http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/108100/index.do 
McBride v. The Queen (February 16, 2015 – 2015 TCC 31, Owen J.).
Précis: Ms. McBride received $13,964 in monthly payments from her ex-husband in 2012. The payments were made pursuant to an Order of the Ontario Superior Court requiring the ex-husband to “pay non-variable and non-taxable spousal support to the Applicant in the amount of $1,163.70” on a monthly basis for 48 months. Ms McBride, who was self-represented, argued that the payments were the aggregate of a non-taxable equalization payment (payable under the express terms of their Separation Agreement) and repayment of the ex-husband’s share of the family debt, payable over time to ease compliance by her ex-husband. The Crown argued that the payments were clearly labelled “support” and, as such, taxable. The Tax Court agreed with the Crown. The fact that the Superior Court had labelled the payments as “non-taxable spousal support” did not have the effect of relieving the amounts from taxation.
Decision: At issue was the taxability of 12 monthly payments received by Ms. McBride in 2012:
[1] This is an appeal by Cathryn McBride of a reassessment of her 2012 taxation year by a notice of reassessment dated March 6, 2014. The reassessment included in Ms. McBride’s income the amount of $13,964 on the basis that this amount was a “support amount”, as defined in subsection 56.1(4) of the Income Tax Act (the “ITA”), received by Ms. McBride during 2012. The $13,964 in issue comprised 12 monthly payments each in the amount of $1,163.70.
Under their Separation Agreement her ex-husband had agreed to make an equalization payment to her:
[6] The copy of the Separation Agreement provided by both parties was signed by the ex-husband but not by Ms. McBride. Ms. McBride testified that she also signed the agreement. Section 3 of the Separation Agreement states:
Upon the completion of the sale of the matrimonial home, Eric will make an equalization payment to Cathryn of $38,995.89 from his proceeds of the sale.
He defaulted on that obligation and she took him to court claiming, inter alia, the enforcement of the equalization claim. She obtained an Order which read, in part, as follows:
3. The Respondent shall pay non-variable and non-taxable spousal support to the Applicant in the amount of $685.58 per month for a period of 48 months commencing October 1, 2010 to and including September 1, 2014.
4. The Respondent shall maintain a life insurance policy or policies having a face amount of at least $35,000.00 naming the Applicant as irrevocable beneficiary as long as he is required to pay support to the Applicant. The Respondent shall provide the Applicant’s solicitor with proof of such coverage within 14 days by October 8, 2010. If the Respondent dies without the life insurance required by this provision in effect, his obligation to support the Applicant shall be a first charge against his estate.
He again defaulted and she took contempt proceedings against him. He was found in contempt and the court made an Order which read, in part:
1. The Respondent shall pay non-variable and non-taxable spousal support to the Applicant in the amount of $1,163.70 commencing October 1, 2010 for a period of 48 months, to and including September 1, 2014, and the Order of September 28, 2010 is so varied.
2. The Respondent shall continue to maintain the Applicant as a beneficiary of his group benefits life insurance policy to the extent of $35,000.00 coverage. In the event that the policy is no longer available to him he shall obtain a replacement policy for the same amount of coverage and provide proof of the new coverage within 20 days of losing his existing policy.
3. If the Respondent dies without this insurance in place any spousal support payments remaining due under this Order shall be a first charge on his estate.
The difference between amount of the monthly payments in the two orders was to account for family debt:
[22] The New Order addresses the ex-husband’s share of the family debt by increasing the monthly payments to Ms. McBride from $685.58 to $1,163.70. The increase of $478 is equal to one-half of the amount of the Scotiabank debt identified in paragraph 21 of the Endorsement divided by 48. The approach of adding the ex-husband’s share of the family debt to the spousal support payments is consistent with the general approach identified in the last paragraph of the Endorsement.
Ms. McBride’s position was straightforward – the Order spread the equalization payment and the ex-husband’s share of family debt over 48 equal payments:
[24] The Appellant argued that the 48 monthly payments required by paragraph 1 of the New Order were simply another way of paying the equalization payment and her ex-husband’s share of the family debt. She submitted that the two orders must be read in their entirety and that, in substance, the New Order was providing for the payment of these two amounts over time. The Appellant further submitted that, if paid as a lump sum, the equalization payment and the ex-husband’s share of the family debt would not be taxable in her hands and that the payment of these amounts over time should be treated no differently. The Appellant argued that the statement in both orders that the monthly payments were “non-variable and non-taxable” was intended to reflect this fact.
The Crown, on the other hand, argued that the language used was “support”, the sum of the payments did not match the original equalization payment and family debt, and the Ontario Superior Court could not declare support payments to be non-taxable.
The Tax Court Judge highlighted the point about the discrepancy in amounts:
[33] The Minutes of Settlement further indicate that the monthly spousal support payments were to be made instead of an equalization payment. This is made clear by paragraph 4 in which the parties release and discharge each other from “any entitlement to an equalization payment”. This interpretation is also supported by the fact that the total amounts do not match: the equalization payment payable under the Separation Agreement is $31,821.67 (i.e., $38,995.89 less one-half of $14,348.45) while the sum of the monthly payments under the Order is $32,907.84. Ms. McBride was not able to explain the reason for this difference.
It is perhaps worth noting that this discrepancy is just slightly over $1,000, or roughly $23 per month.
In the end the Court did not accept Ms. McBride’s position:
[35] I have concluded from the totality of the evidence that the parties accepted the Court’s suggestion that the ex-husband’s share of the family debt should be paid in the form of additional support payments. No doubt, Ms. McBride did not take issue with this because the payments were described in the Minutes of Settlement and in the two orders as “non-taxable”.
[36] The monthly payments made to Ms. McBride in 2012 in accordance with paragraph 1 of the New Order fall squarely within the definition of “support amount” in subsection 56.1(4) of the ITA. The payments were to be made monthly (i.e., on a periodic basis) to Ms. McBride. The New Order describes the payments as “spousal support” and there are no restrictions on the use of the payments, which factors together imply that the payments were an allowance for the maintenance of Ms. McBride and were not for some other, specific purpose. The payments were made to Ms. McBride by her former spouse pursuant to an order of the Superior Court of Justice. Ms. McBride received the payments while she was living separate and apart from her former spouse because of a breakdown of their marriage. I also note that the payments were made through, and enforced by, the Director of the Family Responsibility Office, and the report from that office dated August 11, 2014 describes each payment as an “Amount of recurring support obligation under a court order or contract”.
[37] The orders of the Superior Court of Justice do say that the monthly spousal support payments are non-taxable but such a statement is not determinative of the status of the payments under the ITA as taxable or non-taxable receipts. In Bates v. The Queen, supra, the Tax Court of Canada referred to an earlier judgment of the Federal Court, Trial Division (as it then was) and then stated, at paragraph 13:
In my view, Jerome, A.C.J. has correctly summarized the law when he states that the liability for tax does not spring from a separation agreement or a Court Order. The liability for tax is determined by the provisions of the Income Tax Act and, more particularly, by section 56.
In the result the Court dismissed Ms. McBride’s appeal, but without costs.
Comment: This decision is odd. The equalization payment and the payment of the ex-husband’s share of the family debt would not have been taxable receipts. The Tax Court accepted that the larger monthly payment in the second Order was to pay, dollar for dollar, the family debt. What would be the possible logic for the Ontario Superior Court to order the debt paid by means of taxable receipts? The use of the insurance policy to secure the payment of $35,000 strongly suggests that these monthly payments were in fact to pay down debts in installments, i.e., the aggregate of the equalization debt and the ex-husband’s share of the family debt. If there had been some sort of agreement to exchange the ex-husband’s debt obligations for support obligations would there not have been some form of gross up for taxes? The $1,000 increase in the second Order could hardly be a tax gross up although it might be seen as a proxy for interest.
The unfortunate use of the word “support” should no more render payment of a debt taxable than the Superior Court’s use of the word “non-taxable” should immunize amounts from taxation.