A-734-88
Her Majesty the Queen (Appellant)
v.
Stanley John McKimmon (Respondent)
INDEXED AS: MCKIMMON V. M.N.R. (CA.)
Court of Appeal, Pratte, Urie and Hugessen
JJ.A.—Vancouver, December 4; Ottawa, Decem-
ber 21, 1989.
Income tax — Income calculation — Deductions — Pursu
ant to decree nisi of divorce taxpayer paying $115,000 in
consecutive annual instalments of $25,000 (last payment being
$15,000) to former wife together with interest on unpaid
balance — Prior to divorce, taxpayer paying $600 per month
interim alimony — Income Tax Act, s. 60(b) allowing deduc
tion of allowance payable on periodic basis for maintenance
pursuant to court order or written agreement — Necessary to
look at all circumstances — Considerations including: length
of periods between payments; amount of payments in relation
to income and living standards of payer and recipient; whether
payments bearing interest prior to due date; whether prepay
ment or acceleration provisions; whether payments allowing
significant capital accumulation; whether payable for indefi
nite period or fixed term; assignability; whether releasing
payer from future obligations to pay maintenance — Applying
foregoing criteria payments not allowance for maintenance, but
instalments of lump sum settlement.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 56(1)(b),
60(b).
CASES JUDICIALLY CONSIDERED
APPLIED:
Minister of National Revenue v. Trottier, Dorila, [1967]
2 Ex.C.R. 268; [1967] C.T.C. 28; 67 DTC 5029; Lari-
vière v. Canada, [1989] 2 F.C. 104; [1989] 1 C.T.C. 297
(C.A.); Minister of National Revenue v. Armstrong,
[1956] S.C.R. 446; [1956] C.T.C. 93; (1956), 56 DTC
1044; Trottier v. Minister of National Revenue, [1968]
S.C.R. 728; [1968] C.T.C. 324; (1968), 68 DTC 5216.
REVERSED:
McKimmon v. M.N.R., [1988] 2 C.T.C. 71; (1988), 88
DTC 6296; 15 R.F.L. (3d) 113.
REFERRED TO:
Minister of National Revenue v. Hansen, William
Albert, [1968] 1 Ex.C.R. 380; [1967] C.T.C. 440; 67
DTC 5293; Gagnon v. The Queen, [1986] 1 S.C.R. 264;
(1986), 25 D.L.R. (4th) 481; [1986] 1 C.T.C. 410; 86
DTC 6179; 65 N.R. 321; 1 R.F.L. (3d) 113; The Queen
v. Dorion (L), [1981] CTC 136; (1980), 81 DTC 5111
(F.C.T.D.).
COUNSEL:
Max J. Weder for appellant.
Gerald S. Levey for respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Glasner & Schwartz, Vancouver, for respon
dent.
The following are the reasons for judgment
rendered in English by
HUGESSEN J.A.: This is an appeal from a deci
sion of Collier J. [[1988] 2 C.T.C. 71; (1988), 88
DTC 6296; 15 R.F.L. (3d) 113], of the Trial
Division, allowing the taxpayer's appeal from a
decision of Sarchuk J., [[1986] 2 C.T.C. 2359;
(1986), 86 DTC 1752; 5 R.F.L. (3d) 113] of the
Tax Court of Canada, which had confirmed the
Minister's assessment.
The sole issue for determination is the deducti-
bility, for tax purposes, of certain payments made
by the taxpayer to his former wife in the years
1982 and 1983. Those payments were made pursu
ant to the provisions of a decree nisi of divorce
pronounced by a local judge of the Supreme Court
of British Columbia February 5, 1982. The rele
vant passages of the decree, given on consent, read
as follows:
AND THIS COURT FURTHER ORDERS, by consent, that the
maintenance Respondent pay to the Petitioner the lump sum/
of ONE HUNDRED THIRTY THOUSAND ($130,000.00) DOLLARS
and periodic maintenance in the sum of ONE HUNDRED FIF
TEEN THOUSAND ($115,000.00) DOLLARS in satisfaction of all
financial relief under the Divorce Act and Family Relations
Act, payable in the manner following, that is to say:
(a) Transfer to her of all that certain parcel or tract of land
and premises situate at 33118 Whidden Avenue, Mission,
British Columbia, more particularly known and described as:
Lot 53, S.W. 1 / 4 , Section 28,
Township 17, Plan 28357, New
Westminster District
free and clear of all encumbrances, subject to existing tenan
cies, at a deemed value for the purposes of this Action of
ONE HUNDRED THIRTY THOUSAND ($130,000.00) DOLLARS;
such transfer to be completed by the 1st day of April, 1982
with an adjustment date being the date of transfer;
(b) Payment of the sum of ONE HUNDRED FIFTEEN THOU
SAND ($115,000.00) DOLLARS in consecutive annual install
ments as follows:
$25,000.00 on the first day of April, 1982
$25,000.00 on the first day of January, 1983
$25,000.00 on the first day of January, 1984
$25,000.00 on the first day of January, 1985
$15,000.00 on the first day of January, 1986
together with and in addition to interest at the rate of TEN
(10%) PERCENTUM per annum, on the balance of the said
ONE HUNDRED FIFTEEN THOUSAND ($115,000.00) DOL
LARS from time to time owing, such interest to commence
accruing from and inclusive of the 1st day of April, 1982,
and be computed half-yearly, not in advance, and become
due and payable annually with the annual installments of
principal as they become due and payable.
AND THIS COURT FURTHER ORDERS, by consent, that the
Respondent cause Kapps Enterprises Ltd. to execute and deliv
er to the Petitioner a collateral mortgage of all its equity as
Purchaser in and to all that certain parcel or tract of land and
premises situate at 34054 Parr avenue, Mission, British
Columbia, more particularly known and described as:
Lot 1, S.E.'/, Section 27,
Township 17, Plan 34254,
New Westminster District
free and clear of all financial encumbrances (save and except
the title interest of the unpaid Vendor) by the 1st day of april,
1982, such mortgage to be deemed collateral security for the
payment of the said sum of ONE HUNDRED FIFTEEN THOU
SAND ($115,000.00) DOLLARS and interest to the Petitioner as
hereinbefore provided.
AND THIS COURT FURTHER ORDERS, by consent, that the
Respondent shall have the privilege of prepaying the balance or
any portion thereof owing under the aforesaid terms of pay
ment, and collateral mortgage, without notice or bonus, subject
nevertheless to the proviso that in the event of default of
payment by the Respondent of the principal or interest herein
or any portion thereof, at the times and in the amounts
provided, then and in every such case the principal sum and
every portion thereof at the option of the Mortgagee shall
forthwith become due and payable without notice; and further
subject to the proviso that there shall be no acceleration of
payment in the event of sale. (Appeal Book, at pages 78 and
79).
The payments in issue were said to have been
made pursuant to paragraph (b) above.
Prior to the pronouncement of the decree of
divorce, the parties had lived separate and apart
for approximately four years, during which time
the taxpayer had paid to his wife the sum of $600
per month as interim alimony.
The relevant statutory provision is paragraph
60(b) of the Income Tax Act [S.C. 1970-71-72, c.
63]. This allows a taxpayer to deduct from income:
60....
(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 allow
ance 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 make the pay
ment at the time the payment was made and throughout the
remainder of the year;
The correlative provision is paragraph 56(1)(b),
which requires a taxpayer to include in income:
56. (1) .. .
(b) any amount received by the taxpayer in the year, pursu
ant to a decree, order or judgment of a competent tribunal or
pursuant to a written agreement, as alimony or other allow
ance 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 the recipient was
living apart from, and was separated pursuant to a divorce,
judicial separation or written separation agreement from, the
spouse or former spouse required to make the payment at the
time the payment was received and throughout the remain
der of the year;
It will be observed that the two texts deal with
both alimony and other allowances payable on a
periodic basis for maintenance. Although the
French text is somewhat unclear on this point, it is
now settled that the reference to alimony ("pen-
sion alimentaire") is limited to sums payable
during the currency of the marriage.'
Since the payments with which we are here
concerned were made after the pronouncement of
the divorce between the parties, the issue is to
know whether they were paid as an "allowance
payable on a periodic basis for the maintenance"
of the taxpayer's former wife.
I See Larivière v. Canada, [1989] 2 F.C. 104; [1989] 1
C.T.C. 297 (C.A.), at p. 106 F.C.:
As the amount of $10,000 at issue here was paid by the
appellant to his ex-wife after their marriage was dissolved,
that is not the payment of "pension alimentaire" in the
limited sense in which that phrase is used in paragraph
60(b).
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 surround
ing the payment and to determine what, in the
light of those circumstances, is its proper charac
terization. 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 pay
ment 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. 2 Where the pay
ments 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 sub
stantial portion of a taxpayer's income or even
exceeds it, it is difficult to view it as being an
allowance for maintenance. On the other hand,
where the payment is no greater than might be
expected to be required to maintain the recipient's
2 See, for example, Minister of National Revenue v. Hansen,
William Albert, [1968] 1 Ex.C.R. 380; [1967] C.T.C. 440; 67
DTC 5293.
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.'
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 recipi
ent in the event of default. Prepayment and accel
eration 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 premi
ums 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.'
6. Whether the payments are stipulated to
continue for an indefinite period or whether they
are for a fixed term. An allowance for mainte
nance will more commonly provide for its continu
a See Minister of National Revenue v. Trottier, Dorila,
[1967] 2 Ex.C.R. 268; [1967] C.T.C. 28; 67 DTC 5029, at p.
278 Ex.C.R.:
Further maintenance is payable for the support of the wife
and as such is not assignable by her and neither do such
payments, from their very nature, bear interest.
4 See, for example, Gagnon v. The Queen, [1986] 1 S.C.R.
264; (1986), 25 D.L.R. (4th) 481; [1986] 1 C.T.C. 410; 86
DTC 6179; 65 N.R. 321; 1 R.F.L. (3d) 113.
5 See Larivière, supra, at p. 108:
Having said this, the question for solution as I understand
it is as to whether the decree under which the $10,000
payment was made imposed an obligation to make periodic
payments for the purpose of enabling the appellant's ex-wife
to maintain herself during the period for which these pay
ments were made, rather than enabling her to establish a
capital sum.
ance 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 sur
vives the lifetime of either the payer or the recipi
ent. An allowance for maintenance is normally
personal to the recipient and is therefore unassig-
nable 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 main
tenance. 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.'
Viewing the facts of the present case in the light
of the foregoing criteria, it becomes quickly appar-
6 See Trottier, supra; also The Queen v. Dorion (L), [1981]
CTC 136; (1980); 81 DTC 5111 (F.C.T.D.).
' See Minister of National Revenue v. Armstrong, [1956]
S.C.R. 446; [ 1956] C.T.C. 93; (1956), 56 DTC 1044, at p. 448
S.C.R.:
If, for example, the respondent had agreed with his wife
that he should purchase for her a house in return for a
release of all further liability under the decree, the purchase
price could not, by any stretch of language, be brought
within the section. The same principle must equally apply to
a lump sum paid directly to the wife to purchase the release.
Such an outlay made in commutation of the periodic sums
payable under the decree is in the nature of a capital
payment to which the statute does not extend.
See also Trottier v. Minister of National Revenue, [1968]
S.C.R. 728; [1968] C.T.C. 324; (1968), 68 DTC 5216, at p.
733 S.C.R.:
... it appears that the agreement between the parties was not
that the husband should pay his wife a periodic allowance for
maintenance and that his agreement to do so should be
collaterally secured by a second mortgage; it was rather a
release by her of all her claims for an allowance and the
giving by her (in para. 4 of the agreement) of an irrevocable
power of attorney to bar her dower in her husband's lands in
exchange for a single consideration, the giving of the mort
gage for $45,000.
ent 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.'
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. Final
ly, the payments are stated to be "in satisfaction of
all financial relief under the Divorce 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).
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.
e The actual deductions claimed, which presumably included
interest, were $27,000 in 1982 and $31,757 in 1983. The
taxpayer's total declared income in those years was $33,551
and $36,244 respectively. (Appeal Book, at p. 29 and 35).
9 Counsel for the respondent placed a good deal of emphasis
on the fact that, notwithstanding this phrase in the decree, the
Supreme Court of British Columbia, in fact, retained the power
to reopen the matter and to vary the payments. That may be so,
but we have to deal with the decree as it is and not as it might
be or might have been.
PRATTE J.A.: I agree.
URIE J.A.: I agree.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.