Citation: 2013 TCC 164
Date: 20130517
Docket: 2011-1748(IT)G
BETWEEN:
CRAIG JAMES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
C. Miller J.
[1]
Mr. James agreed to a consent
order in March 2004 which ordered spousal support payments of $5,750 per month.
In July 2005, Justice Holmes of the Supreme Court of British Columbia dismissed
Ms. James’ application to increase spousal support retroactively, but the
British Columbia Court of Appeal on June 10, 2009, allowed Ms. James’ appeal
varying the monthly sum to $9,000 and ordering the increased sum to be payable
retroactively to January 1, 2005. On July 30, 2009, Mr. James paid Ms. James an
amount that included $169,775, representing the difference between $9,000 and
$5,750 for the periods from January 1, 2005 to the date of payment. The issue
is whether the $169,775 is deductible as a support amount under subsection
60(b) of the Income Tax Act (the "Act"). The Respondent
argues, relying on the Federal Court of Appeal in Peterson v. The Queen that the
payment was not on a periodic basis and therefore does not meet the definition
of support amount. The Appellant counters, relying on the cases of Dale v.
R.
and Sills v. The Queen
that the British Columbia Court of Appeal judgment created a liability
retroactive to January 1, 2005, of monthly (periodic) payments which the
Appellant paid in a lump sum and the payment does, therefore, meet the
definition of support amount.
Facts
[2]
The following summary
of the facts is taken from an Agreed Statement of Facts, a Joint Book of
Documents and the testimony of Mr. Jeffrey Rose, Q.C., Mr. James’ lawyer in the
Family Law proceedings.
[3]
Mr. James married
Lynn Anne James on February 28, 1982. They have two children. On December
1, 2001, Mr. James and Ms. James separated. On March 22, 2004, they
entered into a consent order (the "Consent Order"), under the terms
of which, Mr. James was to pay Ms. James spousal support of $5,750 per month
commencing on April 1, 2004.
[4]
On July 4, 2008,
Justice Holmes of the Supreme Court of British Columbia issued an order
(the "Holmes Order"), which, amongst other things, dismissed an
application by Ms. James to vary the amount of spousal support under the
Consent Order.
[5]
On June 10, 2009, the
British Columbia Court of Appeal allowed Ms. James’ appeal from the Holmes
Order and stated in its reasons the following:
When
the parties entered into the consent order in March 2004, it was considered
that the sum to be payable as spousal maintenance was appropriate having regard
to the then estimated income of the respondent husband in the range of
$500,000. The chambers judge found a significant enhancement had occurred in
the income level of the respondent husband, albeit some of the income
attributed was in the form of a dividend or bonus payment declared for tax
reasons by the corporation. Giving the best consideration I can to the matter,
I consider an increase in the monthly sum to be paid as spousal maintenance
should be ordered. I would vary the sum to $9,000 per month and I would order
this increased sum to be payable retroactive to January 1, 2005, the date
stipulated in the application for variance filed by the appellant wife.
I will refer to this as the BCCA Court Order.
[6]
Prior to the British
Columbia Court of Appeal issuing its reasons for judgment, from January to June
2009, Mr. James paid Ms. James $5,750 per month in spousal support. After the
British Columbia Court of Appeal issued its reasons for judgment, from July to
December 2009, Mr. James paid Ms. James $9,000 per month in spousal support.
[7]
On July 30, 2009, Mr.
James paid Ms. James an amount that included $169,775 representing the retroactive
spousal support ordered by the British Columbia Court of Appeal.
[8]
Mr. Rose testified that
it was his understanding that both Mr. James and Ms. James had intended
that the payment be considered support amounts eligible for deduction. He was
not aware of anything further that he or the Court of Appeal could have done to
ensure that result.
Issue
[9]
Does the payment of
$169,775 made by Mr. James in July 2009 qualify as a support amount deductible
under subsection 60(b) of the Act?
Analysis
[10]
What is key is the
definition of support amount and the jurisprudence considering that expression.
Support amount is defined in subsection 56.1(4) of the Act as:
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 legal 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.
[11]
There are several cases
that have considered what is meant by payable on a periodic basis. I will start
by considering the Sills decision. Sills dealt with a separation
agreement calling for $100 per month maintenance payments from the husband to
the wife plus $200 per month for child support. Mr. Sills got in arrears which
he made up, though never fully, by three payments of $1,000 each. The Court of
Appeal found the payments were "payable on a periodic basis", stating
that:
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.
[12]
In the case before me,
does the BCCA Court Order provide that the monies are payable on a periodic
basis, when it says:
I
would vary the sum to $9,000 per month and I would order this increased sum to
be payable retroactively to January 1, 2005.
Obviously, the amounts cannot be paid on a periodic
basis as the time has passed, though payments are required to be payable going
forward and indeed were. The retroactive monthly amount is indicated to be
payable – it is by necessity paid in a lump sum. I do not see how the character
of periodic payments payable has changed. There is nothing else the British
Columbia Court of Appeal could have done to retain that character.
[13]
How literal then, or
how effective, can a court order be interpreted to make something payable
periodically for a period that has passed? To address this, I turn to another
Federal Court of Appeal decision, Dale.
[14]
In Dale, the
taxpayer had obtained a rectification order from the Supreme Court of Nova
Scotia declaring certain shares that were not previously validly issued, due to
failing to get supplementary letters patent, were nevertheless validly issued
as of a prior date. This resulted in the acceptance of a successful section 85
of the Act election. The Federal Court of Appeal stated the
following:
13. In determining whether a legal transaction will be
recognized for tax purposes one must turn to the law as found in the
jurisdiction in which the transaction is consummated. Often that determination
will be made without the aid of guiding precedents which are on point and,
hence, the effectiveness of a transaction may depend solely on the proper
application of general common law and equitable principles. In some instances
it will be necessary for the Tax Court to interpret the statutory law of a
province. As for the Minister, he must accept the legal results which flow from
the proper application of common law and equitable principles, as well as the
interpretation of legislative provisions. This leads me to the question of
whether the Minister is bound by an order issued by a superior court, which
order has its origins in the interpretation and application of the provisions
of a provincial statute.
…
15. The first principle is
that the record of a superior court is to be treated as "absolute verity
so long as it stands unreversed" (per McIntyre J. at 599, quoting Monnin
J.A. in the Manitoba Court of Appeal). Second, an order which has not been set
aside must receive full effect according to its terms (at 604). Third, the
order is binding on all the world (at 601, citing Bird J.A. in Canadian
Transport (U.K.) Ltd. v. Alsbury, [1953] 1 D.L.R. 385 (B.C.C.A.) at 418).
Fourth, a collateral attack is deemed to include proceedings other than those
whose specific object is to effect a reversal or nullification of the order. At
page 599 McIntyre held as follows:
It has long been a fundamental rule that a court order,
made by a court having jurisdiction to make it, stands and is binding and
conclusive unless it is set aside on appeal or lawfully quashed. It is also
well settled in the authorities that such an order may not be attacked
collaterally--and a collateral attack may be described as an attack made in
proceedings other than those whose specific object is the reversal, variation,
or nullification of the order or judgment.
…
18. On the facts of this
appeal, the Nova Scotia court granted the June 25, 1992 order on the basis of
section 44 of the Nova Scotia Companies
Act. In my view, any objection that the court lacked jurisdiction to issue
that order is without foundation. If the legislature of a province authorizes
its courts to deem something to have occurred on a date already past, then it
is not for the Minister to undermine the legislation by refusing to recognize
the clear effect of the deemed event. In any case I am not prepared to concede
that section 44 has the revisionist effect advanced by the Minister. This is
not a case where a court order deems shares to have been issued when in fact
they were not. This is a case where shares were issued, but not validly so until
such time as either supplementary letters patent were obtained in Prince Edward Island or the Nova Scotia court granted the June 25, 1992 order. After all,
no one has argued that the share issuance constituted a nullity, nor could it
be so argued.
[15]
Finally, in disagreeing
with Justice Pratte’s dissent, Justice Robertson also stated:
24. … In my opinion, to
impose the requirement that retroactive orders not be based on facts arising
after the end of the taxation year, if such orders are to have any force in tax
proceedings, is to unduly restrict the effectiveness of such orders and provide
the Minister with a more effective means of avoiding the rule against
collateral attacks. Finally, I have serious reservations about adopting an
inflexible rule requiring that facts be established as of the end of the
taxation year. I prefer to leave that issue for another day.
[16]
The Respondent argues
that the Dale case simply stands for the proposition that orders of
superior courts must not be subject to collateral attack in subsequent
proceedings. The Appellant relies on Justice Bowie’s interpretation of Dale in
the case of Brian Bayliss v. Her Majesty the Queen that,
"when an order purports to operate retroactively that must be taken as
effectively changing history". I do not need to resolve this debate to
resolve the issue before me. Clearly, this is not a case of any collateral
attack by one court order against another. The British Columbia Court of Appeal
is simply varying an amount upwards as it has the legal authority to do. This
is taken from the Family Relations Act:
93(5) An order under this section may also provide for one or
more of the following:
(a) payment periodically, annually or otherwise, and either
for an indefinite or limited period or until the happening of a specified
event;
(b)
payment of a lump sum directly or in trust on
terms provided;
(c)
charging of property with payment under the
order;
(d)
payment of support in respect of any period
before the order is made;
(e)
payment for expenses arising from and incidental
to
(i)
the prenatal care of the mother or child, or
(ii)
the birth of a child.
[17]
The British Columbia
Court of Appeal did order payment in respect of periods before the date of its
order – many periods. It also ordered $9,000 on a periodic basis, monthly, going
forward. It did not order a lump sum: it was silent as to how the increase of
$3,250 per month ($9,000 minus $5,750) was to be paid. It would be fair to
presume a lump sum was likely contemplated, and certainly that is how Mr. James
did in fact pay. Would it change the nature of the order to increase monthly
amounts had Mr. James written 54 cheques for $3,250? The combination of the Sills
concept, the authority of the British Columbia Court of Appeal to make an order
for payment of support "in respect of any period before the order is
made", the binding nature of such an order on all the world ("Dale"),
leads me to conclude that given how the British Columbia Court of Appeal framed
its order, it was ordering increased payments for each of the preceding 54
month periods, and as such, the requirement for payable on a periodic basis is
met. The legal obligation, even if considered to be created currently, is an
obligation to make good the periodic payments, but more on this later.
[18]
This accords not only
with my sense of logic, but my understanding of the purpose of the support
payment deduction. It goes to the nature of the payment. Mr. James was ordered
to pay $9,000 a month back to day one and going forward. These are all periodic
payments. The fact that the concept of time has not been lassoed by science so
that one can travel back in time, making it impossible to physically make 54 -
$3,250 payments from 2005 to 2009, does not strip the support from maintaining
its periodic nature. This is not a situation where the purpose of the one‑time
lump sum payment is to settle all future support entitlements once and for all.
As Justice Mogan at the trial in Peterson was clear, such lump sums are
not deductible. Here, however, we have an arrangement of ordered periodic
payments, some of which were, by necessity, paid in one lump sum.
[19]
This is certainly the
approach followed by Justice Bowie in Bayliss, a case the Respondent
suggests was wrongly decided. In Bayliss, the Court ordered retroactive
support for a year period of $1,400 per month for a total of $16,800, payable
by deduction of the husband’s share of proceeds from the sale of the home: so,
a lump sum for a one-year period. Even in those circumstances, Justice Bowie
interpreted Dale to the effect an order operating retroactively must be
taken as changing history, so that the payment of $16,800 was payment of
accumulated arrears of spousal support, and thus maintained their character of
periodic payments. He declined to rely on Peterson, limiting its
application to agreements not court orders. He also mentioned that Peterson
does not refer to Dale. A review of Justice Mogan’s decision at trial in
Peterson would suggest that the payment was made not just with respect
to an agreement but also with respect to an order. It is for this reason the
Respondent suggests Justice Bowie’s distinction is incorrect.
[20]
Bayliss, however, was followed by Justice Little
in the similar case of Gary Salzman v. her Majesty the Queen, where an
order for $3,600 a month for spousal support was retroactive a couple of years.
The payer made a $90,000 lump sum payment. Justice Little again distinguished Peterson
on the basis the amount paid in Peterson did not reflect exactly the
support arrears. I interpret this distinction by Justice Little of Peterson
as suggesting that an amount not reflecting periodic payments, such as a
settlement amount, is what really drove the Federal Court of Appeal decision in
Peterson.
[21]
This leads inexorably
to a consideration of the Federal Court of Appeal decision in Peterson,
that the Respondent argues is a complete bar to the Appellant’s success. To be
clear, Justices Bowie and Little stick-handled around Peterson,
incorrectly according to the Respondent. The Respondent emphasized the need in
our precedential system to ensure jurisprudential consistency, citing the
Supreme Court of Canada’s recent comments in the Queen v. Craig
decision to the effect that a lower court can identify why a precedent may be
problematic, but it is not our role to overrule it. Indeed, the Respondent pointed
out at a recent British Columbia case (Kerman v. Kerman) which
referred to the Peterson decision, suggesting that it understood Peterson
to mean that a retroactive award of support is received tax‑free. The
Respondent’s point is certainly not lost on me, and I will tackle Peterson
with that concern very much in mind.
[22]
To be clear, relying on
Sills and Dale, on the Tax Court of Canada cases of Bayliss
and Salzman, on a purposive interpretation of "spousal
amount", and on a good dose of logic and common sense, I readily conclude
that the amount paid by Mr. James qualifies as a support amount to which
he is entitled to a deduction. Am I precluded from maintaining this result by
the principle set out by the Federal Court of Appeal in Peterson?
[23]
The Respondent suggests
that the Peterson decision stands for the proposition that a legal
obligation, arising by order or agreement to pay retroactive child support is
not a legal obligation to pay arrears of child support and, therefore, cannot
be seen to be payments payable on a periodic basis. I agree that the BCCA Court
Order does create a legal obligation to pay an amount, but that it does, in
this case, retain the character of periodic payments, notwithstanding it was
paid in one amount. Therein lies the basic difference between the case before
me and Peterson. In effect, even if not considered a legal obligation to
pay arrears of child support, the BCCA Court Order is a legal obligation that
has purposely retained the character of periodic payments – that is what
governs, not that this may not be arrears. The circumstances of Peterson
are unique and there is a glaring difference between them and the circumstances
before me. In Peterson, Justice Sharlow recognized there was
insufficient proof that the $36,000 was intended to represent 36 months of
periodic payments.
[24]
Before providing some
excerpts from the Federal Court of Appeal reasons in Peterson,
I will quickly outline the facts of Peterson. Mr. and Ms. Peterson,
both lawyers, made the unfortunate mistake of drafting their own separation
agreement. It contained a provision for payment of child support of $2,000 a
month, with a proviso that if Ms. Peterson lost her job and earned a
lesser amount then the child support would increase to $36,000 a year. There
was considerable ambiguity whether circumstances ensued causing the higher
amount to click-in. Ms. Peterson brought an action. A settlement conference was
held before Justice Pardu, of the Ontario Court, which resulted in Minutes of
Settlement stipulating:
6. Defendant (Mr. Peterson) will pay retroactive additional
periodic child support to the Plaintiff, Ms. Tossell (for each of the
aforementioned children in the amount of $36,000 for the twelve months from
January 1, 1996 to and including December 1, 1996. Payments are taxable in
hands of Plaintiff and deductible by Defendant.
[25]
The evidence suggested
the amount owed by Mr. Peterson might have been as much as $56,000 before this
settlement. The evidence was apparently confusing. At trial, Justice Mogan
found the amount was arrears of child support and also found the payment was
made pursuant to both an agreement between the parties and also the court
order.
[26]
Justice Sharlow,
interpreted the $36,000 payment differently. Her reasons read in part as
follows:
29. The dispute about the tax treatment of the $36,000 paid in
December, 1996, arises from the difficulty of interpreting the first sentence
of section 6 of the Minutes of Settlement (which is substantially the same as
section 6 of the Court Order)…
…
31. There is no doubt that the $36,000 payment was
intended as child support, and that it was made pursuant to a written
agreement, the Minutes of Settlement. However, an amount does not come within
the scope of paragraph 56(1)(b)
and paragraph 60(b)
of the Income Tax Act
unless it is payable on a periodic basis. An amount is payable on a periodic
basis if the payment obligation recurs at intervals. Although section 6 of the
Minutes of Settlement describes the $36,000 payment as "periodic", it
refers to a single payment in the amount of $36,000. It does not describe an
obligation to make payments on a periodic basis.
32. Mr. Peterson argued in the Tax Court, and in
this Court, that the $36,000 was actually a payment of arrears of child support
payable on a periodic basis pursuant to the 1991 separation agreement. That
argument invokes the authority of The Queen v. Sills,
reflex, [1985] 2 F.C. 200 (F.C.A.), which
stands for the proposition that an obligation to pay an amount on a periodic
basis maintains that character even if several such amounts are paid late in a
single lump sum.
…
34. This conclusion is relevant only if the $36,000
payment required by section 6 of the Minutes of Settlement was intended to
refer to arrears of child support accrued under the 1991 separation agreement,
in which case the Sills principle would apply. The Judge found that the
$36,000 payment was so intended. …
35. I must respectfully disagree with the Judge that
the reasons stated in paragraph 55 support the conclusion that the $36,000
payment referred to in section 6 of the Minutes of Settlement was intended to
be for arrears of child support.
36. In my view, a written agreement or court order
cannot be interpreted as obliging a person to pay arrears of child support
unless, at the time the written agreement or court order is made, there is (1)
an express or implied recognition of a pre-existing obligation to pay child
support for a prior period, (2) an express or implied recognition of a complete
or partial breach of that obligation, resulting in arrears of child support,
and (3) an obligation set out in the written agreement or court order to pay
the arrears in whole or in part.
37. There is no express recognition in the Minutes
of Settlement, or the subsequent Court Order, of a pre-existing child support
obligation, or the existence of arrears of child support. On December 16, 1996,
when the Minutes of Settlement were signed, Ms. Tossell and Mr. Peterson had
not agreed as to what Mr. Peterson's child support obligations were under the
1991 separation agreement, after March of 1993. If Pardu J. had a view on that
point, there is no evidence as to what it was, except the recollections of Ms.
Tossell and Mr. Peterson's lawyer, which are far from conclusive.
…
39. In my view, there is no basis for concluding
that there is any implicit recognition, as of December 16, 1996, that Mr.
Peterson was in arrears of child support. That is sufficient, in my view, to
establish that section 6 of the Minutes of Settlement cannot be interpreted as
requiring a payment of arrears of child support.
40. However, I would reach the same conclusion even
if there had been an implicit recognition that Mr. Peterson was in arrears of
child support because, in my view, section 6 of the Minutes of Settlement
cannot reasonably be interpreted as an obligation to pay $36,000 as arrears of
child support. I base that conclusion on the fact that section 6 describes the
payment as "retroactive". The word "retroactive" does not
simply mean "based on the past", as the Judge stated in paragraph 52
of his reasons. On the contrary, to describe the payment of a past due
obligation as a "retroactive payment" is a misuse of the language.
…
42. It is clear from this statutory description of
retroactive support payments that a legal obligation to pay retroactive child
support is a new obligation. It could be, for example, a new obligation to pay
child support for a specified prior period for which there was no pre-existing
obligation. Or, it could be a new obligation to pay child support for a
specified prior period in addition to child support payable under a previous
agreement that has been found inadequate. Either way, a legal obligation to pay
retroactive child support is the converse of a legal obligation to pay arrears
of child support.
…
44. … In my view, that evidence establishes only
that Mr. Peterson's lawyer had a negotiating position. It is not capable of
proving the nature of the $36,000 payment referred to in section 6 of the
Minutes of Settlement.
…
46. … They might have settled the unpaid child
support issues in a way that would formally recognize the arrears, and provide
for their payment or partial payment. Or, they might have put aside the issue
of arrears of child support and created an entirely new obligation. It is
impossible to determine from the record that either one of those solutions
would have been more reasonable than the other.
[27]
Apologies for the
lengthy excerpt but it is important to capture the flavour of the reasoning. Justice
Sharlow found that the new legal obligation created in these specific circumstances
were not in the nature of periodic payments paid in one lump sum, that might
have attracted the Sills principle. She acknowledges in paragraph 46
that it might have been arranged otherwise. Clearly, from paragraph 44, the
payment was viewed as a settlement amount, insufficient proof otherwise of its
nature. This, I would respectfully suggest, is key.
[28]
So, while the Appellant
argues that the British Columbia Court of Appeal created a retroactive legal
obligation and, therefore, effectively legally created an arrears of support
payments that would have the Sills principle apply, even if
I conclude that is not the case but that the British Columbia Court of
Appeal created a new legal obligation, I find that such a new obligation is
dissimilar from the one in Peterson. Justice Sharlow’s statement that
"a legal obligation to pay retroactive child support is the converse of a
legal obligation to pay arrears of child support" must be taken in the
context of the specific facts of the Peterson case. The Federal Court of
Appeal found this was not arrears but was a legal obligation to pay a lump sum,
not a payment that retained the nature of periodic payment obligations. But
here, the British Columbia Court of Appeal was clear, the parties, according to
Mr. Rose, were clear: there was no ambiguity as in Peterson. There
was no mention of a lump sum payment. The payment ordered was meant to be, and
I find was, a payment in the nature of periodic payments paid in a lump sum and
the requirements of the definition of support payment are satisfied.
[29]
I interpret the
reasoning in Peterson to confirm that, provided the nature of the
payment reflects a periodic payment obligation, then the definition is met. In Peterson,
that simply could not be proven. I do not believe the result I have reached in
this case is in conflict with the Peterson decision.
[30]
I allow the Appeal and
refer the matter back to the Minister of National Revenue for reconsideration
and reassessment on the basis that Mr. James’ payment of $169,775 was a support
amount, for which he is entitled to a deduction. Costs to the Appellant.
Signed at Ottawa, Canada, this 17th day of May 2013.
"Campbell J. Miller"
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