Vaughn Macburnie v. Her Majesty the Queen (Informal Procedure), [1995] 2 CTC 2796, 95 DTC 686

Lamarre J.T.C.C.:-This is an appeal from an assessment of income tax made by the Minister of National Revenue (the "Minister") with respect to the appellant’s 1992 taxation year. In assessing the appellant, the Minister included an amount of $27,500 received by the appellant from her former spouse, Kenrick Eyre, during the 1992 taxation year as alimony or maintenance payments in accordance with paragraphs 56(1 )(b) and 56(l)(c) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63) (the "Act").

Facts

On October 24, 1983, the appellant and her former spouse, Kenrick Eyre, entered into a separation agreement in accordance with the Family Law Reform Act, R.S.O. 1980, c. 152 (the "separation agreement"), whereby the parties declared that they had been living separate and apart from each other since on or about August 1, 1983. Under this agreement, Kenrick Eyre was to pay spousal support to the appellant in the amount of $1,500 per month, plus a cost of living increase.

On November 28, 1990, the appellant filed a motion before the Ontario Court (General Division) to obtain an order for interim spousal support in accordance with the separation agreement in the amount of $1,500 plus cost of living adjustment which increased the total amount to $2,042.66 per month. In this motion, the appellant also requested an order for payment of arrears owing by Kenrick Eyre from July 1990 to the date of the motion, which amount was established at $9,755 at that time. [1]

On May 7, 1991, an order was issued by the Provincial Court (Family Division) [2] following an application made by the director of Support and Custody Enforcement Branch ("SCOE") for the benefit of the appellant, whereby Sheffield J. ordered Kenrick Eyre to pay $1,000 per month commencing June 1, 1991 towards the outstanding arrears set at $19,861.02, and the payments had to be made until the said outstanding arrears had been fully paid and satisfied. The order then stated that in default of any such payment, Kenrick Eyre would be incarcerated for a period of up to 30 days or until such time as the instalment towards the arrears had been made, whichever occurred first.

On September 1991, Kenrick Eyre made a cross-application before the Ontario Court (General Division) whereby he asked the Court to terminate or reduce his obligation to pay spousal support to the appellant under the separation agreement.

On November 6, 1991, Kenrick Eyre received a letter from the Ministry of the Attorney General (SCOE), reminding him that the order of Sheffield J. did not in any way alter his continuing obligation to pay ongoing support at a rate of $2,038.76 per month. SCOE therefore took the position that in order to comply with both the separation agreement and the order of Sheffield J., Kenrick Eyre had to pay both $2 038.76 per month and $1 000 per month. Kenrick Eyre was also reminded in that letter tha should he fail to honour his support obligations by not paying the required $3,038.76 on or before December 1, 1991, a warrant for his incarceration would be requested. [3]

On August 24, 1992, Kenrick Eyre’s solicitors filed their factum before the Ontario Court (General Division) whereby they asked the Court to relieve Kenrick Eyre from the payment of all or part of all arrears.

On September 19, 1992, a judgment was rendered on the cross- application by Soubliere J. of the Ontario Court (General Division), incorporating the minutes of a settlement that the parties had entered into a few days before. By this judgment, the Court ordered that:

1. ...Kenrick Eyre shall pay to the [appellant] in full and final satisfaction of all claims and entitlement to spousal support and all arrears of support the sum of $27,500 to be paid on or before October 14, 1992.

2. ...the respondent will have no further or other obligation to the [appellant] whatsoever after the payment of the sum referred to above and the [appellant] hereby releases the respondent from all obligations to provide her with support, interim support, maintenance, interim alimony, alimony or any other financial assistance, whether under the Family Law Act, the Divorce Act, the laws of any other jurisdiction, the common law or the law of equity. The [appellant] acknowledges and agrees that this clause may be pleaded as and shall constitute a full defence and answer to any such claims made at any point in the future.

The parties acknowledge that their respective financial circumstances may change in the future by reason of their health, the cost of living, their employment, their unemployment, the management of their investments, and otherwise. No change whatsoever, even if it be material, profound, catastrophic, or otherwise, shall give either party the right to claim or obtain any form of spousal support from the other under the Family Law Act, the Divorce Act, the laws of any other jurisdiction, the common law or the law of equity.

3. that upon making the payment of $27,500 pursuant to paragraph 1 above, the respondent shall no longer be obliged to maintain for the benefit of the [appellant] any plan of insurance providing extended medical and pharmaceutical drug coverage or dental coverage. Furthermore, the respondent shall no longer be obliged to maintain any policy or policies of life insurance for the benefit of the [appellant].

4, ...that the [appellant’s] application is dismissed without costs.

5. ...that there shall be no order as to costs in the respondent’s crossapplication.

The parties had agreed in the minutes of settlement that the judgment should dismiss the appellant’s application provided that the sum of $27,500 was paid by Mr. Eyre which sum was effectively paid in October 1992.

At trial, the appellant, Kenrick Eyre and Alan Ross Braidek, who acted as the appellant’s solicitor when the minutes of settlement were signed, all testified. According to the appellant, she did not want to rely anymore on her former husband because he was not reliable and also because she was scared of him. It is therefore in this context that she accepted a final payment of $27,500 in full and final satisfaction of all claims.

As for Kenrick Eyre, he testified that the only reason he accepted to pay the $27,500 was because SCOE threatened to send him to jail and he paid that amount in order to be released from all his past obligations. However, I understand from his testimony and from the proceedings that were filed before the Ontario Court (General Division) that he also wanted to be released for the future from all spousal support obligations to the appellant.

As for Mr. Braidek, he explained to this Court that the tax implications of the payment of this lump sum were discussed between him and Kenrick Eyre’s solicitor at that time and that they agreed that "what [they] were doing would result in no tax implications to [the appellant]. That was the intention." He further said that an investigation into Mr. Eyre’s financial situation was made and they were concerned about his ability to pay future support and that he might leave the country. After a discussion with the appellant, they decided to forego the arrears and concentrate on an amount for future support. When he was asked why the mention of "in full and final satisfaction of all claims and entitlement to spousal support and all arrears of support" [Emphasis added] was drawn, he explained that the only reason was to "give Mr. Eyre a measure of comfort to show that it was all encompassing and there was no intention that any of the arrears would be pursued". In cross- examination, he mentioned that one reason the appellant wanted to settle was that she was aware that Mr. Eyre could demonstrate before the Ontario Court that he was not able to pay future spousal support anymore.

Analysis

In his argument, counsel for the appellant made it clear that the issue turned around the question of how to qualify the amount of $27,500 paid to the appellant by her ex-spouse. If it is qualified as being paid on account of past periodic payments due under the separation agreement, then the amount should be taxable in the hands of the appellant under paragraphs 56(1 )(b) and 56(1 )(c) of the Act. If, on the other hand, the payment is qualified as a lump sum payment in return of a release from future obligations or future liabilities, then this payment of $27,500 should not attract tax for the appellant under the Act. As a matter of fact, counsel for the appellant relied on the decision of the Supreme Court of Canada in M.N.R. v. Armstrong, [1956] S.C.R. 446, [1956] C.T.C. 93, 56 D.T.C. 1044. In that decision, a divorce decree provided for monthly payments. The payments were made for two years and then the wife accepted a $4,000 lump sum in full settlement of all payments due or to become due. Kellock J. said at page 448, C.T.C. 95, D.T.C. 1045, 1046:

In my opinion, the payment here in question is not within the statute. It was not an amount payable "pursuant to" or "conformément à" (to refer to the French text) the decree but rather an amount paid to obtain release from the liability thereby imposed.... Such an outlay made in commutation of the periodic sums payable under the decree is in the nature of a capital payment to which the statute does not extend.

Counsel for the appellant also relied on a decision of this Court in Dubreuil, J G v. M.N.R., [1993] 2 C.T.C. 2004, 93 D.T.C. 542, where Couture J. found out that "[it was] indisputable that the payment in question was made by the appellant in order to terminate his obligations to his former wife under the judgment of the Superior Court, and not as alimony or other allowance". In that case, the taxpayer agreed to pay to his former wife a sum of $10,000 under a subsequent agreement to his former wife as "lump sum alimony" in return for which the former wife gave the taxpayer a full and final discharge. This payment was therefore treated as a capital payment for which the legislation does not authorize a deduction and therefore does not impose inclusion as income for the recipient.

Counsel for the respondent relied on a decision of this Court in Soldera v. M.N.R., [1991] 2 C.T.C. 2097, 91 D.T.C. 987 (T.C.C.), where he contended the situation was the same as in the present case. In Soldera, the taxpayer was ordered pursuant to a decree nisi of divorce to pay monthly support. The taxpayer fell into arrears and there was a second order which varied the first order. The second order specifically fixed the arrears of maintenance at $7,500. Garon J. held that the second order did not change the nature of the taxpayer’s liability but simply reduced the amount. In essence, the $7,500 represented a portion of the arrears which was an allowance payable on a periodic basis under the first order. The Court however noted that the second order did not have a "provision whereby the appellant is released in express terms from any existing or future liability in respect of the maintenance of his children".

The principles laid down in determining the deductibility (or inclusion in income for the recipient) of lump sum payments made by a taxpayer to a spouse or former spouse in the context of the Act, have been reviewed by the Supreme Court of Canada in Armstrong, supra. The chief justice in that case said at page 447, C.T.C. 94, D.T.C. 1045:

The test is whether [the lump sum] was paid in pursuance of a decree, order or judgment and not whether it was paid by reason of a legal obligation imposed or undertaken.

In that case, the divorce decree provided the payment of $100 monthly to the taxpayer’s wife for the maintenance of their daughter. The payments