|
Citation: 2004TCC683
|
|
Date: 20041020
|
|
Docket: 2004-1050(IT)I
|
|
BETWEEN:
|
|
TAMERA CALLON,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
REASONS FOR JUDGMENT
O'Connor, J.
[1] The basic facts and the issue
arising in this appeal are adequately described in paragraphs 5
to 13 of the Respondent's Reply. These paragraphs read as
follows:
5. The
Minister of National Revenue (the "Minister") initially
assessed the Appellant's tax liability for the 2000 taxation
year, Notice of which is dated July 22, 2002.
6. The
Appellant's total income initially assessed was $39,000.00 as
reported by the Appellant as spousal support payments
received.
7. The
Minister reassessed the Appellant for the 2000 taxation year
Notice of which is dated April 10, 2003.
8. In
computing income for the 2000 taxation year, the Minister
reassessed the Appellant's tax liability to include
additional income of $30,000.00 (the "Amount") in the
year pursuant to section 56(1)(b) of the Income Tax Act R.S.C.
1985 c. 1 (5th Supplement), as amended
(hereinafter "the Act"), on the basis that this Amount
constituted spousal support received by the Appellant.
9. The
Appellant was also reassessed to include applicable interest and
late-filing penalties.
10. The Appellant objected
to the reassessment by letter dated April 22, 2003.
11. The reassessment dated
April 10, 2003 was confirmed by the Minister by Notification of
which is dated December 23, 2003.
12. In so confirming the
reassessment, the Minister relied on the following
assumptions:
a) the
Appellant was living separate and apart from her husband, Thomas
Callon throughout the 2000 year.
b) pursuant to
an Order of the Honourable Justice O'Connell of the Ontario
Court (General Division) dated August 12, 1998, the Appellant was
to receive spousal support of $6,500.00 per month commencing
September 1, 1998.
c) pursuant to
Minutes of Settlement and to a Judgment of the Honourable Justice
Campbell of the Ontario Superior Court of Justice dated June 20,
2000, the spousal support payments were reduced to $5,000.00 per
month, commencing July 1, 2000.
d) the
payments made pursuant to the June 20, 2000 Judgment were to
continue until the death of the appellant's spouse and were
to be indexed at 2% per annum commencing July 1, 2001.
e) pursuant to
the terms of the Order dated August 12, 1998 and the Judgment
dated June 20, 2000, the Appellant received $69,000.00 spousal
support payments from her husband during the 2000 taxation
year;
f) the
Appellant included spousal support payments in the amount of
$39,000.00 as income; and
g) the
Appellant did not include the Amount ($30,000.00) as income.
B. ISSUES
TO BE DECIDED
13. The issue to be
decided is whether the Amount received by the Appellant in the
2000 taxation year is to be included in computing income.
Submissions of the Appellant
[2] The Appellant submits that since
she and her husband had agreed prior to the Judgment dated June
20, 2000 that $30,000.00 of the total of $69,000.00 spousal
support payments was not to be included in the Appellant's
income, therefore it should not be so included and that she was
correct in only declaring the spousal support payments in the
amount of $39,000.00. The Appellant submits further that because
of assurances from her daughter and her attorney and the
"judiciary" she was satisfied that the $39,000.00 was
free of tax and therefore agreed to sign the Minutes of
Settlement on June 20, 2000 which led to the Judgment of the same
date. The said Judgment which is annexed to the Notice of Appeal
reads as follows:
Court File No. 96-MC-2339
ONTARIO
SUPERIOR COURT OF JUSTICE
|
THE HONOURABLE
|
TUESDAY, THE 20th DAY
|
|
MR. JUSTICE CAMPBELL
|
OF JUNE, 2000
|
BETWEEN
TAMERA CALLON
Plaintiff (Wife)
- and -
THOMAS PETER CALLON
Defendant (Husband)
JUDGMENT
THIS ACTION was heard this day in the presence of counsel for
the Defendant, the Plaintiff appearing in person.
ON READING the pleadings and hearing the evidence and on
reading the Minutes of Settlement filed:
1. THIS
COURT ORDERS AND ADJUDGES under the Family Law Act
that the Plaintiff shall pay to the Defendant an equalization
payment of $200,000.00. This payment shall be made in two
parts:
(a) on or before
August 31, 2000, in the sum of $100,000;
(b) on or before
March 31, 2001, $100,000 plus interest at 6% to be capitalized.
The Defendant shall be entitled to register a second mortgage to
secure the payment in 1(b) against 37 Pitcairn Crescent in the
City of Toronto("the matrimonial home) provided that the
first mortgage on the matrimonial home does not exceed $175,000,
$100,000 of which shall be used to make the payment in 1(a). The
second mortgage is to be registered only after the Plaintiff
registers a new first mortgage of $175,000.
2. THIS
COURT ORDERS AND ADJUDGES that both parties shall execute all
documents required to effect registration of the mortgage,
immediately.
2.(sic) THIS COURT ORDERS AND ADJUDGES
under the Family Law Act that on June 30, 2000 the interim
spousal support shall terminate. On July 1, 2000, the Defendant
shall pay to the Plaintiff spousal support of $5,000.00 per month
until the Defendant dies. The spousal support payments shall be
indexed annually at 2% per year, commencing July 1, 2001.
3. THIS
COURT ORDERS AND ADJUDGES under the Family Law Act
that each party shall retain all property in his or her
possession or control, including the Plaintiff's right to
retain the matrimonial home and contents with the exception of
those items listed in Schedule "A" to this Judgment
which the Plaintiff shall make a available for retrieval by the
Defendant, immediately.
4. THIS
COURT ORDERS AND ADJUDGES under the Family Law Act that the
Defendant shall vacate, immediately, any matrimonial home
designation that he has registered against the property.
5. THIS
COURT DECLARES that the Judge's Annuity benefits are
vested in the Plaintiff.
6. THIS
COURT ORDERS AND ADJUDGES that this court shall not grant a
Divorce Judgment unless satisfied that the Plaintiff shall
continue to receive the survivor benefits of the Judge's
Annuity after the granting of the Divorce Judgment.
7. THIS
COURT ORDERS AND ADJUDGES that each party shall bear his or
her own costs of this action.
8. THIS
COURT ORDERS AND ADJUDGES that this Judgment binds the
parties' estates.
9. THIS
COURT ORDERS AND ADJUDGES that unless the Support Order is
withdrawn from the offices of the Director of the Family
Responsibility Office, it shall be enforced by the Director and
amounts owing under the Support Order shall be paid to the
Director, who shall pay them to the person to whom they are
owed.
10. THIS JUDGMENT BEARS
INTEREST at the rate of 5% per year commencing on June 20,
2000.
Creditor:
Tamera Callon
37 Pitcairn Crescent
North York, Ontario
M4A 1P5
Debtor:
Mr. Thomas Callon
955 Avenue Road Lower
Toronto, Ontario
M5P 2K9
Submissions of Counsel for the Respondent
[3] Counsel for the Respondent submits
that notwithstanding any agreement between the Appellant and her
husband or the assurances mentioned above as to the $30,000.00
being non-includable in her income, nevertheless it is the
Income Tax Act that governs and which provides that all
support payments of the nature involved in this appeal are to be
included in income notwithstanding any agreement or
assurances.
[4] Counsel for the Respondent
referred to the following decisions all of which are
substantially to the same effect, namely:
R. v. Sigglekow, [1985] 2 C.T.C. 251 (F.C.T.D.),
Arshinoff v. Canada, [1994] 1 C.T.C. 2850 (T.C.C.),
Bates v. R., [1998] 4 C.T.C. 2743 (T.C.C.),
Beaulieu v. Canada, [2001] T.C.J. No. 718 (T.C.C.).
Counsel also referred to sections 3 and 56.1, and paragraph
56(1)(b) of the Income Tax Act, R.S.C., 1985, c.1
(5th Supp.), as amended.
[5] The cases noted above are
substantially similar in their result which in essence is, that
notwithstanding the terms of the Order or Judgment as to the
amounts in question being not subject to tax in the hands of the
recipient, the Order or Judgment cannot override the provisions
of the Income Tax Act, which specifically indicates that
support or maintenance payments are subject to income tax in the
hands of the recipient.
[6] The following extracts from the
Bates appeal, a 1998 decision of Mogan, T.C.J. are
perhaps the best summary of the considerations involved. The
Bates appeal dealt with child support payments but the
same conclusions apply to support payments to a consort. Also in
the Bates appeal, although there was doubt as to whether
the Order of the Senior Master, Sedgwich clearly indicated the
payments were to be free of tax, Mogan J. made the following
analysis on the basis that the Order be considered as having so
indicated.
7
According to the pleadings in this appeal, the Minister of
National Revenue ("M.N.R.") relies on paragraphs
56(1)(b) and 56(1)(c) of the Income Tax Act. Paragraph 56(1)(b)
states:
56(1) Without restricting the generality of
section 3, there shall be included in computing the income of a
taxpayer for a taxation year,
...
(b) any amount received by the taxpayer in the
year, pursuant to a decree, order or judgment of a competent
tribunal or pursuant to a written agreement, as alimony or other
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, and was separated pursuant to a divorce,
judicial separation or written separation agreement from, the
spouse or former spouse required to make the payment at the time
the payment was received and throughout the remainder of the
year;
In paragraph 13 of the ASF [Agreed Statement of Facts], the
Wife recognizes that:
(a) the child
support payments were received pursuant to an interim order of a
tribunal with the jurisdiction to order such payments;
(b) the child
support payments were received as an allowance payable on a
periodic basis for the maintenance of the children of the
marriage;
(c) throughout the
1993 taxation year, the Wife was living apart from the husband
who was required to make the payments at the time the payments
were made;
(d) throughout the
1993 taxation year, the Wife was separated pursuant to a divorce,
judicial separation or written separation agreement from the
Husband who was required to make the payments at the time the
payments were made.
...
13 Can the order of
the Senior Master bind the M.N.R.? In my opinion, it cannot. In
Sigglekow v. The Queen, 85 D.T.C. 5471, a Decree Nisi required a
husband to pay to his wife the sum of $20.00 every week
"tax-free". In computing her income, the wife did not
include such $20.00 payments. When deciding the income tax appeal
against the taxpayer wife, Jerome A.C.J. stated at
page 5473:
It is consistent throughout both the Trial Judgment and the
Judgment of the Court of Appeal in Sills that the liability for
tax does not spring from a separation agreement or a Court Order.
Section 56 provides that moneys received must be included as
income.
...
In the present case, the matter is even clearer because Mr.
Sigglekow made the payments in precise compliance with a Court
Order, except of course for any sums referable to the words
"tax free" which he understandably chose to ignore. On
the reasoning of the Federal Court of Appeal in the Sills case,
there could be no question that such sums actually received by
the Defendant fall precisely within the terms of section 56 and
should, therefore, have been included in her income for the 1975,
1976 and 1977 taxation years. That was the basis of the
Minister's reassessment which, in my view, was entirely
correct.
In my view, Jerome A.C.J. has correctly summarized the law
when he states that the liability for tax does not spring from a
separation agreement or a Court Order. The liability for tax is
determined by the provisions of the Income Tax Act and, more
particularly, by section 56.
14 There are other
cases to support the proposition that the order of the Senior
Master cannot bind the M.N.R.. In Arshinoff v. The Queen, [1994]
1 C.T.C. 2850, a wife appealed claiming that certain payments
received from her separated husband should not be included in the
computation of her income. In Arshinoff, the Master of the
Supreme Court of Ontario had issued an order which contained the
following term:
THIS COURT ORDERS that the petitioner shall pay to the
respondent, pending a further return of this motion following
cross-examination of the parties, interim support in the sum of
$5,000 per month, excluding tax, commencing September 1,
1989.
Relying on the above term, the wife claimed that any amount
received from her husband should be free of tax. Arshinoff was
heard by my colleague, Brulé J. who reviewed the facts and
made the following statement after referring to the terms of
certain orders issued by judges and other officers of the Ontario
Courts:
... If their intention was that the appellant receive $5,000
net of tax, then the order for support should have been grossed
up to ensure that she would in fact receive $5,000 net per month.
The fact that the order was made "excluding tax" cannot
bind the Minister who is entitled to reassess the appellant for
any amount received as support pursuant to an order of a
competent tribunal. Once the conditions enumerated in paragraph
56(1)(c) have been met, the appellant must include the amounts in
question in the computation of her income.
15 Another similar
case is Halligan v. The Queen, [1996] 2 C.T.C. 2555 in which
my colleague, Sarchuk J. was required to consider whether certain
payments received pursuant to a divorce decree issued by a court
in the State of Georgia (USA) were to be included in computing
the income of the recipient who later resided in Canada. In
deciding the case against the taxpayer, Sarchuk J. stated at page
2560:
In the course of her argument, the Appellant also questioned
whether the Decree was issued by a competent tribunal within the
meaning of paragraph 56(1)(b) of the Income Tax Act. ... The
Appellant now says that she was not referring to the competency
of the Georgia Court to grant the divorce, but rather the
competency of that Court to consider the effect of the provisions
of the Income Tax Act regarding child support. She is no doubt
correct that it was not a matter that the Georgia Court would
have concerned itself with since it was not relevant to that
proceeding. But that is of little assistance to her cause since
what facts the Georgia Court may have considered or was entitled
to consider in granting the Decree is not germane to my
determination of whether the maintenance payments received by the
Appellant in 1990 and 1991 were properly included in her income
by the Minister.
16 The superior
court of any province has jurisdiction to order payments for the
maintenance of a spouse or children upon the break-up of a
marriage. That jurisdiction does not include the authority to
determine the character of those payments as being taxable or
tax-free for purposes of the Income Tax Act. Once the superior
court of a province has ordered maintenance payments on a
marriage break-up, the character of those payments as taxable or
not taxable will be determined by the conditions in paragraphs
56(1)(b) and 56(1)(c) of the Income Tax Act. If I had any doubt
concerning separate jurisdictions with respect to ordering
maintenance payments and determining the tax character of such
payments, I would rely on the following statements of Cory J. and
Iacobucci J. in the Queen v. Thibaudeau, 95 D.T.C. 5273 at
5275:
In the present appeal, ss. 56(1)(b) and 60(b) of the Income Tax
Act are triggered by the issuance of a support order pursuant to
the Divorce Act, R.S.C. 1970, c. D-8. Accordingly, the taxation
provisions operate in close conjunction with family law. The
amount of income taxable under ss. 56(1)(b) and 60(b) is
determined by the divorce or separation decree and, unless the
family law system operates in a defective manner, the amount of
child support will include grossing-up calculations to account
for the tax liability that the recipient ex-spouse shall
incur on the income. If there is any disproportionate
displacement of the tax liability between the former spouses (as
appears to be the situation befalling Ms. Thibaudeau), the
responsibility for this lies not in the Income Tax Act, but in
the family law system and the procedures from which the support
orders originally flow. This system provides avenues to revisit
support orders that may erroneously have failed to take into
account the tax consequences of the payments. Therefore, in light
of the interaction between the Income Tax Act and the family law
statutes, it cannot be said that s. 56(1)(b) of the Income Tax
Act imposes a burden upon the respondent within the meaning of s.
15 jurisprudence.
[7] This decision and the other
decisions referred to therein apply a fortiori to the
present appeal, because in the present appeal neither the Minutes
of Settlement nor the Judgment, both dated June 20, 2000 make any
reference to the payments in question being tax free. All that
exists is the alleged agreement between the Appellant and her
separated husband and the assurances mentioned above as to the
payments being free of tax. If a Judgment of a competent tribunal
declaring the spousal payments to be free of tax is not
sufficient, surely the mere agreement and assurances mentioned
above are not sufficient to render the payments free of tax.
[8] For all of the above reasons the
appeal is dismissed. There has been some reference to interest
and penalties. I have no jurisdiction with respect to interest
but if the matter has been or will be referred to the fairness
committee I would, because of the obvious innocence of the
Appellant and her good faith reliance on the agreement with her
separated husband making the payments free of tax, strongly
recommend that that committee waive payment of interest. As to
penalty, I have jurisdiction and because of the foregoing
circumstances, I rule that there shall be no penalty.
Signed at Ottawa, Canada, this 20th day of October, 2004.
O'Connor, J.
Email this Content