Citation: 2007TCC217
Date: 20070509
Docket: 2003-2467(IT)G
BETWEEN:
PETER G. MILLER,
Appellant,
and
HER MAJESTY THE QUEEN,
Counsel for the Appellant: Franklyn Cappell
Counsel for the
Respondent: Andrea Jackett
REASONS FOR JUDGMENT
(Delivered
orally from the bench on
November 23, 2006, in Toronto, Ontario.)
McArthur J.
[1] This is an appeal from an assessment
wherein the Minister of National Revenue disallowed a deduction by the
Appellant in the 2000 taxation year for support amounts of $59,500 pursuant to
subsection 56.1(4) and paragraph 60(b) of the Income Tax Act. The
Appellant and his former wife Karen had been married almost 30 years, when they
separated in May 1999. The negotiations leading to a separation agreement and
subsequent financial arrangements have been unusually cordial.
[2] The Appellant has been a successful
businessman primarily through owning and operating McDonald's Restaurant
franchises, and dealing in real estate. The parties signed a separation
agreement in April 2001, when their children were 23 and 25. In addition to the
payment in question, the Appellant had agreed to pay Karen support of $27,000
annually, subject to conditions that are of no concern in this judgment. The
parties agreed that the net family assets totalled $5,642,000, and they each
were entitled to equalize their respective net worths at $2,821,000.
[3] The major assets were the McDonald's Restaurant
franchises, land acreages in Aurora, Ontario, valued at
$1.6 million, and their principal place of residence valued at 1.2 million. The
following paragraph of the Separation Agreement is relevant, but in particular
paragraph 16, which provide:
Equalization:
15(A) The parties recognize and acknowledge that
they are each entitled to equalize their respective net worths at $2,821,000.
(B) The provisions of this Agreement are
intended to ensure that the equalization takes place in no more than ten (10) years
and the payments by the Husband to the Wife under the provisions of this Agreement
and the assets owned by the Wife and the payments already made by the Husband
to the Wife as set forth in this Agreement are intended to provide the Wife
with the equalization of the said $2,821,000 in no more than 10 years.
…
Additional Support
16. The Husband will pay to the Wife as support
6% per annum of the outstanding balance owed to the Wife for the equalization
payment set forth under the immediately preceding paragraph to a maximum of ONE
HUNDRED and NINETEEN THOUSAND ONE HUNDRED DOLLARS ($119,100) per year. This
support payment is not subject to termination until the equalization payment is
paid in full. The said payments are to be paid monthly and the outstanding
balance shall be determined annually on the 1st day of July.
The following
paragraphs are also relevant:
Tax
Deductibility
18. The Husband and Wife acknowledge and agree
that all support payments under paragraphs 6 and 16 hereof shall be deductible
from the Husband's taxable income and shall be included in the Wife's taxable
income.
Equalization Payment Schedule
20(B) The Husband and Wife acknowledge that the
approximate balance payable by the Husband to the Wife for the equalization
payments required under this Agreement at June 30th, 2005 should be $800,000. On
December 31st, 2005, the Husband shall pay to the Wife a principal payment
equal to 50% of the said outstanding balance. Thereafter, the Husband shall pay
to the Wife interest only on a monthly basis on the balance of the principal
outstanding and the principal outstanding shall be fully paid on or before June
30th, 2010, or on the closing of the sale of the business of P.G. Miller
Enterprises Limited if the said sale closes before June 30th, 2010.
In effect, the Appellant
retained the three major assets, and undertook to ensure that Karen received
her $2.8 million, over a period of 10 years.
[4] As stated in paragraph 16, he agreed to pay
her as support, 6% per annum of the outstanding balance of the equalization
amount, up to a maximum of $119,100 per year. It is the interpretation of
paragraph 16 that is in issue, along with the amount $59,500, being one-half of
the $119,100 to have been paid annually, for the period July 1 to December 30,
2000. This amount was calculated as 6% of the outstanding equalization amount
owing by the Appellant to Karen, after crediting her with payments and assets
of approximately $800,000.
[5] The amount of $119,100 and $27,000 was
agreed to, because Karen had calculated that she needed $150,000 in support,
before taxes, to maintain her standard of living. Counsel for the Appellant
described the situation as follows:
They were wealthy. Peter was a McDonald's franchisee. He had
multiple locations up and down Yonge Street for the most part north of Toronto. He had the investment land and they had a big house on an estate
lot in Richmond Hill. They
lived very well and they travelled, they had an airplane and they entertained
and so on. They had lived in that scale for many years.
[6] The Respondent’s position is that the
$119,100 was interest on the $1.9 million equalization balance, at a rate of 6%,
and if it is interest, it cannot be deducted by the Appellant. The Appellant,
together with witnesses, Tracy Warne, Karen’s solicitor, and accountant Perry Foster,
all testified that the amount was a support payment which would be deductible
by the Appellant. No one testified to the contrary.
[7] The Appellant and his former wife had
retained their long-time accountant, Mr. Foster, to assist in arriving at
the equalization amount and the manner it would be paid. Together they sought
the services of solicitor, Mr. Warne, to structure the separation agreement, in
accordance with the terms they mutually agreed upon. They both testified that
the amount was a support payment reducing over the years with the reducing
equalization balance.
[8] Mr. Foster testified that Peter and
Karen had met with him on several occasions during the negotiations. Karen set
her annual support requirements at approximately $150,000, and it was this
amount that the 6% of the debt intended to achieve. The Appellant's gross
annual income was approximately $600,000, and Karen's income was insignificant,
although she did commence a business, I believe, after the separation,
arranging social functions. She is an able person and I have no doubt she would
be successful.
[9] Mr. Warne testified that he acted for
both Peter and Karen because there was none of the usual acrimony between them,
and they had worked out the basics for a separation agreement without him. He
had each party obtain independent legal advice, each with a separate
highly-regarded matrimonial lawyer. I draw an inference from this that these
two lawyers, Mr. Dasilva and Mr. Straightman, both concluded that the
payment was a support amount to be included in Karen's taxable income, and
deductible by Peter.
[10] The Appellant's solicitor referred to Simpson
(Inspector of Taxes) v. The Executors of Bonner Maurice et al, an English
decision. Briefly, the facts are that a German bank held money through World
War I and for several years after for an English citizen. It paid his estate
the amount, plus what it described as interest. The High Court of Justice found
the additional amount was not interest, but compensation or damages. Counsel
for the Appellant:
We have much the same thing here except, of course, that in our case
the support payments are not called interest. They're called support payments. Just
because they are computed by a percentage amount referring to a larger sum,
that doesn't turn it into interest. Obviously, it's exactly what it was called,
support, nothing else.
…
The position which my learned friend will submit to you is bizarre. It
is bizarre to think that Peter Miller did not pay any support to Karen Miller,
not only is it bizarre, not only is it unexpected, not only is it absurd, not
only is it counter‑productive to both of them, not only is it contrary to
the three lawyers and the two accountants who looked at it, but it makes no
sense.
[11] Counsel the Respondent agrees that the sole issue is the interpretation of paragraph 16, and states
that tax treatment is determined by the Act and not by a separation
agreement. She added that there is no need for extrinsic evidence to interpret
paragraph 16 because it is clear the payment was 6% interest charged on the
outstanding principal amount or equalization amount. In P. Syrier v. M.N.R.
Bonner J. quoted from Huston et al. v. Minister where
at page 420, Thurlow J. said:
The name attached by the parties to payments, the way the amounts
are calculated, and what they represent may often be of great importance in
resolving such an issue. But the issue is one of substance and depends not on these features alone but on
the other features of the case as well. For just as a sum which is in truth
interest, though called by some other name, will fall within the meaning of the
section, so a sum which in truth is not interest, in my opinion, will not be
'received as interest' within the meaning of the section, even though it may
have the name and some of the other attributes of interest.
Analysis
[12] The support amount in section 56.1(4) of the
Act is defined in part:
"Support amount" means an amount payable or receivable as
an allowance on a periodic basis for the maintenance of the recipient, … if the
recipient has discretion as to the use of the amount, and
(a) the recipient is the spouse …
[13] I find that the present facts meet the five
criteria in that short definition. There was an amount payable being a total of
$147,000 as an allowance. The definition of allowance according to the Canadian
Oxford Dictionary is an amount given to a person regularly for a stated
purpose, and that is the situation here. It was to be paid monthly pursuant to
paragraph 16, and it was no doubt for Karen's maintenance. She had the discretion
as to its use, and she was the former spouse of the Appellant.
[14] The payment by the Appellant, in addition
to meeting the definition of support amount in the Act, had attributes
of interest, but for the reasons that follow, I find the evidence is
overwhelming in favour of it being support. First, the parties entered into a
contract for the Appellant to pay Karen support. Second, it was the intention
of the contracting parties, Peter and Karen, to pay and receive support. Third,
the evidence of all four witnesses, without doubt, indicate the payment was
support. And fourth, Karen did not have independent income and required support
until such time as she received sufficient capital equalization payment to
invest and support herself.
[15] The Appellant had moral if not legal
obligations, to pay support to Karen. Mr. Warne, an experienced family
lawyer, acting for both parties carried out their instructions by providing for
support as he felt obligated to do. Two experienced family law lawyers who gave
independent legal advice were satisfied upon receiving the agreement that the Appellant
was paying a support amount to Karen who required it. This I conclude through
inference, not having heard evidence from those two lawyers.
[16] The Respondent referred to paragraph 20(b)
of the separation agreement as evidence that the payment pursuant to paragraph
16 was interest. I have to agree with the Appellant that paragraph 20(b)
strengthens his interpretation of paragraph 16. After most of the
equalization payment was paid by year end 2005, Karen would no longer need
support and it ceased, and thereafter, the Appellant was to pay interest on the
remaining balance which in January 2006 would be, I believe, about $400,000.
[17] Having said this, I do find paragraph 16
somewhat ambiguous in that it refers to support and then 6% per annum on the
outstanding balance owed to the wife. This is interest‑type talk. Yet, I
interpret this, although somewhat confusing, to be a manner of calculating the
amount of support, and not the equivalent of interest on a loan. Looking to
extrinsic evidence to interpret paragraph 16, I have no difficulty concluding
that the payment was support.
[18] Looking at the other side of the coin at
what evidence favours a conclusion that the payment was interest and not
deducible, I find, in effect, the Appellant owed his former wife Karen an
equalization amount of $1.9 million. He contracted to pay this amount over 10
years with interest at 6% on the reducing principal balance until paragraph
20(b) commenced January 2006, when clearly interest on the outstanding balance
begins. Obviously, the Appellant cannot deduct the interest after December 31, 2005.
Also, in favour of interest, the payments terminate once the equalization
amount is paid. Paragraph 16 provides for a payment of 6% on the outstanding
balance. Again, this is interest terminology.
[19] In the recent case of The Royal
Winnipeg Ballet v. M.N.R.,
Justice Sharlow found that the parties' intention was important in determining
the nature of a contract. Presently, the parties clearly intended that the Appellant
husband pay support to Karen. If it can be argued that the payment fits the
definition of both interest and support, the deciding factor is the intention
of the parties and what in fact they did. The Appellant attempted to deduct the
amount paid and Karen paid income tax on the payment. They both intended that
the Appellant pay support to his wife of almost 30 years.
[20] The law provides that she had a right to
support given her circumstances. By calculating the amount of support as 6% per
annum of the outstanding balance, does not detract from the reality of the
contract. While the payment does have some indicia of interest, the strong
conclusion is that it was support, and deductible by the Appellant.
[21] In Syrier, a first agreement clearly
provided for interest on an outstanding sum owed by the husband to his former
wife. When he was unsuccessful in trying to deduct his interest payment, he
simply had the words of the agreement changed to read "support"
rather than "interest", and Bonner J. found the payment was interest,
though called by another name. This differs from this situation where the
Appellant acknowledges responsibility to Karen to pay support which she had set
at $150,000 per year, and they negotiated an amount payable of $147,000, and
this was done with the assistance of an accountant and three lawyers. The Appellant
had no obligation to pay interest on the balance of the equalization payment. He
did have an obligation, I find, to pay support.
[22] In conclusion, I find that the $59,550 paid
by the Appellant to Karen Miller in the 2000 taxation year is a support payment,
as defined in subsection 56.1(4) of the Act, and the Appellant is
entitled to deduct this amount under paragraph 60(b) of the Act
in computing his income for the 2000 taxation year. The appeal is allowed, with
costs.
Signed at Ottawa, Canada,
this 9th day of May, 2007.
“C.H. McArthur”
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