BETWEEN:
and
and
MARTIN LEE ANDREW DAND,
Invervenor.
__________________________________________________________________
Appeal heard on September 2, 2005 at Hamilton, Ontario
Before: The Honourable Justice G. Sheridan
Appearances:
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For the Intervenor: |
The Intervenor himself |
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JUDGMENT
In accordance with the attached Reasons for Judgment, the appeal from the reassessment made under the Income Tax Act for the 2002 taxation year is allowed, with costs, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the amount of $12,000 received by Ms. O'Brien in 2002 from the Toronto Police Benefit Fund was not a "pension benefit" within the meaning of the Income Tax Act.
Signed at Ottawa, Canada, this 12th day of October, 2005
BETWEEN:
MARY MARGARET O'BRIEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
MARTIN LEE ANDREW DAND,
Intervenor.
REASONS FOR JUDGMENT
[1] The Appellant, Mary O'Brien, is appealing a reassessment of the Minister of National Revenue in which equalization payments she received from her former spouse under the OntarioFamily Law Act were included as income. Her former spouse, Martin Dand, was joined as a party under section 174 of the Income Tax Act and accordingly, the decision reached in this matter is binding[1] on him. Mr. Dand represented himself at the hearing, sharing the Minister's position that because his pension fund was the source used for the equalization payments, they were "pension benefits" under subsection 56(1) and therefore, taxable in the hands of the recipient, Ms. O'Brien.
[2] Mr. Dand is a retired member of the Metro Toronto Police Service. He and Ms. O'Brien were married in 1970 and separated in 1998. As of October 1, 1998, the agreed date of separation, only Mr. Dand owned any property; namely, certain entitlements arising from his years of service with the Metro Toronto Police. These were identified in Minutes of Settlement[2] and the parties agreed to the following valuations for each property:
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Toronto Police Benefit Fund |
$ 291,539.00 |
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Accumulated Sick Pay Benefits |
$ 33,849.69 |
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Widows' and Orphans' Benefit |
$ 2,500.00 |
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Total Valuation |
$ 327,888.68 |
(sic) |
[3] It was further agreed under the formula in the OntarioFamily Law Act[3] that Mr. Dand would pay to Ms. O'Brien an equalization payment of $163,944.34, payable as follows:
$30,000 payable from the Accumulated Sick Pay Benefits directly into Ms. O'Brien's RRSP[4] as soon as the Benefits became payable to Mr. Dand;
$2,500 payable from the Widows' and Orphans' Benefit as soon as Mr. Dand received it; and
$131,444.34, being the balance of the equalization payment payable in 131 monthly installments of $1,000[5] and one final payment of $444.34.
[4] These terms were included in an Order[6] of the Ontario Superior Court of Justice dated December 20, 2001. As agreed in the Minutes of Settlement, paragraph 3 of the Order required Mr. Dand to "direct the Toronto Police Benefit Fund to pay the aforesaid monthly installments of $1,000.00 each and said final installment in the sum of $444.34 directly to [Ms. O'Brien] on the first day of each month". The Court further ordered that Mr. Dand would be released from any further obligation to pay spousal support on January 1, 2002, the date upon which the first of his monthly equalization payments would begin.
[5] As it happened, the January 1, 2002 deadline was missed. This was the Fund's first experience with paying out amounts from its pension fund to anyone other than a member-beneficiary and time was needed to sort out the administrative details. After a few weeks' delay, the Toronto Police Benefit Fund began paying $1,000 per month directly to Ms. O'Brien in compliance with the Order. The balance remaining, less the total income tax payable on the full amount of his monthly pension entitlement, was paid to Mr. Dand.
[6] At some point after the payments began, Mr. Dand approached officials at the Toronto Police Benefit Fund regarding his opposition to all the tax being deducted solely from his monthly pension cheque. There was no evidence that either Mr. Dand or the officials included Ms. O'Brien in any discussion of this issue. Not until she received a cheque for approximately $600 instead of the usual $1,000 amount did she become aware of any changes to the terms of their original agreement. Inquiries revealed that as a result of Mr. Dand's intervention with the Toronto Police Benefit Fund, it had been decided that income tax would be deducted proportionally from each of their cheques, rather than from Mr. Dand's cheque only. The supervisor of the Fund advised Mr. Dand by letter[7] that T4A's would be issued to him and Ms. O'Brien reflecting each party's share of the total tax payable. This ultimately led in May 2004, to the reassessment of Ms. O'Brien's 2002 taxation year.
[7] In making his reassessment, the Minister relied on only one assumption[8]: "in the 2002 taxation year, [Ms. O'Brien] was in receipt of pension benefits, in the amount of $12,000, under the Metro Toronto Police Benefit Fund which is the pension plan of Martin Dand, [her] former spouse". This statement is not so much an assumption of fact as a conclusion of law. Whether the $12,000 amount received by Ms. O'Brien from the Toronto Police Benefit Fund is a receipt of "pension benefits" within the meaning of the Income Tax Act is the very question before this Court. Ms. O'Brien does not dispute receiving this amount from the Fund; what she takes issue with is the Minister's characterization of those funds.
[8] In concluding that the $12,000 was taxable as income in Ms. O'Brien's hands, the Minister relied on subsection 56(1)(a)(i) of the Income Tax Act. Of equal importance in determining the nature of the payments received by Ms. O'Brien, however, is the Ontario Family Law Act. The Family Law Act replaced the Family Law Reform Act in 1990. Its purpose is set out in subsection 5(7):
5.(7) The purpose of this section is to recognize that child care, household management and financial provision are the joint responsibilities of the spouses and that inherent in the marital relationship there is equal contribution, whether financial or otherwise, by the spouses to the assumption of these responsibilities, entitling each spouse to the equalization of the net family properties, subject only to the equitable considerations set out in subsection (6). [Emphasis added.]
[9] Included in the new legislation was the concept of "equalization", which heralded a new approach to what used to be the division of matrimonial assets. Equalization replaced the notion of splitting up the assets themselves with a monetary adjustment to equalize the fiscal circumstances between the spouses according to the "net family property" of each spouse. Another of the Family Law Act's innovative provisions, "net family property" is defined in subsection 4(1):
"net family property" means the value of all the property, except property described in subsection (2), that a spouse owns on the valuation date, after deducting,
(a) the spouse's debts and other liabilities, and
(b) the value of property, other than a matrimonial home, that the spouse owned on the date of the marriage, after deducting the spouse's debts and other liabilities, calculated as of the date of the marriage.
[10] Briefly summarized, upon the occurrence of statutorily defined triggering events, the Family Law Act sets out the steps to be taken to determine the valuation of the net family property of each spouse. A valuation date is established, as of which the value[9] of all the property owned[10] by each spouse is calculated by reducing any liabilities he or she may have. The spouse whose net family property is the lesser of the two net family properties is entitled to one-half of the difference between them. This amount is known as an "equalization payment". It is payable to the other spouse by the spouse with the greater net family property. The equalization payment may be paid in a lump sum or in periodic payments over a period of 10 years. As summarized in the Ontario Family Law Act Manual, Second Edition[11], [i]n the end result, one spouse will become entitled to a money judgment against the other spouse and a debtor-creditor relationship will be established".
[11] The amounts Mr. Dand paid to Ms. O'Brien in 2002 were determined in accordance with the provisions of the Family Law Act. The value of the pension plan was agreed to and the amount of equalization payment determined accordingly. To ensure timely and regular payment of the amounts due to Ms. O'Brien, the parties agreed and the Court so ordered that Mr. Dand would direct the Toronto Police Benefit Fund to pay directly to Ms. O'Brien the amounts owed on account of his indebtedness to her under the Family Law Act for the total amount of the equalization payment of $131,944.34. The only means Mr. Dand had of satisfying this debt was his pension fund; had he had another source of funds, given his past unreliability in paying spousal support and the underlying objective of the Family Law Act to encourage former spouses to get on with their separate lives, I have no doubt that the Court would have directed payment from that source.
[12] There was no clear evidence before me as to what, if any, consideration was given to the tax consequences of ordering payment of the equalization payment directly from the Toronto Police Benefit Fund. Whatever discussions occurred between the parties (and the evidence of both showed their memories to be somewhat clouded by hindsight), the Order, as ultimately drafted, is silent as to who is to bear the tax liability of the pay out from the Fund. Yet specific provision has been made regarding the tax consequences of the rollover of funds from Mr. Dand's Widows' and Orphans' Fund to Ms. O'Brien's RRSP. Add to this that nowhere in the Order is there any mention of "splitting" the pension itself or of making Ms. O'Brien a co-beneficiary of the Fund. It is notable that the Order requires insurance to be maintained to guarantee payment in full of the equalization payment; in the event of Mr. Dand's death, any outstanding balance will be satisfied by the life insurance proceeds. Had the Order provided for a division of the pension itself, Ms. O'Brien's right to further payment would terminate upon Mr. Dand's death.
[13] In these circumstances, there is nothing to support the inference urged by the Crown and Mr. Dand that the parties intended or agreed Ms. O'Brien to share in any liability Mr. Dand might incur under the Income Tax Act from his use of the Toronto Police Benefit Fund to satisfy his indebtedness to her. Nor is there anything to justify this Court's reading any such qualification into the plain wording of the Order. It is clear from its terms that ordering direct payments from the Toronto Police Benefit Fund provided a mechanism for securing payment of the equalization debt created by the Family Law Act. Any deficiencies (if, indeed, any there were) in the calculation or method of payment of the equalization payment are properly addressed in the provincial family court, not the Tax Court of Canada.
[14] But for the Court's concerns regarding Mr. Dand's history of partial or delayed payment of spousal support, there would have been no order directing that the equalization payments be made directly from the Toronto Police Benefit Fund to Ms. O'Brien. In that circumstance, each month, the Fund would have paid to Mr. Dand the full amount (less his total tax liability) of his pension benefit. From these proceeds, he would then have paid $1,000 to Ms. O'Brien in payment of his monthly debt to her under the Order. That the payments to which Ms. O'Brien was entitled came from a pension fund is merely incidental. It is not, in itself, sufficient to convert them to "pension benefits" within the meaning of paragraph 56(1)(a) of the Act. Section 56 appears in Part I of the Act under Subdivision d - "other Sources of Income". Paragraph 56(1)(a) provides for the inclusion in income of:
... any amount received by the taxpayer in the year as, on account or in lieu of payment of, or in satisfaction of,
(i) a superannuation or pension benefit including [certain specific plans. The provision then goes on to exclude others which are not relevant to this appeal].
Although paragraph 56(1)(a) is broadly drafted to include "any amount", its swath is narrowed by the qualifying words which follow, directing that that amount must be "as, on account or in lieu of payment of, or in satisfaction of" a "pension benefit". To understand what this entails, regard must first be had to the term "pension benefit" as defined in subsection 248(1):
... any amount received out of or under a superannuation or pension fund or plan and, without restricting the generality of the foregoing, includes any payment made to a beneficiary under the fund or plan or to an employer or former employer of the beneficiary thereunder
(a) in accordance with the terms of the fund or plan,
(b) resulting from an amendment to or modification of the fund or plan, or
(c) resulting from the termination of the fund or plan; [Emphasis added.]
[15] The opening words of subsection 248(1) define pension benefits as "any amount" received out of a pension plan. This, on its face, is broad enough to capture the payments made to Ms. O'Brien "out of" the Toronto Police Benefit Fund. However, the paragraphs which follow, "without restricting the generality of the foregoing", further describe such benefits as including payments made "to a beneficiary" that are "in accordance with" or "resulting from" the terms of the pension fund or changes to or the termination of the pension fund.
[16] Read together, these provisions reveal that the Act contemplates (1) that the payment of pension benefits be made to a "beneficiary"; and (2) that that beneficiary's entitlement to it stems from the terms of, or changes to the pension fund itself. Ms. O'Brien has never been a beneficiary, as that term is normally understood, of the Toronto Police Benefit Fund; rather, she is the creditor of one of its beneficiaries, Mr. Dand. Her entitlement to a payment from the pension arises not from the Fund, but rather by the Order enforcing payment of her former spouse's indebtedness to her under the Family Law Act.
[17] Returning then, to whether the monthly payments are "any amount received by the taxpayer" within the meaning of paragraph 56(1)(a), for the reasons set out above, I find that the $12,000 paid to Ms. O'Brien from the Toronto Police Benefit Fund in 2002 was not "as, on account or in lieu of payment of, or in satisfaction of" a "pension benefit". Rather, it was received by her as, on account or in satisfaction of Mr. Dand's debt to her under the Family Law Act. In these particular circumstances, that such payments had as their source Mr. Dand's pension fund does not operate to transform them into "pension benefits" within the meaning of the Income Tax Act.
[18] For all of these reasons, the appeal is allowed, with costs, and the matter is referred back to the Minister on the basis that the amount of $12,000 received by Ms. O'Brien in 2002 from the Toronto Police Benefit Fund was not a "pension benefit" within the meaning of the Income Tax Act.
Signed at Ottawa, Canada, this 12th day of October, 2005.
"G. Sheridan"
Sheridan, J.
COURT FILE NO.: 2004-4472(IT)I
STYLE OF CAUSE: Mary Margaret O'Brien v. H.M.Q.
PLACE OF HEARING: Hamilton, Ontario
DATE OF HEARING: September 2, 2005
REASONS FOR JUDGMENT BY: The Honourable Justice G. Sheridan
DATE OF JUDGMENT: October 12, 2005
APPEARANCES:
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Counsel for the Appellant: |
Lorne S. Jackson |
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Counsel for the Respondent: |
Craig Maw |
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For the Intervenor: |
The Intervenor himself |
COUNSEL OF RECORD:
Firm: Lorne S. Jackson
Oakville, Ontario
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada
[1] Subsection 174(4) of the Income Tax Act.
[2] Exhibit A-1.
[3] Family Law Act, R.S.O. 1990, c. F-3.
[4] It was further agreed in paragraph 7 of Minutes of Settlement that Ms. O'Brien would bear any tax consequences resulting from the subsequent withdrawal of any amounts from her RRSP.
[5] Certain typographical and mathematical errors contained in the Minutes of Settlement and later embodied in the Order of December 20, 2001(Exhibit A-2) were later corrected in an amending Order dated January 22, 2004 (Exhibit A-3) to reflect accurately the terms of the parties' agreement, as set out above.
[6] Exhibit A-2.
[7] Exhibit R-1.
[8] Paragraph 9 of the Reply to the Notice of Appeal.
[9] The Family Law Act does not provide a valuation method but in the present appeal, the valuation of the Toronto Police Benefit Fund pension was agreed to be $327,888.68.
[10] Although the determination of ownership of property may be contentious, there is no dispute that Mr. Dand is the owner of the Toronto Police Benefit Fund pension or that the definition of "property" [paragraph 4(1)(c)] includes the rights of a spouse under a pension fund.
[11] Part I Family Property, paragraph 4-2.01, page 4-9.