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Citation: 2004TCC531
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Date: 20040728
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Docket: 2003-1174(IT)I
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BETWEEN:
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EDWARD KRUPA,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Bowie J.
[1] The issue in this appeal is the
amount that the Appellant is entitled to deduct in respect of
child support payments in computing his income for the 2000
taxation year. The resolution of the issue lies in the
construction to be given to two documents. One is the Minutes of
Settlement of an action begun by the Appellant against his former
spouse in the Ontario Court (General Division) to resolve issues
of custody, maintenance and division of property. The other is
the Judgment of that Court in the action, based on those Minutes
of Settlement. The Minutes of Settlement are dated April 29, 1997
and the Judgment May 26, 1997. It is not in dispute that the case
falls to be determined under the Income Tax Act (the
"Act") as it stood prior to the 1997
amendments.[1]
[2] The Minutes of Settlement provide
that the Appellant is to pay child support of $125.00 per month
(plus indexing) to his former spouse for each of their two
children until they reach the age of 18, or one of certain other
events occurs. This provision also appears in the Judgment. These
payments were made by the Appellant in 2000, and the Respondent
does not dispute his right to deduct these amounts.
[3] The dispute arises in connection
with paragraph 8 of the Minutes of Settlement, which is
replicated in the Judgment, and paragraph 11, which is not.
Paragraph 8 deals with the division of marital property. It
provides that the Appellant's former spouse shall make an
equalization payment to him of $35,000, to be secured by a
mortgage on the family home (which she retains), and payable,
with interest at 5.5% per annum, at the rate of $430.00 per
month. An amortization schedule attached to the Minutes of
Settlement shows the final payment due on October 1, 2005, at
which time their children will be 25 and almost 21 years old.
[4] The Appellant testified at trial
that his former spouse had an obligation to him under the
Family Law Act in the amount of $35,000 in respect of the
equity in the matrimonial home. However, since she was not in a
position to obtain financing they would have had to sell the
house and divide the proceeds. The mortgage agreement, then, was
entered into so that the Appellant's former spouse and
children could remain in their home.
[5] Paragraph 11 of the Minutes of
Settlement provides that the Appellant will pay an additional
$430.00 on the first day of each month to his former spouse for
child support until October 1, 2005, the payment dates coinciding
with the dates of the mortgage payments to be made by the former
spouse to the Appellant. These payments are not indexed, and it
is made clear that " ... no monies shall exchange hands
with respect to the equalization payment and this support
amount". Paragraph 11 is reproduced in its entirety as
Schedule A to these Reasons. While it is no paragon of clarity,
two things are evident in this paragraph. The payments to be made
by the Appellant for child support under it are to coincide in
amount, due date and duration with the payments to be made by his
former spouse under the mortgage, and the amounts to be paid by
each of them will not be paid in cash, but by mutual forgiveness
of the debt arising each month.
[6] In 2000, the Appellant deducted a
total of $11,910 from his income under paragraph 60(b) as
child support payments paid to his former spouse. The Minister
disallowed the deduction of $5,160 ($430 x 12 months), arguing
that the cancellation of the obligation to pay $430 each month
under the mortgage agreement could not create a deduction under
that paragraph since no amount was paid, nor required to be paid,
by the Appellant to his former spouse.
[7] Paragraph 60(b) of the
Income Tax Act 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:
(a) ...
(b) the total
of all amounts each of which is an amount determined by the
formula
A - (B + C)
where
A is the total
of all amounts each of which is a support amount paid after 1996
and before the end of the year by the taxpayer to a particular
person, where the taxpayer and the particular person were living
separate and apart at the time the amount was paid,
B is the
total of all amounts each of which is a child support amount that
became payable by the taxpayer to the particular person under an
agreement or order on or after its commencement day and before
the end of the year in respect of a period that began on or after
its commencement day, and
C is the total
of all amounts each of which is a support amount paid by the
taxpayer to the particular person after 1996 and deductible in
computing the taxpayer's income for a preceding taxation
year;
A "support amount" is defined in subsection 56.1(4)
as:
"support amount" means an amount payable or receivable as an
allowance on a periodic basis for the maintenance of the
recipient, children of the recipient or both the recipient and
children of the recipient, if the recipient has discretion as to
the use of the amount, and
(a) the
recipient is the spouse or common-law partner or former spouse or
common-law partner of the payer, the recipient and payer are
living separate and apart because of the breakdown of their
marriage or common-law partnership and the amount is receivable
under an order of a competent tribunal or under a written
agreement; or
(b) the payer
is a natural parent of a child of the recipient and the amount is
receivable under an order made by a competent tribunal in
accordance with the laws of a province.
An "amount" is defined in subsection 248(1):
"amount" means money, rights or things expressed in terms of
the amount of money or the value in terms of money of the right
or thing, ...
[8] Counsel for the Respondent argued
that the Appellant is not entitled to a deduction under section
60 for the amounts in excess of $250.00 per month (plus indexing)
because no such amounts were paid by him. The deduction is
provided in that section only for "... the total of all
amounts each of which is a support amount paid ... ".
In my view, the proper construction to be put on the transactions
here is that by entering into the mortgage, the Appellant's
former spouse obliged herself to pay him $430.00 per month, and
by the terms of the Minutes of Settlement, paragraph 11, the
Appellant obliged himself to pay her $430.00 per month. These
mutual obligations were each forgiven by the person entitled to
receive the amount.
[9] In Armstrong v. M.N.R.,[2] which was not
referred to by counsel in argument, Bonner J. stated at 1016:
... As I understood the Appellant's argument, it
rested on the premise that no amount can be said to be received
unless there has been a payment by cash or by cheque. That
premise, in my view, is incorrect. The set off arrangement did
involve receipt by the Appellant of an amount within the meaning
of paragraph 56(1)(b). ...
He also referred to In re Harmony & Montagu Tin and
Copper Mining Co., Spargo's Case,[3] wherein Mellish L.J. stated at page
265:
"Nothing is clearer," he said, "than that if
parties account with each other, and sums are stated to be due on
the one side, and sums to an equal amount due on the other side
of that account, and those accounts are settled by both parties,
it is exactly the same thing as if the sums due on both sides had
been paid. Indeed, it is a general rule of law, that in every
case where a transaction resolves itself into paying money by A.
to B., and then handing it back again by B. to A., if the parties
meet together and agree to set one demand against the other, they
need not go through the form and ceremony of handing the money
backwards and forwards".
Although that case was decided in the context of the English
Companies Act of 1867, the logic is inescapable, and the
same principle applies today for the purposes of the Canadian
Income Tax Act.
[10] Three cases were referred to in
argument. In Rosin v. Canada,[4] the Appellant argued that a garnishee
summons served on his solicitors was a payment for the purposes
of the Act. In disallowing the appeal, I noted at
paragraph 4:
... Garnishee proceedings involve two stages. In the
first, the summons is served on the garnishee; in the second the
garnishee either pays the amount owing into Court, or else
disputes the liability to do so. Paying the funds into Court acts
as a discharge of the garnishee debtor's obligation. Between
the service of the summons and the payment into Court, or the
filing and resolution of a dispute, the garnishee is not free to
pay the funds attached to the debtor, or to otherwise dispose of
them. However, it cannot be said that the debt has been paid
during this period.
The reasoning in that case was limited to whether a person who
has been served with a garnishee summons could be considered to
have made a payment prior to the date of the payment into Court.
It has no application to the facts of this case.
[11] In Fisher v. R.,[5] at the time of the division of
matrimonial property the Appellant owed her ex-spouse $12,138 as
an equalization obligation amount, and her ex-spouse owed her
$7,558 in respect of maintenance arrears. In his Order dividing
the matrimonial property between the parties, the Judge of the
Ontario Court (General Division) applied the two cross
obligations against each other. The Minister reassessed the
Appellant because she did not include the cancelled debt of
$7,558 in her income as maintenance arrears under
paragraph 56(1)(b). Mogan J. of this Court held that
the Order of the Ontario Court represented a setoff at common
law, and that on the facts before him such a setoff did not
constitute payment of an amount for the purposes of the
Act. However, he went on to note that where two parties
mutually agreed to cancel offsetting debts, the agreement could
be the payment of an amount for purposes of the Act. In
the present case, the Appellant and his ex-spouse have very
clearly agreed by virtue of paragraph 11 of the Minutes of
Settlement that the cancellation of their mutual obligations
would be considered the payment of an amount. It is consequently
immaterial whether or not the transaction set out under paragraph
11 of the Minutes of Settlement meets the technical legal
definition of a setoff, and I make no finding as to that. The
term 'setoff' is both a legal term of art and a term of
common usage. It has many acceptable uses, and its meaning in any
particular situation depends on the context in which it is used.
The Fisher case does not apply here.
[12] In Hallett v. Canada,[6] the Appellant's
ex-spouse was delinquent in paying child support. To satisfy the
outstanding arrears he transferred his half interest (worth
$5,600) in the mobile home he had previously shared with the
Appellant, and in which the Appellant resided at the time. The
Appellant did not include the $5,600 in her income under
paragraph 56(1)(b), claiming that it was not a support
amount because it was not an 'amount' for the purposes of
the Income Tax Act. At paragraph 4, I said:
... There can be no doubt that the interest in the mobile
home that passed to the Appellant is a "right or thing", and the
value of it is established by the transaction between the
Appellant and Rodney. The Appellant herself estimated the value
at $6,000, and the transaction between them was certainly at
arm's length. The same result has been reached in the past by
Bonner J., and by O'Connor J. If the value of payments in
kind were not payments for purposes of the Act, the
profits derived from a great many business transactions would be
immune from taxation; it is for that reason that Parliament
defined "amount" the way that it did.
This case does apply. It stands for the proposition that a
'right or thing' can be an amount for the purposes of the
Income Tax Act, and that its value can be determined by
reference to a relevant transaction.
[13] Paragraphs 8 and 11 of the Minutes of
Settlement create a legal right in each of the Appellant and his
former spouse to be paid $430.00. Therefore, although no money
changed hands, a legal right to the value of $430.00 was
transferred by each to the other every month as consideration
under the terms of paragraph 11. The definition of
'amount' in subsection 248(1) certainly encompasses the
transactions. As a result, the Appellant paid an amount equal to
$430.00 per month to his former spouse for the purposes of
paragraph 60(b) of the Act, and is entitled to the
deduction claimed. The Appellant is also entitled to costs.
Signed at Ottawa, Canada, this 28th day of July, 2004.
Bowie J.
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