Naomi Helen Cohen v. Minister of National Revenue, [1987] 1 CTC 2306, 87 DTC 246

Brulé, T.C.J.:—This is an appeal from a reassessment by the Minister of the appellant’s 1981, 1982 and 1983 income tax in which the Minister included the amounts of $10,000, $10,000 and $5,000 respectively as amounts received as alimony or other allowance for her maintenance.

Issue

The issue in this appeal is whether the amounts in question were payments to the appellant by her former spouse which should have been taken into account in computing her income for each of the respective taxation years in accordance with the provisions of paragraph 56(1 )(b) of the Income Tax Act in that such amounts were received by the appellant pursuant to a written agreement as alimony or as other allowance payable on a periodic basis for the maintenace of the appellant.

Facts

There is no dispute as to the facts in this case. The appellant was married to Ernest Cohen in 1959 and separated from him in 1975. She sought legal advice with respect to a separation agreement in 1979 and a separation agreement was signed in October 1980 after lengthy negotiations.

With respect to maintenance, the separation agreement provides in part as follows:

7. Maintenance — The husband shall pay to the wife as maintenance for herself the sum of $1,500.00 per month from November 1, 1980 until November 1, 1982.

Additionally the husband shall pay to the wife as maintenance the sum of $25,000.00 in the following instalments:

(i) $10,000.00 on November 1, 1981;

(ii) $10,000.00 on November 1, 1982;

(iii) $5,000.00 on November 1, 1983.

Provided that the aforesaid maintenance instalments shall be paid to the wife regardless of her marital status and that in the event the husband should die prior to the termination date of the aforesaid maintenance instalments, his estate will assume the husband’s responsibilities and obligations as above set forth in respect of the said maintenance instalments to the wife.

Subsequent to the payment of the aforesaid maintenance and in consideration of the said payments and in consideration for the husband transferring to his wife his interest in the marital home, the wife waives all future rights to maintenance, support or alimony from the husband for herself.

The separation agreement also provided for an annual increase in maintenance based on the cost of living index:

9. Cost of Living Increase — The maintenance payable for the wife under this Agreement shall increase yearly relative to the cost of living index as established by Statistics Canada or by ten per cent (10%), whichever is less. The first increase shall occur on November 1, 1981 and yearly thereafter on November 1st.

The appellant gave evidence that this cost of living increase was only applied with respect to the monthly payments and did not affect the instalment payments. This evidence was not contradicted by the respondent.

All payments have been made in accordance with the terms of the separation agreement.

Appellant's Position

It is the position of the appellant that the sum of $25,000 was intended to be, and is, a lump sum payment and is neither alimony nor an allowance payable on a periodic basis for her support.

In the notice of appeal, counsel for the appellant submitted that the deduction of the instalments by the husband was contrary to the spirit and intent of the separation agreement and in support of this assertion introduced several letters as exhibits which were forwarded to them by the solicitor for the husband during the course of the negotiations which led to the signing of the agreement. These letters made reference to the payment of an amount as lump sum maintenance to the wife and the final letter introduced, dated October 2, 1980, stated in part as follows:

. . .after discussing this matter with Dr. Cohen and after his having discussed this matter further with his wife I understand that a settlement on the following terms may be agreeable to both parties:

1. A lump sum maintenance payment of $25,000.00 payable after the monthly maintenance for Mrs. Cohen ceases. The lump sum is to be paid in three instalments of $8,333.00 per year. There is to be no interest charged on any unpaid portion from the lump sum.

2. Monthly maintenance for Mrs. Cohen and the children in the sum of $2,500.00 per month which maintenance is to commence November 1st, 1980 and continue to October 31st, 1982.

The letter went on to outline further terms of the settlement which are not applicable to the matter at hand.

The terms of payment of the $25,000 as outlined in the letter are at odds with those stipulated in the final agreement and the appellant’s evidence was that she could not recall the reason for this alteration.

Counsel for the appellant argued that the payments in question could not be viewed as periodic payments of allowance because:

(1) — they were payable regardless of marital status or death;

(2) — the cost of living increases did not apply to these payments; and

(3) — the consideration for receipt of these instalment payments was the release of the appellant’s rights flowing from the marriage and therefore not alimony.

Minister's Position

Counsel for the respondent asserts that the instalment payments are taxable income in the hands of the appellant because:

(1) — they were in substance for maintenance;

(2) — they were in the nature of an allowance payable on a periodic basis; and

(3) — they satisfy all the conditions of paragraph 56(1)(b) of the Income Tax Act.

Although counsel agreed that a lump sum payment had been discussed in the negotiations, it was pointed out that paragraph 7 of the separation agreement refers only to “maintenance” and not to a “lump sum". It was also emphasized that paragraph 7 did not specify that the instalment payments were in satisfaction of other property rights of the marriage. In addition, counsel referred us to the appellant’s testimony under cross- examination to the effect that the amount of $25,000 was agreed upon because she would have to be able to cover expenses to enable her to return to the work force. Counsel argued that the above factors indicated these payments were taxable income within the meaning of paragraph 56(1)(b).

Analysis

Paragraphs 56(1 )(b) and (c) of the Income Tax 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;

(c) any amount received by the taxpayer in the year, pursuant to an order of a competent tribunal, as an allowance payable on a periodic basis for the maintenance of the taxpayer, children of the taxpayer, or both the taxpayer and children of the taxpayer if, at the time the payment was received and throughout the remainder of the year, the taxpayer was living apart from his spouse who was required to make the payment.

The interpretation of this section has been the subject of consideration in many cases, a number of which were cited by each of the parties in support of their arguments. As well, counsel for the appellant has directed the attention of the Court to Revenue Canada Interpretation Bulletin IT-118R2 dated March 22, 1985. Paragraphs 14 and 15 of the Bulletin read:

Specified Payable on a Periodic Basis

14. Where, under a court order or an agreement, a specified sum of money is to be paid and payment is required to be made in whole or in part by regular instalments, such regular instalments normally do not qualify under paragraph 60(b), (c) or (c.1) and are not income of the recipient.

Where Payments Excessive

15. Alimony or maintenance is generally a sum not in excess of an amount sufficient to maintain the recipient and/or children in the style to which they were accustomed prior to the breakdown of the marriage or common-law union. Where the periodic payments are considerably in excess of maintenance requirements, there is a presumption that the whole amount is a payment of capital, regardless of the wording used in the agreement, if the payments are to be made over a short period only.

While not determinative of the issue, it has been stated that administrative policy and interpretation are entitled to weight and can be an important factor in case of doubt about the meaning of the legislation (per de Grandpré, J., Harel v. The Deputy Minister of Revenue of the Province of Quebec, [1978] 1 S.C.R. 851 at 859; [1977] C.T.C. 441 at 448).

In the case at bar, the instalment payments are referred to as “maintenance” in the separation agreement. However, as was stated by Dubé, J. in Hanlin v. The Queen, [1985] 1 C.T.C. 54 at 56; 85 D.T.C. 5052 at 5053:

Whether a payment is to be considered an allowance or a maintenance under the Act, depends on the circumstances and on the effect of an agreement, when there is one.

In construing a contract the Court must look to its substance and form, and the fact that a payment is described in a particular manner is not necessarily conclusive of its nature. This was the situation in the case of Stern v. M.N.R., [1983] C.T.C. 2380; 83 D.T.C. 330, where the husband, under the terms of the decree nisi was to pay his wife:

. . .by way of maintenance for herself the sum of $71,000.00 by way of ten equal consecutive annual payments of $7,100.00 commencing January 1st, 1976.

The order further stipulated that interest was to be paid on any outstanding payments, and default on two consecutive payments would cause the entire balance to become due. In addition to these payments, the husband was paying to the wife the sum of $2,000 per month, prorated to the consumer price index, but these payments were not in question.

In deciding that the payments were instalments of a lump sum, Mr. G. Tremblay of the Tax Review Board, as he then was, considered it relevant that the spouses and their lawyers had referred to these sums as lump sum payments in the correspondence which led up to the agreement. He also noted that the lump sum payment of $71,000 was not influenced by the cost of living index while the monthly payments were, and concluded:

. . .the preponderance of evidence is that the amount of $71,000 is the result of her marriage status and of her participation in the increase in the assets of her husband. It is her part of the capital increase. This is not a payment of maintenance despite the wording of the 1974 arrangement and of the decree nisi which is only a transcript of the said arrangement. [Emphasis is mine. ]

It is my opinion that the present case requires similar investigation into the nature of the payments despite the wording of the agreement. The letters introduced into evidence indicate that during negotiations this amount was consistently referred to as a lump sum amount. In addition, there are several distinctions between the instalment payments and the monthly maintenance payments which are of importance.

As was noted above, the monthly maintenance payments are subject to increase in accordance with the cost of living while the instalment payments are to remain without change. This was one of the factors considered to be relevant by the Board in Stern (supra). In my view this evidences the view of the parties that the two types of payments are considered to be separate and distinct.

In addition, the instalment payments are stipulated to be payable by the husband's estate in the event of his death prior to the termination date of the payments. This is not the case with the monthly maintenance payments and is not characteristic of a periodic allowance for maintenance. As was stated by Cattanach, J. in the case of M.N.R. v. Dorila Trottier, [1967] C.T.C. 28 at 37 (67 D.T.C. 5029 at 5034):

Alimony or maintenance continues through the joint lives of the husband and wife but terminates upon the death of either.

On appeal to the Supreme Court of Canada ([1968] C.T.C. 324; 68 D.T.C. 5216), Chief Justice Cartwright expressed "substantial agreement with the reasons of Cattanach, J.”. His Lordship then stated at 327; D.T.C. 5219:

The obligation to make the payments under the mortgage was not dependent on the wife continuing to live. She was free to assign it at any time.

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 case of The Queen v. Louis Dorion, [1981] C.T.C. 136; 81 D.T.C. 5111 was cited by both the appellant and respondent in support of their positions. There it was stated:

A payment as alimony or an allowance for maintenance is linked to the duration of the life of the creditor or debtor or to the period of time during which the alimony or allowance is necessary for the recipient and can be paid by the debtor. In such a case the alimony or allowance cannot be a total fixed amount payable by instalments up to the amount of $20,000 over a period of five years as in the case at bar, as the consideration for alimony or an allowance is the need of the creditor, whereas here the consideration is the waiver of benefits resulting from the marriage contract.

It was argued by counsel for the respondent that in the case at hand the evidence does not support a conclusion that the appellant received the instalment payments as consideration for the waiver of her rights under the marriage contract. I cannot, however, accept that argument. Paragraph 14 of the Agreement reads:

14. Final Agreement — The husband and wife agree that this agreement has been entered into in contemplation of dissolution of the marriage and as a final property settlement as a result thereof and the parties further agree that each has been fully advised of the estate and assets of the other and each has had independent legal advice. They are aware that this is a final agreement and that no further claims will be made against either party by the other arising from the marriage or the dissolution thereof. Both parties have been made aware of the possibilities of fluctuation of their respective income and assets and are cognizant of the possible increases and decreases in the cost of living and each are prepared to accept the terms of this agreement as a full and final settlement and waive all further claims as set out herein save and except those arising under the agreement. [Emphasis is mine.]

The separation agreement must be read in its entirety to ascertain its effect and it is my view that the above release constitutes a waiver by the wife of her rights under the marriage contract.

I have concluded that the payments in question here were clearly instalments of a lump sum maintenance award for which the consideration was the release by the appellant of all past, present and future claims to maintenance. In the circumstances the Court cannot regard these payments as “alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof” within the meaning of paragraph 56(1 )(b).

This appeal is allowed with costs and the matter referred back to the respondent for reconsideration and reassessment.

Appeal allowed.