Citation: 2013 TCC 202
Date: 20130625
Docket: 2012-3807(IT)I
BETWEEN:
DAN BERTY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bédard J.
[1]
In issue in this case is
the deductibility of spousal support payments in the amount of $11,739 with
respect to the 2010 taxation year.
Facts
[2]
The appellant separated
from his wife Kerry Leclerc (the “Former Spouse”) in August 2008. They were
married in 1990. The appellant and the Former Spouse have two children, namely,
SNNB born in 1996 and SBPB born in 1992.
[3]
The appellant was
employed by SunLife Financial (“SunLife”) between the years 1982 and 2011 as an
assistant vice‑president of cost competitiveness.
[4]
The appellant’s gross
annual income for the 2010 taxation year was $236,188.
[5]
On July 17, 2009,
the appellant and the Former Spouse entered into a separation agreement
(Exhibit A‑5) (the “Agreement”).
[6]
The appellant was to
pay periodic monthly support based on his base income. The appellant’s base
income is the usual biweekly income from employment, but does not include
income such as bonus income, proceeds from exercising stock options, investment
income, capital gains and dividend income.
[7]
The appellant was to make
child support payments of $1,876 per month with respect to the two children,
commencing on August 1, 2009 and payable on the 1st day of
each month thereafter (Exhibit A‑5, clause 5.2(a)). The
appellant and the Former Spouse agreed to adjust the amount of child support
payable based on each party’s base income (Exhibit A‑5,
clause 5.3).
[8]
The appellant was to
pay his Former Spouse spousal support of $1,942 per month, commencing on
July 15, 2009 and payable on the 15th day of each month
thereafter (Exhibit A‑5, clause 6.1).
[9]
The Agreement also
required the appellant to pay 50 per cent of his bonus to his Former
Spouse for “child and spousal support”. The stipulation of the Agreement pertaining
to “child and spousal support” reads as follows:
Lump
Sum Child and Spousal Support Payments
7.1 Fifty percent (50%), net of income tax, of any bonus
income received by the husband shall be paid to the wife as lump sum child and
spousal support (called “bonus payment”). Bonus income may include, but is not
limited to, incentive pay and the exercise or redemption of stock options after
the Separation Date. These payments will continue for as long as the husband is
required to pay child and/or spousal support. The bonus payment based shall be
made within seven (7) days of the husband receiving a payment of bonus income.
Interest shall run on any outstanding payments, in accordance with the Courts
of Justice Act.
[10]
The appellant sought to
deduct spousal support payments that were made on a monthly basis as well as a
part of his annual bonus (in the amount of $11,739), the latter of which was
declined by the Minister of National Revenue. The respondent submits that the support
payment of $11,739 made in relation to the appellant’s bonus (i.e. pursuant to
par. 7.1 of the Agreement filed as Exhibit A‑5) was not a
deductible amount pursuant to subsections 56.1(4) and 60(b) of the Income
Tax Act (the “Act”) because such payment made according to section 7.1
of the Agreement was neither:
a)
an amount payable or
receivable as allowance on a periodic basis for the maintenance of the
recipient, children of the recipient or both the recipient and the children
since there is no guarantee that a bonus will be paid each year;
b)
identified as being
solely for the support of the Former Spouse.
[11]
The appellant also
testified that:
1)
he has received a bonus
every year since SunLife commenced that practice in the mid 1990’s, on the
basis of both the employee’s and SunLife’s performance (Transcript,
p. 10);
2)
there was no written
contract defining the features of the bonus. That practice, according to the
appellant, was standard in the insurance industry (Transcript, p. 11). He
added that the bonus was normally paid at the end of February or early March;
3)
since there was some
risk “that it wouldn’t have been paid”, the bonus was a “variable amount” that
was not included in the monthly amounts, so as not to cause financial
difficulty before it became available.
Issues
[12]
The issue herein is
whether the support payment of $11,739 made in relation to the appellant’s
bonus was:
i)
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 the children
of the recipient;
ii)
solely for the support
of the Former Spouse.
Discussion and Conclusion
[13]
“Child support” means
any support that the court order, or the written agreement, does not identify
as being solely for the support of the taxpayer’s spouse or former spouse
(subsection 56.1(4) of the Act). For example, even where an agreement
provides for a global support amount for the spouse and children, the entire
amount is child support and, therefore, not deductible and not taxable.
[14]
Where a payer must make
spousal and child support payments, the presumption is that the payments are
first deemed to be child support, and then spousal support (by virtue of the
formula in paragraph 60(b) of the Act. See also Interpretation
Bulletin IT‑530). Thus, in the event that the payer defaults, the
recipient receives the payment first on a non-taxable basis. The payer cannot
deduct any portion on account of spousal support until the child support
obligations are fully satisfied.
[15]
Pursuant to
section 56.1(4) of the Act, an amount payable or receivable will qualify
as “support amount” if (see also Interpretation Bulletin IT‑530):
• The recipient has
discretion as to the use of the amount;
• The recipient is a
spouse/CL partner and the recipient and payer are living separate because of
the breakdown of their marriage;
• The amount is
receivable under an order of a competent tribunal or under written agreement;
• The payer is a natural
parent of the child of the recipient.
[16]
Furthermore, to qualify
as support amount, the amount must be payable as an allowance on a periodic
basis.
[17]
In Gagnon v. Canada,
[1986] 1 C.T.C 410, the Supreme Court defined the word “allowance” as follows:
“a limited predetermined sum of money paid to enable the recipient to provide
for certain kinds of expense […] determined in advance and once paid […] at the
complete disposition of the recipient who is not required to account for it.”
[18]
In Queen v. McKimmon,
[1990] 1 C.T.C. 109, the Federal Court of Appeal enumerated criteria to be
considered in distinguishing between periodic payments made as an allowance,
and made for lump or capital sum:
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. Where the payments are at longer intervals, the
matter becomes less clear.
2.
The amount of the payments in relation to the
income and living standards of both payer and recipient. […] 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.
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. […].
5.
Whether the payments allow a significant degree
of capital accumulation by the recipient. […] An allowance for maintenance
should not allow the accumulation, over a short period, of a significant pool
of capital.
6.
Whether the payments are stipulated to continue
for an indefinite period or whether they are for a fixed term. […].
7.
Whether the agreed payments can be assigned and
whether the obligation to pay survives the lifetime of either the payer or the
recipient. […].
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.
Appellant’s position regarding the First
Issue
[19]
The appellant submits
that he pays support to the Former Spouse on a received basis; no other mode of
payment would make sense, as cash flow problems could result. He added that, as
such, the Agreement was drafted such that there was an annual “adjustment” to
take into account the bonus amount.
[20]
The appellant also
submits that, in view of the McKimmon factors, the payments in issue
herein should be qualified as periodic. The appellant’s relevant submissions are
as follows:
So
if we take those criteria in McKimmon and apply them, we can see that
this supports the appellant's position that the payments are periodic in
nature. The bonus is to be paid within seven days of the receipt by the
appellant, that's set out in 7.1 of the agreement. The obligations continues as
long as the appellant is required to pay child and/or spousal support. In fact,
a read of the agreement shows that even if a child ages out of the agreement or
marries pursuant to 5.7, the amount continues to be paid. It doesn't stop.
There's no provision in the agreement that 7.1 bonus payments stop.
The
amount of the bonus payment is directly related to and is a significant part of
the appellant's income. As testified by the appellant, the target bonus is 25
percent of the annual compensation, and that bonus payment relates to an amount
that was and remains a significant factor in relation to both the living
standards of both parties. The payment is practically speaking to made, to be
made immediately. It's to be made within 7 days of receipt and interest is
payable on the overdue amounts. There's no accelerated payment contemplated in
the agreement, it's ongoing to the extent that support obligations exist, so
that's 7.1 payment continues indefinitely.
The
bonus payment is determined by reference to a contingent aspect of the
appellant's remuneration package. It's a division of an income amount that the
appellant receives on an annual basis. Moreover, the amount of the bonus
payment is not unusual when compared to the base monthly support payments. The
bonus support payment continues as long as basic support is -- basic
spousal support is payable and the agreement does not expressly address the
survival of the support obligation beyond the life of the wife. However, the
terms of the agreement indicate that the ongoing spousal support is a personal
contractual right, and bonus payment is referred to as spousal support, and
it's not a release of further support payments. Accordingly, it's submitted
that the bonus payment spousal support obligation is an ongoing obligation
payable by the appellant when the bonus payment is realized. The appellant's
remuneration package with his employer contemplates this payment on an annual
basis, notwithstanding the reference to the words lump sum in payment in the
agreement, it's submitted that the better view is that the bonus payment should
be characterized as a periodic payment of spousal support under the Income
Tax Act and the jurisprudence that relates to periodic payment.
[21]
Since the evidence
reveals that there is no guarantee that the bonus will be paid in any given
year (although, as per the appellant’s submissions, the risk seems fairly
remote), I am of the opinion that the support payment of $11,739 made in relation
to the appellant’s bonus does not meet the definition of “periodic” based on
the McKimmon factors, as “periodic” means “at a regular interval”. In
other words, the payments to be made under 7.1 of the Agreement cannot be qualified
as periodic since there is a possibility that the appellant will not be paid a
bonus every year. I also want to point out that the decision in McKimmon
refers to the fact that payments made at intervals of more than one year could
not be conceived as an allowance for maintenance.
Second issue
[22]
Regarding the second
issue, I will also reproduce the appellant’s submissions (Transcript,
pp. 41 to 43):
With
respect to the separation agreement, it's our submission that the separation so
going to the second issue, Your Honour, of whether the amount is a spousal
support amount payable, the separation agreement pursuant to 6.1 specifically
sets out spousal support of 1,942 as basic spousal support. The amounts
calculated by reference to the support advisory guidelines, there's annual indexing
provided in 6.3 of the agreement, and in addition, 7.1 provides an additional
amount equal to 50 percent of any bonus received as a lump sum is the word used
in the agreement, payment to top up the child support and the spousal support
amount.
The
existence of the bonus payment element in the agreement is not surprising. All
of the appellant's income is taken into account in determining spousal support.
This is consistent with the independent net disposable income concept in the
federal support guidelines. The payment is simply a pay as and when received
and it's reasonable as it avoids an arbitrary estimate of what those future
payments would be and would necessitate some kind of reconciliation of what
that is on an annualized basis.
In
the hands of the appellant, the base income and the bonus income are simply
income, they're the same, albeit, they're received at different times. As
spousal support, the payment is a re direction of income of the appellant and
it should be treated in a consistent and like manner with the base amount that
is set out in, I believe, at 6.1. The agreement provides for the allocation of
support payments as between spousal support and child support in 5.2 and 6.1.
It's clear that the approach is an allocation of 50 percent to 50 percent. It's
very close, 47 point something to 53 point something.
The
appellant must direct 50 percent of the bonus income to support given that the
agreement is to be read as a whole. There's no reason to deviate from the rule
that an agreement should be read and interpreted as a whole without a contrary
intention so stated in the agreement. Therefore, the apportionment of the bonus
income being income nonetheless is subject to the same rules of apportionment.
There's no reason to really restate the obvious in the agreement, there's no
reason to resort to arbitrary determinations as to how the amount should be
apportioned because it's clear in the agreement what is being done.
If
any deviations from the 50/50 allocation were intended, it would have been
state in the agreement. As such, Your Honour, there is an allocation, and if we
look at what Justice Bowie commented in Elcich and I have provided you
with a copy, Steven Elcich v. Her Majesty the Queen decided by Mr.
Justice Bowie on February 14th, 2006. Justice Bowie speaks to an agreement
where there is no allocation as between child support and spousal support, and
he suggests that where there's no allocation there's a problem, but in this
case, there is an allocation and a clear allocation is what the intentions of
the parties were, and that's the approximate 50/50 or 47/53 percent which the
appellant claimed on his tax return.
I
did want to address, Your Honour, had questioned the appellant with respect to,
if he had losses which went out the income.
[23]
I am of the opinion
that there is no ambiguity in section 7.1 of the Agreement. In section 7.1
of the Agreement, there is no allocation in relation to support. In the absence
of allocation of amounts between child support and spousal support, the entire
amount is treated as child support in accordance with the definition of “child
support” in the Act. In the case at hand, I also am of the opinion that even
after reading the Agreement as a whole, I cannot come to the conclusion that
there is an implicit apportionment of the support between Former Spouse and the
Children. Since section 7.1 is free from ambiguity, I am of the opinion
that it is improper to resort to extrinsic evidence to determine the meaning of
that stipulation. My role is not to determine the intention of the parties. Assuming
arguendo that I had had to do so, the appellant has the burden of proof. In
that kind of situation, for example, draft documents can be brought in
evidence. The other party to the agreement can be called as a witness to
testify as the intention of the parties. In the case at hand, the fact that no
draft documents have been offered in evidence and that the Former Spouse has
not been called to testify is telling. Furthermore, the Agreement provides that
the parties have received independent legal advice, and yet, there is no
statement of purpose in the Agreement.
[24]
Consequently, I am of
the opinion that the support payments of $11,739 made in relation to the
appellant’s bonus (i.e. pursuant to section 7.1 of the Agreement) are not
a deductible amount pursuant to subsections 56.1(4) and 60(b) of
the Act.
[25]
For those reasons, the
appeal is dismissed.
Signed at Ottawa, Canada, this 25th day of June 2013.
“Paul Bédard”
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