Citation: 2007TCC325
Date: 20070608
Docket: 2006-2088(IT)I
BETWEEN:
MIROSLAV POUZAR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
O'Connor, J.
[1] The issue in these
appeals is whether in each of the 2002, 2003 and 2004 taxation years the
Appellant is entitled to a deduction of $12,000 as spousal support payments.
[2] By a Decree
Absolute of the Supreme Court of Ontario signed December 15, 1978,
the Appellant was divorced from Magda Pouzar (“Magda”). This Decree contained
several property provisions including an Order that the Appellant pay Magda
$450 per month commencing November 3, 1978.
[3] By an Order of the
Ontario Superior Court of Justice dated July 26, 2000 (“Order”), the following,
inter alia, was provided:
1. THIS COURT
ORDERS that effective August 1, 2000 and on the first day of each subsequent
month, the Respondent, MIREK POUZAR, shall pay to the Applicant, MAGDA POUZAR
the sum of $1,000.00 per month as spousal support until the Applicant’s death.
…
3. THIS COURT
ORDERS that the Petitioner, MAGDA POUZAR, shall provide the Respondent,
MIREK POUZAR, with a receipt for all payments for each calendar year by
December 31 of that year.
4. THIS COURT
ORDERS that the Respondent, MIREK POUZAR, shall maintain a life annuity
with Sun Life Assurance Company of Canada with the
Petitioner, MAGDA POUZAR, as annuitant and payee. Effective October 1, 2000 and
on the first day of each subsequent month, the Respondent shall satisfy his
support obligation under paragraph 1 of this Order through the life annuity. If
the Petitioner predeceases the Respondent, the residual of the annuity shall
revert to the Respondent.
5. THIS COURT
ORDERS that the Respondent, MIREK POUZAR, shall maintain the annuity in
good standing and shall provide proof of the annuity to the Petitioner, MAGDA
POUZAR, on an annual basis each October 1.
[4] Paragraph 7 of the Reply
to the Notice of Appeal refers to the above provisions of the Order and
sub-paragraphs (a), (g) and (h) of paragraph 7 provide as follows:
(a) at all material
times, the Appellant and his former spouse, namely Magda Pouzar, (the “Former
Spouse”) were living separate and apart from one another;
(g) on or about
August 14, 2000, the Appellant paid $129,463.00 to purchase the annuity in the
name of the Former Spouse;
(h) the amount of
$129,463.00 referred to in subparagraph 7(g) herein was paid in a single
lump sum by means of cheque transferred from Norek Investments & Management
Inc. to Sun Life Assurance Co.;
[5] The Reply states
further in paragraph 10 as follows:
10. … the Appellant is not entitled
to deduct the amount of $12,000.00 yearly in computing his income for the 2002,
2003 and 2004 taxation years, as the said amounts were not an allowance paid on
a periodic basis for the support of the Former Spouse within the meaning of
paragraph 60(b) of the Act but rather was part of a single lump sum
payment that was not a payment with respect of amounts paid periodically.
There appears to be no doubt that
the amount paid to Sun Life by Norek’s cheque represented a payment by the
Appellant to Sun Life for the purchase of the annuity in question. The Crown
has made no submission to that effect, no evidence was led and none of the
Reply, the reassessment nor any correspondence related to the reassessment
addressed that concern. Moreover, the Reply, in paragraph 7(g), acknowledges
that the Appellant paid the amount. I conclude therefore that the said payment
of $129,463 is to be treated as having been made by the Appellant.
The Applicable Provisions of the Income
Tax Act:
[6] The following
summarizes the applicable provisions of the Income Tax Act:
Paragraph 60(b) provides the formula for determining
the amount a payer may deduct for support amounts paid in a taxation year and
subsection 56.1(4) defines “support amount”.
In general, as applicable to the facts in this appeal,
the payer may deduct a support amount paid to his divorced wife if:
·
the amount is payable to the recipient;
·
the amount is payable as an allowance for the
maintenance of the recipient, …
·
the amount is payable on a periodic basis;
·
the recipient has discretion as to the use of
the amount; and
·
where the recipient is the payer's former
spouse, the amount is payable under an order of a competent tribunal or under a
written agreement and the payer and recipient are living separate and apart
because of the breakdown of their marriage …
[7] The position of the
Appellant is essentially set forth in the Notice of Objection dated July 25,
2001 and the Addendum to Notice of Objection dated November 19, 2005. The main
thrust of these documents is that the Appellant was making the $1,000 monthly
payments pursuant to the Order. With respect to the involvement of Sun Life,
the Notice of Objection states:
5.) As ordered by the
Court … I have to guarantee the support payments through Life Annuity contract
with Sun Life Financial, in case my death precedes my ex-spouse Magda Pouzar. I
had to buy this annuity which pays $1000.00 on the first of each and every
month as long as she lives. …
The Addendum to the Notice of Objection states as
follows:
…
4) As far as the method of payment for spousal support is
concerned, a mutual agreement was reached by the lawyers and respondents in
this matter. The main concern, because of my age, was a guaranteed lifetime
payment to Magda Pouzar. The court could not order my heirs or estate to
maintain the support payments as this matter had nothing to do with either the
estate or heirs. I was not the owner of any life insurance that could have been
paid upon my death, and because of less than desirable health, life insurance
could not be purchased. Furthermore, if Magda would die for instance three
months after my death, a windfall from life insurance would have fallen to her
estate which was not in the spirit of the court order. Therefore, the annuity
with Sunlife was the only viable method to ensure lifetime spousal support
payments for Magda Pouzar. The argument by CRA is that the payments are
not coming directly from the taxpayer, but in fact, I prepaid the support in
the amount of $129,463 in 2000 using Sunlife as my conduit to deposit $1000
monthly into Magda Pouzar’s bank account as per the court order. Furthermore,
as per Ms. Gainer’s letter of September 21, 2005, she states “In order for
amounts to be considered support amounts one of the requirements is that the
$1000.00 payments received by Ms. Pouzar must be paid by you. However, in this
case, Mrs. Pouzar received the monthly amount from Sun Life”, however, as per
the enclosed letter from the Ministry of the Attorney General, Family
Responsibility Office, apparently a third party is permitted to be the conduit
so how does CRA explain this misstatement. It would also therefore appear that
according to Ms. Gainer, any persons using this method would have no tax
deduction. Ms. Gainer also states in her letter “It appears that you made a
lump sum payment of $129,464 to purchase the annuity. Your former spouse did
not have discretion over the money as it was paid directly to the insurance
company” Why should she have discretion over the lump sum? She certainly has
discretion over the monthly amount of $1000 which is what the court order
dictates.
5) The court and lawyers agreed that Magda Pouzar should own
the contract and also be the annuitant so that there was no opportunity except
for her opportunity to redirect the payments. In other words, if I owned the
annuity and was passed onto the estate on my own death, my estate would have
been in a position to redirect such funds.
6) I am therefore asking CRA to cancel the reassessment and
consider Sun Life monthly payments as my spousal support payments are ordered
by the court.
[8] The position of the
Crown essentially is that, to the extent that the $129,463 might be an issue,
it is a lump sum payment and does not qualify as a periodic payment.
[9] As to the $1,000
monthly payment, the further position of the Crown is that the payment is not
being made by the Appellant to his former wife but is rather being made through
the annuity by Sun Life or since, as will be discussed later, the apparent
owner of the annuity contract was Magda, she was in effect paying herself with
the result that the Appellant is not the payer and therefore not entitled to
the deduction.
[10] The Crown has also
submitted considerable authority with respect to the concepts of a prescribed
annuity and insurance policies and the taxation thereof. I do not think these
submissions are relevant in this appeal. The only question is whether the
$12,000 annual payments in the three years in question are deductible. How
annuities or life insurance are taxed generally is not the issue here. For the
same reason I do not think it relevant that any residual value left in the
annuity after the death of Magda reverts to the Appellant. Once again, the
issue is whether the $12,000 annual amounts in question paid to Magda during the
three years in question are deductible to the Appellant.
[11] I have been referred
to several authorities, including McKimmon v. Canada (Minister of National
Revenue – M.N.R.) (C.A.), [1990] 1 F.C. 600 and Ostrowski v. R., 2002 FCA
299 and certain other authorities. These cases have some bearing on the
question at issue but the facts and nature of the cases are considerably
different and do not specifically address the problem that arises in this appeal.
Notwithstanding those differences, the following comments of Sharlow, J.A., in Ostrowski
are helpful:
22 The Tax Court Judge concluded that
this case was similar to McKimmon. He said this at paragraphs 11 and 12
of his reasons:
[11] The Appellant's situation is similar
to that of the husband's in McKimmon. One lump sum was transferred
outright to his wife's lawyer from the house proceeds; it was very substantial;
it was paid by Court Order; it was from capital and the amount in dispute was
not respecting arrears; it was a one time payment; the wife could dispose of it
as she wished; and it released the Appellant from future payments to the total
of the lump sum.
[12] As in McKimmon, most of the
indications point strongly to the payment being a lump sum settlement and
virtually none point the other way.
23 I am unable to agree with this
analysis. In my view, despite the similarities noted by the Tax Court Judge,
the facts in McKimmon are quite different from the facts in this case.
24 The fundamental distinction, which
the Tax Court Judge did not recognize, is that in McKimmon, the
foundation of the payment obligation was the consent decree, which established
simultaneously the payment obligation and the terms and conditions under which
it would be paid. Thus, the nature of the payment and its existence depended
upon the same decree. In this case, the foundation of the payment obligation
was the O'Connell order, which clearly was an order for the payment of
maintenance on a monthly basis The O'Connell order was never amended. It
remained in force throughout all of the subsequent proceedings, until the
maintenance obligation was finally terminated by the Melvin order as of
September 30, 1997.
25 All of the orders made after the
O'Connell order were intended to enforce the maintenance obligation imposed by
the O'Connell order because Mr. Ostrowski had proven to be unreliable in
meeting that obligation. The Clarke order and the Drake order in particular
dictated a practical solution to the problem of unreliability. That solution
was made possible because both judges had it within their power to dictate the
disposition of certain funds then being held in court. Does the character of
Mr. Ostrowski's maintenance obligation change merely because, by virtue of the
Drake order and the Clarke order, the monthly maintenance was required to be
paid in advance? I do not think so.
26 The Court was referred to only one
reported case dealing with an advance payment of maintenance: Sanders v. R.
(2001), 22 R.F.L. (5th) 207, [2001] T.C.J. No. 704 (T.C.C. [Informal
Procedure]). In that case a judge of the Ontario Court of Justice, General
Division had rendered an order on October 8, 1996 providing for the sale of the
matrimonial home. The order included this provision:
4. THIS COURT ORDERS THAT, in the
meantime, a lump sum payment on account of support shall be made by the Husband
to the Wife in the amount of $3,500.00 within two weeks hereof to cover the
period October 8, 1996 to December 9, 1996.
27 On December 20, 1996, a further
order was made for child and spousal support of $1,750 per month, effective
December 9, 1996. Judge Bonner held that the $3,500 referred to in the October
8, 1996 order was paid as an allowance payable on a periodic basis,
notwithstanding the use of the term "lump sum", which he said was
neither conclusive nor an accurate description of the nature of the payment.
The Crown has not sought judicial review of this decision, and in my view it is
based on sound reasoning.
28 As this Court pointed out in R.
v. Sills (1984), [1985] 2 F.C. 200, [1985] 1 C.T.C. 49, 85 D.T.C. 5096
(Fed. C.A.), maintenance that
is payable on a periodic basis does not cease to be payable on a periodic basis
merely because it is paid in arrears. Similarly, where there is an existing
obligation to pay maintenance on a periodic basis, and a judge is satisfied on
the evidence that there is a serious risk of non-payment in the future, an
order that accelerates the payment obligation for a stipulated period does not
by itself change the nature of the underlying obligation.
29 There are situations where a single
payment represents a commutation or replacement of all future maintenance
obligations, as in Minister of National Revenue v. Armstrong, [1956]
S.C.R. 446, [1956] C.T.C. 93, 56 D.T.C. 1044, 3 D.L.R. (2d) 140 (S.C.C.) or Trottier
v. Minister of National Revenue, [1968] S.C.R. 728, [1968] C.T.C. 324, 68
D.T.C. 5216, 69 D.L.R. (2d) 132 (S.C.C.). Such a payment is not within the
scope of paragraph 60(b) because it is not payable on a periodic basis.
However, this case is quite different from Armstrong and Trottier.
Here, Mr. Ostrowski's maintenance obligations were established in 1994 at
$3,700 per month and never changed during the period covered by the prepayment.
Justice Drake's order recognized that obligation without altering it, and
required twenty-four such payments to be made in advance while ready cash was
at hand. Similarly, the payment required by the Clarke order was simply an
advance payment of maintenance for three months.
30 I conclude, therefore, that the
$88,800 payment referred to in paragraph (3) of the Drake order and the $11,100
payment referred to in the Clarke order are deductible as maintenance payable
on a periodic basis. It remains only to consider how much the deduction should
be in each of the two years under appeal. Paragraph 60(b) permits a deduction
in any year only for amounts paid in that year.
[12] I believe the
reasoning in Ostrowski can be applied in this appeal. Paragraph 1 of the
Order orders the Appellant to make periodic support payments. That is the
underlying obligation. The securing of that obligation by way of the annuity
does not change the nature of that underlying obligation. Paragraph 4 of the
Order is very clear. It states: “the Respondent shall satisfy his support
obligation under paragraph 1 of this Order through the life annuity.”
[13] There was
considerable discussion in this appeal as to who was the “owner” of the
annuity; was it Magda who appears as “owner” on the actual annuity contract or
was it the Appellant who applied for the annuity and paid for it. The Crown
argues it was Magda and therefore she was merely paying herself. This is
totally inconsistent with the fact that the Appellant put up the money to
purchase the annuity. In any event, it became clear that Magda’s rights to
receive the annuity could not be altered without her consent. Her rights were
vested and she cannot be considered as paying herself.
[14] In my opinion, the
Appellant has conformed with the Order with respect to the payment of the $1,000
per month ($12,000 per year). Paragraph 1 of the Order orders the Appellant to
pay to Magda $1,000 per month as spousal support. That is clearly an obligation
on the Appellant to make a periodic payment for maintenance to Magda. The
subsequent paragraph 4 simply provides a method to ensure the amounts are paid,
thus the annuity. That does not change the underlying obligation provided for
in paragraph 1 and the method of conduiting or securing that payment by the
purchase of the annuity. Consequently, in my opinion, for all of the above the
reasons, the Appellant is entitled to the deductions claimed by him.
[15] Therefore, the
appeal is allowed with costs, if any, to the Appellant.
Signed
at Ottawa, Canada this 8th day of June, 2007.
"T. O'Connor"
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