Date: 20001218
Docket: 1999-5130-IT-I
BETWEEN:
GINETTE OUELLET,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
FACTS
[1]
This is an appeal for the 1997 taxation year.
[2]
In computing income for the 1997 taxation year, the Appellant
failed to report the amount of $5,305.00 as alimony income.
[3]
The Minister of National Revenue ("Minister") assessed
the Appellant for the 1997 taxation year, Notice of Assessment
thereof mailed May 22, 1998.
[4]
In reassessing the Appellant by Notice of Reassessment mailed
April 15, 1999, the Minister added the amount of $5,284.00
to the Appellant's income as alimony income.
[5]
Ginette Ouellet and her former spouse, Brian Hedman, had one
child during their marriage, Logan Daniel Hedman, born January
13, 1983. The Appellant and Mr. Hedman divorced on May 1, 1987.
Pursuant to the Divorce Order ("Order"), Brian Hedman
was required to pay the Appellant's child maintenance,
pursuant to a sliding scale providing that as Mr. Hedman's
income increased, the obligation for support would increase, in
accordance with the formula set out in the Order. The Order also
had separate provisions for the indexing of the child support
pursuant to the Consumer Price Index for Canada with such
increases to occur on March 31 of every year. The Order has never
been modified or replaced since. At all material times, the
Appellant and Mr. Hedman were living separate and apart.
[6]
The Appellant submits that the child support she received should
not be considered as income, since the Order stated that the sum
of $5,000.00 payable each year by Mr. Hedman and increased
as set out in the Order, shall be tax-free to the recipient. She
further submits that the amounts should be considered as
instalments of a lump sum rather than periodic payments.
[7]
The Minister submits that Brian Hedman paid the child support in
1997 in the amount of $5,305.00 in several payments as follows.
Payments in the amounts of $425.34, $425.35, $425.35, $2,589.24
and $440.35 were made to the Family Responsibility Office
("FRO") on January 22, 1997, February 24, 1997, March
21, 1997, December 19, 1997 and December 31, 1997, respectively.
Those payments were deposited directly into the Appellant's
bank account by the FRO. On or about October 5, 1997, Brian
Hedman also gave the Appellant a cheque in the amount of
$1,000.00, for a total amount of $5,305.00. The Minister
therefore contends that the amounts received by the Appellant
were support amounts as defined in the Income Tax Act
("Act") that should be included in the
Appellant's income.
ISSUE
[8]
The issue is whether the Minister, in computing the
Appellant's income, properly included the child support
payments she received in the 1997 taxation year.
STATUTORY FRAMEWORK
[9]
The relevant provisions of the Act read as follows:
56. (1) Amounts to be included in income for year —
Without restricting the generality of section 3, there shall be
included in computing the income of a taxpayer for a taxation
year,
...
(b) support — 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 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; [emphasis added]
56.1(4) “commencement day” at any time of
an agreement or order means
(a)
where the agreement or order is made after April 1997, the day it
is made; and
(b)
where the agreement or order is made before May 1997, the day,
if any, that is after April 1997 and is the earliest of
(i) the day specified as the commencement day of
the agreement or order by the payer and recipient under the
agreement or order in a joint election filed with the Minister in
prescribed form and manner,
(ii) where the agreement or order is varied after April
1997 to change the child support amounts payable to the
recipient, the day on which the first payment of the varied
amount is required to be made,
(iii) where a subsequent agreement or order is made after
April 1997, the effect of which is to change the total child
support amounts payable to the recipient by the payer, the
commencement day of the first such subsequent agreement or
order, and
(iv) the day specified in the agreement or order, or any
variation thereof, as the commencement day of the agreement or
order for the purposes of this Act. [emphasis added]
“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 [...] [emphasis
added]
“child support amount” means any support amount
that is not identified in the agreement or order under which it
is receivable as being solely for the support of a recipient who
is a spouse or former spouse of the payer or who is a parent of a
child of whom the payer is a natural parent.
ANALYSIS
THE PROVISION IN DISPUTE
[10] The
provision of the Divorce Order of the Supreme Court of Ontario,
paragraph 2(j), provides as follows:
(j)
THIS COURT ORDERS AND ADJUDGES that under the Divorce Act the
Petitioner and the Respondent agree that the sum of $5,000.00 of
child support in each and every year as called for under this
Agreement shall be tax free to the Respondent in that the
Respondent need not claim the same as income on her income tax
return, nor shall the Petitioner claim the same as a tax
deduction on his income tax return. However, all sums paid by the
Petitioner to the Respondent over $5,000.00 in each and every
year shall be treated by the Respondent as income and by the
Petitioner as a deduction on their respective tax returns and so
claimed by each on their respective income tax returns.
PERIODIC PAYMENTS
VERSUS LUMP SUM PAYMENT
[11] Pursuant
to subsection 56.1(4) of the Act, only amounts payable on
a periodic basis are to be considered as "support
amounts". Thus, a lump sum payment is not a "support
amount" as defined by the Act. Whether an amount
should be considered as payable on a periodic basis or as a lump
sum is a question of fact.
[12] The
Federal Court of Appeal in The Queen v. McKimmon[1] has developed the
following analytical criteria:
The problem of distinguishing between periodic payments
made as an allowance for maintenance, which are deductible for
income tax purposes, and periodic payments made as instalments of
a lump or capital sum, which are not so deductible, is one which
has given rise to considerable discussion and jurisprudence.
[...] [T]he Court is required to look at all the circumstances
surrounding the payment and to determine what, in the light of
those circumstances, is its proper characterization. [...]
The following are, as it seems to me, some of the
considerations which may properly be taken into account in making
such a determination. The list is not, of course, intended to be
exhaustive.
1. The length of the periods at which the payments are made.
Amounts which are paid weekly or monthly are fairly easily
characterized as allowances for maintenance. Where the payments
are at longer intervals, the matter becomes less clear. While it
is not impossible, it would appear to me to be difficult to
envisage payments made at intervals of greater than one year as
being allowances for maintenance.
2. The amount of the payments in relation to the income and
living standards of both payer and recipient. Where a payment
represents a very substantial portion of a taxpayer's income
or even exceeds it, it is difficult to view it as being an
allowance for maintenance. On the other hand, where the payment
is no greater than might be expected to be required to maintain
the recipient's standard of living, it is more likely to
qualify as such an allowance.
3. Whether the payments are to bear interest prior to their
due date. It is more common to associate an obligation to pay
interest with a lump sum payable by instalments than it is with a
true allowance for maintenance.
4. Whether the amounts envisaged can be paid by anticipation
at the option of the payer or can be accelerated as a penalty at
the option of the recipient in the event of default. Prepayment
and acceleration provisions are commonly associated with
obligations to pay capital sums and would not normally be
associated with an allowance for maintenance.
5. Whether the payments allow a significant degree of capital
accumulation by the recipient. Clearly not every capital payment
is excluded from an allowance for maintenance: common experience
indicates that such things as life insurance premiums and blended
monthly mortgage payments, while they allow an accumulation of
capital over time, are a normal expense of living which are paid
from income and can properly form part of an allowance for
maintenance. On the other hand, an allowance for maintenance
should not allow the accumulation, over a short period, of a
significant pool of capital.
6. Whether the payments are stipulated to continue for an
indefinite period or whether they are for a fixed term. An
allowance for maintenance will more commonly provide for its
continuance either for an indefinite period or to some event
(such as the coming of age of a child) which will cause a
material change in the needs of the recipient. Sums payable over
a fixed term, on the other hand, may be more readily seen as
being of a capital nature.
7. Whether the agreed payments can be assigned and whether the
obligation to pay survives the lifetime of either the payer or
the recipient. An allowance for maintenance is normally personal
to the recipient and is therefore unassignable and terminates at
death. A lump or capital sum, on the other hand, will normally
form part of the estate of the recipient, is assignable and will
survive him.
8. Whether the payments purport to release the payer from any
future obligations to pay maintenance. Where there is such a
release, it is easier to view the payments as being the
commutation or purchase of the capital price of an allowance for
maintenance.[2]
[footnotes omitted; emphasis added]
[13] In
relation to the facts of this case I find the McKimmon
criteria results in the following findings:
1.
The payments were to be made at intervals of one year, such
intervals which are not excluded by the Federal Court of Appeal
to be periodic payments.
2.
The payments in the amount of $5,000.00, as increased pursuant to
the Order, are not likely to represent a very substantial portion
of Brian Hedman's income and are no greater than what might
be expected to maintain the Appellant's child's standard
of living.
3.
While the Order provides for interest on payments in respect of
which there is a default, no interest is payable prior to the
payments' due date.
4.
There is no mention of the possibility of anticipated payments in
the Order.
5.
The payments in the amount of $5,000.00, as increased pursuant to
the Order, are not likely to allow a significant degree of
capital accumulation by the Appellant.
6.
The payments are stipulated in the Order to continue to enable
the child to complete one post-secondary school degree. The
continuance of the payments thus depends on an event that will
cause a material change in the needs of the recipient.
7.
The payments cannot be assigned and there is no mention in the
Order providing the survival of the obligation after the lifetime
of the payer or the recipient.
8.
While the Order provides that the Appellant and Brian Hedman
"neither shall be obligated to make any payments in the
nature of support, alimony, maintenance, or any similar payment
[...] to or for the benefit of the other", such release is
not, pursuant to the wording of the Order, related to the
payments for the benefit of the child. In my opinion, the
payments received by the Appellant do not purport to release
Brian Hedman from any future obligations to pay maintenance. From
this I conclude that the amounts received by the Appellant are in
the nature of periodic payments rather than instalments of a lump
sum.
REQUIREMENT OF NON-INCLUSION IN THE
ORDER
[14] The
Appellant's liability for income tax does not depend on what
the Order provided in this regard. Indeed, the jurisprudence
states clearly that liability for income tax does not stem from a
separation agreement or a court order, but from the provisions of
the Act.
[15] In The
Queen v. Sigglekow,[3] the taxpayer was, pursuant to a divorce decree,
entitled to a "tax free" maintenance and support from a
former spouse for the care of her son. Relying on the decree, she
did not include in her income the amounts she received pursuant
to it. The Minister reassessed and included the amounts. The
Federal Court - Trial Division ruled that the Minister's
reassessment was entirely correct since "there could be no
question that such sums actually received by the Defendant fall
precisely with the terms of section 56 and should, therefore,
have been included in her income".[4]
[16] More
recently, in Bates v. The Queen,[5] Mogan T.C.C.J. relied in the
reasons given in Sigglekow to dismiss a similar appeal.
While Judge Mogan concluded that the Order did not
effectively provide "tax free" support payments, he
concluded that, in any event, the Order could not bind the
Minister in this regard.[6] The following part of his reasons is relevant:
The superior court of any province has jurisdiction to order
payments for the maintenance of 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.[7] [emphasis added]
CONCLUSION
[17] I
therefore conclude the allowance paid to the Appellant by
Brian Hedman was on a periodic basis for the maintenance of
Logan Daniel Hedman under the Order of the Supreme Court of
Ontario and is to be included in computing the Appellant's
income for the 1997 taxation year in accordance with
paragraph 56(1)(b) of the Act.
DECISION
[18] The
appeal is dismissed.
Signed at Ottawa, Canada, this 18th day of December 2000.
"D. Hamlyn
J.T.C.C.
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