Stanley John McKimmon v. Her Majesty the Queen, [1988] 2 CTC 71, 88 DTC 6296

Collier, J.: —This is an appeal from a decision of the Tax Court of Canada, [1986] 2 C.T.C. 2359; 86 D.T.C. 1752. The Court held certain annual payments made by the plaintiff to his former wife, in determining his taxable income for the 1982 and 1983 taxation years, were not deductible as alimony.

The plaintiff and his former wife, Betty McKimmon, were married on August 23, 1952. They separated on January 1, 1978. Shortly after their separation, the plaintiff agreed to pay his wife $600 per month as interim alimony. He continued to make those payments until the date of the divorce proceedings. On November 12, 1978, the plaintiff's wife filed a petition for divorce in the Supreme Court of British Columbia, claiming, inter alia, interim alimony and permanent maintenance for herself. By a consent judgment, by way of decree nisi dated January 5, 1982, the Court made the following order:

AND THIS COURT FURTHER ORDERS, by consent, that the Respondent pay to the Petitioner the lump sum maintenance of ONE HUNDRED THIRTY THOUSAND ($130,000.00) DOLLARS and periodic maintenance in the sum of ONE HUNDRED FIFTEEN THOUSAND ($115,000.00) DOLLARS in satisfaction of all financial relief under the Divorce Act and Family Relations Act, payable in the manner following, that is to day:

(a) Transfer to her of all that certain parcel or tract of land and premises situate at 33118 Whidden Avenue, Mission, British Columbia, more particularly known and described as:

Lot 53, S.W. /4, Section 28, Township 17, plan 28357, New Westminster District

free and clear of all encumbrances subject to existing tenancies, at a deemed value for the purposes of this Action of ONE HUNDRED THIRTY THOUSAND ($130,000.00) DOLLARS; such transfer to be completed by the 1st day of April, 1982 with an adjustment date being the date of transfer;

(b) Payment of the sum of ONE HUNDRED FIFTEEN THOUSAND ($115,000.00) DOLLARS in consecutive annual installments as follows:

$25,000.00 on the first day of April, 1982

$25,000.00 on the first day of January, 1983

$25,000.00 on the first day of January, 1984

$25,000.00 on the first day of January, 1985

$15,000.00 on the first day of January, 1986

together with and in addition to interest at the rate of TEN (10%) PERCENTUM per annum, on the balance of the said ONE HUNDRED FIFTEEN THOUSAND ($115,000.00) DOLLARS from time to time owing, such interest to commence accruing from and inclusive of the 1st day of April, 1982, and be computed half- yearly, not in advance, and become due and payable annually with the annual installments of principal as they become due and payable.

AND THIS COURT FURTHER ORDERS, by consent, that the Respondent cause Kapps Enterprises Ltd. to execute and deliver to the Petitioner a collateral mort- gage of all its equity as Purchaser in and to all that certain parcel or tract of land and premises situate at 34054 Parr Avenue, Mission, British Columbia, more particularly known and described as:

Lot 1, S.E. /4, Section 27, Township 17, plan 34254, New Westminster District

free and clear of all financial encumbrances (save and except the title interest of the unpaid Vendor) by the 1st day of April, 1982, such mortgage to be deemed collateral security for the payment of the said sum of ONE HUNDRED FIFTEEN THOUSAND ($115,000.00) DOLLARS and interest to the Petitioner as hereinbefore provided.

The collateral mortgage given by Kapps Enterprises Ltd., a corporation directed by the plaintiff, was required as the plaintiff had no other real property or unencumbered assets to secure the payment of $115,000 ordered by the Court in paragraph (b) of the decree nisi. The mortgage was never realized. It was discharged on January 8, 1986.

The court order, in addition, gave the plaintiff the privilege of prepaying the balance on any portion owing under the terms of the decree nisi. In the event of default by the plaintiff, his former wife was entitled to demand payment of the amount owing in full.

The plaintiff complied fully with the terms of the order. There was no default in any of the payments. Nor did the plaintiff prepay any of the portion of the amounts due.

In computing his income for the 1982 and 1983 taxation years, the plaintiff deducted $27,000 and $31,757 respectively as alimony or other allowance paid by him to his former spouse pursuant to the decree nisi. The deductions were made under paragraphs 60(b) and (c) of the Income Tax Act. The Minister of National Reven uedi sa I lowed the deductions by notice of reassessment dated October 3, 1985.

The plaintiff appealed to the Tax Court of Canada. The Court dismissed the appeal on the grounds the payments could not be regarded as “alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof", as required by paragraphs 60(b) and (c) of the Income Tax Act. In the Court's opinion, the amounts payable pursuant to the decree nisi were not deductible because they were granted to the wife in full and final satisfaction of all claims by her against the plaintiff and, having made these payments, the plaintiff was once and for all released from any further liability to support his wife.

On appeal to this Court, the plaintiff argued the payments fulfil all the requirements of paragraphs 60(b) and (c) of the Income Tax Act; the amounts were paid pursuant to a judgment of a competent tribunal as maintenance on a periodic basis; the plaintiff was living separate and apart from his former spouse; these statutory requirements having been met, the amounts are deductible in accordance with the provisions of the Act.

The plaintiff further submits the competent tribunal referred to in section 60 of the Income Tax Act, in this case the Supreme Court of British Columbia, has the power to order security for payment of maintenance; this power is granted to it by paragraphs 11(1)(a) and 19(i)(d) of the Divorce Act of Canada, R.S.C. 1970, c. D-8; the existence of a collateral mortgage as security for the payment of maintenance does not affect what is otherwise deductible; the security was collateral only to the prime obligation to pay periodic maintenance as set out in the decree nisi; its terms do not become effective unless and until there is a default on the prime obligation; there was no default by the plaintiff; none of the terms and conditions of the collateral mortgage became effective or operative at any time.

In the defendant's view, the amounts in issue are not deductible because they were not amounts paid by the plaintiff in the year pursuant to a decree, order or judgment of a competent tribunal, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient. It was said no distinction is made in the decree nisi between the amounts described as "the lump sum maintenance" and “periodic maintenance"; both amounts in paragraphs (a) and (b) of the decree nisi, are to be paid by the plaintiff to his former spouse in satisfaction of all financial relief under the Divorce Act and Family Relations Act, R.S.B.C. 1979, c. 121.

Counsel for the defendant contended paragraph (b) of the decree nisi, which provides for payment of interest on the balance of $115,000 from time to time owing, the paragraph allowing the plaintiff the right of prepayment and granting his former spouse the right to demand payment of the full amount in the event of default by the plaintiff, are totally inconsistent with the concept of an allowance paid on a periodic basis. The amount, according to the defendant, is more appropriately viewed as a capital sum which could be, and was paid, in instalments.

Paragraphs 60(b) and (c) of the Income Tax Act provide an amount paid is deductible by a taxpayer in the year it is paid if all the following requirements are met:

1. the amount is paid as alimony or other allowance for the maintenance of the former spouse, children of the marriage or both;

2. the spouses are living separate and apart at the time the payment is made and throughout the remainder of the year pursuant to a divorce, judicial separation, or written separation agreement;

3. the amount is paid pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement;

4. the periodic payment is one of a series payable on a periodic basis;

and

5. the amount is paid or deemed to be paid to the spouse or former spouse.

A number of cases were cited by the defendant in support of its position, particularly in M.N.R. v. Trottier, [1967] C.T.C. 28; 67 D.T.C. 5029 (Ex. Ct.); [1968] C.T.C. 324; 68 D.T.C. 5216 (S.C.C.). In that case, the respondent and his wife, prior to their separation, operated a hotel purchased by the respondent. Both contributed to building up the business and improving the value of the property. After their separation, the respondent agreed to pay to his wife $45,000 representing half the value of the hotel. A second mortgage on the hotel property was given by the respondent to his wife. The mortgage was for the principal sum of $45,000 of which $12,000 was payable immediately and the balance payable in monthly instalments of $350. The monthly payments included interest on the outstanding balance. The respondent sought to deduct the total monthly payments in computing his taxable income. This was disallowed by the Minister of National Revenue on the grounds the arrangement between the respondent and his wife represented a division of their property.

The trial judge, agreeing with the Minister, held the amounts were not deductible. In the Court's opinion, the payments were made pursuant to the mortgage and not pursuant to a written agreement as alimony or other allowance for the maintenance of the recipient. According to the separation agreement, the respondent's wife accepted the mortgage in full settlement of all claims for an allowance for herself from her husband. As far as the trial judge was concerned, this indicated that she received property of value in exchange for her right to maintenance.

The decision was confirmed by the Supreme Court of Canada. The Chief Justice made the following comment at page 327 (D.T.C. 5219):

The main contention of the appellant is that the Separation Agreement and the mortgage must be read together and, so read, constitute an agreement imposing upon the appellant an obligation to make payments of an allowance on a periodic basis for the maintenance of his wife, within the terms of s. 11(1)(/).

I agree that these documents which were prepared contemporaneously and relate to the same transaction should be read together . . .

[Emphasis added.]

That the order, pursuant to which payments are made, is to be read in its entire context, is clear from the decision of the Exchequer Court in M.N.R. v. Hansen, [1967] C.T.C. 440; 67 D.T.C. 5293. In that case, a property settlement and separation agreement made by the taxpayer and his wife provided, among other matters, he would pay the sum of $20,000; $6,000 was payable upon execution of the agreement; $14,000 was payable in equal consecutive monthly instalments of $100 each. The taxpayer sought to deduct the monthly payments in computing his taxable income. The Minister disallowed the deductions. One of the grounds was that the $20,000 was a lump sum payment payable in instalments.

The Court ruled the monthly payments were deductible. Jacket, P. held paragraph 7 of the agreement, providing for the payment of the $20,000, construed in the light of the whole agreement, was clearly a provision for the maintenance of the wife. At page 446 (D.T.C. 5297):

Finally, I reject the contention that paragraph 7 provides for a "lump sum payment" of $20,000 and that the monthly payments in question are merely payments on account of that lump sum. Quite the contrary, in my view, paragraph 7 provides for a number of payments totalling $20,000 and the monthly payments in question are some of the payments so provided for. A reference to the words of the paragraph makes it quite clear. It says, "the Husband agrees to pay the Wife the sum of . . . $20,000 . . . as follows”, and then it sets out the actual payments that are to be made. The real question is, of course, whether the payments were made pursuant to a provision for payments on a periodic basis and, in my view, paragraph 7(2), pursuant to which the payments in question were made, is precisely that.

In the case before me, the fact paragraph (b) of the decree nisi sets out the specific sum of $115,000 to be paid by the plaintiff to his former wife does not, of itself, preclude a finding the payments in issue are periodic in nature. On reading the decree nisi in its entirety, it appears clear to me paragraph (a) is aimed at the settlement of the division of family assets between the plaintiff and his former spouse. Paragraph (b) is concerned with maintenance payable by regular instalments on account. The preamble states that periodic maintenance in the sum of $115,000 is to be paid by the plaintiff to his former wife; paragraph (b) directs the payments to be made in consecutive annual instalments.

The primary purpose of the payments described in paragraph (b) was, in my view, to make arrangement for the support and maintenance of the plaintiff's former wife. The payments there referred were to recur at fixed times so as to constitute periodic payments.

The Trottier case is, in my opinion, distinguishable from the case before me. There, the respondent's wife accepted the mortgage in full settlement of all claims for an allowance for herself from her husband. She received property of value in exchange for her right to maintenance. The mortgage was not given as collateral security for periodic payments to be made under the separation agreement. It was given in discharge of the respondent's obligation to support his wife. At page 327 (D.T.C. 5219) the Chief Justice stated :

. . . it appears that the agreement between the parties was not that the husband should pay his wife a periodic allowance for maintenance and that his agreement to do so should be collaterally secured by a second mortgage; it was rather a release by her of all her claims for an allowance and the giving by her (in paragraph 4 of the agreement) of an irrevocable power of attorney to bar her dower in her husband's lands in exchange for a single consideration, the giving of the mortgage for $45,000.00.

Here, the mortgage given by Kapps Enterprises Ltd. to the plaintiff's former spouse, represents security for the payment of a periodic allowance for maintenance. Paragraph (b) of the decree nisi, as I see it, orders the plaintiff to pay to his wife a certain sum by way of periodic installments; the mortgage was given as collateral security for those payments.

Counsel for the defendant argued the interest-bearing feature of the annual payments, contemplated by paragraph (b) of the decree nisi, was inconsistent with periodic payments. Rather, it was argued, that feature is indicative of a lump sum payment payable in instalments.

I do not agree.

The fact that the payments were subject to some variation because of interest does not, to my mind, prevent them from being considered as periodic payments. In Gagnon v. The Queen, [1986] 1 S.C.R. 264; [1986] 1 C.T.C. 410, the appellant was required, pursuant to a decree nisi, to pay to his former wife alimony of $360 a month to repay two hypothecs and municipal and school taxes. The deductions claimed by the appellant for this amount in his 1974, 1975 and 1976 taxation years was disallowed by the Minister of National Revenue, The appellant appealed the decision to the Federal Court-Trial Division which allowed the appeal but the Court of Appeal reversed the decision. The Supreme Court of Canada upheld the decision of the trial judge. Referring to that decision, Beetz, J. stated at page 269 (C.T.C. 413):

On the first point, which is not in dispute, he properly held that the fact that these amounts were subject to slight variations did not mean that they were not predetermined. At page 256, he wrote:

Certainly in the present case it was intended that the payments were to be used by the former wife to make the monthly payments on the two mortgages and to pay the school and municipal taxes. The fact that they were subject to some slight variations foreseen by the judgment due to variable tax rates does not in my view prevent them from being considered at predetermined sums of money. . . .

[Emphasis added.]

Any amount awarded as alimony or maintenance may be subject to variation, as the needs of the recipient spouse or the ability of the donor spouse to pay, changes with time. The payments can then be changed by order of the court. However, this does not prevent the maintenance payments from being considered periodic in nature.

Accordingly, I am satisfied the payments in issue meet the requirements of paragraphs 60(b) and (c) of the Income Tax Act and are, therefore, deductible by the plaintiff in the calculation of his taxable income.

The appeal is allowed and the judgment of the Tax Court of Canada is set aside.

Appeal allowed.