Her Majesty the Queen v. Stanley John McKimmon, [1990] 1 CTC 109

Hugessen, J.A.: — This is an appeal from a decision of Collier, J., of the Trial Division, allowing the taxpayer's appeal from a decision of Sarchuk, J., of the Tax Court of Canada, which had confirmed the Minister's assessment.

The sole issue for determination is the deductibility, for tax purposes, of certain payments made by the taxpayer to his former wife in the years 1982 and 1983. Those payments were made pursuant to the provisions of a decree nisi of divorce pronounced by a local judge of the Supreme Court of British Columbia February 5, 1982. The relevant passages of the decree, given on consent, read as follows:

AND THIS COURT FURTHER ORDERS, by consent, that the Respondent pay to the Petitioner the lump sum maintenance of ONE HUNDRED THIRTY THOUSAND ($130,000.00) DOLLARS and periodic maintenance in the sum of ONE HUNDRED FIFTEEN THOUSAND ($115,000.00) DOLLARS in satisfaction of all financial relief under the Divorce Act and Family Relations Act, payable in the manner following, that is to say:

(a) Transfer to her of all that certain parcel or tract of land and premises situate at 33118 Whidden Avenue, Mission, British Columbia, more particularly known and described as:

Lot 53, S.W. / Section 28,

Township 17, Plan 28357,

New Westminster District

free and clear of all encumbrances, subject to existing tenancies, at a deemed value for the purposes of this Action of ONE HUNDRED THIRTY THOUSAND ($130,000.00) DOLLARS; such transfer to be completed by the 1st day of April, 1982 with an adjustment date being the date of transfer;

(b) Payment of the sum of ONE HUNDRED FIFTEEN THOUSAND ($115,000.00) DOLLARS in consecutive annual installments as follows:

$25,000.00 on the first day of April, 1982

$25,000.00 on the first day of January, 1983

$25,000.00 on the first day of January, 1984

$25,000.00 on the first day of January, 1985

$15,000.00 on the first day of January, 1986

together with and in addition to interest at the rate of TEN (10%) PERCENTUM per annum, on the balance of the said ONE HUNDRED FIFTEEN THOUSAND ($115,000.00) DOLLARS from time to time owing, such interest to commence accruing from and inclusive of the 1st day of April, 1982, and be computed half- yearly, not in advance, and become due and payable annually with the annual installments of principal as they become due and payable.

AND THIS COURT FURTHER ORDERS, by consent, that the respondent cause Kapps Enterprises Ltd. to execute and deliver to the Petitioner a collateral mortgage of all its equity as Purchaser in and to all that certain parcel or tract of land and premises situate at 34054 Parr Avenue, Mission, British Columbia, more particularly known and described as:

Lot 1, S.E. / Section 27,

Township 17, Plan 34254,

New Westminster District

free and clear of all financial encumbrances (save and except the title interest of the unpaid Vendor) by the 1st day of April, 1982, such mortgage to be deemed collateral security for the payment of the said sum of ONE HUNDRED FIFTEEN THOUSAND ($115,000.00) DOLLARS and interest to the Petitioner as hereinbefore provided.

AND THIS COURT FURTHER ORDERS, by consent, that the Respondent shall have the privilege of prepaying the balance or any portion thereof owing under the aforesaid terms of payment, and collateral mortgage, without notice or bonus, subject nevertheless to the proviso that in the event of default of payment by the respondent of the principal or interest herein or any portion thereof, at the times and in the amounts provided, then and in every such case the principal sum and every portion thereof at the option of the Mortgagee shall forthwith become due and payable without notice; and further subject to the proviso that there shall be no acceleration of payment in the event of sale.

(Appeal Book, at pages 78 and 79).

The payments in issue were said to have been made pursuant to paragraph (b) above.

Prior to the pronouncement of the decree of divorce, the parties had lived separate and apart for approximately four years, during which time the taxpayer had paid to his wife the sum of $600 per month as interim alimony.

The relevant statutory provision is paragraph 60(b) of the Income Tax Act. This allows a taxpayer to deduct from income:

60. . . .

(b) an amount paid 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 he was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, his spouse or former spouse to whom he was require[d to] make the payment at the time the payment was made and throughout the remainder of the year.

The correlative provision is paragraph 56(1)(b), which requires a taxpayer to include in income:

56. (1) . . .

(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.

It will be observed that the two texts deal with both alimony and other allowances payable on a periodic basis for maintenance. Although the French text is somewhat unclear on this point, it is now settled that the reference to alimony ("pension alimentaire") is limited to sums payable during the currency of the marriage. [1]

Since the payments with which we are here concerned were made after the pronouncement of the divorce between the parties, the issue is to know whether they were paid as an “allowance payable on a periodic basis for the maintenance" of the taxpayer's former wife.

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. It is not dissimilar, and is indeed related to the problem, common in income tax law, of determining if sums of money expended or received are of an income or of a capital nature. As with that problem there can be very few hard and fast rules. On the contrary, the 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 characterisation. Because of the correlation between paragraphs 60(b) and 56(1)(b), a finding that a payment is deductible by the payer will normally result in its being taxable in the hands of the recipient. Conversely, a determination that a payment is not so deductible will result in the recipient having it free of tax.

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 characterised as allowances for maintenance. [2] 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. [3]

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, [4] 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. [5]

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. [6]

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. [7]

Viewing the facts of the present case in the light of the foregoing criteria, it becomes quickly apparent that most of the indicators point strongly to the payments in issue being instalments of a lump sum settlement and that virtually none point the other way.

The payments are to be made only once a year. The amounts paid are not only greatly in excess of the prior alimony of $600 per month but also constitute a very large proportion of the taxpayer's declared income in the two years in question. [8] Interest is, by the terms of the decree, payable on the balance of the total sum of $115,000 from time to time remaining due. The taxpayer is given a prepayment privilege at his option while, in the event of default, his former wife may require the accelerated payment of the whole of the balance. The total sum of $115,000 represents a significant capital amount when compared not only with the taxpayer's declared income but also with the deemed value of the real estate which was also transferred as part of the same consent decree. The payments are to be made over a fixed term and are not stated to be dependent upon the survival of either the payer or the recipient. Finally, the payments are stated to be “in satisfaction of all financial relief under the Divorce Act and Family Relations Act" [9]

I conclude that the sums here in issue were not paid by the taxpayer as an allowance for the maintenance of his former wife. Accordingly they were not deductible from the taxpayer's income under paragraph 60(b) and are taxable in his hands rather than those of the recipient as would be required by paragraph 56(1)(b).

For these reasons, I would allow the appeal with costs, set aside the judgment of the Trial Division and dismiss the taxpayer's appeal to the Trial Division with costs.

Appeal allowed.