Maxine Ann McNeely v. Minister of National Revenue, [1981] CTC 2886, 81 DTC 796

The Chairman:—The appeal of Maxine Ann McNeely is from an assessment in respect of the 1977 taxation year.

The facts of this appeal are not in dispute and can be summarized as follows:

1. Under a written separation agreement dated August 20, 1971, Charles Kenneth McNeely was required to pay to the appellant the sum of $200 a month for her support and maintenance (Exhibit R-1).

2. As a result of the separation agreement, arrears accumulated in the amount of $11,620 for the period of November 1, 1972 to May 1, 1975.

3. Judgment was received in the amount of $11,690 on October 9, 1975 and filed with the sheriff of judicial district of Ottawa Carleton.

4. In 1977 Mr McNeely paid to the appellant an amount of $3,000 in satisfaction of the arrears of payment under the separation agreement.

5. The appellant did not include the amount of $3,000 in computing her 1977 income.

Submissions

The appellant in her notice of appeal contends that the amount of $3,000 received by her is not income and was not paid as such. In argument, two submissions were made:

(a) The amount was not received pursuant to paragraph 56(1 )(b) of the Income Tax Act but was received as a release of a liability under a judgment which was satisfied thereby;

(b) The payment was not a periodic payment, as required by paragraph 56(1 )(b) of the Act but a lump-sum payment.

The respondent’s position is that the amount of $3,000 was paid, pursuant to a written separation agreement, payable on a periodic basis as alimony or other allowance and is taxable, pursuant to paragraph 56(1 )(b) of the Act.

The taxability of alimony receipts under paragraph 56(1 )(b) of the Act and the deductibility of alimony payments under paragraph 60(b) are the reverse sides of the same coin and are governed by the same basic principles. In such cases the Minister of National Revenue has, perhaps rightly so, the flexibility of varying the thrust of his argument, depending on whether the taxpayer assessed is the recipient or the payor of alimony payments.

In the instant appeal, and as I understand the facts, the respondent’s position is that the amount of $3,000 received by the appellant in satisfaction of a judgment awarding her arrears of alimony in the amount of $12,000 is a taxable periodic receipt made to her, pursuant to a written separation agreement. The courts have, for valid reasons, been cautious in interpreting rather restrictively what constitutes alimony within the meaning of paragraphs 56(1 )(b) and 60(b) of the Act.

The conditions of paragraph 56(1 )(b) which, for purposes of this appeal, are pertinent and which must be met, are:

(a) The amount received in the taxation year was to be made pursuant to a decree or order of a competent tribunal or pursuant to a written separation agreement;

(b) The amount must be received as alimony or other allowance;

(c) The amount must be payable on a periodic basis for the maintenance of the recipient or the children of the marriage.

There is no dispute that, under the written separation agreement, the appellant’s husband was required to pay his wife alimony in the amount of $200 a month, which he failed to do and arrears accrued in the amount of $11,670. At paragraph 7(c) of the respondent’s reply to the notice of appeal, it is stated:

Judgment was obtained against Mr. McNeely in the amount of $11,690 on October 9, 1975.

That the appellant received the $3,000 in 1977 which she did not include in her income is also admitted.

Although in MNR v John James Armstrong, [1956] CTC 93; 56 DTC 1044, cited by counsel for the appellant, it is the payor who was disallowed a deduction of a maintenance payment. I find the decision pertinent and interesting.

Summarizing the facts in Armstrong (supra), the taxpayer was to pay $100 a month to his wife for the maintenance of their daughter until she was sixteen years of age.

When the child was less than 11 years old, the wife accepted a lump-sum payment of $4,000 in full settlement of all amounts payable in the future. The Minister of National Revenue disallowed the deduction on the ground that it was a lump-sum payment. The appellant appealed and both the Tax Appeal Board and the Exchequer Court ruled in favour of the taxpayer. The Minister of National Revenue appealed to the Supreme Court of Canada which allowed the Minister’s appeal on the ground that the lump-sum payment was not an amount paid pursuant to the divorce decree.

In his reasons in the Armstrong case (supra), Chief Justice Taschereau States at 94 [1045]:

The Income Tax Appeal Board (52 DTC 414 and the Exchequer Court (54 DTC 1104) have found that the sum of $4,000 was property deductible by the respondent from his income tax for the taxation year 1950, within the provisions of section 11 (1 )(j) of The Income Tax Act. I am unable to agree as, in my opinion, the sum was not “an amount paid by the taxpayer in the year pursuant to a decree, order or judgment of a competent tribunal in an action or proceeding for divorce or judicial separation or pursuant to a written separation agreement as alimony or other allowance payable on a periodic basis. . .”

Further, the learned Chief Justice explains:

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 states on 95 [1045]:

In this case the sum of $4,000 was paid by the respondent “in full settlement” of all payments due or to become due under a decree nisi which obligated him to pay to his former wife the sum of $100 a month for maintenance of the infant child of the parties until the latter should attain the age of sixteen years. In consideration of this payment the respondent was released by the wife “from any further liability” under the said judgment.

In my opinion, the payment here in question is not within the statute. It was not an amount payable “pursuant to” or “conformément a” (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 states on 96 [1046]:

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.

It is the respondent’s position that the Supreme Court’s decision is not applicable because Armstrong’s payment was not for arrears of alimony payments but was his release for future alimony payments.

What the Supreme Court in Armstrong is emphasizing, in my opinion, is that the payment must be made pursuant to the decree or written separation agreement. Whether a lump-sum payment is made to obtain a release from the payment of future alimony payments as in Armstrong or from the liability for accrued past payments, which is the issue in the instant appeal, it is not a payment made pursuant to a decree or a written separation agreement in which the amounts of periodic payments had been pre-determined.

It would appear therefore that failure to meet the conditions of paragraphs 56(1 )(b) and 60(b) of the Act as well as deviations from the terms of a decree nisi or a written separation agreement would invalidate the payments as being in the nature of alimony or maintenance, it is the decree nisi or the written separation agreement which, under certain specified conditions, gives the amounts their characteristic of alimony or maintenance payments.

It is conceivable, as stated by Mr Justice Locke in Armstrong at 96 [1046], that the court may, owing to changed circumstances, order the suspension, the increase or the diminution of the amounts originally ordered in a decree without destroying the nature of the payments as alimony or maintenance. This concept, in my opinion, is equally applicable to changes agreed upon in writing by the parties with respect to the amounts of the alimony or maintenance payments set out in the original separation agreement. From this, one may logically conclude, I would think, that although the courts or the parties to a separation agreement may, for valid reasons, change the quantum of the periodic payments, the conditions set out in paragraphs 56(1 )(b) and 60(b) of the Act must nevertheless be strictly adhered to if the payments are to retain their nature of alimony or maintenance.

The judgment of a court enforcing payment in a lump sum of the full amount of alimony ordered in a decree or under a written separation agreement or a subsequent agreement arrived at by the parties to effectuate the release from a liability imposed by the decree nisi or the written separation agreement is not, as suggested by Mr Justice Locke, a payment made pursuant to the decree or the written separation agreement, although it may well have been paid “in consequence” of the liability originally imposed by the decree or separation agreement.

Counsel for the appellant also cited the case of Stewart A MacDonald v MNR, [1968] Tax ABC 1271, 69 DTC 2, In support of his second position that the payment received by the appellant was not a periodic payment.

In that case, the appellant was to pay $250 per month for the maintenance of his wife and child plus $1,000 a year. The appellant failed to comply with the terms of the formal separation agreement and arrears in the amount of $30,000 accrued. The appellant’s wife sued but, as the result of a settlement, the appellant paid $4,000 of the $7,000 agreed upon in a lump sum, the balance being paid on a periodic basis. In assessing the appellant, the Minister allowed the amounts paid on a periodic basis but disallowed the lump- sum payment on the ground that it was not for maintenance payable on a periodic basis.

In dismissing the appellant’s appeal, R S W Fordham, then Assistant Chairman of the Tax Appeal Board, states at 1273 [3]:

I am of the opinion that this appeal cannot succeed. Section 11 (1 )(l) of the Income Tax Act allows the deduction of sums paid for maintenance only if such sums are payable on a periodic basis. A lump sum, or any sum based on a compromise and not plainly corresponding with figures in either a court order or a separation agreement, cannot properly be termed an amount payable on a periodic basis; in this instance, largish sums were paid at irregular times.

The facts of the MacDonald case (supra) is on all fours with those of the instant appeal. Counsel for the respondent contends in the instant issue that paragraph 56(1 )(b) of the Act requires only that the payments be payable on a periodic basis but need not necessarily be paid on that basis. In support of that proposition, he cited the case of Bertram v MNR, [1970] Tax ABC 759; 70 DTC 1510. Here again, the appellant’s husband failed to comply with the terms of a separation agreement and arrears in alimony payments accrued for which the appellant obtained judgment. The couple was subsequently divorced and the husband was ordered to pay maintenance to the wife pursuant to the 1958 separation agreement. Arrears in maintenance payments again accrued and the appellant recovered a second judgment. As a result of the agreement, the arrears for maintenance were considered to be $8,000, the total sum to be paid in four instalments over a period of two years. In 1966 the appellant received two payments of $2,000 each, which the Minister included in the appellant’s income. The appellant appealed the assessment on the ground that, having accepted the lesser sum of $8,000 in satisfaction of arrears, the situation had changed and the original periodic payments had thereby lost their character of maintenance payments.

In dismissing the appellant’s appeal, W O Davis, member of the Tax Appeal Board, states at 763 [1513]:

The pertinent requirement of paragraphs (d) and (da) of subsection (1) of section 6 is that the amounts received by the taxpayer be payable on a periodic basis, not that they be paid on a periodic basis. Amounts which, in addition to fulfilling all other requirements of the said paragraphs (d) and (da) also fulfill the requirements of being payable on a periodic basis, are alimony or maintenance payments within the meaning of the said paragraphs. The mere fact of such payments being paid late, or being paid in an amount which includes several periodic payments in one cheque, cannot alter their character.

Mr Davis is referring here specifically to the periodicity of alimony and maintenance payments. There is no controversy that alimony payments must be payable on a periodic basis. The facts in MacDonald are that the appellant having remarried, the parties entered into a new separation agreement on December 1, 1965 by which not only was a sum of $8,000 payable and indeed was paid to the appellant in four instalments, but the regular periodic payments continued to be made, pursuant to the separation agreement and divorce decree for the support of the infant child.

At 764 [1514], Mr Davis continues:

I regard the agreement of December 1, 1965, as a confirmation of Eadie’s legal responsibility to make the original periodic payments, embodying therein a new schedule setting out when the respective payments of the compromised amount were to be made. This agreement was in no sense a final or general release to the appellant’s husband of any liability to continue to make payments which were not yet in arrears. It is arguable that, if Eadie had defaulted on the agreement of December 1, 1965, the appellant would have been free to bring an action for whatever was actually owing to her on the original separation agreement.

As I see it, the parties agreed to amend the separation agreement by which the quantum of some of the periodic payments were altered to meet changes in circumstances, viz the appellant’s remarriage. The periodic payment of $8,000 did not bring to an end the separation agreement nor did it release the appellant’s husband from his liability thereunder.

The case of Bertram (supra) was cited by the respondent more particularly for the remarks made by Mr Davis to the effect that maintenance payments need only be payable on a periodic basis. Equally important in the Bertram case is the fact that the payments were made pursuant to a written separation agreement. The appeal was dismissed on both those grounds.

In the appeal under review, the amount of $3,000 was not payable nor was it paid on a periodic basis. The lump sum payment of $3,000 was not made under the written separation agreement. The appellant’s husband, under the terms of the separation agreement, had no obligation to make such a payment and the payment cannot be said to have been made for the maintenance of the appellant. On the contrary, it was made to obtain Mr McNeely’s release from all alimony and maintenance liabilities arising from the separation agreement and to free himself from the judgment pending against him for arrears of $11,690. Although the payment may have been made “consequent to” the separation agreement, it was not made pursuant to it within the meaning of paragraph 56(1 )(b) or 60(b) of the Act.

For these reasons, the appeal is allowed and the matter referred back to the Minister for reassessment on the basis that the amount of $3,000 was not received by the appellant as alimony or other allowance payable on a periodic basis within the meaning of paragraph 56(1 )(b) of the Income Tax Act.

Appeal allowed.