Citation: 2009 TCC 413
Date: 20090824
Docket: 2004-919(IT)G
BETWEEN:
PATRICIA MCDONOUGH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
DONALD SINCLAIR,
Third Party.
REASONS FOR JUDGMENT
Archambault J.
[1]
Ms. Patricia McDonough is
appealing an income tax reassessment made by the Minister of National Revenue (Minister)
pursuant to paragraph 56(1)(b) of the Income Tax Act (Act).
The Minister treated the transfer of the matrimonial home by Mr. Donald
Sinclair, Ms. McDonough’s former husband, as a payment in satisfaction of taxable
arrears of alimony. Ms. McDonough argues that the residence was
transferred to her as a lump sum payment which did not constitute taxable spousal
support. The respondent having made an application for the joinder of Mr.
Sinclair in Ms. McDonough’s appeal, then Associate Chief Justice Bowman granted
the application in November 2004.
[2]
There is no dispute
among the parties that all the conditions set out in paragraphs 56(1)b)
and 60(b) of the Act have been met, except with regard to the matter of whether
the transfer of the matrimonial home represented spousal support “payable on a
periodic basis”.
Facts
[3]
Ms. McDonough and Mr.
Sinclair were married in December 1976. They separated in October 1997 and
divorce procedures were instituted in January 1998. They had two children who
were aged 11 and 14 at the time. An interim order to pay pre-tax spousal
support of $12,887 per month and child support of $4,605 per month was issued
by Justice Maughan of the Quebec Superior Court on April 29, 1998. From April 1998
to October 16, 2000, Mr. Sinclair accumulated support arrears of $281,256.
[4]
Sometime before the
hearing of the application for divorce on its merits, which began on June 6,
2000, a motion to cancel or review the interim support order was brought before
Justice Capriolo by Mr. Sinclair’s lawyer, Mr. Gerald Stotland. The basis for this
motion was that Justice Maughan had overestimated Mr. Sinclair’s income. Mr.
Sinclair was a stockbroker working for CIBC Wood Gundy and, like most
stockbrokers, was earning commission income which depended upon the number and
the size of stock transactions done for his clients. Justice Maughan assumed a level
of income close to $500,000 while Mr. Sinclair claimed that his future income would
more likely be around $150,000. He therefore, claimed that his earning capacity
did not allow him to fulfil his obligations to pay both the spousal and child
support ordered by Justice Maughan. Part of Mr. Sinclair’s problem was that his
credibility had been questioned by Justice Maughan because of contradictory
evidence presented before him.
[5]
Unfortunately, these divorce
proceedings, like all too many others, became nasty. The two children had to
testify at one point before the Quebec Superior Court. Furthermore, Mr.
Sinclair had, according to Mr. David Schatia, the attorney
representing Ms. McDonough in the divorce proceedings, to a great extent depleted
his assets, including assets that had been gifted to him by his father. This was
due in part to a lavish lifestyle, which included owning several luxury
automobiles, and to a drug addiction. Mr. Schatia was very concerned about the
financial security of his client and both the financial stability and health of
Mr. Sinclair. It should be noted that Ms. McDonough had never worked after
becoming pregnant for the first time and continued to be a caregiver until she
separated from Mr. Sinclair. Mr. Schatia therefore made a proposal with a view of
resolving the dispute. In order to ensure future security for Ms. McDonough,
he suggested that she be given ownership of the matrimonial home situated on Upper Roslyn Avenue in Westmount and that she abandon any claim to arrears of alimony. Mr. Schatia was
able to convince Mr. Stotland of the merit of his proposal.
[6]
Mr. Sinclair’s estimate,
given during his testimony before me, was that this residence was worth between
$600,000 and $700,000. In his reply to the amended notice of appeal, the Minister
assumed that the house was worth over $500,000[1]. Both counsel who acted with respect to the divorce stated
in their testimony that they agreed on the payment of a lump sum within the
meaning of the Divorce Act[2] for
the purpose of affording future financial security to Ms. McDonough. Mr.
Stotland stated that during the negotiations no discussion took place as to the
taxable nature of this lump sum. The lump sum represented, as he put it, the global
solution to the overall problem. No value was put on the arrears, on the family
patrimony or on any claim for a compensatory allowance.
[7]
The agreement occurred
during the course of the hearing before Justice Capriolo and the Partial Consent
to Judgment on Accessory Measures was signed on June 8, 2000 (Exhibit A-5).
This document was drafted by Mr. Stotland, Mr. Sinclair’s counsel. The key
provisions are the following:
B. LUMP SUM
PAYMENT, FAMILY PATRIMONY AND ARREARS OF SUPPORT
1. THAT
Defendant undertakes to transfer to Plaintiff, as a lump sum payment for her
maintenance, all of his rights, title and interest in the immovable
property located at 698 Upper Roslyn in the city of Westmount, district of
Montréal within thirty (30) days from the signing of this consent;
2.
THAT Plaintiff shall retain the sole and absolute ownership of
all the furnishings and movables located in the residence at 698 Upper Roslyn;
. . .
4. THAT
the transfer of ownership of the residence situated at 698 Upper Roslyn is also
effected in lieu of payment of any accumulated arrears of alimentary
allowance and child support.
. . .
7.
THAT Defendant undertakes to obtain Main Levée and
Discharge of the Deed of Collateral Loan with Royal Bank of Canada currently
registered against the property at 698 Upper Roslyn within three (3) months
from the signing of this agreement;
C.
ADDITIONAL LUM SUMP
1.
THAT Defendant undertakes to pay Plaintiff the sum of
twenty-five thousand ($25,000) within 30 days from the signing of
this consent in order to assist Plaintiff with the cost of the repairs and
improvements which are needed in the former common domicile;
D.
PROVISIONS FOR COSTS
2.
THAT Defendant undertakes to pay the attorney for Plaintiff a
provision for costs in the amount of thirty thousand ($30,000) within
thirty (30) days from the signing of this consent;
. . .
G.
SPOUSAL SUPPORT AND CHILD SUPPORT
1.
THAT the parties acknowledges [sic] that Defendants [sic]
gross earnings from his employment in the calendar year 1999 totaled one
hundred and sixty-three thousand four hundred and thirty-five and eighty-eight
cents ($163,435.88);
2.
THAT Defendant accepts the sum of one hundred and
sixty-three thousand four hundred and thirty-five and eighty-eight cents ($163,435.88)
per annum for the purposes of establishing child support and spousal support
in the present instance;
H.
MISCELLANEOUS PROVISIONS
1.
THAT Plaintiff undertakes not to register the present judgment
against any immovables owned by Defendant, save in the event that Defendant is
in arrears of support and has not cured the arrears within fifteen (15) days
from receipt of written notice;
2.
THAT subject to completion of the undertakings set out in
paragraphs B. (1), (2), (6,) (7), C. (1), D (1), E (1) and F.(1) and (2),
the parties hereby irrevocably renounce one against the other to [sic]
any and all claims of any nature arising out of their marriage, with respect to
claims of lump sum, compensatory allowance, further division of family
patrimony or claims in virtue of the marriage contract or arrears
of support resulting from the judgment on provisional measures;
3.
THAT the Wife declares that the prenuptial marriage contract has
been satisfied in its and hereby grants entirety the Husband a complete release
and discharge thereof;
. . .
6. THAT
the parties shall proceed to the partition of their respective Canadian Pension
Plans and Quebec Pension Plans according to law.
[My
emphasis].
[8]
According to Mr. Stotland, Mr. Sinclair
had to agree to this partial settlement, given the credibility issues, in particular,
with respect to his level of income, that had arisen during the course of the
hearing of the motion for interim relief before Justice Maughan. The only major
aspect on which the parties could not agree was the amount of future spousal
support to be paid to Ms. McDonough.
[9]
It was the hope of Mr. Stotland
that Justice Capriolo would take into account the significant asset being
transferred to Ms. McDonough. In his view, Ms. McDonough would not be able
to afford the cost of owning the Westmount residence and its sale was therefore inevitable. He
estimated, in his argument before Justice Capriolo, that she would be able to
obtain at least $500,000 for it, which would represent capital that could
generate $30,000 of income. This argument clearly shows that Mr. Stotland
assumed that the transfer of the Westmount residence as a lump sum to Ms. McDonough did not
constitute taxable support in her hands and that the full amount of the value
of the residence would be available for the purpose of investment. Mr. Stotland
confirmed this in his testimony (see par. 303, 304,583, 584, 592, 593 of the
transcript). He also indicated that he knew that a payment of arrears would be deductible
for the payor (see par. 652 and 665 of the transcript).
[10]
Mr. Schatia testified that he
informed Ms. McDonough that the transfer of the Westmount
residence would not be taxable in her hands. This was confirmed by Ms.
McDonough. On the other hand, both Mr. Stotland and Mr. Sinclair indicated
that, to the best of their recollection, they did not discuss during the negotiations
the tax treatment of the transfer of the Westmount residence. Had Mr. Sinclair required his legal
opinion on the matter, Mr. Stotland would have referred him to a tax
professional. It is interesting to note that Mr. Sinclair did not claim in his
tax return the amount of $314,647 in spousal support that the minister included
in Ms. McDonough’s income. He only claimed an amount of $52,550, which
indicates that Mr. Sinclair did not believe that he was paying his support arrears
when he agreed to transfer the Westmount residence to his wife.
[11]
It should also be noted that, when
Justice Capriolo issued her judgment, the amount of monthly support that Mr. Sinclair
was ordered to pay was reduced to $2,303 for spousal support and $2,683 for
child support, a significant reduction from the $12,887 and $4,605 respectively
ordered by Justice Maughan. It is apparent that she took into account not only the
fact that Ms. McDonough became the owner of the Westmount residence, but also the
acknowledgment by Ms. McDonough that Mr. Sinclair’s gross earnings were
$163,435 for the purpose of establishing child and spousal support, as stated
in clause G.2 of the partial consent agreement.
[12]
When Mr. Stotland was cross-examined
before this court, he testified that clause B.4 should be read within the context
of the whole partial consent agreement. In his view, the words “in lieu of” where
synonymous with “instead of”, that is, Mr. Sinclair did not have to pay the
arrears (see par. 438 to 440 of the transcript). Mr. Stotland also pointed to
clause H.2 of the partial consent agreement, in which Ms. McDonough renounced her
claim to support arrears resulting from the judgment on interim relief.
[13]
Mr. Stotland also indicated that
if he had meant to deal with the payment of the arrears through the transfer of
the Westmount property he would have drafted the agreement differently:
he would have included in the agreement a breakdown of the figures. Given that
no discussion took place with respect to the arrears, he obviously had to
protect his client in agreeing to the transfer of the Westmount property and
make sure that the lump sum that the transfer represented would cover all
potential claims that Ms. McDonough may have had against Mr. Sinclair, including
any claims arising from her marriage to Mr. Sinclair, such as a claim for a compensatory
allowance, a claim with respect to any entitlement resulting from the division
of the family patrimony, claims based on the marriage contract and claim for the
arrears. The only claims that were not covered by the agreement respecting the transfer
of the Westmount residence were those for future spousal and child support and for
division with respect to the Canada Pension Plan or Quebec Pension Plan.
[14]
The Westmount residence was
eventually transferred by deed executed before a notary on September 1, 2000.
In accordance with the partial consent agreement, Mr. Sinclair had secured the cancellation
of the various mortgages affecting the property.
[15]
It is also interesting to note
that the Quebec Ministère du Revenu did not treat the transfer of the Westmount residence
as payment of the arrears. It treated it instead as the cancellation of those
arrears (see Exhibit A-7, page 2).
[16]
As anticipated by Mr. Stotland, Ms.
McDonough, even though she received a lump sum payment of $25,000 for repairs
and improvements to the Westmount residence, disposed of the house, in 2002.
Analysis
[17]
The key provisions of the Act
which are applicable here are paragraph 56(1)(b), subsection 56.1(4) (definition
of “support amount”) and paragraph 60(b), which are reproduced under:
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) the
total of all amounts each of which is an amount determined by the formula
A
– (B + C)
where
A is
the total of all amounts each of which is a support amount received
after 1996 and before the end of the year by the taxpayer from a particular
person where the taxpayer and the particular person were living separate and
apart at the time the amount was received,
B is
the total of all amounts each of which is a child support amount that
became receivable by the taxpayer from the particular person under an agreement
or order on or after its commencement day and before the end of the year in
respect of a period that began on or after its commencement day, and
C is
the total of all amounts each of which is a support amount received after 1996
by the taxpayer from the particular person and included in the taxpayer’s
income for a preceding taxation year.
. . .
56.1(4) “support amount” means 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 children of the
recipient, if the recipient has discretion as to the use of the amount, and
(a)
the recipient is the spouse or common-law partner or former spouse
or common-law partner of the payer, the recipient and payer are living separate
and apart because of the breakdown of their marriage or common-law partnership
and the amount is receivable under an order of a competent tribunal or under a
written agreement; or
. . .
60.
There may be deducted in computing a taxpayer’s income for a taxation
year such of the following amounts as are applicable:
. . .
(b) the
total of all amounts each of which is an amount determined by the formula
A – (B + C)
where
A is the total of all amounts each of which is a support
amount paid after 1996 and before the end of the year by the taxpayer to a
particular person, where the taxpayer and the particular person were living
separate and apart at the time the amount was paid,
B is the total of all amounts each of which is a child
support amount that became payable by the taxpayer to the particular person
under an agreement or order on or after its commencement day and before the end
of the year in respect of a period that began on or after its commencement day,
and
C is the total of all amounts each of which is a support
amount paid by the taxpayer to the particular person after 1996 and deductible
in computing the taxpayer’s income for a preceding taxation year.
[My
emphasis.]
[18]
Basically, the outcome of this
appeal depends on whether the transfer of the Westmount residence can be
considered to have been made in payment of the arrears owed by Mr. Sinclair. All
parties agree that, if such is the case, Ms. McDonough’s appeal should be
dismissed and Mr. Sinclair should be entitled to an equivalent amount as a
deduction for support. In the light of the decision rendered by the Federal
Court of Appeal in The Queen v. Sills, 85 DTC 5096, it is clear that the
payment of arrears, whether made in a lump sum or by instalments, would still
represent the payment of spousal support payable “on a periodic basis”.
[19]
Here, counsel for Ms. McDonough argued
that the transfer of the residence constituted a non-taxable payment. In his
view, either it represents a new obligation, a novation
within the meaning of article 1660 et
seq. of the Quebec Civil Code or, alternatively, it simply represents
another debt and the old debt (the arrears) owing by Mr. Sinclair was
extinguished by Ms. McDonough’s renunciation. Therefore, the transfer could not
be considered as having been made in payment of arrears. He relied on the
decision of the Federal Court of Appeal in McKimmon v. M.N.R., 1989
CarswellNat 406, [1990] 1 C.T.C. 109. In that decision, Hugessen J.A. described
the factors which may properly be taken into account in deciding whether an
amount constitutes a periodic payment made as an allowance for maintenance (which
is deductible) or an instalment of a lump or capital sum (which is not deductible). Counsel
relied especially on the fifth and eighth factors described by Justice Hugessen
at paragraphs 15 and 18. He also cited in support of his position the dicta of
Sharlow J.A. in Peterson v. R., 2005 FCA 223, 2005 DTC 5365, [2005] 3
C.T.C. 277, in particular the following at paragraphs 36 and 46.
36
In my view, a written agreement or court order cannot be interpreted
as obliging a person to pay arrears of child support unless, at the
time the written agreement or court order is made, there is (1) an express
or implied recognition of a pre-existing obligation to pay child support
for a prior period, (2) an express or implied recognition of a complete or
partial breach of that obligation, resulting in arrears of child
support, and (3) an obligation set out in the written agreement or court
order to pay the arrears in whole or in part.
. . .
46 The Judge considered that
allocating the $36,000 over the 36 months from January 1994 to December 1996 is
the “most reasonable and common sense” interpretation of section 6 of the
Minutes of Settlement. I must respectfully disagree. On December 16, 1996, each
of the parties faced the prospect of litigating the 1991 separation agreement,
which presented significant challenges for both of them. The litigation would
have involved numerous issues, some involving issues with potential long term
effects that would have been more significant than arrears of child support.
They might have settled the unpaid child support issues in a way that would
formally recognize the arrears, and provide for their payment or partial
payment. Or, they might have put aside the issue of arrears of child support
and created an entirely new obligation. It is impossible to determine from
the record that either one of those solutions would have been more
reasonable than the other.
[20]
In my view, considering the
evidence as a whole, the transfer of the Westmount residence did not constitute payment of the arrears. First,
the obligation to pay those arrears was contested in a motion to cancel or to
review the interim support order issued by Justice Maughan. The solution
proposed by Ms. McDonough’s lawyer, Mr. Schatia, represented an alternative to
the collection of the arrears. He recommended that Ms. McDonough renounce her
claim for the arrears and accept instead the transfer of the Westmount
residence as lump sum capital to ensure long-term financial security for her.
The Westmount residence represented a value significantly greater
than the arrears amount. It is evident that Mr. Sinclair himself did not
believe that he was paying arrears when he transferred this property. Mr.
Sinclair’s lawyer in his argument before Justice Capriolo also assumed
that the transfer of the Westmount residence did not constitute payment of the arrears. On the contrary,
he assumed that it was a capital payment that would enable Ms. McDonough to
eventually earn investment income from it.
Mr. Sinclair did not claim a deduction for the value of the Westmount
residence which he transferred to his former wife. Finally, the Quebec Ministère
du revenu which was responsible for the collection of alimony, did not treat
the transfer as payment of the arrears. It simply cancelled the arrears. In my
view, the Westmount residence constituted a capital payment made to Ms. McDonough.
[21]
Therefore Ms. McDonough’s appeal should
be allowed with cost, and the reassessment should be referred back to the
Minister of National Revenue for reconsideration and reassessment on the basis
that the transfer in 2000 of the Westmount residence did not constitute payment of
alimony arrears.
Signed at Magog, Quebec, this 24th day of August 2009.
“Pierre Archambault”
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