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Posts from the ‘Income Tax’ Category

“Property” or “Income”? Appeal Court Rules on Structured Settlement Annuities

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“Property” or “Income”? Appeal Court Rules on Structured Settlement Annuities

Recently the Ontario Court of Appeal delivered a ruling on a very narrow, but important, issue:  Whether structured settlement annuity payments are considered “property” or “income” under Ontario family law legislation dealing with property-division by spouses on separation.

In Hunks v. Hunks, the wife had been injured while shopping at a supermarket.  She was hit by either a shopping cart or a pallet, and sued the store for damages.  When her claim was later settled, about $300,000 from the proceeds of her settlement were used to create a structured settlement annuity.  This paid out funds to her on a regular, pre-determined basis since she was no longer able to work.

At the point when she and the husband separated, the wife was still entitled to receive about 13 years’ worth of payments from the annuity.

In the context of determining their respective Net Family Property amounts for the purposes of equalization, a legal question arose as to whether the wife’s annuity payment entitlement should be counted as “property” or as “income” as those terms are used in the Ontario Family Law Act.

This was an important distinction:  If they were “income”, then they would be taken into account when calculating spousal support obligations.  If they were “property”, then their treatment would depend on other provisions of the Act that might allow for their exclusion.

The Court of Appeal concluded that such structured settlement annuities are properly considered “income” under the Act.

The key was that the annuity arose from a structured settlement, which is created when some or all of a personal injury settlement is deposited with a life insurance company in exchange for guaranteed, tax-free payments for the recipient’s lifetime, or for a specific number of years.  The court noted that annuities arising from personal injury settlements are very specialized contracts, and are subject to certain legal contingencies and stipulations.

The net result is that the casualty insurer is actually the legal owner and beneficiary of the contract.  Using the wife’s case as an example, it was the casualty insurer that purchased the annuity, and made an irrevocable direction to the issuer of the annuity contract to make all payments directly to the wife.  The court noted that an individual, such as the wife, is not entitled to purchase a structured settlement him or herself.

With that vantage-point, it could not be said that during the marriage the wife “received” the $300,000 used for the structured settlement.   The court also noted that payments received pursuant to a structured settlement annuity were analogous to disability benefits, which was another reason they should be treated as income.  Like disability benefits – which prior courts have concluded are “income” for these purposes – structured settlement annuity payments are meant to replace employment income that the wife would have earned if she had been able to work.  Since they provide her with financial support because she cannot work, they are “of the same nature as the income she would have earned had she not been injured.”

For the full text of the decision, see:

Hunks v. Hunks

At Russell Alexander, Family Lawyers our focus is exclusively family law, offering pre-separation legal advice and assisting clients with family related issues including: custody and access, separation agreements, child and spousal support, division of family property, paternity disputes, and enforcement of court orders.  For more information, visit us at RussellAlexander.com

 

Couple’s Use of Support Set-Off Calculations Costs Husband His $15,000 Tax Credit

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Use of Support Set-Off Calculations Costs Husband His $15,000 Tax Credit

The husband and wife separated in 2011.  Based on their respective yearly incomes, they amicably resolved their issues as to child support by way of an agreement and consent order that was filed with the court.   They reached an agreement on child support by using a software program which, as the court put it, “introduce[d] various offsetting inputs and devise[d] a final unilateral payment from one spouse to the other.”

The outcome of the calculations was that the husband owed a single payment to the wife, who acknowledged that he was not required to pay further support for a specified time-period.   On this income tax return for the year, the husband then went ahead and claimed non-refundable child tax credits of almost $15,000 in respect of their two children.

As the court explained:

All of the usual stressful, difficult and emotional issues for this couple relating to child custody, financial support and raising a family within the constraints of marriage breakdown were resolved in a laudatory, sensible and agreeable fashion. [The husband] testified all issues settled amicably. Lawyers were involved to prepare all documents, undertake court proceedings and ensure all details complied with the parties’ wishes and the law. All seemed to unfold accordingly until the Minister’s reassessment disallowing the 2012 dependent deductions. Understandably, [the husband’s] child support commitment was predicated upon his use of the dependent deductions to reduce his taxable income.

The problem was that the Income Tax Act provision under which the husband had purported to claim that tax credit, namely s. 118(5.1), was an exception to the general rule in another section of the Act that disallows a support-paying person from claiming a tax deduction for dependents in certain stipulated instances.  Under the wording of that latter provision, the loss or non-use of the dependent deduction could be prevented only where both parents factually pay to the other an amount for child support.

In this case, since the spouses had essentially used a set-off procedure to come up with a single payment by the husband to the wife, there was no such payment by each of them separately, as the provision required.

Unfortunately, this meant that the Minister of National Revenue disallowed the $15,000 the husband purported to claim under s. 118(5.1) of the Act.  Because the husband was the only spouse to pay “a support amount”, the Minister concluded, he did not fall within the exception in s. 118(5.1) and was not eligible.

The husband appealed the Minister’s decision, but was unsuccessful.   The court pointed out that the case law precedent was uniform in its interpretation of the Act, and that the fact that the couple had used a set-off mechanism in the course of calculating their child support obligations to each other did not transform the respective and distinct values they used into “a support amount” as that term is used in the Act’s provision.  The Act, as worded, did not accommodate for the “expeditious use of a computer software program, the culmination of which is a unilateral payment of a support amount by only one parent to the other.”

Despite this outcome arguably based on technicalities, the court said it had “no alternative but to dismiss” the husband’s appeal, “however sympathetic it may be.”

For the full text of the decision, see:

Harder v. The Queen

At Russell Alexander, Family Lawyers our focus is exclusively family law, offering pre-separation legal advice and assisting clients with family related issues including: custody and access, separation agreements, child and spousal support, division of family property, paternity disputes, and enforcement of court orders.  For more information, visit us at RussellAlexander.com

 

 

Wednesday’s Video Clip: Two Necessary Evils – Know Your Obligations Re: Income Tax and Spousal/Child Support


Wednesday’s Video Clip: Two Necessary Evils – Know Your Obligations Re: Income Tax and Spousal/Child Support

Income tax: Not a popular concept even at the best of times. But add in the obligations, which arise in the context of paying child or spousal support, and it’s enough to cause heart palpitations in most Canadians.

This is because the Canada Revenue Agency rules relating to how support payments are to be treated are quite complex. To make things more confusing, the federal Income Tax Act has separate rules for spousal support as opposed to child support.

In this video we review some key points to keep in mind.

At Russell Alexander, Family Lawyers our focus is exclusively family law, offering pre-separation legal advice and assisting clients with family related issues including: custody and access, separation agreements, child and spousal support, division of family property, paternity disputes, and enforcement of court orders. For more information, visit us at RussellAlexander.com