Citation: 2007TCC576
Date: 20070927
Docket: 2005-4472(IT)G
BETWEEN:
DEAN R. THORLAKSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
CAROLYN THOMPSON,
Party as per s.174.
REASONS FOR JUDGMENT
V. A. Miller, J.
[1] On February 2, 2007
this Court made an Order pursuant to section 174 of the Income Tax Act
(“Act”) to join Carolyn Thompson (“former spouse”) as a party to the
appeal of Dean Thorlakson. As a result, this decision answers the questions
posed in the section 174 application and the issue in the appeal of Dean Thorlakson.
[2] The issue is
whether for the 2003 taxation year the Appellant can claim a deduction of
$30,800 as a spousal support payment in accordance with paragraph 60(b) of the Act
and conversely the former spouse must include the amount of $30,800 in her
income in accordance with paragraph 56(1)(b) of the Act.
[3] The Minister of
National Revenue (“Minister”) denied the $30,800 deduction claimed by the
Appellant. The former spouse did not include the amount in her income. In
making his assessment, the Minister relied on the facts set out in paragraph 11
of the Reply to the Notice of Appeal (“Reply”) as follows:
11. In so
reassessing the Appellant by Notices dated April 5, 2005 and
September 29, 2005, the Minister relied on the same assumptions of fact as
follows:
a) the
facts stated and admitted above;
The
Separation Agreement
b) the Appellant
and Carolyn Thorlakson (“Carolyn”) have been living separate and apart since
September 1, 2000;
c) the Appellant
and Carolyn entered into a separation agreement dated November 1, 2002 (the
“Separation Agreement”);
Spousal Support
d) under the
Separation Agreement, the Appellant was required to pay spousal support to
Carolyn totalling $30,800.00 for the 2003 taxation year, payable in four
quarterly amounts on January 1st, April 1st, July 1st and October 1st;
e) the Separation
Agreement did not require the Appellant to set up an annuity for the payment of
spousal support to Carolyn;
f) the Appellant
did not pay any spousal support amounts to Carolyn in 2003; and
g) the Appellant
did not pay any amounts to Carolyn for her maintenance in 2003.
[4] The Appellant, self-employed;
the former spouse, wealth consultant; and Mr. Jay Christensen, a financial
planner, testified.
[5] The following facts
are not disputed. The Appellant and his former spouse were married on October
19, 1996. They have lived separate and apart since September 1, 2000. They
entered into a Separation Agreement (“Agreement”) on November 1, 2002. They
each had independent legal advice with respect to the Agreement and signed a
Certificate to that effect.
[6] Paragraphs 27 to 30
of the Agreement provided for spousal support as follows:
SPOUSAL SUPPORT
27. The parties
agree that Dean will pay Carolyn spousal support from January 1, 2002 to
December 31, 2005 at the amount of $30,800.00 per year, payable periodically
commencing January 1, 2002, payable January 1st, April 1st, July 1st and
October 1, to and including October 1, 2005. Commencing January 1, 2006, and up
to and including December 31, 2007, Dean agrees to pay to Carolyn spousal
support calculated at $18,000.00 per year; again, payable quarterly commencing
January 1, 2006 and payable January 1st, April 1st, July 1st and October 1st. Commencing
January 1, 2008, and up to and including December 31, 2008, Dean agrees to pay
to Carolyn spousal support calculated at $15,000.00 per year; again, payable
quarterly commencing January 1, 2008 and payable January 1st, April 1st, July
1st and October 1st with the last payment to be made October 1, 2008, at which
time Dean’s obligation to pay spousal support will have been fully satisfied.
28. The parties
agree that the aforesaid periodical maintenance payments will be taxable in
Carolyn’s hands and deductible in Dean’s hands.
29. The parties
agree that the aforesaid payments represent a full and final settlement of any
inequity in the division of family assets between the parties, and sufficiently
compensates Carolyn for any economic disadvantage suffered as a result of the
marriage, and provide her with a complete and adequate opportunity to become
self-sufficient.
30. The parties
agree that, except as set out in this agreement, neither of them will make any
claim now or at any time in the future for spousal support, and this agreement,
and all of its terms may be referred to in defence of any such application that
might be made at any time in the future.
[7] The testimony of
the witnesses disclosed that while negotiating the Agreement the former spouse
expressed concern that the Appellant would not make the spousal support
payments on a timely basis. She was also concerned about being financially
dependent on the Appellant and/or his family. In 2002, the former spouse was
working part-time at the Bank of Montreal, taking care of her children and
studying to receive her Bachelor of Business Administration. Her annual salary
was approximately $19,000. She proposed that she receive an income supplement
so that her average annual income equal approximately $50,000 for the next 8
years. She asked that the spousal support be a lump sum payment. The Appellant
rejected this as he wanted to receive the deduction for periodic payments.
[8] To allay the former
spouse’s concerns and to satisfy the Appellant, it was agreed that the support
payments would be paid by way of an annuity which was to be funded by the
Appellant. The former spouse met with Jay Christensen to discuss the annuity
and it was decided that the annuity would be purchased from Manulife Financial.
On November 25, 2002, the former spouse applied for two annuities with Manulife
Financial. The Appellant paid for the purchase of the policies by way of cheque
dated November 29, 2002 made out to Manulife Financial in the amount of
$136,678.99 and drawn on the account of Timber Investments Ltd..
[9] The documentary
evidence showed that the former spouse applied for two term certain annuities;
she was the annuitant, the owner and the payee on the policies. She named her
sons as beneficiaries under the policies and the Appellant as trustee for the
beneficiaries. The policy, which is relevant for the 2003 taxation year,
guaranteed annuity payments for three years and six months to be paid quarterly
in the amount of $7,700 per quarter with payments to start on January 1, 2003
and to end on October 1, 2005. Payments were made in accordance with the policy
by direct deposit to the former spouse’s bank account. As well, the former
spouse received a T4A for the 2003 taxation year from Manufacturers Life Insurance
Company for interest income of $794.52 earned by the annuity.
[10] The Appellant
testified that he had no discussions with the financial advisor who set up the
annuity nor did he see any documentation with respect to the annuity until this
proceeding.
[11] The relevant
provisions of the Act are paragraphs 56(1)(b), 56.1(4) and 60(b) which
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, …
Support
(b) the total of all amounts each of which is an amount
determined by the formula
A - (B + C)
where
A
is the total of all amounts each of which is a support amount received after
1996 and before the end of the year by the taxpayer from a particular person
where the taxpayer and the particular person were living separate and apart at
the time the amount was received,
B
is the total of all amounts each of which is a child support amount that became
receivable by the taxpayer from the particular person under an agreement or
order on or after its commencement day and before the end of the year in
respect of a period that began on or after its commencement day, and
C
is the total of all amounts each of which is a support amount received after
1996 by the taxpayer from the particular person and included in the taxpayer’s
income for a preceding taxation year;
Support
56.1 (4) The definitions in this
subsection apply in this section and section 56. …
"support amount"
«pension alimentaire »
"support
amount" means an amount payable or receivable as an allowance on a
periodic basis for the maintenance of the recipient, children of the recipient
or both the recipient and children of the recipient, if the recipient has
discretion as to the use of the amount, and
(a) the recipient is the spouse or common-law partner or
former spouse or common-law partner of the payer, the recipient and payer are
living separate and apart because of the breakdown of their marriage or
common-law partnership and the amount is receivable under an order of a
competent tribunal or under a written agreement; or
(b) the payer is a legal parent of a child of the recipient
and the amount is receivable under an order made by a competent tribunal in
accordance with the laws of a province.
60. There may be deducted in computing a
taxpayer’s income for a taxation year such of the following amounts as are
applicable …
Support
(b) the total of all amounts each of which is an amount
determined by the formula
A - (B + C)
where
A is the total of all amounts each of which is a
support amount paid after
1996 and before the end of the year by the taxpayer to a particular person,
where the taxpayer and the particular person were living separate and apart at
the time the amount was paid,
B
is the total of all amounts each of which is a child support amount that became
payable by the taxpayer to the particular person under an agreement or order on
or after its commencement day and before the end of the year in respect of a period
that began on or after its commencement day, and
C
is the total of all amounts each of which is a support amount paid by the
taxpayer to the particular person after 1996 and deductible in computing the
taxpayer’s income for a preceding taxation year;
SUBMISSIONS
[12] It is the
Appellant’s position that the Court should look at only the Agreement to
determine if the amounts paid to the former spouse were support amounts within
the definition at subsection 56.1(4) of the Act. He says that the
annuity was just the vehicle used to pay the support.
[13] He relied on the
decision in McKimmon v. Canada (Minister of National Revenue –
M.N.R.),
[1990] 1 F.C. 600 to argue that the character of the obligation as stated in
paragraph 27 of the Agreement is periodic support. He stated that the terms of
the Agreement show the intent of the parties when executing the Agreement.
Finally, he relied on Ostrowski v. Canada, [2002] F.C.J. No. 1123
and Pouzar v. Canada, [2007] T.C.J. No. 205 for the proposition that the
Court must consider the foundation of the payment obligation (the Agreement)
separate and apart from the terms and conditions of the actual payment (the
annuity).
[14] In conclusion, counsel
for the Appellant argued that the amount of $30,800 was receivable under a
written agreement and the fact that payments are made or received through a
third party does not make the payments non-deductible where the spouses
consent. (Arsenault v. Canada, [1995] T.C.J. No. 241 (T.C.C.)).
[15] It is the Respondent’s
position that the payment the court must analyze is the payment made by the
Appellant to Manulife Financial. He stated that the payment was a lump sum
payment and not a support amount. As well, he submitted that the payment to
purchase the annuity was the transfer of capital into an income stream. In
conclusion, the Respondent relied on the reasons of Linden J.A. of the Federal
Court of Appeal in Friedberg v. Her Majesty the Queen, 92 D.T.C. 6031
(affirmed by the Supreme Court of Canada, [1993] 4 S.C.R. 285), at p.6032,
where he said:
In
tax law, form matters. A mere subjective intention, here as elsewhere in the
tax field, is not by itself sufficient to alter the characterization of a
transaction for tax purposes. If a taxpayer arranges his affairs in certain formal
ways, enormous tax advantages can be obtained, even though the main reason for
these arrangements may be to save tax (see Canada v. Irving Oil Ltd.,
[1991] 1 C.T.C. 350, 91 D.T.C. 5106, per Mahoney, J.A.). If a taxpayer fails to
take the correct formal steps, however, tax may have to be paid. If this were
not so, Revenue Canada and the courts would be engaged in endless
exercises to determine the true intentions behind certain transactions.
Taxpayers and the Crown would seek to restructure dealings after the fact so as
to take advantage of the tax law or to make taxpayers pay tax that they might
otherwise not have to pay. While evidence of intention may be used by the
courts on occasion to clarify dealings, it is rarely determinative. In sum,
evidence of subjective intention cannot be used to "correct"
documents which clearly point in a particular direction.
On the basis of the above, counsel
for the Respondent contended that it is not what the Appellant intended to do
but what he actually did that is relevant to the characterization of the
payment.
ANALYSIS
[16] I do not agree with the Appellant’s position. The
Agreement may stipulate that the Appellant would pay the former spouse periodic
payments; however, the documentary and oral evidence disclose that the
Appellant made a lump sum payment of $136,678.99 in 2002 to enable his former
spouse to obtain two annuities. The Court cannot ignore the actual
transactions that occurred and look only at the parties intentions as evidenced
by the Agreement. In fact the former spouse testified that she always wanted
the support payment to be in the form of a lump sum so that she would not have
to include it in income. The Appellant has to be taxed on how he arranged his
affairs, not how he could have arranged his affairs.
[17] The Appellant was represented by counsel
when he negotiated and signed the Agreement and when he agreed to fund the
purchase of the annuities for his former spouse. He was also represented by
counsel when it was decided how he would fund the purchase of the annuities. His
liability for income tax does not depend on the Agreement between him and his
former spouse but on the application of the relevant sections of the Act. (Ouellet
v. The Queen (2000), 55 D.T.C. 3688)
[18] In his submissions counsel
for the Appellant relied on the decisions in Ostrowski and Pouzar
to support his position. In both cases the foundation of the support
obligation was a court order for periodic payments. In Ostrowski the
court ordered that the payments be made in advance while the cash was on hand
and in Pouzar the court ordered that the husband purchase an annuity to
secure the periodic payments. In the present appeal the Agreement does not
contain any reference to the annuity. I do not opine that if the Agreement did
reference the annuity the payments would be deductible, I state this only to
distinguish those cases from this appeal.
[19] In his submissions,
counsel for the Appellant referred to only two sections of the Act - the
definition of support amount in subsection 56.1(4) and paragraph 56(1)(b)
for the amount to be included in income. These sections of the Act
cannot be analyzed in isolation. There is a correlation between paragraphs
56(1)(b) and 60(b) and in the circumstances of this appeal paragraph
60(b) is very relevant.
[20] The Appellant is
only able to deduct an amount under paragraph 60(b) if the payment was periodic
in nature and made pursuant to a court order or a written agreement. The amount
of $136,678.99 paid by the Appellant in 2002 was not a support amount. It was
not an amount that was payable on a periodic basis. Consequently the amount is
not deductible pursuant to paragraph 60(b) and the former spouse does not have
to include the amount of $30,800 in her income for the 2003 taxation year.
[21] Reluctantly I must
dismiss the appeal. I say reluctantly because the parties did agree that the
payments would be deductible by the Appellant and taxable by the former spouse.
However, the agreement to provide an annuity to the former spouse constituted a
fundamental modification, not only in the form of the transaction but also in
its substance.
[22] The appeal is
dismissed with costs.
Signed at Ottawa, Canada this 27th day of September, 2007.
“V.A. Miller”
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