Hanlin v. The Queen, 85 DTC 5052, [1985] 1 CTC 54 (FCTD)

Dubé, J:—The issue to be resolved in these three income tax cases is whether the sum of $18,000, $19,000 and $17,000 paid by the plaintiff to his wife on April 24, 1979, January 1, 1980 and January 1, 1981, respectively are deductible under paragraphs 60(b) and 60(c) of the Income Tax Act, which read as follows:

60. Other deductions. — There may be deducted in computing a taxpayer’s income for a taxation year such of the following amounts as are applicable. . . .

(b) Alimony payments. — an amount paid 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 he was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, his spouse or former spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year;

(c) Maintenance payments. — an amount paid 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 recipient, or both the recipient and children of the recipient if, at the time the payment was made and throughout the remainder of the year, he was living apart from his spouse to whom he was required to make the payment;

It is common ground that the plaintiff, a former Vancouver lawyer now living in California, entered into an agreement in writing on April 24, 1979, which contained inter alia the following provisions:

1. The husband agrees to pay to the wife in any event for her maintenance periodic sums as follows:

(a) on April 24th, 1979, the sum of $18,000.00;

(b) on May 1st, 1979 and on the 1st day of each and every month thereafter to December 1st, 1979, the sum of $1,000.00;

(c) on January 1st, 1980, the sum of $19,000.00;

(d) on February 1st, 1980 and on the 1st day of each and every month thereafter up to December 1st, 1980, the sum of $1,000.00;

(e) on January 1st, 1981, the sum of $17,000.00;

(f) on February 1st, 1981 and on the 1st day of each and every month thereafter up to April 1st, 1981 the sum of $1,000.00.

2. The wife agrees with the husband that all the sums payable by the husband to the wife pursuant to the provisions of paragraph 1 hereof are for her periodic maintenance and are paid to her by the husband pursuant to the provisions of Section 60(b) of the Income Tax Act, SC 1970-71-72, Chapter 63 and amendments thereto, and further agrees to declare the same as income to her in her income tax returns to the Minister of National Revenue in the respective years. In the event that the husband is assessed income tax as a result of payments made by the husband to the wife pursuant to this Agreement, the wife agrees to indemnify the husband and reimburse the husband as a result thereof; save and except that the wife’s reimbursement to the husband shall be limited in any year to that sum that the wife would have paid in income tax on sums received from the husband in the said year.

3. The husband agrees to provide to the wife postdated cheques for all payments referred to in paragraph 1 hereof.

It is also common ground that on April 24, 1979, a decree nisi of divorce was granted by the Supreme Court of British Columbia to Mrs Hanlin, which decree provided inter alia the schedule of payments contained in paragraph 1 of the agreement. The decree which became absolute on August 29, 1979 also included an order to the effect that the plaintiff will have custody of the only child.

The payments were made, as agreed and ordered, on schedule. In filing his income tax returns for the years 1979, 1980 and 1981 the plaintiff claimed all the payments as a deduction from his income. The Minister denied the plaintiffs deductions of the three larger amounts of $18,000, $19,000 and $17,000 for each year on the ground that they were “lump sums” and not deductible as payments under either of the paragraphs 60(b) and 60(c).

The only witness called at the hearing of this matter was the plaintiff himself who introduced the relevant documents and confirmed the facts above referred to. Under cross-examination he denied that the larger payments were made for other reasons than as provided under the separation agreement and the decree nisi.

The couple did own a house in the Vancouver area which was sold and the profits divided between the two before the agreement was signed.

The only reason advanced by the plaintiff to explain the three larger payments is that his law firm makes a yearly distribution of cash to the partners to reduce the current account of the firm, which distribution takes place around January and February. That explanation was not contradicted. No evidence was adduced by the Minister to show otherwise.

In The Queen v Morton Pascoe, [1975] CTC 656; 75 DTC 5427, at 658 [5428], Pratte, J, speaking for the Federal Court of Appeal, defined an allowance as follows:

An allowance is in our view 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.

Whether a payment is to be considered an allowance or a maintenance under the Act, depends on the circumstances and on the effect of an agreement, when there is one. In MNR v Hansen, [1967] CTC 440; 67 DTC 5293, Jackett, P, as he then was, said at 441 [5294]

The only question is whether such payments fall within the class of payments the deduction of which is permitted by section 1 l(l)(i) [now subsection 60(b)]. This question depends upon a proper understanding of the effect of the agreement.

In the case at bar, the agreement and the decree nisi describe the payments as maintenance. That description applies to all the payments, including the three larger ones. And paragraph 2 of the agreement specifies clearly that all the sums payable by the husband to the wife are for her periodic maintenance and paid to her pursuant to paragraph 60(b) of the Act.

There is nothing in the agreement or in the decree nisi describing any of the sums as being “lump sums”. From the agreement and the decree all the payments, therefore, would appear to qualify under paragraphs 60(b) or (c) in that they constitute either an allowance or an alimony or a maintenance payment made to the former spouse. The former spouses were living apart at the time the payments were made and throughout the remainder of the year pursuant to a divorce, judicial separation or written separation agreement; the amounts were paid pursuant to a decree, order or judgment of a competent tribunal or pursuant to written agreement. There only remains to determine whether or not the payments in question were of a series “payable on a periodic basis”.

In No 427 v MNR (1957), 17 Tax ABC 264; 57 DTC 291, the Income Tax Appeal Board in 1957 defined periodical payments as follows at 268 [293]:

Payments occurring periodically, that is at fixed times from some antecedent obligation and not at variable periods at the discretion of individuals.

W S Fisher, QC went on to say at 269 [294]:

I am of the opinion that it is not necessary for all of the payments to be identical in order to qualify them as periodic payments so long as they are specifically provided in the decree and occur periodically, that is at fixed times and so long as they arise from some antecedent obligation — (in this case the former relationship of husband and wife) — and are not payable at variable periods which can be varied at the discretion of the individuals.

In The Queen v Barbara Sills, [1985] 1 CTC 49; 85 DTC 5096, Heald, J, speaking on behalf of the Federal Court of Appeal, considered whether amounts were payable on a periodic basis and said at 52:

So long as the agreement provides that the moneys are payable on a periodic basis the requirement of the subsections is met.

In Dorila Trottier v MNR, [1968] CTC 324; 68 DTC 5216, the Supreme Court of Canada disallowed monthly payments made by the appellant to his wife, holding that the agreement between the parties was not that the husband should pay his wife a periodic allowance for maintenance and that his agreement to do so should be collaterally secured by a second mortgage. The court held that it was rather a release by her of all her claims for allowance and the giving by her of an irrevocable power of attorney to bar her dower in her husband’s lands in exchange for a single consideration — the giving of a mortgage for $45,000. The appellant apparently had accepted his wife’s claim that she was entitled to half the value of a hotel (worth about $90,000) and agreed to pay her $45,000. There is no evidence in the case at bar of any such agreement between the plaintiff and his wife. There is no evidence, written or oral, that the payments, large or small, were made for other purposes than for maintenance of the spouse.

In Takis P Veliotis v The Queen, [1974] CTC 237; 74 DTC 6190, the plaintiff was ordered by a decree to pay a total of $50,000 to his wife in lieu of alimony. He paid it in two lump sums of $25,000. Pratte, J, then of the Trial Division, rightly held that those payments were not periodical but merely two lump sums.

In J Adrien Lavoie v The Queen, [1979] CTC 48; 79 DTC 5059, the taxpayer by virtue of a divorce decree was required to pay his former spouse the sum of $11,000 which he owed her and a final lump sum of $33,000 by way of alimentary allowance. Addy, J of this Court properly held that that lump sum was indeed a “lump sum’’ and not an allowance deductible under paragraph 60(b) of the Act.

In The Queen v Louis Dor ion, [1981] CTC 136; 81 DTC 5111, the taxpayer was directed by a court order to pay his ex-wife a weekly sum and then a lump sum of $4,000 each year for five years. Decarie, J, then of this Court, held that the lump sums were not deductible mainly because the consideration for the payment of those lump sums was not the need of the recipient but her waiver of benefits under the marriage contract.

In Gilles St Arnaud v MNR, [1982] CTC 2697; 82 DTC 1723, the Court clearly established “that it is not necessary for alimony to continue throughout the recipient’s lifetime in order to be considered alimony.’’

I find in the case at bar that all the payments, including the three larger ones, belong to a series of payments payable on a periodic basis, that those payments being of the nature of alimony or maintenance were for the maintenance of the taxpayer’s wife while she was living apart pursuant to an agreement and a decree. No evidence was adduced by the Crown to show that the three larger payments were not maintenance payments as provided by the agreement and the decree.

Under the circumstances, the appeal is allowed and the three reassessments vacated, all with costs to the plaintiffs.