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Citation: 2004TCC143
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Date: 20040213
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Docket: 2002-4001(IT)I
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BETWEEN:
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DAVID CRANSWICK
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
and
NANCY CRANSWICK,
Party Added.
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REASONS FOR JUDGMENT
Bowie J.
[1] When he filed his income tax
return for the 2000 taxation year, David Cranswick claimed
to be entitled to deduct support payments totalling $16,500. He
was assessed on that basis initially, but on January 28, 2002 the
Minister of National Revenue (the Minister) reassessed him to
disallow the deduction of support payments entirely. He has
appealed from that reassessment, and on the application of the
Attorney General his former spouse, Nancy Cranswick, has
been added as a party to his appeal pursuant to section 174
of the Income Tax Act (the Act). The appeal was
heard under the Court's informal procedure.
[2] The questions that I am to answer
pursuant to the Order of O'Connor J. made on August 14, 2003
are:
a) What
amounts, if any, paid by the Appellant to Nancy Cranswick
("Nancy") in the 2000 taxation year, meet the
definition of a "support amount" pursuant to subsection
56.1(4) of the Act;
b) Whether any
amounts paid by the Appellant to Nancy are be included in
computing the income for Nancy Cranswick [for] the years at issue
pursuant to paragraph 56(1)(b) and subsections 56.1(1) and
56.1(2) of the Act.
During the course of the hearing, counsel for the Crown
conceded that the Appellant had in fact made payments totalling
$16,500 to his former spouse for support in the year 2000,
pursuant to an agreement between them.
[3] There are three documents that are
relevant to the issues before me. The first is a separation
agreement entered into between David Cranswick and
Nancy Cranswick on March 12, 1997,[1] following the breakdown of their
marriage. It was prepared by David, using a precedent sold
commercially by a popular chain of book stores. The second is a
handwritten document styled Definition Agreement and Consent.[2] Mr. Cranswick
testified that when they first appeared before the Ontario
Superior Court of Justice in connection with divorce proceedings
begun by Ms. Cranswick, the presiding Justice directed them to
enter into an agreement as to interim support. This document was
negotiated by the parties and their respective counsel on
February 14, 2000, in response to that direction. The third
document is Minutes of Settlement[3] in that action, negotiated between the parties
and signed by them on or about November 15, 2000.
Ms. Cranswick was represented by counsel at that time, and
Mr. Cranswick was not.
[4] The first document makes these
provisions for support and maintenance:
Support and Maintenance;
The Husband and the Wife each acknowledge that they will come
to a future agreement for spousal support once the marital
children have left home or reached the age of 21.
...
Child Support:
Commencing January 15th, 1997 and on the 1st day of every
month thereafter, the Husband shall pay the Wife child support in
the amount of $500.00 per child, per month, which payments shall
continue until the earliest of the following occur:
(1)
the child reaches the age of 18 years and ceases to attend a
full-time educational institution.
(2)
the child reaches the age of 21 years.
(3)
the child marries.
Support payments are to be mutually managed to provide living
accommodation at 830 Reytan Blvd., Pickering for the Wife and
children of the marriage. Other expenses and repairs, along with
the children's education and leisure are to be mutually
decided upon as to the payment or financial arrangements as they
arise.
Variation;
the parties intend that Child support of this Agreement to be
final, except for variation requested due to a material change in
circumstances. In the event of a material change in
circumstances, the party requesting the variation shall give the
other party 30 days' notice of the variation sought during
which time the parties shall attempt to negotiate an amendment to
this Agreement. If no agreement is reached during the said
period, either party shall be at liberty to apply to Court to
obtain the relief sought.
[5] The following are the provisions
of the second agreement which is styled Definition Agreement and
Consent, that relate to the issue of maintenance and support:
1. This
agreement is without prejudice to the wife moving to set aside
the Separation Agreement dated 12 March 1997.
...
5. Parties
agree that husband's obligation under agreement of 12 March
97 shall include the following which are tax deductible by the
husband (all $ figures are approx):
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Property taxes
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$2,500 p.a.
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a. Cash (tax liability)
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1,800
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b. Mortgage
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390 per mo.
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c. Water
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429 per year
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d. Electricity
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1,140 p.y.
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e. Natural Gas
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1,000 p.y.
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f. Home Insurance
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425 p.y.
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g. Car Insurance, wife & Kiley
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150 p.m.
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h. Children's Life Insurance
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20 p.m.
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i. Line of Credit
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350 p.m.
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6. Husband to
continue to pay credit card and other debts shown on his
financial statement.
7. These
payments are without prejudice to husband's argument at trial
the further debts and expenses he is paying fall within 12 March
97 agreement and to argument by wife that child and spousal
support amounts ought to be higher or differently structured.
8. Wife to
give husband, through solicitors, bills as they come due and
husband to pay same, husband to have credit for $865 paid 13 Feb
00 net of wife's actual payment of hydro & gas,
$460.87.
[6] The Minutes of Settlement signed
on November 15, 2000 include several clauses dealing with support
payments.
1. David shall
pay to Nancy spousal support in the sum of $1,000.00 per month
commencing Nov 15, 2000 until either the wife cohabits with any
other person at any time or dies, whichever occurs first.
2. The amount
of spousal support shall be adjusted annually, that is, as at
January 1st of each year, based on the CPI (All Items Toronto) as
it may be in January of each year compared to the January of the
immediately preceding year.
...
5. David shall
pay to Nancy child support in the amount of $534.00 a month,
commencing November 15, 2000, for Michael Cranswick, the child of
the marriage born the 15th day of July 1981, until:
[there follow seven conditions, none of which had occurred
before the end of the year 2000]
The parents will contribute to the add-on expenses, including but
not limited to tuition for education and books and supplies, as
well as to extra-curricular expenses for the child proportionate
to the parties' respective incomes.
6. The parties
will exchange income tax returns by the 15th of June in each
year, if requested. Child support may be reviewed upon the
request of either party and shall be adjusted to reflect the
payor's income pursuant to the provisions of the Federal
Child Support Guidelines.
7. David will
maintain the child as beneficiary of extended health insurance
through his employment. The parties hereto agree to contribute
proportionate to their respective incomes to medical/dental
expenses incurred on behalf of the child not covered through an
existing health insurance plan, and agree to obtain the
other's consent in writing before incurring this expense. A
party incurring non-emergency child medical expenses will obtain
the other party's consent in advance in writing.
[7] The oldest child of the marriage
was 22 years old and working full-time by January 1, 2000. The
second child was 20 and was in university by that date. She
became 21 on May 15, 2000. The youngest child was 18, and he
continued to live at home throughout 2000.
[8] In order to qualify as a support
amount, a payment made by one former spouse to the other must
meet the definition that is found in subsection 56.1(4) of the
Act. It reads:
56.1(4) The definitions in this subsection apply in this
section and section 56.
"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.
[9] As the only year under appeal is
2000, we are concerned here only with payments made during that
year. They may be divided into two categories. The first consists
of the payments made prior to November 15, 2000, which must of
necessity have been made pursuant to the first agreement, dated
March 12, 1997, as further defined by the second agreement. The
second consists of those payments made pursuant to the third
agreement, on and after November 15, 2000.
[10] Dealing first with category one, these
payments fail to meet the definition of support payments as they
are not amounts as to which the payee, Nancy, had discretion. The
language of the first agreement makes it clear that the payments
are to be expended by her only in accordance with the agreement
from time to time of the payor, David.
[11] David Cranswick argued that this
requirement as to discretionary use of the payments was satisfied
in the present case by the deeming provisions found in
subsections 56.1(2) and 60.1(2) of the Act. The relevant
words of those subsections are:
56.1(2) For the purposes of section 56, this section
and subsection 118(5), the amount determined by the formula
A - B
...
is, where the order or written agreement, as the case may be,
provides that this subsection and subsection 60.1(2) shall apply
to any amount paid or payable thereunder, deemed to be an amount
payable to and receivable by the taxpayer as an allowance on a
periodic basis, and the taxpayer is deemed to have discretion as
to the use of that amount.
60.1(2) For the purposes of section 60, this section and
subsection 118(5), the amount determined by the formula
A - B
...
is, where the order or written agreement, as the case may be,
provides that this subsection and subsection 56.1(2) shall apply
to any amount paid or payable thereunder, deemed to be an amount
payable by the taxpayer to that person and receivable by that
person as an allowance on a periodic basis, and that person is
deemed to have discretion as to the use of that amount.
It is not necessary that the written agreement contain the
subsection numbers 56.1(2) and 60.1(2) in order for these deeming
provisions to apply. In Pelchat v. M.N.R.[4] and Ferron v. The Queen,[5]
Archambault J. explained that it is sufficient that the agreement
should make clear that the parties intend that these subsections
are to be applied to their agreement. This approach was approved
by the Federal Court of Appeal in Veilleux v. M.N.R.[6] Letourneau
J.A. said in that case at pages 333-334 that it is
sufficient that the agreement makes it apparent that the parties
to it understood and agreed to the tax consequences of their
agreement for subsections 56.1(2) and 60.1(2) to be invoked.
However, the only words in the second agreement relating to the
tax consequences are "... which are tax deductable
(sic) by the husband ...". This is inadequate to
meet the requirement of the cases to which I have referred, as it
does not make it at all apparent that the parties, and in
particular Nancy, understood and agreed that these payments were
to be taxable in her hands. The deeming provisions therefore do
not apply and the payments made prior to November 15 are not
support amounts, are not deductible by David, and are not income
of Nancy.
[12] The second category of payments are
those made pursuant to agreement no. 3 made on November 15, 2000.
That agreement varied the amount of child support to be paid by
David to Nancy in a number of respects, any one of which would be
sufficient to create a new commencement date of November 15,
2000, which is the date on which the first payment of the varied
amount was to be made. Under that agreement David was required to
pay spousal support to Nancy, in addition to the child support,
in the amount of $1,000 per month.
[13] By application of the formula A - (B +
C) in paragraphs 56(b) and 60(b) of the Act,
the amount that David may deduct and Nancy must include in her
income is the $1,500 spousal support paid for November and
December 2000.
[14] The child support amount paid under the
third agreement in the year 2000 is 1.5 x $534 = $801. This
amount is included in both A and B of the formula A - (B
+C). It is not included in Nancy's income, and it is not
deductible by David.
[15] The answer to question (a) therefore is
$1,500 + $801 = $2,301.
[16] The answer to question (b) is that
$1,500 paid by David to Nancy for spousal support is to be
included in Nancy's income for the year 2000.
[17] For clarity, I add that the answer to
question (a) does not determine the result of David
Cranswick's appeal. He is entitled to a deduction of $1,500
in the 2000 taxation year. His appeal will be allowed and the
assessment will be referred back to the Minister for
reconsideration and reassessment on that basis.
Signed at Ottawa, Canada, this 13th day of February, 2004.
J.T.C.C.
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