Brian Ambler v. Her Majesty the Queen, [1993] 2 CTC 2996, 93 DTC 1460

Mogan, T.C.C.J.:—The appellant and his former wife Constance were married around 1964. There were two children of the marriage. The appellant and Constance separated around 1977 and were later divorced. Constance commenced proceedings against the appellant under the Family Law Reform Act of Ontario, S.O. 1975, c. 41. Those proceedings were commenced around 1978 in the trial division of the Supreme Court of Ontario. The dispute was set down to be heard at Toronto on February 25, 1981. Just before going into Court, the appellant and Constance signed minutes of settlement (Exhibit A-1) dated February 25, 1981 settling all outstanding matters between them. The Honourable Mr. Justice Walsh (Ontario Court) issued a judgment (Exhibit A-2) dated February 25, 1981 giving effect to the minutes of settlement and resolving the dispute between the appellant and Constance.

In accordance with the terms of the judgment, the appellant made certain payments to Constance in 1984 and 1985 deducting the amounts of those payments in the computation of his income for each year. The Minister of National Revenue disallowed the deductions claimed by the appellant. The only issue in these appeals is whether the amounts paid by the appellant to Constance in 1984 and 1985 pursuant to the judgment are deductible in computing his income for each of those years. I shall refer to both the minutes of settlement and the judgment in order to summarize the substance of the settlement reached between the appellant and his former wife.

1. Constance acknowledged that she had received the sum of $97,000 from the sale of the matrimonial home.

2. The appellant released to Constance his interest in the family cottage in Mus- koka which had a value in the range of $150,000.

3. Constance released to the appellant her interest in the family farm near Camp- bellville, Ontario which had a value in the range of $150,000.

4. The chattels representing domestic assets were divided between the appellant and Constance in accordance with which party had possession of particular chattels as at February 25, 1981, except for an automobile which Constance was required to transfer to the appellant on or before April 1, 1981.

5. The appellant agreed to pay to Constance for the maintenance of their daughter Polly (born August 17, 1965) the sum of $450 per month for so long as Polly resided with Constance and was under the age of 19 years.

6. The appellant agreed to make certain payments to Constance. Because these payments are at the very heart of this appeal, I shall set out the precise words of paragraphs 4 and 5 of the judgment (Exhibit A-2):

4. AND THIS COURT DOTH FURTHER ORDER AND ADJUDGE that the defendant shall pay to the plaintiff various sums as more particularly set out below:

(a) The proceeds of the sale of the matrimonial home in the sum of $97,000 which sum has already been received by the plaintiff;

(b) On or before April 1, 1981, the defendant shall pay to the plaintiff $58,000;

(c) On or before April 1, 1982, the defendant shall pay to the plaintiff the

sum of $40,000 plus $15,000 in interest, making a total of $55,000;

(d) On or before April 1, 1983 the defendant shall pay to the plaintiff the sum of $40,000 plus $11,000 in interest, making a total of $51,000;

(e) On or before April 1, 1984, the defendant shall pay to the plaintiff the

sum of $40,000 plus $7,000 in interest, making a total of $47,000;

(f) On or before April 1, 1985, the defendant shall pay to the plaintiff the sum of $30,000 plus $3,000 in interest, making a total of $33,000.

5. AND THIS COURT DOTH FURTHER ORDER AND ADJUDGE that if the defendant so elects, he shall have the option of paying to the plaintiff the said sum of $150,000 together with interest at ten per cent in monthly payments, the option to be exercised on or before April 1, 1981 or on or before April 1, 1982, or April 1, 1983, or April 1, 1984. In the event that the defendant so exercises the option, he shall pay to the plaintiff, commencing on April 1, 1981 or in the subsequent years in which he elects the said option, monthly payments in the sum of $3,789.84. In the event that the defendant exercises that option, the defendant shall pay to the plaintiff such additional amounts as are necessary to compensate the plaintiff for the income taxes which would accrue to her assuming that she was earning $45,478.08 in a twelve month period. On the computation of the income tax all standard deductions available to the plaintiff shall be assumed. In the event that the defendant wishes to do so, he may discharge all of his obligations to the plaintiff by paying her on or before April 1, 1981, the sum of $208,000. Should the defendant wish to pay the principal sum then outstanding as at either April 1, 1982, 1983, 1984 and 1985 at the time he so elects, an amortization schedule will be prepared and the then principal balance outstanding will be made available to the defendant and payment can be made in accordance with the said principal balance then outstanding.

The appellant elected one of the options provided in paragraph 5 of the judgment and made monthly payments to Constance in the amount of $3,789.84 commencing in April 1981. During 1984, he made such payments in the aggregate amount of $45,478.08 (12 times $3,789.84). In computing his income for 1984 he deducted the aggregate amount of $45,478.08. For 1985, the appellant deducted the amount of $51,949 with respect to payments made to Constance. It is not clear to me how the amount of $51,949 was determined because, as I read the judgment and the pleadings herein, the only payments made to Constance in 1985 were as follows:

January, February and March @ $3,789.84	$11,369.52
Single Payment April 1, 1985	33,800.00
Total	$45,169.52

The respondent has not disputed the quantum of the amount of $51,949 and so the only issue is whether the appellant is entitled to deduct in computing income for 1984 and 1985 the amounts of $45,478 and $51,949 respectively.

The appellant relies on paragraph 60(b) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") claiming that the amounts in issue were paid to Constance as alimony for her maintenance. The respondent argues that the amounts in issue were payments on account of capital being instalments of an aggregate capital obligation. Both counsel cited authorities in support of their respective arguments but, before considering such authorities, I propose to set out my own observations with respect to the terms of paragraphs 4 and 5 of the judgment as quoted above. Firstly, at no place in paragraphs 4 and 5 is there any indication that the amounts are paid for the maintenance or support of Constance. Paragraph 4 simply states that the appellant shall pay to Constance "various sums as more particularly set out below”. This may be contrasted with the words in paragraph 9 of the judgment which provides maintenance payments with respect to the daughter Polly:

9. AND THIS COURT DOTH FURTHER ORDER AND ADJUDGE that the defendant pay to the plaintiff for the maintenance of the child of the marriage, Polly Ambler, born August 17, 1965. . .the sum of $450 per month on the first day of each and every month.

Secondly, about half way through paragraph 5, the following sentence appears:

In the event that the defendant wishes to do so, he may discharge all of his obligations to the plaintiff by paying her on or before April 1, 1981, the sum of $208,000.

The amount of $208,000 has no significance standing alone but, having regard to paragraph 4, it is the precise aggregate of the non-interest amounts appearing in subparagraphs (b) $58,000; (c) ,000; (d) $40,000; (e) $40,000; and (f) $30,000. It is significant that the appellant could have discharged all of his obligations to Constance by paying the amount of $208,000 to her without interest on or before April 1, 1981 (five weeks after the date of the judgment) because the portion ($150,000) which was not paid until after April 1, 1981 bore interest at the rate of ten per cent per annum. This can be illustrated as follows:

The above computation could be extended to show that under subparagraphs 4(d), 4(e) and 4(f) interest of $11,000 payable on April 1, 1983 was derived from an unpaid balance of $110,000 after April 1,1982; interest of $7,000 payable on April 1,1984 was derived from an unpaid balance of $70,000 after April 1, 1983; and interest of $3,000 payable on April 1, 1985 was derived from an unpaid balance of $30,000 after April 1, 1984.

Thirdly, immediately following the sentence half way through paragraph 5 quoted above, the following sentence appears:

Should the defendant wish to pay the principal sum then outstanding as at either April 1, 1982, 1983, 1984 and 1985 at the time he so elects. . . .

It is significant that the appellant and Constance in the minutes of settlement refer to a “principal sum then outstanding" and the same words are picked up in the judgment. And fourthly, the opening sentence of paragraph 5 of the judgment provides the appellant with an option to pay the amount of $150,000 in monthly instalments of $3,789.84 if he so elects. Otherwise, the amount of $150,000 would be payable in four annual instalments after April 1, 1981 in accordance with the terms of paragraph 4.

The above four observations cause me to infer, before reviewing the relevant jurisprudence, that the appellant and Constance had agreed upon a principal capital sum of $208,000 which the appellant would pay to Constance to complete the final division of their family assets after the allocation of real estate (the home, the cottage and the farm) and apart from any maintenance amounts for their daughter Polly. Because my reading of the minutes of settlement and the judgment lead me to a first blush conclusion which is against the appellant, I will consider with care the authorities cited by appellant's counsel. I should add that for the years 1981, 1982 and 1983, it appears that the appellant deducted in computing his income the amounts paid to Constance in accordance with the judgment and such deductions were not challenged by the income tax authorities. I regard that fact as interesting but irrelevant in deciding the issue before me.

In McKimmon v. Canada, [1990] 1 C.T.C. 109, 90 D.T.C. 6088, the Federal Court of Appeal set out a number of criteria at pages 111-12 (D.T.C. 6090-91) which are helpful in determining whether periodic payments passing between separated or former spouses are for the maintenance of the recipient or instalments of a capital sum. I will summarize those criteria because they apply directly to the issue herein.

1. The length of the periods at which the payments are made. The shorter the period (weekly or monthly) the more likely they will be maintenance.

2. The amount of the payments in relation to the income and living standards of both payer and recipient.

3. Whether the payments are to bear interest prior to due date. The obligation to pay interest would point to instalments of a capital sum.

4. Whether the amounts can be paid by anticipation at the option of the payer or accelerated as a penalty at the option of the recipient in the event of default.

5. Whether the payments allow a significant degree of capital accumulation by the recipient.

6. Whether the payments are stipulated to continue for an indefinite period or are for a fixed term. Amounts payable over a fixed term are more readily seen as being instalments of a capital sum.

7. Whether the payments can be assigned and whether the obligation to pay survives the lifetime of either the payer or recipient.

8. Whether the payments purport to release the payer from any future obligations to pay maintenance.

I would apply the above criteria to the facts of this case as follows. No. 1 and No. 3 favour the respondent because the payments are first established at one- year intervals in paragraph 4 of the judgment with interest at ten per cent per annum on amounts remaining unpaid after April 1, 1981. It was only when the appellant elected an option in paragraph 5 that he converted four annual payments to monthly payments of $3,789.84 over a 48-month period. The monthly payments (including interest at ten per cent per annum) are based on the original four annual payments. No. 2 favours the appellant because the annualized payments of $45,478 represent about 40 per cent of the appellant's income and that amount would not be extravagantly high in relation to his former wife's standard of living. No. 4 favours the respondent because the appellant has the option of paying the amount of $208,000 in one lump sum by April 1, 1981; or he can make five annual payments of $58,000, $40,000, $40,000, $40,000 and $30,000 with interest at ten per cent per annum commencing April 1,1981; or he can make monthly payments of $3,789.84 from April 1981 to March 1985.

No. 5 probably favours the appellant because the payments alone would not allow a significant accumulation of capital by Constance although she had already received $97,000 from the sale of the matrimonial home and a cottage valued at $150,000 which, according to the appellant's testimony, she sold for $175,000. No. 6 favours the respondent because the payments are for a fixed term of four years and do not end on any particular event like the death of either party or the maintenance payments for Polly which ended on her 19th birthday. No. 7 favours the respondent because the judgment and minutes of settlement are binding upon the executors, administrators, successors and assigns of the appellant and Constance. No. 8 favours the respondent because of the terms in paragraphs 1 and 8 of the minutes of settlement which state:

1. The parties intend the settlement set out in the paragraphs below to be a final settlement and agree that the settlement represents a clean break between the parties. Under no circumstances whatsoever shall the defendant pay to the plaintiff less funds than are provided by these minutes of settlement, and under no circumstances whatsoever shall the plaintiff receive from the defendant more funds than are represented by this settlement. Each party agrees that there shall be no variation whatsoever, and except as provided in this minutes of settlement, neither party shall pay to the other maintenance for the other party.

8. The plaintiff expressly states that all of her claims pursuant to the Family Law Reform Act, R.S.O. 1980, c. 152, and in particular paragraphs 4, 6, 7 and 8 have been fully satisfied by the terms of those minutes of settlement. In addition, the plaintiff states that her claims with respect to paragraph 18 have been fully satisfied. If requested by the defendant, the plaintiff shall execute any other documents which shall have the effect of releasing any interests which she may have to any corporation, partnership or proprietorship in which the defendant has an interest.

Referring to the last words of paragraph 1, the only reference to "maintenance" in the minutes of settlement is the provision of $450 per month for Polly. Although there is no explicit release in paragraph 1 or 8, the reference in paragraph 1 to a "clean break", the clear wording of the second sentence of paragraph 1, and the obligation in paragraph 8 to execute a release if requested indicate that the payments from April 1, 1981 to April 1, 1985 are to be the final payments between the appellant and Constance.

As I view the criteria set out by the Federal Court of Appeal in McKimmon, supra, six of them favour the respondent and only Nos. 2 and 5 favour the appellant. That balance in the respondent's favour does not determine the appeal but it supports the inference I drew from my initial observations of the minutes of settlement and the judgment that the amount of $208,000 was a capital sum. In Trottier v. M.N.R., [1968] S.C.R. 728, [1968] C.T.C. 324, 68 D.T.C. 5216, a husband and wife separated after owning and operating a hotel for many years. The wife claimed half of the value of the hotel ($90,000) and the husband agreed to pay her $45,000. They signed certain documents including a separation agreement and a mortgage on the hotel granted by the husband to the wife requiring monthly payments of $350. The issue in Trottier was whether the monthly payments were alimony (deductible) or instalments of a capital sum (non-deductible). When dismissing the appeal by Mr. Trottier, the Supreme Court of Canada (unanimous judgment) stated at page 733 (C.T.C. 327-28, D.T.C. 5219):

The giving of the mortgage was analogous to the payment of a lump sum by which once and for all the husband was released from liability to support his wife. The mortgage was given because the husband was not in a position to pay the lump Sum in cash.

It may be observed in passing that part of each monthly payment was made up of interest on the capital sum which the appellant had undertaken to pay.

The appellant was not able to pay the lump sum of $208,000 on April 1, 1981. He elected the monthly payments of $3,789.84 because he did not know what his income would be from year to year or month to month. He would have preferred a slower payout and was concerned as to whether he could maintain the higher payments in a shorter four-year period. According to paragraph 5 of the judgment, the appellant had the option of paying $150,000 together "with interest at ten per cent in monthly payments". The monthly payments of $3,789.84 over 48 months came to $181,912.32 indicating that the appellant paid interest of $31,912.32 over the four years. These facts, coupled with the above quoted statements from the Supreme Court decision in Trottier, indicate that the payments were of a capital nature.

In M.N.R. v. Hansen, [1967] C.T.C. 440, 67 D.T.C. 5293 (Ex. Ct.), a husband and wife had separated with the husband agreeing to pay the wife $20,000 with $6,000 payable upon signing the property settlement and separation agreement and the remaining $14,000 payable at $100 per month until paid— approximately 12 years later. The agreement contained the following paragraph:

9. ACCEPTANCE BY WIFE. The wife acknowledges that the provisions of this agreement for her support and maintenance are fair, adequate, and satisfactory to her and in keeping with her accustomed standard of living for her reasonable requirements. The wife, therefore, accepts these provisions in full and final settlement and satisfaction of all claims and demands for alimony or for any other provision for support and maintenance, and fully discharges the husband from any such claim and demands except as provided in this agreement.

When dismissing the appeal by the Minister of National Revenue from a decision of the Tax Appeal Board, Jackett, P. stated at page 445 (D.T.C. 5297):

If there could have been any doubt that paragraph 7, read by itself, is a provision for the maintenance of the wife . . . when paragraph 7 is read with the preamble and with the reference in paragraph 9 to "the provisions of this agreement for her support and maintenance”, there cannot, in my view, by any doubt that paragraph 7 provides exclusively for the maintenance of the wife.

There are no terms in the minutes of settlement or judgment like the words in the Hansen agreement which permit me to conclude that the two documents, when read as a whole, provided monthly payments for the support and maintenance of Constance. I would also note that in Pisony v. M.N.R., [1982] C.T.C. 2010, 82 D.T.C. 1023 (T.R.B.), M.J. Bonner (as he then was) stated that the decision in Hansen must be approached with caution. And in Cohen v. Canada, [1991] 1 C.T.C. 288, 91 D.T.C. 5239 (F.C.T.D.), Cullen, J. distinguished and declined to follow Hansen making the following statement at page 295 (D.T.C. 5244):

It is significant that Jackett, P. seemed to base his decision on the fact that the payments were made periodically. He did not deal expressly with the fact that the payments would terminate, but seemed to be content to hold that section 7, considered in the context of the whole agreement, had the primary purpose of providing for the maintenance of the wife. Later cases were to examine other factors in order to determine if the payments were in substance alimony or a payment in consideration of the renunciation of marital rights.

And lastly, in Slater v. M.N.R., [1968] Tax A.B.C. 753, 68 D.T.C. 607, the Tax Appeal Board held that certain payments were for maintenance but, in the Slater agreement, there was an expressed stipulation that if the husband was still alive when the payments to the wife reached the aggregate sum of $18,000, then the husband was obliged to continue payments to the wife at the rate of $800 per year as long as he lived. This significant term in the Slater agreement distinguishes it from the facts herein.

The appellant and respondent are in agreement that all of the conditions of paragraph 60(b) of the Income Tax Act are satisfied except for the question as to whether the payments in issue were "alimony or other allowance . . . for the maintenance of the recipient”. The sole issue therefore is the character of the monthly amounts paid by the appellant to Constance in 1984 and 1985. The appellant argues that the separation of capital was accomplished when the wife took the cottage; the husband took the farm; and the wife was awarded $97,000 from the proceeds of sale of the matrimonial home. Therefore, the further payments in the minutes of settlement and judgment must be for the wife's maintenance. I take a different view of the two documents.

In my opinion, the main thrust of the minutes of settlement was the division of capital property. The cottage and farm were specifically allocated to the wife and husband respectively. The sum of $97,000 from the sale of the matrimonial home was granted to the wife. And the husband was required to pay a further amount of $208,000 to the wife in any one of three ways:

(a) $208,000 fully paid by April 1,1981 ;

(b) five annual instalments of $58,000, $40,000, $40,000, $40,000 and $30,000 with interest at ten per cent per annum after April 1, 1981; or

(c) monthly payments of $3,789.84 over 48 months from April 1981 to March 1985 including a ten per cent interest component.

The minutes of settlement stated in paragraph 1 that the parties were making a“ clean break”. The wife agreed in paragraph 8 to provide a release if requested. The judgment (Ex. A-2) was simply a court order which adopted the terms of the minutes of settlement. The words "maintenance", "support" or “alimony” do not appear in the minutes of settlement or in the judgment except with respect to the $450 per month for the daughter Polly. Any portion of the $208,000 paid after April 1,1981 was subject to interest at ten per cent per annum whether in annual or monthly instalments. And the agreement survived the parties indicating that the wife (or her estate) was to receive the full amount of $208,000 either at one time (by April 1,1981) or over the next four years. If a single payment of $208,000 on April 1,1981 would have been a capital amount, as I think it would, how can the character of that amount change from capital to alimony or maintenance just because it is stretched over four years or 48 months?

According to criterion No. 4 in McKimmon, the appellant's option to pay a lump sum on April 1, 1981 or to spread the payments over four years is commonly associated with an obligation to pay capital sums. I have no doubts concerning the decision to be given in these appeals but, if I were in doubt, the decision to dismiss the appeals is clinched by the last few lines of paragraph 5 of the judgment which state:

Should the defendant wish to pay the principal sum then outstanding as at either April 1, 1982, 1983, 1984 and 1985 at the time he so elects, an amortization schedule will be prepared and the then principal balance outstanding will be made available to the defendant and payment can be made in accordance with the said principal balance then outstanding.

It is worth noting that the words "principal sum" appear once and the words "principal balance” appear twice in the above quotation. For the above reasons, the appeals are dismissed with costs.

Appeals dismissed.