Berty v. The Queen – Agreements to Pay Spousal Support from Contingent Bonuses not “Periodic” and Hence not Deductible

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The decision in Berty v. The Queen[1] (June 25, 2013) is another example of the complexity surrounding the ITA’s provisions dealing with child and spousal support.  The taxpayer had entered into a separation agreement in 2009 under the terms of which he agreed to pay 50% of any bonus received from his employer:

Lump Sum Child and Spousal Support Payments

7.1      Fifty percent (50%), net of income tax, of any bonus income received by the husband shall be paid to the wife as lump sum child and spousal support[2] (called “bonus payment”). Bonus income may include, but is not limited to, incentive pay and the exercise or redemption of stock options after the Separation Date. These payments will continue for as long as the husband is required to pay child and/or spousal support. The bonus payment based shall be made within seven (7) days of the husband receiving a payment of bonus income. Interest shall run on any outstanding payments, in accordance with the Courts of Justice Act.

He paid 50% of his 2010 bonus and claimed a deduction of $11,739 with respect to his 2010 taxation year.  The Minister denied the deduction and that was the subject of this appeal.

The evidence was that the taxpayer had received bonuses in every taxation year since the mid 1990’s and the likelihood of his receiving no bonus was remote:

[11]        The appellant also testified that:

1)               he has received a bonus every year since SunLife commenced that practice in the mid 1990’s, on the basis of both the employee’s and SunLife’s performance (Transcript, p. 10);

2)               there was no written contract defining the features of the bonus. That practice, according to the appellant, was standard in the insurance industry (Transcript, p. 11). He added that the bonus was normally paid at the end of February or early March;

3)               since there was some risk “that it wouldn’t have been paid”, the bonus was a “variable amount” that was not included in the monthly amounts, so as not to cause financial difficulty before it became available.

This evidence, however, was not sufficient for the Tax Court judge:

[21]        Since the evidence reveals that there is no guarantee that the bonus will be paid in any given year (although, as per the appellant’s submissions, the risk seems fairly remote), I am of the opinion that the support payment of $11,739 made in relation to the appellant’s bonus does not meet the definition of “periodic” based on the McKimmon factors, as “periodic” means “at a regular interval”. In other words, the payments to be made under 7.1 of the Agreement cannot be qualified as periodic since there is a possibility that the appellant will not be paid a bonus every year. I also want to point out that the decision in McKimmon refers to the fact that payments made at intervals of more than one year could not be conceived as an allowance for maintenance.

The McKimmon case referred to above is a decision of the Federal Court of Appeal.[3]  That decision does not specifically deal with the case of an absolute obligation to pay amounts which are periodic but contingent. 

Let us take the case of a spouse who is obliged to pay 50% of the dividends paid annually on his or her stock portfolio to a former spouse (which portfolio, for the purposes of this example, we will assume consists of a defined amount and mix of shares).  There is a theoretical possibility that no dividends would be paid in any given year, but statistically that possibility can be demonstrated to be extremely remote.  It seems difficult to justify denying the deduction of spousal support on the basis of lack of periodicity.

Taxpayers would benefit from the Federal Court of Appeal examining the application of the reasoning in McKimmon to contingent periodic payments such as those at issue in Berty.

[1] 2013 TCC 202.

[2] The failure of the agreement to allocate a specific portion of the payment to the former spouse was also possibly fatal to the taxpayer’s claim but the author believes that the more interesting issue is “periodicity”.

[3] Queen v. McKimmon, [1990] 1 C.T.C. 109 (FCA).