Serena G. Hewett-Carlson v. Minister of National Revenue, [1989] 1 CTC 2065, 89 DTC 4

Sarchuk, T.C.J.:—The appeal of Serena Hewett-Carlson is from a reassessment of tax with respect to her 1984 taxation year. The circumstances giving rise to the reassessment are as follows. The appellant separated from her former spouse, Dr. Richard Carlson, late in 1981. A divorce petition was issued on her behalf in April 1982 seeking, among other things, support for both the appellant and the children of the marriage. An interim order was made upon the mutual consent of both parties on April 22, 1982 which provided for support in the sum of $2,500 per month to be paid by Dr. Carlson to the appellant for the support and maintenance of herself and the two children.

Subsequent to that date a separation agreement was drafted incorporating support and various other provisions as to property upon terms which, it appeared, were agreeable to both parties. Prior to signing that agreement Dr. Carlson moved to the State of Texas and when contacted by the appellant's solicitor indicated that he would pay nothing further and would not co-operate in any way with respect to the divorce proceedings.

The divorce proceeded without Dr. Carlson's participation and came on for hearing before Mr. Justice Walsh of the Supreme Court of Ontario on February 25, 1983. The amounts payable for the maintenance of the appellant and the children of the marriage under the interim order were, at that time, in substantial arrears.

Pursuant to a decree nisi made February 25, 1983 the Court directed that the appellant's former spouse pay an amount for the support and maintenance of the children and further directed that the matrimonial home and a motor vehicle be vested in the appellant in satisfaction of her claims under Part I of the Family Law Reform Act and lump sum maintenance.

In addition to the foregoing the Court further ordered that the interest of Dr. Carlson, in a Registered Retirement Savings Plan account, registered with the Maritime Life Assurance Company, being a deferred annuity policy, "be and the same is hereby vested in the Petitioner in satisfaction of the arrears of support under the Interim Order of Master Donald Elliott made herein the 22nd day of April 1982”.

Evidence was adduced from the appellant with respect to the problems she and her counsel encountered in obtaining the proceeds of the Registered Retirement Savings Plan (RRSP). She herself was the owner of a spousal RRSP at the Maritime Life Assurance Company and sought to transfer the funds in Dr. Carlson's RRSP to her RRSP. This could not be done without Dr. Carlson's consent which was refused. Various alternatives were considered. Counsel wrote to Revenue Canada, Taxation, to determine its position. In due course the appellant learned that an annuitant's consent was not always necessary for a transfer to take place pursuant to subsection 146(16) of the Income Tax Act (the Act). Revenue Canada, Taxation, suggested that in certain circumstances if a court ordered that an amount in an RRSP be vested in a spouse or former spouse then a transfer of property could take place whether or not the annuitant agrees. However in this particular case Revenue Canada, Taxation, was also of the view that the decree nisi provided that Dr. Carlson's RRSP was to be vested in the appellant to satisfy arrears for support payments. Such vesting did not appear to satisfy the provisions of subparagraph 146(16)(a)(ii) [1] in that it did not relate to a division of property in settlement of rights arising out of marriage. That conclusion does not appear to be in dispute.

Following this exchange the Maritime Life Assurance Company took the following position in a letter to the appellant's solicitors dated April 13, 1984:

The fact that the transfer of Dr. Carlson's RRSP does not fall with the provisions of paragraph 146(16)(a)(ii) of the Income Tax Act has two major ramifications. First, it means a significant amount of withholding tax must be paid before distribution of the funds. This amount could be as much as 30% of the accumulated value of the policy (in the vicinity of $6,000). There are two ways of extracting this withholding tax. The first is to have the tax paid by the policyowner and the second is to simply retain the tax out of the funds to be distributed from the policy. Our normal procedure is the former however you have indicated it is unlikely we are to obtain Dr. Carlson's cooperation in this matter. The second problem created by this new picture is that the funds received by Mrs. Carlson will not be eligible for a transfer to an RRSP. Certainly, she is entitled to put a portion of these funds into a RRSP, up to her yearly limit, but the full amount of the funds will not be eligible.

The Maritime Life Assurance Company wrote to Dr. Carlson seeking his cooperation but not surprisingly he refused (Exhibit A7-14).

Instructions were then given on the appellant's behalf to have the RRSP collapsed; that was done and in due course the balance of the funds, less administration fee, surrender charge and RRSP withholding taxes, was remitted to the appellant. The T4-RRSP for the withholding tax was sent to Dr. Carlson.

In filing her income tax return for the 1984 taxation year the appellant reported that her total income for the said year was $24,608.37. The respondent reassessed her and included in her total income a receipt in the amount of $13,476, thereby increasing her total income to $42,583.

Counsel advanced two positions on behalf of the appellant. The first is that neither the amount of $21,129.08 (being the gross amount of the RRSP) or the amount of $13,476.29 (being the net amount the appellant received) is taxable because neither was “paid” in accordance with the original interim order for support. Furthermore, neither amount accords with the amount of arrears which were owing at the time and the element of periodicity required by the provisions of the Act is absent. It was therefore submitted that the payment in issue represented a lump sum settlement of arrears owing under the interim order and once paid the interim order was fully satisfied. Counsel argued that where a commuted lump sum payment is made to obtain release from liability under an order, such payment is not then made in accordance with an order and is therefore neither deductible nor includable in income, and urged the Court to apply the reasoning in M.N.R. v. Armstrong, [1956] S.C.R. 446; [1956] C.T.C. 93.

Counsel for the respondent submitted that Armstrong, supra, has no application. She argued that the interest in the RRSP vested in the appellant

. . . in satisfaction of the arrears of support" and that the Order of Mr. Justice Walsh was made in circumstances similar, if not identical, to those in The Queen v. Sills, [1985] 1 C.T.C. 49; 85 D.T.C. 5096. In Sills, supra, the facts before the Court were that under the terms of a written separation agreement Sills was to receive a defined monthly payment from her husband. Although the husband paid certain sums of money to her by the end of 1975 arrears in the sum of $2,500 had accumulated. In 1976 the husband made three payments of $1,000, at random times, and in each case when such payments were received the arrears owing always exceeded the moneys received. The Minister included these amounts in Sills’ income as alimony.

In the course of his judgment Mr. Justice Heald said at page 52 (D.T.C. 5098):

The Shorter Oxford Dictionary defines "pursuant", inter alia, as "in accordance with". The Fifth Edition of Black’s Law Dictionary defines “pursuant”, inter alia, as "to execute or carry out in accordance with or by reason of something”. It also defines "pursuant to" inter alia, as follows: "pursuant to" means “in the course of carrying out; in conformance to or agreement with; according to". 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 basis 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.

There can be no argument that the moneys paid in 1976 were, under the agreement, payable partially in satisfaction of her alimony claim prior to July of 1975 and partially in satisfaction of the claim for maintenance of the dependant children. Likewise, it is agreed that the respondent in 1976 was living apart from her spouse under the terms of a separation agreement which agreement required her spouse to make the payments at the time she received them and throughout the remainder of 1976. However, respondent's counsel relies on the Armstrong case supra, a decision of the Supreme Court of Canada ([1956] C.T.C. 93; 56 D.T.C. 1044). She cites from the reasons of the Chief Justice at 94 [1045] where he stated the proper test for the application of the predecessor section to paragraph 56(1)(b) to be as follows:

The test is whether it was paid in pursuance 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.

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 sixteen. 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.

I am satisfied that Sills v. M.N.R., supra, is applicable. As noted in Sills, the payment did not change in character merely because it was not made on time, nor because its payment was enforced by the Court. The payment in issue was unquestionably directed for the express purpose of forcing compliance with the terms of the interim order.

The second position advanced on behalf of the appellant is that the order of Mr. Justice Walsh vested in the appellant an asset valued at approximately $21,000 and that this vesting took place as of the date of pronouncement of the order, being February 1983. Notwithstanding the fact that the policy was collapsed almost a year later, the effect of that vesting order is that the property, being the RRSP, was immediately and absolutely the appellant's and Dr. Carlson had no further right to it. Counsel argued that tax equity could be achieved by including in the appellant's 1984 income the amount of $21,000, crediting her with the taxes withheld and crediting Dr. Carlson with $21,000 as a support payment. That suggestion, when made to Revenue Canada, Taxation, was rejected. Counsel now urges the Court to exercise its discretion and direct the respondent to reassess in that manner on what are essentially equitable grounds. In the event the Court were to hold that it had no jurisdiction to increase an assessment, as urged by counsel for the respondent, counsel for the appellant further argued that the amount of income assessed be left at $13,000 but that this Court should, on an equitable basis, credit the appellant with the amount of taxes withheld. It is the appellant's position that the taxes deducted from the proceeds of the RRSP were withheld from an asset belonging to her and that she was and remains entitled to the credit for the taxes withheld in the amount of $5,775.75.

I am satisfied that I have no jurisdiction to increase the amount of the assessment, which is essentially what the appellant's position amounts to, nor do I have the jurisdiction to instruct the Minister of National Revenue to include the full amount of the proceeds from the RRSP in the appellant's income and to direct the respondent to credit the amount of the withholding taxes to her in that taxation year. As my colleague, Rip, T.C.J. recently noted in Cohen v. M.N.R., [1988] 2 C.T.C. 2021 at 2023; 88 D.T.C. 1404 at 1406:

The Court can consider an appeal of an assessment of tax only when relief sought is in the form of a reduced amount of tax for the year under appeal: Vide: No. 526 v. M.N.R., 20 Tax A.B.C. 114; 58 D.T.C. 497, Neil L. Boyko et al. v. M.N.R., [1984] C.T.C. 2233 at 2237; 84 D.T.C. 1233 at 1237 and Steven Cooper v. M.N.R., [1987] 1 C.T.C. 2287 at 2301; 87 D.T.C. 194 at 205. The Court has no authority to increase tax in a taxation year properly before it even if such a decision may result in reduced taxes for other taxation years.

It may well be, as counsel for the appellant noted, that the Ontario courts fairly uniformly have taken the position that they do not look at tax consequences or disposition costs in respect of various assets unless a particular type of disposition is contemplated at the time of the trial. That may be so, but as a result of the decree nisi the appellant finds herself in a Catch-22 situation. It is not for me to speculate what order might have been made had the relevant provisions of the Act been considered.

I have considered the arguments submitted and have concluded that the position taken by the respondent is correct. A Registered Retirement Savings Plan is a creation of the Parliament of Canada. It exists solely and only under the Act. It has to be registered pursuant to the provisions of subsection 146(1). That is a requirement of the Act. Pursuant to subsection 146(2), only the Minister of National Revenue can accept a plan for registration. Once so registered there is only one beneficiary, one annuitant. In this case the RRSP was registered in the name of Dr. Carlson. The Supreme Court of Ontario does not have the jurisdiction to deal with matters arising under the Act and the decision of Walsh, J. could not by itself have the effect of transferring the RRSP; a transfer can only be effected if the provisions of subsection 146(16) of the Act were met. The decree nisi cannot be read as giving the appellant an unconditional entitlement to the whole of the RRSP since it is subject to the provisions of the specific sections of the Income Tax Act dealing with RRSPs.

When the plan had to be collapsed the provisions of paragraph 153(1)(j) required the payor to remit a portion of the proceeds by way of withholding taxes to the Receiver General. Equally the payor had no alternative but to provide the registered owner of the plan with the requisite T4RSP. Failure to do so brings into operation the provisions of subsection 227(10) and entitles the respondent to asses the payor and impose a penalty. All of the steps taken by the payor were in accordance with the various provisions of the Act.

The appellant, in her income tax return, did not include the receipt of the amount of $13,476, being the proceeds of the collapsed RRSP. I have found that these funds were paid to her to carry out the terms of the interim order and were properly included in her income by the respondent.

The appeal is dismissed.

Appeal dismissed.