Barbara Arshinoff v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2850

Brulé, J.T.C.C.:—This appeal was brought under the informal procedure of the Tax Court of Canada Act, R.S.C. 1985, c. T-2. It concerns the appellant’s 1989 taxation year. She did not include in her income for that year the sum of $20,000 received from her separated husband as support payments. The Minister of National Revenue ("Minister") assessed on the basis that the amount received was taxable, and this appeal resulted.

Facts

These are brief and not in dispute. During the relevant year the appellant received payments of $20,000 from her estranged husband, Steve Arshinoff. The payments represented a four-month period.

These payments were received pursuant to an order, dated 16 October 1989, of Master McBride of the Supreme Court of Ontario. The order in question was rendered on a motion for interim support, interim exclusive possession and a restraining order. Paragraph 2 stated:

THIS COURT ORDERS that the petitioner shall pay to the respondent, pending a further return of this motion following cross-examinations of the parties, interim support in the sum of $5,000 per month, excluding tax, commencing September 1, 1989.

It appears to have been the Master McBride's intention that the appellant receive a monthly amount net of tax of $5,000 and as such, Steve Arshinoff was either not to deduct the payments made to the appellant who, in turn, was not to include them, or Mr. Arshinoff was to gross up the payments to reflect any income taxes which would be payable by the appellant. Although the appellant did not include the amounts received in 1989 in the computation of her income for that year, her husband did in fact deduct them, and furthermore, he did not gross up the payments.

The Minister issued a notice of reassessment dated 4 September 1992 by which the appellant’s taxable income for her 1989 taxation year was revised to reflect the $20,000 received for maintenance pursuant to paragraph 56(1 )(c) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The appellant objected to the reassessment on the basis that her husband was not entitled to deduct the support payments and she did not have to pay tax on them because they were on an "excluding tax" basis.

Jarvis, J. of the Ontario Court (General Division) upon hearing of the case for custody, support and regarding the equalization payments, reviewed Master McBride’s order for interim support and agreed with the content of the order. Jarvis, J., rendered his judgment on July 2, 1993, and he stated at page 8 of his judgment, after quoting Master McBride's order:

I find that it was Master McBride's intention that the wife not pay tax on the $5,000. He clearly contemplated that the issue would be revisited but it was not dealt with again until this trial.

The husband defeated the intentions of the Master's order by treating the monthly payments as deductible for income tax purposes. This was done from September 1989 to the commencement of trial and presumably thereafter.

Issue

The sole issue in this appeal is whether or not the maintenance payments received by the appellant should be included in her 1989 taxation year as income received by her.

Analysis

Paragraph 56(1 )(c) of the Act clearly stated in 1989 that an amount received as maintenance is to be included in the computation of income of the taxpayer recipient. It read:

56.(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year. . . .

(c) any amount received by the taxpayer in the year, pursuant to an order of a competent tribunal, as an allowance payable on a periodic basis for the maintenance of the taxpayer, children of the taxpayer, or both the taxpayer and the children of the taxpayer if, at the time the payment was received and throughout the remainder of the year, the taxpayer was living apart from his spouse who was required to make the payment. . . .

In light of the clear wording of paragraph 56(1 )(c) of the Act as it then was in 1989, it seems obvious that the amounts received by the appellant should be taxable. The requirements have been met, that is:

1. the payments were made as an allowance for the maintenance of the recipient, the children of the recipient or both;

2. the payments were payable on a periodic basis;

3. the appellant was living separate and apart from her husband required to make the payment at the time the payment was received and throughout the remainder of the year;

4. Steve Arshinoff is the natural parent of the children of the taxpayer; and

5. the amount was paid pursuant to an order of a competent tribunal in accordance with the laws of a province.

The only qualification which could offset the application of these requirements is found in the words “excluding tax" as set out in Master McBride’s order.

In the case of Sigglekow v. M.N.R., [1981] C.T.C. 2830, 81 D.T.C. 775, the taxpayer who divorced her husband received $20 per week on a "tax free" basis for the support and maintenance of each of her children as ordered by a judge of the Supreme Court of Ontario. The husband only paid the $20 per week and did not gross uP the amount to reflect income taxes which would be payable. In computing her income for the taxation years in question, the taxpayer did not include those amounts. The Tax Review Board allowed the taxpayer's appeal of the assessment. The chairman held that by using the words "tax free" if the judge fixing the order meant that no tax would be payable by the recipient he would have had to completely ignore the clear wording of paragraph 56(1 )(c) of the Act. The order could not bind the Minister and could not usurp the jurisdiction of the Federal Court and the Tax Review Board in deciding that the maintenance payments were not taxable. What the learned judge meant by the term "tax free" was interpreted at page 2833 (D.T.C. 777) as follows:

The direction that the payments be tax free did not exempt the appellant from paying tax on the maintenance payments received but was an order to the appellant's husband to pay such amount greater than $20 so that the appellant would be in possession of $20 per week per child, after she had paid the tax liability consequent upon her receipt of the larger amount.

I question the wisdom and the practicality of the wording of the order in establishing as it did the amount of the award but I cannot conclude that, in so doing, the learned judge was deciding on the non-taxability of the maintenance payments in the hands of the recipient. Also, I do not find that the order bound the Minister of National Revenue or the Tax Review Board as to the taxability of maintenance payments in the hands of the appellant under paragraph 56(1)(c) of the Act.

The chairman allowed the appeal but on different grounds. The matter was then brought before the Federal Court ([1985] 2 C.T.C. 251, 85 D.T.C. 5471). There it was held that the payments were taxable. Jerome, A.C.J. at page 254 (D.T.C. 5473) stated:

. . 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. . . . They are taxable income if their source is in an agreement or order caught by section 56. The fact that the agreement or order may impose additional burdens upon the spouse is extraneous.

Section 12 of the Tax Court of Canada Act gives the Court exclusive original jurisdiction to hear and determine appeals on matters arising out of the Act. This has the effect that neither the Master McBride nor Judge Jarvis of the Ontario Court (General Division) have the authority to make an order contrary to the Act. 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.

The appeal is dismissed.

Appeal dismissed.