Date: 20010212
Docket: 1999-3938-IT-G
BETWEEN:
PETER J. OSTROWSKI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Amended Reasons for Judgment
Beaubier, J.T.C.C.
[1] This appeal pursuant to the General Procedure was heard at Prince George, British Columbia on January 23, 2001. The Appellant was the only witness. Paragraphs 2 to 8 inclusive of the Reply to the Notice of Appeal read:
2. The Appellant has lived separate and apart from his wife, Carla Ostrowski since on or about August 1, 1993.
3. The Ontario Court by Order dated November 18, 1994 ordered the Appellant to pay child support in the amount of $3,200.00 per month ($800.00 per child – four children) commencing December 1, 1994 and to pay spousal support in the amount of $500.00 per month for a total of $3,700.00 per month.
4. The Appellant claimed a deduction for child and spousal support of $44,400.00 (amount of support required per court order of November 18, 1994) in each of the 1995 and 1996 taxation years.
5. The above claims were allowed upon initial assessment of the returns, but were subsequently reviewed and the 1995 year was reassessed to delete all but an amount of $11,100.00 allowed as an arrears payment and the 1996 return was reassessed to delete the entire claim of $44,400.00.
6. The Appellant objected to the said reassessments and by Notice of Confirmation dated November 19, 1998, the Minister of National Revenue (the "Minister") confirmed the said reassessments.
7. In reassessing the Appellant in respect of his 1995 and 1996 taxation years, the Minister relied on inter alia, the following assumptions:
a) that the Ontario Court by Order dated November 18, 1994 ordered the Appellant to pay child support in the amount of $3,200.00 per month and spousal support in the amount of $500.00 per month totaling $3,700.00;
b) that the Ontario Court by Order dated March 29, 1995 ordered that $11,100.00 be paid as a prepayment of support for April, May and June, 1995;
c) the Supreme Court of British Columbia by Order dated September 22, 1995, ordered that out of the sale proceeds of the family home in Ontario, the Appellant was to pay his spouse $88,800.00 as a lump sum prepayment of child and spousal support for 2 years;
d) that the Supreme Court of British Columbia by Order dated October 12, 1995, amended the court order of September 22, 1995, to state that of the $88,800.00 paid, $1,500.00 shall be considered arrears of spousal maintenance and $9,600.00 arrears of child maintenance (for a total of $11,100.00) for the months of July, August and September, 1995;
e) that the $11,100.00 ordered to be paid by the Ontario Court by Order dated March 29, 1995 was a prepayment of support for April, May and June, 1995 and since it was a prepayment, it is not deductible in the 1995 year;
f) that the Order of the Supreme Court of British Columbia dated October 12, 1995 ordering that the amount of $11,100.00 be considered arrears of spousal maintenance and child support for the months of July, August and September, 1995 were amounts payable on a periodic basis and the Appellant was reassessed to allow that amount as a deduction in the 1995 taxation year;
g) that the remainder of the amount of $88,800.00, being the amount of $77,700.00, and which amount was paid in September, 1995 was paid as a prepayment of support for 2 years following September, 1995; and therefore the amount of $33,300.00 claimed as a deduction in the 1995 year and $44,400.00 in the 1996 year were not properly deductible and the Minister so reassessed; and
h) that the amount of $77,700.00 paid in September, 1995 as a lump sum prepayment of support to be paid in advance to Carla Ostrowski for support payments due from October, 1995 to June, 1997 (as corrected by the Court Order dated October 12, 1995) can not be considered as support payments payable on a periodic basis within the meaning of paragraph 60(b) of the Income Tax Act (the "Act").
B. ISSUES TO BE DECIDED
8. The Issue is whether the amount of $77,700.00 ($33,300.00 claimed in 1995 and $44,400.00 in 1996) is deductible in computing the Appellant's income for the 1995 and 1996 years as an allowance payable on a periodic basis within the meaning of paragraph 60(b) of the Act.
[2] All of the assumptions except 7(g) and (h) are correct. Paragraphs (g) and (h) are in dispute and the exact wording of the Orders and Reasons raised therein are the gist of the dispute.
[3] On March 29, 1995 Clarke, J. of the Ontario Court (General Division) ordered in paragraph 2(a):
2. THIS COURT FURTHER ORDERS that, on consent, the monies currently in Court to the credit of this action be paid out as follows forthwith:
a) To Thomas H. Marshall, Q.C., on behalf of the Respondent, Carla Ostrowski, the sum of $11,100.00 for three months support for the months of April, May and June, 1995.
[4] On September 22, 1995 Drake, J. of the Supreme Court of British Columbia divided the proceeds of Ostrowskis' sale of their home and ordered:
THIS COURT ORDERS that the Petitioner and Respondent are entitled each to one-half of the net sale proceeds, inclusive of accumulated interest, from the sale of the matrimonial home and which funds are being held in trust by solicitor Thomas Marshall, Q.C. of Oakville, Ontario;
AND THIS COURT FURTHER ORDERS that the said Thomas Marshall pay to the credit of the Respondent Carla Ostrowski the said one-half of the net sale proceeds with accumulated interest;
AND THIS COURT FURTHER ORDERS that from the Petitioner's net sale proceeds, the sum of $88,800.00 be secured as a lump sum payment for maintenance and support for a period of two years for the Respondent and the children of the marriage (namely Nicholas Peter Ostrowski, born December 8, 1979, Raimund Joseph Ostrowski, born March 27, 1982, Jan Paul Ostrowski, born July 27, 1984, and Simone Johanne Ostrowski, born July 3, 1986) which maintenance was originally ordered by the Honourable Mr. Justice O'Connell on the 18th day of November, 1994;
AND THIS COURT FURTHER ORDERS that Thomas Marshall, Q.C. pay to the credit of the Respondent, Carla Ostrowski, the said sum of $88,800.00;
AND THIS COURT FURTHER ORDERS that the Petitioner's application for variation of maintenance and support be dismissed;
[5] On May 1, 1998 the Appellant launched a motion, which included requests for the following:
(f) An Order that the Order of The Honourable Mr. Justice Drake granted on September 22, 1995 and entered in the Registry's Order Book on September 25, be corrected pursuant to Rule 41(24) by inserting the word "prepaid periodic" and deleting the word "lump" in the third clause.
(g) An Order that the Order of The Honourable Mr. Justice Clarke granted on the 29th March, 1995 be corrected pursuant to Rule 41(24) by inserting the word "prepaid periodic" before the word "support" in clause 2(a).
This motion was heard by Melvin, J. of the Supreme Court of British Columbia on May 14, 1998.
[6] In course of giving the reasons for his Order, which followed that Motion, Melvin, J. said at paragraphs 2, 3, 4 and 17:
[2] That came before the Court -- I'm going to deal with this in a little bit of length, in terms of an application before Mr. Justice Drake on the 25th of -- I'm sorry, 22nd of September, 1995, at which time he was dealing both with access and with maintenance. Insofar as access is concerned, he said he made the same order in terms of Mr. Justice O'Connell, so I have nothing further at this time to say about that.
[3] But in reference to maintenance, he said this -- I'm reading from page 3 of his oral reasons:
Mr. Ostrowski's share is to be subject to the deduction of a lump sum by way of maintenance for Mrs. Ostrowski and the children for the next two years at the rate set by Mr. Justice O'Connell in his original order in Ontario. I think that he -- Ostrowski -- is an unreliable payer of periodical maintenance. That is my main reason for making this position, as he is in considerable arrears now, these are to be calculated and recouped in the lump sum. The formal order of the Court that was entered consequent upon those reasons orders that from that sale proceeds the sum of eighty-eight thousand be secured as a lump sum payment for maintenance and support for a period of two years for the respondent and the children.
[4] And he goes on to name them.
...
[17] THE COURT: I realize that. I realize that. All I'm saying is that this lump sum was there as security for payment of periodic maintenance. Some of it was allocated towards arrears and insofar as the future was concerned, it's a sum there available for payment of periodic maintenance. It's still no different than that sum being in a bank account and being -- and thirty-seven hundred dollars drawn from it monthly, as each month goes by, until such time as it is exhausted. It does not mean that Mr. Justice O'Connell's order terminated two years from the date that Mr. Justice Drake spoke in September of 1995. That is not the interpretation that I put on either the O'Connell order, Mr. Justice Drake's reasons or Mr. Justice Drake's order.
[7] Thereupon, Melvin, J. ordered on May 14, 1998:
Court File No. 29375-T
Victoria Registry
IN THE SUPREME COURT OF BRITISH COLUMBIA
BETWEEN:
PETER OSTROWSKI
PETITIONER
AND:
CARLA OSTROWSKI
RESPONDENT
BEFORE THE HONOURABLE ) Thursday, the 14th day of
MR. JUSTICE MELVIN ) May, 1998
ORDER
THE APPLICATION of the Petitioner coming on for hearing at Victoria, British Columbia on May 14, 1998 and September 1, 1998 and on hearing Peter Ostrowski, the Petitioner, on his own behalf on both days and on hearing Carla Ostrowski, the Respondent, on her own behalf, and David Aujla appearing as counsel for the Respondent on September 1, 1998 and on hearing Alan P. Leslie, Legal Counsel on behalf of the Family Maintenance Enforcement Program.
THIS COURT ORDERS that the application to terminate spousal maintenance as of September 30, 1997 is granted.
THIS COURT FURTHER ORDERS that the suspension of child maintenance made by Mr. Justice Sigurdson on November 12, 1997 shall continue indefinitely until such time as there is evidence before the Court that Peter Ostrowski, the Petitioner, is in receipt of income. The Petitioner is to provide the Respondent in writing of when he has obtained some form of employment. Whether it is contract employment or otherwise, the Petitioner is to provide the Respondent the details of that employment, the details of the income generated by that employment and what the Petitioner feels is the appropriate amount of monthly maintenance for the children based on the Federal Support Guidelines. If the Respondent agrees with the figures as advanced, the parties need not come back to court. The parties are at liberty to apply to return to court to seek further direction if problems concerning amount, concerning duration of payment, or problems concerning the fact that the Petitioner may be out of the country.
THIS COURT FURTHER ORDERS that in the event the Petitioner becomes regularly employed, or there is a further order of the Court, then such steps as are necessary to be taken by the Enforcement Program may be taken by it.
THIS COURT FURTHER ORDERS that there will be no accumulation of arrears as of Mr. Justice Sigurdon's [sic] memorandum.
THIS COURT FURTHER ORDERS there will be no interest accumulating on arrears.
THIS COURT FURTHER ORDERS that travel costs of the children between Victoria and the Lower Mainland are to be shared equally by the Petitioner and the Respondent. In the event there is a change of location by either party which may have an impact on those travel costs, then, unless the parties can agree, the parties have liberty to apply on that issue.
THIS COURT FURTHER ORDERS the memorandum of Mr. Justice Sigurdson dated November 12, 1997 is backdated to November 1, 1997 and the obligation to pay arrears of child and spousal support is suspended as of November 1, 1997 insofar as the child support is concerned.
THIS COURT FURTHER ORDERS that the Family Maintenance Enforcement Program are precluded from taking any enforcement action until such time as the Petitioner becomes regularly employed.
BY THE COURT
"signature"
Deputy District Registrar
APPROVED AS TO FORM:
___________________ __________________
Peter Ostrowski David Aujla
Petitioner Counsel for the Respondent
"signature" __________________
Carla Ostrowski Alan P. Leslie
Respondent Family Maintenance
Enforcement Program
[8] All of the documents quoted are taken from Exhibit A-2 filed by the Appellant.
[9] In particular, the Appellant submits that in paragraph [17] of his reasons of May 14, 1998, Melvin, J. dealt with the lump sum remaining in question of $77,700.00 and by his words, retroactively converted it to periodic payments to Ms. Ostrowski. From that, it appears to follow in the Appellant's mind that the $11,100.00 referred to in assumption 7(e) is also periodic. But it is noteworthy that Melvin J. did not grant the Appellant's requests contained in paragraphs (f) and (g) of his May 1, 1998 motion.
[10] The Respondent disputes the Appellant's submissions and in support of its argument quoted Her Majesty the Queen v. Stanley John McKimmon, 90 DTC 6088 (F.C.A.), in which Hugessen, J.A., speaking for the entire panel, stated at pages 6090 and 6091:
The problem of distinguishing between periodic payments made as an allowance for maintenance, which are deductible for income tax purposes, and periodic payments made as instalments of a lump or capital sum, which are not so deductible, is one which has given rise to considerable discussion and jurisprudence. It is not dissimilar, and is indeed related to the problem, common in income tax law, of determining if sums of money expended or received are of an income or of a capital nature. As with that problem there can be very few hard and fast rules. On the contrary, the Court is required to look at all the circumstances surrounding the payment and to determine what, in the light of those circumstances, is its proper characterization. Because of the correlation between paragraphs 60(b) and 56(1)(b), a finding that a payment is deductible by the payer will normally result in its being taxable in the hands of the recipient. Conversely, a determination that a payment is not so deductible will result in the recipient having it free of tax.
The following are, as it seems to me, some of the considerations which may properly be taken into account in making such a determination. The list is not, of course, intended to be exhaustive.
1. The length of the periods at which the payments are made. Amounts which are paid weekly or monthly are fairly easily characterized as allowances for maintenance. Where the payments are at longer intervals, the matter becomes less clear. While it is not impossible, it would appear to me to be difficult to envisage payments made at intervals of greater than one year as being allowances for maintenance.
2. The amount of the payments in relation to the income and living standards of both payer and recipient. Where a payment represents a very substantial portion of a taxpayer's income or even exceeds it, it is difficult to view it as being an allowance for maintenance2. On the other hand, where the payment is no greater than might be expected to be required to maintain the recipient's standard of living, it is more likely to qualify as such an allowance.
3. Whether the payments are to bear interest prior to their due date. It is more common to associate an obligation to pay interest with a lump sum payable by instalments than it is with a true allowance for maintenance.3
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. Prepayment and acceleration provisions are commonly associated with obligations to pay capital sums and would not normally be associated with an allowance for maintenance.
5. Whether the payments allow a significant degree of capital accumulation by the recipient. Clearly not every capital payment is excluded from an allowance for maintenance: common experience indicates that such things as life insurance premiums and blended monthly mortgage payments,4 while they allow an accumulation of capital over time, are a normal expense of living which are paid from income and can properly form part of an allowance for maintenance. On the other hand, an allowance for maintenance should not allow the accumulation, over a short period, of a significant pool of capital.5
6. Whether the payments are stipulated to continue for an indefinite period or whether they are for a fixed term. An allowance for maintenance will more commonly provide for its continuance either for an indefinite period or to some event (such as the coming of age of a child) which will cause a material change in the needs of the recipient. Sums payable over a fixed term, on the other hand, may be more readily seen as being of a capital nature.
7. Whether the agreed payments can be assigned and whether the obligation to pay survives the lifetime of either the payer or the recipient. An allowance for maintenance is normally personal to the recipient and is therefore unassignable and terminates at death. A lump or capital sum, on the other hand, will normally form part of the estate of the recipient, is assignable and will survive him.6
8. Whether the payments purport to release the payer from any future obligations to pay maintenance. Where there is such a release, it is easier to view the payments as being the commutation or purchase of the capital price of an allowance for maintenance.7
[Determination]
Viewing the facts of the present case in the light of the foregoing criteria, it becomes quickly apparent that most of the indicators point strongly to the payments in issue being instalments of a lump sum settlement and that virtually none point the other way.
The payments are to be made only once a year. The amounts paid are not only greatly in excess of the prior alimony of $600 per month but also constitute a very large proportion of the taxpayer's declared income in the two years in question.8 Interest is, by the terms of the decree, payable on the balance of the total sum of $115,000 from time to time remaining due. The taxpayer is given a prepayment privilege at his option while, in the event of default, his former wife may require the accelerated payment of the whole of the balance. The total sum of $115,000 represents a significant capital amount when compared not only with the taxpayer's declared income but also with the deemed value of the real estate which was also transferred as part of the same consent decree. The payments are to be made over a fixed term and are not stated to be dependent upon the survival of either the payer or the recipient. Finally, the payments are stated to be "in satisfaction of all financial relief under theDivorce Act and Family Relations Act".9
I conclude that the sums here in issue were not paid by the taxpayer as an allowance for the maintenance of his former wife. Accordingly they were not deductible from the taxpayer's income under paragraph 60(b) and are taxable in his hands rather than those of the recipient as would be required by paragraph 56(1)(b).
[Crown's appeal allowed]
For these reasons, I would allow the appeal with costs, set aside the judgment of the Trial Division and dismiss the taxpayer's appeal to the Trial Division with costs.
[11] The Appellant's situation is similar to that of the husband's in McKimmon. One lump sum was transferred outright to his wife's lawyer from the house proceeds; it was very substantial; it was paid by Court Order; it was from capital and the amount in dispute was not respecting arrears; it was a one time payment; the wife could dispose of it as she wished; and it released the Appellant from future payments to the total of the lump sum.
[12] As in McKimmon, most of the indications point strongly to the payment being a lump sum settlement and virtually none point the other way.
[13] For this reason, the appeals are dismissed, with costs in favour of the Respondent.
Signed at Ottawa, Canada, this 12th day of February, 2001.
"D.W. Beaubier"
J.T.C.C.