The Queen v. Sigglekow, 85 DTC 5471, [1985] 2 CTC 251 (FCTD)

The Associate Chief Justice:—This action is by way of appeal from the decision of the Tax Review Board, pronounced by The Hon Lucien Cardin, Chairman. At issue is the taxation of sums of money received by the defendant in the 1975, 1976 and 1977 taxation years on account of maintenance and support for her child. The facts are not complex and are not in dispute and were the subject of an agreed statement of facts filed by the parties at trial.

The defendant successfully petitioned her spouse for divorce and on June 4, 1975, a decree nisi was granted by the Supreme Court of Ontario. The decree nisi requires John Sigglekow to pay to the defendant, on the first day of each and every week, the sum of $20 “tax free” for the care, maintenance and support of David John Sigglekow. These payments are to be made as long as the child while under 16 years of age resides with the defendant or under 18 years of age while residing with the defendant and in attendance at school. In accordance with this order, John Sigglekow paid to the defendant $2,100, $3,120 and $1,080 in the taxation years 1975, 1976 and 1977, respectively, ($20 per week during that time).

Throughout the taxation years 1975, 1976 and 1977, the defendant lived apart from the said John Sigglekow. In computing her income for those years, she did not include the amounts paid to her by John Sigglekow, and in due course the Minister reassessed them as income. On September 29, 1981, His Honour Judge Cardin, QC, of the (then) Tax Review Board, allowed an appeal by the taxpayer. The plaintiff commenced the present action by way of appeal.

The learned Chairman dealt first with any suggestion that the words “tax free” in the court order might have a genuine tax consequence. He set it aside in the following language:

If the Learned Judge meant that no tax would be payable by the appellant with respect to the receipt of maintenance payments, he would have had to completely ignore the clear wording of Section 56(1)(c) of the Income Tax Act. He could then have been seen, not only as attempting to bind the Minister of National Revenue in an action in which the Minister was not a party but he also, as suggested by counsel for the respondent, would have usurped the jurisdiction of the Federal Court and the Tax Review Board in deciding that maintenance payments were not taxable.

I question the wisdom and the practicality of the wording of the order in establishing as it did the amount of award but I cannot conclude that, in so doing, the Learned Judge was deciding on the non-taxability of the maintenance payments in the hands of the recipient. Also, I do not find that the order bound the Minister of National Revenue or the Tax Review Board as to the taxability of maintenance payments in the hands of the appellant under Section 56(1 )(c) of the Act.

Indeed, no serious argument to the contrary was made before me, so I do not propose to deal further with that aspect of the matter.

The sole issue is whether the amounts received by the defendant are caught by paragraphs 56(1 )(b) or (c) of the Income Tax Act.

56. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(b) any amount received by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if the recipient was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, the spouse or former spouse required to make the payment at the time the payment was received and throughout the remainder of the year.

(c) any amount received by the taxpayer in the year, pursuant to an order of a competent tribunal, as an allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if the recipient was living apart from the spouse required to make the payment at the time the payment was received and throughout the remainder of the year.

A great deal of argument was directed toward the indefinite nature of the effect of the words “tax free" in the court order. Counsel delivered a very persuasive submission that, to the extent the words impose some special burden upon the husband over and above the $20 per week, it creates an obligation that cannot be quantified. The basis of the argument is that since the tax burden can't be calculated until the filing of Mrs Sigglekow's return, there is never any time at which the husband can know how much should be added on a weekly basis. Counsel also pointed out that no matter when the husband attempts to fulfil that obligation, it creates a further sum upon which some tax must be calculated rendering it doubly impossible to fix the amount at any time and certainly in advance.

In view of the decision of the Federal Court of Appeal in The Queen v Barbara D Sills,* [1] however, I have to conclude that none of this has any effect upon the question in issue here. In that case, by the terms of a separation agreement later incorporated in a court order, the husband was required to pay to the taxpayer the sum of $300 per month until July of 1975 and $200 per month thereafter. The husband fell into arrears in the payment of these sums during 1975. In the 1976 taxation year he made three lump sum payments of $1,000 to the taxpayer. In filing her return for the 1976 taxation year, the taxpayer did not include the $3,000 in her income for that year. The Minister of National Revenue, in reassessing the taxpayer's tax for the 1976 taxation year, included the $3,000 as income. Both the Tax Review Board and the Federal Court (Trial Division) held that the $3,000 did not fall within the meaning of paragraph 56(1 )(b) of the Income Tax Act and was, therefore, not to be included in the taxpayer’s income for the 1976 taxation year. On appeal, however, the Federal Court of Appeal held that the payments were to be included as income under paragraph 56(1)(b). Speaking for the Court, Heald, J states:

On these facts, the $3,000 received by the Respondent from LaBrash was clearly paid by him and received by her to carry out the terms of the separation agreement. Some of the money was payable to the Respondent as alimony, the remainder to her as maintenance for the dependent children. All of it was payable on a monthly basis as stipulated in the separation agreement. Where the Trial Judge erred, in my view, was in not having due regard to the use of the word “payable” in the subsection. So long as the agreement provides that the moneys 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. The learned Tax Review Board member made the same error, in my view, when he said that the amounts to be included in income “must be received exactly according to the terms of the agreement”. The subsection does not say that. If the learned Tax Review Board member and the learned Trial Judge are right, then any monthly payment made to the Respondent on the second day of the month for which it is due, for example would not be taxable in the hands of the Respondent. This is surely not a reasonable or a proper interpretation of the subsection.

It is consistent throughout both the trial judgment* [2] and the judgment of the Court of Appeal in Sills that the liability for tax does not spring from a separation agreement or a court order. Section 56 provides that moneys received must be included as income. Clearly, the sums must be received by this taxpayer before there can be any tax burden upon them. Her obligation can only be to report any sums received. They are taxable income if their source is in an agreement or order caught by section 56. The fact that the agreement or order may impose additional burdens upon the spouse is extraneous.

In the Sills case, the sums received by the spouse were in amounts unrelated to the terms of the agreement. Indeed, they were not paid in the taxation year in which they were due, nor did they ever constitute a complete discharge of the husband's responsibility. Again, the issue is not whether there was any further responsibility or obligation on the part of the husband, only the tax liability upon those sums actually received. In the present case, the matter is even clearer because Mr Sigglekow made the payments in precise compliance with a court order, except of course for any sums referable to the words “tax free” which he understandably chose to ignore. On the reasoning of the Federal Court of Appeal in the Sills case, there could be no question that such sums actually received by the defendant fall precisely within the terms of section 56 and should, therefore, have been included in her income for the 1975, 1976 and 1977 taxation years. That was the basis of the Minister’s reassessment which, in my view, was entirely correct.

Accordingly, the appeal must succeed and the assessment of the Minister that the sums of $2,100, $3,120 and $2,080 received by the defendant were income in the hands of the defendant in the 1975, 1976 and 1977 taxation years, respectively, is restored. In view of the provisions of subsection 178(2), the Minister shall bear the reasonable costs of the taxpayer in connection with the appeal.

Appeal allowed.