Date: 20010119
Docket: 2000-1123-IT-I
BETWEEN:
DARLENE A. GILES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hershfield J.
[1] In this appeal for the 1997 taxation year the issue is whether the sum of $10,600.00 is income to the Appellant. The amount was paid in the year by the Appellant's former husband to the Family Maintenance Enforcement Program of Alberta which credited the payment to arrears recorded as owing by him to the Appellant.
[2] The following facts are not in dispute:
(a) The Appellant separated from her former husband in June of 1996 and they have lived separate and apart since that time;
(b) Pursuant to a Decree Nisi of the Supreme Court of Alberta issued in 1977 incorporating minutes of settlement, the Appellant's former spouse was ordered to pay to the Appellant certain monthly amounts for the support and maintenance of each of the children of the marriage (the 1977 Order);
(c) The Appellant's former spouse fell into arrears in 1978. But for the payments referred to below, no maintenance payments were made since October 1978 (Exhibit A-3). Arrears to the beginning of May 1992 totalled $44,250.00. Exhibit A-3 suggests that the obligation for maintenance ended in May 1992 when the youngest child of the marriage attained the age of 19 years. Although the arrears asserted in the Notice of Appeal were $52,650.00, the Appellant did not assert at the trial that the amount in arrears was other than $44,250.00.
(d) The Appellant enrolled in the Family Maintenance Enforcement Program of British Columbia in 1996. While the Appellant lived in British Columbia, her former spouse was resident in Alberta. Accordingly, the matter was referred to the Alberta Maintenance Enforcement Program that advised that their program could not collect maintenance arrears prior to July 1, 1984. The Appellant recalculated arrears from July 1984 to May 1992. Recalculated arrears were $23,850.00. A Statement of Arrears was filed in the Court of Queen's Bench of Alberta by the Director of Maintenance Enforcement of Alberta in June of 1997. The Statement of Arrears (Exhibit A-2) indicated an arrears balance of $23,850.00;
(e) On July 17, 1997 the Appellant's former spouse offered to pay the sum of $15,000.00 for the termination of the child maintenance claim. The money was to be used for the continuing education of Lorilei Burk, one of the children of the marriage. The Appellant's former spouse unilaterally signed an agreement to this affect but the Appellant never agreed. That is, the agreement (Exhibit A-6), signed only by the Appellant's former spouse, reflects only an offer made by him to pay a fixed sum in consideration of the Appellant’s terminating her maintenance claim. It is clear that the Appellant did not accept this offer. After rejecting the offer, she continued to pursue her claim for arrears and her former husband continued his attempts to negotiate a settlement of the arrears claim.
(f) On September 9, 1997 the Appellant wrote to her former husband's lawyer. The letter asserts that the Appellant's former spouse had promised Lorilei the sum of $10,000.00 if the Appellant agreed to recognize the payment as a deduction from any award granted by the Court in respect of the Appellant's action to collect arrears. The letter confirms that the Appellant had agreed to recognize the payment as a reduction in any award granted but suggested that the money was still not being sent as a tactic to work out a full settlement of the arrears claim which the Appellant asserted was not the promise made to Lorilei. The letter goes on at length to describe the prejudice to Lorilei of her father not having sent the promised funds. She (Lorilei) enrolled in a private school but could not pay the tuition without the funds promised by him. She suffered from a mental condition, had previously been under a psychiatrist's care and had attempted suicide. The letter would lay the blame of a relapse of Lorilei's condition on her father’s failure to provide her (Lorilei) with the promised funds. The letter got results. On September 15, 1997, the Appellant's former husband's lawyer couriered a cheque in the amount of $10,000.00 to the Director of Maintenance Enforcement. The letter is short and warrants being set out:
RE: M.E.P. Account #0919-415
Please find enclosed my trust cheque in the amount of $10,000.00 to be credited as a payment against the above-noted account.
Please be advised that the enclosed payment is required by my client's daughter, Lorilei Burk, to attend school. Accordingly, I would ask that you expedite the processing of this amount through your system.
(g) According to Exhibit A-10, the Appellant's former spouse brought two motions to the Court of Queen's Bench of Alberta on September 26, 1997. The first motion sought an order directing the Appellant's former spouse to pay his daughter Lorilei the sum of $10,000.00 on a without prejudice basis until the issue of child maintenance arrears was determined by the Court and that all payments of child maintenance paid to the daughter Lorilei directly be a credit against any and all arrears of child maintenance. The request for this Order postdates the payment. Presumably it was a protective motion. The second motion brought on the same day was for remission of all outstanding arrears of child support and costs of the application. The grounds for both motions was that the Appellant had made no attempt to collect arrears in maintenance for approximately 19 years, had hoarded arrears and behaved in a manner that justified the remission of arrears. Further, it was asserted by the Appellant's former spouse that he had contributed to the maintenance and upbringing of the children but was unable to make a complete answer to the allegation of arrears due to the absence of records. The Appellant argues that these motions (together with the offer referred to above) confirm that her former husband's position at the time of the $10,000.00 payment was that he was not paying arrears (that he denied owing) but was making a settlement payment to have the arrears claim abandoned or discharged in full;
(h) On November 13, 1997 the Court of Queen's Bench of Alberta issued an Order relating to the service of the Motions on the Appellant and the requirement for the Appellant to file a reply;
(i) On January 21, 1998 a Consent Order was issued by the Court of Queen's Bench of Alberta. The Consent Order read as follows:
UPON THE APPLICATION of the Applicant; AND UPON HAVING HEARD representations of Counsel for the Applicant; AND UPON HAVING READ the Affidavit of the Applicant, filed; AND UPON IT APPEARING that of child maintenance arrears claimed in the amount of $23,850.00 the sum of $10,900.00 has been paid by the Applicant to the Respondent through Alberta Justice, Maintenance Enforcement, AND UPON NOTING the consent of counsel for the Respondent endorsed hereon; IT IS ORDERED THAT:
1. Child maintenance arrears in this matter are hereby set at $9,000.00. The Applicant, Richard Llewellyn Burk, shall forthwith pay the sum of $9,000.00 to the solicitor for the Respondent, Miles Davison McCarthy ... in full satisfaction of all child maintenance arrears.
2. A copy of this Order shall be forwarded by counsel for the Applicant by mail or facsimile to Family Maintenance Enforcement Program ... Case No. 704047 and to Alberta Justice, Maintenance Enforcement ... Account No. 0919-415.
3. No further child maintenance or support shall be payable by the Applicant, Richard Llewellyn Burk, following payment of the amount set out in paragraph 1, above.
4. There shall be no costs of this application granted to either party.
(j) It is noted that while the Order refers to $10,900.00 having been paid on account of arrears, the payments in 1997 were acknowledged by the Respondent and the Appellant to be $10,600.00, which includes the $10,000.00 referred to above and two additional payments of $300.00, each made in 1997 by the Appellant's former spouse to the Appellant. No evidence was provided as to the circumstances of these additional $300.00 payments other than they were paid to the Alberta Maintenance Enforcement Program. I understand that the parties accept that the additional $600.00 receipt in 1997 will be treated the same as the $10,000.00 receipt.
[3] It is the Respondent's position that the 1997 payments were payments of arrears of maintenance amounts required to be paid under the 1977 Order. The Respondent relies on The Queen v. B.D. Sills, [1985] 1 C.T.C. 49 (F.C.A.) where it was held that payments do not change in character merely because they are not made on time. Accordingly, the Respondent argues that the character of the payments was maintenance payments made pursuant to the terms of the 1977 Order and that they met the requirements of the Income Tax Act, namely paragraph 56(1)(b), to be taxable in the hands of the recipient. I am satisfied that all of the requirements of that paragraph would be met if I were to find that the payments in 1997 were payments of arrears of amounts payable pursuant to the 1977 Order.
[4] The Appellant argues that the 1997 payments were payments made pursuant an arrears “Order” and not pursuant to the 1977 Order. She argues that Exhibit A-2 which is a “Statement of Arrears” signed by the Director of Maintenance Enforcement and filed with an affidavit in the collection action before the Court of Queens Bench of Alberta is an “Order” and that the payment was a lump sum payment made pursuant to it. While the Reply refers to this Statement as an “Order” as well, it clearly is not. In any event, no payment in 1997 was made pursuant to this “Statement”. The Appellant then argues that at the time of the $10,000.00 payment (and the additional $600.00 payments) her former husband was not paying arrears pursuant to the 1977 Order (that he denied owing) but was making a settlement payment to have the arrears claim abandoned and to have any maintenance obligations discharged in full. That is, she argues that the character of the payments should not be found to be payments of arrears but lump sum payments made to discharge the claim and finally settle any and all obligations under the 1977 0rder.
[5] In the Sills case, arrears were paid to carry out the terms of a separation agreement. This was a finding of fact in that case and such finding distinguishes that case from the Supreme Court of Canada decision in Armstrong, 56 DTC 1044. In Armstrong the divorce decree ordered the husband to pay child maintenance until the child was 16. When the child was less than 11 the husband paid the wife $4,000.00 for her release of any further obligation under the decree. While it was true that the payment was made as a consequence of the liability created by the decree, the Court distinguished such payments from payments made pursuant to the decree. The amount was paid and received in lieu of, not pursuant to, the obligation under the decree. The outlay was found to be capital in nature having been made in commutation of periodic sums payable as opposed to having been made pursuant to a Decree or Order to make periodic payments. That case did not deal with arrears. On the other hand, in Sills, it was found that payments in satisfaction of arrears of periodic payments payable pursuant to a separation agreement were properly treated as payments of such periodic amounts.
[6] In the case at bar, the Appellant’s former husband clearly sought to make the subject payment a final settlement payment. If the offer he made on July 17, 1997 had been accepted, it might well be said that the payment was paid and received as a consequence of the 1977 Order but not pursuant to it. In that situation, the payment would have been a release oriented payment made to settle a claim and thereby made in lieu of paying arrears. A payment in lieu of arrears would be analogous to the commutation payment in Armstrong. However, the relevant time to consider the nature of the payment must be when the payment was made. The terms and circumstances of the payment at that time indicate that they were being made on account of arrears. The Appellant did not grant her former husband a release until later, in 1998, when the Consent Order was issued. While the 1997 payments may have anticipated some final settlement, they cannot be said to be payments made as settlement payments. They were payments of arrears. This conclusion is supported by the September 15, 1997 letter accompanying the $10,000.00 payment to Maintenance Enforcement asking for credit to the subject arrears account, by the Appellant’s letter of September 9, 1997 that sets out the understanding in respect of the payment which was that it would be on account of or credited to the Appellant’s arrears claim and by the wording of the Consent Order that acknowledges that the subject payments were on account of arrears. There was clearly no release consideration being extended by the Appellant in 1997 at the time the subject payments were made. Accordingly, I find the subject payments in 1997 to have been on account of arrears and that they did not lose their character as periodic maintenance payments.
[7] Finally, the Appellant takes the position that the payments cannot be considered as pursuant to the 1977 Order in that they cannot be identified as being the particular payments required under that Order. Can it be said, for example, that the $10,600.00 was in respect of the $150.00 per month payable under the 1977 Order to the Appellant as maintenance for Lorilei? The requirement in the Act is simply that the payment be made to the spouse or former spouse pursuant to the 1977 Order. The Appellant received payment of arrears payable pursuant to the 1977 Order when it was paid to her account with the Family Maintenance Enforcement Program. That the payment was directed, with the Appellant's consent, to the benefit of Lorilei does not alter this fact. There has been, if not actual receipt, constructive receipt by the Appellant of the arrears payment. The Act does not look into how the recipient spouse applies the monies received pursuant to the Order. Again, I find the requirements of the Act have been met on the facts of this case for the inclusion of the subject payments in the Appellant's income in 1997.
[8] Based on the foregoing, the appeal is dismissed without costs.
Signed at Ottawa, Canada, this 19th day of January 2001.
"J.E. Hershfield"
J.T.C.C.