Date: 19981222
Docket: 97-2278-IT-I
BETWEEN:
DAVID MURRAY PROVOST,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Brulé, J.T.C.C.
[1] The Appellant is appealing under the Informal Procedure the assessment of his 1995 taxation year which was confirmed by the Minister of National Revenue (the "Minister") by Notice of Confirmation dated April 25, 1997. He deducted the amount of $15,500 when computing his income for the 1995 taxation year on the basis that this amount was paid as periodic spousal support to his ex-wife. This was disallowed but $7,500 was agreed upon and is in dispute.
Facts
[2] The facts are not in dispute. The Appellant and his wife, Jacqueline Provost ("JP"), separated in or around September 1993 after the breakdown of their twenty-eight-year-marriage. A Divorce Judgment dated February 13, 1995 was granted by the Court of Queen’s Bench of Alberta. The issue of corollary relief was specifically reserved to the trial of the corollary relief action.
[3] No application for interim spousal support was filed by JP nor was there any written agreement between the parties providing alimony payments.
[4] The Corollary Relief Judgment dated March 28, 1995 was ordered by Girgulis, J. of the Queen’s Bench of Alberta. The relevant passages of the judgment read as follows:
"1. IT IS HEREBY ORDERED THAT the Respondent (Petitioner by Counter-Petition) shall pay to the Petitioner (Respondent by Counter-Petition) the sum of $4,000 per month periodic spousal support calculated from the 1st day of May, 1994 to the 1st day of March, 1995.
2. IT IS ORDERED THAT the Respondent (Petitioner by Counter-Petition) shall pay to the Petitioner (Respondent by Counter-Petition) the sum of $2,800 per month for a period of four years, commencing April 1, 1995, as periodic spousal support, after which time there shall be a review by the Court of the periodic spousal support payments."
[5] JP appealed the Corollary Relief Judgment on May 18th, 1995. On September 26, 1995, the Appellant made an application before Girgulis, J. requesting a stay of execution on all the payments to be made after April 1, 1995. The learned judge ordered:
"1. There shall be a partial Stay of Execution on the Corollary Relief Judgment of the Honourable Justice Girgulis dated the 28th day of March 1995, with respect to the requirement of the Respondent to make maintenance payments of $4,000 per month for the period May 1, 1994 to March 1, 1995.
2. The Respondent shall pay $10,000 to the Petitioner forthwith and a further $5,000 by November 1, 1995."
[6] On October 10, 1995, the Appellant paid to JP a sum of $7,500 representing the partial stay both parties have agreed on after negotiations. This is the amount in dispute before the Court.
[7] On November 9, 1995, upon application by the Appellant and upon consent of JP, a consent order was made by Cooke, J. of the Queen’s Bench of Alberta. The stay of execution ordered previously was modified, to the extent that the Appellant was only required to pay $7,500 forthwith and any other amounts would not be required until a judgment from the Court of Appeal had been rendered. In addition, there was no stay of execution in respect of the $2,800 monthly spousal support. These periodic payments would be paid to the Director of Maintenance Enforcement. The Appellant paid the amount of $7,500 to JP on the condition that she instructs her lawyer to write to the Director of Maintenance Enforcement directing the latter to temporarily stop the enforcement.
[8] A judgment by the Court of Appeal of Alberta was pronounced on January 9, 1996. The periodic monthly support payment to JP was increased to $4,000 per month for a period of four years, commencing April 1, 1995. Finally an order was issued on March 8, 1996 by Girgulis, J. whereby the amount owing by the Appellant to JP was clearly set out. From this amount, the sum of $7,500 was deducted.
Issue
[9] Was the sum of $7,500 payable on a periodic basis, and therefore deductible pursuant to subsection 60(b) of the Income Tax Act?
Appellant’s position
[10] The Appellant claims that the amount of $7,500 is deductible pursuant to subsection 60(b) of the Act as applicable in the 1995 taxation year. He is of the view this provision does not require that the sum in dispute be periodic. The only requirement, argues the Appellant, is that the amount be "payable" and represents amounts in arrears which ought to be paid periodically. He further submits that the wording of the court order clearly provides that the support was periodic. He states that case law recognizes that a periodic payment calculated with respect to a prior period is payable on a periodic basis. He agrees that subsection 60.1(3) of the Act is inapplicable because the payment was made after the court order was issued.
Respondent’s position
[11] It is the Respondent’s view that although the payment of the sum of $7,500 was pursuant to a court order, the payment nonetheless is not deductible under the Act because to be "payable on a periodic basis", a legal obligation must exist prior to the court order. Counsel for the Respondent argues that the definition of "payable" clearly encompasses the necessity of a legal obligation. If no legal obligation exists, it follows that the payment is not paid pursuant to subsection 60(b) of the Act. Alternatively, the Respondent argues that the sum is not deductible because it does not fall within the ambit of subsection 60.1(3) of the Act. The payment was made after a court order was issued, whereas subsection 60.1(3) provides for the retroactivity of payments made before a court order.
Legislation
[12] Subsections 60(b) and 60.1(3) of the Act, during the relevant period, read:
"60. Other deductions
There may be deducted in computing a taxpayer’s income for a taxation year such of the following amounts as are applicable:
...
(b) Alimony payments--- an amount paid by the taxpayer in the year as alimony or other allowance payable on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient and the children, if the taxpayer, because of the breakdown of the taxpayer’s marriage, was living separate and apart from the spouse or former spouse to whom the taxpayer was required to make the payment at the time the payment was made and throughout the remainder of the year and the amount was paid under a decree, order or judgment of a competent tribunal or under a written agreement;
60.1(3) Prior payments--- For the purposes of this section and section 60, where a decree, order or judgment of a competent tribunal or a written agreement made at any time in a taxation year provides that an amount paid before that time and in the year or the preceding taxation year is to be considered to have been paid and received thereunder, the amount shall be deemed to have been paid thereunder."
Analysis
[13] It appears from subsection 60(b) of the Act that the taxpayer may deduct alimony payments if the following criteria are met:
1. The payments are made pursuant to a decree, order or judgment of a competent tribunal or under a written agreement.
2. The payments are in the nature of alimony or an allowance payable on a fixed periodic basis.
3. The payments are a result of the breakdown of the taxpayer’s marriage.
4. The taxpayer was living separate and apart from the spouse or former spouse.
5. The payments are made to the taxpayer’s spouse or former spouse for the maintenance of the latter and/or his or her children.
[14] The crux of the case at bar is whether the sum of $7,500 is payable on a periodic basis or conversely, constitute a lump sum.
[15] In order to deduct any alimony payments, the foregoing criteria must be satisfied. The only criterion in dispute is the periodicity of the payment made by the Appellant in respect of the $7,500 and whether it was made pursuant to a decree, court order or written agreement. Counsel for the Respondent is not disputing that the payment is made pursuant to a court order. She also admits that at the time the payment was made, a legal obligation does exist. She is simply arguing that this payment is not deductible because it is a lump sum and that no legal obligation exists, since the payment pertains to a period prior to the court order.
[16] Counsel for the Respondent claims (as set out above) that the sum of $7,500 paid in respect of a period prior to any court order was not payable because the definition of "payable" implies a legal obligation. She submits that it follows that no legal obligation exists because no court order was granted and thus the payment is not deductible. It is the Court's opinion that this argument cannot succeed. A legal obligation does exist. In fact, as evidenced by the Corollary Relief Judgment, alimony payments have been established for the period prior to the judgment. Therefore, a legal obligation exists.
[17] Counsel for the Respondent referred to the definition of "payable" as defined by Black’s Law Dictionary, 6th edition. It reads:
"Payable. Capable of being paid; suitable to be paid; admitting or demanding payment; justly due; legally enforceable. A sum of money is said to be payable when a person is under an obligation to pay it. Payable may therefore signify an obligation to pay at a future time, but, when used without qualification, term normally means that the debt is payable at once, as opposed to “owing”."
In the same vein, counsel for the Respondent submits that the definition of "periodic payment" as defined by the Dictionary of Canadian Law indicates that some kind of obligation must exist at the time of the payment. "Periodic payment" is defined as:
"Periodic Payment. "...in order to constitute periodic payments there is no requirement that the time elapsing between each payment be of equal duration, the time between each payment may well vary and be quite unpredictable, yet, the payments may still be characterized as periodic. Periodic indicates something which recurs from time to time but not necessarily at precise or regular intervals." The Queen. v. Guay, 75 DTC 5044 at 5047, Addy, J.
[18] In M.N.R. v. Armstrong, 56 DTC 1044, the Supreme Court of Canada refused the deductibility of a sum of $4,000 paid by the taxpayer in settlement of all future alimony payments. It held that the existence of a legal obligation is not necessary, contrary to counsel for the Respondent’s contention. Chief Justice Kerwin stated at page 1045:
"...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."
[19] In light of these preceding factors, even though they are not exhaustive, it is the Court's opinion that the sum of $7,500 is clearly paid to JP as alimony. If a payment is recognized to be an alimony, arrears in alimony payments will be deductible. As Professors J.W. Durnford and S.J. Toope comment in their article “Spousal Support in Family Law and Alimony in the Law of Taxation” (1994) 42 Can Tax J. at 87:
"As to arrears in alimony payments, payments of such amounts qualify as alimony despite their appearance of being lump-sum payments. The reason is that such payments meet the Act’s criterion of being payable on a periodic basis. It is important, however, to distinguish between mere payments of arrears that qualify for deductibility and lump-sum payments that are a substitute for original obligations to pay instalments, are designed to free the paying spouse from all future support obligations, and are accordingly not paid pursuant to the judgment or written agreement."
[20] Likewise, in an earlier decision of the Tax Appeal Board, No. 427 v. M.N.R., 57 DTC 291, Mr. W.S. Fisher, Q.C. dealt with a case similar to the one at bar. A court decree ordered the taxpayer to pay a sum of $5,000 to his former wife upon the entering of the decree along with payments of $60 per month for her maintenance. Mr. Fisher, Q.C. concluded at page 294:
"I am of the opinion that it is not necessary for all of the payments to be identical in order to qualify them as periodic payments, so long as they are specifically provided for in the decree and occur periodically, that is, at fixed times, and so long as they arise from some antecedent obligation — (in this case, the former relationship of husband and wife) — and are not payable at variable periods which can be varied at the discretion of individuals."
[21] It is also counsel for the Respondent’s view that the sum of $7,500 paid by the Appellant is maintenance. She is only disputing that no obligation exists at the time of the period prior to the order. In the Court's opinion, this argument cannot be sustained since the relevant provision does not impose such a requirement. Moreover, in Mr. Fisher’s, Q.C. findings in No. 427 (supra), the obligation need not be legal. Only some “antecedent obligation” is required and he found that the former relationship between spouses is sufficient for an obligation to exist.
[22] Similarly, Revenue Canada sets out its position in respect of the deductibility of arrears in Interpretation Bulletin IT-118R3, dated December 21, 1990, at paragraph 13:
"13. An amount paid as a single lump sum will generally not qualify as being payable on a periodic basis and hence not be deductible. For example,
(a) a lump sum payment made in place of several periodic payments not yet due but imposed under a court order or agreement, and
(b) an amount paid pursuant to an order or agreement requiring that a payment be made in respect of a period prior to the date of that order or agreement,
would not qualify as periodic payments. However, a lump sum paid in a taxation year is regarded as qualifying as a periodic payment where it can be identified as being the payment of amounts payable periodically that were due after the date of the order and had fallen into arrears." [Emphasis added.]
[23] In this regard, it appears that the sum of $7,500 is deductible because it represents the aggregate amount of many payments from May 1994 to March 1995 for the sum of $4,000 per month. In the Corollary Relief Judgment as reproduced above, the learned judge did not order the payment of an amount in respect of a period prior to the date of the judgment. Instead, he clearly identified that payments should be made for a period prior to the judgment for the amount of $4,000 per month. The execution of the said judgment is immediate. However, the Appellant did not pay and applied for a stay of execution on the payment of $4,000 per month for the period of May 1994 to March 1995, totalling $40,000. Furthermore, upon an order which was varied by Cooke, J. dated November 9, 1995, a partial stay of execution has been ordered requiring that the Appellant pay an amount of $7,500 in respect of the said payments. Clearly, this amount represents arrears in respect of the period from May 1994 to March 1995.
[24] Consequently, it appears that the payment of $7,500 was made pursuant to a court order for arrears in maintenance. It should not be envisaged as a sum for the settlement of arrears for, as evidenced by this order, the debt is still owing. Therefore, the wording of the initial order dated September 26, 1995 and later varied by an order dated November 9, 1995 in respect of the sum of $7,500, is consistent with the case law pertaining to a payment resembling a lump sum but paid for arrears in alimony payments. It is not necessary that the payment of arrears be paid in full. No such requirement exists under the material provision. The payment satisfies the wording of the provision if it is paid pursuant to the criteria as set out above. In conclusion, the sum of $7,500 paid by the Appellant on October 10, 1995 is clearly deductible. It satisfies all the requirements set out in subsection 60(b) of the Act: (1) The payment was made pursuant to an order. (2) It is paid as alimony to the Appellant's former wife. (3) It is to be paid on a periodic basis. The mere fact that the payment consists of arrears does not change the nature of the payment. It remains periodic.
[25] The Court hereby allows the appeal and the matter is to be returned to the Minister for reconsideration and reassessment.
Signed at Ottawa, Canada, this 22nd day of December 1998.
"J.A. Brulé"
J.T.C.C.