REASONS
FOR JUDGMENT
Owen J.
I. Introduction
[1]
This is an appeal by Cathryn McBride of a
reassessment of her 2012 taxation year by a notice of reassessment dated March
6, 2014. The reassessment included in Ms. McBride’s income the amount of
$13,964 on the basis that this amount was a “support
amount”, as defined in subsection 56.1(4) of the Income Tax Act
(the “ITA”), received by Ms. McBride during
2012. The $13,964 in issue comprised 12 monthly payments each in the amount of
$1,163.70.
II. The Facts
[2]
Ms. McBride testified on her own behalf. Ms. McBride
provided the court with a collection of documents that included a separation
agreement signed by her ex-husband together with a cover letter from her
ex-husband’s lawyer, a conference notice for a case conference, a conference
brief and net family property statement and two orders of the Superior Court of
Justice. With the exception of the net family property statement, the
Respondent provided the same documents in her book of documents. Ms. McBride
also provided a copy of an affidavit prepared in furtherance of a motion for
contempt filed by her against her ex-husband, an Endorsement of the Superior
Court of Justice in respect of that motion and a statement of account from the
Family Responsibility Office of the Ministry of Community and Social Services
dated August 11, 2014, which provides a summary of the payments received from
her ex-husband to August 1, 2014.
[3]
Following the conclusion of the hearing on
January 8, 2015, I determined that the first order of the Superior Court of
Justice tendered into evidence by both parties made reference to minutes of
settlement (see excerpt from the order below). As well, the affidavit in
support of the contempt motion referred to a copy of the minutes of settlement
as being attached thereto as Exhibit A, and the Endorsement referred to minutes
of settlement as the basis for the wording of the first order. The minutes were
not tendered by either party at the hearing but Ms. McBride provided a
copy after a request for them was made to the parties.
[4]
The minutes are on a standard form and are
signed by Ms. McBride (on September 27, 2010) and her ex-husband (on
September 24, 2010) (the “Minutes of Settlement”).
In light of the multiple references to these minutes in documents tendered into
evidence at the hearing and the role of the minutes identified by the Superior
Court of Justice in the Endorsement, and considering subsection 18.15(3)
of the Tax Court of Canada Act, I have taken into account these minutes
in reaching my conclusions in this appeal.
[5]
Ms. McBride testified that she had
separated from her husband in 2009 and had retained a lawyer to represent her
in the divorce proceedings. In the first half of 2010, a separation agreement
was prepared that addressed the equalization of net family property only. Ms. McBride
tendered a copy of the agreement (the “Separation
Agreement”) together with a cover letter from her ex-husband’s lawyer
dated June 4, 2010. The cover letter stated in part:
As a sign of his good
faith in wishing to resolve the issues, I am mailing to you four copies of a
signed Separation Agreement in respect of Equalization Only, a copy of which is
attached.
[6]
The copy of the Separation Agreement provided by
both parties was signed by the ex-husband but not by Ms. McBride. Ms. McBride
testified that she also signed the agreement. Section 3 of the Separation
Agreement states:
Upon the completion
of the sale of the matrimonial home, Eric will make an equalization payment to
Cathryn of $38,995.89 from his proceeds of the sale.
[7]
Section 4 of the Separation Agreement addressed
the couple’s debt. Ms. McBride was to be responsible for one-half of the
debt owing at the time of separation and her ex-husband was to be responsible
for the balance (including any advances on the line of credit made after
separation).
[8]
Section 5 of the Separation Agreement stated:
Eric and Cathryn
acknowledge that they are in the process of negotiating to enable them to
address the balance of the outstanding issues, including not but [sic]
limited to support-related issues.
[9]
Ms. McBride testified that she did not seek
alimony and that the equalization payment and the division of the debt were the
only compensation that she sought from her ex-husband.
[10]
The ex-husband did not make the equalization
payment required by section 3 of the Separation Agreement and Ms. McBride
had to resort to a court proceeding to enforce her right to that payment. She
tendered a copy of a Case Conference Notice that provided for a case conference
hearing before the Superior Court of Justice (Ontario) on September 28, 2010. The
Notice stated that the conference had been arranged at the request of the
applicant (i.e., Ms. McBride) to deal with the following issues: “Equalization of Net Family Property; Spousal Support”. Ms. McBride
also tendered a copy of a Case Conference Brief together with a cover letter from
her lawyer dated September 21, 2010 (Exhibit A-3). The cover letter
stated in part:
Please confirm that
Eric agrees that his share of the net proceeds of sale of the matrimonial home
in the amount of $6,669.90 will be released to Cathryn forthwith.
Enclosed please find
a copy of our Case Conference Brief which was served on Eric . . . by courier
yesterday at the address indicated on his pleadings.
When you have
clarified Eric’s position regarding the house proceeds, I will review same
together with your letter dated September 17, 2010 with my client and advise of
her position.
[11]
The Case Conference Brief indicates in section 6
in Part 2 thereof that the issues that had not yet been settled were “spousal support”, “equalization
of net family property”, “Repayment of joint
Scotia Visa and joint Scotia line of credit”, “Maintenance
of life insurance as security for support and the equalization payment”
and “Costs”. In Part 3, section 11 of the Case
Conference Brief, the issues for the case conference are described as being:
1. Equalization
Payment
2. Payment of Joint
Debts owing to Scotiabank for line of credit and Visa.
3. Spousal Support
[12]
The Case Conference Brief then provides details
regarding these issues in a series of numbered sentences included in
section 11. The position on the equalization payment was that the parties
had agreed that the ex-husband would make an equalization payment to Ms. McBride
of $38,995.89. The proposal by Ms. McBride was that the ex-husband’s
one-half share of the proceeds from the sale of the matrimonial home of
$13,339.81 (i.e., $6,669.90) would be applied to reduce the equalization
payment to $32,325.99. His half of the proceeds would be paid to Ms. McBride
forthwith.
[13]
With respect to the two debts (the Scotiabank
line of credit and the Scotiabank Visa), Ms. McBride requested an order
that they be refinanced and that each party assume sole responsibility for
one-half of each debt.
[14]
With respect to spousal support, the Brief
states: “The Respondent earns substantially more than the
Applicant and can afford to pay support.” It then states their
respective incomes. Ms. McBride stated in cross-examination that in her
mind no such support was sought and that the inclusion of spousal support in
the Brief was simply a matter of strategy.
[15]
Section 11, paragraph 14 of the Brief addresses
a life insurance policy held by the ex-husband. Ms. McBride sought
particulars regarding the policy and an order that her ex-husband maintain the
policy for her benefit to secure his “support obligation
and obligation to make the equalization payment.”
[16]
In section 12 of the Brief, Ms. McBride
seeks the following in order to resolve the issues:
(a) An Order that
the Respondent’s share of the net proceeds of sale of the matrimonial home of
$6,669.90 be released to the Applicant forthwith and that the balance of the
equalization payment in the amount of $32,325.99 be paid on terms to be ordered
by the court.
(b) An Order that
the joint Scotia line of credit and Scotia Visa be refinanced into two separate
loans with each party to assume responsibility for one-half of each debt.
(c) An Order that
the Respondent pay spousal support in the amount of $1,000 per month[.]
(d) An Order that
the Respondent maintain the Applicant as irrevocable beneficiary of his group
life insurance policy to secure any support obligation.
[17]
The Superior Court of Justice issued an order (the
“Order”) dated September 28, 2010. The Order
states:
. . . on reading the
signed Minutes of Settlement
THE COURT ORDERS
THAT:
1. The net proceeds of sale of the matrimonial home in the
amount of $14,348.45 shall be released forthwith to the Applicant.
2. The joint Scotia line of credit and joint Scotia Visa
Account #942 039 shall be refinanced by the parties such that each party
assumes responsibility for one-half of the balance currently owing in relation
to each of the aforesaid debts. The parties shall proceed forthwith to
refinance the aforesaid debts and each shall provide proof to the other no
later than October 4, 2010 of the fact that his or her one-half share of each
of the aforesaid debts has been paid off or refinanced by a loan owed solely by
that party.
3. The Respondent shall pay non-variable and non-taxable
spousal support to the Applicant in the amount of $685.58 per month for a
period of 48 months commencing October 1, 2010 to and including
September 1, 2014.
4. The Respondent shall maintain a life insurance policy or
policies having a face amount of at least $35,000.00 naming the Applicant as
irrevocable beneficiary as long as he is required to pay support to the
Applicant. The Respondent shall provide the Applicant’s solicitor with proof of
such coverage within 14 days by October 8, 2010. If the Respondent dies without
the life insurance required by this provision in effect, his obligation to
support the Applicant shall be a first charge against his estate.
5. Unless the support order is withdrawn from the Family
Responsibility Office, it shall be enforced by the Director and amounts owing
under the order shall be paid to the Director, who shall pay them to the person
to whom they are owed. A support deduction order will be issued.
6. The Respondent shall forthwith withdraw his Answer and
the Applicant shall proceed with the divorce on an uncontested basis.
7. Each party shall pay his or her own costs of this
proceeding.
8. This order bears post-judgment interest at the Courts of
Justice Act rate, effective from the date of this order. Where there is a
default in payment the payment in default shall bear interest only from the
date of default.
[18]
The Minutes of Settlement provide as follows:
The parties agree to
settle all issues in this matter on a final basis, as follows:
1. The net proceeds of sale of the matrimonial home in the
amount of $14,348.45 shall be released forthwith to the Applicant.
2. The joint Scotia line of credit and joint Scotia Visa
Account #942 039 shall be refinanced by the parties such that each party
assumes responsibility for one-half of the balance currently owing in relation
to each of the aforesaid debts. The parties shall proceed forthwith to
refinance the aforesaid debts and each shall provide proof to the other no
later than October 4, 2010 of the fact that his or her one-half share of each
of the aforesaid debts has been paid off or refinanced by a loan owed solely by
that party.
3. The Respondent shall pay non-variable and non-taxable
spousal support to the Applicant in the amount of $685.58 per month for a
period of 48 months commencing October 1, 2010 to and including September 1,
2014.
4. Subject to the payment in full of the support owing by
the Respondent at paragraph 3 herein and subject to each of the parties
complying with paragraph 2 herein, the parties release and discharge each other
from any entitlement to an equalization payment pursuant to Part 1 of the
Family Law Act.
5. The Respondent shall maintain a life insurance policy or
policies having a face amount of at least $35,000.00 naming the Applicant as
irrevocable beneficiary as long as he is required to pay support to the
Applicant. The Respondent shall provide the Applicant’s solicitor with proof of
such coverage within 14 days of signing these Minutes of Settlement. If the
Respondent dies without the life insurance required by this provision in
effect, his obligation to support the Applicant shall be a first charge against
his estate.
6. The support shall be enforced by the Director and amounts
owing under the order shall be paid to the Director, who shall pay them to the
person to whom they are owed. A support deduction order will be issued.
7. The Respondent shall forthwith withdraw his Answer and
the Applicant shall proceed with the divorce on an uncontested basis.
8. Each party shall pay his or her own costs of this
proceeding.
[19]
In the Order, paragraphs 1, 2, 3, 5, 7 and 8 of
the Minutes of Settlement are adopted essentially without modification. As
well, paragraph 6 is adopted in the Order subject only to a caveat about
the withdrawal of the Order.
[20]
The ex-husband did not meet his obligations
under the Order and Ms. McBride was forced to bring before the Superior
Court of Justice a motion for contempt on the basis that the ex-husband did not
comply with paragraphs 2 and 4 of the Order. The motion was heard on
January 6, 2011 and the Superior Court of Justice issued an Endorsement on
January 7, 2011 (2011 ONSC 174). The Court found the ex-husband in contempt
with respect to paragraph 2 of the Order and ordered the parties to return
to court on January 13, 2011 for the following purposes:
i) To
determine whether the respondent has by then complied with paragraph 4 of the
order;
ii) To
determine whether the respondent is able to purge his contempt by complying
with paragraph 2 of the order;
iii) To
determine the order that will be imposed to address the respondent’s contempt;
iv) To determine costs of this motion.
With respect to (iii) above, I invite
submissions by counsel with respect to the potential remedy raised by the court
at the conclusion of argument of this motion, which, in addition to any other
order permissible under r.31(5), might be an award of damages to the applicant
for breach of the agreement to be paid as a spousal support payment.
[21]
On January 13, 2011, the Superior Court of
Justice issued a new order (the “New Order”) that
stated:
1. The Respondent shall pay non-variable and non-taxable
spousal support to the Applicant in the amount of $1,163.70 commencing
October 1, 2010 for a period of 48 months, to and including September
1, 2014, and the Order of September 28, 2010 is so varied.
2. The Respondent shall continue to maintain the Applicant
as a beneficiary of his group benefits life insurance policy to the extent of
$35,000.00 coverage. In the event that the policy is no longer available to him
he shall obtain a replacement policy for the same amount of coverage and
provide proof of the new coverage within 20 days of losing his existing policy.
3. If the Respondent dies without this insurance in place
any spousal support payments remaining due under this Order shall be a first
charge on his estate.
4. The Respondent shall pay costs in the amount of $5,189.00
payable in 30 days.
5. Unless the support order is withdrawn from the Family
Responsibility Office, it shall be enforced by the Director and amounts owing
under the order shall be paid to the Director, who shall pay them to the person
to whom they are owed. A support deduction order will be issued.
6. This order bears post-judgment interest at the Courts of
Justice Act rate, effective from the date of this order. Where there is a
default in payment the payment in default shall bear interest only from the
date of default.
[22]
The New Order addresses the ex-husband’s share
of the family debt by increasing the monthly payments to Ms. McBride from
$685.58 to $1,163.70. The increase of $478 is equal to one-half of the amount
of the Scotiabank debt identified in paragraph 21 of the Endorsement divided by
48. The approach of adding the ex-husband’s share of the family debt to the
spousal support payments is consistent with the general approach identified in
the last paragraph of the Endorsement.
[23]
Ms. McBride testified that the monthly payments
provided for in paragraph 3 of the Order were intended to provide her with
the equivalent of an equalization payment. Similarly, the monthly payments
provided for in paragraph 1 of the New Order were intended to provide her with
the equivalent of an equalization payment and her ex-husband’s share of the
family debt. In cross-examination, Ms. McBride admitted that the monthly
payments were referred to in the two orders as “spousal
support” and that there were no restrictions on her use of the monthly
payments.
A. The
Appellant’s Position
[24]
The Appellant argued that the 48 monthly
payments required by paragraph 1 of the New Order were simply another way
of paying the equalization payment and her ex-husband’s share of the family
debt. She submitted that the two orders must be read in their entirety and that,
in substance, the New Order was providing for the payment of these two amounts
over time. The Appellant further submitted that, if paid as a lump sum, the
equalization payment and the ex-husband’s share of the family debt would not be
taxable in her hands and that the payment of these amounts over time should be
treated no differently. The Appellant argued that the statement in both orders
that the monthly payments were “non-variable and
non-taxable” was intended to reflect this fact.
B. The
Respondent’s Position
[25]
The Respondent cited Gagnon v. The Queen,
[1986] 1 S.C.R. 264 at 267 as support for the existence of four conditions
for an amount to be a “support amount” as defined
in subsection 56.1(4) of the ITA:
. . . First, the
amount paid by the taxpayer has to be paid pursuant to a decree, order or
judgment of a competent tribunal or pursuant to a written agreement. Second,
the amount paid has to be paid as alimony or other allowance payable for the
maintenance of the recipient, children of the marriage or both the recipient
and children of the marriage. Third, the amount has to be paid on a periodic
basis. Fourth, at the time the payment was made and throughout the remainder of
the year, the taxpayer had to be living apart from, and be separated pursuant
to a divorce, judicial separation or written separation agreement from, his
spouse or former spouse to whom he was required to make the payment.
[26]
The Respondent submitted that the terms of the
Order and the New Order were clear and dispositive of the issue as the orders
provided for the payment of monthly spousal support payments that the Appellant
could use as she saw fit and that were received while the Appellant and her
ex-husband were divorced and living apart. In light of the clear words used in
the orders, the payments could not be considered to be equalization payments or
the payment of the debt. The Respondent submitted that, in the case of the
Order, this interpretation was supported by the fact that the total of the 48
support payments provided for therein did not match the amount that was
originally proposed to be paid as an equalization payment.
[27]
The Respondent submitted that the original
application to the Superior Court of Justice asked for an equalization payment
and for spousal support and that the payment of spousal support was therefore
contemplated by the parties. The Respondent also noted that the Appellant was
represented by counsel in the divorce proceedings. If the Appellant had any
doubt regarding the wording of the orders then the remedy was to appeal the
wording of the orders. The Respondent cited Yourkin v. The Queen, 2008
TCC 686 for the proposition that the Tax Court of Canada has no authority to
collaterally attack or amend an order of the Superior Court of Justice.
[28]
Finally, the Respondent cited paragraph 16 of Bates
v. The Queen, [1998] T.C.J. No. 660 (QL), 98 DTC 1919, for the
proposition that the statement in the orders to the effect that the support
payments are “non-taxable” is not binding on the
Tax Court of Canada.
III. The Law
[29]
Paragraph 56(1)(b) of the ITA states in
part:
Without restricting
the generality of section 3, there shall be included in computing the income of
a taxpayer for a taxation year,
. . .
(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 received after 1996 and before the end of the year by the taxpayer from
a particular person where the taxpayer and the particular person were living
separate and apart at the time the amount was received,
[B and C are not relevant to this case.]
[30]
The term “support amount”
is defined in subsection 56.1(4) as follows:
“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.
IV. Analysis
[31]
The New Order provides for the payment to Ms. McBride
of monthly spousal support of $1,163.70. Ms. McBride conceded that there
are no restrictions placed on the use of the monthly payments.
[32]
The Minutes of Settlement indicate that,
immediately prior to the hearing on September 28, 2010, Ms. McBride and
her ex-husband negotiated a settlement that waived Ms. McBride’s right to
the equalization payment previously agreed to in exchange for the monthly
payments described in paragraph 3 of the Minutes. The wording describing the
payments in the Minutes of Settlement was adopted without modification in
paragraph 3 of the Order.
[33]
The Minutes of Settlement further indicate that
the monthly spousal support payments were to be made instead of an equalization
payment. This is made clear by paragraph 4 in which the parties release and
discharge each other from “any entitlement to an equalization payment”. This
interpretation is also supported by the fact that the total amounts do not match:
the equalization payment payable under the Separation Agreement is $31,821.67
(i.e., $38,995.89 less one-half of $14,348.45) while the sum of the monthly
payments under the Order is $32,907.84. Ms. McBride was not able to
explain the reason for this difference.
[34]
The monthly spousal support payment was
increased in paragraph 1 of the New Order by $478 to compensate Ms. McBride
for her ex-husband’s share of the family debt. The last paragraph of the
Endorsement, reproduced above, identifies the logic behind this approach:
With respect to
(iii) above, I invite submissions by counsel with respect to the potential
remedy raised by the court at the conclusion of argument of this motion, which,
in addition to any other order permissible under r.31(5), might be an award of
damages to the applicant for breach of the agreement to be paid as a spousal
support payment.
[35]
I have concluded from the totality of the
evidence that the parties accepted the Court’s suggestion that the ex-husband’s
share of the family debt should be paid in the form of additional support
payments. No doubt, Ms. McBride did not take issue with this because the
payments were described in the Minutes of Settlement and in the two orders as “non-taxable”.
[36]
The monthly payments made to Ms. McBride in
2012 in accordance with paragraph 1 of the New Order fall squarely within the
definition of “support amount” in subsection
56.1(4) of the ITA. The payments were to be made monthly (i.e., on a periodic
basis) to Ms. McBride. The New Order describes the payments as “spousal support” and there are no restrictions on the
use of the payments, which factors together imply that the payments were an
allowance for the maintenance of Ms. McBride and were not for some other,
specific purpose. The payments were made to Ms. McBride by her former
spouse pursuant to an order of the Superior Court of Justice. Ms. McBride
received the payments while she was living separate and apart from her former
spouse because of a breakdown of their marriage. I also note that the payments were
made through, and enforced by, the Director of the Family Responsibility Office,
and the report from that office dated August 11, 2014 describes each payment as
an “Amount of recurring support obligation under a court
order or contract”.
[37]
The orders of the Superior Court of Justice do
say that the monthly spousal support payments are non-taxable but such a
statement is not determinative of the status of the payments under the ITA as
taxable or non-taxable receipts. In Bates v. The Queen, supra,
the Tax Court of Canada referred to an earlier judgment of the Federal Court,
Trial Division (as it then was) and then stated, at paragraph 13:
In my view, Jerome,
A.C.J. has correctly summarized the law when he states that the liability for
tax does not spring from a separation agreement or a Court Order. The liability
for tax is determined by the provisions of the Income Tax Act and, more
particularly, by section 56.
[38]
In the circumstances, I find that the 12 monthly
payments in the aggregate amount of $13,964 received by Ms. McBride from
her ex-husband in 2012 pursuant to the order of the Superior Court of Justice
dated January 13, 2011, are to be included in her income for that taxation year
pursuant to paragraph 56(1)(b) of the ITA because each of the 12
payments is a “support amount” as defined in
subsection 56.1(4) of the ITA.
[39]
For the foregoing reasons, the appeal is
dismissed without costs.
Signed at Ottawa, Canada, this 16th day of February 2015.
“J.R. Owen”
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