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Docket: 2005-3119(IT)I |
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BETWEEN: |
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GAIL GALBRAITH, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent, |
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and |
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WILLIAM GALBRAITH, Party joined under section 174 of the Income Tax Act. |
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Reference under section 174 of the Income Tax Act heard
on September 18, 2006 at Toronto, Ontario.
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Before: The Honourable D.G.H. Bowman, Chief Justice
Appearances:
For the Appellant: The appellant herself Counsel for the Respondent: Kandia Aird |
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Agent for the party joined: J. Waldo Baerg |
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JUDGMENT
The answer to the question stated in the Reference under section 174 of the Income Tax Act,
3. Whether payments made by William Galbraith to the Appellant during the 2003 taxation year, in the amount of $25,566.72, representing income tax liabilities of the Appellant relating to her 1999 and 2000 taxation years, are required to be included in computing the income of the Appellant for the 2003 taxation year;
is as follows:
The amount of $25,166.72 should be included in the appellant's income for her 2003 taxation year.
The appellant's appeal is allowed to reduce the amount included in her income by $400.00 from $25,566.72 to $25,166.72.
Signed at Ottawa, Canadathis 3rd day of October 2006.
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"D.G.H. Bowman" |
Bowman, C.J.
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Citation: 2006TCC536 |
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Date: 20061003 |
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Docket: 2005-3119(IT)I |
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BETWEEN: |
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GAIL GALBRAITH, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent, |
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and |
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WILLIAM GALBRAITH, Party joined under section 174 of the Income Tax Act. |
REASONS FOR JUDGMENT
Bowman, C.J.
[1] This matter began as an appeal by Gail Galbraith from an income tax assessment for her 2003 taxation year. It was transformed by an application made by the Minister of National Revenue into a Reference under section 174 of the Income Tax Act. The court ordered that William Galbraith be joined as a party to the Reference.
[2] Essentially the question is whether payments totalling $25,566.72 made by William Galbraith to his ex-spouse constitute a "support amount" as defined in section 56.1 of the Income Tax Act. If they are, they are to be included in the appellant's income under paragraph 56(1)(b) of the Income Tax Act and deductible by her spouse under paragraph 60(b). Support amount is defined in subsection 56.1(4) as follows:
"support amount" means an amount payable or receivable as an allowance on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient and children of the recipient, if the recipient has discretion as to the use of the amount, and
(a) the recipient is the spouse or common-law partner or former spouse or common-law partner of the payer, the recipient and payer are living separate and apart because of the breakdown of their marriage or common-law partnership and the amount is receivable under an order of a competent tribunal or under a written agreement; or
(b) the payer is a natural parent of a child of the recipient and the amount is receivable under an order made by a competent tribunal in accordance with the laws of a province.
[3] Gail Galbraith and William Galbraith separated in 1998 and entered into a separation agreement dated December 8, 1998. Section 15 of the separation agreement reads:
15. SPOUSAL SUPPORT
(a) The Husband shall pay to the Wife an amount that will be deductible by the Husband from his gross income and taxable to the Wife so that the Wife will receive after tax, the sum of no less than $2,500.00 per month and the Husband will pay to the Wife any tax exigible on the amount of spousal support the Wife receives.
(b) In addition, by way of spousal support, the Husband will pay to the Wife 1/3 of his gross annual bonus and 1/3 of his net quarterly bonuses and further, will pay any tax exigible on those sums paid to the Wife which she includes in her income.
[4] Mr. Galbraith fell behind in his payments and in April 2001 the parties found themselves in court before Madam Justice Goodman of the Ontario Superior Court of Justice. Madam Justice Goodman wrote detailed and comprehensive reasons. Paragraphs 45 and 46 of her reasons read:
ARREARS:
[45] 1999 Support-Related Amounts Payable - Having considered the evidence, I estimate that in 1999, Mr. Galbraith was to pay his wife the following approximate amounts:
(i) $2,500 a month from January, to November; $2,500, adjusted upward by 3.1% for the month of December, 1999;
(ii) $6,987.66, being 1/3 of his gross annual bonus received in the amount of $20,963;
(iii) $4,000, this being 1/3 of the estimated net amount of his $21,000 total of performance bonuses received. No evidence was led as to Mr. Galbraith's tax rate in 1999. However, considering his tax return and the combined top personal marginal tax rate in 1999 of 48.8%, it would be entirely reasonable to accept $12,000 as the net amount of the performance bonuses Mr. Galbraith received in 1999; and
(iv) the amount of tax that Mrs. Galbraith is required to pay for 1999 on the support she actually received in 1999 from Mr. Galbraith.
Mrs. Galbraith is, within 30 days, to prepare two draft 1999 income tax returns, in one of which she will include any support payments she received in 1999 under the Separation Agreement and in the other of which she will not include those amounts. The tax payable under paragraph (iv) above will be the difference in the two amounts of income tax which are payable under the respective returns. She is to give these two tax returns to Mr. Galbraith within the 30-day period.
[46] 2000 Support-related Amounts Payable: Given that Mr. Galbraith is obliged by this decision to commence paying support monthly to his wife as of November 1st, 2000, I find that in 2000, he was required to pay the following amounts to his wife as spousal support:
(i) $2,500 a month, adjusted upward by 3.1%, for the months of January, 2000, to October, 2000, inclusive;
(ii) $0 on account of an annual bonus because I am not satisfied that such a bonus was earned of paid;
(iii) $4,000, being 1/3 of the net of the total of the performance bonuses paid to Mr. Galbraith in 2000. I have taken the $20,600 bonus payment shown on the pay "slip" at September 23, 2000 (at page 109 of the Continuing Record) as the total of the performance bonuses paid or to be paid prior to the end of October, 2000. Again, looking at Mr. Galbraith's 2000 tax return and the combined top personal marginal tax rate in 2000 of 47.9%, it would be reasonable to accept Mr. Galbraith's net bonus amount of $12,000 for the year;
(iv) the amount of tax payable on any support payments Mrs. Galbraith received under the Agreement in 2000 to the end of October, 2000; and
(v) $3,500 payable for each of the months of November and December, 2000.
Mrs. Galbraith is, within 30 days, to prepare two draft 2000 income tax returns, in one of which she will include any amounts received under paragraphs (i) and (iii) above and in the other of which she will not include those amounts. She is not to include the amounts payable under paragraph (v) in either of these two returns. The tax payable under paragraph (iv) above will be the difference in the two amounts of income tax which are payable under the respective returns. She is to give these two tax returns to Mr. Galbraith within the 30-day period.
[5] The formal order read in part as follows:
THIS COURT ORDERS THAT the Separation Agreement dated December 8, 1998, and registered as an Order of this Court on October 26, 2000, pursuant to section 35 of the Family Law Act, R.S.O. 1990, c. F3, is hereby varied as follows:
1. Commencing November 8, 2000, and on the 8th day of each subsequent month the Respondent shall pay spousal support to the Applicant Wife in the sum of $3,500.00 per month.
2. The amount of (spousal support) arrears owing by the Respondent to the Applicant pursuant to the separation agreement of December 8, 1998, as amended by this Order, are fixed at $60,446.16, as of October 31, 2001, including interest;
3. In any years in which the Respondent pays any (of the) spousal support arrears owing under paragraphs 45(i) - (iii) or 46(i) - (iii) of the Reasons for the Order of Goodman J. dated October 22nd, 2001, the Applicant is to prepare two (2) draft tax returns by April 15th of the next year, in one of which she is to include the arrears paid and in the other of which she will not. The difference between the two amounts of income tax owing will be the amount of tax owing by the Respondent to the Applicant under paragraph 15 of the Separation Agreement. The Applicant shall give to the Respondent the two draft tax returns by April 20th. The Respondent shall pay to the Applicant by way of certified cheque by April 29th, the amount of tax owed by the Applicant.
[6] In summary, then, Madam Justice Goodman amended the agreement and registered order to provide that commencing on November 8, 2000, Mr. Galbraith was to pay to Mrs. Galbraith $3,500 per month and there was no obligation to pay her the tax on that amount. For the time up to November 8, 2000, he was to pay her the arrears plus the tax reimbursement.
[7] In the result, in 2003 she received $52,013.50 as support payments and $25,166.72 as tax on the support payment arrears for 1999 and 2000. The amount of tax reimbursement for 1999 is $15,013.24 and for 2000, $10,294.48. Mrs. Galbraith does not dispute the taxability in her hands of the $52,013.50 but her position is that she is not taxable on the $25,166.72 which she describes as "specific purpose payments".
[8] Mr. Galbraith's position is that the tax reimbursement is also a "support amount" and is therefore deductible by him and taxable in Mrs. Galbraith's hands.
[9] Mrs. Galbraith argues that the intent of the spouses in clause 15 of the separation agreement was that the support payments she was to receive were to be net of tax. The word "net" is not found in clause 15 of the agreement but I agree with her if "net" means that Mr. Galbraith is obliged to pay the tax exigible in respect of the support payments received by her.
[10] This does not, however, answer the question whether the amount Mr. Galbraith pays her in addition to the $2,500 monthly support payments to reimburse her for the tax she has to pay is itself part of the support amount. I quoted above the definition of support amount. The key words in the definition, at least for the purposes of this appeal, are "an allowance on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient and children of the recipient, if the recipient has discretion as to the use of the amount, and...".
[11] I will begin by stating what I believe to be the general principle to be applied when a payment (the "basic amount") is "grossed up", to use the terminology customarily used in these circumstances, to include the taxes on the basic amount. It is this: Where a payor agrees to pay to a recipient an amount to compensate the recipient for any tax that may be exigible on the basic amount, the additional amount that is paid to cover the taxes (the "tax amount") takes on the same quality as the basic amount. Thus, if a payment of salary is grossed up to cover the taxes that the recipient has to pay, the tax amount is salary. If the basic amount is the proceeds from the sale of an asset, the additional amount for taxes forms part of those proceeds. Here, the basic amount is a support amount and so the additional amount for taxes forms part of that support amount.
[12] The above is what I think is a broad purposive and common sense approach to the problem. Some may find it unduly simplistic. Therefore, I shall endeavour to analyse the matter in a more legally structured fashion. If the textual, contextual and purposive approach to statutory construction admits of a deconstructive analysis of both the statute and the payment, I would arrive at the same conclusion. This would involve separating the basic support amount from the additional payment needed to cover the tax exigible on it (the "tax amount") and focussing solely on the amount paid in respect of the tax and treating it as a separately identifiable element whose quality for tax purposes is not influenced by that of the basic amount to which it relates. A deconstructive analysis that applies the statute to the payment would yield the following:
[13] Is the tax amount an allowance? The ordinary meaning of allowance, without reference to judicial precedent would support the view that it is an allowance. It is paid to the appellant to enable her to cover her living expenses.
[14] The meaning of "allowance" was considered by the Supreme Court of Canada in Gagnon v. The Queen, 86 DTC 6179. In the course of the unanimous reasons of the Supreme Court of Canada, Beetz J. commented on the definition of allowance given by the Federal Court of Appeal in The Queen v. Pascoe, 75 DTC 5427 per Pratte J.:
An allowance is, in our view, a limited predetermined sum of money paid to enable the recipient to provide for certain kinds of expense; its 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. A payment in satisfaction of an obligation to indemnify or reimburse someone or to defray his or her actual expenses is not an allowance; it is not a sum allowed to the recipient to be applied in his or her discretion to certain kinds of expense.
Beetz J. believed that the third condition imposed by Pratte J. was unduly restrictive. Beetz J. said at page 6182:
According to the definition in Pascoe, for a sum of money to be regarded as an "allowance" it must meet three conditions: (1) the amount must be limited and predetermined; (2) the amount must be paid to enable the recipient to discharge a certain type of expense; (3) the amount must be at the complete disposition of the recipient, who is not required to account for it to anyone.
and at page 6184:
In The Queen v. Poynton, 72 DTC 6329, Evans J., rendering the unanimous judgment of the Ontario Court of Appeal, specifically adopted the ratio in James, and at 6335 suggested additional guidelines for determining whether an amount received by a taxpayer is in the nature of income.
. . . the manner of receipt, the control over it, the liabilities and restrictions attaching to it, the use made of it by the holder, the person to whom the benefits accrue. These are but some of the circumstances to be weighed.
Seen in this context, the third condition imposed by Pascoe must be corrected: for an amount to be an allowance within the meaning of s. 60(b) of the Income Tax Act, the recipient must be able to dispose of it completely for his own benefit, regardless of the restrictions imposed on him as to the way in which he disposes of it and benefits from it.
To return to the circumstances of the case at bar, there is no doubt that the recipient of the amounts in question, appellant's former wife, could dispose of them completely, and that she derived from them what Burton J. called in Rutkin, at 137, a "readily realizable economic value". The duty which she had to apply these amounts to particular purposes does not affect the benefit she derived from them. These amounts are in the nature of income for her, and qualify as "allowances" within the meaning of both ss. 60(b) and 56(1)(b) of the Income Tax Act.
[15] Following the Gagnon decision, the Income Tax Act was amended to add the requirement found in the present definition quoted above that the recipient have discretion as to the use of the amount. I shall deal with this portion of the requirement later in these reasons.
[16] With respect to the other criteria in the judicial definition of allowance, I think the tax amount meets them. It is a limited predetermined sum of money. The fact that the tax must be calculated annually and may vary with the applicable tax rates and the recipients' other income, deductions and credits does not make it any the less predetermined. See Pach v. The Queen et al., 2003 DTC 5634 (F.C.A.). It is clearly made to enable the appellant to discharge her obligation to pay her taxes.
[17] Is it for the appellant's maintenance? Taxes, like food and housing and other necessities of life are an incident of daily living. Clearly an amount that is paid to enable the appellant to pay her taxes is for her maintenance.
[18] Is it payable on a periodic basis? The support amount of $2,500 per month is obviously payable periodically. The tax amount is calculated and payable annually since income tax is a phenomenon of annual incidence. The requirement of periodicity is therefore met.
[19] Does the appellant have discretion as to the use of the tax amount? The amount paid by Mr. Galbraith to the appellant is determined by the tax on what she receives from him. Once she is paid the tax amount by her husband, she is free to do what she wishes with it. As Beetz J. said in Gagnon, "The duty which she had to apply these amounts to particular purposes does not affect the benefit she derived from them". The discretion test is therefore met.
[20] In Hak v. The Queen, 99 DTC 36, the appellant agreed, as an alternative to paying a fixed monthly amount to his spouse, to pay rent, health care premiums and utility bills directly. I held that the amounts paid were support amounts and therefore deductible by the appelant. The facts in that case were very close to those in The Queen v. Arsenault, 96 DTC 6131, where a similar conclusion by the Tax Court of Canada was upheld by the Federal Court of Appeal. There seems to be an inconsistency between Arsenault and The Queen v. Armstrong, 96 DTC 6315. In Hak, the court distinguished Armstrong and followed Arsenault. As Woods J. pointed out in Sears v. The Queen, 2004 DTC 3660, the case law is not entirely consistent. However, in my view, the entire grossed up amount (the basic amount and the tax amount) is a support amount.
[21] Mrs. Galbraith observed that by treating the tax amount as part of the support payment, I am requiring that the parties perform a series of mathematical computations since Mr. Galbraith must pay the appellant the amount of tax on a constantly decreasing amount. By way of example, if a is the basic support amount of $2,500 per month and b is the tax on a, and c is the tax on b, and d is the tax on c and e is the tax on d, Mr. Galbraith's obligation is a + b + c + d + e and so on until we reach one cent. Although the Canada Revenue Agency may administratively cut off the calculation after b or c, this is nonetheless the result, however inconvenient it may be to make a series of calculations. This point was discussed fully by a three person panel of the Tax Appeal Board (Fabio Monet, Q.C.), W.S. Fisher, Q.C. and R.S.W. Fordham, Q.C. in New York Central Railroad Co. v. M.N.R., (1952) 7 Tax A.B.C. 334. Ms. Aird, counsel for the respondent, is to be commended for her diligence in finding this venerable and obscure authority. I will not quote from the learned discussion of the tax on tax on tax computation beyond noting that it supports my conclusion. I will, however, observe that under clause 15 of the separation agreement any additional tax Mrs. Galbraith has to pay on amounts paid to her by her husband must also be paid to her by Mr. Galbraith.
[22] The question stated in the Reference is as follows:
3. Whether payments made by William Galbraith to the Appellant during the 2003 taxation year, in the amount of $25,566.72, representing income tax liabilities of the Appellant relating to her 1999 and 2000 taxation years, are required to be included in computing the income of the Appellant for the 2003 taxation year;
Of this, $400.00 does not represent a portion of the tax on support payments. Therefore the answer to the question stated is that $25,166.72 should be included in the appellant's income for her 2003 taxation year.
[23] Mrs. Galbraith's appeal should therefore be allowed to reduce the amount included in her income by $400.00 from $25,566.72 to $25,166.72.
Signed at Ottawa, Canada this 3rd day of October 2006.
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"D.G.H. Bowman" |
Bowman, C.J.
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CITATION: |
2006TCC536 |
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COURT FILE NO.: |
2005-3119(IT)I |
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STYLE OF CAUSE: |
Gail Galbraith v. Her Majesty The Queen and William Galbraith (Intervener) |
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PLACE OF HEARING: |
Toronto, Ontario |
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DATE OF HEARING: |
September 18, 2006 |
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REASONS FOR JUDGMENT BY: |
The Honourable D.G.H. Bowman, Chief Justice |
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DATE OF JUDGMENT AND REASONS FOR JUDGMENT: |
October 3, 2006 |
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APPEARANCES: |
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For the Appellant: |
The appellant herself |
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Counsel for the Respondent: |
Kandia Aird |
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Counsel for the Intervener: |
J. Waldo Baerg |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada |
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