Irving Berlin v. Minister of National Revenue, [1974] CTC 2251

Judge K A Flanigan (orally: July 10, 1974):—This is an appeal by Irving Berlin against reassessments of the Minister of National Revenue for the 1967 and 1968 taxation years.

The point at issue is whether or not certain sums which were paid to the spouse of the appellant in this case in those years are able to qualify as alimony or maintenance payments under paragraph 11 (1)(la) of the Income Tax Act applicable to those years.

The difficulty arises in this case out of the fact that a trust agreement was entered into, which is appellant’s Exhibit A-4, on November 19, 1957, whereby the appellant settled upon The Toronto General Trust Corporation, now Canada Permanent Trust Company, the sum of $20,000 to secure payments that he was required to make to his wife pursuant to the judgment of the then Chief Justice of the Supreme Court of Ontario, dated March 27, 1957, and which is in evidence as appellant’s Exhibit A-1.

The section at issue here, which, as I say, is paragraph 11 (1)(la) of the Act, provides that, where an amount was 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 there- of, children of the marriage, or both the recipient and children of the marriage, if he was living apart from the spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year, then the payment so made qualifies as alimony under the Act.

There is no question whatsoever that the appellant’s Exhibit A-1 is an order of a competent tribunal, being an order of the Supreme Court of Ontario. That order provides for the payment, on a periodic basis, of certain sums of money. There is also no doubt that those sums are to be paid to the spouse for her own maintenance and that of the infant children at the material time. This order was subsequently varied by appellant’s Exhibit A-2, a judgment of Mr Justice Grant of the same court, so as to increase the payments to the wife from $300 a month to $450 a month. Then appellant’s Exhibit A-3 is a further judgment of Mr Justice Henderson (as he then was) dismissing the trial of the issue, which I presume or infer from the evidence was an issue arising out of the matrimonial difficulties of the appellant and his wife.

The issue was finally resolved on the last day of July 1968 by appellant’s Exhibit A-5, whereby a final settlement of all obligations on the part of the appellant to his wife was covered, she, in exchange, giving the usual releases and indemnities that one finds in such agreements.

That the wife received the amounts in question in the taxation years at issue here is not in dispute. The question is whether or not those amounts fall within the provisions of paragraph 11(1)(la) as being paid by the appellant as periodic payments.

The evidence of the appellant is that the trust agreement came into being as a result of his wife’s fear that he might be unable to fulfil the obligations placed upon him by the court judgment. The only equity that the appellant had at the material time was in the matrimonial home, and he subsequently settled, as I have said, the sum of $20,000 on The Toronto General Trust from the proceeds of sale of that home.

The difficulty arises mainly, I think, out of a provision in the trust which says (on page 5), if I may paraphrase it, that if the husband fails to make the payments required under the judgment, then, by the wife’s filing an affidavit with the trustee and a copy on the appellant indicating that she has not received the payment or payments to which she is entitled, and if no dispute is filed by the appellant within two days, I believe the provision was, then the trustee would be authorized to pay out of the trust fund an amount equal to the arrears. The payment of that sum was referred to as an advance by way of loan by the trustee.

The thrust of the respondent’s argument is, first of all, that the amounts paid in the years in question were loans to the appellant’s spouse and not alimony payments. Secondly, the respondent argues: that the fact that they were paid, not by the appellant, but by the trustee pursuant to appellant’s Exhibit A-4, takes them out of the ambit of the section in question; that the word “trustee” is not synonymous with “agent”; and that the trust fund was a separate taxable entity.

On the other hand, the appellant argues that all that he has done in this case is to insert an intermediary, by way of this trust agreement, to make payments in the event of his default pursuant to the terms of the agreement, and that this has the same effect as having an agent paying over the funds of the appellant to his spouse, and nothing more.

One must look at all of the documents when considering the effect of the poor choice of wording in the trust agreement which was drawn in 1957. May I say, by way of general comment, that alimony cases under paragraphs 11(1)(l) and (la) of the old Act have been very numerous over the years. Their early history shows clearly a most rigid interpretation of the provisions of the section. The cases are legion where it has been held that, unless the payments are made from husband to wife directly, they are not deductible.

The most recent and oft-quoted case on this point is the case of MNR v Sproston, [1970] Ex CR 602; [1970] CTC 131; 70 DTC 6101. In that case, maintenance was paid by way of a cheque or cheques in favour of the children of the marriage. These cheques were then endorsed over by the children to the wife. The court held that these were not payments made pursuant to the provisions of paragraph 11 (1)(l), I think it was, in that case.

There has been a recent breakthrough in this antiquated approach to the interpretation of this section and its subsections in the decision of Mr Justice Walsh in the case of MNR v Hastie, [1974] CTC 131; 74 DTC 6114. That case is different from the Sproston case in that it upheld the decision of the old Tax Appeal Board whereby payments made to a third party for or on behalf of a wife were held to be deductible.

Nevertheless, as I pointed out in the case of J A C Belanger v MNR, [1974] CTC 2170; 74 DTC 1130, in my view Mr Justice Walsh has placed a more realistic interpretation on this troublesome provision than has been the case in the past. I also reiterate what ! said in that case, namely, that it is trite law to say that taxing statutes must be Strictly interpreted. May I add that they must be strictly interpreted in the light of changing social conditions in society. What may very well have been excellent law and interpretation of any given section of the Act in years gone by, may nevertheless, under current social conditions, require some updating.

I also think that it is quite obvious that, since the middle sixties, and in the seventies to date, there has been a more general awareness, on the part of the average citizen and professional, of the laws relating to income tax. This is probably due to the increased income that individuals in this country are, for the most part, experiencing today. Perhaps as a result of inflation, or for whatever reason, more and more people are falling into tax brackets where the tax payments are large enough to cause them, in a great many more instances, to contest decisions of the assessors for the respondent.

As a former general practitioner in the practice of law, I also feel that, in years gone by, lawyers drafting separation agreements or settling alimony or maintenance disputes in matrimonial causes have in the past—and to a certain extent this is still true at the present time—given little or no consideration to the effect of their awards of alimony or maintenance on the respective parties in the light of the provisions of the Income Tax Act.

Therefore, on being confronted with a document such as appellant’s Exhibit A-4, a document drawn by a very competent firm of solicitors, I suspect that what I have just said also applies to the degree of consideration they gave to the appellant’s possible tax position at the material time in this case, which was 1957.

Putting aside these general remarks and coming to the issue before me, I must look at all the documents and consider their form, basing my decision on the substance of what took place. In my view, the trustee in this case was acting as trustee under that agreement but was also acting as agent or alter ego of the appellant for the purpose of securing the rights of the spouse of the appellant under the court order. The only person who could benefit from the termination of the trust was the husband, even if it were to reach the point where he was in default for so long a period of time that the trust was exhausted.

The trust provided that any interest was to be the income of the appellant, that the payments were to be made only in the case of the default of the appellant, and that, if the appellant subsequently brought the required payments up to date, the moneys were to be paid back to the trust by the wife to the extent that she had been paid twice, so to speak. So it is hard to concede that what was paid to the wife under the trust agreement was a loan.

The only person who could turn this money into a loan was the appellant himself, who would simply be putting the money back into the trust fund by a circuitous route and restoring it to the position it was in when he failed to make the required payment. There was no obligation whatsoever on the wife to repay any money unless she received a double payment; and there is evidence that she never did repay any amounts received from the trust because the appellant did not pay when the trust paid.

Therefore it seems to me that what Parliament. really meant in providing this deduction was that any moneys paid by or on behalf of one spouse to the other should be deductible provided the payment met with all the other requirements. It seems to me, by analogy, that this case would be no different if the husband and wife had maintained bank accounts at the same bank and at the same branch and the husband had paid the moneys into his own account and had directed the bank to debit his account and credit his wife’s account with an equal amount each month. The fact that the trust did not pay the same amount each time is of no consequence, because there were periodic payments made, and ! think the law is clear that all the payments need not be of the same amount in order to be deductible. The payments were based on the demands of the wife and were made periodically at intervals of one, two and three months.

On all of the evidence, and applying a strict, but what I consider more current, approach to the interpretation of this section of the Act, I find that the payments were made by the trustee acting as agent for the appellant, and that the insertion of a middleman between the appellant and his spouse did not, in substance, change the nature of these payments made pursuant to the requirements of paragraph 11(1)(la). Therefore, on all the evidence, I find that the appellant has satisfied the onus that is cast upon him and, as a result, the appeal will be allowed and the matter referred back to the Minister for reassessment accordingly.

Appeal allowed.