Cullen, J.:—This is an appeal by way of statement of claim against a notice of reassessment for the plaintiff's 1981, 1982 and 1983 taxation years. The appeal concerns whether certain annual payments made by the plaintiff to his former spouse of $10,000, $10,000, and $5,000 in 1981, 1982 and 1983 respectively were deductible as alimony by virtue of subsection 60(b) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").
Facts
The plaintiff is an orthodontist residing in Winnipeg. The plaintiff married Naomi Cohen in 1959, and separated from her in 1979. The plaintiff entered into a written separation agreement with Naomi Cohen on October 31, 1980. The relevant provisions of the agreement are reproduced below:
7. Maintenance—The husband shall pay to the wife as maintenance for herself the sum of $1,500 per month from November 1, 1980 until November 1, 1982.
Additionally, the husband shall pay to the wife as maintenance the sum of $25,000 in the following instalments:
(i) $10,000 on November 1, 1981
(ii) $10,000 on November 1, 1982
(iii) $5,000 on November 1, 1983
Provided that the aforesaid maintenance instalments shall be paid to the wife regardless of her marital status and that in the event the husband should die prior to the termination date of the aforesaid maintenance instalments, his estate will assume the husband's responsibilities and obligations as above set forth in respect of the said maintenance instalments to the wife.
Subsequent to the payment of the aforesaid maintenance and in consideration of the said payments ana in consideration for the husband transferring to his wife his interest in the marital home, the wife waives all future rights to maintenance, support or alimony from the husband for herself.
9. Cost of Living Increase—The maintenance payable to the wife under this agreement shall increase yearly relative to the cost of living index as established by Statistics Canada or by 10%, whichever is less. The first increase shall occur on November 1, 1981 and yearly thereafter on November 1st.
14. Final Agreement—The husband and wife agree that this agreement has been entered into in contemplation of dissolution of the marriage and as a final property settlement as a result thereof and the parties further agree that each has been fully advised of the estate and assets of the other and each has had independent legal advice. They are aware that this is a final agreement and that no further claims Will be made against either party by the other arising from the marriage or the dissolution thereof. Both parties have been made aware of the possibilities of fluctuation of their respective income and assets and are cognizant of the possible increases and decreases in the cost of living and each are prepared to accept the terms of this agreement as a full and final settlement and waive all further claims as set out herein save and except those arising under the agreement.
All the payments were made in accordance with the provisions of the agreement.
In filing his income tax returns for the taxation years 1981, 1982 and 1983, the plaintiff deducted from his income the amounts of $10,000, $10,000 and $5,000 respectively as maintenance payments to Naomi Cohen. The Minister of National Revenue allowed these deductions in the years in which they were made. However, Naomi Cohen did not report these amounts as income in her tax return for the years in question. The Minister determined that the payments should have been included in Naomi Cohen's income in accordance with paragraph 56(1)(b) of the Act as alimony or as other allowance payable on a periodic basis for her maintenance. Naomi Cohen appealed this determination successfully to the Tax Court of Canada. In a decision reported at [1987] 1 C.T.C. 2306; 87 D.T.C. 246, the Tax Court held that in the context of the separation agreement, the payments in question were instalments of a lump sum maintenance award, and not an allowance within the meaning of paragraph 56(1)(b) of the Act.
By notice of reassessment dated July 31, 1987, the Minister reassessed the plaintiff in respect of the 1981, 1982 and 1983 taxation years, and disallowed the purported maintenance deductions on the grounds that the amounts paid by the plaintiff in those years were not paid pursuant to a decree, order, or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the plaintiff's spouse within the meaning of subsection 60(b) of the Act. The plaintiff objected by notice of objection, and by notice of confirmation dated February 22, 1988, the reassessments were confirmed by the Minister.
The plaintiff appeals to the Federal Court of Canada.
Position of the Plaintiff
The plaintiff's position is that the payments in question were paid for the maintenance of Naomi Cohen, and that the payments were in the nature of an allowance payable on a periodic basis made pursuant to a written separation agreement, and that at the time of the payment the plaintiff was living apart from Naomi Cohen. He submits that the payments meet all the requirements of subsection 60(b) of the Act and should therefore be considered deductible.
The plaintiff also submits that as the Minister initially allowed the deduction and took the position before the Tax Court proceedings involving Naomi Cohen that the payments should be included in her income (and conversely deductible to the payer), the Minister should now be estopped from taking the position that payments to Naomi Cohen are not deductible under subsection 60(b).
Position of the Defendant
The position of the Crown is that the intention of the plaintiff's spouse in the course of the separation negotiations was to obtain a lump sum payment that would not be subject to income tax, in order to provide her with some long-term security beyond the limited periodic maintenance she was to receive. It submits that the lump sum was made payable in three instalments in order to accommodate the plaintiff, who was experiencing financial difficulty at the time. The lump sum payment accordingly was not periodic and not an allowance and thus did not meet the requirements of subsection 60(b).
The Crown also points to provisions of the separation agreement that accord different treatment to the instalment payments than to the periodic maintenance. The obligation to pay the instalments was not terminated by the death of the plaintiff, in which case his estate would continue to pay the required instalments. The periodic maintenance payments were to be increased annually to reflect increases in the cost of living, while the instalment payments were to remain the same. Also, the Crown relies on the provision in the agreement that payment of the monthly maintenance and the instalments would constitute a full and final settlement of Naomi Cohen's marital rights, and thus, rather than being a periodic payment or allowance, was rather a capital payment resulting from the division of property and the settlement of all claims.
The Case at Hand
Witnesses for the plaintiff were Mr. Ernest Cohen himself and Mr. George Orle who represented the plaintiff during the separation negotiations. For the defendant we heard from Naomi Cohen, the plaintiff's former wife and Alan Maclnnes, the lawyer who represented Mrs. Cohen during the separation negotiations.
Doctor and Mrs. Cohen were married on September 26, 1959 and there were two children of the marriage, a daughter born in 1963 and a son born in 1966. This couple separated on December 31, 1979 and a separation agreement dated October 31, 1980 was signed by them. From the evidence it is clear this was an amicable separation and when they initially separated (Doctor's evidence at page 55 of transcript):
A. Well, she agreed not to run up big bills and I agreed to pay for them. Whatever she—I agreed to pay for her maintenance and the children.
Q. Was there any fixed cash amount agreed to?
A. I don't think so.
At the time this couple were married the wife was 19 and the husband was 26. Immediately following the separation the husband and wife endeavoured to make some arrangements without involving lawyers and when they weren't getting anywhere doing things on their own, Mrs. Cohen retained Mr. Alan Maclnnes (Maclnnes). Even after counsel were retained by both parties they continued to meet to endeavour to arrange some kind of settlement or at least agree on amounts to be paid. The $25,000 figure which is the subject of this action was negotiated and was a compromise between the parties.
At the time of the separation, and for that matter during the course of the marriage, Mrs. Cohen did not work outside the home save and except for teaching some yoga at a local high school. Mrs. Cohen also received a small amount of money as a result of an investment made by her father. Mrs. Cohen laughingly commented that she did the payroll at her husband's orthodontic practice but that primarily was a cheque-signing task and she received some sort of remuneration for that. Her yoga activities netted somewhere between $1,000 and $1,800 a year and it wasn't full employment but represented about three sessions a year. Consequently, at the time of the separation Mrs. Cohen was not really trained for work in the business world and frankly conceded that she knew very little about income or income taxes.
Once legal representation was secured by each of the parties negotiations got under way to determine what benefits should accrue to Mrs. Cohen and what, therefore, should be incorporated into a separation agreement. After meeting with their clients the two counsel exchanged views on what form the separation agreement should take. Maclnnes produced a memorandum in his own handwriting which indicated to him that he either met with or spoke by telephone with George Orle on April 2, 1980 and the memo, "generally would be the content of my discussion” (page 137 of transcript). As described by Maclnnes at page 136 of the transcript:
On . . . April 2, I guess, 1980 I have a document headed "Orle", "$2,750.00—two years. 1,375, 1,375 to kids,” and then "$50,000.00—lump sum, $26,000.00—loan. He’ll see whether paid. Equity in house or maintain house and pay $75,000.00 lump sum. Space out lump sum payments if necessary."
At page 138 of the transcript the question was put:
Q. Now, there are the words "lump sum" on that page but no amount. Can you tell me what Mrs. Cohen's position was in the negotiations as of that date?
A. No, I can't.
However, Maclnnes' evidence is that he had had a meeting with Mr. Fagus, Mrs. Cohen's financial adviser, and he had heard from Mrs. Cohen that Fagus had suggested a $50,000 cash lump sum. All of this was very preliminary on or about February 1, 1980 and at that time Maclnnes had not received any instructions about how to proceed but was simply giving him information that she had secured from Fagus. There was, however, no question that as of April 2, 1980, Mrs. Cohen was looking at a $50,000 lump sum in addition to other benefits. In a later memo of May 2, 1980, written again by Maclnnes, he states: "She still wants lump sum of $50,000 and house.”
There was an exchange of correspondence between the solicitors and on June 12 Maclnnes has another memorandum to file in his own handwriting reading:
June 12, 1980 spoke to Mrs. Cohen. Told her of discussion. Only real issue is lump sum. Told her of my discussion with Orle as to manner in which payment could be made. His giving us the house is really only the equivalent of equalizing division of marital assets. Told her lump sum arguable but should stick to our demand for it.
And then Maclnnes had a further memo to file, again handwritten, and again dated June 12, 1980, to which he refers at page 142 of the transcript as follows:
George Orle and me. "Transfer of home", reference to periodic maintenance, reference to furnishings, and then, "Told him that we'd spread lump sum by way of monthly payments and then instalments”.
Orle wrote a letter to Maclnnes dated June 27, 1980 (Exhibit 1, page 107) and made reference to the meeting of June 12. In that letter Orle makes reference to Dr. Cohen paying Mrs. Cohen the sum of $25,000 cash, referred to as a lump sum by Orle. At page 144 of the transcript we have this exchange dealing with the June 27 letter:
Q. And then in the second paragraph of page 2—
A. It talks about periodic payments, or periodic maintenance, rather, in the second paragraph of page 2. And that was certainly consistent with what we were discussing, that is, both a lump sum and periodic maintenance.
This letter of June 27 is really an initial proposal but it comes from Dr. Cohen and it provides that the house be sold and the equity of about $100,000 be divided between them, that the Transcona building, a property in which Dr. Cohen had an interest, be sold and the net proceeds be divided, and then this phrase, ” Dr. Cohen from his share of the net proceeds will pay to Mrs. Cohen the sum of $25,000 cash in addition to this lump sum cash payment." Following these three proposals from Dr. Cohen, reference is made to something that they treat as entirely different and I quote: ” Insofar as monthly maintenance is concerned Dr. Cohen is of the opinion that the $2,750 per month requested by your client is more than he can afford." Thus, in this letter there is a clear distinction between maintenance payments and a lump sum cash payment. I think it is fair to say that counsel for the defendant had it right when he said at page 220 of the transcript:
Now, obviously what she would be looking for when the marriage was over was a roof over her head. She would be looking for some income, monthly income, to support herself and her children, and she would be looking for something in recognition of having spent twenty years in that marriage. As Mr. Macinnes said in his cross-examination this morning, something over and above straight equalization of assets was in order in this case because she had been in that marriage for twenty years.
Throughout the negotiations Dr. Cohen paid very little attention to that which his lawyer was telling him about his obligations on the breakdown of a marriage. Dr. Cohen was endeavouring to be fair and on balance, if his counsel is correct and I think he is, he ended up paying considerably more than might have been required under the provincial legislation. Throughout these negotiations, however, the components were always the house, the periodic maintenance, and the lump sum payment. Mrs. Cohen endeavoured to be accommodating and accept periodic payments of the lump sum because her husband was unable to borrow that money from the banks.
Issue
Are the payments in question maintenance within the meaning of subsection 60(b) of the Act and therefore deductible from the income of the plaintiff?
Analysis
Under subsections 60(b) and 60(c) of the Act, alimony payments are deductible by the person making them if certain conditions are met. These provisions read as follows:
60. There may be deducted in computing a taxpayer's income for a taxation year such of the following amounts as are applicable:
(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 allowance 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 to make the payment at the time the payment was made and throughout the remainder of the year.
In Klement v. The Queen, [1987] 2 C.T.C. 27; 87 D.T.C. 5284 (F.C.T.D.), the following criteria which must all be met in order for payments made to a spouse or former spouse to be deductible were set out at page 29 (D.T.C. 5285):
1. The amount must be paid pursuant to a decree, order, or judgment of a competent tribunal or pursuant to a written agreement;
2. The payment must be in the nature of alimony or other allowance "paid on a periodic basis”;
3. The amount must be paid to the taxpayer's spouse or former spouse;
4. The amount must be for the maintenance of the recipient, the children of the marriage or both;
5. The taxpayer must be living apart from the recipient at the time of the payment and throughout the remainder of the year;
6. The taxpayer must be separated from the recipient pursuant to a divorce, judicial separation or written separation agreement.
In the present case, the issue is whether the payment "was in the nature of alimony or other allowance paid on a periodic basis”, all the other requirements having been met. In determining whether the payment is made (a) periodically and (b) as alimony or an allowance, it is necessary to examine the nature of the payments in light of all the circumstances.
The interpretation of this requirement has been the subject of considerable litigation. It has been repeatedly established that money paid in a lump sum in settlement of future spousal obligations is not an allowance or a periodic payment: Larivière v. The Queen, [1986] 1 C.T.C. 206; 86 D.T.C. 6549 (F.C.T.D.); Gagné, G. v. M.N.R., [1982] C.T.C. 2655; 82 D.T.C. 1672 (T.R.B.); Pisony v. M.N.R., [1982] C.T.C. 2010; 82 D.T.C. 1023; Veliotis v. The Queen, [1974] C.T.C. 237; 74 D.T.C. 6190 (F.C.T.D.). While it is not conclusive of the issue, it has been held that administrative practices and interpretations may be of assistance and can be accorded weight: Harel v. D./M.R. (Quebec), [1978] 1 S.C.R. 851; [1977] C.T.C. 441; 77 D.T.C. 5438 at 448 (D.T.C. 5442; S.C.R. 859). The Minister of National Revenue, in Interpretation Bulletin IT-118R2, has determined that in general, instalment payments of a specified sum are not considered déductible:
Specified Sum Payable on a Periodic Basis
14. Where, under a court order or an agreement, a specified sum of money is to be paid and payment is required to be made in whole or in part by regular instalments, such regular instalments normally do not qualify under paragraph 60(b), (c) or (c.1) and are not income of the recipient.
Where Payments Excessive
15. Alimony or maintenance is generally a sum not in excess of an amount sufficient to maintain the recipient and or children in the style to which they were accustomed prior to the breakdown of the marriage or common-law union. Where the periodic payments are considerably in excess of maintenance requirements, there is a presumption that the whole amount is a payment of capital, regardless of the wording used in the agreement, if the payments are to made over a short time only.
As noted above, a lump sum payment does not meet the requirement that the payments be periodic in order to be deductible. However, lump sums payable by instalments, as in the present case, have been considered to be periodic in nature. It is a question of degree as to whether the instalment payments have been made on a regular basis, and that the entire context of the order or agreement pursuant to which the payments are made must be considered in making this determination. This is clear from the decision in M.N.R. v. Hansen, [1967] C.T.C. 440; 67 D.T.C. 5293 (Ex. Ct.). In this case the husband had agreed to pay the sum of $20,000 for the support and maintenance of his wife, of which $6,000 was payable immediately and $14,000 by monthly instalments of $100. The Court ruled that the monthly payments were deductible. Jackett, P. stated as follows at 446 (D.T.C. 5297):
Finally, I reject the contention that paragraph 7 provides for a “lump sum payment" of $20,000 and that the monthly payments in question are merely payments on account of that lump sum. Quite the contrary, in my view, paragraph 7 provides for a number of payments totalling $20,000 and the monthly payments in question are some of the payments so provided for. A reference to the words of the paragraph makes it quite clear. It says, "the Husband agrees to pay the Wife the sum of. . . $20,000 . . . as follows", and then it sets out the actual payments that are to be made. The real question is, of course, whether the payments are made pursuant to a provision for payment on a periodic basis and, in my view, paragraph 7(2), pursuant to which the payments in question were made, is precisely that.
[Emphasis added.]
It is significant that Jackett, P. seemed to base his decision on the fact that the payments were made periodically. He did not deal expressly with the fact that the payments would terminate, but seemed to be content to hold that section 7, considered in the context of the whole agreement, had the primary purpose of providing for the maintenance of the wife. Later cases were to examine other factors in order to determine if the payments were in substance alimony or a payment in consideration of the renunciation of marital rights.
The fact that the instalment payments in this case were not all for an equal amount does not necessarily mean that the payments cannot be considered to have been made on a periodic basis: No. 427 v. M.N.R. (1957), 17 Tax A.B.C. 264; 57 D.T.C. 291 (T.A.B.).
In McKimmon v. The Queen, [1986] 2 C.T.C. 2359; 86 D.T.C. 1752 (T.C.C.); revd [1988] 2 C.T.C. 71; 88 D.T.C. 6296 (F.C.T.D.); revd [1990] 1 C.T.C. 109; 90 D.T.C. 6088, the taxpayer was ordered pursuant to a decree nisi to pay his former wife lump sum maintenance of $130,000 and periodic maintenance of $115,000 in four annual instalments of $25,000 and a final instalment of $15,000. These payments were subject to interest, were secured by a mortgage on the taxpayer's company's property, and in the event of default the principal would be payable at the option of the recipient. The taxpayer attempted to deduct the payments, but the Minister disallowed the deductions. On appeal to the Tax Court, the assessment was upheld, the court holding that the payments were not deductible because they were granted to the wife in full and final satisfaction of all the claims against her husband. Once the payments were made, the taxpayer was released from any further liability to his former wife, and therefore the payments could not be regarded as periodic. On appeal to the Federal Court, Collier, J. allowed the taxpayer's appeal. He found, based on a construction of the decree nisi, that the primary purpose of the payments was to make arrangements for the support of the taxpayer's former wife, and that the payments were to recur at fixed times so as to constitute periodic payments. The fact that the decree nisi set out a specific sum to be paid did not, of itself, preclude a finding that the payments were periodic in nature.
In this case, it is considered significant by the Minister that the agreement provides that the instalment payments were to be paid to Naomi Cohen even in the event of the death of the plaintiff. There is authority that such a provision is inconsistent with the characterization of the payments as alimony. In Veliotis v. The Queen, supra, Pratte, J. quoted from the judgment of Cattanach, J. in M.N.R. v. Trottier, [1967] 2 Ex. C.R. 268; [1967] C.T.C. 28; 67 D.T.C. 5029, at 37 (D.T.C. 5034):
Alimony or maintenance continues through the joint lives of the husband and wife but terminates upon the death of either. If Mrs. Trottier had died during the currency of the second mortgage the payments under the second mortgage would continue to be payable to her assignee, if she had assigned it, and otherwise to her heirs, executors and administrators in accordance with a covenant in the indenture to that effect. It follows that the periodic payments cannot be classified as payments for maintenance.
In Pisony v. M.N.R., supra, the taxpayer agreed in a divorce settlement to pay his former wife $25,000 in instalments of $5,000 for five years. The taxpayer's attempt to deduct this amount as maintenance was disallowed by the Minister. The Tax Review Board upheld the assessment. Relying on Trottier, supra, the Board stated that there was nothing in the agreement to support a finding that the taxpayer was only obligated to pay the instalments during the joint lifetime of the former spouses. The Board also found, based on the wording of the agreement that the payment was a "once and for all maintenance award”, and "in full satisfaction of all her past, present and future claims for maintenance”, that the payment was more in the nature of a capital payment in discharge of the husband's obligation to the wife, rather than a continuing obligation for maintenance. The same argument was made in the present case by the Crown, based on the final settlement clause in the separation agreement.
A similar conclusion as to whether the payments were periodic or not, or should be characterized as a capital payment for the discharge of all marital rights was made in The Queen v. Dorion, [1981] C.T.C. 136; 81 D.T.C. 5111 (F.C.T.D.). The taxpayer was required to pay his wife the sum of $20,000 in five equal annual instalments. Décary, J. relied on a decision of the Quebec Court of Appeal in a related matter that the $20,000 represented payment in full of all amounts the wife could claim under the marriage contract. He stated as follows at 137 (D.T.C. 5112):
A payment of alimony or an allowance for maintenance is linked to the duration of the life of the creditor or debtor or to the period of time during which the alimony or allowance is necessary for the recipient and can be paid by the debtor. In such a case the alimony or allowance cannot be a total fixed amount payable by instalments up to the amount of $20,000 over a period of five years as in the case at bar, as the consideration for alimony or an allowance is the need of the creditor, whereas here the consideration is the waiver of benefits resulting from the marriage contract.
(See also Gagné v. M.N.R., supra.)
In Leclair v. M.N.R., [1982] C.T.C. 2715; 82 D.T.C. 1755 (T.R.B.), the taxpayer agreed to pay his former wife a lump sum of $17,000 over four years. The Board found that the payment was in substance alimony, as the evidence revealed that the purpose of the payments was to re-establish the former spouse in the workplace, and that this is often a factor in the negotiation of alimony settlements that are paid over a limited time. The Board noted that there were no other elements present in the agreement that would change the nature of the obligation from one of limited-time support to one inconsistent with its characterization as alimony, such as a clause that would make the payment of the amounts a debt owed by the estate of the husband.
Here, it is the wife's uncontradicted and credible evidence that she spent all of the money as and when it was received. There was no money used for tuition or fees on training or educational courses to enable her to become gainfully employed. Her first interview resulted in a job and she trained “on the job” so no fee or tuition was necessary.
Conclusion
Based on the foregoing, the payments by the plaintiff in this case are not alimony. While the payments appear to be periodic in the sense of being paid over a period of time, the agreement contains provisions that make the obligation to pay inconsistent with an allowance for maintenance, which is usually intended to be in the nature of a periodic allowance for the needs of the recipient spouse: Veliotis, supra. The obligation was designed to survive the parties, and the finality clause in the agreement is an acknowledgement of a capital payment in consideration of the renunciation of rights, although it is clearly not the only possible interpretation. It would have been useful for the plaintiff's case if there were evidence led that established that the payment was made to re-establish his former spouse as in Leclair, supra. Based on the construction of the agreement, the appeal is dismissed.
With respect to the argument that the Crown is estopped from arguing that the maintenance is not deductible because of its previous representations in the case of Naomi Cohen, the case of Gibbon v. The Queen, [1977] C.T.C. 334; 77 D.T.C. 5193, makes it clear that the Minister or other subordinate of the Crown cannot by any conduct or representation bar the Crown from enforcing a statute where there had previously been a failure to apply the law. Estoppel cannot override the law of the land.
Accordingly the action will be dismissed with costs to the defendant.
Appeal dismissed.