Norman C. Soldera v. Minister of National Revenue, [1991] 2 CTC 2097, 91 DTC 987

Garon, T.C.J. [Orally]: —In this case, the appellant appeals an income tax reassessment dated April 25, 1989, whereby the respondent disallowed the deduction in the amount of $7,500 claimed by the appellant in computing his income for the 1986 taxation year.

The facts are not in dispute. By paragraph 3 of a Decree Nisi of divorce, dated June 20, 1983, issued by the Queen's Bench of Alberta, the appellant was ordered to pay to his wife, who was the Petitioner in the proceeding which led to the issue of the Decree Nisi:

. . . for the maintenance and support of the aforesaid children the sum of Two Hundred Dollars ($200.00) per month per child.

The mention in paragraph 3 of the above Order of "aforesaid children” is a reference to the two children of the appellant's marriage with his former spouse, who is hereafter referred to as Mrs. Leggett. In the same Decree of the Court it was "Further Ordered And Adjudged that maintenance for the Petitioner is reserved".

The appellant and Mrs. Leggett were divorced later in 1983. Sometime during that year the appellant moved to the Province of Ontario. Less than two months after the date of the above Decree Nisi, the solicitors for the appellant wrote the solicitors for Mrs. Leggett about, amongst other things, the matter of the maintenance payments for the two children of the appellant and Mrs. Leggett. The letter dated July 26, 1983, of the appellant's solicitors, reads in part as follows:

In addition my client is presently working part-time and he cannot afford to pay the sum of $200.00 per month per child. He is, however, prepared to pay $100.00 per month per child and he asked me to request that your client agree to an amendment of the original Decree Nisi on consent to reduce the amount of support for each child to $100.00 per month.

The evidence discloses that between the date of the Decree Nisi of June 20, 1983, and June 1986, no single payment was made by the appellant to Mrs. Leggett pursuant to the subject Order of the Court. The appellant explained that because of certain disputes with Mrs. Leggett and his personal financial situation the maintenance payments fell in arrears. The appellant elaborated further by indicating that he was, during a portion of the three-year period, unemployed or at times employed on a part-time basis. He went on to say that he had to obtain the financial assistance of his parents. On the other hand, Mrs. Leggett was, according to the appellant's best recollection, in receipt at that time of an annual income of about $46,000.

As alleged in the notice of appeal and as admitted by the respondent in his reply to the notice of appeal, a settlement was arrived at between the appellant and Mrs. Leggett in respect of the maintenance payments for the children and other matters. The minutes of such settlement not having been located could not be filed at the hearing of this appeal but it would appear they were incorporated into an Order of the same Court of Queen's Bench of Alberta dated August 1, 1986. It is mentioned in particular in this 1986 Order that it was issued upon the ex parte application of Mrs.Leggett and upon reading her affidavit and the minutes of settlement attached thereto. The body of the Order of August 1, 1986, reads as follows:

It Is Hereby Ordered:

1. That paragraph 3 of the Decree Nisi be and is hereby varied by deleting the same and substituting therefore the following:

3. It Is Further Ordered And Adjudged that the respondent shall pay to the Petitioner for the maintenance and support of the child Adrian Charles Soldera the sum of $100.00 per month until the 31st day of May, 1987, following which there shall be no further support payable, and all obligations for the support of the said child by Norman Soldera shall cease; and for the support of Talitha Ann Soldera the sum of $100.00 per month until the month immediately preceding her eighteenth birthday, following which there shall be no further support payable, and all obligations for the support of the said child by Norman Soldera shall cease.

2. That paragraph 4 of the Decree Nisi be and is hereby varied by deleting the same and substituting therefore the following:

4. And It Is Further Ordered And Adjudged that the Petitioner's claim for maintenance is dismissed.

3. That the arrears of maintenance as of May 31, 1986 by and the same are hereby fixed at $7,500.00.

In anticipation of the Order of August 1, 1986, a cheque dated June 19, 1986, in the amount of $7,900 was drawn by the appellant to the order of his solicitors. This cheque was held in trust by the appellants solicitors for some time and forwarded later to Mrs. Leggett’s solicitors in the latter part of July 1986. It is not disputed that out of the amount of $7,900 the sum of $400 represented the maintenance payments in respect of the two children for the months of June and July 1986. It was also brought in evidence that the appellant made the monthly payments of $200 to Mrs. Leggett during the balance of 1986 and in 1987 until June 5. At that point the appellant began to make monthly remittances of $100 in respect of his younger child and continued doing so until she attained the age of 18 years. All these monthly payments of $200 or $100 as the case may be, were made in accordance with the terms of the Order of August 1, 1986.

It is the appellant's position, in light of these facts, that the $7,500 deduction should be allowed because it was a lump sum payment for maintenance made on account of amounts payable periodically that were due after the Order of June 20, 1983, and that had fallen in arrears. In expressing in this way the appellant's position I was paraphrasing the wording of the notice of objection, dated October 31, 1989, served by the appellant in response to the reassessment of April 25, 1989, that has been attacked in this appeal. That notice of objection reflects better than the notice of appeal the position adopted by the appellant's representative in the course of the hearing of this appeal.

For his part the respondent submitted that the sum of $7,500 was in full and final satisfaction of all liabilities outstanding as at May 31, 1986, under the Decree Nisi and consequently, in his view, the subject amount was not an allowance payable on a periodic basis for the maintenance of the children of the marriage. At this juncture, I should state that it is common ground that all the requirements for the application of paragraph 60(b) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") are met in the present case with the exception of the element relating to the nature of the payment of $7,500.

Before entering into a discussion of the facts involved in the present case and proceeding with an analysis of the terms of the Orders respectively dated June 20, 1983, and August 1, 1986, I find it convenient to study the principles laid down in the judgment of the Supreme Court of Canada in the case of the M.N.R. v. Armstrong, [1956] C.T.C. 93; 56 D.T.C. 1044, and in the decision of the Federal Court of Appeal in the case of The Queen v. Sills, [1985] 1 C.T.C. 49; 85 D.T.C. 5096. These decisions deal with deductibility of lump sum payments made by a taxpayer to a spouse, or his former spouse, in the context of the provisions of the Income Tax Act that were either identical with or similar to the present paragraph 60(b) of the Income Tax Act which paragraph is relevant to the present litigation.

In the Armstrong case, supra, the facts are well summarized in headnote of the referenced reports. The relevant part of this headnote reads as follows:

The Respondent was divorced by his wife in 1948. The divorce decree provided the payment of $100.00 monthly to his wife for the maintenance of their daughter until she reached the age of sixteen years. The payments ordered were made until the summer of 1950. At that time his wife accepted a lump sum of $4,000.00 in full settlement of all amounts payable in the future.

The Chief Justice in that case, speaking for himself and two other judges of the five-member Court said this at page 94 (D.T.C. 1045):

The test is whether it was paid in pursuance of a decree, order or judgment and not whether it was paid by reason of a legal obligation imposed or undertaken. There was no obligation on the part of the respondent to pay, under the decree, a lump sum in lieu of the monthly sums directed thereby to be paid.

Justice Kellock who wrote separate reasons in that case, but concurring in the result, made an interesting observation at page 95 (D.T.C. 1045) of the reference report:

In my opinion, the payment here in question is not within the statute. It was not an amount payable "pursuant to" or "conformement à" (to refer to the French text) the decree but rather an amount paid to obtain a release from the liability thereby imposed.

The comments of Justice Locke at page 97 (D.T.C. 1046) are worth noting:

It was for the purpose of obtaining what purported to be a release of the appellant's liability to maintain his infant child to the extent that it was imposed by the decree nisi that the $4,000 was paid. It cannot, in my opinion, be properly said that this lump sum was paid, in the words of the section, pursuant to the divorce decree. It was, it is true, paid in consequence of the liability imposed by the decree for the maintenance of the infant, but that does not fall within the terms of the section.

In the Sills case, supra, the taxpayer was entitled, pursuant to the terms of her separation agreement, to receive specific monthly payments from her husband. Although the taxpayer's former spouse, in that case, made certain payments to the taxpayer arrears had accumulated by the end of 1975 and in 1976 the taxpayer received three lump sum payments of $1,000 each at random times during that year. The following passages in the judgment of Justice Heald, speaking for the Federal Court of Appeal, are particularly interesting. At page 52 (D.T.C. 5098) he said this:

On these facts the $3,000 received by the respondent from LaBrash was clearly paid by him and received by her to carry out the terms of the separation agreement. Some of the money was payable to the respondent as alimony, the remainder was payable to her as maintenance for the dependant children. All of it was payable on a monthly basic as stipulated in the separation agreement. Where the trial judge erred, in my view, was in not having due regard to the use of the word “payable” in the subsection. So long as the agreement provides that the moneys are payable on a periodic basis, the requirement of the subsection is met. The payments do not change in character merely because they are not made on time. The learned Tax Review Board member made the same error, in my view, when he said that the amounts to be included in income “must be received exactly according to the terms of the agreement". The subsection does not say that.

Later on, the same learned judge added, beginning at page 53 (D.T.C. 5098-99) the following comments:

There is a clear distinction between the facts in Armstrong and those in the present case. In Armstrong the respondent was divorced by his wife in 1948. The divorce decree provided for monthly $100 payments to the wife for maintenance of their daughter until she became 15. The payments so ordered were made until the summer of 1950 when the wife accepted a lump sum settlement of $4,000 in full settlement of all amounts payable in the future. Thus clearly the $4,000 was not paid pursuant to the divorce decree but in lieu thereof. However, in the case at bar, all moneys were paid to carry out the terms of the separation agreement. The consequence and result of these payments was not to finally release the husband from his liabilities to his wife and children under the separation agreement as was the case in Armstrong and in Trottier another decision of the Supreme Court of Canada where the principle enunciated in Armstrong was followed.

Having regard to the foregoing principles, I shall now proceed with the consideration of the factual situation in the present case and the terms of the two Orders referred to above providing for certain payments to be made by the appellant to Mrs. Leggett in respect of the maintenance of their children.

First of all, in the 1986 Order there is no provision whereby the appellant is released in express terms from any existing or future liability in respect of the maintenance of his children. On the other hand, the effect of the 1986 Order is that from the time it became operative the matter of both the existing or future liability is no longer governed by the 1983 Order as it stood at the time of its issue in June 1983. In effect, the appellant's obligation with regard to the payments to be made in the future for the maintenance and support of the children of the marriage was set out in paragraph 1 of the 1986 Order which varies paragraph 3 of the 1983 Order which reduces inter alia the monthly payments to be made in respect of the maintenance of the children to $100. Furthermore, the matter of the appellant's existing liability prior to the issue of the 1986 Order in respect of the maintenance payment that had fallen in arrears, was expressly dealt with in paragraph 3 of the 1986 Order which provides that, leaving out certain expletive words: ”. . . the arreas of maintenance as of May 31, 1986 . . . are hereby fixed at $7,500.00.”

In my view, the effect of paragraph 3 of the 1986 Order was simply to reduce to $7,500 the appellant's liability as of May 31, 1986, in respect of the maintenance payments that were then in arrears. In this connection it must be recalled that the total amount owing by the appellant as of May 31, 1986, under paragraph 3 of the 1983 Order was approximately $14,000. It then becomes apparent that paragraph 3 of the 1986 Order in fixing the arrears of maintenance payments at $7,500 as of May 31, 1986, in effect reduced the appellant's liability roughly by half. Paragraph 3 of the 1986 Order does not alter or change the nature of the appellant's liability but simply reduces it. This is made clear By an express reference in that paragraph to the “arrears of maintenance as of May 31, 1986”. If need be, the point that the nature of the appellant's liability fixed by paragraph 3 of the 1986 Order is not affected is reinforced by the fact that the payment of $7,500 is roughly in line with what the appellant indicated he was willing to pay in terms of maintenance payments for his children in his solicitor's letter of July 26, 1983, to Mrs. Leggett's solicitors. As well, the sum of $7,500, if broken down to monthly payments, represents approximately what the appellant was required to pay under paragraph 1 of the 1986 Order and actually paid to Mrs. Leggett in respect of the maintenance of their children. From another angle, the payment or $7,500 could be viewed as part payment of all arrears owing under the 1983 Order, which part payment was in a sense accepted by Mrs. Leggett since provision for the $7,500 payment in settlement of the appellant's liability as of May 31, 1986, is contemplated in paragraph 3 of the 1986 Order for which Mrs. Leggett had applied ex parte.

The soundness of the position I have adopted respecting the the nature and character of the $7,500 payment by the appellant becomes, I believe, more apparent if the hypothetical situation that follows is considered.

If, for instance, the appellant here had during the currency of the first Order made monthly payments of $100 to Mrs. Leggett in respect of the maintenance of each child, after having informed his ex-wife that he could not afford to pay more, as he said in his solicitor's letter of July 26, 1983, referred to above, instead of making monthly remittances of $200 per child as required by the 1983 Order, and if his former wife had accepted these payments by cashing the cheques absent any other relevant facts, there is no doubt that these monthly payments in this hypothetical situation would have been deductible by the payer under subsection 60(b) of the Income Tax Act and includable by the payee in her income under paragraph 56(1)(b) of the Income Tax Act. In effect these payments would be viewed as a partial payment of an allowance payable on a periodic basis for the maintenance of his children. Otherwise, any payment of an allowance which is in any degree lesser than the total amount provided under an Order of the Court or separation agreement could not be deducted from the income of the payer and would not have to be included in the income of the payee. This result is certainly not intended for the smooth operation of the statutory provisions relating to the deduction from and inclusion in income of alimony and maintenance payments.

I am fortified in this approach by the reasoning adopted by Mr. Davis of the Tax Appeal Board in the case Bertram v. M.N.R., [1970] Tax A.B.C. 759; 70 D.T.C. 1510 when he expressed himself, as follows, at page 764 (D.T.C. 5153):

Counsel for the appellant argued that, because certain of the arrears of alimony were forgiven when the agreement of December 1, 1965, was entered into and the appellant agreed to accept the lesser sum of $8000 in satisfaction of arrears greatly in excess thereof, the entire situation had changed, and the original periodic. payments had thereby lost their character as such. I have great difficulty in following this line of reasoning. Moreover, this contention was never raised in the appellants notice of objection or in her notice of appeal, nor was it raised in the correspondence between the appellants solicitor and the taxation officials.

I regard the agreement of December 1, 1965, as a confirmation of Eadie's legal responsibility to make the original periodic payments, embodying therein a new schedule setting out when the respective payments of the compromised amount were to be made. This agreement was in no sense a final or general release to the appellants husband of any liability to continue to make payments which were not yet in arrears. It is arguable that, if Eadie had defaulted on the agreement of December 1, 1965, the appellant would have been free to bring an action for whatever was actually owing to her on the original separation agreement.

I am therefore of the view that the payment of $7,500 made by the appellant under paragraph 3 of the 1986 Order represents a portion of the arrears of maintenance payments that were an allowance payable on a periodic basis under the 1983 Order. Consequently, this payment of $7,500 is deductible in full in computing the appellant's income for the 1986 taxation year.

For these reasons, the appeal is allowed with costs and the reassessment dated April 25, 1989, is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the subject payment of $7,500 is deductible in full in the computation of the appellant's income for the 1986 taxation year.

Appeal allowed.