Cho v. Cho

[Indexed as: Cho v. Cho]

56 O.R. (3d) 150

[2001] O.J. No. 3871

Docket No. C34231

Court of Appeal for Ontario

Osborne A.C.J.O., Finlayson and Weiler JJ.A.

October 5, 2001

Family law -- Support -- Arrears -- Wife claimed that support arrears totalled at least $50,000 over 11-year period -- Trial judge fixed arrears at $15,000 -- Tax consequences were major consideration in trial judge's refusal to enforce arrears in their entirety -- Trial judge erred in reducing support arrears on basis that wife did not pay tax on support payments and in concluding that wife would receive windfall if transfer of matrimonial home were ordered in satisfaction of arrears -- Payment of arrears out of husband's share of matrimonial home was subject to being reported as income by wife and was deductible by husband -- Wife did not acquiesce in non-payment of arrears and husband did not alter his position based on wife's delay in seeking to enforce arrears -- Arrears of support should be enforced to extent of $50,000.

The trial judge fixed support arrears owing by the husband at $15,000. In reaching that conclusion, she noted that most of the payments were received by the wife tax-free and that the wife would receive a windfall if the matrimonial home were to be transferred in satisfaction of arrears. The wife appealed, submitting that the arrears totalled at least $50,000 over an 11-year period.

Held, the appeal should be allowed.

The trial judge erred in concluding that the wife did not pay tax on support payments. In any event, whether she did or did not report most of the support payments as income was not a proper basis on which to reduce the support arrears in this case. There was no evidence as to the husband's tax rate, nor with respect to the prejudicial effect on his tax position. The matrimonial home had been listed for sale. It was likely that, in this case, the payment of arrears of support out of the husband's share of the proceeds of the matrimonial home would be taxable in the hands of the wife. In general, periodic payments that fall into arrears and then are accumulated and paid in lump sum are still deductible in the hands of the payer and taxable in the hands of the recipient. Where the court reduces the amount of arrears owing, the nature of the debtor's liability is not changed, it is simply reduced, and the payment remains deductible in the hands of the payer and taxable in the hands of the recipient. This was not a case where a lesser amount of arrears is paid for a release of future obligations. The payment of arrears out of the husband's share of the matrimonial home was subject to being reported as income by the wife. The wife, therefore, would not receive a "windfall" if arrears of support were enforced.

Delay in enforcing the claim was not a factor favouring the husband in this case. Although the wife did not enforce support arrears until 1999, she made two unsuccessful early attempts at enforcement. She did not acquiesce in the non-payment of arrears, and there was no evidence that the husband altered his position based on her delay in seeking to enforce the arrears. The arrears should be enforced to the extent of $50,000 to be paid out of the husband's share of the proceeds of the matrimonial home.

APPEAL from an order fixing arrears of support owed by a husband.

Gibson v. R. (1994), 1994 CanLII 18246 (TCC), 95 D.T.C. 749, 5 R.F.L. (4th) 209 (T.C.C.), apld Other cases referred to M. (K.) v. M. (H.), 1992 CanLII 31 (SCC), [1992] 3 S.C.R. 6, 96 D.L.R. (4th) 289, 142 N.R. 321, 14 C.C.L.T. (2d) 1; MacDonald v. M.N.R. (1968), Tax A.B.C. 1271; R. v. Sills (1984), 1984 CanLII 5347 (FCA), [1985] 2 F.C. 200, 85 D.T.C. 5096 (C.A.), revg (1982), 83 D.T.C. 5070 (F.C.T.D.); Soldera v. M.N.R. (1991), 91 D.T.C. 987 (T.C.C.)

T. Michele O'Connor, for appellant. Alan F.N. Poole, Q.C., for respondent.

The judgment of the court was delivered by

Background

1WEILER J.A.: -- The appellant appeals the order fixing the arrears of support owing by the respondent at $15,000. The appellant submits that the arrears total at least $50,000 from February 24, 1988 to the date of trial in November 1999, a period of over 11 years. In addition, the appellant claims interest of $27,240.

2The appellant submits that, in fixing the amount of arrears of spousal and child support at $15,000, the trial judge made several factual errors that affected her decision as to the appropriate amount.

3The trial judge's findings with respect to the arrears of support are summarized at para. 24 of her reasons:

I do not accept the arrears as calculated by Mrs. Cho. I do not believe that all of the payments made by Mr. Cho were credited. The list of arrears was reconstructed long after the fact. Mrs. Cho was working for part of the time that the arrears were accruing. For part of the time, Mr. Cho was not working. She was reassessed for income tax purposes and required to include one year of support in her income. The rest of the payments were received tax-free. Another issue is the taxability of the arrears. Even if I accepted the arrears she claims, were I to transfer the home in satisfaction of the arrears, she would receive a windfall. The support order predated the child support guidelines and the payments would have been taxable. The matrimonial home is a tax-free asset. The windfall would be the tax on the support.

Analysis

4The trial judge's findings and our conclusions with respect to these findings are as follows:

Credit for Payments

(1) The appellant did not give credit to the respondent for all the payments he made.

5At trial, the respondent questioned four payments totalling $2,500. The appellant admits that one support payment of $850 made on March 31, 1992 was not credited. The other three amounts were clarified and in any event would not reduce the amount of arrears below $50,000.

Reconstruction of Arrears

(2) The arrears were reconstructed long after the fact.

6The parties were married in South Korea in 1969 and separated in 1985. From the time the parties separated in 1985 until February 1988, the respondent voluntarily supported the children. He would give an envelope with cash in it of varying amounts to his children, Walter and Stella, when he saw them. He kept careful records of every expense he paid and every payment he made to them during this time, and produced these records at trial.

7After an argument with Walter in 1987, the respondent had no further direct or indirect contact with Walter, Stella or the appellant. Consequently, he made no further payments by giving an envelope of money to the children or buying things for them. Instead, he began to make direct bank deposits into the bank accounts of the children. In October 1987, the respondent issued a petition for divorce and the appellant filed an answer and counter petition seeking corollary relief. In February 1988, Master Cork made an interim order of support in favour of the appellant as well as Walter and Stella, in the amount of $1,200 per month. The respondent continued to make direct bank deposits into the bank accounts of the children in an amount that was less than the $1,200 per month he had been ordered to pay. In August 1995, the respondent stopped depositing money into Walter's bank account. The respondent paid $900 a month by money order into Stella's bank account. The pass books showing the deposits were produced at trial. The respondent made no other payments.

8In August 1996, on his lawyer's advice and out of concern that he would lose the income tax deductibility of his support payments, the respondent began to send monthly money orders of $900 directly to the appellant. This continued until October 1998, when the respondent discontinued his petition for divorce and issued a statement of claim for partition and sale of the matrimonial home. He made no payments from October 1998 until March 1999.

9The appellant issued a new petition for divorce and corollary relief and, in March 1999, Madam Justice Himel ordered the respondent to pay interim support of $2,000 a month. That order was subsequently varied to $1,500. After Justice Himel's order, the respondent made one payment directly to the appellant. Thereafter, all support payments were enforced through the Family Responsibility Office ("F.R.O.").

10The F.R.O. Director's statement of arrears of October 6, 1999 shows arrears of over $50,000. The Director's statement was made an exhibit at trial. Having regard to the fact that no arrears accrued while the respondent was voluntarily giving envelopes of money to the children, the evidence of direct deposit into the children's bank accounts until 1996, and the fact there is no dispute concerning the arrears after 1996, the trial judge erred in concluding that the arrears were reconstructed long after the fact.

Employment of Appellant

(3) Mrs. Cho was working for part of the time that the arrears were accruing.

11The appellant worked for part of the time the arrears were accruing. She worked six years as a mail clerk for McCarthy Tétrault and, during this time, her salary ranged from $12,000 to $19,000. She then worked on a part-time basis at a legal copy store and subsequently performed relatively low-level clerical work on a freelance basis. The respondent did not, however, bring an application to vary the applicable order of support. Having no contact with the appellant or the children, he was unaware that the appellant was working.

12The fact that the wife worked part-time would properly have been a factor for the trial judge to consider in deciding whether or not to enforce the arrears claimed and the interest of over $20,000 claimed on those arrears, as this evidence goes to whether there has been a material change in circumstances warranting the remission of all or part of the accumulated arrears.

Employment of Respondent

(4) For part of the time the husband was not working.

13The respondent went through a period of depression and did not work for six months. It is not disputed, however, that there was no period between the time the order was made in February 1988 and the trial in October 1999 when the respondent was not receiving his full salary from York University. His annual income increased from $40,000 in 1988 to $66,000 in 1999.

14Because the respondent had no interruption in his earnings, the fact that he did not work for part of the time was not a reason to refuse to enforce the arrears. The respondent had the ability to pay the support ordered.

Tax Consequences

(5) The support payments received were tax-free apart from one year when the wife was reassessed.

15With respect to the issue of income tax, the respondent's factum did not dispute para. 21 of the appellant's factum. That paragraph states:

The Appellant declared the support payments and the Respondent claimed the corresponding deductions every year from 1988. On the advice of H & R Block, the Appellant did not include the 1996-1997 support payments in her income tax returns. Following the Respondent's notification to Revenue Canada the Appellant was reassessed and paid the required taxes. The Respondent has received an income tax refund every year since 1988.

16While the respondent sought to withdraw this admission after the appellant's argument, we did not grant leave to do so. The trial judge erred in concluding that the appellant did not pay tax on the amount of money that was being paid into the children's bank accounts. In any event, whether the appellant did or did not report most of the support payments as income is not, in our view, a proper basis on which to reduce the support arrears in this case. There is no evidence as to the appellant's tax rate, nor with respect to the prejudicial effect on the respondent's tax position. The matrimonial home has been listed for sale. It is likely that, in this case, the payment of arrears of support out of the respondent's share of the proceeds of the matrimonial home would be taxable in the hands of the appellant. In Gibson v. R. (1994), 1994 CanLII 18246 (TCC), 5 R.F.L. (4th) 209, 95 D.T.C. 749 (T.C.C.), the court examined an order that transferred the husband's equity in the matrimonial home to the wife to satisfy support arrears. The court held that the transfer was a form of payment and, thus, deductible in the hands of the payer and taxable in the hands of the recipient. As O'Connor T.C.J. held, at paras. 10-11 [at p. 214 R.F.L.],

The court finds the effect of the consent judgment and the transfer effected pursuant thereto was that the appellant was released with respect to all arrears of his alimony payments except for a sum of $5,100. Surely therefore the transfer must be considered as a form of payment. The court therefore concludes that for paragraph 60(b) or (c) to operate, there need not necessarily be payment in cash or by cheque. Payment in kind, provided there has been an agreement or a binding determination of the value in money of the object given, will suffice. . . .

Furthermore, this case is distinguishable from another line of cases holding lump sum payments not deductible because they were made in consideration of the spouse granting a total release of all possible claims. The amounts here represented accumulated arrears of periodic maintenance payments. When the appellant paid the arrears (by transferring assets) he was entitled to claim the deduction, just as he could have done had he made the payments on time.

17In general, periodic payments that fall into arrears and then are accumulated and paid in lump sum are still deductible in the hands of the payer and taxable in the hands of the recipient because, as the Federal Court of Appeal held in R. v. Sills (1984), 1984 CanLII 5347 (FCA), [1985] 2 F.C. 200, 85 D.T.C. 5096 at p. 5098, "[t]he payments do not change in character merely because they are not paid on time."

18Where a lump sum of an amount substantially less than the amount owing is agreed to be paid so as to release the debtor from any future obligations, the character of the payments is changed and the lump sum payment is not deductible (MacDonald v. M.N.R. (1968), Tax A.B.C. 1271). However, where the court reduces the amount of arrears owing, the nature of the debtor's liability is not changed, it is simply reduced, and the payment remains deductible in the hands of the payer and taxable in the hands of the recipient. See Soldera v. M.N.R. (1991) 91 D.T.C. 987 (T.C.C.).

19This is not a case where a lesser amount of arrears is paid for a release of future obligations. Having regard to the decision in Gibson, supra, the payment of arrears out of the respondent's share of the matrimonial home appears to be subject to being reported as income by the appellant. The appellant, therefore, will not receive a "windfall" if arrears of support are enforced.

20The respondent submits that even if the trial judge erred with respect to some of her findings of fact, she had the discretion to decide whether or not to enforce the arrears and we should not interfere with the exercise of her discretion. The trial judge's reasons indicate that tax consequences were a major consideration in her refusal to enforce the arrears of support in their entirety. As indicated, it appears that she erred with respect to this consideration. Having regard to this and the other factual errors made by the trial judge, I cannot say that, absent these errors, the trial judge would have exercised her discretion in the same manner.

Delay in Enforcement

21Mere delay in enforcing a claim for support, as with an equitable claim, will not afford the respondent redress. The appellant must have acquiesced in the respondent's conduct, or the appellant's conduct must have either caused the respondent to alter his position in reasonable reliance on the appellant's acceptance of the status quo or permitted a situation which it would be unjust to disturb. Ultimately, the issue of delay or laches is a matter of justice as between the parties: M. (K.) v. M. (H.), 1992 CanLII 31 (SCC), [1992] 3 S.C.R. 6 at pp. 76-78, 96 D.L.R. (4th) 289.

22The respondent also relies on the trial judge's finding, at para. 17 of her reasons, that, although the appellant could have enforced the payment of support arrears in 1991, she did not do so.

23Although the appellant did not enforce support arrears until 1999, she made two unsuccessful early attempts to enforce the support order prior to the F.R.O. taking over in 1999. One of these attempts was in August 1991. The appellant wanted to enforce the amount of the difference between what the respondent had been ordered to pay and what he was paying into the children's bank accounts. On both these occasions, the appellant was told that she could not do this. The support order had to be enforced in its entirety or not at all. The appellant formed the opinion that it would be better not to pursue enforcement because, if the government agency failed her, she and the children would be unable to survive.

24The appellant's evidence was that she did not acquiesce in the non-payment of arrears but, in her circumstances, she was not prepared to risk non-receipt of the monthly payments into the children's bank accounts. There is no evidence that the respondent altered his position based on the appellant's delay in seeking to enforce the arrears. The appellant and the children were the beneficiaries of a support order based on need. Throughout the period in question, the respondent had the ability to fully discharge his support obligation but he chose to only partially discharge it. The appellant worked for part of the time but it is not clear to what extent her earnings would have reduced the need for support of herself and the children. In our opinion, the arrears of support should be enforced to the extent of $50,000 to be paid out of the husband's share of the proceeds of the matrimonial home. Having regard however to the lack of contact between the parties, the fact that the appellant worked for part of the time, and considering the equities of the case, I do not consider this to be an appropriate case in which to allow interest on the arrears.

Disposition

25The appeal is therefore allowed. Paragraph 3 of the judgment of divorce is varied by deleting the amount of $15,000 and substituting, in its place, the amount of $50,000.

Costs

26Paragraph 10 of the judgment fixes the amount of costs at trial on a party-and-party basis to be paid by the appellant to the respondent at $5,000. Having regard to the result of this appeal, I would also vary para. 10 of the judgment by ordering that the respondent pay to the appellant the sum of $5,000 for her costs. If there were outstanding offers at the time of trial that would affect the order as to costs, further submissions in writing may be made to the panel.

27The appellant is entitled to her costs of this appeal on a party-and-party basis to be paid after assessment out of the respondent's share of the proceeds of the matrimonial home.