that there were arrears of $50,590. The amount owed ($50,590) is simply the aggregate of all amounts which David should have paid but failed to pay for the maintenance of the three children under the terms of the divorce judgment. When the amount actually received ($15,000) is so different from and so much smaller than the amount owed ($50,590), I cannot regard the amount received as having the same character as the amount owed. In other words, I cannot regard the $15,000 amount received by the Appellant as having been received for the maintenance of the three children. In my opinion, this small amount was paid by David in one lump sum firstly, to obtain a release from his very real liability to pay the remaining $35,590, and secondly, to obtain a reduction in the aggregate amount of his monthly maintenance payments from $795 per month to $600 per month. In summary, the $15,000 amount was paid to obtain a release from existing obligations and a reduction in future obligations, and not for the maintenance of the three children.
16. There is no question that if the maintenance payments of $265 per child per month had been paid over the years they would have been income in the hands of the Appellant. The hard fact is that they were not paid; David fell in arrears by $50,590 and, because of the distressed position of the Appellant, he was able to escape from his liability of $50,590 by making a lump-sum payment of only $15,000 (30% of the amount owed). In those circumstances, I cannot construe the $15,000 amount paid in February of 1992 to be, in the words of paragraph 56(1)(b), "an amount received by the taxpayer in the year as alimony or other allowance payable on a periodic basis".
[15] In the case of Soldera v. M.N.R., 91 DTC 987, Judge Garon T.C.J. (as he then was) dealt with the appeal of a taxpayer who had been ordered to pay the sum of $200 per month in child support. Later, he fell into arrears and the Order was varied to provide for ongoing payments in the sum of $100 per month plus payment of the sum of $7,500 in arrears. The Minister disallowed the $7,500 deduction on the basis it was not a periodic payment for purposes of subsection 60(b) of the Act. After referring to the decision in Sills, supra, Judge Garon - at page 990 and following of his judgment stated:
First of all, in the 1986 Order there is no provision whereby the Appellant is released in express terms from any existing or future liability in respect of the maintenance of his children. On the other hand, the effect of the 1986 Order is that from the time it became operative the matter of both the existing or future liability is no longer governed by the 1983 Order as it stood at the time of its issue in June, 1983. In effect, the Appellant's obligation with regard to the payments to be made in the future for the maintenance and support of the children of the marriage was set out in paragraph 1 of the 1986 Order which varies paragraph 3 of the 1983 Order which reduces inter alia the monthly payments to be made in respect of the maintenance of the children to $100.00. Furthermore, the matter of the Appellant's existing liability prior to the issue of the 1986 Order in respect of the maintenance payment that had fallen in arrears, was expressly dealt with in paragraph 3 of the 1986 Order which provides that, leaving out certain expletive words:
...the arrears of maintenance as of May 31, 1986 ... are hereby fixed at $7,500.00.
In my view, the effect of paragraph 3 of the 1986 Order was simply to reduce to $7,500 the Appellant's liability as of May 31st, 1986, in respect of the maintenance payments that were then in arrears. In this connection it must be recalled that the total amount owing by the Appellant as of May 31st, 1986, under paragraph 3 of the 1983 Order was approximately $14,000. It then becomes apparent that paragraph 3 of the 1986 Order in fixing the arrears of maintenance payments at $7,500 as of May 31st, 1986, in effect reduced the Appellant's liability roughly by half. Paragraph 3 of the 1986 Order does not alter or change the nature of the Appellant's liability but simply reduces it. This is made clear by an express reference in that paragraph to the "arrears of maintenance as of May 31, 1986". If need be, the point that the nature of the Appellant's liability fixed by paragraph 3 of the 1986 Order is not affected is reinforced by the fact that the payment of $7,500 is roughly in line with what the Appellant indicated he was willing to pay in terms of maintenance payments for his children in his solicitor's letter of July 26th, 1983, to Mrs. Leggett's solicitors. As well, the sum of $7,500, if broken down to monthly payments, represents approximately what the Appellant was required to pay under paragraph 1 of the 1986 Order and actually paid to Mrs. Leggett in respect of the maintenance of their children. From another angle, the payment of $7,500 could be viewed as part payment of all arrears owing under the 1983 Order, which part payment was in a sense accepted by Mrs. Leggett since provision for the $7,500 payment in settlement of the Appellant's liability as of May 31, 1986, is contemplated in paragraph 3 of the 1986 Order for which Mrs. Leggett had applied ex-parte.
The soundness of the position I have adopted respecting the true nature and character of the $7,500 payment by the Appellant becomes, I believe, more apparent if the hypothetical situation that follows is considered.
If, for instance, the Appellant here had during the currency of the first Order made monthly payments of $100 to Mrs. Leggett in respect of the maintenance of each child, after having informed his ex-wife that he could not afford to pay more, as he said in his solicitor's letter of July 26th, 1983, referred to above, instead of making monthly remittances of $200 per child as required by the 1983 Order, and if his former wife had accepted these payments by cashing the cheques absent any other relevant facts, there is no doubt that these monthly payments in this hypothetical situation would have been deductible by the payer under subsection 60(b) of the Income Tax Act and includable by the payee in her income under paragraph 56(1)(b) of the Income Tax Act. In effect these payments would be viewed as a partial payment of an allowance payable on a periodic basis for the maintenance of his children. Otherwise, any payment of an allowance which is in any degree lesser than the total amount provided under an Order of the Court or separation agreement could not be deducted from the income of the payer and would not have to be included in the income of the payee. This result is certainly not intended for the smooth operation of the statutory provisions relating to the deduction from and inclusion in income of alimony and maintenance payments.
I am fortified in this approach by the reasoning adopted by Mr. Davis of the Tax Appeal Board in the case Bertram v. Minister of Natioinal Revenue, 70 DTC 1510 when he expressed himself, as follows, at page 5153:
Counsel for the Appellant argued that, because certain of the arrears of alimony were forgiven when the agreement of December 1, 1965, was entered into and the Appellant agreed to accept the lesser sum of $8000 in satisfaction of arrears greatly in excess thereof, the entire situation had changed, and the original periodic payments had thereby lost their character as such. I have great difficulty in following this line of reasoning. Moreover, this contention was never raised in the Appellant's Notice of Objection or in her Notice of Appeal, nor was it raised in the correspondence between the Appellant's solicitor and the taxation officials.
I regard the agreement of December 1, 1965, as a confirmation of Eadie's legal responsibility to make the original periodic payments, embodying therein a new schedule setting out when the respective payments of the compromised amount were to be made. This agreement was in no sense a final or general release to the Appellant's husband of any liability to continue to make payments which were not yet in arrears. It is arguable that, if Eadie had defaulted on the agreement of December 1, 1965, the Appellant would have been free to bring an action for whatever was actually owing to her on the original separation agreement.
I am therefore of the view that the payment of $7,500 made by the Appellant under paragraph 3 of the 1986 Order represents a portion of the arrears of maintenance payments that were an allowance payable on a periodic basis under the 1983 Order. Consequently, this payment of $7,500 is deductible in full in computing the Appellant's income for the 1986 taxation year.
[16] In the case of MacBurnie v. Canada, [1995] T.C.J. No. 817, Judge Lamarre - Tax Court of Canada - heard the appeal of a taxpayer who had been ordered by the Court - in recognition of an agreement between the parties - to pay a lump sum of $27,500 to the appellant in satisfaction of all claims. After reviewing the jurisprudence within the context of the specific facts, Judge Lamarre - at paragraphs 20 and 21- commented as follows:
20. In the present case, it seems obvious that the payment of $27,500 was made pursuant to the judgment of Soubliere J. dated September 19, 1992 incorporating the Minutes of Settlement agreed upon by the parties, and not pursuant to the terms of the previous Separation Agreement. Indeed, the payment was made in October 1992 in conformity with the judgment of Soubliere J. In my view, the payment was clearly made by Mr. Eyre in order to obtain a release from his liability under the Separation Agreement and to terminate his obligations to the Appellant under that Agreement. The wording of the judgment of Soubliere J. is supporting that conclusion in that it was clearly stated therein that Mr. Eyre would have no further or other obligation towards the Appellant after the payment of the sum of $27,500 and that the Appellant released Mr. Eyre from all obligations to provide her with support, maintenance and alimony. One has also to keep in mind that the judgment of Soubliere J. was on the cross-application made by Mr. Eyre whereby the latter was asking to terminate or reduce his obligation to pay spousal support to the Appellant under the Separation Agreement. Obviously, the judgment terminated Mr. Eyre's obligation to provide spousal support to the Appellant. On that aspect, the present situation is distinguishable from the one in the Soldera case. Moreover, I accept the explanation given by Mr. Braidek that the words "in full and final satisfaction of ... and all arrears of support", were added to give Mr. Eyre a measure of comfort and that there was no intention to pursue him for any past arrears. Even if the evidence showed that Mr. Eyre owed more than $27,500 to the Appellant at the time of signing the Minutes of Settlement that were incorporated in the Judgment of Soubliere J., I am of the opinion that the Appellant and Mr. Eyre finally settled for the payment by the latter of an outlay that was in commutation of the periodic sums payable under the Separation Agreement. Such an outlay is in the nature of a capital payment as stated by the Supreme Court of Canada in Armstrong, which amount did not have to be included in the computation of the Appellant's income as it was not an alimony or maintenance payment within the meaning of paragraphs 56(1)(b) and 56(1)(c) of the Act.
21. The appeal is therefore allowed.
[17] A similar situation was before Judge Hamlyn - Tax Court of Canada - in the case of Turner v. Canada, [1997] T.C.J. No. 120. In that instance, the Minister had included in income amounts received by the taxpayer pursuant to an agreement recognized in an Order of the Supreme Court of British Columbia. The husband had been ordered to pay the sum of $300 per month together with a percentage of his pension, also payable monthly. He fell into arrears and the divorce judgment was varied to delete the $300 per month in spousal maintenance but the pension division provision was continued. In issuing the Order, the Supreme Court of British Columbia had stated that "...the provision for spousal maintenance ... in the sum of $300.00 per month contained in the Judgment By Way of Decree Nisi entered on February 5, 1987 ... is hereby deleted". The Order then went on to specifically state that "... this Order shall in no way affect the provisions for pension division contained in the said Decree Nisi ..." In the judgment issued by Judge Hamlyn - at paragraphs 15 to 17 - inclusive, he stated:
15. The Order deleting the spousal support payment and the fixed lump sum arrears was on consent.
16. The consent arrears fixed lump sum was substantially less than the actual arrears outstanding. Thus the arrears fixed sum is so different it does not have the same characterization as the arrears outstanding. (see Wilmer v. Canada [1995] T.C.J. No 1115 (Mogan J.); also see Soldera v. M.N.R., 91 D.T.C. 987 (Garon J.)
17. By virtue of the varied Order, the payment of the lump sum arrears settlement was the condition leading to the release and cessation of all payments due under the fourth paragraph on page 2 of the judgment by way of decree nisi. As a result, I conclude the lump sum arrears settlement payment was not an amount paid pursuant to paragraphs 56(1)(b) and 56(1)(c) as alimony or other allowance payable on a periodic basis.
[18] In Leet v. R., [1999] 2. C.T.C. 2477, Judge Beaubier - Tax Court of Canada - heard the appeal of a husband who had been denied a deduction - claimed under subsection 60(b) of the Act - concerning a payment made to his former wife pursuant to a court Order. In that case, the taxpayer had paid the sum of $60,000 to his former wife and it was the only payment made pursuant to an Order since the previous monthly payments had been made pursuant to a separation agreement. After reviewing the reasons for judgment of Boudreau J. of the Supreme Court of Nova Scotia in ordering the lump sum settlement to be paid to the taxpayer's former wife, Judge Beaubier - at page 2480 and following - of his reasons for judgment referred to relevant jurisprudence, as follows:
In Ambler v. R. (1993), 93 D.T.C. 1460 (T.C.C.), at 1463, Mogan, J.T.C.C. listed the criteria to be examined respecting the sum in question here. His statements were confirmed on appeal by the Federal Court of Appeal at (1995), 95 D.T.C. 5401 (Fed. C.A.). Mogan, J.T.C.C. stated:
In The Queen v. McKimmon, 90 D.T.C. 6088, the Federal Court of Appeal set out a number of criteria which are helpful in determining whether periodic payments passing between separated or former spouses are for the maintenance of the recipient or instalments of a capital sum. I will summarize those criteria because they apply directly to the issue herein.
1. The length of the periods at which the payments are made. The shorter the period (weekly or monthly) the more likely they will be maintenance.
2. The amount of the payments in relation to the income and living standards of both payer and recipient.
3. Whether the payments are to bear interest prior to due date. The obligation to pay interest would point to instalments of a capital sum.
4. Whether the amounts can be paid by anticipation at the option of the payer or accelerated as a penalty at the option of the recipient in the event of default.
5. Whether the payments allow a significant degree of capital accumulation by the recipient.
6. Whether the payments are stipulated to continue for an indefinite period or are for a fixed term. Amounts payable over a fixed term are more readily seen as being instalments of a capital sum.
7. Whether the payments can be assigned and whether the obligation to pay survives the lifetime of either the payer or recipient.
8. Whether the payments purport to release the payer from any future obligations to pay maintenance.
Using these criteria by reference number:
1. Only one payment was ordered by Boudreau J.
2. Boudreau J. did not make any reference to the income or living standards of the parties.
3. The payment was, practically speaking, to be made immediately.
4. No anticipation or penalty was referred to. The Appellant described the $60,000 as equivalent to a mortgage's "balloon payment" in his argument. However, the separation agreement (Exhibit R-2) did not provide for a balloon payment and in his reasons for judgment Boudreau J. specifically ordered that "The monthly spousal maintenance will therefore cease upon payment of the April, 1994, maintenance." Similarly, on page 12, Boudreau J. ordered Mr. Leet to pay "a monthly contribution of $850 ... for Chelsea's maintenance." In other words, the $850 per month was for maintenance, whereas Mrs. Leet's "monthly spousal maintenance" ceased upon the April payment, thus terminating the periodicity described in the signed separation agreement.
5. In particular, subparagraph 4(c) of the Agreement, as quoted, placed the burden on Mrs. Leet to establish why her support shall not cease. "Support" was described in subparagraph 4(a) as $2,550 per month, and that did cease in April, 1994.
6. The $60,000 ordered was a one-time payment.
7. The $60,000 payment, on its face, would have survived Mrs. Leeth's death as an obligation to be paid.
8. Mr. Leeth had no further obligation to pay maintenance to Mrs. Leeth.
The payment was "a finial lump sum maintenance payment to Mrs. Leeth." Moreover, the judge was specific in stating that the "monthly spousal maintenance" (that is, the periodic payments) "will therefore cease upon the payment of the April, 1994, maintenance" and that "the final lump sum maintenance payment" would be paid on May 1, 1994.
In this context, the single payment of $60,000 pursuant to the Court Order was not a periodic payment. It was an amount which released Mr. Leet from the liability imposed by the separation agreement's periodic payments. It was, in the words of Minister of National Revenue v. Armstrong (1956), 56 D.T.C. 1044 (S.C.C.), in the nature of a capital payment.
For these reasons, the $60,000 is not deductible pursuant to the Income Tax Act.
[19] Returning to the specific facts concerning the within appeal, the evidence established that the appellant's former husband had been ordered to pay the sum of $2,000 per month commencing August 1, 1991, as an amount representing a mix of spousal maintenance and support for the two children of the marriage. He paid - as ordered - for approximately one year and but was continuously in default thereafter. The appellant pursued the arrears to be best of her ability and secured the indebtedness by registering a lien - as a charge - against her former husband's residence. By mid-1997, the arrears owing under the Order - dated July 12, 1991 - were in the sum of $102,000, and represented the unfortunate result of an ongoing default that had persisted over the course of 51 consecutive months. The appellant and her former spouse entered into certain discussions which resulted in an agreement whereby he would pay her - forthwith - the sum of $16,000 and - in return - would be released from any liability respecting the balance of the arrears - amounting to the substantial sum of $86,000 - as well as any future obligation to pay her any spousal maintenance. He also received a discharge of the lien registered against his principal residence. As an ongoing encumbrance, it would have severely fettered his ability to mortgage or sell the property in that he would have been required to remove the lien prior to carrying out any transaction. The agreement of the parties was ratified in the form of a Consent Order - dated July 18, 1997 - approved and issued by Master Doolan, the jurist who had issued the first Order dated July 12, 1991. In that Consent Order, Master Doolan ordered:
...that the Order of Master Doolan made July 12, 1991 be and the same is hereby varied to cancel the spousal maintenance to be paid to the Petitioner by the Respondent.
[20] Master Doolan further ordered that the previous Order be varied so that Henderson would pay the sum of $200 per month for each of two children of the marriage commencing July 1, 1997.
[21] The said Order - in which the appellant is named as the Petitioner and her former husband as the Respondent - continued as follows:
THIS COURT FURTHER ORDERS that the arrears which have arisen under the Order of Master Doolan made July 12, 1991 be and the same are hereby reduced to the sum of $16,000.00;
THIS COURT FURTHER ORDERS that the Respondent shall forthwith pay the sum of $16,000.00 to the Petitioner to cancel the arrears;
THIS COURT FURTHER ORDERS that the Petitioner shall remove the lien for arrears of maintenance she has filed against the Respondent's house.
[22] It is apparent the Minister considered the Order - dated July 12, 1997 - to have been a new Order since there is no dispute concerning the non-taxable receipt by the appellant in respect of the ongoing maintenance for the children - in the total sum of $400 per month - paid to her by her former spouse. It is also clear that the original obligation of the appellant's former spouse to pay the sum of $2,000 per month was an amalgam of spousal support and maintenance for the two children but there was no evidence adduced in the within appeal - nor was that Order ever produced - to permit any attribution to be made. However, I do not consider it to be beyond the bounds of reasonable inference to conclude that a significant portion - probably at least 50% of the total amount awarded - was in relation to the spousal entitlement of the appellant. In the same vein, there was no apportionment offered up in relation to the composition of the total arrears in the sum of $102,000. The appellant decided to accept the sum of $16,000 in full settlement of accumulated arrears - comprised of both spousal support and maintenance for the children - as well as abandoning any future claim for spousal support. She also agreed to accept the relatively small sum of $200 per month per child - for a total of $400 - by way of ongoing maintenance. The sum of $16,000 - even if it had no other component attached to it - still represented only 15.6% of the total amount due to the appellant pursuant to the 1991 Order. The total indebtedness of Henderson - in the sum of $102,000 - represented an unbroken string of missed payments over a period of 51 months. In my view, it is extremely difficult to consider the sum of $16,000 as retaining the nature of periodic payments, as had been the case for the first year when Henderson was actually meeting his obligations. During that period and on that basis, the appellant had the right to expect a timely, steady income stream in a fixed amount and would have been able to use that regular flow of revenue in order to manage her financial affairs. However, once Henderson ceased making payments - at all - she was put into a situation where she was facing accumulating arrears despite her best efforts to collect the defaulted payments. The appellant's decision - in 1997 - to abandon all rights to claim future spousal maintenance and to accept less than 16% of the amount owing to her under the 1991 Order was similar to a business decision made by a creditor when faced with an intransigent debtor who had consistently defaulted on an ongoing loan, royalty, rental or lease payment and did not possess sufficient attachable assets to satisfy the total indebtedness. In accepting the settlement and obtaining ratification by way of consenting to the 1997 Order of Master Doolan, the appellant also relinquished her right to retain an interest in Henderson's principal residence which she held by virtue of having registered a lien against the title. While she may have been able - at some point - to commence an action seeking a judicially-ordered sale of Henderson's house in order to obtain payment, that process would have been lengthy, costly and the amount of money ultimately recoverable would have been dependent on the nature and priority of other encumbrances also registered against the property. The appellant - after considering her position in light of Henderson's past performance - made the following decisions. She agreed: a) to abandon her own rights to any future spousal maintenance; b) to accept an incredibly reduced amount in full satisfaction of arrears; c) to discharge a lien - on Henderson's house - which constituted the only form of security available to her for that large debt and d) to accept a reduced amount of maintenance for the children in the future.
[23] The facts in the within appeal go beyond those in the case of Soldera, supra, where Judge Garon found the Order in that matter did not alter or change the nature of the liability but merely reduced it. In addition, the bundle of rights traded away by the appellant in return for payment of $16,000 also places her situation in a different category than the taxpayers in Widmer, supra, and Turner, supra. In Widmer, it was the vast discrepancy between the amount owed and the amount accepted - in a lump sum - as full settlement of arrears coupled with a reduction in future obligations that caused Judge Mogan to regard the payment as a non-taxable receipt. In Turner, Judge Hamlyn considered the fixed lump sum in payment of arrears to have been sufficiently less than the amount of actual arrears that when considered in light of a release and cessation of all payments due pursuant to a particular paragraph of the Decree Nisi, the payment could no longer be considered as an amount paid pursuant to paragraphs 56(1)(b) and 56(1)(c) of the Act as alimony or other allowances paid on a periodic basis. In my view, the facts in the within appeal are closer to those in MacBurnie, supra, where payment of a lump sum was made in order to terminate an obligation to provide spousal support under a Separation Agreement.
[24] The July 18, 1997 Order - Exhibit A-1 - specifically reduces the arrears owing under the former Order of July 12, 1991 - to the sum of $16,000. Then, Henderson is ordered to pay that sum - forthwith - in order to cancel the arrears and the appellant is ordered to remove the lien for arrears of maintenance she had registered against Henderson's house. Earlier - in the second paragraph of the July 18, 1997 Order - the spousal maintenance previously ordered to be paid to the appellant was cancelled by varying the previous Order to that effect. I adopt the definitions of "cancel" provided by the appellant in her written submissions, as follows:
Cancel - to obliterate; to put an end to. - The Shorter Oxford English Dictionary, 3rd edition (Clarendon Press; Oxford, 1986)
Cancel - to rescind, abandon, repeal; surrender; waive; terminate. - Black's Law Dictionary, 6th ed. (West Publishing Co., St Paul, Minn. 1990)
[25] In addition, the Canadian Oxford Paperback Dictionary - Oxford University Press - 2000 - includes a definition of "cancel" as: annul; make void; abolish.
[26] While recent decisions by the Supreme Court of Canada permit a claim for spousal support to survive any agreement or Order to the contrary in the event of exceptional circumstances, the appellant - in 1997 - relinquished her claim to future spousal support to the degree permitted by the existing state of matrimonial law. It was a very real abandonment of a potentially valuable income stream, although reality dictates that - like the aspirations of fans devoted to a perennially inept hockey team or the blissful state of persons entering starry-eyed into subsequent marriages - it would probably have been a triumph of hope over experience. The inequity visited upon individuals receiving past spousal support in a lump payment led to the 1999 Federal Budget Resolution which proposed a mechanism by which a retroactive lump sum could be spread out over prior years to which the lump sum payment related.
[27] Having regard to the particular facts in the within appeal and the circumstances under which the lump sum was paid in the context of the special bargain struck between the parties, I find the sum of $16,000 paid to the appellant by her former husband to have been so inextricably bound up with other valuable consideration that it can no longer be regarded as having a reasonable nexus with the periodic payments ordered by Master Doolan on July 12, 1991. The acceptance by the appellant of the immediate payment of the sum of $16,000 - pursuant to an Order - permitted her to accumulate some capital forthwith and the agreement to accept reduced future maintenance for the children was an integral part of that overall settlement in which she not only abandoned her right to collect an existing debt but also agreed to relinquish any claim for future spousal maintenance.
[28] When one party by continuous neglect and omission over a substantial period of time destroys the quality of periodicity existing within an obligation, it is unrealistic to expect that a one-time, tardy and inadequate payment - when viewed in context - can serve to restore that pre-existing obligation to its original nature, especially under circumstances where the payor has linked the lump sum payment to an abandonment of other rights by the recipient in such a manner that it constitutes an integral and indivisible part of the bargain.
[29] As a result of the reasons discussed herein, I find the receipt by the appellant of the sum of $16,000 to have been non-taxable in nature as it did not constitute income pursuant to paragraph 56(1)(b) of the Act.
[30] The appeal is allowed with costs and the assessment is referred back to the Minister for reconsideration and reassessment on the basis the sum of $16,000 - previously included in income - be deleted therefrom.
Signed at Sidney, British Columbia, this 25th day of January 2002.
"D.W. Rowe"
D.J.T.C.C.
COURT FILE NO.: 2001-112(IT)I
STYLE OF CAUSE: Carol Jennings and H.M.Q.
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: August 15, 2001
REASONS FOR JUDGMENT BY: the Honourable Deputy Judge D.W. Rowe
DATE OF JUDGMENT: January 25, 2002
APPEARANCES:
For the Appellant: The Appellant herself
For the Respondent: Arsalaan Hyder (Articling student)
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-112(IT)I
BETWEEN:
CAROL JENNINGS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on August 15, 2001 at Vancouver, British Columbia, by
the Honourable Deputy Judge D.W. Rowe
Appearances
For the Appellant: The Appellant herself
For the Respondent: Arsalaan Hyder (Articling student)
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1997 taxation year is allowed, with costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Sidney, British Columbia, this 25th day of January 2002.
|
"D.W. Rowe" |
D.J.T.C.C.