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Docket: 2004-1240(IT)I
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BETWEEN:
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MARIA DEFINA,
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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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and
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MATTHEW CUTRARA,
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Third Party.
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____________________________________________________________________
Appeals heard on January 31, 2005, at Toronto, Ontario,
By: The Honourable Justice A.A. Sarchuk
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Appearances:
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Counsel for the
Appellant:
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Kim B. Larsen
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Counsel for the
Respondent:
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John Grant
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For the Third
Party:
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The third party
himself
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JUDGMENT
ON A DETERMINATION OF QUESTIONS
UNDER
SECTION 174 OF THE INCOME TAX ACT
By Order dated November 1, 2004, Mathew Cutrara was added as a Third
Party to the appeal of Maria Defina for the purpose of determining the
following questions:
1. What amounts receivable and/or received by
Maria Defina from Mathew Cutrara are to be included by her in computing her
income for her 2001 and 2002 taxation years pursuant to paragraph 56(1)(b)
of the Income Tax Act?
2. What amounts paid and/or payable by Mathew
Cutrara to Maria Defina in the 2001 and 2002 taxation years are deductible by
him in computing his income pursuant to paragraph 60(b) of the Act?
Upon hearing the evidence of
the Appellant and the Third Party; and upon hearing submissions from all three
parties;
It is determined that:
(a) The answer to
question 1 is the amount of $7,200 received by Maria Defina from Matthew
Cutrara is to be included by her in computing income in each of the 2001 and
2002 taxation years, pursuant to paragraph 56(1)(b) of the Act;
and
(b) The answer to
question 2 is the amount of $7,200 paid by Matthew Cutrara to Maria Defina
is to be deductible by him in computing his income in each of the 2001 and 2002
taxation years, pursuant to paragraph 60(b) of the Act.
The appeals from assessments of tax made under the Act for the
2001 and 2002 taxation years are dismissed.
Signed at Ottawa, Canada, this 22nd day of June, 2005.
Sarchuk
J.
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Citation: 2005TCC404
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Date: 20050622
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Docket: 2004-1240(IT)I
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BETWEEN:
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MARIA DEFINA,
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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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and
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MATTHEW CUTRARA,
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Third Party.
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REASONS FOR JUDGMENT
Sarchuk J.
[1] This
is an application by the Minister of National Revenue made under section 174 of
the Income Tax Act for the determination of questions in respect of
Maria Defina (Defina) and Matthew Cutrara (Cutrara). The questions to be
determined are:
(a) What amounts receivable and/or received by
Maria Defina from Mathew Cutrara are to be included by her in computing her
income for her 2001 and 2002 taxation years pursuant to paragraph 56(1)(b)
of the Act? and
(b) What amounts paid and/or payable by Mathew
Cutrara to Maria Defina in the 2001 and 2002 taxation years are deductible by
him in computing his income pursuant to paragraph 60(b) of the Act?
Evidence
[2] Cutrara and Defina were married in 1986. They are the parents of
three children, Matthew, Christopher and Briana. By 1996, the marriage
relationship had deteriorated and on August 10 of that year, Cutrara moved out
of the matrimonial home. A handwritten document captioned "formal
separation agreement" was entered into evidence. Cutrara
confirmed that it was sworn before a Justice of the Peace on August 29, 1996.
The relevant portion of this document reads as follows:
I, Matthew J. Cutrara … would like to
advise Revenue Canada, that effective August 10th/96, I no
longer live with my spouse Maria M. Cutrara. …
The joint ownership of 7606 Netherwood Road, has been given to Maria M. Cutrara on
August 19th/96. I, Matthew J. Cutrara will support our three children
with payment of $600.00 monthly, with first payment due September 10th/96.
Cutrara testified
that he was under undue emotional stress from the break-up when this document
was signed and that he does not view the agreement as valid. He stated he did
not want to "go through the aggravation of a lawyer" when he could
"do the document" himself. For her part, Defina testified that she
considered the 1996 agreement to be legally binding at the time.
[3] A consent Order of the Ontario Court, Provincial Division dated
April 2, 1998, awarded custody of the children to the wife. Paragraph 4 of
that Order provided that the existing support deduction was to continue without
prejudice to Cutrara's ability to bring an application to vary the support. The
copy of this Order tendered as an exhibit is not signed. However, the parties
agree that the Order was endorsed by the Court at some point of time. Cutrara
further testified that he made the required payments of $600 per month pursuant
to the agreement.
[4] Cutrara and Defina signed a new separation agreement on August 17,
1999 and August 24, 1999, respectively.
Both parties were represented by counsel. This agreement makes specific
reference to child support, the relevant portions of which read:
11. CHILD SUPPORT
The husband and wife acknowledge that:
(a) there is
presently an Order of the Ontario Court (Family Division) in Court File No.
1194/97 requiring the husband to pay to the wife total support for the
aforesaid children in the amount of $600 per month;
(b) there
are arrears of support under the aforesaid support Order and that, in
consideration of the following, the wife agrees to an Order rescinding any and
all such support arrears;
(c) the
parties shall execute the necessary documentation to withdraw the enforcement
of the husband's child support obligation from the Family Responsibility
Office;
(d) that the
husband's child support obligation, pursuant to the Federal Child Support
Guidelines, and based on his 1998 gross income of $29,429.14, is $556 per
month;
(e) the
husband and wife have agreed that there is owing by the wife to the husband the
sum of $36,000 as at July 9, 1999. Such sum represents a combination of the
child support arrears owing by the husband to the wife and the sum owing by the
wife to the husband with respect to the sale proceeds received by her from the
former matrimonial home.
In lieu of the wife paying the lump of of (sic)
$36,000 to the husband and the husband making child support payments to the
wife, the parties agree as follows:
(a) commencing July 9th, 1999, the husband
shall pay to the wife child support in the amount of $600 per month. The
husband shall not make the $600 monthly payment to the wife but instead his
support obligation will be effected by the amount due and owing by the wife to
the husband being reduced at the rate of $600 per month;
(b) Upon the total sum of $36,000 being repaid
by the wife to the husband in the aforesaid manner, the husband's child support
obligation shall be set in accordance with the provisions of the Federal Child
support Guidelines;
(c) …
Defina confirmed
that the first $600 “payment” to reduce the $36,000 amount was made July 9,
1999 and that the arrangement ended 60 payments later in June 2004. It is
not disputed that Cutrara made no other support payments during that time
period.
Appellant's position
[5] Counsel
for Defina argued that changing the series of payments to a lump sum payment
created a new commencement day, a result of which any payments made thereafter
are governed by the new provisions of the Income Tax Act. More
specifically, counsel referred to the fact that as a result of the agreement,
the proceeds of the sale of the matrimonial home by Defina were now to be taken
into account and therefore, the child support obligations were suspended to
permit her to repay Cutrara for his share.
[6] Reference
was made to Pelletier v. Canada in which case the husband, by agreement was to pay the Appellant
$150 per week as maintenance. A subsequent agreement was executed and it
indicated that the amount of maintenance would not be paid for a period of time
because the Appellant was paying her husband an amount reflecting his equity in
the mobile home they had jointly owned. In Pelletier, the Court
concluded that its analysis "leads fairly conclusively to a firm inference
that the purpose of the supplementary agreement from the outset was to avert
the periodic alimony completely to replace it with the lump sum which half the
price of the mobile home would represent". Thus, Mrs. Pelletier did not
receive “alimony or other allowance payable on a periodic basis” in 1990.
Counsel for Defina, relying on this decision, argued that the nature of
the agreement between her and Cutrara provides for the transformation of what
in other circumstances could have been an obligation to make periodic payments
into an obligation to pay a lump sum. For that reason, the amounts in issue
should not be included in computing Defina's income for her 2001 and 2002
taxation years.
Respondent's
position
[7] Counsel for the Respondent submitted that the evidence does not
support the Appellant's position that the amounts in issue are tax-free to the
Appellant and not deductible by Cutrara. More specifically, there was no new
commencement date and second, the amount in issue cannot be considered to be a
lump sum payment within the meaning of the Act.
Conclusion
[8] I
am unable to accept the Appellant’s position that the separation agreement made
on June 21, 1999 was intended to and did transform an obligation to make
periodic payments into an obligation to pay a lump sum. Pelletier, for
its part provides no assistance to the Appellant since the agreement in that
case was clearly made to avert the periodic alimony completely, and to replace
it with a lump sum that would be payment for the Appellant’s husband’s share of
the mobile home.
[9] In
an earlier decision, I observed:
7 It is generally accepted that periodic
payments which have fallen into arrears and were accumulating and subsequently
paid in lump sum are nonetheless deductible in the hands of the payor and in
appropriate circumstances, taxable in the hands of the recipient. This is
consistent with the position set out by the Federal Court of Appeal in The
Queen v. Sills that "the payments do not change in character merely
because they are not paid on time". On the other hand, where a lump sum
in an amount substantially less than the amount owing is agreed to be paid so
as to release the payor from any future obligations, the character of the
payments is altered and the lump sum payment is not deductible.
8 In
the present appeal, there is no question that the amount of $16,095 to be paid
"as arrears of spousal support" did not represent the full amount of
arrears due and owing at that particular time. There is equally no question
that the amount agreed to formed part of the consideration paid so as to
release the Appellant from any future obligations. …
{Emphasis
added}
In such a case obviously, the very character of the payments is altered
and thus the lump sum payments in such circumstances are not deductible.
[10] I am unable to read the agreement in issue as one which extinguished
either the present or future obligations of Cutrara to pay periodic alimony. In
fact, I must note that both parties were represented by counsel and that the
language they used and agreed upon was selected very carefully so as to ensure
that it did not have the effect of creating a lump sum payment situation. What
we have in this particular case is an offset between the two amounts, i.e.
Defina paid the amount of $600 to her husband and he in turn, paid her the $600
required pursuant to the maintenance agreement. The fact that they did not
exchange cheques is, in my view, irrelevant since the intention to use the
offset mechanism was clear on the face of it.
[11] Accordingly, I have concluded that:
(a) the child support amounts of
$7,200 received by Maria Defina from Matthew Cutrara in each of 2001 and 2002
are to be included by her in computing her income for those years pursuant to paragraph
56(1)(b) of the Act; and
(b) the child support amounts of
$7,200 paid by Matthew Cutrara to Maria Defina in each of 2001 and 2002 are
deductible by him in computing his income pursuant to paragraph 60(b) of
the Act.
[12] The appeals are dismissed.
Signed at Ottawa,
Canada, this 22nd day of June, 2005.
Sarchuk
J.
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