The Queen v. Bryce, 82 DTC 6126, [1982] CTC 133 (FCA)

Urie, J:—This is an appeal from a judgment of the Trial Division dismissing the appellant’s appeal from a decision of the Tax Review Board which had allowed the respondent’s appeal from a reassessment of income tax made by the Minister of National Revenue with respect to the respondent’s 1975 taxation year.

The relevant facts, as disclosed in an Agreed Statement of Facts, are these: The respondent was divorced from his former wife on March 20, 1975. The decree nisi of the Supreme Court of British Columbia incorporated the terms of a maintenance agreement between the respondent and his wife, the material terms of which required the respondent to pay:

(a) all mortgage payments on a duplex to be transferred to the respondent and his former wife as joint tenants, of which one half was to be occupied by the wife;

(b) all expenses necessary to maintain the duplex in good condition;

(c) all the land taxes, sewer rates, water rates and cablevision charges as they fell due.

Only the payments made pursuant to (a) and (c) are in issue in this appeal.

The decree nisi also contained a provision whereby the former wife would forego any claim for monthly support from the respondent other than that provided by his paying one-half of the payments referred to in the immediately preceding paragraph.

The respondent, during the year 1975, complied with all of the provisions contained in the agreement. The following amounts were paid by him:

The respondent claimed as a deduction in the computation of his taxable income for the 1975 taxation year the sum of $1,256.20, which is 10/12 of 1/2 of the above total, the decree nisi having been granted in March 1975. The sole issue in this appeal is whether or not the respondent was entitled to the deduction. The learned trial judge held, as did the Tax Review Board, that he was. It is the appellant’s contention that the trial judge was in error in holding that section 60.1 of the Income Tax Act, as amended by SC 1974-75- 76, c 26, subsection 31(1), provided, in itself, the statutory authority for the deduction.

To appreciate the appellant’s position it is necessary to examine the relevant sections of the Income Tax Act, RSC 1952, c 148, as amended by SC 1970-71-72, c 63 (“the Act”). Division B contains the various provisions for the computation of income for tax purposes. Subdivision e of Division B deals with certain deductions permitted in the computation. Paragraph 60(b) reads 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:

Alimony Payments

(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;

Its companion paragraph, 56(1 )(b), is contained in subdivision d which relates to income from various sources. It reads as follows:

56.(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year

Alimony

(b) any amount received 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 the children of the marriage, if the recipient was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, the spouse or former spouse required to make the payment at the time the payment was received and throughout the remainder of the year;

In 1976, this Court rendered judgment in the case of The Queen v Pascoe, [1976] 1 FC 372; [1975] CTC 656; 75 DTC 5427. In that case the respondent and his wife had entered into a separation agreement providing for fixed monthly maintenance payments and, as well, an agreement that the respondent husband pay all medical, hospital and dental accounts on behalf of his wife and children and certain educational expenses of the children. It was the deductibility for tax purposes of payments so made that was the issue in that appeal. Pratte, J, speaking for the Court, said at 374 [658, 5428] of the report:

In our view, neither the sums paid by the respondent for the education of his children nor those paid for the medical expenses were deductible.

First, we are of opinion that the payment of those sums did not constitute the payment of an allowance within the meaning of section 11 (1 )(l). An allowance is, in our view, a limited predetermined sum of money paid to enable the recipient to provide for certain kinds of expense; its amount is determined in advance and, once paid, it is at the complete disposition of the recipient who is not required to account for it. A payment in satisfaction of an obligation to indemnify or reimburse someone or to defray his or her actual expenses is not an allowance; it is not a sum allowed to the recipient to be applied in his or her discretion to certain kinds of expense.

Furthermore, even if the payment of the expenses here in question could be construed as the payment of an allowance, it was not, in our view, an allowance “payable on a periodic basis” as required by section 11(1)(I). The payment was not

Both of the above cases were in respect of taxation years prior to the enactment of section 60.1 supra.

In 1981, in The Queen v Gagnon, [1981] CTC 463; 81 DTC 5377, this Court again applied the ratio decidendi of the Pascoe case in respect of mortgage payments paid by a spouse to his former wife in holding that they were not an “allowance” within the meaning of paragraph 60(b) on the basis that the recipient had no discretion as to the use of the money. While it appears that two of the three taxation years under review in that appeal were subsequent to the enactment of section 60.1, no reference to that section is made in the reasons for judgment.

The consequence of all of the foregoing is that, as the trial judge said, the real issue here is as to the interpretation to be given to section 60.1 in light of the Pascoe case. Section 60.1 read as follows in 1975:

Maintenance Payments

60.1. Where after May 6, 1974, a decree, order, judgment or written agreement described in paragraph 60(b) or (c) or any variation thereof, has been made providing for the periodic payment of an amount by the taxpayer to or for the benefit of his spouse, former spouse or children of the marriage in the custody of the spouse or former spouse, the amount or any part thereof, when paid, shall be deemed to have been paid to and received by the spouse or former spouse if the taxpayer was living apart from the spouse or former spouse at the time the payment was received and throughout the remainder of the year in which the payment was received.

Its companion, subsection 56.1, follows:

56.1 Where, after May 6, 1974, a decree, order, judgment or written agreement described in paragraph 56(1 )(b) or (c), or any variation thereof, has been made providing for the periodic payment of an amount to the taxpayer by his spouse or former spouse or for the benefit of the taxpayer or children of the marriage in the custody of the taxpayer, the amount or any part thereof, when paid, shall be deemed to have been paid to and received by the taxpayer if the taxpayer was living apart from the spouse or former spouse at the time the amount was paid and throughout the remainder of the year in which the amount was paid.

If section 60.1 permits the mortgage payments to be be deducted by a taxpayer such as the respondent in the computation of his taxable income in 1975, then section 56.1 operates to include such payments in the computation of his spouse’s income for that year.

It should first be observed that section 60.1 does not, in specific terms, provide for deducting periodic payments made to or for the benefit of a spouse, former spouse or her children in her custody, in the computation of a taxpayer’s taxable income although the section appears in subdivision e which is headed “deductions in computing income.” Rather, on its face, it simply deems such payments to have been paid to and received by the spouse or former spouse if she and the taxpayer were living apart when the payment was received and for the remainder of the year in which it was received. In this respect, then, it overcomes one of the bases for finding that periodic payments not directly paid to the spouse do not constitute “an allowance” as that term in paragraph 60(b) has been interpreted by this Court in the Pascoe and Weaver cases.

However, according to counsel for the appellant, the section goes only that far and to ascertain the deductibility of such payments regard must be had to paragraph 60(b) as interpreted in the cases earlier referred to: He conceded that

(a) the payments in this case were made when the spouses were living apart when received and throughout the remainder of the year, pursuant to a decree, order, judgment or separation agreement;

(b) the payments were made pursuant to a decree, order or judgment or a separation agreement;

(c) payments were part of a series payable on a periodic basis; and

(d) by virtue of section 60.1 were paid to a spouse or former spouse.

The only condition imposed by paragraph 60(b) that was not met in this case, according to appellant’s counsel, was that they were not paid by the taxpayer as an “allowance” as that term was interpreted in the line of cases in this Court commencing with Pascoe, supra, because the payments were not at the complete disposition of the recipient but rather, were committed to the mortgagee and the payees of land taxes, water rates and cablevision levies in accordance with the terms of the separation agreement.

The learned trial judge dealt with similar submissions made before him in the following fashion:

Paragraph 60(b) deals with amounts paid as alimony or other allowance for maintenance, to the recipient, children of the marriage or both. Section 60.1, as I interpret it, deals with amounts, stipulated in a decree order, judgment (of a competent tribunal) or pursuant to a written agreement, periodically paid to, or for the benefit of, the taxpayer’s spouse, former spouse or children of the marriage.

I am unable to conceive the legislators intended to make amounts paid to third parties, for the benefit of a spouse, former spouse or children of the marriage, deemed payable to those persons themselves, only if, at the same time, the document specified that the spouse, former spouse or children of the marriage could, at any time, direct the payments be made to different persons, or to themselves, or for other purposes than those stipulated in the document. It would, it seems to me, be inconsistent for the legislators to endorse maintenance agreements where payments for the benefit of the person or persons to be maintained were stipulated to be made to third parties, and at the same time, require the agreement to give the recipient of the benefit, complete control of the actual destination and purpose of the benefit payments.

It is with considerable reluctance that I have concluded that the trial judge’s interpretation of the two sections cannot be upheld and that the appellant’s contention must prevail. Since the only permissible deductions in the computation of taxable income are those authorized by the statute and since section 60.1 does not authorize a deduction, the taxpayer, in determining the deductibility of alimentary payments, must bring himself within the ambit of paragraph 60(b). In the interpretation of that section we are bound by the previous decisions of this Court which have held that payments of the type made by the respondent here do not constitute an “allowance” within the ambit of the section despite the fact that, by virtue of section 60.1, they are deemed to have been made for the benefit of the spouse. If Parliament had intended that payments envisaged by section 60.1 were to be deductible without reference to paragraph 60(b) to determine their deductibility, the section could easily have been so drafted. It is noteworthy that each of the sections of subdivision e which permits deductions specifically employs words such as “there may be deducted” or “may deduct” to authorize the deduction to be made by the taxpayer in computing his taxable income. Section 60.1 contains no such authorization.

The appeal, accordingly, must be allowed and the assessment of the Minister of National Revenue dated June 21, 1976, confirmed. In accordance with the provisions of subsection 178(2) of the Act, the respondent shall be entitled to recover from the Minister of National Revenue, all his reasonable and proper costs both here and below after taxation thereof.