Date: 20010212
Docket: 1999-3938-IT-G
BETWEEN:
PETER J. OSTROWSKI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Amended Reasons for Judgment
Beaubier, J.T.C.C.
[1]
This appeal pursuant to the General Procedure was heard at Prince
George, British Columbia on January 23, 2001. The Appellant was
the only witness. Paragraphs 2 to 8 inclusive of the Reply to the
Notice of Appeal read:
2.
The Appellant has lived separate and apart from his wife, Carla
Ostrowski since on or about August 1, 1993.
3.
The Ontario Court by Order dated November 18, 1994 ordered the
Appellant to pay child support in the amount of $3,200.00 per
month ($800.00 per child – four children) commencing
December 1, 1994 and to pay spousal support in the amount of
$500.00 per month for a total of $3,700.00 per month.
4.
The Appellant claimed a deduction for child and spousal support
of $44,400.00 (amount of support required per court order of
November 18, 1994) in each of the 1995 and 1996 taxation
years.
5.
The above claims were allowed upon initial assessment of the
returns, but were subsequently reviewed and the 1995 year
was reassessed to delete all but an amount of $11,100.00 allowed
as an arrears payment and the 1996 return was reassessed to
delete the entire claim of $44,400.00.
6.
The Appellant objected to the said reassessments and by Notice of
Confirmation dated November 19, 1998, the Minister of National
Revenue (the "Minister") confirmed the said
reassessments.
7.
In reassessing the Appellant in respect of his 1995 and 1996
taxation years, the Minister relied on inter alia, the
following assumptions:
a)
that the Ontario Court by Order dated November 18, 1994 ordered
the Appellant to pay child support in the amount of $3,200.00 per
month and spousal support in the amount of $500.00 per month
totaling $3,700.00;
b)
that the Ontario Court by Order dated March 29, 1995 ordered that
$11,100.00 be paid as a prepayment of support for April, May and
June, 1995;
c)
the Supreme Court of British Columbia by Order dated September
22, 1995, ordered that out of the sale proceeds of the family
home in Ontario, the Appellant was to pay his spouse $88,800.00
as a lump sum prepayment of child and spousal support for 2
years;
d)
that the Supreme Court of British Columbia by Order dated October
12, 1995, amended the court order of September 22, 1995, to state
that of the $88,800.00 paid, $1,500.00 shall be considered
arrears of spousal maintenance and $9,600.00 arrears of child
maintenance (for a total of $11,100.00) for the months of July,
August and September, 1995;
e)
that the $11,100.00 ordered to be paid by the Ontario Court by
Order dated March 29, 1995 was a prepayment of support for April,
May and June, 1995 and since it was a prepayment, it is not
deductible in the 1995 year;
f)
that the Order of the Supreme Court of British Columbia dated
October 12, 1995 ordering that the amount of $11,100.00 be
considered arrears of spousal maintenance and child support for
the months of July, August and September, 1995 were amounts
payable on a periodic basis and the Appellant was reassessed to
allow that amount as a deduction in the 1995 taxation year;
g)
that the remainder of the amount of $88,800.00, being the amount
of $77,700.00, and which amount was paid in September, 1995 was
paid as a prepayment of support for 2 years following September,
1995; and therefore the amount of $33,300.00 claimed as a
deduction in the 1995 year and $44,400.00 in the 1996 year were
not properly deductible and the Minister so reassessed; and
h)
that the amount of $77,700.00 paid in September, 1995 as a lump
sum prepayment of support to be paid in advance to Carla
Ostrowski for support payments due from October, 1995 to June,
1997 (as corrected by the Court Order dated October 12, 1995) can
not be considered as support payments payable on a periodic basis
within the meaning of paragraph 60(b) of the Income Tax
Act (the "Act").
B. ISSUES TO BE DECIDED
8.
The Issue is whether the amount of $77,700.00 ($33,300.00 claimed
in 1995 and $44,400.00 in 1996) is deductible in computing the
Appellant's income for the 1995 and 1996 years as an
allowance payable on a periodic basis within the meaning of
paragraph 60(b) of the Act.
[2]
All of the assumptions except 7(g) and (h) are correct.
Paragraphs (g) and (h) are in dispute and the exact wording of
the Orders and Reasons raised therein are the gist of the
dispute.
[3]
On March 29, 1995 Clarke, J. of the Ontario Court (General
Division) ordered in paragraph 2(a):
2.
THIS COURT FURTHER ORDERS that, on consent, the monies currently
in Court to the credit of this action be paid out as follows
forthwith:
a)
To Thomas H. Marshall, Q.C., on behalf of the Respondent, Carla
Ostrowski, the sum of $11,100.00 for three months support for the
months of April, May and June, 1995.
[4]
On September 22, 1995 Drake, J. of the Supreme Court of British
Columbia divided the proceeds of Ostrowskis' sale of their
home and ordered:
THIS COURT ORDERS that the Petitioner and Respondent are entitled
each to one-half of the net sale proceeds, inclusive of
accumulated interest, from the sale of the matrimonial home and
which funds are being held in trust by solicitor Thomas Marshall,
Q.C. of Oakville, Ontario;
AND THIS COURT FURTHER ORDERS that the said Thomas Marshall pay
to the credit of the Respondent Carla Ostrowski the said one-half
of the net sale proceeds with accumulated interest;
AND THIS COURT FURTHER ORDERS that from the Petitioner's net
sale proceeds, the sum of $88,800.00 be secured as a lump sum
payment for maintenance and support for a period of two years for
the Respondent and the children of the marriage (namely Nicholas
Peter Ostrowski, born December 8, 1979, Raimund Joseph Ostrowski,
born March 27, 1982, Jan Paul Ostrowski, born July 27, 1984, and
Simone Johanne Ostrowski, born July 3, 1986) which maintenance
was originally ordered by the Honourable Mr. Justice
O'Connell on the 18th day of November, 1994;
AND THIS COURT FURTHER ORDERS that Thomas Marshall, Q.C. pay to
the credit of the Respondent, Carla Ostrowski, the said sum of
$88,800.00;
AND THIS COURT FURTHER ORDERS that the Petitioner's
application for variation of maintenance and support be
dismissed;
[5]
On May 1, 1998 the Appellant launched a motion, which included
requests for the following:
(f)
An Order that the Order of The Honourable Mr. Justice Drake
granted on September 22, 1995 and entered in the Registry's
Order Book on September 25, be corrected pursuant to Rule 41(24)
by inserting the word "prepaid periodic" and deleting
the word "lump" in the third clause.
(g)
An Order that the Order of The Honourable Mr. Justice Clarke
granted on the 29th March, 1995 be corrected pursuant
to Rule 41(24) by inserting the word "prepaid periodic"
before the word "support" in clause 2(a).
This motion was heard by Melvin, J. of the Supreme Court of
British Columbia on May 14, 1998.
[6]
In course of giving the reasons for his Order, which followed
that Motion, Melvin, J. said at paragraphs 2, 3, 4 and 17:
[2]
That came before the Court -- I'm going to deal with this in
a little bit of length, in terms of an application before Mr.
Justice Drake on the 25th of -- I'm sorry,
22nd of September, 1995, at which time he was dealing
both with access and with maintenance. Insofar as access is
concerned, he said he made the same order in terms of Mr. Justice
O'Connell, so I have nothing further at this time to say
about that.
[3]
But in reference to maintenance, he said this -- I'm reading
from page 3 of his oral reasons:
Mr. Ostrowski's share is to be subject to the deduction of
a lump sum by way of maintenance for Mrs. Ostrowski and the
children for the next two years at the rate set by Mr. Justice
O'Connell in his original order in Ontario. I think that he
-- Ostrowski -- is an unreliable payer of periodical maintenance.
That is my main reason for making this position, as he is in
considerable arrears now, these are to be calculated and recouped
in the lump sum. The formal order of the Court that was entered
consequent upon those reasons orders that from that sale proceeds
the sum of eighty-eight thousand be secured as a lump sum payment
for maintenance and support for a period of two years for the
respondent and the children.
[4]
And he goes on to name them.
...
[17] THE
COURT: I realize that.
I realize that. All I'm saying is that this lump sum was
there as security for payment of periodic maintenance. Some of it
was allocated towards arrears and insofar as the future was
concerned, it's a sum there available for payment of periodic
maintenance. It's still no different than that sum being in a
bank account and being -- and thirty-seven hundred dollars drawn
from it monthly, as each month goes by, until such time as it is
exhausted. It does not mean that Mr. Justice
O'Connell's order terminated two years from the date that
Mr. Justice Drake spoke in September of 1995. That is not the
interpretation that I put on either the O'Connell order,
Mr. Justice Drake's reasons or Mr. Justice Drake's
order.
[7]
Thereupon, Melvin, J. ordered on May 14, 1998:
Court File No. 29375-T
Victoria Registry
IN THE SUPREME COURT OF BRITISH COLUMBIA
BETWEEN:
PETER OSTROWSKI
PETITIONER
AND:
CARLA OSTROWSKI
RESPONDENT
BEFORE THE HONOURABLE
) Thursday, the
14th day of
MR. JUSTICE MELVIN
) May, 1998
ORDER
THE APPLICATION of the Petitioner coming on for hearing at
Victoria, British Columbia on May 14, 1998 and
September 1, 1998 and on hearing Peter Ostrowski, the Petitioner,
on his own behalf on both days and on hearing Carla Ostrowski,
the Respondent, on her own behalf, and David Aujla appearing as
counsel for the Respondent on September 1, 1998 and on hearing
Alan P. Leslie, Legal Counsel on behalf of the Family Maintenance
Enforcement Program.
THIS COURT ORDERS that the application to terminate spousal
maintenance as of September 30, 1997 is granted.
THIS COURT FURTHER ORDERS that the suspension of child
maintenance made by Mr. Justice Sigurdson on November 12, 1997
shall continue indefinitely until such time as there is evidence
before the Court that Peter Ostrowski, the Petitioner, is in
receipt of income. The Petitioner is to provide the Respondent in
writing of when he has obtained some form of employment. Whether
it is contract employment or otherwise, the Petitioner is to
provide the Respondent the details of that employment, the
details of the income generated by that employment and what the
Petitioner feels is the appropriate amount of monthly maintenance
for the children based on the Federal Support Guidelines. If the
Respondent agrees with the figures as advanced, the parties need
not come back to court. The parties are at liberty to apply to
return to court to seek further direction if problems concerning
amount, concerning duration of payment, or problems concerning
the fact that the Petitioner may be out of the country.
THIS COURT FURTHER ORDERS that in the event the Petitioner
becomes regularly employed, or there is a further order of the
Court, then such steps as are necessary to be taken by the
Enforcement Program may be taken by it.
THIS COURT FURTHER ORDERS that there will be no accumulation of
arrears as of Mr. Justice Sigurdon's [sic] memorandum.
THIS COURT FURTHER ORDERS there will be no interest accumulating
on arrears.
THIS COURT FURTHER ORDERS that travel costs of the children
between Victoria and the Lower Mainland are to be shared equally
by the Petitioner and the Respondent. In the event there is a
change of location by either party which may have an impact on
those travel costs, then, unless the parties can agree, the
parties have liberty to apply on that issue.
THIS COURT FURTHER ORDERS the memorandum of Mr. Justice Sigurdson
dated November 12, 1997 is backdated to November 1, 1997 and the
obligation to pay arrears of child and spousal support is
suspended as of November 1, 1997 insofar as the child support is
concerned.
THIS COURT FURTHER ORDERS that the Family Maintenance Enforcement
Program are precluded from taking any enforcement action until
such time as the Petitioner becomes regularly employed.
BY THE COURT
"signature"
Deputy District Registrar
APPROVED AS TO FORM:
___________________ __________________
Peter
Ostrowski
David Aujla
Petitioner
Counsel for the Respondent
"signature"
__________________
Carla
Ostrowski
Alan P. Leslie
Respondent
Family Maintenance
Enforcement Program
[8]
All of the documents quoted are taken from Exhibit A-2 filed by
the Appellant.
[9]
In particular, the Appellant submits that in paragraph [17] of
his reasons of May 14, 1998, Melvin, J. dealt with the lump sum
remaining in question of $77,700.00 and by his words,
retroactively converted it to periodic payments to
Ms. Ostrowski. From that, it appears to follow in the
Appellant's mind that the $11,100.00 referred to in
assumption 7(e) is also periodic. But it is noteworthy that
Melvin J. did not grant the Appellant's requests contained in
paragraphs (f) and (g) of his May 1, 1998
motion.
[10] The
Respondent disputes the Appellant's submissions and in
support of its argument quoted Her Majesty the Queen v.
Stanley John McKimmon, 90 DTC 6088 (F.C.A.), in which
Hugessen, J.A., speaking for the entire panel, stated at pages
6090 and 6091:
The problem of distinguishing between periodic payments made
as an allowance for maintenance, which are deductible for income
tax purposes, and periodic payments made as instalments of a lump
or capital sum, which are not so deductible, is one which has
given rise to considerable discussion and jurisprudence. It is
not dissimilar, and is indeed related to the problem, common in
income tax law, of determining if sums of money expended or
received are of an income or of a capital nature. As with that
problem there can be very few hard and fast rules. On the
contrary, the Court is required to look at all the circumstances
surrounding the payment and to determine what, in the light of
those circumstances, is its proper characterization. Because of
the correlation between paragraphs 60(b) and 56(1)(b), a finding
that a payment is deductible by the payer will normally result in
its being taxable in the hands of the recipient. Conversely, a
determination that a payment is not so deductible will result in
the recipient having it free of tax.
The following are, as it seems to me, some of the
considerations which may properly be taken into account in making
such a determination. The list is not, of course, intended to be
exhaustive.
1. The length of the periods at which the payments are made.
Amounts which are paid weekly or monthly are fairly easily
characterized as allowances for maintenance. Where the payments
are at longer intervals, the matter becomes less clear. While it
is not impossible, it would appear to me to be difficult to
envisage payments made at intervals of greater than one year as
being allowances for maintenance.
2. The amount of the payments in relation to the income and
living standards of both payer and recipient. Where a payment
represents a very substantial portion of a taxpayer's income
or even exceeds it, it is difficult to view it as being an
allowance for maintenance2. On the other hand, where
the payment is no greater than might be expected to be required
to maintain the recipient's standard of living, it is more
likely to qualify as such an allowance.
3. Whether the payments are to bear interest prior to their
due date. It is more common to associate an obligation to pay
interest with a lump sum payable by instalments than it is with a
true allowance for maintenance.3
4. Whether the amounts envisaged can be paid by anticipation
at the option of the payer or can be accelerated as a penalty at
the option of the recipient in the event of default. Prepayment
and acceleration provisions are commonly associated with
obligations to pay capital sums and would not normally be
associated with an allowance for maintenance.
5. Whether the payments allow a significant degree of capital
accumulation by the recipient. Clearly not every capital payment
is excluded from an allowance for maintenance: common experience
indicates that such things as life insurance premiums and blended
monthly mortgage payments,4 while they allow an
accumulation of capital over time, are a normal expense of living
which are paid from income and can properly form part of an
allowance for maintenance. On the other hand, an allowance for
maintenance should not allow the accumulation, over a short
period, of a significant pool of capital.5
6. Whether the payments are stipulated to continue for an
indefinite period or whether they are for a fixed term. An
allowance for maintenance will more commonly provide for its
continuance either for an indefinite period or to some event
(such as the coming of age of a child) which will cause a
material change in the needs of the recipient. Sums payable over
a fixed term, on the other hand, may be more readily seen as
being of a capital nature.
7. Whether the agreed payments can be assigned and whether the
obligation to pay survives the lifetime of either the payer or
the recipient. An allowance for maintenance is normally personal
to the recipient and is therefore unassignable and terminates at
death. A lump or capital sum, on the other hand, will normally
form part of the estate of the recipient, is assignable and will
survive him.6
8. Whether the payments purport to release the payer from any
future obligations to pay maintenance. Where there is such a
release, it is easier to view the payments as being the
commutation or purchase of the capital price of an allowance for
maintenance.7
[Determination]
Viewing the facts of the present case in the light of the
foregoing criteria, it becomes quickly apparent that most of the
indicators point strongly to the payments in issue being
instalments of a lump sum settlement and that virtually none
point the other way.
The payments are to be made only once a year. The amounts paid
are not only greatly in excess of the prior alimony of $600 per
month but also constitute a very large proportion of the
taxpayer's declared income in the two years in
question.8 Interest is, by the terms of the decree,
payable on the balance of the total sum of $115,000 from time to
time remaining due. The taxpayer is given a prepayment privilege
at his option while, in the event of default, his former wife may
require the accelerated payment of the whole of the balance. The
total sum of $115,000 represents a significant capital amount
when compared not only with the taxpayer's declared income
but also with the deemed value of the real estate which was also
transferred as part of the same consent decree. The payments are
to be made over a fixed term and are not stated to be dependent
upon the survival of either the payer or the recipient. Finally,
the payments are stated to be "in satisfaction of all
financial relief under theDivorce Act and Family Relations
Act".9
I conclude that the sums here in issue were not paid by the
taxpayer as an allowance for the maintenance of his former wife.
Accordingly they were not deductible from the taxpayer's
income under paragraph 60(b) and are taxable in his hands rather
than those of the recipient as would be required by paragraph
56(1)(b).
[Crown's appeal allowed]
For these reasons, I would allow the appeal with costs, set
aside the judgment of the Trial Division and dismiss the
taxpayer's appeal to the Trial Division with costs.
[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.
[13] For this
reason, the appeals are dismissed, with costs in favour of the
Respondent.
Signed at Ottawa, Canada, this 12th day of February, 2001.
"D.W. Beaubier"
J.T.C.C.