The Queen v. Sills, 85 DTC 5096, [1985] 1 CTC 49 (FCA)

Heald, J:—This is an appeal from a decision of the Trial Division which dismissed the appellant’s (plaintiffs) appeal from a decision of the Tax Review Board with respect to the respondent’s 1976 taxation year. The sole issue in the appeal is whether the amount of $3,000 received by the respondent in the 1976 taxation year from her former husband, Paul Douglas LaBrash, was a payment of an allowance payable on a periodic basis for the maintenance of the respondent, the children of the marriage, or both the respondent and the children of the marriage, and whether it was made pursuant to the written separation agreement entered into between the respondent and her former husband within the meaning of paragraph 56(l)(b) of the Income Tax Act, SC 1970-71-72, c-63 as amended.

The relevant facts are not in issue since a statement of agreed facts was filed in the Trial Division. The respondent was married to Paul Douglas LaBrash in 1967. A separation agreement was entered into by the parties on November 1, 1974. At that time there were two dependent children of the marriage. Paragraph 6 provided for payment of the sum of $6,200 and the wife acknowledged receipt of that sum at the time the agreement was signed. Paragraph 7 required LaBrash to pay to the respondent on December 1, 1974, and on the 1st day of each and every month following, during the joint lives of both of them: (a) the sum of One Hundred Dollars for her maintenance until she remarries or enters into a living arrangement with a man other than her husband; and (b) a further sum of One Hundred Dollars for each dependent child.

In July 1975, the respondent entered into a living arrangement with another man, advising LaBrash of this fact. The respondent was divorced from LaBrash in June of 1977, at which time the separation agreement was incorporated into the decree nisi of divorce. Accordingly, the parties agree that under the terms of the agreement, the amount payable by LaBrash to the respondent was $300 per month until July of 1975 and thereafter the sum of $200 per month for the maintenance of the two dependent children. Although LaBrash paid certain sums of money to the respondent in 1975 on the basis of the separation agreement, arrears in the sum of $2,000 had accumulated by the end of 1975, The respondent received the following payments from LaBrash in the 1976 taxation year:

At the time such payments were received by the respondent in 1976, the arrears owing under the separation agreement always exceeded the moneys received. At the end of 1976, the arrears outstanding amounted to $1,400. Throughout 1975 and 1976 the respondent attempted to collect the arrears, either directly or through her solicitor. Prior to the divorce proceedings in 1977 all of the arrears due under the separation agreement were paid up by LaBrash.

In filing her return for the 1976 taxation year, the respondent did not include the sum of $3,000 referred to supra, and received from LaBrash, in her income for that year. However, LaBrash claimed a deduction of $3,000 from his income for the 1976 taxation year with regard to alimony payments made by him to the respondent. The Minister reassessed the respondent, including an amount of $2,700 in the respondent’s income for the 1976 taxation year.* [1] The Tax Review Board allowed the respondent’s appeal and the Trial Division confirmed that decision.

Paragraph 56(l)(b) reads:

Sec 56. Amounts to be included in income for year

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

(b) Alimony — 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;

The Tax Review Board concluded that:

. . . amounts to be included in income by virtue of section 56(1 )(b) of the Act must be received exactly according to the terms in the relevant order or agreement, and such terms must include details of the regularized pattern of payment agreed upon.

The learned Trial Judge, after reciting paragraph 56(l)(b) and paragraph 7 of the separation agreement, observed:

Since all other conditions of section 56(l)(b) are obviously present, the only issue is whether the payments made in the amounts and at the times indicated can be said to have been made pursuant to the separation agreement. Obviously, had the payments been made precisely in the amounts and at the times specified in the agreement, they would fall squarely within section 56(1 )(b). Jurisprudence makes it equally clear that in situations where the obligation springs from such an agreement but is met in one lump sum payment in full settlement of obligations and all arrears, the payment is not considered to have been made “pursuant to the agreement’’ and is therefore not covered by section 56(l)(b). (Dr John J Armstrong v Minister of National Revenue, 52 DTC 415, 54 DTC 1105 and 56 DTC 1044.)

In the present case, the application to pay is imposed by an agreement which is caught by section 56(1)(b), but the payments are in lump sums which are not referable to the terms of the agreement and are not made as a final settlement. The Court must therefore determine, as a question of fact, whether the payments bear sufficiently close relationship with the terms of the agreement to warrant the finding that they are made pursuant to the agreement.

Returning then to the facts of the present case, the 1974 agreement calls for payments of $300.00 per month while the situation remains as it was at the time of the agreement. The obligation to make the 1976 payments obviously springs from the 1974 agreement, but there is otherwise no relationship whatever between the terms of the agreement and these payments which were made at random times during 1976, and in varying amounts. I therefore confirm the disposition made in this matter by the Tax Review Board.

I have no hesitation in concluding that both the Tax Review Board and the learned Trial Judge were in error in their interpretation and application of the provisions of paragraph 56(1 )(b) to the facts in this case. An analysis of the subsection reveals the following requirements (when applied to these facts):

(A) the amounts received by the taxpayer in the year under review must be received pursuant to the terms of the separation agreement;

(B) they must be received as alimony or other allowance payable on a periodic basis;

(C) they must be payable for the maintenance of the recipient thereof, children of the marriage or both the recipient and the children; and

(D) the recipient must be living apart from and be 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.

I am satisfied that all of the requirements of the subsection, as enumerated supra, were met on the facts of this case. Dealing now with the four essential requirements set forth supra:

Requirements (A) and (B)

The Shorter Oxford Dictionary defines “pursuant”, inter alia, as “in accordance with”. The Fifth Edition of Black's Law Dictionary defines “pursuant”, inter alia, as “to execute or carry out in accordance with or by reason of something.” It also defines “pursuant to” inter alia, as follows: “pursuant to” means “in the course of carrying out; in conformance to or agreement with; according to”. 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 was payable 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.

Requirements (C) and (D)

There can be no argument that the moneys paid in 1976 were, under the agreement, payable partially in satisfaction of her alimony claim prior to July of 1975 and partially in satisfaction of the claim for maintenance of the dependent children. Likewise, it is agreed that the respondent was, in 1976, living apart from her spouse under the terms of a separation agreement which agreement required her spouse to make the payments at the time she received them and throughout the remainder of 1976. However, respondent’s counsel relies on the Armstrong case, supra, a decision of the Supreme Court of Canada ([1956] CTC 93; 56 DTC 1044). She cites from the reasons of the Chief Justice at 94, [1045] where he stated the proper test for the application of the predecessor section to paragraph 56(l)(b) to be as follows:

The test is whether it was paid in pursuance of a decree, order or judgment and not whether it was paid by reason of a legal obligation imposed or undertaken. There was no obligation on the part of the respondent to pay, under the decree, a lump sum in lieu of the monthly sums directed thereby to be paid.

(Emphasis added)

There is a clear distinction between the facts in Armstrong and those in the present case. In Armstrong the respondent was divorced by his wife in 1948. The divorce decree provided for monthly $100 payments to the wife for maintenance of their daughter until she became sixteen. The payments so ordered were made until the summer of 1950 when the wife accepted a lump sum settlement of $4,000 in full settlement of all amounts payable in the future. Thus clearly the $4,000 was not paid pursuant to the divorce decree but in lieu thereof. However, in the case at bar, all moneys were paid to carry out the terms of the separation agreement. The consequence and result of these payments was not to finally release the husband from his liabilities to his wife and children under the separation agreement as was the case in Armstrong and in Trottier,* [2] another decision of the Supreme Court of Canada where the principle enunciated in Armstrong was followed.

Counsel for the respondent also submitted that since the payments received in 1976 were on account of the arrears owing, they could not be said to be an “allowance . . . for the maintenance of . . .”, the respondent and her children as referred to in paragraph 56(1 )(b) and therefore they should be treated as payments reimbursing the respondent for the maintenance of herself and the children for the earlier period when the payments were due. One of the problems with this submission is that there is no evidence on this record of any reimbursement for actual expenses. Furthermore, it seems clear that the kind of allowance contemplated by paragraph 56(l)(b) would include any and all amounts paid under the agreement whenever they are paid and received since the 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.f [3] Accordingly I see no merit in this submission.

For all of the above reasons I would allow the appeal, set aside the decision of the Trial Division and restore the reassessment of the Minister of National Revenue which added the amount of $2,700 to the respondent’s income for the 1976 taxation year. Since counsel for the appellant indicated that the Minister has agreed to pay all costs, both here and below as contemplated by paragraph 178(2)(a), of the Income Tax Act, I would order, pursuant to paragraph 178(2)(a), that the Minister pay all reasonable and proper costs of the respondent in connection with this appeal.