REASONS
FOR JUDGMENT
D’Auray J.
[1]
The question that I need to determine in this
appeal is whether the appellant is entitled to deduct a lump sum payment for
spousal support in the amount of $12,000 for his 2013 taxation year.
Facts
[2]
The facts are straightforward. The appellant and
his spouse started living together in 1994 and married on August 1, 1998.
[3]
In November 2012, the appellant and his spouse
separated and have since been living apart.
[4]
A Petition for Divorce was filed on February 6,
2013, before the Court of Queen’s Bench of Saskatchewan (the “Saskatchewan
Court”).
[5]
On March 7, 2013, the Saskatchewan Court ordered
interim support payments, whereby the appellant had to pay to his spouse
support payments of $1,000 per month, commencing on April 1st, 2013
until September 1st, 2013.
[6]
A divorce was granted by the Saskatchewan Court
in December 2013. The appellant and his spouse entered into Minutes of
Settlement, signed on December 18, 2013, whereby they agreed on spousal
support payments and how assets would be divided. These Minutes of Settlement
formed an integral part of the divorce decree rendered by the Saskatchewan
Court.
[7]
Before the divorce was granted, the appellant’s
spouse had proposed spousal payments totalling $85,200 over seven years. As
seen below, this was ultimately revised to $60,000 over five years. Paragraph
17 of the Minutes of Settlement set out the parameters of spousal support as
follows:
SPOUSAL SUPPORT
17. The Respondent shall pay to the
Petitioner a lump sum payment in the amount of $60,000.00 as full and final
satisfaction of the Petitioner’s claim for spousal support. This payment shall
be made in five (5) installments of $12,000.00 per annum commencing December 18th,
2013 and on December 1st each year thereafter until the final
payment is made on December 1, 2017.
Positions of the parties
[8]
The appellant submitted that during the
negotiations, the parties agreed the support payments would be paid on a
monthly basis ($1,000 per month). At the last minute, however, in order to
minimize contact between the parties, the appellant suggested that he could
make one payment of $12,000 per year.
[9]
The appellant submitted that I should take into
account the intentions of the parties at the time of the negotiations. He
stated that both parties understood that he would be entitled to deduct the
support payments and that his former spouse would have to include such payments
in her income for tax purposes.
[10]
The appellant also relied on Hanlin in support of the
deductibility of the payments.
[11]
The respondent submitted that the lump sum
payments for spousal support are not deductible since the payments are capital in
nature. The respondent relied on McKimmon
to support her position.
Analysis
[12]
The relevant provisions of the Income Tax Act
in this appeal are paragraph 60(b), which allows the deduction with
respect to a “support amount”, subsection 56.1(4), which defines “support
amount”, and subsection 60.1(4), which imports the definition of “support
amount” into section 60. They read as follows:
60. There may be deducted in computing a
taxpayer’s income for a taxation year such of the following amounts as are
applicable: […]
(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;
56.1(4) […]
“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.
60.1(4) The
definitions in subsection 56.1(4) apply in this section and section 60.
[Emphasis
added.]
[13]
Accordingly, an amount will be deductible as a “support
amount” if:
−
An allowance is paid on a periodic basis for the
maintenance of the recipient.
−
The recipient has the discretion to use the
amount as he or she wishes.
−
The recipient and the payer are living separate
and apart.
−
The amount is receivable under an order of a
competent tribunal.
[14]
In this appeal, only the first requirement
listed above is in dispute.
[15]
Support payments that are capital in nature are
not deductible because payments must be made for the maintenance of the
recipient.
[16]
As argued by the respondent, the leading case on
whether an amount paid by a taxpayer is a non‑deductible capital payment
or a deductible allowance for maintenance is the decision rendered by Justice
Hugessen of the Federal Court of Appeal in McKimmon. Justice Hugessen
stated that “the Court is required to look at all the circumstances surrounding
the payment and to determine what, in light of those circumstances, is its
proper characterisation”.
He listed eight non‑exhaustive factors that a court must take into
account in determining whether support payments are paid as an allowance for
maintenance or as capital payments.
[17]
I will therefore apply the eight factors
enumerated by Justice Hugessen in light of the circumstances surrounding the
appellant’s payment to his former spouse.
[18]
The first factor is the length of the periods at
which the payments are made. Payments made at intervals of greater than one
year would not normally be for maintenance. In this appeal, since the period is
not greater than one year, this factor is in favour of the taxpayer.
[19]
The second factor is the amount of the payments
in relation to the income and living standards of the parties. As stated in McKimmon,
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
maintenance. On the other hand, where the payment is no greater than might be required
to maintain the recipient’s standard of living, it is more likely to qualify as
an allowance for maintenance.
[20]
This factor favours the appellant. Contrary to
the McKimmon’s appeal, where the support payments represented a significant
portion of Mr. McKimmon’s income, the support payments in the case at bar
do not represent a significant proportion of the appellant’s income. The
payment in issue represents 12.2% of the appellant’s total income for his 2013
taxation year.
[21]
Furthermore, the payments are made by the
appellant to maintain the recipient’s standard of living. This follows from the
observations that, firstly, the spouse’s original proposal ($85,200 over seven
years) was based on the Spousal Support Advisory Guidelines and the
payments in issue ($60,000 over five years), though less in aggregate value,
are sufficiently similar to the original proposal. Moreover, the amount of the
payments is the same as the interim support payments made pursuant to the
interim order dated March 7, 2013, (which were themselves deductible
as support payments).
[22]
The third factor is whether the payments bear
interest prior to the due date. It is more common to pay interest on a capital
payment than a payment for maintenance. This factor also favours the appellant
since there is no interest on the spousal support payments.
[23]
The fourth factor is whether the amounts can be
prepaid or accelerated. Rights of prepayment or acceleration are associated
with capital amounts rather than an allowance for maintenance. There are no
such rights on the appellant’s payments and thus, this factor favors the
appellant.
[24]
The fifth factor is whether the payments allow a
significant degree of capital accumulation by the recipient. As I mentioned
earlier, the appellant’s payments correlate with the spouse’s living standards.
They do not allow her to accumulate a significant amount of capital.
Accordingly, this factor plays in favour of the appellant.
[25]
The sixth factor is whether the payments last
for an indefinite period or for a fixed term. Since support amounts must be
made for the maintenance of the former spouse, it makes sense that the payments
last for an indefinite period. However, as stated in McKimmon, some
allowances for maintenance may have fixed terms that end on some event (such as
the coming of age of a child, at the time a pension kicks in, or after the
completion of a degree). In this appeal, the appellant’s former spouse would
turn 63 years old when the support payments cease.
[26]
I am of the view that the emphasis should be put
on the purpose behind the payments. In this regard, the length of the period is
not, per se, helpful. The period must be examined in light of the
circumstances of each case to determine how far the period goes to suggest that
the payments were either made for maintenance or for some reason other than
maintenance. This factor, in my view, does not favour the appellant because the
fixed term of five years does not do anything to support the notion that the
payments were made for maintenance. Nor do I believe that this factor is
against the appellant. In the circumstances, a five‑year fixed term is
not significant enough to somehow change the purpose of the support payments as
discerned from the other McKimmon factors. Support payments do not have
to last throughout the lifetime of the recipient to be deductible by the payer.
I am therefore of the view that this factor is neutral.
[27]
The seventh factor is whether the payments can
be assigned and whether the obligation to pay survives the lifetime of either
of the parties. If the payments can be assigned or are to survive either of the
parties, the payments are likely capital in nature, since they are not made for
maintenance purposes. For example, in Trottier, the payments in issue were
made pursuant to a mortgage given by the taxpayer to the spouse. At the lower
court level, the Exchequer Court noted that the agreement explicitly stated
that the rights of the spouse were assignable and would pass to her heirs,
executors, administrators or successors, as the case may be. In Lam, the separation agreement
included a clause that read “Personal Representatives Bound: Unless otherwise
expressly provided herein, this Agreement and every covenant, provision and
term herein contained shall ensure to the benefit of and be binding upon the
husband and the wife and each of them and their respective heirs, executors and
administrators.” This Court held that this meant the support payments would
survive the death of the recipient.
[28]
In contrast, the Minutes of Settlement in this appeal
are silent on whether the payments can be assigned or survive the lifetime of
the parties. It has long been held that an obligation to make support payments
does not survive the death of the payer unless explicitly provided for in the
support order.
Accordingly, I conclude that the appellant’s obligation to pay does not survive
his lifetime. This factor favours the appellant.
[29]
The eighth factor is whether the payments
release the payer from future obligations to pay maintenance. At paragraph 18
of McKimmon, Justice Hugessen describes this factor as follows:
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.
[30]
Pursuant to the Minutes of Settlement, the
amounts are made by the appellant “as full and final satisfaction of the
Petitioner’s claim for spousal support”. This factor is not in favour of the
appellant. As stated in McKimmon, this type of clause “suggests it is
easier to view the payments as capital payments”.
[31]
Except for the eighth factor that is not in
favour of the appellant and the sixth factor that is neutral, all the other
factors established by the Federal Court of Appeal in McKimmon indicate
that the support payments were for the maintenance of the appellant.
[32]
I find that the release does not in this appeal
prevent the deduction of the appellant’s payment to his former spouse. McKimmon
states that such a release is only one consideration among eight (and
potentially more, since the list of factors is non-exhaustive) that the payment
is a capital in nature. McKimmon does not state that any payments made
pursuant to an agreement in which there is a release will be non-deductible
capital payments.
[33]
At the end of the day, the definition of
“support amount” asks whether the payments were made for the maintenance of the
recipient. The factors in McKimmon aid the Court in examining the true
nature of the payments to determine whether they were so made. Applying the
factors in McKimmon to the facts of the case, I conclude that the payment
was made for the maintenance of the appellant’s former spouse. The requirements
found in the definition of “support amount” are met. The payments are an
allowance for maintenance, paid on a periodic basis. The recipients are living
separate and apart. The order was made by a competent tribunal. The recipient
had complete discretion over the payments she received from the appellant.
[34]
The payment made by the appellant, with respect
to his 2013 taxation year, to his former spouse is therefore deductible.
[35]
The appeal is allowed, without costs.
Signed at Montreal,
Quebec, this 3rd day of December 2015.
“Johanne D’Auray”
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