Minister of National Revenue v. Anita L Stern and Cyril Stern, [1983] CTC 2380, 83 DTC 330

Guy Tremblay:—This case was heard in Winnipeg, Manitoba, on December 7, 1982. The taxpayers were joined pursuant to section 174 of the Income Tax Act, SC 1970-71-72, c. 63, as amended.

1. Point at issue

The question to be determined is whether the taxpayer, Anita Stern, is correct in not including in the computation of her income for the taxation years 1976 and 1977, the amount of $7,100 for each year received from her former husband pursuant to a decree nisi. She contends that the said $71,000 per year during 10 years was part of the lump sum payment of $71,000 which was the result of a settlement of the claims of her marriage Status.

Her former husband, Cyril Stern, and the Minister contend that the amounts, being paid by way of maintenance for herself (Anita Stern) pursuant to a decree nisi, are deductible by the former husband and taxable in the hands of the former wife.

2. Burden of proof

2.01 In a case of this nature, the burden of proof is on both taxpayers. The Board must decide pursuant to the preponderance of the evidence.

3. Facts

3.01 The two taxpayers were married in the City of Winnipeg, Manitoba on May 12, 1959.

3.02 Three children were born of the marriage: Jeffrey (1960), Debra Ellen (1962) and Marshall David (1967).

3.03 The husband and wife were judicially separated by order of the Court of Queen’s Bench of Manitoba dated March 1, 1973, which order contained provisions as to maintenance in the sum of $2,000 per month for herself and the children (Exhibit R1-3).

3.04 On November 28, 1974, in view of the divorce, the taxpayers entered into a written agreement (Exhibit R1-8) to vary the terms of the Court’s order. On the one hand the payment of $2,000 per month was maintained, prorated pursuant to the consumer price index; on the other hand, the husband had to pay an amount of $71,000 to his wife. Paragraph 3 of the said agreement reads as follows:

The Husband agrees to pay the Wife as further maintenance for the Wife the sum of $71,000.00 by way of ten equal consecutive annual payments of $7,100.00 commencing January 1st, 1976. If the Husband should default in the payment of any $7,100.00 instalment at its maturity, interest will be paid by the Husband from the date of maturity until payment at two points above the prime rate of the Canadian Imperial Bank of Commerce as at the date of default. Upon default of payment of any two consecutive instalments on their respective maturities all remaining instalments shall immediately become due.

3.05 The said sum of $71,000 was the result of several letters between counsel for the two taxpayers from October 1972 to September 1974 (Exhibits R1-1, R1-2, R1-4 and R1-5) but not all the letters were filed as exhibits.

3.06 In the letter dated October 23, 1972 (Exhibit R1-1), counsel for Anita stern mentioned the lump sum payment:

Since Mrs Stern does not intend to seek a divorce, there is no need to make any arrangements at this time for releases of dower, rights to administration and claims under The Dower Act, The Devolution of Estates Act, the Testator’s Family Maintenance Act and similar legislation.

On the basis of the authorities since the new Divorce Act was enacted and Mr Stern’s capital position, on any dissolution of the marriage Mrs Stern would clearly be entitled to a lump sum payment to compensate her for losses under these statutes. On the understanding no request is being made for a lump sum payment at this time.

3.07 Also, in the letter of November 1972 (Exhibit R1-2) one can read:

We also discussed the payment of a lump sum by Mr Stern, recognizing as in Feldman v Feldman (1971) Vol 2 RFL 173 that immediate payment could impose some hardship and that the manner of payment would have to be worked out.

On considering Mr Stern’s capital interest in Stern GMC Trucks (1969) Ltd, his undivided one-half interest in 999 King Edward Street, and the fact that his fortune was accumulated during the marriage, a $50,000 lump sum would appear to be appropriate when deducting from that sum what could have been the husband’s interest in both the family dwelling and cottage now in the wife’s name alone, that is, a maximum $20,000.00.

When refined, then a clause providing for the payment of the lump sum could be incorporated into a Separation Agreement along the lines set out in my letter dated October 23, 1972.

3.08 On September 16, 1974, counsel for Anita L Stern, replying to a letter dated June 12, 1974, said:

We have reviewed the proposal as to the lump sum settlement with Mrs Stern.

She is prepared to accept a settlement of $71,000.00.

Mr Stern’s proposal however as to the terms of payment is not satisfactory. Payment would have to commence the 1st of January, 1975 and not the 1st of January, 1976. The unpaid balance would have to bear interest at 1% less than the Canadian Imperial Bank of Commerce prime rate as it fluctuates from time to time. Further, the unpaid balance would have to be secured. It would seem to us that the best way of securing the balance would be by way of a Mortgage affecting Mr Stern’s interest in 999 King Edward Street, in the City of Winnipeg. We would be prepared to consider the further suggestions in that respect.

3.09 In a letter dated October 2, 1974 (Exhibit R1-6) counsel for Cyril Stern wrote to counsel for Anita Stern as follows:

1. Mr Stern is prepared to pay to his wife the sum of $71,000.00 without interest by way of a lump sum settlement payable by ten equal consecutive annual payments of $7,100.00 commencing on the first day of January, 1976.

2. Mr Stern will pay interest to Mrs Stern on any arrears at a rate equal to the prevailing bank rate at the time of default.

3. Mr Stern is prepared to enter into an agreement with Mrs Stern whereby the maintenance payable to her for herself and the children will increase or decrease along with increases or decreases in cost of living. We shall have to examine the income tax ramifications of this arrangement as it is the intention of Mr and Mrs Stern that the payments made under the maintenance order are tax deductible in Mr Stern’s hand and taxable in Mrs Stern’s hand. We are sure that some satisfactory drafting could be devised to cover this question.

The financial arrangements above outlined have been thoroughly discussed with his tax consultants and his bank by Mr Stern, and from a point of view of the Company’s potential earnings and profitability the proposal is a feasible one from a financial point of view.

If Mrs Stern is prepared to accept the above proposal and to commence civil divorce proceedings and in fact obtains a civil divorce, Mr Stern would be prepared to enter into an agreement to grant Mrs Stern a Jewish Divorce.

3.10 On March 17, 1975, the decree nisi (Exhibit R1-11) was given, paragraph 6 of which reads as follows:

AND THIS COURT DOTH FURTHER ORDER AND ADJUDGE that the Respondent, Cyril Stern, do pay to the Petitioner, 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. If the Respondent, Cyril Stern should default in the payment of any $7,100.00 instalment at its maturity, interest will be paid by the said Respondent, Cyril Stern from the date of maturity until payment at two points above the prime rate of the Canadian Imperial Bank of Commerce as at the date of default. Upon default of payment of any two consecutive instalments on their respective maturities all remaining instalments shall immediately become due.

3.11 In a letter dated April 4, 1977, Cyril Stern wrote to Anita Stern as follows:

Enclosed is another payment re the lump sum settlement.

4. Law—Cases at law—Analysis

4.01 Law

The main provisions of the Income Tax Act involved in the present case are paragraphs 56(1)(b) and 60(b). They 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 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.

4.02 Cases at law

Counsel for the parties referred the Board to the following doctrines and cases at law:

1. Arthur Pitman v MNR, [1953] CTC 15; 53 DTC 1060;

2. Walter H Stewart v MNR, [1971] Tax ABC 462; 71 DTC 326;

3. MNR v William Albert Hansen, [1967] CTC 440; 67 DTC 5293;

4. Attorney General of Canada v James C Weaver and Freda J Weaver, [1975] CTC 646; 75 DTC 5462;

5. Louis Dorion v MNR, [1980] CTC 2945; 80 DTC 1815; [1981] CTC 136, 81 DTC 5111;

6. Gilles St-Arnaud v MNR, [1982] CTC 2697; 82 DTC 1723;

7. David Franklin v MNR, [1981] CTC 2518; 81 DTC 468;

8. Guy Gagné v MNR, [1982] CTC 2655; 82 DTC 1672;

9. Melvin Pisony v MNR, [1982] CTC 2010; 82 DTC 1023;

10. The Queen v Gordon A. Bryce, [1982] CTC 133; 82 DTC 6126;

11. Gaétan Leclair v MNR, [1982] CTC 2715; 82 DTC 1755;

12. Feldman v Feldman (1971), Vol 2 RFL 173.

Doctrine

Phipson on Evidence, 12th edition; Sopinka & Lederman: Evidence in Civil Cases.

4.03 Analysis

4.03.1 In his argument, counsel for Cyril Stern said that all the letters between counsel for the parties written from 1972 to 1974 must not be considered because of the following rule of law quoted from Sopinka & Lederman, Evidence in Civil Cases:

By the general rules of the common law, if there be a contract which has been reduced into writing, verbal evidence is not allowed to be given of what passed between the parties, either before the written instrument was made, or during the time that it was in a state of preparation, so as to add to or subtract from, or in any manner to vary or qualify the written contract . . .

He also referred to Phipson on Evidence as follows:

Extrinsic evidence is in general inadmissible to contradict or vary judicial documents.

Referring also to the principle that taxing statutes must be strictly construed, he concluded that, as paragraphs 56(1 )(b) and 60(b) speak about alimony “for the maintenance of the recipient’, and as the 1974 agreement says “as further maintenance for the wife the sum of $71,000”, and the decree nisi says that “Mr Cyril Stern must pay to Mrs Anita Stern by way of maintenance for herself the sum of $71,000 .. therefore the 10 payments of $7,100 must be deductible by Mr Stern and taxable to the former Mrs Stern.

4.03.2 The Board understand the principles cited above but wonders whether they apply in the instant case.

First it is clear that the principle of strict interpretation applies. The payment for maintenance indeed is deductible for the payer and taxable for the receiver. The problem however is whether the sum of $71,000 in 10 annual payments is actually a payment for maintenance.

To construe a contract the Courts always apply the well-known principle of substance and form. Despite the fact that it could have written on a contract: “contract of sale”, if, pursuant to all clauses, it is substantially a contract of rent the words “contract of sale” must not be considered to construe the said contract.

It is the same with the payment for maintenance in the present case. Because the decree nisi in substance is the transcription of the 1974 agreement (Exhibit R1-8) the Board must study whether the said “payment for maintenance” in the agreement is actually a “payment for maintenance”. The Tax Review Board may study the other documents surrounding the decision to pay $71,000 to find the real intention of the parties, especially when the 1974 arrangements was drafted with a view to satisfying the tax ramifications (para 3.09).

4.03.3 It is obvious from the evidence that in the decree of judicial separation rendered in March of 1973 (Exhibit R1-3) there is no question of the amount of $71,000. The reason was given in the letter of October 1972 (Exhibit R1-1 ), extract of which is cited in paragraph 3.06. It seems from this that the lump sum payment was “to compensate her for losses under these statutes” (Dower Act, Devolution of Estates Act, etc). It is clear however that the said lump sum payment was already under discussion between the two lawyers. The greater part of the said letter concerns the assets of Mr Stern. Moreover, it seems to the Board the reasons are well described in the letter of November 27, 1972 (Exhibit R1-2), extract of which is cited in paragraph 3.07. One important element “the fact that his fortune was accumulated during the marriage .. is related to the reference in the case of Feldman v Feldman.

In this case the Alberta Supreme Court (Appellate Division) confirmed, among other things, that despite the fact that the wife had committed adultery, the husband had to pay a lump sum payment of $85,000 based, among other things, on the facts: “the parties started living together as man and wife without material assets. A large fortune was accumulated during this period when they lived together and after their marriage the husband admitted that the wife was a considerable help to him.”

4.03.4 Moreover, if we refer to the letter of October 2, 1974 from Cyril Stern’s counsel to Anita Stern’s counsel, extract of which is cited in paragraph 3.09, one can see that there is a distinction between the lump sum payment of $71,000 in numbered paragraph 1 of the letter and the maintenance provided in numbered paragraph 3. The latter maintenance shall be influenced by the cost of living index, but not the $7,100. Further he said “we shall have to examine the income tax ramifications . . . We are sure that some Satisfactory drafting could be devised to cover this question.”

It is not up to the taxpayer to decide to be taxed or not to be taxed, it is the legislator who imposes a tax pursuant to law. The drafting of an arrangement must in fact describe the substance of the actual arrangement. One can draft an arrangement with a view to meeting or not meeting the requirements of a tax law. However, when it does not meet the actuality, then this person should expect that a court will revise his position.

For the Board, the preponderance of evidence is that the amount of $71,000 is the result of her marital 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. Such conclusion is in conformity with the Dorion case.

5. Conclusion

Therefore, the payments are not taxable to the former Mrs Stern and are not deductible by Cyril Stern.