Turner v. R., [1997] 2 CTC 2670

Hamlyn T.CJ.:

In computing income for the 1991 and 1992 taxation years, the Appellant reported the amounts of $8,400 and $5,563 respectively as alimony or maintenance income.

By Notice of Reassessment dated June 2, 1994, the Minister of National Revenue (the “Minister”) included “additional amounts” of $18,585 and $6,001 respectively in the 1991 and 1992 taxation years as alimony or maintenance income.

The Appellant appealed to this Court.

Thereafter upon application by the Minister pursuant to paragraph 174(3)(b) of the Income Tax Act (the “Act”) it was ordered that William Thomas Turner (the former spouse of the Appellant, hereinafter called “Turner”) be joined as a party to the appeal of the Appellant from the assessment for the 1992 taxation year. Under paragraph 174(3)(b) certain questions affecting the potential tax liability of the Appellant and of Turner were to be answered. Turner did not appear, nor was he represented at the hearing of the appeals.

In reassessing the Appellant, the Minister made the following assumptions of fact:

(a) the Appellant received the following payments in the 1991 and 1992 taxation years (the “Payments”):

	1991	1992
Cancelled cheques	$ 10,447	$ 2,006
Canadian Forces Assignment	$ 4,992	$ 4,992
Lump sum payment	$ 11,546	$ 4,556
	$ 26,985	$ 11,564
(admitted by the Appellant at trial)

(b) The Payments were received 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 Appellant, children of the marriage, or both the recipient and children of the marriage;

(C) The Lump-sum payment in the amounts of $11,546.00 and $4,566.00 respectively in 1991 and 1992 taxation years, were received pursuant to the declaration of a competent tribunal as a payment of amounts of alimony or other allowance, payable on a periodic basis for maintenance, that were in arrears;

(d) the Canadian Forces Assignment in the amounts of $4,992.00 in each of the 1991 and 1992 taxation years were a division of the Appellant’s former spouse’s pension pursuant to the declaration of a competent tribunal as a payment of amounts of alimony or other allowance, payable on a periodic basis for maintenance;

(e) the Appellant was living apart from the spouse or former spouse required to make the Payments at the time the Payments were made and throughout the remainder of the year, and

(admitted by the Appellant at trial)

(f) the Appellant was separated pursuant to a divorce, judicial separation or written separation agreement from the spouse or former spouse required to make the Payments at the time the Payments were made and throughout the remainder of the year.

(admitted by the Appellant at trial)

Issue

The issue to be decided is whether the additional amounts received by the Appellant in the 1991 and 1992 taxation years are to be included as alimony or maintenance income in computing income for those years pursuant to paragraphs 56(1)(Z>) and 56(l)(c) of the Act as amended for the 1991 and 1992 taxation years [1] .

Evidence at the Hearing of the Appeals

The Appellant and Turner were divorced by way of decree nisi signed on the 5th of February 1987.

In the judgment by way of decree nisi Turner was ordered by the Supreme Court of British Columbia to pay to the Appellant the following:

AND THIS COURT DOTH FURTHER ORDER AND ADJUDGE AND BY CONSENT THAT the Respondent do pay to the Petitioner maintenance for herself in the sum of THREE HUNDRED DOLLARS ($300.00) per month per child on the first day of each and every month, commencing on the first day of September, 1986. [2]

AND THIS COURT DOTH FURTHER ORDER AND ADJUDGE AND BY CONSENT THAT: [3]

a) All the Respondent’s pension and benefits and accretions thereto under the Canadian Forces Superannuation Act and Supplementary Retirement Benefits Act and amendments thereto or subsequent or similar legislation is a family asset and the Petitioner is entitled to a percentage interest or share as tenant-in-common in and to the same (hereinafter called the “Petitioner’s interest”);

e) The Respondent will pay to the Petitioner in monthly installments, a sum equal to the Petitioner’s interest of the pension plan and benefits, payable forthwith upon receipt by him of his pension benefits;

I) The Petitioner is to indemnify the Respondent and save him harmless from the tax liability attributable to her share of the pension and the benefits thereunder or payment of the compensation equivalent to her share of the pension and there shall be an accounting annually to determine the amount of tax paid by the Respondent with respect to the Petitioner’s share of the pension or compensation payments, which amount shall be payable by the Petitioner to the Respondent forthwith upon determination and notice to the Petitioner....

Thereafter several events took place, the payment obligations of Turner under the decree nisi fell into arrears, Turner retired from the Canadian Forces and began to receive the stated pension benefit and the Appellant sought to enforce the defaulted orders by way of garnishment and other court proceedings.

On the 20th of August 1990, the Supreme Court of British Columbia ordered variations to the judgment of the 5th of February 1987. The selected relevant paragraphs of the varied order read as follows:

THIS COURT FURTHER ORDERS that the provision for spousal maintenance for the Petitioner in the sum of $300.00 per month contained in the Judgment By Way of Decree Nisi entered on February 5, 1987, and being the fourth paragraph on page two of the said Decree Nisi, is hereby deleted.

THIS COURT FURTHER ORDERS that this Order shall in no way affect the provisions for pension division contained in the said Decree Nisi, which shall continue in full force and effect and the Respondent shall pay to the Petitioner all sums due to the Petitioner as her share of his pension (presently $287.25 per month plus incremental increases as and when the same become payable).

THIS COURT FURTHER ORDERS that arrears of pension and maintenance payments up to and including May, 1989 are hereby fixed at $10,135.76 and that the Respondent shall pay the same to the Petitioner.

THIS COURT FURTHER ORDERS that the Respondent shall pay to the Petitioner additional arrears of pension payments due and owing to the Petitioner from June, 1989 up to and including April, 1990, in the sum of $3,159.75.

THIS COURT FURTHER ORDERS that as of August, 1990 there will be additional sums due and owing to the Petitioner for pension payments in the sum of $1,150.00. Total arrears of pension and maintenance payments as of August 31st, 1990 will be $14,445.51 and the Respondent shall pay the same to the Petitioner.

THIS COURT FURTHER ORDERS that the Respondent shall pay to the Petitioner the sum of $300.00 per month as payments on the maintenance and pension arrears commencing September 1st, 1990 and shall continue to pay the sum of $300.00 per month on the first day of each and every month until the aforementioned arrears are fully paid. This sum shall be in addition to the ongoing maintenance required for the children in the sum of $700.00 per month and in addition to monthly pension payments payable by the Respondent to the Petitioner (presently $287.25 per month plus incremental increases as and when same become payable).

It is of significance in an Affidavit filed by the Appellant to the proceedings in the Supreme Court of British Columbia, the Appellant stated the arrears of pension and maintenance not paid and outstanding as of the 31st of May 1989 were $19,135.76. This sum is far in excess of the amount fixed in this varied Supreme Court of British Columbia judgment far arrears of pension and maintenance set forth above. For the taxation years at the hearing of the appeals the Appellant presented an exhibit (A-7), albeit somewhat confusing, showing the receipt of funds, the reporting of funds on the tax returns, the source of funds and the allocation of funds for the years in question.

From this exhibit is is to be noted the Appellant conceded for 1992 that $2,554 was correctly assessed by the Minister leaving the amount to be litigated $3,447 as attributed to pension payments.

The Appellant’s Submission

The Order of the Supreme Court of British Columbia (20th of August 1990) wherein the paragraph of the judgment by way of decree nisi (spousal support payment) was deleted and the fixed arrears of maintenance and pension payments ordered paid as a final payment was a lump sum settlement payment and not a payment of alimony or maintenance.

Further, the payments made by Turner to the Appellant as a result of pension payments made to Turner under the Canadian Forces Superannuation Act should not be taxable in the hands of the Appellant as the decree nisi contemplates the taxation of the pension is in the hands of Turner and there is to be an accounting between the Appellant and Turner as to any tax Turner was liable to pay as a result of the operation of the Court Order.

Analysis

Lump Sum Payment — Alimony or Maintenance Characterization

The Order deleting the spousal support payment and the fixed lump sum arrears was on consent.

The consent arrears fixed lump sum was substantially less than the actual arrears outstanding. Thus the arrears fixed sum is so different it does not have the same characterization as the arrears outstanding. (see Widmer v. Canada [1995] T.C.J. 1115 (Mogan J.); also see Soldera v. Minister of National Revenue, (1991), 91 D.T.C. 987 (T.C.C.), (Garon J.)

By virtue of the varied Order, the payment of the lump sum arrears settlement was the condition leading to the release and cessation of all payments due under the fourth paragraph on page 2 of the judgment by way of decree nisi. As a result, I conclude the lump sum arrears settlement payment was not an amount paid pursuant to paragraphs 56(1)(b) and 56(1)(c) as alimony or other allowance payable on a periodic basis.

The “Pension” Characterization

The pension clause of the judgment by way of decree nisi (February 5, 1987) envisaged Turner receiving the full pension payment and remitting the Appellant’s monthly share to the Appellant. At the end of each year, the Appellant upon being so advised was to remunerate Turner for any tax liability incurred for him receiving the Appellant’s share (based on the Appellant’s marginal tax rate).

The Appellant’s interest in the pension was specified as a family asset and was fixed; her percentage interest or share was stated as a tenant in common. It is important to note the ordered “pension” arrangement was between the Appellant and Turner and not the Appellant, Turner and the Canadian Forces Superannuation authority. There was no provision for Turner to assign directly the Appellant’s interest in the pension to the Appellant. Turner was to hold the Appellant’s share in trust for the Appellant and Turner was to protect the Appellant’s interest in the pension including provision for the Appellant’s interest in the event of the death of Turner.

The lack of assignment possibility and the precise income tax stipulations take this case beyond the cited decision of Walker v. Canada, [1994] T.C.J. 982 [4] .

It is clear the judgment by way of decree nisi did not envisage the pen- sion being split at source (i.e. allocated separately at source) and indeed it was not. It is clear from the Order that Turner was to send the Appellant’s income tax paid share of the pension to the Appellant subject to an annual tax adjustment indemnification to Turner by the Appellant of tax paid to the limit of the Appellant’s margin at tax rate. Because the payment made by Turner to the Appellant as stated under the judgment by way of decree nisi is in the form of a stipulated income tax paid payment from a family asset it is not to be included in the income of the Appellant under paragraphs 56(l)(a), (b) or (c).

Decision as to the Appeals of the Appellant

The appeal is allowed for the taxation year 1991 and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the “lump sum payment” of $11,564 was not alimony or maintenance within the meaning of paragraphs 56(l)(h) and (c) of the Act and therefore should not have been included in the Appellant’s assessed income. And the appeals are further allowed for the taxation year 1991 and 1992 on the basis that the income tax paid payment from the family asset (Turner’s pension and benefits under the Canadian Forces Superannuation Act and Supplementary Retirement Benefits Act) by Turner to the Appellant are not to be included in the assessed income of the Appellant under paragraphs 56(1)(«), (b) or (c).

The Determination of the Question

The answers to the questions posed to Court are as follows:

QUESTIONS

a) Is the amount of $6,001.00 [5] which Bernice Turner received in the 1992 taxation year from William Thomas Turner pursuant to the Judgment by way of Decree Nisi to be included in the computation of her income under Paragraphs 56(1)(6) or 56(l)(c) of the Act?

Answer: No

b) If the amount referred to in Question (a) is not to be included in computing the income of Bernice Turner for the 1992 taxation year, is this amount to be included in computing the income of William Thomas Turner for the 1992 taxation year so that he is not able to deduct the amount from his income under subsections 60(b) and 60(c) of the Act?

Answer: Yes, subject to footnote 5.

Appeal allowed.