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Citation: 2008 TCC 473
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Date: 20080901
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Docket: 2007-1580(IT)G
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BETWEEN:
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GREGORY S. GILL,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Campbell J.
[1] The
Appellant, in computing his income for the 2005 taxation year, deducted the sum
of $100,000 U.S. as child support payments pursuant to subsection 60(b) of the Income
Tax Act (the “Act”). The Minister of National Revenue (the
“Minister”) disallowed this deduction. The issue is whether the Appellant can
deduct this lump sum payment of $100,000 U.S.
[2] The
facts are straightforward. The Appellant admitted all of the assumptions of
fact upon which the Minister relied in the Reply to the Notice of Appeal. Those
assumptions of fact at paragraph 7 of the Reply stated:
a) the facts
stated and admitted above;
b) the Appellant
and Louann Gill (“Louann”) were married on October 4, 1975, in Johns Town,
Pennsylvania;
c) the Appellant
and Louann had four children:
i) Joshua,
born August 30, 1976;
ii) Rebecca,
born April 7, 1979;
iii) Louanna,
born May 12, 1981; and
iv) Benjamin,
born September 14, 1983;
d) the Appellant
and Louann were divorced pursuant to the Order dated April 30, 1993;
e) pursuant to
the Order, the Appellant was required, inter alia, to:
i) pay child
support of $826 US per week, allocated at 25% per child, until each child
reached the age of 21 years;
ii) pay, for
the children, 50% of their health related care not covered by insurance until
each child reached the age of 21 years; and
iii) pay the
premiums for the continuation of a medical insurance plan for Louann and the
children;
f) as of August
5, 2005, pursuant to his obligations under the April 30, 1993 Order, the
Appellant was approximately $370,000 in arrears of child support;
g) pursuant to
the Agreement between the Appellant and Louann executed on September 11, 2005,
the parties agreed that:
i) the child
support due and owing for each child was in excess of $44,000 for Joshua,
$72,000 for Rebecca, $94,000 for Louanna, and $119,000 for Benjamin;
ii) the
Appellant also owed Louann for past due medical insurance premiums and
un-reimbursed medical expenses;
iii) the
Appellant would pay Louann the sum of $100,000 US in settlement of the child
support arrears, past due medical insurance premiums and un-reimbursed medical
expenses;
iv) if the
Appellant did not make the $100,000 US payment and sign the Agreement within 30
days, Louann would be entitled to proceed with a Judgment for the full arrears
and past due amounts;
v) the
Agreement reduced the past due child support obligations and arrears to the sum
of $100,000 US;
vi) upon the
payment by the Appellant of the sum of $100,000 US, the Appellant and Louann
each waives, renounces, grants, remises, discharges and releases to the other,
forever and all purposes whatsoever, any and all rights, title and interest in
any claims whatsoever with regard to past, present and future child support
obligations, medical insurance premiums and out‑of‑pocket health
related expenditures with regard to all four children; and
vii) the
Agreement in all respects modified the Order as to arrears;
h) the September
11, 2005 Agreement varied the April 30, 1993 Order;
i) the
Appellant made the Lump Sum Payment pursuant to the September 11, 2005
Agreement, not pursuant to the April 30, 1993 Order;
j) the
Appellant made the Lump Sum Payment in order to be released from his
outstanding obligation for child support arrears, past due medical insurance
premiums and un-reimbursed medical expenses under the Order;
k) as such, the
Lump Sum Payment was in settlement of the amount owing, significantly reducing
the amount the Appellant otherwise owed;
l) the
Agreement changed the child support payable to Louann under the Order; and
m) under the
Agreement, the Appellant was not required to pay an allowance on a periodic
basis but to make a one time lump sum settlement payment.
[3] The
two relevant legal documents are:
(1) a Judgment of
Divorce of the Supreme Court of the State of New York dated April 30, 1993
dissolving the Appellant’s marriage to Louann Gill (the “Order”); and
(2) a Modification and
Resolution of Past Due Child Support arrears executed on September 11, 2005
between the Appellant and Louann Gill (the “Agreement”).
[4] The
relevant portions of the 1993 Order are as follows:
ORDERED, ADJUDGED AND
DECREED,
that the Defendant shall pay the Plaintiff as and for child support until
emancipation as hereinafter set forth EIGHT HUNDRED AND TWENTY-SIX ($826.00)
DOLLARS per week to be allocated at twenty-five percent (25%) per child; said
payments shall be made to the MOTHER at her current residence or whatever
residence she may be at and shall be reduced by twenty five percent (25%) upon
the emancipation of each child; and it is further
ORDERED, ADJUDGED AND
DECREED,
(a) the basic child support obligation in this case is EIGHT HUNDRED AND
TWENTY-SIX ($826.00) DOLLARS per week plus each parent shall pay fifty (50%)
percent of health related care not covered by insurance; …
[5] The
relevant portions of the 2005 Agreement are as follows:
NOW, THEREFORE, in
consideration of the promises and the mutual covenants and undertakings
hereinafter set forth, the Parties agree as follows:
1. That attached hereto as EXHIBIT
A is a copy of a letter dated April 1, 2004, from Yukon Justice from
Deb Hardie, Maintenance Enforcement Officer, which letter is directed to Shayne
Fairman. Said letter provides a copy of the payment history provided by the
Rockland County Support Collection Unit. Said document shows, on the report run
of August 5, 2004, a child support obligation due and owing of approximately
$374,291.84.
2. That attached hereto as EXHIBIT
B is a Yukon Maintenance Enforcement Program Statement of Account with
a date of August 5, 2004, entitled Gill, Louann v. Gill, Gregory File No. 1336,
which showed an amount owed by respondent in the approximate sum of
$369,618.52.
3. That based upon the
approximation of the party, child support would be due and owing for Joshua
Gill in excess of approximately $44,000.00; child support would be due and
owing for Rebecca Gill in excess of approximately $72,000.00; child support
would be due and owing for Louanna Gill in excess of approximately $94,000.00;
and child support would be due and owing for Benjamin Gill in excess of
approximately $119,000.00.
4. That the Parties agreed that
interest for a judgment in the State of New York runs at nine (9%) percent per
year.
5. That sums due and owing by
GREGORY GILL to LOUANN GILL also involve past-due medical insurance premiums
and unreimbursed medical expenses.
6. That the aforesaid sums due and
owing as and for child support, medical insurance premiums and unreimbursed
medical expenses shall be deemed fully paid upon the following: a) the
execution, by all Parties, of four (4) fully executed duplicate original
Agreements, and b) payment by a bank teller’s check made payable to Louann Gill
in the sum of $100,000.00 United States currency, subject to collection; said
Agreements shall be held in escrow and not filed until said payment clears collection.
…
9. The Parties herein agree that,
taking into consideration all the relevant facts and circumstances, including
but not limited to the factors set forth in Section 236, Part B, and
Section 240 of the Domestic Relations Law of the State of New York, and in
view of the other terms, conditions and provisions of this Agreement, it is
fair and equitable to modify the aforesaid past due child support obligations
and arrears so that same is herein modified to be reduced to the present sum of
$100,000.00 United States currency.
…
12. The Parties agree that upon
the prompt payment and collection pursuant to this Agreement of the aforesaid
$100,000.00 in United States currency payable to Louann Gill, that ten (10)
business days thereafter, each of the Parties hereby waives, renounces, grants,
remises, discharges and releases to the other, forever and all purposes
whatsoever, any and all rights, title and interest in any claims whatsoever
under any present or future law or decision of any Court of the State of New
York with regard to past, present and future child support obligations, medical
insurance premiums and out-of-pocket health related expenditures with regard to
the aforesaid four (4) children, Joshua Gill, Rebecca Gill, Louanna Gill
and Benjamin Gill.
13. The Parties herein agree that
this Agreement shall, in all respects, modify any decree of the Judgment of
Divorce as to “arrears,” and shall remain binding upon the Parties.
…
[6] Pursuant
to the terms of the 2005 Agreement, the Appellant, on August 29, 2005, provided
a $100,000 U.S. bank draft to his lawyer in Whitehorse to be retained in escrow
in a New York lawyer’s trust account pending execution
of the Agreement by Louann Gill. On September 11, 2005 Ms. Gill signed
this Agreement.
[7] The
Appellant’s position is that the amount of $100,000 U.S. was paid to settle child support arrears owed pursuant to the 1993 Order
and therefore was paid in accordance with this Order. The Appellant contends
that the $100,000 U.S. amount is a support payment that would
be deductible in his 2005 taxation year.
[8] The
Respondent relied on two grounds. The first argument was that the $100,000 U.S. payment was a “lump sum” payment, made to settle
arrears, pursuant to the 2005 Agreement, not the 1993 Order. Since it was
not payable on a “periodic basis”, it was not a support amount as defined by
subsection 56.1(4) for the purposes of the deduction permitted under
subsection 60(b) of the Act. In the alternative, the Respondent
argued that, if the $100,000 U.S. amount is a support amount, because the 2005
Agreement varied the terms of the 1993 Order, the Agreement created a
“commencement day” pursuant to subsection 56.1(4) of the Act. The
Appellant is therefore not entitled to deduct the payment under subsection
60(b) of the Act.
Analysis
[9] Subsequent to the decision of the Supreme Court
of Canada in Thibaudeau v. Canada,
[1995] S.C.J. No. 42, legislative amendments were enacted in 1997. Prior to
these amendments, under subsection 60(b) and paragraph 56(1)(b) of the Act,
amounts paid pursuant to a court order or written agreement by one parent to
another for the support of the children, after their separation or divorce,
were deductible by the payor and taxable in the hands of the recipient. This is
referred to as the old regime, pre-May 1997. The tax treatment of these amounts
continued after the legislation changed so long as the pre-May 1997 order or
agreement remained unchanged.
[10] Following the 1997 amendments, if an existing agreement or order was
varied to change the support amount payable to the recipient after April 1997, a
new commencement day will be established as the day on which the first payment
of the varied “child support amount” is payable to the recipient. Payments made
before the new commencement day will be deductible/taxable for the
payor/recipient respectively while payments made after the new commencement day
will not be.
[11] The terms “child support amount”, “commencement day” and “support
amount” are defined in subsection 56.1(4):
The definitions in this subsection
apply in this section and section 56:
"child support amount" means any
support amount that is not identified in the agreement or order under which it
is receivable as being solely for the support of a recipient who is a spouse or
common-law partner or former spouse or common‑law partner of the payer or
who is a parent of a child of whom the payer is a legal parent.
"commencement day" at any time of an agreement or
order means
(a) where the agreement
or order is made after April 1997, the day it is made; and
(b) where the agreement
or order is made before May 1997, the day, if any, that is after April
1997 and is the earliest of
(i) the day specified as
the commencement day of the agreement or order by the payer and recipient under
the agreement or order in a joint election filed with the Minister in
prescribed form and manner,
(ii) where the agreement
or order is varied after April 1997 to change the child support amounts payable
to the recipient, the day on which the first payment of the varied amount is
required to be made,
(iii) where a subsequent
agreement or order is made after April 1997, the effect of which is to change
the total child support amounts payable to the recipient by the payer, the
commencement day of the first such subsequent agreement or order, and
(iv) the day specified in
the agreement or order, or any variation thereof, as the commencement day of
the agreement or order for the purposes of this Act.
"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
(b) the payer is a legal
parent of a child of the recipient and the amount is receivable under an order
made by a competent tribunal in accordance with the laws of a province.
[12] Subsection 60(b) provides that:
60(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;
[13] The Respondent’s first argument, that the $100,000 U.S. was not a
support amount payable on a periodic basis, relied on a number of cases
beginning with the Supreme Court decision in M.N.R. v. Armstrong, 56 DTC
1044. At page 1045 J. Kellock, in concluding that an amount paid in full
settlement of future support amounts did not fall within subsection 60(b),
stated that this amount “…was not
an amount payable "pursuant to" or "conformément à" (to
refer to the French text) the decree but rather an amount paid to obtain a
release from the liability thereby imposed”. At page 1045 of that decision, the
following test was provided:
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.
[14] The Respondent also relied on the Federal Court of Appeal decision in The Queen
v. Sills, 85 DTC 5096, which was decided prior to the legislative
amendments in 1997. I believe Sills is decided correctly but it is
inapplicable to the facts before me. The decision in Sills held that if
a taxpayer pays a series of lump sum payments, although in irregular amounts,
which catches him up on the arrears then the amount paid will be deductible
because its nature and character have not changed. However, I believe that if
the taxpayer pays an amount, that is less than the amount of the arrears owed
but that will settle his liability for those arrears then it is not deductible
as the nature of the payment has changed. In the present appeal, the Appellant
paid $100,000 U.S. in lieu of the $370,000 he owed. It was a
modification of the original arrears amount and according to the 2005 Agreement,
and the evidence presented, it was paid to settle the entire outstanding
arrears and release the Appellant from further liability in respect to these
past due arrears. I agree with J. Mogan’s assessment of Sills in
Widmer v. Canada, [1995] T.C.J. No. 1115 where he distinguished
the facts of Sills from those before him. At paragraph 17 he stated:
As I
read the Sills decision,
neither one of those thousand dollar payments was a lump-sum payment but was
more in the nature of a catch-up payment. Also, as counsel for the Respondent
indicated in argument, there was no second order of the Court in the Sills case
as there was in this case.
The facts in Widmer were similar
to those in this appeal. At paragraph 15 J. Mogan states:
When the amount actually received
($15,000) is so different from and so much smaller than the amount owed
($50,590), I cannot regard the amount received as having the same character as
the amount owed. In other words, I cannot regard the $15,000 amount received by
the Appellant as having been received for the maintenance of the three
children. In my opinion, this small amount was paid by David in one lump sum
firstly, to obtain a release from his very real liability to pay the remaining
$35,590, and secondly, to obtain a reduction in the aggregate amount of his
monthly maintenance payments from $795 per month to $600 per month. In summary,
the $15,000 amount was paid to obtain a release from existing obligations and a
reduction in future obligations, and not for the maintenance of the three
children.
[15] In Soldera v. M.N.R., 91 DTC 987, also decided prior
to the 1997 amendments, J. Garon determined that the lump sum payment made
pursuant to a 1986 Order reduced the amounts owing under a 1983 Order. It
reduced the Appellant’s liability as of May 31, 1986 in respect to the arrears
of maintenance, but did not alter the Appellant’s liability respecting the
existing or future maintenance obligations. At page 990, it states:
First of all, in the 1986 Order there is
no provision whereby the Appellant is released in express terms from any
existing or future liability in respect of the maintenance of his children.
Soldera relies on the principles expressed in the decisions in Armstrong and
Sills (page 989 of Soldera). The Respondent counsel distinguished Soldera
from the present appeal because in Soldera there was no provision in the
documentation that released the taxpayer from any existing or future liability
respecting maintenance payments for the children. The Appellant in the present
appeal was released from any liability concerning the past due arrears of
$370,000 once the $100,000 U.S. was paid.
[16] J. Sarchuk in Glazier v. Canada, [2003] T.C.J. No. 133, also distinguished Soldera on the same
basis and his reasons support the assessment in this present appeal, although Glazier
involved spousal support payments and not child support amounts. At paragraph
9, J. Sarchuk made the following comments:
This Appellant's reliance on Soldera is
not well-founded since in that case the lump sum payment represented what
Soldera was required to pay under a previous Order and, more importantly, there
was no extinguishment of present or future obligations. In my view, it is not
possible to consider the lump sum payment in the present case as anything other
than an amount paid to obtain a release from a liability imposed by an Order or
agreement whether such liability be in respect of arrears of maintenance
payments, future payments or both.
[17] Many
of the decisions decided by this Court in respect to this issue could be
distinguished on the basis that the facts involved both arrears and future
support payments (see also Bégin v. Canada, 2005 DTC 949; MacBurnie
v. Canada, 95 DTC 686). What is common to all of the decisions is that
they have been decided under the Informal Procedure and I am not obliged to
follow any of them. I do not have to decide whether there is any difference
between the liability for past due arrears and the liability for future
payments of maintenance as this appeal deals only with past due arrears. I
believe however that the same principles should apply whether the lump sum
payment being made is in respect to the amount owed in the past or in respect
to an amount that will be owed in the future.
[18] In
deciding the first argument relied on by the Respondent, I go back again to the
words of J. Kellock in Armstrong where he stated that if an amount is
payable to obtain a release from the liability otherwise imposed pursuant to a
decree, then the amount is not payable pursuant to that decree. It is simply a
lump sum amount paid to obtain a release in respect to the liability otherwise
imposed by that decree. If, however, the $100,000 U.S.
amount had equalled the total arrears owed at the time of the 2005 Agreement, I
would have allowed the deduction because I do not believe that the nature and
character of the payment would have changed. If the $100,000 U.S.
amount had been paid as a portion of the total arrears owed with specific and
satisfactory arrangements outlined for payment of the balance of any and all
arrears, I would have also been inclined to allow the deduction of the amount
paid. This is in accordance with the Sills decision that “The payments do not change in character merely
because they are not made on time” (page 5098). However, in the
present appeal, the Appellant paid $100,000 U.S. to
obtain a full release from the liability to pay the arrears of $370,000. The
amount of $100,000 U.S.
cannot therefore be considered to be an amount that is payable on a periodic
basis. The character and nature of the payment is altered and consequently it
is not deductible.
[19] Even if I had determined that the $100,000 U.S. payment was a “support amount”, in accordance with the definition in
subsection 56.1(4), with the result that it would also have been a “child
support amount”, the 2005 Agreement clearly varied the 1993 Order, triggering a
“commencement day”, with the $100,000 U.S. amount payable on
or after that date. Therefore even if the facts in this appeal could support a
finding that the amount was a “child support amount” in accordance with the
definitions, it would not be deductible from the Appellant’s income pursuant to
subsection 60(b).
[20] Paragraphs 9, 11 and 13 of the 2005 Agreement all refer to the past
due child support arrears as being “modified” under the 2005 Agreement. It is
clear that in accordance with the terms of the 2005 Agreement the Appellant was
released from his obligations under the 1993 Order to pay $370,000 in arrears. This
so-called modification released the Appellant from his obligation to pay
$370,000, owed under the 1993 Order. The $100,000 U.S. payment became payable upon the execution of the 2005 Agreement.
[21] During cross-examination, the Appellant agreed that this $100,000 U.S. amount was in fact paid pursuant to the 2005
Agreement in settlement of the support arrears (Transcript page 25). This was
also reflected in his agreement on cross-examination with assumption (i) of the
Reply where he acknowledged that the lump sum payment was not made pursuant to
the 1993 Order. The $370,000 in arrears included past due medical
insurance premiums and unreimbursed medical expenses. This arrears amount also
represented the total existing obligation because the Appellant’s future
obligation to pay support had ended prior to 2005 when pursuant to the terms of
the 1993 Order, the youngest child attained the age of 21 years. The obligation
to pay the $100,000 U.S. amount is imposed under the 2005 Agreement.
Because the 2005 Agreement varied the 1993 Order, a commencement day was
established of September 11, 2005, being the date of the 2005 Agreement,
pursuant to subsection 56.1(4) of the Act. The $100,000 U.S. payment became payable on or after the execution of
the 2005 Agreement, or on or after the commencement day established in
this Agreement. The amount is therefore no longer deductible as a support
amount under subsection 60(b) of the Act. This means that the payor of
the amount cannot deduct the payment under subsection 60(b) and the recipient
does not have to include the amount in income under paragraph 56(1)(b).
[22] The definition of “commencement day” clearly applies to the facts in
this appeal. The 1993 Order was varied by the subsequent agreement in 2005 with
the payment of the changed amount becoming payable by the Appellant in
accordance with the commencement day of the 2005 Agreement. The legislative
changes in April 1997 and the caselaw since those changes are
straightforward as they relate to the facts before me. Unfortunately, even if
this $100,000 U.S. payment could be considered a “child
support amount” it would not be deductible by the Appellant because it was paid
after this commencement day was triggered by the 2005 Agreement. J.
Bowman’s comments in Kovarik v. Canada, [2001] 2 C.T.C. 2503, at paragraph 15, are relevant:
… definition of "commencement
day" in subsection 56.1(4) is not difficult to understand. … I do not see
how the plain words of the definition can be avoided, however sophisticated the
rules of statutory interpretation one may choose to use may be.
[23] The Appellant relied on the recent decision of
J. Hershfield in Stephenson v. Canada, 2007 DTC 1608. In that case
the taxpayer had accumulated arrears of spousal support in the amount of
$25,000 pursuant to an Order in 1998. By a consent order, the taxpayer’s
obligation to pay spousal support was reduced to $7,500, to be paid in two
tax-deductible amounts in 2003. J. Hershfield found that the $7,500 amount was
a deductible support amount. Whether this decision is rightly or wrongly
decided, there are several important distinguishing factors between the Stephenson
decision and the present appeal. Stephenson involves spousal support and
not child support amounts. There is no commencement day which is critical in
this appeal. Because it is decided under the Informal Procedure, I am not
required to follow it in any event.
[24] Although I have some sympathy for the
Appellant’s plight, he is the author of his own misfortune. If he had complied
with the 1993 Order and remitted his support amounts for his children on time
in accordance with that Order, he would have had no need to bring this appeal
because he could deduct the weekly support amount pursuant to the 1993 Order.
[25] The appeal is dismissed with costs.
Signed at Charlottetown,
Prince Edward Island, this 1st day of September 2008.
Campbell J.
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