Citation: 2007TCC674
Date: 20071115
Docket: 2007-892(IT)I
BETWEEN:
JOHN B. LANE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Webb J.
[1] The Appellant’s
2005 taxation year was reassessed to deny the Appellant the deduction that he
had claimed for $13,801.93. The Appellant had claimed this amount as a
deduction for support amounts paid by him to his spouse from whom he was living
separate and apart. The alternate issue in this case is whether this amount
should have been excluded from his income based on the decision of the Federal
Court of Appeal in Walker v. The Queen, [2000] 1 C.T.C. 271, 2000 DTC
6025.
[2] The Appellant and
his spouse were married in 1964. They separated in 2005 and executed a
Separation Agreement dated June 15, 2005. This Agreement included the following
paragraph:
3. MAINTENANCE/SUPPORT
The Wife and the Husband are both retired, the Husband acknowledges
that if he was not retired and was working he would have to pay
maintenance/support to the Wife. Therefore, if for any reason the pension
division under clause 12 is changed or the Husband recommences work the
maintenance/support issue for the Wife will be revisited.
[3] The payment of the pension amounts (which
are the subject of this appeal) is dealt with in paragraph 12 of the Agreement
which provides as follows:
12. PENSION PLANS
(a) The Husband and the Wife acknowledge and
agree that they are each aware of the amendments to the Canada Pension Plan Act
whereby pension credits earned by one or both spouses during their years of
marriage may be divided equally upon marriage dissolution, or upon a permanent
separation. Further, such Act precludes spouses from releasing their rights to
the Canada Pension Plan benefits of the other, unless there is a specific
statutory provision in the province in which the spouses reside at the date of
separation, enabling such a release. The parties acknowledge and agree that no
such statutory provision exists in the Province of
Newfoundland and Labrador and that, therefore, their pension credit,
up to the date of separation are subject to equal division between them (herein
called the “Canada Pension”). Further the Husband is now receiving his Canada Pension,
the Canada Pension payment shall be divided equally between the Husband and
Wife.
(b) The Husband is receiving a pension in
relation to his employment with the Business Development Bank (herein called
the “BDC Pension”), this pension shall be divided equally between the Husband
and Wife;
(c) The Husband is receiving a pension from
the Government of Newfoundland and Labrador (herein called the “NL Pension”), this pension shall be divided
equally between the Husband and Wife;
(d) The Husband shall execute the required
documentation to allow the division of the Canada Pension, the BDC Pension and
NL Pension at the source so that the Wife receives 50% of each payment.
[4] The total gross
amount of the pensions that the Appellant was receiving was approximately
$60,000. The pension from the Government of the Province of Newfoundland and Labrador
represented approximately two-thirds of the total pension income of the
Appellant. The Appellant attempted to have the pension payable from the
Government of the Province of Newfoundland and Labrador divided at source but was informed by letters dated July
6, 2005 and September 12, 2005 that this division could not be made at source.
There were two years of service that the Appellant had provided to the
Government of the Province of Newfoundland and Labrador that were prior to the marriage and therefore
ought not to have been included in the amounts to be divided. The Appellant had
forgotten about these two years when he signed the Separation Agreement. By an
Amending Agreement dated February 7, 2007 the original Separation Agreement was
amended to reflect that the pension benefits that related to the two years
prior to the marriage were not to be divided between the Appellant and his
spouse and to provide that the BDC pension and the NL pension benefits
were to be paid by the Husband making direct deposits to his spouse’s bank
account. Paragraph 1(d) of the Amending Agreement provides that these payments
“are to be treated as spousal support payments from the Husband to the Wife”.
[5] The amount at issue
in this case, $13,801.93, was determined by the Appellant based on the gross
amount of the total pensions that he received, excluding the benefits related
to the two years of service that were prior to the marriage. The amount was
calculated as 50% of the total gross amount per month times 5 ½ months
(the period of separation in 2005). The amount was paid by the Appellant to his
spouse monthly. Since the pension payable by the Government of the Province of Newfoundland and
Labrador was approximately two-thirds of the total pensions, the Appellant
adopted the same method of dividing the other two pensions as he had to adopt
for the pension payable by the Government of the Province of Newfoundland and Labrador.
[6] In Andrews v.
The Queen, 2005 TCC 246, [2006] 1 C.T.C. 2012, 2005 DTC 1546,
Bowman C.J. dealt with a very similar situation. That case also dealt with the
division of pension plans following a breakdown of a marriage that was effected
by one spouse making a payment to the other of an amount that was equal to the
gross amount of the pension.
[7] In dealing with the
issue of whether the amounts paid in relation to the division of the pension
are support amounts, Bowman C.J. made the following comments:
[18] … The result is that an amount paid
monthly by a husband to his ex-spouse as a division of a matrimonial asset, the
husband’s pension, is neither a support amount nor a pension benefit in the
hands of the recipient spouse nor is it deductible by the payor as a support
amount.
[8] In the original Separation Agreement
in this case the division of the pension plan was not contemplated as a support
amount. This reference to the treatment of the payment of the pension amounts
as a support amount appears in the Amending Agreement dated February 7, 2007.
Although the Addendum to [the] Amendment to Separation Agreement indicates
that the effective date of the amendment is to be June 15, 2005,
because the Agreement was not executed until 2007 this purported effective date
of July 15, 2005 cannot change or alter the tax consequences of the 2005
taxation year. Since the Amending Agreement was made in 2007, it could only
affect prior support amounts paid in 2006 or in 2007 as a result of the
provisions of subsection 60.1(3) of the Act. Whether the amounts paid
under the Separation Agreement as amended by the Amending Agreement will
qualify as “support amounts” is not the issue in this case. The tax treatment
of the amounts paid in 2005 under the Separation Agreement before it was
amended by the Amending Agreement is the issue in this case.
[9] As a result of the finding of Bowman, C.J. in the Andrews
case, as noted above, the amounts that were paid by the Appellant to his spouse
in 2005 were not support amounts for the purposes of the Act and hence
were not deductible under paragraph 60(b) of the Act. These amounts were
paid as a division of the Appellant’s pensions.
[10] However, as noted by Bowman C. J. in the Andrews
case, this does not end the matter. The next issue to be decided is whether or
not the amount that was paid by the Appellant to his spouse, which was equal to
50% of the gross amount of his pension for the months for which they were
separated, should be excluded in determining his income. As noted by Bowman C. J.,
this is based on the Walker
decision referred to above. In paragraph 27 of the Andrews case Bowman C. J. made the following
comments in relation to the Walker decision:
[27] ... The ratio of the
Federal Court of Appeal’s judgment seems to be contained in paragraph 5 of
the reasons which reads:
[5] We believe it was the
intention of the parties at the time the separation agreement was executed that
each would pay income tax on the gross amount received with the result that
each would be left with their share of the pension (the property in this case) after
taxes.
[11] Mogan J. in his
decision in Walker v. The Queen, [1995] 1 C.T.C. 2408, 95 DTC 753 stated as
follows in relation to this issue:
17 To me, the above words are
a clear indication that the husband and wife (i.e., the third party and
the appellant) intended that the military pension be allocated at the source so
that the administrator of the pension would issue two cheques each month: one
to the husband for $418.42 and one to the wife for $418.42. How else can I
interpret words like: 'and until such time as the payments resulting from the
assignment are processed and reach the wife, the husband shall pay to the wife
... '? Also, the last sentence of section 14 supports my interpretation: 'The
husband warrants that he will proceed with due diligence to process such
assignment'. If the assignment had been processed immediately causing the
administrator to issue two cheques each month, the appellant and the third party
would have each reported annual income of $5,021 with respect to the military
pension.
[12] In the present case
the language is clearer that it was the intention of the parties that the
pensions would be divided at source as this was contemplated by paragraph 12(d)
of the original Separation Agreement. This case is indistinguishable from Walker
and from Andrews and hence I find that, based on the Federal Court of
Appeal decision in Walker and on the decision of Bowman, C.J. in Andrews,
the amount of $13,801.93 (which was the portion of the gross amount of the
pensions that was paid by the Appellant to his spouse for the period of time
that they were separated in 2005) should not have been included in the income
of the Appellant in 2005.
[13] This is not an unjust
result. The position of the Respondent was that the Appellant should be taxed
on all of the pension income that he received in 2005 without any deduction for
the amount paid to his spouse, regardless of the fact that $13,801.93 of this
amount was paid by the Appellant to his spouse. This would have resulted in the
Appellant paying taxes on amounts that, as a result of a Separation Agreement,
he had agreed would be split with his spouse. Presumably (although this was not
in issue in this case) the position of the Respondent would be that the Appellant’s
spouse would not be required to include this amount in her income. As a result the
Appellant’s spouse would have received more than what would have been the
intention of the parties under the Agreement as it would not have been their
intention that she receive this amount without paying the income taxes related
thereto. Since the Agreement contemplated that the amounts would be divided at
source, the Agreement had contemplated that each party would bear the tax
consequences of receiving one-half of the gross amount of the pensions.
[14] The Appellant is
entitled to his costs, if any, as determined in accordance with the Rules.
This Amended
Reasons for Judgment is issued in substitution for the Reasons for Judgment
dated November 7, 2007.
Signed at Ottawa, Ontario, this 15th day of November 2007.
"Wyman W. Webb"
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