Geoffrey F Brooks v. Minister of National Revenue, [1977] CTC 2048, 77 DTC 38

Delmer E Taylor:—This is an appeal from an income tax assessment for the year 1973, in which the Minister of National Revenue has disallowed two deductions, paid in accordance with an Order of the Supreme Court of Ontario dated July 18, 1973 and claimed by the appellant as interim alimony. One amount is $500, the initial payment made on July 20, 1973, and the other is a total of $1,561, representing several monthly payments under a real estate mortgage on the matrimonial home. Although not claimed as a deduction in his 1973 income tax return, the appellant now requests consideration for a further $1,208, stated to represent the proportion up to June 22, 1973 of the normal dependants’ allowances for the full year. The appellant relies on paragraphs 60(b) and (c) of the Income Tax Act, SC 1970-71-72, c 63, as amended. The respondent relies, inter alia, on subsection 109(4) and paragraphs 60(b) and (c) of the Income Tax Act, RSC 1952, c 148, as amended by SC 1970-71-72, c 63, and amendments thereto.

Facts

The appellant was, during the year in question, a lawyer practising his profession in the Province of Ontario. For a considerable period of time prior to July 18, 1973 he had been living apart from Mrs Barbara A Brooks, but supporting her and the children under a voluntary arrangement. This arrangement had been discontinued by him in June 1973 with regard to both direct financial support and payments in connection with the Crown Life Insurance mortgage, on the home. Mrs Brooks took legal action resulting in the above-noted Order.

Evidence

The following argreement was identified by the appellant and introduced at the hearing (Exhibit A-1):

3031/73

IN THE SUPREME COURT OF ONTARIO

SENIOR MASTER RODGER	WEDNESDAY, THE 18TH DAY
	OF JULY, 1973.
BETWEEN:
BARBARA A BROOKS
	Plaintiff
	—and—

GEOFFREY F BROOKS

Defendant

ORDER

UPON the application of the plaintiff for an order for interim alimony and interim disbursements, upon hearing read the affidavit of Barbara A Brooks, filed, and the transcript of the cross-examination of Barbara A Brooks, and upon hearing what was alleged by counsel for the plaintiff and counsel for the defendant,

1. IT IS ORDERED that the defendant do pay to the plaintiff interim alimony in the sum of $500.00 per month, commencing on the 22nd day of June, 1973, on the condition that the defendant pay the principal and interest and the realty taxes on the matrimonial home, and the defendant may deduct from such interim alimony payments any payments made to the plaintiff from the 22nd day of June, 1973 to the date of this order.

2. IT IS FURTHER ORDERED that the defendant do pay to the plaintiff the sum of $200.00 for interim disbursements to be accounted for.

3. IT IS FURTHER ORDERED that the costs of this motion shall be to the plaintiff in the cause.

(Sgd) A F Rodger

Cancelled cheques were identified also and filed with the Board by the appellant as follows:

The appellant explained that the excess amount of $100 (marked x) had been adjusted in later payments and therefore the total amount involved ($5,061) did not include this $100. The Minister did not allow as deductions the amount indicated (xx) because it was paid prior to the date of entry of the Order (August 23, 1973); and also disallowed the amount marked (xxx) as it did not fall within the provisions of the Income Tax Act.

Counsel for the respondent identified through the appellant and filed with the Board a copy of the mortgage document on the matrimonial home, designated Exhibit R-2, but not reproduced herein.

Contentions

The appellant states that all payments claimed were made “pursuant” to the Order, and therefore deductible by him. Further, the appellant States that the additional claim for $1,208 now lodged is logical and reasonable. Counsel for the respondent stated that the amount of $500 disallowed was paid prior to the effective date of the Order, claiming such date to be the date of entry, August 23, 1973; and that the amount of $1,561 was not an “allowance payable on a periodic basis”. Further, counsel for the respondent stated that subsection 109(4) of the Income Tax Act specifically denies the appellant his claim for the additional $1,208.

Argument

In dealing with the $500 amount, the appellant pointed out that he was duty bound under the Order, from the day it was handed down (July 18, 1973), to live up to its terms, and that to have done less than make an immediate payment would have left him in defiance of the Order. Further, he mentioned that his feelings of moral obligation dictated that he relieve any financial discomfort to his family as quickly as possible after the date of the Order. With regard to the $1,561 amount, he stated that the Order covered all his interim total alimony responsibilities, and although the matrimonial home was jointly owned by Barbara A Brooks and himself, and although it was eventually sold and the net proceeds are to be divided equally between the two parties, the use of the home was entirely that of Barbara A Brooks and the two children during the period. He had made the mortgage payments in order to provide maintenance and support to them, not to retain or enhance his portion of the joint real estate investment. The $1,208 deduction he regarded as merely equitable under the circumstances, although he was aware of the income tax provisions regarding it. For support of his case, the appellant largely relied on the decision and comments given in Rodney v MNR, [1975] CTC 2143; 75 DTC 113.

Counsel for the respondent noted that, in his opinion, the applicable section of the Act was 60(c) rather than 60(b). He stated that the matter of the effective date of the Order—July 18, 1973 or August 23, 1973— was not entirely clear from available jurisprudence, but he relied mainly on the comments made in the Rodney case (supra) to accept the date of entry as the effective date. He also supported the Minister’s position by pointing out that in any event the $500 at issue was for a period (the month of June 1973) during which no order even existed, quoting several authorities but relying heavily on Pezet v MNR, [1974] CTC 2315; 74 DTC 1246. On the $1,561 mortgage payments, counsel’s position was that these fell exactly within the ambit established in the following decisions: The Queen v Pascoe, [1975] CTC 58; 75 DTC 5427; Attorney General of Canada v James C Weaver and Freda J Weaver, [1975] CTC 646; 75 DTC 5462; and Veliotis v The Queen, [1974] CTC 237; 74 DTC 6190. Finally, subsection 109(4) disposed of the point for allowance of the $1,208.

Findings

The Board will deal with the matters raised by the appellant, but in the reverse order. First, since the appellant has already been allowed to claim an amount of $3,000 as an allowance coming under paragraph 60(b) or (c) of the Act, there can be no further provision for the $1,208 since this is specifically denied under subsection 109(4). Second, the monthly payments totalling $1,561 were blended payments of principal, interest and municipal taxes, the mortgage document itself calling for payments of $130.79 per month, plus “such monthly amount which as estimated by the mortgagee when accumulated to the 1st of August In each year will pay the municipal taxes on the property’’. The amount of $223 paid monthly in 1973 was therefore not a limited, predetermined amount set by an agreement. The point has been covered adequately in the cases cited by counsel for the respondent, and the Board particularly notes the decision of the Federal Court—Trial Division, Dubé, J presiding, in Carl Caleb Cotton v The Queen, [1976] CTC 406; 76 DTC 6232. Turning to the third point at issue, the $500 amount paid July 20, 1973, the Board will review this in more detail as follows:

At this juncture it should be noted that the Board accepts the argument of counsel for the respondent that the applicable section is 60(c) rather than 60(b) and that to be allowable the $500 amount must meet the criteria covered therein:

(c) an amount paid 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 he was living apart from his spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year;

The position of counsel for the respondent was that although the Order was in existence on July 20, 1973 (the date of payment), it was not effective until August 23, 1973 (the date of entry). This is not of sufficient merit, in my opinion, to deny the allowance to the appellant when there has been no satisfactory evidence or argument brought forward to refute the position of the appellant that, had he not complied with the Order immediately, he might have been in defiance of it and have suffered thereby. The date of August 23, 1973 could have some validity under other circumstances, perhaps, in determining the period of time available for an appeal against the Order. However, that an administra- tive technicality such as entering the date should leave the obligation of interim alimony imposed in the Order effective against the appellant, but make the possible counterbalancing financial relief unavailable to him, is a conclusion difficult to reach. Surely the perspective of the retroactivity of the payment is a larger matter than merely the date.

Retroactivity, or payment of arrears, where alimony or maintenance payments are concerned, has been a subject of some earlier case review. The circumstances would appear to divide into two groups: those dealing with straight “arrears”, where payments have not been made as agreed and in some form such back payments are made in one or more “lump sums”; and back payments, which have been made following, and as a result of, a valid agreement or court order. The basic question confronting the Board is whether or not “arrears” under any circumstances are allowable as a deduction, and whether “back payments” resulting from an order should be considered “arrears” for such purposes. There is something less than clear com- mon ground in the available jurisprudence to support any conclusion.

A very early case is that of Ronald Munro Helmer v MNR, 32 Tax ABC 250; 63 DTC 532, in which the presiding Member of the then Tax Appeal Board, J O Weldon, QC, allowed the appeal in part, stating as follows, at page 254 [534]:

While Section 11(1)(l) specifically provides that amounts to be deductible should be payable on a periodic basis, there would appear to be no demonstrable infraction of the section in this matter by the appellant paying up in one sum the modest accumulated arrears of the periodic payments called for in the separation agreement.

Another case touching on this point is that of Charles Edmund Brown v MNR, 37 Tax ABC 86; 64 DTC 812 (upheld by the Exchequer Court, [1965] CTC 302; 65 DTC 5184). This case, heard before the then Tax Appeal Board by W O Davis, QC, dealt, among other matters, with the deductibility as alimony of an amount of $1,170 paid in a lump sum by the appellant to the father of his separated (later divorced) wife, for her support. The following excerpt is taken from the reported text, at page 88 [814]:

In October of 1961, the appellant’s wife commenced a second action in the Supreme Court of Ontario against the appellant, this time asking for alimony and interim alimony of $300 a week. Pleadings were served in this action and, on February 27, 1962, on a motion by the plaintiff Whilhelmina E Brown, the Senior Master of the Supreme Court of Ontario at Toronto made an Order which reads, in part, as follows:

“1. IT IS ORDERED that the Defendant do pay to the Plaintiff the sum of $65.00 per week as interim alimony commencing at the date of the issue of the Writ of Summons.

2. AND IT IS FURTHER ORDERED that the arrears of alimony owing from the date of issue of the Writ of Summons is to be paid to the father of the Plaintiff, Wilfred Baker.

3. AND IT IS FURTHER ORDERED that this Order is to be effective as long as the Plaintiff is on probation and in the custody of her parents. Should the said Plaintiff be released therefrom a considerable time prior to the trial of this action, she may apply to this Court for an Order increasing the interim alimony.”

Commencing March 6, 1962, the appellant made payments of $65 a week to his wife, pursuant to the said Order of the Senior Master, up to and including a payment on June 26, 1962. These payments the respondent has recognized as deductible by the appellant from his reported income for the taxation year 1962.

On April 4, 1962, the appellant gave a cheque in the amount of $1,170 to Wilfred Baker, father of the appellant’s wife Whilhelmina Brown, in accordance with paragraph 2 of the Senior Master’s Order. This payment was disallowed by the respondent as a deduction from the appellant’s income on the ground that it was not “an allowance payable on a periodic basis for the maintenance of the recipient thereof”, and for further reasons given in his notification under Section 58 of the Income Tax Act already set forth above.

In the opinion of the presiding Member, Mr Davis, there were three obstacles to the allowance being provided to the appellant, and although he dismissed this part of the appeal on the third of these obstacles on the basis that, since the payment of $1,170 had been made to the father, the payment had not been made “for the maintenance of the recipient thereof’’; his comments on the other two areas of interest, at page 95 [818] are worthy of note:

In dealing with the first point, Mr Barkin argued that the arrears were never paid on a periodic basis and never could have been. The amount of $1,170 was computed on a periodic basis, but it was a lump sum arrived at by multiplying the weekly amount of $65 by the number of weeks which had elapsed between the date of issue of the Writ of Summons and the date of the Order. Therefore, the payment could not be said to be an amount ordered to be paid on a periodic basis, even though it was an amount computed on a periodic basis.

This argument, interesting as it is, does not, in my opinion, prove fatal to the appellant’s position. Section 11(1)(la) of the Income Tax Act speaks of “an amount paid by the taxpayer in the year . . . as an allowance payable on a periodic basis”. The weekly amount was payable on a periodic basis even though it was not in fact paid on a periodic basis.

In his dissertation on the second point of his argument wherein he alleged that the $1,170 was not for maintenance, Mr Barkin referred to the Reasons for Judgment of the Senior Master already dealt with by counsel for the appellant, wherein the said Senior Master stated the thought behind the order to make the cheque in payment of the arrears of alimony payable to the father of the plaintiff. Counsel for the respondent contended that it was clear that the payment was not for the maintenance of the wife, as she had already been maintained by her father for the period in question, but was intended to reimburse the father for arrears of rent owed to him by his daughter. In my view, this argument would have no force had the payment for arrears of alimony been made direct to the wife, there being no question that the appellant and his wife were living separate and apart from each other.

The conclusion I reach from the above excerpt is that the fact the Order covered interim alimony for a period prior to the existence of the Order would not have disqualified it as a deduction in the opinion of the presiding Member; and the fact the payment had not been made for current maintenance but rather as a reimbursement for earlier maintenance, of itself would not have disqualified it as a deduction. This case, on appeal by Mr Brown, is reported at [1965] CTC 302; 65 DTC 5184, and the decision was upheld by Cattanach, J, where he says as follows at page 304 [5185]:

Since I am in agreement with the conclusions reached by the learned member of the Tax Appeal Board and the reasoning by which he reached those conclusions, the appeal is dismissed with costs.

There is no specific confirmation of the reasons given above by Mr Davis, QC in not accepting the respondent’s arguments regarding the “arrears” per se or the “current maintenance” question, but there is no negation of the reasons advanced by the Member, in the judgment by Cattanach, J.

The next case which interests the Board is that of Margaret Vernon Flett v MNR, 39 Tax ABC 433; 65 DTC 761, a decision of the then Tax Appeal Board by the Assistant Chairman, R S W Fordham, QC. A quotation from the DTC headnote suffices to put the matter in perspective:

A separation agreement signed on November 28, 1963 provided that the husband was to pay the appellant interim alimony in the sum of $60 per week from March 9, 1962 to November 29, 1963, and that the parties consented to an order for such interim alimony being pronounced. After the last mentioned date, the payments were to be $65 per week. The order referred to was made on December 6. 1963, the principal part of the order only referring to the weekly payments to be made from March 9, 1962 to November 29, 1963. (The order was part of an alimony action which was subsequently dismissed on consent.) On November 29, 1963 the appellant received, in a lump sum, the amount of $5,460 from her husband. This amount was not shown in her income tax return for 1963. The Minister treated the sum as income under section 6(1 )(d) and assessed accordingly. The appellant objected.

Held: The appeal was allowed. It was only sums “payable on a periodic basis’’ that were to be treated as income under section 6(1)(d). Both the separation agreement and the order were retroactive in their wording and effect. There was never a possibility that the payments could be made weekly. They were overdue at the start and thus became arrears from the beginning. All the husband could do was issue a cheque for the full balance owing, although neither the agreement or order so provided.

Another excerpt, from page 434 [762] is also useful in this review:

Here, both the separation agreement and the order, under the former of which the said payment primarily was made, were retroactive in their wording and effect, all the payments mentioned therein having fallen due before the Master’s order was even made and one day short of the separation agreement’s date. Hence, there was never a possibility that the payments mentioned in either document could be made weekly. Instead these were overdue at the start and thus became arrears ab initio. In such circumstances, about all that the husband could do was issue a cheque for the full balance owing, which he did, although neither the agreement nor the order so provided or directed.

This is not the kind of payment envisaged in Section 6(1)(d) and, consequently, the appeal should succeed. It may well be, as it happens, that the payment is one of those that are neither deductible from income by the payer nor taxable in the hands of the payee, but I make no finding about the income tax position of the husband, as that is not before me. Suffice it to say that the payment under examination would seem to be one that does not come within the purview of the Act.

The elementary conclusion from the Flett decision is that payments made under circumstances almost identical to the $500 at issue here were not income to the recipient, and probably not deductible to the payer.

The next case at point is that of Florence B Rowell v MNR, [1968] Tax ABC 1090; 68 DTC 796. This does not clarify the matter greatly, since it is difficult to be certain from the reported judgment that the presiding Member of the Tax Appeal Board considered any part of the lump sum payment as arrears of alimony specifically. However, to whatever degree they exhibited that characteristic of alimony, in the Member’s opinion they were not taxable to the appellant, and, it can be concluded, not deductible to the payer.

Turning to the appeal of Stewart A MacDonald v MNR, [1968] Tax ABC 1271; 69 DTC 2, the presiding Member of the Tax Appeal Board, R S W Fordham, QC, dismissed the appeal, thereby denying the deduction to the appellant, and the DTC headnote outlines the reasons:

In January 1955 the appellant and his wife entered into a formal separation agreement whereby he undertook to pay her monthly $250 or one-third of his net income, whichever was the greater, for the maintenance of his wife and daughter and in addition $1,000 per school-year for his daughter’s advanced education. The marriage was dissolved in October 1955. The appellant was frequently in default and, at the end of 1963, arrears amounted to nearly $30,000. The ex-wife sued for these arrears but, to avoid publicity, a settlement of the action was achieved and reduced to a formal agreement in January 1964 whereby she accepted payment of $7,000 in full settlement of her claim and $350 per month thereafter. In 1964 the appellant paid $4,000 of the specified $7,000 in a lump sum and other varying amounts, his payments for the year totalling about $8,900. In his 1964 return, he sought to deduct the $8,900 as alimony paid. The Minister permitted him to deduct only $5,200 (made up of twelve payments of $350 and one of $1,000), taking the position that the balance was not for maintenance payable on a periodic basis. The appellant objected.

Held: The appeal was dismissed. The appellant was not entitled to deduct the balance of the amount paid to his ex-wife in 1964. Section 11 (1)(l) 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 the instant case, the Minister, if he erred at all, did so in the appellant’s favour in allowing him more than that for which he strictly qualified under the 1955 separation agreement.

The MacDonald case, however, is of further note for the reference made on page 1273 [4] to an earlier decision:

In the present case Mr Riddell relied particularly on Helmer v MNR, 32 Tax ABC 250; 63 DTC 532, decided by my colleague, J O Weldon, QC, wherein a payment of $420 was allowed to be deducted by the appellant, or husband, there concerned, although under the separation agreement involved monthly payments of $125 only were stipulated. That case appears to me to have been decided on its special facts and was not intended, I think, to be viewed as a precedent for the unusual proposition that lump sum payments for maintenance are deductible by the payer. I think it may be assumed that my colleague considered the $420 mentioned as being so little more, comparatively, than the amount ordinarily payable periodically, that it should be deductible.

Finally, two excerpts from the case of Dora Jean Bertram v MNR, [1970] Tax ABC 759; 70 DTC 1510, by the then Tax Appeal Board, before W O Davis, QC, at page 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.

And at page 764 [1514]:

Useful reference may be had to He/mer v MNR, 32 Tax ABC 250, in which arrears of alimony paid in a lump sum were held to have retained their character as alimony payments;

Again the above case does not touch precisely on the point which I see at issue, the nature of any payments made for a period of time prior to the making of a valid order, but it does reflect the view expressed in some earlier decisions by Mr Davis, QC.

It appears to the Board that an order might be obtained requiring that certain payments already in arrears be paid, but these would be payments (obviously not met on time) for which an obligation to pay already existed. An order might also be obtained, as in this appeal, requiring that payments be made for a period prior to the date of the order, but this would not create of itself the condition of such payments “being in arrears” when no earlier obligation or agreement existed requiring that they be made. Even though in the Order such payments are stated to relate to specified intervals in the past, no periodic basis could have existed prior to the granting of the Order. The wording used in paragraph 60(c) of the Income Tax Act is “payable on a periodic basis’’, and in The Living Webster, Encyclopedic Dictionary of the English Language, 1973-74 edition, published by North American Educational Guild, Ltd, Winnipeg, Manitoba, “payable” is defined as “Justly owed and unpaid; capable of being paid; suitable for payment”. No such condition existed allowing for the amounts to be payable “on a periodic basis” prior to the date of this Order, and it is irrelevant that the amount involved was a payment for one month, as in this appeal, or that it might have been a greater amount calculated by some stated formula over a longer period of time, as in some of the other cases cited.

Based on this reasoning alone, the payment of $500 made on July 20, 1973, although in accordance with the Order, does not appear to qualify as a deduction to the appellant. However, there is a further point which should be raised, and indeed it is an imposing obstacle to the deductibility of this amount as provided for under paragraph 60(c) of the Act. I refer again to the Veliotis decision (supra), in which the learned judge stated as follows, at page 240 [6192]:

In my opinion, even assuming that the plaintiff paid the sum of $25,000 which he seeks to deduct for the maintenance of his former wife, that sum was still not paid, as required by paragraph 11(1)(l), “as alimony or other allowance payable on a periodic basis . . .”.

First, it seems clear that the sum of $25,000 was not paid “as alimony’’. The word “alimony”, which, in the French version of paragraph 11(1)(l), is translated by the expression pension alimentaire, has a narrower meaning than that expression: it refers only to the periodic allowance which, pursuant to a judgment, one spouse must pay the other during the marriage. [See Halsbury’s Laws of England, 3rd ed, Vol 12, p 288.]

Secondly, the sum of $25,000 cannot be said to have been paid as an “allowance payable on a periodic basis”. In my view, the allowance payable on a periodic basis referred to in paragraph 11 (1)(l) is periodic in the same sense as alimony, and alimony is a periodic allowance not only in the sense that the payer must make payments at regular intervals, but also in the sense that at regular intervals the payer must provide a sum adequate to maintain the payee until the next payment.

I take the liberty of suggesting that in the above decision a fine definition has been provided of the terms “alimony payments” and “maintenance payments” as they should be applied in the interpretation of the Income Tax Act. The learned judge has placed considerable emphasis on the purpose for which such payments are made: “at regular intervals the payer must provide a sum adequate to maintain the payee until the next payment”. It appears to me that this does great damage to the case for the deductibility of any amounts representing alimony or maintenance payments which are in arrears for any reason. The purpose of the payments would seem to be, according to the Veliotis judgment, to provide for current support, and to give assurance that such support will continue in the future. Any payment made “in arrears” could hardly be judged to have provided such support on a current basis. However continued survival had been arranged—either out of borrowed funds, gifts, charity, family assistance, or available personal or capital funds—this maintenance, stressed so strongly by Pratte, J, had already been provided or made available to the recipient, and any receipts of funds after that fact, calculated to relate to this period of time already in the past, could only be in reimbursement or restitution for funds already expended. In the case before the Board, Barbara A Brooks had been maintained or had maintained herself and her children for the period from June 22, 1973 to the date of the Order, and the payment of $500 was not “for the maintenance of the recipient thereof”.

Decision

The appellant has failed to establish that any of the deductions sought by him for the year 1973 should be allowed, and the appeal is therefore dismissed.

Appeal dismissed.