Lynda Aceti v. Minister of National Revenue, [1992] 2 CTC 2282

Rip, T.C.CJ.:—Lynda Aceti ("Aceti") appealed her income tax assessment for 1988 in which the Minister of National Revenue Minister") added to her income the sum of $18,750 in accordance with the provisions of paragraph 56(1)(b) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). Aceti is of the view that of the $24,750 she received in 1988 from her former husband Matthew Gravino ("Gravino"), $20,250 represented “various random lump sum payments [paid] at his sole discretion not pursuant to any agreement and only $4,500 ought to be included in her income for the year.

Any finding by the Court with respect to Aceti's appeal would affect her former husband's assessment for 1988 as well. Therefore the Minister, on September 5, 1991, applied to this Court for an order pursuant to paragraph 174(3)(b) of the Act joining Gravino as a party to Aceti's appeal to determine the following question:

What portion of the amount of $24,750 was received by Lynda Aceti and paid by Matthew Gravino pursuant to a written separation agreement as alimony or other allowance payable on a periodic basis for the maintenance of herself and/or her children, within the meaning of paragraphs 56(1)(b) and 60(b) of the Act, as subject to subsections 56.1(3) and 60.1(3) of the Act, respectively, with the consequence that Lynda Aceti is required to include the amount in the calculation of her income for her 1988 taxation year and Matthew Gravi no is permitted to deduct the amount in the calculation of his income for said year?

Aceti and Gravino were married in 1970 and commenced to live separate and apart on December 21, 1987. Two children, aged 13 and 14 at time of trial, were born of the marriage.

Gravino stated that initially he paid "pocket moneys" to Aceti in 1988. He made no regular maintenance payments to his wife before May, 1988 but in his mind there was an agreement between him and his wife that provided for the payment of $750 per month support for each child and $750 per month for Aceti. He started making monthly payments of $2,250 to Aceti on May 3, 1988 and continued to make these payments on June 1, July 2 and August 1, 1988. Aceti acknowledged that she received cheques of $2,250 from Gravino in each of these months.

At first Aceti was of the view that she did not require a separation agreement but in February she retained counsel to represent her interests in negotiating such an agreement with her husband. Gravino testified that the main issue in negotiation was custody of the children; "the financial aspects had been agreed right from the beginning”. While a separation agreement was being negotiated Gravino's solicitor was hospitalized with a heart ailment and a final draft of the agreement was not ready for execution until August, 1988. On August 18 and 20, 1988 a separation agreement purporting to be "made this 22nd day of March, 1988 was signed by Gravino and Aceti respectively.

The separation agreement ("agreement") contains, amongst other things, the following provisions:

FINANCIAL PROVISION

a) Spousal Support

The husband shall pay to the wife the sum of Seven Hundred and Fifty Dollars (750) per month for a period of two years only. The said payments are to commence as of the 1st day of January, 1988 and are to be paid on the 1st day of each month thereafter for the said period of two years so long as the wife does not remarry, co-habit with a male person or dies.

b) Child Support

The husband shall pay to the wife the sum of Seven Hundred and Fifty Dollars ($750) per month per child so long as the children are children of the marriage as defined under the Divorce Act of Canada. Said payment to commence January 1st, 1988.

The agreement also provided for Aceti to have custody of the two children.

On September 7, 1988 Gravino paid to Aceti the sum of $11,250. Aceti agreed that this amount represented the $9,000 Gravino did not pay her in the first months of 1988, that is, $2,250 for January, February, March and April, and $2,250 for September, 1988. Gravino also paid to Aceti the sum of $1,500 on each of October 1, November 1 and December 1,1988. [1]

The amounts of $1,500 paid by Gravino to Aceti in each of October, November and December, 1988 are not in issue. The parties agree that these sums ought to be included in the income of Aceti in accordance with paragraph 56(1)(b) and be deductible by Gravino in computing his income in accordance with subsection 60(b) of the Act.

In reporting her income for 1988, Aceti included in income only the $4,500 she received during the months of October, November and December as alimony or maintenance payments. However, by Notice of Reassessment, the Minister added $18,750 of the payments by Gravino to her income, for a total of $23,250. Apparently the Minister, in reassessing, omitted to include the $1,500 Aceti received in December and when he made the application in accordance with section 174 included the payment of $1,500 for December in the question put to the Court, thus asking the Court to allocate the total payments of $24,750 between what payments are included in her income as alimony and what amounts are not.

Paragraphs 56(1)(b) and 60(b) and subsections 56.1(3) and 60.1(3) of the Act read as follows:

56(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(b) any amount received by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if the recipient was living apart from and was separated pursuant to a divorce, judicial separation or written separation agreement from, the spouse or former spouse required to make the payment at the time the payment was received and throughout the remainder of the year;

60 There may be deducted in computing a taxpayer’s income for a taxation year such of the following amounts as are applicable;

(b) an amount paid by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if he was living apart from, and was 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 at the time the payment was made and throughout the remainder of the year;

56.1(3) For the purposes of this section and section 56, where a decree, order or judgment of a competent tribunal or a written agreement made at any time in a taxation year provides that an amount received before that time and in the year or the immediately preceding taxation year is to be considered as having been paid and received pursuant thereto, the following rules apply:

(a) the amount shall be deemed to have been received pursuant thereto; and (b) the person who made the payment shall be deemed to have been separated pursuant to a divorce, judicial separation or written separation agreement from his spouse or former spouse at the time the payment was made and throughout the remainder of the year.

60.1(3) For the purposes of this section and section 60, where a decree, order or judgment of a competent tribunal or a written agreement made at any time in a taxation year provides that an amount paid before that time and in the year or the immediately preceding taxation year is to be considered as having been paid and received pursuant thereto, the following rules apply:

(a) the amount shall be deemed to have been paid pursuant thereto; and

(b) the person who made the payment shall be deemed to have been separated pursuant to a divorce, judicial separation or written separation agreement from his spouse or former spouse at the time the payment was made and throughout the remainder of the year.

As suggested by Ms. Valeriano, counsel for Aceti, her client received three different categories of payments from Gravino. These were:

(a) the payments of $2,250 made in each of May, June, July and August, 1988, aggregating $9,000;

(b) a payment made on September 7, 1988 in the amount of $11,250; and

(c) the payments of $1,500 made in each of October, November and December, 1988, aggregating $4,500.

As previously stated the last category of payments is not in dispute. The dispute between the parties is in respect to the payments made during the period May 1988 to August, 1988 in the amount of $9,000 and the payment of $11,250 made by Gravino to Aceti on September 7, 1988.

In order for the payments of $9,000 to be included in the income of Aceti and to be deductible by Gravino in the computing of his income for 1988, the payments must meet the requirements of either paragraph 56(1)(b) or subsection 56.1(3).

To be included in the recipient's income and deductible in computing the payer's income for the year the periodic payments totalling $9,000 are to be made pursuant to a decree, order or judgment of a competent tribunal or written agreement as alimony or maintenance payable on a periodic basis and at the time the payment was received and throughout the remainder of the year the recipient and payer are to live apart pursuant to a divorce, judicial separation or written separation agreement: paragraphs 56(1)(b) and 60(b). [2] However, on May 3, June 1, July 2 and August 1, 1988 when Gravino made the payments to Aceti, no separation agreement nor any written agreement existed between them. The moneys were not paid or received pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement. The fact that the agreement states that the payments were to commence in January, 1988, and is dated March 22, 1988, does not alter the fact that an agreement did not exist at the time the payments were made and received: See Chenail v. M.N.R., [1968] Tax A.B.C. 641, 68 D.T.C. 498 (T.A.B.); Haigh v. M.N.R., [1971] Tax A.B.C. 434, 71 D.T.C. 308 (T.A.B.).

Counsel for Gravino argued that the payments should be deductible by his client in computing income since Gravino and Aceti had agreed on the amounts required to be paid as alimony or as a periodic allowance for her maintenance and that of her children; it was only due to unfortunate circumstances, counsel's illness, that the agreement was not reduced to writing at the time the payments were made.

I do not question counsel's reason for the delay in having the agreement executed. However paragraph 56(1)(b) and subsection 60(b) are quite clear: a written separation agreement must exist at the time a payment is made. This was not the case before August 20, 1988.

With respect to subsections 56.1(3) and 60.1(3), the agreement between Aceti and Gravino does not provide that the amounts made and received in May, June, July and August are to be considered as having been paid and received pursuant to the agreement. In Stewart v. M.N.R., [1990] 1 C.T.C. 2231, 90 D.T.C. 1110, Lamarre Proulx, T.C.C.J. stated, at page 2235 (D.T.C. 1113), that:

Not only shall the clause stipulate that amounts have been received in the year or the previous year but it should also be clear that the parties want these amounts to be considered as having been paid and received pursuant to the agreement.

See also Chabros v. The Queen (unreported), File No. 91-2294 and Cottrell v. M.N.R., [1990] 2 C.T.C. 2031, 90 D.T.C. 1581.

The amounts of $2,250 paid by Gravino and received by Aceti in May, June, July and August of 1988, aggregating $9,000, are not to be included in Aceti's income, nor are the payments to be deducted in computing Gravino's income, for 1988.

Gravino paid Aceti the $11,250 on September 7, 1988, after the agreement had been made. This payment was made pursuant to the agreement. Counsel for Aceti argued that this amount represented a lump sum payment and did not represent any arrears of amounts that were payable by Gravino to Aceti under the agreement. Gravino's counsel submitted the payment was made pursuant to the agreement which required him to make monthly payments for the maintenance of his wife and children for January, February, March, April and September, 1988; the payments for the first four months fell due on August 20, 1988, once the agreement was signed. In his view, the payment is one that is contemplated by paragraph 56(1)(b) and subsection 60(b): all of the $11,250, which includes the amount payable in September, 1988, was paid by Gravino to Aceti in September, 1988 pursuant to a written agreement as alimony or maintenance.

Counsel for the Minister agrees with Gravino's counsel. In his view, the $9,000, representing payments of $2,500 for each of January, February, March and April, was an amount received by Aceti in the year under a written agreement. The amounts of $2,500 were payable on a periodic basis since January 1, 1988 even though, in fact, they had not been paid. Counsel submitted that paragraph 56(1)(b) and subsection 60(b) contemplate an agreement to provide for periodic payments for periods prior to the making of the agreement. These provisions, he stated, do not require that the alimony or other allowance be paid on a periodic basis but that they be "payable on a periodic basis". [3] Counsel referred to Armstrong v. M.N.R., [1988] 1 C.T.C. 2019, 88 D.T.C. 1015.

I agree with counsel that the amounts required to be paid by the agreement need not be paid on a periodic basis as and when required by the agreement to be included in income of the recipient or deductible in computing the payer's income for the year, but amounts must be payable on a periodic basis under the terms of the agreement: The Queen v. Sills, [1985] 1 C.T.C. 49, 85 D.T.C. 5096. The word “ payable” is defined as". . . that may, can or must be paid" (Webster's Ninth New Collegiate Dictionary, 1989, at page 864), and as:

Capable of being paid; suitable to be paid; admitting or demanding payment; justly due; legally enforceable. A sum of money is said to be payable when a person is under an obligation to pay it. Payable may therefore signify an obligation to pay at a future time, but, when used without qualification, term normally means that the debt is payable at once, as opposed to "owing". (Black’s Law Dictionary, 6th Edition, 1990, at page 1128)

The agreement entered into on August 20, 1988 created a legal impossibility, the payment of a sum of money at a time prior to not only the execution of the agreement but also the effective date of the agreement, March 22, 1988. No amount can be said to be payable, nor is it payable, under an agreement before the making of the agreement. The amounts of money called for payment under an agreement with respect to periods prior to the agreement become due and payable under an agreement when the agreement is made, not as periodic payments with respect to periods prior to the agreement but as a lump sum payment. During the months of January, February, March and April no amount was capable of being paid under the agreement because at the time Gravino was under no obligation under the agreement to pay it; the amounts at those times were simply not payable and Aceti then could not enforce the payments. I agree with the interpretation of the Minister set out in his Interpretation Bulletin 118R3, op cit, and not the submissions of his counsel.

It may well be that Gravino and Aceti had agreed verbally that he pay to her $2,250 for the months of January, February March and April of 1988 and that such payments would be made on the first days of each of these months but such agreement is not contemplated by paragraphs 56(1)(b) and 60(b). In fact Gravino did pay Aceti $2,250 in each of those months. Unfortunately when he made the payments there was no written agreement between him and Aceti. In January, February, March and April no amount was payable by Gravino to Aceti on a periodic basis under a written agreement. Once the agreement was made, the payments required to be made prior to the making of the agreement were not capable of being made on a periodic basis. Hence prior to the making of the agreement the payments for January, February, March and April could not have been made pursuant to the agreement and once the agreement was made, the payments for those months were not capable of being made on a periodic basis and could only be paid in a lump sum as arrears.

Paragraph 56(1)(b) and subsection 60(b) do not recognize the retroactive intent of agreements between spouses and former spouses. It is for this reason that Parliament enacted subsections 56.1(3) and 60.1 (3), to recognize payments made and received prior to the making of an agreement when the parties intend the prior payments to be made pursuant to the agreement. A separation agreement is not unlike any other agreement or contract and the

ment be made in respect of a period prior to the date of that order or agreement,

would not qualify as periodic payments. However, a lump sum paid in a taxation year is regarded as qualifying as a periodic payment where it can be identified as being the payment of amounts payable periodically that were due after the date of the order and had fallen into arrears.

parties may provide that, as between themselves, it have a retroactive effect. However the tax results may not be what the parties intended. When the effective date of an agreement is relevant in the scheme of a provision in the Act the legislator, in the amending legislation or the Act itself, uses the words "made"/'entered into” or similar phraseology to express the effective time tax events are triggered by such agreement. [4] When the legislator contemplates existing agreements, such as those in paragraph 56(1) (b) and subsection 60 (b) there is, of course, no need to use the words "made or "entered into". In drafting these provisions the legislator contemplated that an agreement would be in existence at the time the payment was payable, paid and received.

The $11,250 paid by Gravino to Aceti on September 7, 1988 in my view represented two different sums:

(a) a lump sum payment of $9,000, which was calculated on the basis of $2,250 for each of January, February, March and April, 1988; and

b) $2,250 required by the agreement to be made on September 1, 1988.

The first amount was not made pursuant to the agreement since it was not a payment under the written agreement and was not paid as alimony or other allowance payable on a periodic basis under the agreement. The other amount, representing $2,250 for September, was made pursuant to the agreement since it was paid for a period after the agreement was made.

Therefore I determine the question as follows: $6,750 of the amount of $24,750 was received by Lynda Aceti and paid by Matthew Gravino pursuant to a written separation agreement as alimony or other allowance payable on a periodic basis for the maintenance of herself and/or her children within the meaning of paragraphs 56(1)(b) and 60(b) of the Act respectively with the consequence that Lynda Aceti is required to include $6,750 in the computing of her income for the 1988 taxation year and Matthew Gravino is permitted to deduct $6,750 in computing his income for the said year.

Lynda Aceti’s appeal shall be allowed, with costs, and the assessment for 1988 shall be referred back to the Minister for reconsideration and reassessment on the basis of the determination.

Appeal allowed.