|
Citation: 2004TCC751
|
|
Date: 20041110
|
|
Docket: 2003-2736(IT)I
|
|
BETWEEN:
|
|
WILLIAM L. SEARS,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
REASONS FOR JUDGMENT
Woods J.
[1] In this appeal for the 2001
taxation year, William Sears claims a deduction for support
payments made in respect of household expenses such as taxes,
hydro and insurance.
[2] The Crown submits that the
deduction should be disallowed because one of the requirements of
the deduction, that the recipient have discretion as to use, was
not satisfied. In the Reply, the Crown further argued that
another requirement, that the payments be under a court order or
written agreement, also was not satisfied but this argument was
abandoned at the hearing. I will accordingly restrict my
consideration to the discretion issue.
Facts
[3] In a court order issued in 1976
following the separation of Mr. Sears and his wife, Pauline, Mr.
Sears was required to pay regular monthly support plus expenses
relating to the home that Mrs. Sears lived in at the time, which
was located at 2 Keats Road, Hamilton. The relevant part of the
court order reads:
the Petitioner, William Lewis Sears, shall pay to the
Respondent, Pauline Elinore Sears;
...
(c) and shall make all payments for hydro, gas, oil, taxes,
insurances and telephone (excluding long distance telephone
charges) in connection with the home presently occupied by the
Respondent.
[4] In 1998, Mrs. Sears moved to a new
home at 163 Highbury Drive in Stoney Creek, Ontario. As part of
the legal and financial arrangements surrounding the move, Mrs.
Sears' lawyer prepared an agreement that provided, inter
alia, for the following: a transfer by Mr. Sears of his
interest in the old home at 2 Keats Road; an interest-free
mortgage in favour of Mr. Sears on the new home; and an
obligation on Mr. Sears to pay household expenses on the new
home. The clause dealing with support reads:
The Husband hereby agrees and intends to continue to pay
spousal support to the Wife in the sum of $480.83 per month and
further agrees to continue to pay household expenses pursuant to
the Decree Nisi dated November 12, 1996 by paying property taxes,
hydro, gas, water and insurance on the current matrimonial home,
which shall be paid thereon until that home is vacated. The
husband shall thereafter pay the aforesaid expenses for the new
home that the Wife is to purchase, being 163 Highbury Drive,
Stoney Creek, Ontario.
[5] Mr. and Mrs. Sears acted in
accordance with the terms of this agreement and, in particular,
Mr. Sears continued to pay the household expenses on 163 Highbury
Drive. Mrs. Sears arranged for the bills to be sent to her former
husband and the bills were paid directly.
[6] Mr. Sears could not locate a
signed copy of this agreement and introduced into evidence a
version that was undated and unsigned. He tried to obtain an
executed copy for the hearing but was unable to locate the lawyer
that drafted the agreement.
[7] In his income tax returns, Mr.
Sears had always claimed a deduction for the support payments,
including the payment of household expenses. Until the 2001
taxation year, the Minister of National Revenue had accepted the
deduction but, in that year, the Minister disallowed the part of
the deduction that related to household expenses. The total
amount disallowed was $10,725.
Analysis
[8] In order for support payments to
be deductible for purposes of the Income Tax Act, they
must fit the definition of "support amount" in
subsection 56.1(4). The part of the definition that is relevant
to this appeal is the requirement that "the recipient has
discretion as to the use of the amount."
[9] The specific obligation that Mr.
Sears had was "to pay" certain listed household
expenses. Although the bills were paid directly, Mr. Sears
submits that Mrs. Sears could have insisted that the payments be
made to her. I accept this interpretation except to note that
Mrs. Sears could not demand payment unless she had incurred an
expenditure. The question, then, is whether Mrs. Sears exercised
discretion as to use of the support payments when she directed
her former husband to pay the third party expenses directly.
[10] According to dictionary definitions,
"discretion" means freedom to decide and
"use" means exploit or employ. Generally, money
is employed when it is applied to some purpose such as purchasing
goods or services. Unless a person has some choice over the
application of the funds, I do not think that the person has
discretion as to use. Mrs. Sears did not in a substantive
sense have any discretion as to how the money could be applied.
The support obligation was earmarked for specific household
expenses and Mrs. Sears would not be entitled to receive any
payments unless these particular expenses had been incurred.
[11] This interpretation appears to be
consistent with the statutory scheme dealing with support
payments. Under that scheme, support payments are generally not
deductible (and included in the recipient's income) unless
the recipient has discretion as to use. However, if the support
payments are in respect of specific expenses, they can be
deductible (and included in recipient's income) if the
intended tax treatment is reflected in the court order or written
agreement: subsection 60.1(2) of the Act. Accordingly,
Parliament appears to have intended that payments earmarked for
specific expenses would not be deductible (or included in the
recipient's income) unless the parties specifically agreed to
this.
[12] In addition, this interpretation is
consistent with the majority of cases that I am aware of that
have considered clauses with similar wording, including one
decision of the Federal Court of Appeal: The Queen v.
Armstrong, 96 D.T.C. 6315 (F.C.A.); Borsellino v. The
Queen, [1997] 2 C.T.C. 2923 (T.C.C.); and Levy v. The
Queen, 2003 D.T.C. 1512 (T.C.C.).
[13] The case law is not entirely
consistent, however. Counsel for the Crown brought to my
attention a recent decision of Mogan J. dealing with a similar
clause: Carmichael v. The Queen, 2003 D.T.C. 856
(T.C.C.).
[14] Carmichael is one of the few
cases that I am aware of that decided that a recipient has
discretion where the support obligation requires the payment of
specific expenses. Mogan J. referred to the decision of Bowman
A.C.J. in Hak v. The Queen, 99 D.T.C. 36 (T.C.C.) but the
facts in Hak were somewhat different.
[15] The decision in Carmichael that
the spouse had discretion was based on a finding that the spouse
exercised discretion by appointing her husband as her agent to
pay the expenses on her behalf. Although I agree that the
appointment of the husband is an exercise of discretion, it is
not, in my respectful view, an exercise of discretion as to use
of the payments.
[16] For these reasons, I would conclude
that Mrs. Sears did not have discretion as to the use of payments
made on account of household expenses. Mr. Sears could have
ensured a tax deduction for these payments if the written
agreement had specifically provided for a deduction to the payor
and an income inclusion to the recipient. This was not done.
[17] The appeal is dismissed.
Signed at Ottawa, Canada this 10th day of November, 2004.
Woods J.
Email this Content