Michel Champagne v. Minister of National Revenue, [1993] 1 CTC 2655, 93 DTC 479

Tremblay, J.T.C.C:—This appeal was heard on April 7, 1992, in Sherbrooke, Quebec.

1. Point in issue

The point in issue is whether the appellant was correct, when computing his income for the 1986 taxation year, in deducting the sum of $10,000 paid, according to him, as a maintenance payment to his former spouse Céline Lesage, the whole in accordance with an agreement entitled "Agreement on Corollary Relief” [translation], hereinafter called the agreement". This agreement was made pursuant to a petition for divorce.

The respondent disallowed the deduction, alleging that it represented a partial payment of a total sum of $50,000, not a maintenance payment.

The appellant maintained, however, that this sum of $50,000, to be paid over a period of five years, was intended to enable his spouse to remain with the young children and also to improve her academic training before returning to the labour market.

The appellant also contended that the sum of $50,000 could not constitute a compensatory allowance since his former spouse had not contributed at all to the enrichment of the appellant's patrimony.

2. Burden of proof

2.01 The burden is on the appellant to show that the respondent's assessments are incorrect. This burden arises from several judicial decisions, including a judgment by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182.

2.02 The facts assumed by the respondent in the present case are described in subparagraphs (a) to (d) of paragraph 11 of the reply to the notice of appeal. They read as follows:

11. In reassessing as he did, the respondent, the Minister of National Revenue, took for granted, inter alia, the following facts:

(a) pursuant to a petition for divorce filed by Ms. Céline Lesage, wife of the appellant, the former and the appellant signed an agreement entitled "Agreement on corollary relief" dated November 25, 1983; [admitted]

(b) under the terms of this agreement, the parties provided the following:

the respondent will pay the applicant, for herself and her children, weekly maintenance payments of $500 indexed in accordance with the annual pension index established pursuant to section 119 of the Act respecting the Quebec Pension Plan, the whole in accordance with the Act;

the respondent will also pay the applicant a support payment of $10,000 per year for five years, the first payment to be made within 30 days of the pronouncement of the decree nisi of divorce and on the anniversary date of the first payment in the four subsequent years;

the respondent agrees to add to this sum of $10,000 the interest accrued on the sum of $50,000 at the prime rate of the National Bank, plus one per cent; this interest will be calculated on the balance of the amount of $50,000 due at the time of each payment; [admitted]

(c) furthermore, by this agreement, Ms. Céline Lesage [Translation] "waives all other claims against the respondent either for lump sums or compensatory allowances, or under her marriage contract”, and the parties "grant each other full, mutual and final discharge”; [admitted]

(d) the amount of $50,000 paid to Ms. Céline Lesage following the pronouncement of decree nisi of divorce does not constitute a maintenance payment or allowance payable on a periodical basis. [denied]

[Translation.]

3. Facts

The material facts pertaining to this appeal are substantially the following.

3.01 On March 22, 1984, an absolute decree of divorce was delivered by the Honourable Judge André Biron, S.C.J., granting a divorce between the taxpayer appellant, Mr. Michel Champagne, and his former spouse, Ms. Céline Lesage.

3.02 Prior to this absolute decree of divorce, a decree nisi of divorce had been granted on December 8,1983 by the Honourable Judge Jacques Vaillancourt, S.C.J.

3.03 Custody of the two minor children, Myriam and Claudine, was granted to the taxpayer's wife under the agreement signed by the parties dated November 25, 1983 and subsequently sanctioned under the terms of the decree nisi of divorce.

3.04 The taxpayer was required, also under this same agreement, sanctioned by the decree nisi of divorce, to pay his former spouse, for her personal benefit and for that of the two minor children, weekly maintenance payments of $500, as well as a gross sum of $50,000 spread over five years.

3.05 The said agreement reads as follows concerning the corollary relief incorporated in the decree nisi:

1. Custody of the minor children, Myriam and Claudine, is granted to the applicant;

2. The respondent will have the right to visit and take out his children at his convenience; either party may petition the Court in case of disagreement;

3. The respondent will pay the applicant, for herself and her children, weekly maintenance payments of $500 indexed in accordance with the annual pension index established pursuant to section 119 of the Act respecting the Quebec Pension Plan, the whole in accordance with the Act;

4. The respondent will also pay maintenance payments to the applicant of $10,000 per year for five years, the first payment to be made within thirty days of the pronouncement of the decree nisi of divorce and the four others subsequently on the anniversary date of the first payment;

5. The respondent agrees to add to this sum of $10,000 the interest accrued on the sum of $50,000 at the prime rate of the National Bank plus one per cent; this interest will be calculated on the balance of the amount of $50,000 due at the time of each payment;

6. It is expressly agreed between the parties that the applicant shall pay the income tax on the weekly and annual maintenance payment income mentioned above and that the respondent will deduct those amounts paid from his own income;

7. The applicant agrees to leave the matrimonial home located in the house belonging to the respondent at 685 Chemin Hemmings, Drummondville, no later than January 23, 1984;

8. The applicant may take with her the following movable property:

Washer-dryer;

Dishwasher;

Bedroom furniture for the daughters;

Bedroom furniture for the applicant;

Dining room furniture, lamp, two stools;

Living room furniture including: 2 wall units, 1 arm chair, 1 sofa, 1 small table with lamp, 1 central table, 1 rug, 1 plant stand, 1 sound system plus 1 television set;

The respondent also agrees to buy the applicant a stove and a refrigerator;

9. The applicant waives all other claims against the respondent either for lump sums or compensatory allowances, or under her marriage contract;

10. The parties grant each other full, mutual and final discharge;

11. Should the applicant work, the respondent agrees not to reduce the weekly maintenance payments, if the applicant's gross income does not exceed $150 per week, and if she provides the respondent with proof of her income; however, if this proof is not provided on request, or if the applicant’s income exceeds the sum of $150 per week, the respondent may address the court to have the maintenance payments reduced. The parties agree that the court shall take into account the applicant's total income, not only her earnings in excess of $150 from her work;

12. Each party will pay its own costs.

[Translation.]

3.06 According to the testimony of the appellant's former spouse, the latter did not consider the sum of $50,000 (that is $10,000 for five years) as a maintenance payment.

She also stated that the amount of $500 per week was fully sufficient for her maintenance and that of her children.

4. Law — case law — analysis

4.01 Law

The main legislative provision which applies in this case is paragraph 60(c) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act") which reads as follows:

60(c) Maintenance payments.— an amount paid 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 recipient thereof, children of the recipient, or both the recipient and children of the recipient if, at the time the payment was made and throughout the remainder of the year, he was living apart from his spouse to whom he was required to make the payment.

4.02 Case law

Counsel for the parties referred the Court to the following case law:

1. The Queen v. McKimmon, [1990] 1 C.T.C. 109, 90 D.T.C. 6088;

2. Ernest Cohen v. The Queen, T-944-88, T-945-88, T-946-88 (F.C.T.D.);

3. Hansen v. M.N.R., [1967] C.T.C. 440, 67 D.T.C. 5293;

4. Hanlin v. The Queen, [1985] 1 C.T.C. 54, 85 D.T.C. 5052;

5. Veliotis v. The Queen, [1974] C.T.C. 237, 74 D.T.C. 6190;

6. Trottier v. M.N.R., [1968] S.C.R. 728, [1968] C.T.C. 324, 68 D.T.C. 5216;

7. Pascoe v. The Queen, [1975] C.T.C. 656, 75 D.T.C. 5427.

4.03 Analysis

4.03.1 The point for determination in this case is whether, given the true nature of the $10,000 payment made by the appellant to his former spouse during the 1986 taxation year, the Court can rule that sum deductible under paragraph 60(c) of the Act.

4.03.2 Only two of the four conditions set by paragraph 60(c) were raised by the parties, the two others posing no difficulty.

The two conditions of interest to us are the following:

1. The maintenance payment or allowance must be payable on a periodic basis;

2. That same maintenance payment or allowance must be paid for the maintenance of the spouse, of the children of the marriage or of both.

The first condition mentioned above may in fact be explained by the second. The periodic nature of the payment is explained by the fact that the purpose of the amount actually paid must be to meet the alimentary needs of the recipient, those needs being of a regularly renewable and ongoing nature.

4.03.3 The alimentary obligation is discharged under the provisions of the Civil Code of Quebec (article 637) and the Divorce Act (section 15).

It is true that courts will generally order the periodic payment of a specific amount, that is maintenance payments. In certain circumstances, however, these payments may possibly be supplemented or even replaced by a gross or lump sum.

According to most of the case law on this matter, allowances in the form of capital are not deductible for the person who pays them and not taxable for the person who receives them (Veliotis v. The Queen (4.02(5)), Trottier v. M.N.R. (4.02(6)), Pascoe v. The Queen (4.02(7)).

4.03.4 However, some of the case law goes against the majority position and permits the deduction of a lump sum, although the periodic factor is not as clear (Hansen v. M.N.R. (4.02(3)), Hanlin v. The Queen (4.02(4)).

This Court is of the view that a gross sum paid annually may be deductible if the facts and circumstances show that the amount thus paid was in payment of an alimentary allowance. This is what arises from Cohen (4.02(2)), which also refers to Hansen (4.02(3)). The relevant passage reads as follows:

As noted above, a lump sum payment does not meet the requirement that the payments be periodic in order to be deductible.

However, lump sums payable by instalments, as in the present case, have been considered to be periodic in nature. It is a question of degree as to whether the instalment payments have been made on a regular basis, and that the entire context of the order or agreement pursuant to which the payments are made must be considered in making this determination. This [it is indicated] is clear from the decision in M.N.R. v. Hansen. . . .

This Court does not believe that it is relevant to dwell any further on this condition. Payment once a year over five years meets the condition of the Act in this respect.

4.03.5 The point in issue which concerns us thus calls for a careful examination of the terms of the agreement, as well as of the circumstances of the payment of the sum of $10,000.

One of the arguments advanced by the appellant was that the sum of $10,000 could not have been paid as a compensatory allowance since his former spouse had not contributed in any way to enriching the patrimony during their marriage.

The Court cannot dispute this point, particularly since it was not contradicted by the respondent. In fact, the compensatory allowance would be due from a spouse who had enriched himself unduly at the expense of the other.

It is important, however, not to confuse this with the total sum payment or lump sum payment, which in actual fact is very often of a completely different nature.

In the present case, it is the true nature of the sum of $10,000 which we are trying to determine. The fact that this sum was not paid as a compensatory allowance nevertheless does not exclude the possibility that it was a payment other than a maintenance payment.

4.03.6 Although the parties stipulated in clause 5 of the agreement that the total sum of $50,000, at the rate of $10,000 per year over five years, was intended to be a maintenance payment, that stipulation cannot be significant.

Although the taxpayer's intention remains a fundamental factor, it must be examined in the light of the facts in issue and of the terms of the agreement. The Court will also consider the tests developed in McKimmon (4.02(1)).

4.03.7 In that decision, the Federal Court of Appeal established certain tests for distinguishing between sums received as an allowance payable on a periodic basis or as total sums, which, as we have seen, usually may not be deducted in the calculation of the payer's income (subject to each particular case).

The tests developed are as follows:

— the length of the periods at which the payment is made;

— the amount of the payments in relation to the income and living standards of both payer and recipient;

— whether the payments are to bear interest prior to their due date;

— whether the amounts can be paid by anticipation by the payer or can be submitted to an event of default;

— whether the payment of these amounts allow capital accumulation by the recipient;

— whether the payments are stipulated to continue for an indefinite period or whether they are for a fixed term;

— whether these payments can form part of the estate of the recipient and whether they are claimable after death;

— whether these payments purport to release the payer from any future obligations to pay maintenance to the recipient.

The Court will thus assess the material facts of the present case against these tests.

4.03.8 The appellant resolutely argued that the gross sum of $10,000 was paid during the taxation year (1986) strictly to support his wife and two children. The appellant thus argued that, in knowing that his wife could not return to the labour market for a period of more or less five years, and considering the young age of the two children at the time of the divorce, he therefore preferred that his wife stayed at home in order to attend adequately to the children’s upbringing.

He also contended that, in this perspective, he took into account his wife's wish to improve her academic training before returning to the labour market.

4.03.9 The appellant would no doubt have benefitted by filing evidence establishing that this was his intention. However, it is the opinion of this Court that nothing in the evidence submitted or in the facts firmly corroborates this argument.

No mention of or reference to this intention is made in the agreement, for example. Furthermore, the testimony of the former spouse appears to contradict this argument, since she mentioned that she had never considered the sum in issue as a maintenance payment. The evidence shows, quite to the contrary, that she did not touch the amount received to cover the basic and alimentary needs of the two children and herself.

The purpose of maintenance payments, however, must be the payment of sums necessary to the subsistence of the recipient or the children of the marriage. Such payments must therefore be based on the recipient's needs and the payer's possibilities.

It appears, however, that there was no real relationship between the recipient's needs and the amount paid. She should have been able, of course, after her divorce, to enjoy a style of living similar to that which she led when she was Mr. Champagne's spouse. It was clearly shown, however, that the alimony and maintenance requirements were amply met by the weekly maintenance payment of $500, the purpose of the maintenance payment being in fact that the sums paid should serve to support the recipient, not to constitute capital.

4.03.10 Another aspect which appears to contradict the appellant's claim arises from clause 10 of the agreement. This clause provides that the parties grant each other full, mutual and final discharge. In reality, however, alimony or maintenance allowances are provided through payments spread over an undetermined period, not one predetermined by the clauses of an agreement.

4.03.11 As for what was provided in clause 5 of the agreement (3.05), the Court finds it hard to explain the rate of interest imposed on the total sum of $50,000.

The obligation to pay interest is associated much more with a lump sum payment than a true maintenance payment. The very nature of such payments naturally excludes the addition of any interest on those sums.

4.03.12 In addition, the respondent appropriately mentioned the fact that the agreement provided for the possibility for the appellant to reduce the maintenance allowance of $500 per week if the conditions mentioned in clause 11 arose (3.05).

Why did the said clause apply exclusively to the maintenance payments? Why was this amount of $50,000 treated differently, if it was really supposed to be a maintenance payment?

4.03.13 It therefore appears from the various facts above that the balance of evidence contradicts the appellant's claim. The burden of proof was on him.

The Court therefore finds that the appellant Michel Champagne was not justified in deducting the sum of $10,000 paid to his former spouse from his income for the 1986 taxation year.

5. Conclusion

The appeal is dismissed, and the assessment is affirmed.

Appeal dismissed.