Widmer v. R., [1996] 1 CTC 2647, 96 DTC 3231 (Informal Procedure)

Mogan J.T.C.C.: — In this appeal for the 1992 taxation year, the only issue is whether a certain amount of $15,000 is required to be included in computing the appellant’s income. That amount was received in 1992 from her former husband in circumstances which I will describe below. The appellant has elected the informal procedure.

The appellant was married to David Laveck in 1975. There were three sons born of the marriage, in 1976, 1977 and 1980. The appellant and David Laveck were divorced in 1984. The divorce judgment by way of a Decree Nisi was issued on June 11, 1984. Under that judgment issued by the Supreme Court of British Columbia, David Laveck (hereafter called “David”) was ordered to pay maintenance and support for the three infant children in the amount of $265 per child per month commencing June 1, 1984. That would require payments of $795 per month for the maintenance of the three sons. There was no amount which was ordered to be paid for the maintenance of the appellant as the divorcing wife, although she was given custody of the three sons.

In the years following 1984 when the divorce was granted, David made a number of payments pursuant to the divorce judgment but the fact is that he fell in arrears by a significant amount. In other words, although he made some payments to support the sons, there were many times when either he did not make any payments at all or he made payments that were not sufficient to meet the terms of the judgment.

The appellant remarried in 1989. In 1991, the appellant had worked for a business which prepared income tax returns for a fee. Through that work she found out about the Alberta statute for the enforcement of maintenance payments. In the fall of 1991, she decided to make an application to enforce the maintenance payments owing by David. There was filed in this appeal as Exhibit A-3 an Affidavit of Arrears in the matter of the Alberta Maintenance Enforcement Act in which the appellant disclosed that in the seven years and five months preceding October 31, 1991 (that is, back to June 1984 when the divorce was granted) there were arrears owing of $50,590. According to Exhibit A-3, in the period of three years preceding October 1991 the arrears owing were $24,215.

It can therefore be seen that there were consistent and frequent arrears of payments because in the four years from 1984 to 1988 the arrears were approximately $26,000, and in the following three years they were approximately $24,000.

The appellant informed David that she was going to make an application to enforce the maintenance payments because she had had a difficult time. She had to borrow money from family and friends to maintain her sons and give them the things that boys like that normally need, registration for playing organized hockey and other costs. David asked her if they could work out some arrangement whereby he would give her a lump sum to settle the arrears and he would make payments in the future which would be reduced from the $265 amount per child fixed in the divorce decree. After some discussions it was agreed between the appellant and David that she would accept $15,000 in settlement of the whole claim she had for $50,590 for arrears if he would continue maintenance payments at the reduced amount of $200 per month per child commencing January 1, 1992.

David retained a lawyer who drafted the appropriate documents. The appellant did not retain a lawyer but signed a Waiver of Independent Legal Advice. Filed as Exhibit A-1 is a Consent Variation Order issued by the Supreme Court of the Yukon Territory which has a number of provisions. I will quote only the relevant parts:

1. The Judgment by Way of Decree Absolute granted by Judge Washington of the Supreme Court of British Columbia pronounced on the 12th day of September, 1984 is varied to reduce the monthly child support obligation to $200 per month per child for a total payment of $600 per month commencing January 1, 1992 and payable on the 1st day of each month thereafter.

3. The arrears of maintenance under the Judgment by Way of Decree Absolute of Judge Washington dated September 12, 1984 be fixed at $15,000.

4. The Respondent be ordered to pay $15,000 in arrears of child support to the Petitioner forthwith.

And then later, in the same Exhibit A-1, there is a Waiver of Independent Legal Advice signed by the appellant.

The appellant is under a misunderstanding with respect to independent legal advice. In Exhibit A-1 which was filed by her, a man named “W. John Andresen” certifies that he gave independent legal advice to the appellant. He states that: “I explained ... the provisions and effect of the attached Consent Variation Order ...”. Although she appears in the same document to have signed a Waiver of Independent Legal Advice, on the same page there is an indication that she did receive independent legal advice from Mr. Andresen. In any event, the document was signed by the appellant and by a person named “Shayne Fairman”, counsel for David. It is the operative document for the purpose of this appeal.

Immediately after this document was signed, she received a single cheque for $15,000. Also, David has maintained the adjusted reduced monthly payments of $200 per child per month since January 1992.

The issue, as stated, is whether the $15,000 amount is income to the appellant. She acknowledged that in all of her income tax returns from and after 1984 she has included any monthly amounts she received from David as they were received on a periodic basis representing payments for the children. And in 1992, she included in her income tax return the monthly payments of $600 she received from David on the basis of $200 per child per month throughout that year. She did not, however, include the $15,000 because she takes the position that it was not a periodic payment; that it was not a maintenance payment; and that it was only a lump-sum settlement.

In argument, counsel for the Respondent drew my attention to some recent law and, to his credit, he brought to my attention at least one case which goes against him. The cases to which I am referred relate to some form of lump-sum payment and whether it should be included in computing the income of the recipient or whether it can be deducted in computing the income of the payor. Two recent cases in this Court are Burnes v. Minister of National Revenue, [1983] C.T.C. 2399, 83 D.T.C. 338 (T.R.B.), a decision of the former Chairman, The Honourable L.J. Cardin of the Tax Review Board, as he then was; and a decision of Judge Garon in Soldera v. Minister of National Revenue, [1991] 2 C.T.C. 2097, 91 D.T.C. 987 (T.C.C.). The Burnes case goes against the Minister. In that case, there had been a divorce in 1965 and the husband was ordered to pay maintenance at the rate of $175 per month for the support of two infant children. By 1975, ten years later, there was a significant amount of arrears owing by the husband to the wife, and the wife commenced an action against the husband for the arrears. In 1976, the action was settled for a lump-sum payment of $6,000, which was substantially less than the arrears then owing. The appellant in Burnes was the wife because the Minister had added the $6,000 to her income. Her appeal was allowed by Chairman Cardin on the basis that the lump-sum payment released the husband from an obligation imposed on him by the order, and it was significantly less than what he really owed.

Soldera was a case of deductibility. In that case, by a divorce decree granted in June of 1983 the husband was ordered to pay to his wife for the maintenance and support of the children a monthly sum of $200. He fell into arrears and pursuant to a second order of the same Alberta Court in 1986, three years later, the original order was varied to reduce the monthly payments to $100. In the second (1986) order, the arrears of maintenance was fixed at $7,500. The question was whether the husband in that case could deduct the amount of $7,500. The Court held that he could deduct it on the basis that the second Court order did not alter or change the nature of the taxpayer’s liability. It simply reduced it. Garon J. also observed that the amount of $7,500, if broken down, represented approximately what the husband had been required to pay under the first Court order. Therefore, the Court was able to conclude that the $7,500 really represented the arrears of maintenance payments and the husband was permitted to deduct the $7,500 lump-sum payment.

Counsel for the Respondent pointed out that between Burnes and Soldera, the Federal Court of Appeal had decided R. v. Sills (formerly La Brash), [1985] 1 C.T.C. 49, 85 D.T.C. 5096 (F.C.A.), a case which Garon J. discussed at some length in his judgment. In Sills, there was only one order of the Court between the husband and wife. The payments fell into arrears and, to make up part of the arrears, the husband had made three payments of $1,000 each on a kind of scattered basis in 1975 and 1976 to catch up with the arrears payments. The appellant in Sills was the wife who had had the three amounts of $1,000 added to her income. When she appealed, the Court held that the amount of $3,000 really was in the nature of periodic payments. Therefore her appeal was dismissed.

In Soldera, there was a second Court order and counsel for the Respondent pointed out how closely the wording in the Soldera order matches the wording in the appellant’s order. Specifically he referred me to page 2 of the decision in Soldera where the following is the relevant paragraph:

That the arrears of maintenance as of May 31, 1986 be and the same are hereby fixed at $7,500.

In Exhibit A-l of this appeal, the Consent Variation Order, the statement is:

The arrears of maintenance under the Judgment by Way of Decree Absolute of Judge Washington dated September 12, 1984 be fixed at $15,000.

I appears to me that the Consent Variation Order (Exhibit A-l) was drafted either without much thought to the income tax consequences or, if there was any such thought, that thought was applied by David’s lawyer for David’s benefit. Soldera was a recent case at that time.

The appellant made a statement in argument which I find most persuasive. She said that the consent order makes the amount of $15,000 appear to be something that it was not. One would think, reading it, that $15,000 was in the range of what was really owed. I should think that a Consent Variation Order, if it had been jointly drafted by lawyers for both the appellant and David, would have recited the fact that there were arrears of $50,590. The amount owed ($50,590) is simply the aggregate of all amounts which David should have paid but failed to pay for the maintenance of the three children under the terms of the divorce judgment. When the amount actually received ($15,000) is so different from and so much smaller than the amount owed ($50,590), I cannot regard the amount received as having the same character as the amount owed. In other words, I cannot regard the $15,000 amount received by the appellant as having been received for the maintenance of the three children. In my opinion, this small amount was paid by David in one lump sum firstly, to obtain a release from his very real liability to pay the remaining $35,590, and secondly, to obtain a reduction in the aggregate amount of his monthly maintenance payments from $795 per month to $600 per month. In summary, the $15,000 amount was paid to obtain a release from existing obligations and a reduction in future obligations, and not for the maintenance of the three children.

There is no question that if the maintenance payments of $265 per child per month had been paid over the years they would have been income in the hands of the appellant. The hard fact is that they were not paid; David fell in arrears by $50,590 and, because of the distressed position of the appellant, he was able to escape from his liability of $50,590 by making a lump-sum payment of only $15,000 (30 per cent of the amount owed). In those circumstances, I cannot construe the $15,000 amount paid in February of 1992 to be, in the words of paragraph 56(1 )(b), “an amount received by the taxpayer in the year as alimony or other allowance payable on a periodic basis”.

In my opinion, this was more like the payment in Burnes than the payments in Soldera and Sills. As I read the Sills decision, neither one of those thousand dollar payments was a lump-sum payment but was more in the nature of a catch-up payment. Also, as counsel for the Respondent indicated in argument, there was no second order of the Court in the Sills case as there was in this case.

For these reasons, the appeal will be allowed and the assessment will be referred back to the Minister of National Revenue for the purpose of deleting from the appellant’s income for 1992 the sum of $15,000 which she received as a lump sum in February of that year.

Appeal allowed.