Citation: 2012 TCC 54
Date: 20120215
Docket: 2011-948(IT)I
BETWEEN:
DAVID LAM,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan J.
[1]
The Appellant, David Lam, is
appealing the reassessments of the Minister of National Revenue under the Income
Tax Act of his 2007 and 2008 taxation years. The issue in these appeals is
whether the Appellant is entitled to deduct amounts paid in those years to his
former common law partner under a written separation agreement.
[2]
In 2006, the Appellant and his former
partner separated after having cohabited as husband and wife for approximately
two years. They executed a separation agreement dated January 3, 2007
(“Separation Agreement”), the relevant provisions of which read:
7. RELEASE OF SUPPORT AND
MAINTENANCE:
(1)
Each of the parties hereby releases and
discharges the other from all rights and claims for support and maintenance
that he or she has or may have under the law of any jurisdiction and in
particular all rights to and claims for support and maintenance that he or she
has or may have under the Family Law Act and any other applicable legislation.
(2)
Each party acknowledges that in waiving and
releasing all rights to receive and to claim support from the other and in
consideration of same LAM agrees to pay to CHAN the sum of one thousand five
hundred ($1,500.00) dollars commencing on December 1, 2006 for a period of 26
months with a final payment of one thousand ($1,000.00) dollars on the 27th
month for a total amount of forty-thousand ($40,000.00) dollars. In the event
that the New Territories property is sold within the 27th month
period, then LAM will pay to CHAN a sum of ten thousand ($10,000.00) dollars as
prepayment of the monthly payments owing. LAM further agrees to maintain
medical and dental coverage for the son of CHAN, Ben CHAN, and the parties
acknowledge that LAM has not acted in LOCO PARENTIS to BEN CHAN.
(a) each has considered his or her prospects
now and for the future and his or her future financial security, whatever
circumstances, catastrophic or otherwise, may arise in the future, including
possible career reversals, the lack of employment opportunities, the
contingencies of life including illness and disability, adverse economic
circumstances such as rising costs and inflation, and the mismanagement of
funds by themselves or others; and,
[. . .]
9. MATRIMONIAL HOME:
The husband and the wife currently reside at 3139
Bartholomew Crescent, Mississauga, which home is in the name of CHAN and was
always considered her home. They acknowledge that LAM paid $15,000.00 to
renovate the kitchen and put in a new bathroom. LAM paid to CHAN $2,000.00
monthly for a two year period as his contribution to household expenses
including food, utilities and mortgage payments. CHAN acknowledges that the
down payment for the New Territories property was funded from the proceeds of the sale of LAM’s
Terraghar property. LAM releases any claim he may have for an interest in 3139 Bartholomew Crescent. As consideration
for same, CHAN agrees to sign over her alleged interest in Flat F. 22nd
Floor, Tower 5, Monterey Cove, No.2 Kin Tung Road, Caribbean Coast, Tung Chung,
Lantau Island, New Territories by executing any and all documents required to
transfer sole ownership in the same to LAM.
[. . .]
28. PERSONAL REPRESENTATIVES BOUND:
Unless otherwise expressly provided herein, this
Agreement and every covenant, provision and term herein contained shall ensure
to the benefit of and be binding upon the husband and the wife and each of them
and their respective heirs, executors and administrators.
[3]
In 2007 and 2008, the Appellant
deducted $16,500 and $18,000, respectively, for amounts paid under subparagraph
7(2) of the Separation Agreement. The Appellant testified that it was the
parties’ intention that these amounts would be deductible. Further, it was his
understanding that because the Separation Agreement provided for monthly
payments to his former common law partner of amounts to be used at her
discretion, they fell within the definition of “support amount” under subsection
56.1(4) of the Act:
“support amount” means an amount payable or
receivable as an allowance on a periodic basis for the maintenance of the
recipient, … if the recipient has discretion as to the use of the amount,
and
(a) the recipient is the … 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 … a written agreement; or
[…]
[4]
While conceding that the amounts
were “periodic payments” and that the Appellant’s former common law partner had
discretionary use of them, the Minister contended they did not constitute a
“support amount” because they were not “for the maintenance” of the former
common law partner as required by subsection 56.1(4). Rather, pursuant to subparagraphs
7(1) and (2) of the Separation Agreement, the monthly payments were paid by the
Appellant to secure his release from any obligation to pay support or
maintenance to her. As such, the payments were periodic payments made as
installments of the capital sum of $40,000 which the Appellant had agreed to
pay under subparagraph 7(2) of the Separation Agreement.
[5]
In distinguishing between periodic
payments made as a maintenance allowance and as a capital sum, the Minister
relied on the considerations set out in the Federal Court of Appeal decision, McKimmon
v. Minister of National Revenue, [1990] 1 C.T.C. 109 at paragraphs 11-18.
Ms. Caterina, the student-at-law who argued the Respondent’s case, made a
thorough review of the criteria and their application to the Appellant’s case.
I am persuaded by her argument that on the evidence in the present matter,
factors 4, 7 and 8 of the McKimmon test lead to the conclusion that the
payments made under the Separation Agreement were installments on a capital
amount rather than an allowance for maintenance. In these circumstances, the
amounts claimed in 2007 and 2008 are not deductible.
[6]
I regret this conclusion because I
have no reason to doubt the Appellant’s testimony that he always intended the
amounts to be deductible. Unfortunately for the Appellant, it is not his
intention but his ability to satisfy the requirements of the Act which
must determine the deductibility of the payments. Blocking his ability to do so
is the clear wording of the Separation Agreement.
[7]
Subparagraphs 7(1) and (2) are
unambiguous in their description of the $40,000 as an amount, payable in
monthly installments, to release the Appellant from any future obligations to
pay maintenance (factor 8, McKimmon).
[8]
Under subparagraph 7(2), the
Appellant’s obligation to pay could be accelerated in the event he sold a
certain property prior to the expiry of the 27-month payment period (factor 4, McKimmon).
I do not agree with the Appellant’s submission that paragraph 9 of the
Separation Agreement can be read as diminishing the effect of these provisions.
[9]
Finally, paragraph 28 of the
Separation Agreement provided that the Appellant’s obligation to make the
payments was to survive the death of his former common law partner (factor 7, McKimmon).
The Appellant indicated that he was not even aware of this provision and further,
that he suspected the Separation Agreement was simply a standard-form template
used by the real estate lawyer who prepared it. He also said that
notwithstanding his lawyer’s certificate of disclosure attached to the
Separation Agreement, at the time of its execution, he did not appreciate the
tax consequences it might have. Unfortunately, the Separation Agreement is a
valid agreement and as such, must be taken as representing the intentions of
the parties.
[10]
In my view, the factors considered
above outweigh the others in the McKimmon criteria which favour the
Appellant’s argument that the monthly payments constituted a support amount. In
these circumstances, the appeals of the 2007 and 2008 taxation years must be
dismissed.
Signed at Ottawa, Canada, this 15th
day of February 2012.
“G. A. Sheridan”
Email this Content