White v. R., [1997] 2 CTC 2890, 97 DTC 1108

O’Connor T.CJ.:

These appeals were heard on February 17, 1997 at Vancouver, British Columbia, pursuant to the General Procedure of this Court.

The Appellant was the only person to give evidence. Numerous exhibits were submitted by both the Appellant and counsel for the Respondent, hereinafter referred to as “the Minister”.

Issues

The appeals relate to the years 1990 and 1991. The issues are:

1. Whether certain amounts paid by the Appellant to his former employer, The District of Coquitlam (“Coquitlam”), to settle an action by Coquitlam against the Appellant for damages and other claims resulting from the Appellant’s breach of fiduciary duty and fraudulent misrepresentation constitute deductible business losses;

2. Whether legal expenses incurred by the Appellant in defending and settling said action and related criminal proceedings are deductible; and

3. Whether certain amounts paid by the Appellant to his former spouse to settle her action against the Appellant for various amounts payable pursuant to a divorce settlement are deductible as alimony.

Facts

I find the principal facts to be as follows:

1. The Minister assessed the Appellant for the 1990 and 1991 years by Notices dated July 24, 1991 and September 4, 1992, respectively.

2. The Appellant filed an amended 1990 tax return in September 1991 claiming the following:

(a) a business expense of $170,669.72 for an alleged payback of earnings;

(b) a business expense of $3,000 for legal fees;

(c) a deduction of $8,750 for alimony payments; and,

(d) a request for loss carry-backs to 1987 of $19,639.06, to 1988 of $70,000 and to 1989 of $55,000.

3. In his 1991 tax return filed in August 1992, the Appellant claimed a loss carry-back of $20,104.04.

4. The Minister reassessed the Appellant for the 1990 and 1991 taxation

years by Notices dated September 1, 1993 disallowing:

(a) a business expense of $170,669.72;

(b) a business deduction of $3,000 for legal fees;

(c) the deduction for alimony payments;

(d) loss carry-backs for 1987 to 1989; and,

(e) a loss carry-back of $20,104.04 in 1991.

5. By letter dated October 13, 1993 the Appellant requested that his 1990 and 1991 tax returns be further amended to claim,

(a) the deduction of $27,566.22 from his 1990 income on account of alimony payments paid by the Appellant to his ex-spouse, Leanne White;

(b) a business expense in the amount of $156,352 based on the sale of two properties in which he held an interest:

(c) loss carry-backs in the amount of $124,281.93; and,

(d) deductions for legal costs of $ 12,500 and $27,065.93 in the 1990 and 1991 taxation years, respectively.

6. By Notice of Confirmation dated September 27, 1994 the Minister determined:

(a) the business expense of $156,352 in 1990 be disallowed in total;

(b) the legal expenses of $12,500 in 1990 and $27,065.93 in 1991 be disallowed in total; and

(c) the deduction for $27,566.22 for alimony payments in 1990 be disallowed in total.

There are some discrepancies between some of the above figures, which are taken from the Minister’s Reply and the figures claimed by the Appellant but no useful purpose will be served in analyzing these discrepancies.

7. With respect to the disallowed business loss and legal costs:

(a) the Appellant worked as an employee for Coquitlam from September 1982 to December 1989 in the positions of Chief Building Inspector and Department Head of the Permits and Licences Department;

(b) from 1985 to 1989, the Appellant also operated a proprietorship called Delta Drafting Services (“Delta”), which provided drafting services to Coquitlam. Delta had no employees and the Appellant did all of the work himself.

(c) Coquitlam became aware that the Appellant was the owner of Delta during 1989, at which time it commenced British Columbia Supreme Court Action Number C900742 against the Appellant for breach of fiduciary duty and fraudulent misrepresentation, with regard to monies obtained by the Appellant through Delta; a further Amended Statement of Claim (“Claim”) dated February 12, 1990 alleges the Appellant hired Delta to carry out various drafting services and Coquitlam paid “at least $133,204” to Delta for those drafting services. The Claim alleges other acts of fraud by the Appellant which are not germane to these appeals. The Claim also alleges that the monies paid to Delta can be traced to two sites referred to as the Sonara property and the Fresno property and seeks an order that those properties be sold to provide monies to satisfy, at least in part, the claims of Coquitlam and others having interests in those properties.

(d) The Claim’s conclusions deal, inter alia, with the properties

but the principal conclusions are as follows:

WHEREFORE the Plaintiff claims ... as follows:

1) Damages for fraudulent misrepresentation against the Defendant, RICHARD WHITE;

2) Damages for breach of fiduciary duty against the Defendant, RICHARD WHITE;

3) Punitive damages for fraudulent misrepresentations and breaches of fiduciary duty against the Defendant, RICHARD WHITE;

4) In addition or in the alternative to damages for fraudulent misrepresentation and/or breach of fiduciary duty, a declaration that all funds wrongfully received by the Defendant, RICHARD WHITE, RICHARD ALAN WHITE carrying on a business in the style and name of Delta Drafting Services ... and all profits earned on the same are impressed with a trust and that the Defendants, RICHARD ALAN WHITE, RICHARD ALAN WHITE carrying on business in the style and name of Delta Drafting Services ... holds the same as constructive trustee for the Plaintiff, and for an order returning the same to the Plaintiff or equitable tracing of the said funds and profits;

(e) On June 18, 1991, the Appellant and Coquitlam settled the Claim on the basis that the Appellant was to pay Coquitlam $200,000. On June 26, 1991 a consent judgment was entered (the “Consent Judgment”). Its principal provisions read:

THIS COURT ORDERS and BY CONSENT that the Plaintiff recover Judgment against the Defendant, Richard Alan White in the sum of $200,000.00 in respect to those matters particularized in the Further Amended Statement of Claim dated June 21, 1991.

THIS COURT FURTHER ORDERS and BY CONSENT that this Judgment be for all purposes of the same force and effect as if this Judgment had been pronounced after a Trial of this action on its merits and the Defendant, Richard Alan White, hereby acknowledges, inter alia, that he was in breach of a fiduciary duty to the Plaintiff, as pleaded in the Further Amended Statement of Claim dated June 21, 1991.

THIS COURT FURTHER ORDERS and Declares AND BY CONSENT that any and all Claims or Rights whether Equitable or Legal that the Defendant, Richard Alan White has or may have (in the Fresno property) are hereby extinguished, forfeited or surrendered to the Legal Owner ... James H. McCullough Ltd.

In satisfaction of the Consent Judgment the Appellant paid Coquitlam $84,869.72 from the sale of the Sonora property and $10,000 from the sale of the Fresno property in 1991. The Appellant had incurred expenditures totalling $61,250 in commencing construction of a home on the Fresno property which sum he lost when, as part of the Consent Judgment, the Fresno property was forfeited to James H. McCullough Ltd., the owner of the land.

(f) Criminal proceedings were also taken against the Appellant and his second wife, Susan White, for the fraud and breach of trust described above. The Appellant pleaded guilty to the criminal charge and was given a sentence of one year. The criminal charge against his wife was dropped.

(g) In cross-examination of the Appellant, it was established that (i) the Appellant filed no return for 1986 until April 1990;

(ii) The 1987 return filed May 2, 1988 shows no business income; (iii) the 1988 return filed April 30, 1989 shows no business income; and (iv) it was only in 1990 that the Appellant’s filings indicate certain amounts of business income from Delta.

8. With respect to the disallowed alimony payments:

(a) the Appellant and his ex-spouse obtained a Decree Nisi of divorce dated July 13, 1981 (the “Decree Nisi”), by which, inter alia, the Appellant was ordered to pay his ex-spouse $600 per month in child maintenance, $200 per month in spousal maintenance, a lump sum settlement of $25,000 to be paid in $5,000 installments on the 31st days of July 1982, 1983, 1984 and 1985 and costs of $500 all of which had been agreed to in a previous divorce settlement;

(b) the Appellant and his ex-spouse obtained a Decree Absolute of divorce on November 16, 1981;

(c) by Writ of Summons dated July 29, 1988, the Appellant’s exspouse brought an action against him in British Columbia Su- preme Court Action Number A882225 (the “1988 Action”), where in addition to interest and costs the endorsement of the Writ of Summons claimed the following:

(1) Lump sum settlement pursuant to the Divorce Settlement or alternatively the Decree Nisi $25,000.00

(2) Costs pursuant to the Divorce Settlement or alternatively the Decree Nisi $500.00

(3) Taxes on residence owing pursuant to Divorce Settlement $2,269.31

(4) 1979 and 1980 income tax paid by Leanne White pursuant to an agreement between them $5,126.12

(5) Arrears owing for alimony and maintenance pursuant to the Divorce Settlement or alternatively the Decree Nisi $14,700.00

TOTAL CLAIM: $47,595.43

(d) the 1988 Action was settled out of court by distributing the proceeds of the sale of the Sonora property as follows:

(e) as a result of the settlement of the 1988 Action, the Appellant’s ex-spouse released him from all further claims relating to the Decree Nisi, Decree Absolute, the divorce settlement and the 1988 Action. The said release, so far as material, reads as follows:

IN CONSIDERATION of the payment of the sum of $1.00 and other good and valuable consideration to KAY LEANNE WHITE, ... (the “Releasor”) by or on behalf of RICHARD ALAN WHITE (the “Releasee”), ... the Releasor HAS ... RELEASED AND FOREVER DISCHARGED and by these presents doth ... RELEASE AND FOREVER DISCHARGE the Releasee, ... of and from any and all actions, causes of action, claims and demands ... whatsoever, ... which the Releasor ever had or now has or which the Releasor ... hereafter can, shall or may have by reason of any cause, matter or thing whatsoever existing up to the present time ..., and in particular and without restricting the foregoing which have resulted from or in any way arisen out of or developed from, or which may at any time

in future result from or in any way arise out of or develop from:

-the marriage, divorce, separation and subsequent settlements of such between the Releasor and Releasee;

-a Decree Nisi and Decree Absolute of divorce decreed by the Queen’s Bench of Alberta, Judicial District of Lethbridge, on July 13, 1981 and November 16, 1981, respectively, in which the Releasor is the Petitioner and the Releasee is the Respondent;

-the Minutes of Settlement and Property Settlement between the Releasor and Releasee dated July 7, 1981;

and

-Supreme Court of British Columbia action #A882225 in which the Releasor is the Plaintiff and the Releasee is the Defendant, and the subsequent settlement of that action; and...

Law

The principal applicable provisions of the Income Tax Act (“Act”) are 8(l)(b), 8(1)(m), 12(1)(a), 20(1)(m.2), 18(1)(a), and 60(b) which, so far as material, read as follows:

5.(1) In computing a taxpayer’s income for a taxation year from an office or employment, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(b) amounts paid by the taxpayer in the year as or on account of legal expenses incurred by the taxpayer to collect or establish a right to salary or wages owed to the taxpayer by the employer or former employer of the taxpayer;

(n) an amount paid by or on behalf of the taxpayer in the year pursuant to an arrangement under which the taxpayer is required to reimburse any amount paid to him for a period throughout which he did not perform the duties of his office or employment, to the extent that

(i) the amount so paid to him for the period was included in computing his income from an office or employment, and

(ii) the aggregate of amounts so reimbursed does not exceed the aggregate of amounts received by him for the period throughout which he did not perform the duties of his office or employment;

12.(1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

(a) any amount received by the taxpayer in the year in the course of a business

(i) that is on account of services not rendered or goods not delivered before the end of the year or that, for any other reason, may be regarded as not having been earned in the year or a previous year, or

(11) under an arrangement or understanding that it is repayable in whole or in part on the return or resale to the taxpayer of articles in or by means of which goods were delivered to a customer;

20.(1) Notwithstanding paragraphs 18(1)(a), (b) and (A), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(m.2) a repayment in the year by the taxpayer of an amount required by paragraph 12(l)(a) to be included in computing his income from a business for the year or a preceding taxation year;

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

60. There may be deducted in computing a taxpayer’s income for a taxation year such of the following amounts as are applicable:

(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 required to make the payment at the time the payment was made and throughout the remainder of the year;

Submissions of Appellant

With respect to the alleged business losses the Appellant submits that Delta was carrying on a business and that the payments made by the Appellant to Coquitlam were business expenses. He also submits that, in essence, all of the payments made to the District represented a pay-back of wages. I believe this latter position of the Appellant is based upon certain allegations in the Claim, which refers to the fact that Coquitlam paid large amounts to Delta and that those monies were impressed with a trust in favour of Coquitlam. The Claim states further that these monies were used to acquire an interest in the Sonora property and the Fresno property and that all benefits and interests acquired by the Appellant in those properties were impressed with a trust in favour of Coquitlam. Further, in a letter from the Appellant’s attorneys, Swinton & Company, to the Appellant dated May 2, 1991 the following is stated:

This position raises the issue which we discussed with you earlier as to whether or not the District of Coquitlam is entitled to all of their money back, or they are only entitled to a portion of the money, being that portion for which they did not receive value. Mr. Goddard informs me that he has looked at the law and that the District of Coquitlam is entitled to all of the money back. We are researching the law in order to provide you with our own opinion on this point.

The Appellant’s Exhibit A-l at Tab 8 refers to paragraphs 12(1)(a) and 20(l)(m.2) of the Act as well as the following commentary in the Canadian Tax Reporter at No. 5085b:

Paragraph 12(l)(o) brings into income for a year certain amounts received in that year for services to be rendered or goods to be delivered in a later year. Complimenting this provision, paragraph 20(1)(m) allows the taxpayer to deduct certain reserves in respect of amounts so included....

Paragraph 20(1)(m.2) provides a deduction, as opposed to a reserve which is brought back into income later, when a taxpayer repays an amount which was brought into income under paragraph 12(1)(a). This deduction would apply, forexample, where a taxpayer received a payment for services or goods to be delivered in the future but was required to repay all or a portion of this amount because the services or goods were not in fact delivered.

The Appellant further contends that even the monies expended on the Fresno property which were lost when it and the improvements were forfeited to H. McCullough Ltd. actually represented monies paid back to Coquitlam because the loss thereof all resulted from the settlement with Coquitlam.

With respect to the legal fees, the Appellant refers to Interpretation Bulletin IT-99R4.

With respect to the deduction for alleged alimony payment the Appellant refers to Interpretation Bulletin IT-118R3 which discusses in what circumstances alimony payments are deductible and which states in paragraph 13 as follows:

However, a lump sum paid in a taxation year is regarded as qualifying as a periodic payment where it can be identified as being the payment of amounts payable periodically that were due after the date of the order and had fallen into arrears.

Submissions of the Minister

As to the business loss and legal fees, the Minister submits as follows:

-amounts paid by the Appellant to Coquitlam were not expenses incurred for the purpose of gaining or producing income from a business or property, but were expenses relating to the Appellant’s employment with Coquitlam;

-the legal costs incurred by the Appellant and disallowed by the Minister were not incurred for the purpose of producing income from a business or property, but were expenses relating to the Appellant’s employment with Coquitlam;

-the Appellant’s defense of the Claim and the related criminal prosecution was not in defense of any alleged illegal actions in the operation of his business Delta, nor a defense of the day-to-day methods of carrying on a business; the legal costs were incurred in defending a charge of breach of fiduciary duty and fraudulent misrepresentation in relation to the Appellant’s actions as an employee of Coquitlam.

In summary, the expenses related to the Appellant’s employment with Coquitlam simply are not contemplated in section 8 of the Act and in particular not in paragraphs 8(1)(b) and 8(l)(n). Alternatively the Minister submits that even if the expenses and legal fees can in some way be considered as relating to a business operation, the expenses were certainly not incurred for the purposes of earning income from that business and consequently are not deductible.

As to the alimony deduction the Minister submits that as a result of the settlement of the 1988 Action, the Appellant’s ex-spouse released him from all further claims relating to the Decree Nisi, Decree Absolute, the divorce settlement and the 1988 Action; the $27,566.20 amount now claimed by the Appellant as a deduction for alimony was incurred by him as part of a settlement of the 1988 Action and does not represent outstanding alimony pay- ments; and the $27,566.20 was not payable on a periodic basis within the meaning of paragraph 60(b) of the Act. Moreover, how can the Appellant claim $27,566.20 when the arrears of alimony were only $14,700?

Analysis

With respect to the claim for business losses, I am satisfied that the position of the Minister is correct. If they can be characterized as expenses related to employment, there is no provision in the Act which permits their deduction. Alternatively, even if one could find that they related to a business, in my opinion it is absolutely clear that they were not incurred for the purposes of earning income from that business. Further, I do not believe that they constitute a payback of wages but rather constitute damages suffered by reason of the Appellant’s fraud and breach of fiduciary duty. The terms of the Claim and the Consent Judgment in my opinion make this clear. This is not altered because the Claim alleges tracing to the two properties. That approach simply was to allow Coquitlam to force a sale of the properties and be paid.

Further paragraphs 12(l)(a) and 20(l)(w.2) are not applicable. They certainly do not contemplate a payment of the kind in question.

In Poulin c. R., (1996), 96 D.T.C. 6477, Mr. Poulin, a real estate broker, defrauded certain clients. They obtained a judgment against him awarding them damages, interest and costs. Mr. Poulin paid the amount of the judgment and then sought to deduct the amount as a business loss. The Tax Court originally found in favour of Mr. Poulin but the decision was reversed by the Federal Court of Appeal. The following passages, in translation, from the judgment of Marceau, J. are relevant:

On the second point, however, and with respect, I would dispute the judge’s position. In my view, the restrictive character of paragraph 18(1)(«) of the Act would be completely distorted if it could be argued that the wrongful prejudicial act for which an individual must pay damages need only have been committed in the course of carrying on a trade or profession in order for the payment to be deductible from the income gained from carrying on that trade or profession. In order for such a payment, which in itself, of course, is not made for the purpose of earning a profit, to be nonetheless considered to meet the requirement in paragraph 18(l)(a) of the Act, it must be seen as the unfortunate consequence of a risk that the taxpayer had to take and assume in order to carry on his trade or profession. And in order for the payment to be seen as such, it is an essential condition, I believe, that it be directly related to an act that was necessary in order to carry on the trade or profession and that it could potentially have been considered to have been performed improperly.

However, while it must be admitted that the commission of an involuntary fault in performing an act that is necessary for carrying on a trade or profession is inevitable, and accordingly that the obligation to pay compensation is a risk inherent in that activity, we cannot extend the idea to the commission of a delict in the civil law sense, to the commission of a reprehensible act committed deliberately with the aim of causing damage. The delictual act cannot in that case be considered as being necessary for carrying on the trade or profession. It was committed while carrying on the trade or profession, but it is completely foreign to it. There is therefore no ground for arguing that, in this case, the payment of an award of damages meets the requirement in paragraph 18(1)(«) of the Act.

Accordingly, what we have in this case is payment in satisfaction of a judgment awarding damages for a delict, an intentional unlawful act, a deliberate act committed with the aim of causing damage. For the reasons which I have attempted to explain, I am of the opinion that such a payment does not meet the condition in paragraph 18(1)(a) in order for the respondent to be able to deduct it from his income as an expense associated with carrying on his profession as a real estate broker, because it does not correspond to a risk that it was necessary for him to assume in order to carry on business as a real estate broker.

Reference is also made to the decision of this Court in Gracey v. Minister of National Revenue, (1988), 88 D.T.C. 1544 (T.C.C.). In Gracey, the taxpayer worked for two companies over a ten-year period as a director and signing officer. In 1981, the taxpayer was fired and the companies took action against him obtaining judgment for $213,695.83. In addition to this amount the taxpayer incurred legal fees of $46,984.72. The taxpayer claimed a professional loss in his 1983 tax return in the amount of $259,574.81 and as a result of this, requested that non-capital losses be carried back to previous years. Judge Brulé held that the amount of the judgment and the legal fees did not constitute a professional loss deductible against income.

In Cormier v. Minister of National Revenue, (1988), 89 D.T.C. 44 (T.C.C.) (T.C.C.), the taxpayer sought to deduct legal expenses incurred to defend criminal charges of tax evasion filed against him. Judge Kempo held that the legal expenses were not deductible given that there was no nexus between the taxpayer’s activities and the activities carried out in the normal course of business operations. In developing her reasons, Judge Kempo had these comments:

My reading of the relevant jurisprudence is that the incurrence of legal fees must have been commercially necessitated or driven in that their purpose must have some measurable nexus to some kind of working or business-related expense: ...or to protect or enhance an income stream: [references deleted] [In Ben Matthews & Associates] Rip, J. of this Court found that the legal expenses incurred to defend the prosecution arose directly from that taxpayer’s practice of preparing financial statements in the normal course of its business and the defence of that practice.

In the case at Bar, the Appellant had been charged and convicted of wilfully failing to report substantial amounts of income which, in the context of this case, can not be described as a normal business activity carried out in the course of business operations or which had been carried out for the purpose of gaining or producing income... This activity, on these particular facts, lacks commercial- ity and simply does not fit within the jurisprudential phraseology of incurring legal expenses to defend a way of doing business or to preserve a system under which a business operates.

See also Thiele Drywall Inc. v. R., [1996] 3 C.T.C. 2208 (T.C.C.) (T.C.C.).

I believe that the above authorities are applicable in these appeals. Moreover, in this case the Appellant only decided to report business income from Delta in 1990 for the previous years. I infer from this that the Appellant realized he could never claim the business expenses he alleges, unless he reported business income, so he did so in 1990 when he realized he would have to pay a large sum to Coquitlam.

With respect to alimony, the amounts paid were not pursuant to a judgment or an order but were rather paid pursuant to a settlement and release agreement which released the Appellant from all obligations past and present. It is true that in certain circumstances a lump sum payment representing payment of alimony arrears may qualify but in this appeal there is absolutely no proof as to whether any portion of the amount paid to the former wife relates to payment of arrears of periodic alimony. Moreover, in my opinion, the $25,000 lump sum payment provided for in the Decree Nisi cannot be considered as alimony paid on a periodic basis.

The principles for the deductibility of lump sum payments made to a former spouse were established in a judgment of the Supreme Court of Canada in Minister of National Revenue v. Armstrong (1956), 56 D.T.C. 1044 (S.C.C.). In Armstrong the taxpayer was divorced by his wife in 1948. The divorce decree provided for the payment of $100 monthly to his wife for the maintenance of their daughter until she reached a certain age. The payments ordered were made until the summer of 1950 where at that time the taxpayer’s wife accepted a lump sum of $4,000 in full settlement of all amounts payable in the future. Kerwin, C.J.C. speaking for himself and two others had these comments at 1065:

The test is whether it 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. There was no obligation on the part of the respondent to pay, under the decree, a lump sum in lieu of the monthly sums directed thereby to be paid.

Justice Kellock, who wrote separate reasons that concurred with the results of the Chief Judge, had these comments on page 1045:

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 a release from the liability thereby imposed.

Finally, in another concurring judgment, Justice Locke’s comments at page 1046 are worth mentioning:

It was for the purpose of obtaining what purported to be a release of the appellant’s liability to maintain his infant child to the extent that it was imposed by the decree nisi that the $4,000. was paid. It cannot, in my opinion, be properly said that this lump sum was paid, in the words of the section, pursuant to the divorce decree. It was, it is true, paid in consequence of the liability imposed by the decree for the maintenance of the infant, but that does not fall within the terms of the section.

In Armstrong, all indications are that at no time was the taxpayer in arrears in his payment obligation whereas in Lambrinos v. M.N.R., [1992] T.C.J. No. 265 (TCC) the taxpayer fell into substantial arrears. In Lambrinos, the taxpayer paid $10,000 in a lump sum to his former wife in exchange for a release of all liability including any amounts in arrears. In developing his reasons, Judge Brulé quoted the decision in Armstrong and in this regard had these comments:

In the Armstrong case the Supreme Court of Canada held that a lump sum payment, similar to the present appeal, was an amount paid by arrangement between the parties to obtain a release from liability. Therefore, if a payment is classified as a lump sum payment made to obtain a release of liability for maintenance and arrears of maintenance, it seems clear that such a payment is not taxable by the recipient and not deductible by the payer.

In Minister of National Revenue v. MacBurnie, (1995), 95 D.T.C. 686 (T.C.C.)(T.C.C.) the taxpayer had entered into a separation agreement under which the taxpayer was to receive spousal support in the amount of $1,500 per month. The taxpayer’s former spouse fell into arrears and eventually judgment was rendered requiring the former spouse to pay $27,500 in full and final satisfaction of all claims and entitlement to spousal support and all arrears of support. Although the issue at hand was not concerned with the deductibility of the payments but whether the amount paid had to be included in the taxpayer’s income, these provisions are mirror provisions with inclusion triggering deductibility and vice versa. Judge Lamarre examined the relevant jurisprudence and had these comments:

...it seems obvious that the payment of $27,500 was made pursuant to the judgment of Soubliere, J ... incorporating the Minutes of Settlement agreed upon by the parties, and not pursuant to the terms of the previous Separation Agreement.... In my view, the payment was clearly made ... in order to obtain a release from his liability under the Separation Agreement and to terminate his obligations to the Appellant under that Agreement. The wording of the judgment ... is supporting that conclusion... I am of the opinion that the Appellant and Mr. Eyre finally settled for the payment by the latter of an outlay that was in commutation of the periodic sums payable under the Separation Agreement. Such an outlay is in the nature of a capital payment as stated by the Supreme Court of Canada in Armstrong, which amount did not have to be included in the computation of the Appellant’s income as it was not an alimony or maintenance payment...

In conclusion, since the amount paid by the Appellant to his ex-spouse fully released him with respect to all amounts claimed in the 1988 Action and any future claims and since there was no proof that identified any portion of the amount paid with the arrears of alimony, in my opinion, the Minister properly disallowed the claim for a deduction.

Thus, the appeals are dismissed with costs.

Appeals dismissed