Allen v. Minister of National Revenue, [1975] C.T.C. 2248, 75 D.T.C. 200

The Assistant Chairman:

1 These are the appeals of George Douglas Allen and Muriel Allen in respect of the 1968, 1969, 1970 and 1971 taxation years which arose pursuant to subsection 174(1) of the Income Tax Act and from an order of the Tax Review Board dated July 15, 1974, joining Muriel Allen in the appeal of George Douglas Allen for the purpose of determining a question of law, fact, or mixed law and fact, arising out of one and the same transaction which is common to the assessments of both the above-named appellants.

2 In the course of the hearing, Jean-Charles Sirois, QC, acting for George Douglas Allen (hereinafter referred to as the husband) withdrew the latter's appeal for the 1971 taxation year with the result that the principal issue in these appeals is whether certain payments made to Muriel Allen (hereinafter referred to as the wife) by the husband in 1968, 1969 and 1970 and included in her income for those years, were deductible from the husband's income in those years.

3 At the hearing the appellants were not present, but counsel for the husband, Jean-Charles Sirois, QC, counsel for the wife, Rowell Laishley, QC and Richard Pyne, counsel for the Minister of National Revenue, agreed that there was no dispute as to the facts but that the issue stemmed from the interpretation to be given to a separation agreement between Muriel Allen and George Douglas Allen.

4 The separation agreement between the husband and wife, dated September 22, 1967, and duly signed by the parties, was produced as Exhibit A-1.

5 Mr J-C Sirois, QC, counsel for the husband, in interpreting the agreement, referred particularly to paragraphs 9, 10, 11 and 12 as the pertinent paragraphs of the agreement, and contended that all the preceding paragraphs were simply property arrangements whereas the payments provided for in paragraphs 9, 10, 11 and 12 were the part of the written agreement that intended to set out the periodic payments to be made for the maintenance of his wife and child.

6 According to the agreement, these payments to the wife were guaranteed by the husband through the delivery to the wife of a $65,000 second mortgage on a business owned by the husband and known as Doug Allen Enterprises Limited, and his counsel concludes that, as such, the payments should be deductible from the husband's income for the years pertinent to this appeal.

7 Mr Rowell Laishley, QC, counsel for the wife, pointed out that, according to paragraph 10 of the agreement, for the first three years of the second mortgage only the interest, at the rate of 7%, was payable thereon, and the payments were to be made half-yearly. After the expiration of the three-year period, an amount of $400 in principal and interest was payable to the wife monthly until the whole of the principal was paid and satisfied. The interest on the mortgage was in fact paid to the wife from September 1967 to September 1970 and these interest payments were declared by her in her income tax returns for the pertinent years.

8 Alleging that both counsel for Muriel Allen and counsel for the respondent seemed to be in agreement with regard to the interest payments made to the wife from September 1967 to September 1970, counsel for George Douglas Allen, in urging that the appeal be allowed for the first three years, withdrew his appeal for the 1971 taxation year.

9 However, there still remains to be considered and determined by this Board the question of the blended payments of capital and interest on the said mortgage which were made to the wife during the balance of the 1970 taxation year.

10 Counsel for the wife contends that, notwithstanding that one of the introductory clauses of the agreement refers to the parties' desire to settle their property rights and to provide for the custody, support and maintenance of the child, the agreement, taken as a whole, is in satisfaction and settlement of any claims for alimony or maintenance that the wife or child might have. In support of his contention, Mr Lashley suggested that the lump sum cash payment of $20,076.29 paid to the wife on execution of the agreement and the transfer of Investors' Syndicate shares to the value of $10,000 to the wife were payments in satisfaction of the husband's liability to pay alimony, and he concludes that, in like manner, the mortgage assigned to the wife, the terms of which contained no reference whatever to the payment of alimony or maintenance, was not given as collateral for periodic payments of alimony but was given simply as an income-bearing security paying 7% interest.

11 Counsel then pointed out that nothing was set out in the separation agreement to limit the payments on the mortgage to the lifetime of Muriel Allen or until she remarried; she was free at any time to assign the mortgage; in default of payment by the mortgagor of either principal or interest, the whole amount was to become due and payable at the option of the wife; and the sale of the husband's shares, the sale of the mortgaged premises or the winding-up of the husband's business would all result in the payment to the wife of all the principal and interest owing to her on the said mortgage. In 1974 George Douglas Allen sold his business and the whole amount of principal and interest outstanding became immediately due and was in fact paid to Muriel Allen.

12 The wife's counsel concluded that the facts of this appeal and the terms of the mortgage were inconsistent with the essence of what constitute alimony payments.

13 The position of counsel for the respondent is that the payments made by George Douglas Allen to his wife were not deductible be cause they were not paid by him but were paid by Doug Allen Enterprises Limited, a separate entity. Secondly, he argues that George Douglas Allen, as a shareholder, received a benefit from Doug Allen Enterprises Limited because the company paid the mortgage payments to the wife to acquit the husband's liability to her for alleged maintenance. Thirdly, he contends that the payments made to Muriel Allen pursuant to the terms of the mortgage do not relate to maintenance or support but were in settlement of the disposition of property between the estranged couple.

14 Dealing first with counsel for the respondent's contention that the payments made to the wife pursuant to the mortgage were not deductible because they were paid by Doug Allen Enterprises Limited and not by George Douglas Allen, and considering exclusively the validity of the said payments made to Muriel Allen, I am in full agreement, on the basis of Judge Flanigan's reasoning in both J A C Belanger v Minister of National Revenue, [1974] C.T.C. 2170, 74 D.T.C. 1130, and Irving Berlin v Minister of National Revenue, [1974] C.T.C. 2251, 74 D.T.C. 1185, that the main purpose and intent of paragraph 11(1)(l) is to assure that the alimony payments do in fact benefit the recipient in the form of maintenance. In my view, this is equally applicable to the source of the payment. Whether the payments are made by the husband personally, or on his behalf and at his instigation through a company which he wholly owns, as I understand is the case in the present instance, does not, in my opinion, affect the nature, the purpose or the effectiveness of the maintenance payments.

15 In the circumstances of this appeal, I can readily accept the fact that, in making the mortgage payments, Doug Allen Enterprises Limited acted as agent of George Douglas Allen and the payments so made are valid. However, the validity of payments made by an agent on behalf of George Douglas Allen is not, in my opinion, the principal issue in this appeal. The main issue is whether the payments made to Muriel Allen under the terms of a mortgage assigned to her by her husband were periodic payments for her maintenance and that of the child, or whether they were payments made in settlement and in consideration of property rights.

16 In my opinion, the fact that one of the introductory clauses of the separation agreement states “and whereas the parties hereto desire to settle their property rights and to provide for the custody, support and maintenance of the said child”, and the fact that the payments of interest alone on the mortgage for the first three years were made on a half-yearly basis and that subsequently an amount of $400 in principal and interest was paid on a monthly basis, do not justify my coming to the conclusion that, pursuant to a written agreement, the said payments were made on a periodic basis for the maintenance of the recipient and her child.

17 In considering the separation agreement as a whole, I have some difficulty in seeing any fundamental difference in the nature of the cash payment made to the wife in accordance with paragraph 7 of the agreement, the transfer of Investors' Syndicate shares to the wife according to paragraph 8 of the agreement and the act of securing for the benefit of the wife a total sum of $65,000 by delivery to her of a mortgage in that amount bearing interest at the rate of 7% per annum as provided for in paragraph 9 of the separation agreement.

18 It seems to me quite clear that the payments of interest on a biannual basis for the first three years and the subsequent payments of the combined interest and principal at the rate of $400 a month until the principal has been fully satisfied, although conceivably made on a periodic basis (Exhibit R-1), were payments arising from the terms of the mortgage and were not paid pursuant to a written agreement as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof within the meaning of paragraph 11(1)(l) of the Income Tax Act.

19 In my view the mortgage was given to the wife as an asset or additional security along with the cash payment agreed upon in paragraph 7 and the Investors' Syndicate shares described in paragraph 8, and although there is no doubt of the husband's concern for the future welfare of his estranged wife and child, the form in which he assured their future was not by means of alimony or maintenance payments within the meaning of the relevant provisions of the Act.

20 Although the cases cited by counsel are not on all fours with the facts of this appeal, there are, in my opinion, certain fundamental principles to be found therein which are applicable to the circumstances of this case.

21 In the case of MNR v Dorila Trottier, [1967] C.T.C. 28, 67 D.T.C. 5029, Mr Justice Cattanach, at page 37 [5034], stated:

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

22 In the present instance, under the terms of the mortgage, payments were not to cease at the death of either party but were to end only with the full satisfaction of the principal and interest of the mortgage.

23 Mr Justice Cattanach continues—

If Mrs Trottier had died during the currency of the second mortgage the payments under the second mortgage would continue to be payable to her assignee, if she had assigned it, and otherwise to her heirs, executors or administrators in accordance with a covenant in the indenture to that effect. It follows that the periodic payments cannot be classified as payments for maintenance.

Further maintenance is payable for the support of the wife and as such is not assignable by her and neither do such payments, from their very nature, bear interest. The payments here under consideration are both assignable and interest bearing under the terms of the second mortgage.

24 In the appeal before us, there is nothing in the terms of the mortgage which could prevent the wife from assigning it. By the terms of the mortgage she could, under certain circumstances, foreclose on the mortgage, at which time the whole amount would become due. As a matter of fact, the mortgage was fully paid off in 1974 and no further payments, periodic or otherwise, were made by the husband to the wife, though she was and is still living.

25 It was further established in the Trottier case (supra) that maintenance payments do not bear interest. It was established in this appeal that the payments made to the wife in the first three years of the agreement were exclusively interest payments on the mortgage.

26 In the light of the facts of this appeal, and the case law cited at the hearing dealing with the essence of maintenance and alimony payments, I conclude that the payments of interest and capital on the $65,000 mortgage given by the husband to his estranged wife in the years 1968, 1969 and 1970, though they may have been the result of a transfer of assets to ensure the financial security of the wife and child, were not alimony payments within the meaning of paragraph 11(1)(l) of the Act, and are not deductible as such by the husband.

27 In deciding that the payments made by the husband to his wife in the years pertinent to this appeal in connection with the said mortgage were not periodic maintenance payments made pursuant to a written agreement within the meaning of the Act and therefore not deductible by George Douglas Allen, I feel that I have determined the pertinent issue in this appeal. Since, pursuant to an Order of the Tax Review Board, Muriel Allen was joined in the appeal of her husband, George Douglas Allen, for the purposes of subsection 174(1) of the Income Tax Act, I hereby order that the appeal of George Douglas Allen be dismissed and that of Muriel Allen be allowed.