BETWEEN:
and
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Appeal heard on June 9, 2005, at St. Catharines, Ontario
Before: The Honourable Justice G. Sheridan
Appearances:
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JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 2002 taxation year is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 17th day of June, 2005.
BETWEEN:
CHARLES COSTELLO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] The Appellant, Charles Costello, is appealing the assessment of the Minister of National Revenue of his 2002 taxation year disallowing support payments claimed in that year. It is common ground that Mr. Costello paid a lump sum of $22,500 to his former spouse in 2002. The question is whether this amount is deductible as a "support amount" as defined in subsection 56.1(4) of the Income Tax Act:
"support amount" means an amount payable or receivable as an allowance on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient and children of the recipient, if the recipient has discretion as to the use of the amount, and
(a) the recipient is the spouse or common-law partner or former spouse or common-law partner of the payer, the recipient and payer are living separate and apart because of the breakdown of their marriage or common-law partnership and the amount is receivable under an order of a competent tribunal or under a written agreement; or
(b) the payer is a natural parent of a child of the recipient and the amount is receivable under an order made by a competent tribunal in accordance with the laws of a province.
...
[2] To determine whether the amount paid by Mr. Costello falls within the statutory criteria it is necessary to examine the circumstances surrounding its payment. He and his former spouse separated in 1998. By Order of the Ontario Superior Court of Justice[1] dated March 8, 2001, he was required to pay, among other amounts, interim spousal support of $600 per month. Mr. Costello fell behind in these payments. Meanwhile, winding up the marriage was proving to be an acrimonious affair. To resolve the issues standing in the way of the divorce, Minutes of Settlement[2] dated September 17, 2002 were prepared. This document was drafted by Mr. Costello's former spouse's lawyer and is hand written with various insertions and deletions. Nonetheless, it sets out the terms agreed to by the parties which were later incorporated in an Order of the Ontario Superior Court of Justice[3] issued on consent and dated September 30, 2002. Paragraph 1 reads: "... the Respondent shall pay to the Petitioner the sum of $22,500.00 in full satisfaction of spousal arrears, future spousal support and costs". Paragraph 7 provides that "... as of September 17, 2002, any support arrears shall be eliminated."
[3] Mr. Costello's agent argued that the $22,500 paid by Mr. Costello represented arrears of approximately $14,000 based on the periodic amounts payable under the March 8, 2001 Order, together with costs. While the periodic nature of the payments does not change merely because they are not paid on time[4], the taxpayer has the onus of establishing that such periodic payments were embodied in the lump sum payment. I accept the Crown's position that there was no evidence of what the arrears actually were as of September 17, 2002, nor was it clear from Mr. Costello's testimony what "costs" were contemplated; both the Minutes of Settlement[5] and the Consent Order[6] of September 30, 2002 state that there shall be no order as to costs.
[4] What is known from the documentary evidence is that Mr. Costello paid the $22,500 in full satisfaction of the arrears (whatever they may have been) and any future obligation to pay spousal support, terms Mr. Costello described as "an ultimatum". He entered Exhibit A-3 in proof of the fact that he transferred $22,500 to his former spouse at 11:03 a.m. on September 20, 2002. By his own admission, if he had not paid that amount by noon on September 20, 2002, there would have been "no divorce", an outcome he very much wanted to avoid at the time.
[5] In support of its argument that the $22,500 was not "an allowance on a periodic basis", counsel for the Respondent cited the factors listed by the Federal Court of Appeal in The Queen v. McKimmon[7] that may assist in the determination of whether a lump sum payment is of an income or capital nature:
1. The length of the periods at which the payments are made.
2. The amount of the payments in relation to the income and living standards of both payer and recipient.
3. Whether the payments are to bear interest prior to their due date.
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.
5. Whether the payments allow a significant degree of capital accumulation by the recipient.
6. Whether the payments are stipulated to continue for an indefinite period or whether they are for a fixed term.
7. Whether the agreed payments can be assigned and whether the obligation to pay survives the lifetime of either the payer or the recipient.
8. Whether the payments purport to release the payer from any future obligations to pay maintenance.
[6] This list is not meant to be exhaustive but does provide a framework for considering the circumstances of a particular case. In the matter before me, it is not disputed that the $22,500 was a one-time payment. It had to be paid by a fixed time - at noon only three days after the Minutes of Settlement were signed - failing which the agreement reached would be null and void[8]. Its payment released Mr. Costello from any future obligations to pay spousal support. The amount was large in comparison to his earnings, approximately 75% of Mr. Costello's income for the year - so large a sum that he had to borrow the funds to meet his obligations. Similarly, this amount certainly permitted some degree of capital accumulation in the hands of his former spouse.
[7] In view of the evidence before me, I am unable to conclude that the $22,500 was "an allowance on a periodic basis" within the meaning of subsection 56.1(4) of the Income Tax Act. Accordingly, it is not a "support amount" and cannot be deducted under paragraph 60(b) from Mr. Costello's income for 2002. The appeal is dismissed.
Signed at Ottawa, Canada, this 17th day of June, 2005.
"G. Sheridan"
Sheridan, J.
STYLE OF CAUSE: Charles Costello v. H.M.Q.
PLACE OF HEARING: St. Catharines, Ontario
REASONS FOR JUDGMENT BY: The Honourable Justice G. Sheridan
DATE OF JUDGMENT: June 17, 2005
APPEARANCES:
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Agent for the Appellant: |
Allen Crosgrey |
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Counsel for the Respondent: |
Marie-Eve Aubry |
COUNSEL OF RECORD:
Firm:
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada