Date: 20011012
Docket: 2000-2527-IT-I
BETWEEN:
BARBARA HENNESSY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Beaubier, J.T.C.C.
[1] This appeal pursuant to the Informal Procedure was heard at Kelowna, British Columbia, on January 9 and October 3, 2001. The Appellant and her former husband, Steven Hennessy, both testified. Steven Hennessy was not a credible witness; his answers were self serving and bordered on argumentative and his memory existed where it served him and disappeared when it did not serve him. The Appellant's address for service is her Counsel's address.
[2] Paragraphs 4 to 8 inclusive of the Reply to the Notice of Appeal outline the subject matter of the appeal. They read:
4. The Minister reassessed the Appellant for the 1997 taxation year by Notice dated December 14, 1999 to include in income an additional $40,500.00 maintenance income.
5. Subsequent to the Notice of Objection the Minister reassessed the 1997 taxation year by Notice dated January 24, 2000 to reduce the amount included as maintenance income by $3,408.00.
6. In so reassessing the Appellant, the Minister relied on the following assumptions of fact:
a) the Appellant and Robert Steven Hennessy (the "Former Spouse") are the parents of James Earl Hennessy, (the "Child") born June 11, 1989;
b) by Order of the Supreme Court of British Columbia (the "Order") dated May 29, 1995, the Former Spouse was required to pay spousal support to the Appellant in the amount of $800.00 per month on June 1, 1995 and on July 1, 1995 and $1,500.00 per month commencing on August 1, 1995 and on the first day of each and every month thereafter up to and including December 1, 1997, at which time the spousal maintenance would terminate;
c) the Order required the Former Spouse to pay maintenance for the Child to the Appellant in the amount of $500.00 per month on June 1, 1995 and on July 1, 1995 and $1,000.00 per month commencing August 1, 1995 and on the first day of each and every month thereafter for so long as the Child was a child of the marriage;
d) by Order of the Supreme Court of British Columbia dated May 26, 1997 (the "Second Order") the Child maintenance was varied to the sum of $426.00 per month commencing on May 1, 1997;
e) the Second Order made no alteration to the arrears of the Child maintenance;
f) the Second Order made no variation or cancellation of the maintenance of the Appellant;
g) the Former Spouse was in arrears of the maintenance (the "Arrears") in the amount of $50,318.19 as at November 5, 1997;
h) the Former Spouse made a lump sum payment of $40,000.00 on November 14, 1997 on account of the Arrears;
i) the Appellant received $5,634.00 in maintenance payments from her Former Spouse over and above the $40,000.00 lump sum payment;
j) of the $5,634.00 referred to in paragraph 6 i) herein, $3,408.00 was received by the Appellant as maintenance pursuant to the Second Order which Second Order had a commencement date of May 1, 1997;
k) the $3,804.00 received by the Appellant from the Former Spouse subsequent to the commencement date of the Second Order was deducted from the maintenance amounts required to be included in the Appellant's income for the 1997 taxation year by reassessment dated January 24, 2000.
B. ISSUES TO BE DECIDED
7. The issue is whether the lump sum payment of $40,000.00 on account of Arrears was correctly included in calculating the Appellant's total income for the 1997 taxation year.
C. STATUTORY PROVISIONS RELIED ON
8. He relies on paragraph 56(1)(b) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the "Act").
[3] Assumption 6 h) is in dispute. It is obviously incorrect, because the $40,000 was paid on 14 November, 1997 by Mr. Hennessy in acceptance of the terms of a letter dated November 12, 1997 from Mrs. Hennessy's lawyer Kenneth Fiddes, which reads:
KENNETH R. FIDDES
B.Comm., LL.B. Lawyer
Family Law Mediator
#2, 2908-31ST AVENUE TELEPHONE: (250) 542-5391
VERNON, B.C. FAX: (250) 542-4199
V1T 2G4
OUR FILE: 4879
November 12, 1997
Mr. Steven Hennessy
5959 McMurray Avenue
BURNABY, BC
V5H 3E5
Dear Sir:
RE: Hennessy vs. Hennessy
Upon receipt of the sum of $40,000.00 in certified funds or bank draft payable to the writer, Mrs. Hennessy will release you from all obligations of spousal support including the existing arrears, all obligations for arrears of child support and all existing court costs. Funds must be received in this office prior to 4:30 p.m. Friday, November 14, 1997.
Yours truly,
"Signature"
KENNETH R. FIDDES
KRF/td
Enclosure
[4] The sum of $40,000 was paid on time without any other conditions by Mr. Hennessy. That payment constituted acceptance of the conditions of Mr. Fiddes' letter. Therefore, it consisted of satisfaction of:
1. All past and future obligations of spousal support.
2. All obligations for arrears of child support.
3. All existing Court costs.
[5] In McKimmon v. M.N.R., 90 DTC 6088, the Federal Court of Appeal (Hugessen, J.A.) stated the following:
The problem of distinguishing between periodic payments made as an allowance for maintenance, which are deductible for income tax purposes, and periodic payments made as instalments of a lump or capital sum, which are not so deductible, is one which has given rise to considerable discussion and jurisprudence. It is not dissimilar, and is indeed related to the problem, common in income tax law, of determining if sums of money expended or received are of an income or of a capital nature. As with that problem there can be very few hard and fast rules. On the contrary, the Court is required to look at all the circumstances surrounding the payment and to determine what, in the light of those circumstances, is its proper characterization. Because of the correlation between paragraphs 60(b) and 56(1)(b), a finding that a payment is deductible by the payer will normally result in its being taxable in the hands of the recipient. Conversely, a determination that a payment is not so deductible will result in the recipient having it free of tax.
The following are, as it seems to me, some of the considerations which may properly be taken into account in making such a determination. The list is not, of course, intended to be exhaustive.
1. The length of the periods at which the payments are made. Amounts which are paid weekly or monthly are fairly easily characterized as allowances for maintenance.2 Where the payments are at longer intervals, the matter becomes less clear. While it is not impossible, it would appear to me to be difficult to envisage payments made at intervals of greater than one year as being allowances for maintenance.
2. The amount of the payments in relation to the income and living standards of both payer and recipient. Where a payment represents a very substantial portion of a taxpayer's income or even exceeds it, it is difficult to view it as being an allowance for maintenance. On the other hand, where the payment is no greater than might be expected to be required to maintain the recipient's standard of living, it is more likely to qualify as such an allowance.
3. Whether the payments are to bear interest prior to their due date. It is more common to associate an obligation to pay interest with a lump sum payable by instalments than it is with a true allowance for maintenance.3
4. Whether the amounts envisaged can be paid by anticipation at the option of the payer or can be accelerated as a penalty at the option of the recipient in the event of default. Prepayment and acceleration provisions are commonly associated with obligations to pay capital sums and would not normally be associated with an allowance for maintenance.
5. Whether the payments allow a significant degree of capital accumulation by the recipient. Clearly not every capital payment is excluded from an allowance for maintenance: common experience indicates that such things as life insurance premiums and blended monthly mortgage payments,4 while they allow an accumulation of capital over time, are a normal expense of living which are paid from income and can properly form part of an allowance for maintenance. On the other hand, an allowance for maintenance should not allow the accumulation, over a short period, of a significant pool of capital.5
6. Whether the payments are stipulated to continue for an indefinite period or whether they are for a fixed term. An allowance for maintenance will more commonly provide for its continuance either for an indefinite period or to some event (such as the coming of age of a child) which will cause a material change in the needs of the recipient. Sums payable over a fixed term, on the other hand, may be more readily seen as being of a capital nature.
7. Whether the agreed payments can be assigned and whether the obligation to pay survives the lifetime of either the payer or the recipient. An allowance for maintenance is normally personal to the recipient and is therefore unassignable and terminates at death. A lump or capital sum, on the other hand, will normally form part of the estate of the recipient, is assignable and will survive him.6
8. Whether the payments purport to release the payer from any future obligations to pay maintenance. Where there is such a release, it is easier to view the payments as being the commutation or purchase of the capital price of an allowance for maintenance.7
Viewing the facts of the present case in the light of the foregoing criteria, it becomes quickly apparent that most of the indicators point strongly to the payments in issue being instalments of a lump sum settlement and that virtually none point the other way.
(Footnotes omitted)
[6] It is on that basis that the payment of $40,000 on November 14, 1997, must be considered. Using the eight criteria set out above, this Court finds:
1. The $40,000 was a one-time payment in full satisfaction of the three items set out in paragraph [4] hereof.
2. The living standards of Mr. and Mrs. Hennessy are not in evidence. But the assumptions set out the maintenance and support amounts which the trial judge in the divorce determined. The are based on the parties' circumstances and their living standards. In relation to them, the $40,000 is a very large amount.
3. There is no reference to interest, but there is only a two day window in which the $40,000 could be paid in full satisfaction.
4. The two day window and the full satisfaction clauses indicate a capital sum. Together they indicate acceleration.
5. The $40,000 is a significant pool of money in the two Hennessy's circumstances. It is indicative of capital.
6. The $40,000 was a one-time payment and terminated the named future obligations of Mr. Hennessy.
7. There is no reference to assignability. But Mr. Fiddes' letter would have bound Mrs. Hennessy's estate had she died before 4:30 p.m. Friday, November 14, 1997.
8. The payment clearly released Mr. Hennessy from any future obligation to pay Mrs. Hennessy maintenance, arrears of child support and Court costs.
[7] In view of these findings by the Court, the indicators are that the payment of the $40,000 was a lump sum settlement and that it was not paid as maintenance for the Appellant. There was no obligation on Mr. Hennessy under any Court order to pay the $40,000 in lieu of the spousal support, arrears of child support and existing Court costs. He paid the $40,000 to obtain the release described in Mr. Fiddes' letter of November 12, 1997, and he got it. It was not paid pursuant to the Court Orders which occurred in the litigation between Mr. and Mrs. Hennessy. (See M.N.R. v. Armstrong, (S.C.C.) 56 DTC 1044)
[8] The appeal is allowed and this matter is referred back to the Minister of National Revenue for reconsideration and reassessment accordingly.
[9] Mrs. Hennessy began this appeal herself in Kelowna, British Columbia on January 9, 2001. It was rescheduled for 9:30 a.m. October 3, 2001 at which time Mrs. Hennessy and her lawyer appeared. Respondent's Counsel asked for an adjournment because its witness, Mr. Hennessy, had not appeared. As a result, trial commenced at 1:05 p.m. October 3, 2001. Mr. Fiddes who practises at Vernon, British Columbia was obliged to wait in Kelowna a full half day after the 9:30 adjournment before the half-day trial followed. In these circumstances, Mrs. Hennessy is awarded costs as follows:
|
1. |
Preparation for hearing |
$200 |
|
2. |
Two half-days for hearing |
$600 |
|
3. |
Disbursements for travel and photocopying, covering and binding copies of Appellant's Books of Authorities fixed at: |
$350 |
|
Total Costs Awarded |
$1,150 |
Signed at Ottawa, Canada, this 12th day of October, 2001.
"D.W. Beaubier"
J.T.C.C.
COURT FILE NO.: 2000-2527(IT)I
STYLE OF CAUSE: Barbara Hennessy v. The Queen
PLACE OF HEARING: Kelowna, British Columbia
DATE OF HEARING: January 9, 2001 and October 3, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge D. W. Beaubier
DATE OF REASONS: October 12, 2001
APPEARANCES:
Counsel for the Appellant: K.R. Fiddes
Counsel for the Respondent: Johanna Russell
COUNSEL OF RECORD:
For the Appellant:
Name: K.R. Fiddes
Firm: K.R. Fiddes
#2, 2908-31st Ave., Vernon, B.C. V1T 2G4
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-2527(IT)I
BETWEEN:
BARBARA HENNESSY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on October 3, 2001 at Kelowna, British Columbia
by the Honourable Judge D. W. Beaubier
Appearances
Counsel for the Appellant: K.R. Fiddes
Counsel for the Respondent: Johanna Russell
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1997 taxation year is allowed, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Costs are awarded to the Appellant in the sum of $1,150.
Signed at Ottawa, Canada, this 12th day of October, 2001.
|
"D.W. Beaubier" |
J.T.C.C.