Tax Court of Canada Judgments

Date: 20021004

Docket: 2002-1052-IT-I

BETWEEN:

RICHARD GORDON PYNE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Sarchuk J.

[1]            This is an appeal by Richard Gordon Pyne from an assessment of tax made by the Minister of National Revenue with respect to his 1999 taxation year. In computing his income for that year, the Appellant, inter alia, deducted the amount of $10,300 as support payments. The Minister by his assessment disallowed the deduction on the basis that:

(a)            it was an amount paid by the Appellant to his former spouse, Susan Mary Hilton (Hilton), in lieu of support payments and was paid to release him from the liability of support payments;

(b)            the lump sum payment of $10,300 deducted by him was not an amount paid to Hilton by the Appellant pursuant to an Order of a competent tribunal or written agreement as periodic support payments; and

(c)            the lump payment of $10,300 deducted by the Appellant was not a payment of the arrears of child support and spousal support owing by the Appellant to Hilton pursuant to the judgment.

Facts

[2]            The Appellant was the common-law spouse of Hilton. The parties separated in 1992 and the spousal relationship terminated in a Judgment issued by O'Connell J. of the Ontario Court (General Division) dated June 22, 1993.[1] Paragraph 5 of this Judgment provided:

                THIS COURT ORDERS AND ADJUDGES pursuant to the Family Law Act and pursuant to paragraph 3 of the Minutes of Settlement, that the Defendant shall pay to the Plaintiff the sum of $5,100.00 per month as spousal and child support commencing on the 1st day of the month following the date the Plaintiff vacates 47 Thicket Road.

The Judgment further provided, in paragraph 6, as follows:

                THIS COURT FURTHER ORDERS AND ADJUDGES pursuant to the Family Law Act and pursuant to paragraph 3 of the Minutes of Settlement, that the quantum of spousal and child support will be reviewed in two years.

[3]            At the conclusion of the two-year period, the Appellant attempted to have the quantum reviewed but received no cooperation from Hilton. As a result of her intransigence, he commenced an action in 1995 and, in order to accelerate resolution of the issue, unilaterally reduced the required spousal and child support payments. Nonetheless, according to the Appellant, matters progressed slowly and it was not until early 1997 that his counsel was finally able to have the matter set down for a pre-trial hearing, coincidentally before O'Connell J. During the course of the appearance, a number of items were canvassed including arrears, continuing spousal support and child support and by the end of the pre-trial, the parties had reached an agreement. A lengthy summary of the proposed Minutes of Settlement were written out by counsel and were signed by each of the parties. It was understood by counsel and the parties that these Minutes would be typed and re-executed. In late May 1997, the Minutes were signed by the Appellant and were forwarded to Hilton's solicitor and where they languished until April 28, 1998 when she signed them. In the interim, the Appellant carried out the terms of the agreement as required.

[4]            The portion of the Minutes of Settlement[2] relevant to this appeal are found in paragraphs 10 and 16 of the Minutes, which read:

10.            (a)            The Applicant Richard Gordon Pyne shall pay to the Respondent Susan Mary Hilton, in full and final satisfaction of all of her claims for arrears of support payments under Paragraph 5 of the Judgment, all claims arising under or pursuant to Paragraph 8 of the Judgment and for costs in this Application and Counter-Application, the sum of FORTY-FIVE THOUSAND ($45,000) DOLLARS.

                (b)            The said sum of $45,000 shall be paid in two (2) equal instalments of TWENTY-TWO THOUSAND FIVE HUNDRED ($22,500) DOLLARS each on or before the First day of July in each of the years 1998 and 1999.

                (c)            Of each of the aforementioned instalments of $22,500 the sum of TEN THOUSAND THREE HUNDRED ($10,300) DOLLARS shall be credited and attributed by each of the Parties on account of arrears of support owing under Paragraph 5 of the Judgment, the sum of TEN THOUSAND ($10,000) DOLLARS shall be credited and attributed by each of the parties on account of arrears of support owing under Paragraph 8 of the Judgment and the balance of TWO THOUSAND TWO HUNDRED ($2,200) DOLLARS shall be credited and attributed by them on account of the Respondent's claims for costs in this Application and Cross-Application and any partial payments on account of an instalment shall be credited and attributed in the same ratio.

16.            The Respondent, Susan Mary Hilton, acknowledges and agrees that payment to her of the sum of $20,600 referred to in subparagraph 10(c) hereof (comprised of two (2) amounts of $10,300 each) will be in full and final satisfaction of all arrears of periodic support payments due to her pursuant to paragraph 5 of the Judgment and that the provisions of paragraph 7 of the Judgment will apply to such payment.[3]

Appellant's Position

[5]            The payments of $10,300 in each of 1998 and 1999 as required by paragraph 10(c) of the Minutes of Settlement represented the arrears of spousal and child support owing under paragraph 5 of the Judgment which the Appellant had withheld in the period 1995 to 1997. He does not dispute that arising solely from the lump sum payment of $110,000 to Hilton, he was relieved of making any further "spousal support payments".[4] However, he maintains that this release has no relationship to or bearing on the payment of the $10,300 which was "purely, wholly attributable to arrears" and does not represent a release from future payments of "spousal support" as suggested by the Respondent. Relying on The Queen v. Sills[5] and Soldera v. M.N.R.,[6] the Appellant argues that the payment in issue does not change in character merely because it was not made on time and says that there is a clear distinction between the facts in his case and those in M.N.R. v. Armstrong,[7] a decision relied upon by counsel for the Respondent.

Respondent's Position

[6]            Counsel for the Respondent argued that it was irrelevant whether a lump sum payment was made in respect of existing or future support obligations, since the appropriate test is whether the amount was paid in pursuance of a decree, order or judgment, and not whether it was paid by a legal obligation imposed or undertaken. In the present case, the Respondent contends that the language in paragraph 16 of the Minutes of Settlement can only be read as extinguishing an obligation relating to existing arrears. More particularly, counsel argued that the phrase "in full and final settlement" was necessary because the actual amount of arrears was not specified in the Minutes of Settlement. Thus, these provisions speak to the obligations vis à vis the totality of the arrears that existed and released the Appellant from any future liability with respect to any potential unpaid amounts relating to the maintenance of the children. That is so, counsel argued, because the language used in the Minutes of Settlement suggests that additional amounts of arrears existed over and above the amounts paid by the Appellant. Accordingly, the release was necessary to prevent further action against the Appellant. On this basis, counsel for the Respondent argued that the present case comes within the scope of the decisions in Armstrong and Groleau v. The Queen[8] and the Appellant's position must be rejected.

[7]            Furthermore, relying on the definition of "child support amount" in subsection 56.1(4) of the Income Tax Act, counsel for the Respondent also argued that the amount of $10,300 deducted by the Appellant, if considered to be a support payment, is captured under paragraph 60(b) of the Act. The substance of this submission is that the section of the Act referred to applies retrospectively and affects payments due and owing for a period of time prior to the enactment of the sections relied upon.

Conclusion

[8]            The Appellant testified that the amounts of $10,300 paid in 1998 and 1999 were paid to satisfy the actual arrears of the periodic amounts payable by him under paragraph 5 of the Judgment in respect of spousal and child support. He further contends that payment of arrears of support if such payment represents support payable as an allowance on a periodic basis and otherwise deductible, is paid by way of a lump sum, the amount so paid is deductible in the year of payment.

[9]            I am satisfied that the Appellant's position is valid. In the present case, the amounts of $10,300 were paid in 1998 and 1999 to carry out the terms of the separation agreement. The Minister's contention that these payments were made in full settlement of a larger amount of arrears than that reflected by these amounts is not tenable. Notwithstanding the words "in full and final satisfaction of all claims for arrears of support payments", I am satisfied that these payments of $10,300 reflected no more than a crystallization of the amounts due periodically under the original Judgment. Furthermore, it did not relieve the Appellant of future "child support" obligations, or of future "spousal support" obligations, the latter aspect having been expressly dealt with by virtue of the payment of $110,000.[9]

[10]          I am satisfied that the position adopted by the Federal Court of Appeal in Sills is applicable to the present case. In that case, Heald J. observed as follows at page 5098:

... 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. ...                           (emphasis added)

In his resumé, the Judge distinguished the decision in Armstrong stating at page 5099:

... 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 $4,000 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, another decision of the Supreme Court of Canada where the principle enunciated in Armstrong was followed.

                                                                                                                                   (emphasis added)

It is clear from the Minutes of Settlement that the payment of $10,300 was not a release-oriented payment made to settle a claim and/or made in lieu of paying arrears. The circumstances in which the Minutes of Settlement were agreed upon and the manner in which the amounts were characterized and payment made clearly indicate that they were made on account of arrears. No release was intended with respect to child support nor did the payment of these amounts in any way anticipate some future final settlement with respect to child support payments. I am satisfied on the evidence as a whole that the payment of $10,300 was not a "settlement payment" for anything, but rather represented accumulated arrears of periodic support payments. Such payments that fall into arrears and are subsequently paid in lump sum form remain deductible in the hands of the payor.

[11]          As for the Respondent's supplementary argument, I adopt the comments of Bowman A.C.J. at page 2769 in Hunter v. The Queen[10] as follows:

The presumption against the retroactive operation of statutes is one that is intended to protect a subject from the retroactive removal of accruing or accrued rights.

In my view, the payments of $10,300 made and to be made by the Appellant were clearly in respect of arrears and accordingly, the right to the deduction was an accrued right which continued to exist.

[12]          For the foregoing reasons, the appeal is allowed and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that in computing income for 1999, the Appellant is entitled to deduct $10,300 as spousal support payments.

Signed at Ottawa, Canada, this 4th day of October, 2002.

"A.A. Sarchuk"

J.T.C.C.

COURT FILE NO.:                                                 2002-1052(IT)I

STYLE OF CAUSE:                                               Richard Gordon Pyne and

                                                                                                Her Majesty the Queen

PLACE OF HEARING:                                         Toronto, Ontario

DATE OF HEARING:                                           August 7, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge A.A. Sarchuk

DATE OF JUDGMENT:                                       October 4, 2002

APPEARANCES:

For the Appellant:                                                 The Appellant himself

Counsel for the Respondent:              A'Amer Ather

COUNSEL OF RECORD:

For the Appellant:                

Name:                                N/A

Firm:                  N/A

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2002-1052(IT)I

BETWEEN:

RICHARD GORDON PYNE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on August 7, 2002, at Toronto, Ontario, by

the Honourable Judge A.A. Sarchuk

Appearances

For the Appellant:                                                                 The Appellant himself

Counsel for the Respondent:                              A'Amer Ather

JUDGMENT

                The appeal from the assessment of tax made under the Income Tax Act for the 1999 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that in computing income, the Appellant is entitled to deduct $10,300 as spousal support payments.

Signed at Ottawa, Canada, this 4th day of October, 2002.

"A.A. Sarchuk"

J.T.C.C.