Isabel E Burnes v. Minister of National Revenue, [1983] CTC 2399, 83 DTC 338

The Chairman:—The appeal of Isabel Burnes is from an assessment with respect to the 1976 taxation year by which the Minister, in computing the appellant’s income for that year, included an amount of $6,000. The issue is. whether the amount was properly included in income as having been received as an allowance for the maintenance of her children, pursuant to an order of a competent tribunal within the meaning of paragraph 56(1 )(c) of the Income Tax Act, SC 1970-71-72, c 63 as amended.

The facts are not in dispute and are stated clearly in Schedule A of the appellant’s notice of appeal which reads as follows:

SCHEDULE “A”

Statement of Facts

The taxpayer, Isabel Burnes, married Dr John Burnes in 1952.

Two children were born of the marriage, Jane, in March, 1954, and John, in August 1955.

In May, 1959, the husband and the wife separated pursuant to a Separation Agreement. Although the said Agreement stipulated that the separation was only to be for a period of one year, there was provision for extension of the Agreement and the husband and wife have since remained separated.

On July 13, 1965, a maintenance Order was made under the Wives and Children’s Maintenance Act RSBC 1960, by His Honour Judge Alfred Watts, QC in the Provincial Court of British Columbia, Family Division, in the amount of $175.00 per month for the two infant children of the marriage, until they reached the Age of 21 years. This Order was made on the consent of and in the presence of Dr Burnes (Ex A-1).

Strenuous efforts were made by Mrs Burnes to enforce the British Columbia Order, but due to Dr Burnes’ extended absences from the country as a medical doctor working for the Canadian Government these efforts were largely unsuccessful. Following the Order, Dr Burnes had paid $900.00 in 1965, nothing in 1966 or 1967, $741.00 in 1968, $1,225.00 in 1969, $2,100.00 in 1970, $700.00 in 1971 and nothing in 1972, 1973 and 1974. Arrears totalled at least $11,900.00 at the end of 1974 (Exhibits A-4, A-5 and A-6).

Action was brought by Mrs Burnes in the Provincial Court (Family Division) of the Judicial District of Ottawa-Carleton in December, 1975 under the Reciprocal Enforcement of Maintenance Orders Act, RSO 1970, for arrears owing under the British Columbia order. Concurrently with the above proceedings, an application was brought under the Deserted Wives’ and Children’s Maintenance Act, RSO 1970, in the Provincial Court (Family Division) of the Judical District of York for maintenance for Mrs Burnes.

In February, 1976, the actions commenced under the Reciprocal Enforcement of Maintenance Orders Act and Deserted Wives and Children’s Maintenance Act were settled for a lump sum payment of $6,000.00 to Mrs Burnes by Dr Burnes and Dr Burnes was released from any further liability under the Order made by His Honour Judge Alfred Watts, QC (Exhibits A-2 and A-3).

In determining her income for the 1976 taxation year, the taxpayer did not include the said amount of $6,000.00 received in settlement of her legal actions.

The Minister of National Revenue, by the Notice of Re-Assessment to which objection is now made, has included the said amount of $6,000.00 in the income of the taxpayer for the 1976 taxation year.

The appellant contends that the amount should not have been included in her income for the following reasons:

1. The payment received by her, namely the $6,000.000, was received by her in satisfaction of a claim of almost twice that amount.

2. The payment received was a lump sum payment.

3. The payment was made in consideration of a release from further obligations under the terms of the order of His Honour Judge Alfred Watts, QC.

The respondent’s position is set out in paragraph 7 of his reply to the notice of appeal and reads as follows:

7. The Respondent submits that the amount of $6,000.00 which was received by the Appellant in 1976 was properly included in the computation of her income for that year as it was received by her in that year pursuant to an order of a competent tribunal on account of allowances payable on a periodic basis for the maintenance of the children of the marriage pursuant to paragraph 56(1 )(c) of the Income Tax Act.

Findings

Judge Watts of the Provincial Court of British Columbia in 1965 had ordered that an amount of $175 per month be paid to the appellant for the maintenance of her two children then aged 10 and 11. By the end of 1975 arrears in maintenance payments totalled at least $11,900 (Exhibits A-4, A-5 and A-6).

Although the question of the quantum of arrears owing by Dr Burnes in 1976 in relation to the age at which the children would have attained majority was raised, no firm evidence was adduced on the point. In my opinion, the determination of the exact amount of arrears has no relevance in deciding the issue as there was agreement that the $6,000 paid by Dr Burnes in 1976 under the consent judgment was, irrespective of the age of majority applicable, substantially less than the maintenance allowance provided for in Judge Watts’ order.

The appellant having brought action for the said arrears in the Provincial Court (Family Division) of the Judicial District of Ottawa-Carleton in December of 1975, that Court, under the Reciprocal Enforcement of Judgment Act, was authorized to enforce the maintenance order issued in 1965 by Judge Watts of the Provincial Court of British Columbia.

Counsel for the respondent’s principal contention appeared to be that all that the Ottawa-Carleton Provincial Court was authorized to do was to enforce Judge Watts’ order and that it had no jurisdiction to amend, cancel or vary the order (subsections 2(2) and 3 of the Reciprocal Enforcement of Maintenance Orders Act). Counsel concluded that the $6,000 was therefore paid pursuant to Judge Watts’ order, within the meaning of paragraph 56(1 )(c) of the Income Tax Act which reads as follows:

(c) Maintenance where recipient living apart from spouse.—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 recipient thereof, children of the marriage, or both the recipient and children of the marriage, if the recipient was living apart from the spouse required to make the payment at the time the payment was received and throughout the remainder of the year;

Whether the consent judgment was rendered by the Provincial Court of British Columbia or that of Ottawa-Carleton is immaterial in determining whether the lump sum payment of $6,000 in 1976 in full and final satisfaction of arrears of maintenance payments ordered by Judge Watts in 1965 was made pursuant to that order.

Judge Watts’ order of August 1, 1965 provides all the elements necessary to meet the requirements of paragraph 56(1 )(c) of the Act; payments were to be made pursuant to an order of a competent tribunal; the $175 monthly allowance was payable on a monthly basis and it was to be paid as an allowance for the maintenance of the children of the marriage. In creating a legal right for the appellant to receive a specific monthly allowance for the maintenance of the children, the order also imposed on the appellant’s spouse a legally enforceable liability in the exact amount stipulated in the order. Had Dr Burnes complied exactly with Judge Watts’ order, there can be no doubt that the payments would have been made pursuant to the order and would have been deductible by Dr Burnes and taxable in the appellant’s hands. This obviously did not occur. In the years from 1965 to 1975 only a quarter of the amount of the maintenance allowance stipulated in the order was paid by the appellant’s spouse sporadically and in varying amounts. In 6 out of 10 years in question, no amount was paid by Dr Burnes for the maintenance of the children.

While the consent judgment may, as suggested by the respondent, be related to or arise from Judge Watts’ 1965 order, its terms, conditions and purpose are very different from the provisions set out in the original order and, in my opinion, no longer meet the requirements of paragraph 56(1 )(c) of the Act. A lump sum payment of $6,000 in 1976 in full and final satisfaction of the appellant’s claim for arrears is not the payment of a $175 monthly allowance for the maintenance for children of 10 and 11 years old, as required under the order.

It is the parties themselves and not the Provincial Court of Ottawa- Carleton who changed the terms and conditions of Judge Watts’ order. It was the appellant’s prerogative, sanctioned by the Ottawa-Carleton Provincial Court to waive, in the consent judgment, part of the accrued maintenance arrears to which she was legally entitled under the order so as to release her spouse from the weight of the full liability imposed upon him by Judge Watts in 1965.

Both counsel referred to the Supreme Court’s decision in MNR v Armstrong, [1956] CTC 93; 56 DTC 1044, which is certainly a leading case on the issue but their interpretation of it differed.

Counsel for the respondent seemed to suggest that the facts in Armstrong, (Supra) were quite different and the Supreme Court arrived at its decision because the lump sum payment was made in settlement of amounts payable in the future or was related to potential matrimonial rights of the taxpayer’s wife. The principle enunciated in Armstrong, (supra) appears to me to be more basic and less complicated than the respondent seemed to suggest.

The Court simply concluded that alimony or maintenance payments which do not meet the test of having been made pursuant to a decree or order of a competent tribunal are not deductible.

At 94 and 1045 respectively of Armstrong, (supra ) the Chief J ustice stated:

. . 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.

Mr Justice Kellock at 95 and 1045 respectively restates the principle:

(Payment not pursuant to the decree)

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

Mr Justice Locke at 96 and 1046 respectively stated:

(Lump sum settlement)

On June 30, 1950, when the child born of the marriage was less than eleven years old, the appellant made an arrangement with his wife whereby, in consideration of a sum of $4,000, she purported to release him of any further liability under the judgment.

(Sum not pursuant to decree)

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.

The arguments made by the respondent with respect to the periodicity of payments, the delays in which payments can be properly considered periodic and that such payments need only be payable and not necessarily paid on a periodic basis are not pertinent to the issue. The only question to be decided here is whether the payment was made pursuant to Judge Watts’ order.

Under the consent judgment, the payment was obviously not made pursuant to Judge Watts’ order but an amount was paid to release the appellant’s spouse from an obligation imposed on him by the order in 1965: to pay $175 monthly for the maintenance of minor children. Notwithstanding the consent judgment, there was no obligation under Judge Watts’ order for the appellant to pay a lump sum of $6,000 (an amount less than the arrears) to the appellant in 1976 and on the basis of the Armstrong decision, the payment does not come within paragraph 56(1 )(c) of the Income Tax Act.

For these reasons, judgment will go allowing the appeal and referring the matter back to the Minister for reconsideration and reassessment on the basis that the amount of $6,000 was not received by the appellant pursuant to an order of a competent tribunal on account of allowances payable on a periodic basis for the maintenance of the children and is therefore not taxable.

Appeal allowed.