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Citation: 2003TCC355
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Date:20030520
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Docket: 2000-1426(IT)I
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BETWEEN:
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EVANGELOS KOLAKIS,
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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
(Edited from transcript of Reasons delivered orally
from the
Bench at Edmonton, Alberta on September 22,
2000)
Hershfield, J.T.C.C.
[1]
As I indicated at the outset of the trial, I have been somewhat
frustrated by not having evidence attested to before me.
The purpose of a trial court is to be a finder of fact and I
think that the outcome of this case depends as much as in any
other case on findings of fact. With hindsight, I might
have insisted that the Appellant have at least obtained an agreed
statement of facts to go with the document book that was
submitted as an exhibit of the Appellant and accepted without
protest or objection by the counsel for the Respondent.
Since this is an Informal Proceeding, with both parties being
represented by legal counsel who were prepared to put before me a
document book as sufficient to determine the question of law
which was put to me, I have proceeded on that basis; that is, on
the basis that the parties are in agreement that any facts that I
need to rely on to resolve the question of law put to me could be
found within the document book. Factual inferences from the
document book were there for me to draw. Counsel were in
total agreement with this. Still, as I stated, where the
outcome of a decision is dependent on facts, this is an
unsatisfactory way to put in a case.
[2]
That being the case, notwithstanding that this appeal might
otherwise warrant written Reasons so as to potentially contribute
to the body of law on the question before me, I regard it as
limited value in terms of contributing to the jurisprudence on
the question it raises. It's not of precedential value
because it's an Informal Proceeding and because it has not
been put to me as generally required in an adversarial
proceeding. It falls short of a stated case as I have had to draw
my own inferences of fact from data without the testimony of
witnesses or an agreed statement of fact. Nonetheless I will
proceed as requested by counsel. As stated, I will
give my Reasons orally.
[3]
This appeal concerns reassessments of the Appellant's 1995,
1996, 1997 and 1998 taxation years. Certain maintenance
payments made by the Appellant to his former spouse in each of
these years were disallowed as deductions. The issue, by
agreement of legal counsel for the Appellant and the Respondent,
has been narrowed to the deductibility of certain of these
payments under paragraph 60(c) in respect of payments
before 1997 and paragraph 60(b) for payments in the 1997
and 1998 years (both such provisions being referred to in these
Reasons as the section 60 deduction provision) or subsection
60.1(2). The payments in question are third party maintenance
payments made after an Order of the Court of Queen's Bench in
November of 1996, which I will refer to as the "Subject
Order".
[4]
In so narrowing the issue, the Respondent and Appellant, through
their legal counsel, have agreed on the record that the Appellant
will be allowed his appeal in 1995 so as to permit in that year
maintenance deductions of $6,893.23. Further, the Appellant
will similarly be allowed his appeal in 1996 so as to permit in
that year a maintenance deduction of $6,323.25, plus the December
1996 third party payment of $545.00, the latter additional amount
to be allowed only if it is found that the Subject Order does not
alter the application of section 60 or subsection 60.1(2).
[5]
The reassessments of the 1997 and 1998 years will stand subject
to the further allowance, by agreement of counsel on the record,
of $614.00 in 1997 and, in both 1997 and 1998, the third
party payment of $545.00 per month, the latter additional amount
to be allowed only if it is found that the Subject Order does not
alter the application of section 60 or subsection
60.1(2).
[6]
Lastly, since the Subject Order and any other relevant agreement
or order were in place before 1997, it was acknowledged by
counsel for the Appellant and Respondent that there was no
commencement day regarding post April 1997 payments to the effect
that such payments were treated the same under section 60 as
payments prior to May 1997.
[7]
These various acknowledgements between counsel have narrowed the
issue before me to the $545.00 monthly third party payments made
after the November 1996 Subject Order. However, as I said
at the outset, they have agreed also not to call any witnesses,
but rather to present me with an agreed upon exhibit, namely a
Book of Documents, and I was invited to consider each document in
resolving the legal question put to me, namely whether the
Subject Order adversely affected the deductibility of the third
party payments in question. As I said, I think the parties
failed to understand that the impact of the Subject Order
depended on findings of fact better served by direct
testimony. Nonetheless, as I stated, I will proceed. The
choice of dismissing the appeal for failure to bring appropriate
evidence seems harsh given the Respondent's position.
[8]
Respondent's counsel's position is that the Subject Order
by its existence and wording alone dictate a finding that
the third party payments were not deductible given the Federal
Court Decision in Armstrong v. Canada, [1996] F.C.J. No.
599. Evidencing his resolve on this point was his agreement
with counsel for the Appellant that the third party payments
before December 1996, that is before the Subject Order, were
deductible. That is, it was agreed that a prior agreement
respecting these payments met the deduction criteria of the
Act. It was the intervening Order that failed to
meet that criteria and the payments in question made after
November 1996 were made pursuant to that intervening Order.
[9]
Respondent's counsel emphasized that I was bound by the
Federal Court of Appeal decision in Armstrong on this
question respecting third party payments under the intervening
Order. He put that proposition to me in spite of clear
authority from this Court that on certain facts, the
Armstrong decision would not apply. Counsel for the
Respondent was aware of these cases, indeed he included a number
of them in his Book of Authorities, but he suggested that since
they were all Informal Proceedings they carried no precedential
weight and I that I was bound by the Federal Court of Appeal
decision in Armstrong.
[10]
I am of the view, however, that these cases subsequent to
Armstrong do not offend that decision. They simply
stand for the principle that in a factual situation different
from that present in Armstrong, subsection 60.1(2) is not
exhaustive of statutory authority permitting the deduction of
third party maintenance payments.
[11]
Subsection 60.1(2) is, however, an absolute safe harbour if
expressly referred to in an order or agreement. But absent
that safe harbour, absent an express reference in an agreement or
order to subsections 60.1(2) and 56.1(2), there should be no
mandatory negative inference as to the possibility that section
60 could permit third party payment deductions in certain
situations that are clearly outside of the factual scope of
Armstrong.
[12]
I will refer to the documents in the document book that I think
have been helpful to me in determining the limited question
before me. Referring first to Tab 2 of the document book,
we have Minutes of Settlement and Matrimonial Property Agreement
tendered in proceedings in the Court of Queen's Bench of
Alberta and signed by the Appellant and his former spouse on
March the 7th, 1995. Paragraph 2.1 of the
Settlement Agreement reads as follows:
The husband covenants and agrees to pay to the wife for the
better maintenance and support of the said infant children of the
marriage the sum or two hundred and fifty dollars ($250.00) per
month per child, for a total of seven hundred and fifty dollars
($750.00) per month commencing on ...
Paragraph 2.2 goes on to say,
The parties agree that the maintenance to be paid by the
husband hereunder shall be deductible by the husband and taxable
in the hands of the wife, and the parties agree that at the time
of filing their respective income tax returns they shall make
whatever elections are required to give effect to this
clause.
[13]
I refer now to Tabs 10 and 11 which are affidavits of the
Appellant and his former spouse respectively forming part of the
proceedings that resulted in the Subject Order in November of
1996. These affidavits were executed in September of 1996
and in October of 1996 respectively.
[14]
Looking at the Appellant's affidavit, paragraph 3 in Tab 10,
referring to the Minutes of Settlement and what happened,
paragraph 3 reads as follows:
That the Petitioner and I further agreed that until the
Petitioner sold the property that was transferred to her pursuant
to the Minutes of Settlement, I would pay the first mortgage on
her property to the Alberta Treasury Branch in partial payment of
child support. The mortgage payment was $545.00 [and some
cents] per month and we agreed that I would pay her the
difference of $205.00 per month ...
[15]
Paragraph 5 under Tab 11 of the affidavit of the Appellant's
former spouse reads as follows:
"Normally when Evangelos ...
that's the Appellant,
... makes a monthly mortgage payment for me, it is credited
against his child support obligations. However, this has
not been the case over the course of the summer of 1996, because
of the rental agreement referred to above.
[16]
Let me make two points on these two excerpts by way of
explanation. Firstly, it is clear that the property in
respect of which the mortgage payments were made was the sole
property of the Appellant's former spouse and that she had
the sole obligation to meet the mortgage payments.
[17]
Secondly, it is clear that the Appellant's former spouse was
normally treating the mortgage payments being made by the
Appellant directly to the mortgagee, as payments that she was
permitting, at her discretion, as crediting child support payment
obligations. This seems to me to be clear enough by virtue
of paragraph 5 of her affidavit at Tab 11. What then
happened was that the Appellant's former wife, owning lands
that the Appellant wanted to use, in a handwritten agreement also
contained at Tab 5, agreed to rent these lands to the
Appellant. But the rent was to be paid by the Appellant
paying the mortgage on the spouse's lands. That's
two payment requirements in respect of the same mortgage.
One payment requirement is under their arrangement, where
maintenance will be credited $545.00 per month by payment of that
amount to the mortgagee, and now a second payment requirement
under a rental agreement. What the wife asserted is that
the rent, which totalled $3,000.00 paid to the mortgagee, could
not be credited against maintenance because it was qua
rent, not support. To sort out the difficulty, in terms of
what were the credits and what were the arrears in support
payments, the November '96 order was petitioned; petitioned
and received by consent of the parties. The consent was not
to alter the impact of any arrangement in my view, but was to
clarify what credits ought to be given in respect of the mortgage
payments against the maintenance obligations.
[18]
On this point I would refer also to Tab 8, at which is a record
of the Office of the Director of Maintenance Enforcement, and
this record demonstrates that in November of 1996, there were
arrears shown in maintenance payments that exceeded the arrears
asserted by the Appellant to be payable. The consent order
clarified amounts in arrears and in doing so was not meant to
alter the ongoing arrangement but confirm it.
[19]
I refer to Tab 15, at which are Revenue Canada statements of the
Appellant's former spouse's income and deductions.
They have been accepted by counsel for the Respondent as
documents from which I can draw factual inferences. In
those statements, statements are shown for the 1995, 1996 and
1997 years, there is no correlation between the amounts that
Revenue Canada has permitted as maintenance deductions to the
Appellant in the subject years and the amounts that his former
spouse included. Indeed, the former spouse has included
considerably more. For example, in 1997, $1,440.00 was the
amount of the deduction allowed by the Respondent according to
the reassessment for 1997, but the amount of income included by
his spouse in respect of the maintenance was $6,100.00.
There's no corresponding income and deduction amount. I
have no way to reconcile the numbers. Again, I have no
testimony. I have no idea as to the rationalization of the
inclusions versus the deductions. But an anomaly is
presented, from which I believe I, in the circumstances, again
without the benefit of testimony, can draw an inference.
The Appellant's former spouse has treated the subject third
party payments as income.
[20]
Lastly, consider Tab 5, which is the Subject Order. As I
stated, it is a consent order. It's an order that the
parties, I believe, petitioned to straighten away the arrears
situation and clarify which mortgage payments had been made on
account of rent and which mortgage payments had been paid on
account of maintenance. Paragraph 1 of that Subject Order
reads:
That the child support arrears owing by the Respondent are
hereby confirmed in the total amount of $3,000.00.
That underlines to me that there is consent in this order that
the mortgage payments as to $3,000.00 were rent payments.
The spouse of the Appellant was exercising her discretion, at
least until that point in time, to say how she wanted to receive
these amounts. Under paragraph 2 of the Subject Order she agreed
to stay the execution of enforcement of arrears payments until
certain lands were sold. Everything about the Subject Order
underlines its focus: dealing with arrears.
[21]
Paragraph 3 of the Subject Order is the paragraph on which
counsel for the Respondent relies. It reads:
That commencing December, 1996, in lieu of child support, the
Respondent shall pay directly to the Alberta Treasury Branches
the monthly mortgage of the Petitioner for the lands legally
described ... in addition the Respondent shall pay to the
Petitioner $205.00 commencing January, 1997 and continuing
...
[22]
It's the Respondent's position that this paragraph no
longer constitutes the mortgage payments as deductible
maintenance and relies, as I said, on Armstrong to give
effect to that position.
[23]
As I said, the purpose of the order is clear, in my view.
It was only to sort out the question of arrears. It seems
to me that it specifically addresses the Appellant's former
spouse's concern at paragraph 5 of the affidavit at Tab 11,
namely that the $3,000.00 paid against her mortgage was rent and
could not be credited as child support. It also corrected
the amount of arrears that had been recorded as arrears in the
records of the Office of the Director of Maintenance Enforcement
and allowed time for payment of arrears. It should, in my
view, not be given a higher purpose by reason of being set out in
a consent order. The importance of it as a consent order
will be addressed momentarily.
[24]
That takes me to my analysis of the sections of the
Act. I do not believe it is necessary to recite the
sections of the Income Tax Act that pertain to this
case. They are cumbersome, and their drafting style has
drawn criticism on several occasions from this Court. To
sort matters out, simply consider that the two deduction
provisions in the context of this case are subsections 60.1(2)
and section 60. I will deal with subsection 60.1(2)
first. Under this provision if a maintenance order or
agreement expressly refers to subsections 56.1(2) and 60.1(2),
then on the deduction side, 60.1(2) says that such express
reference will satisfy all deduction requirements in respect of
third parties as to who the recipient is, as to whether it's
periodic, as to whether it's an allowance, as to whether or
not the recipient had discretion. All issues are resolved
if you have express reference to subsections 60.1(2) and
56.1(2).
[25]
I agree, that reliance on that absolute safe harbour requires
express reference in the agreement or order to 56.1(2) and
60.1(2). Further, I believe that that is what the
Armstrong case in its ratio decides, and I take no issue
with that ratio. Accordingly, I conclude that 60.1(2) does
not help the Appellant in this case. The Subject Order does
not make reference to those sections.
[26]
That takes us to section 60 and the issue as to whether or not it
permits the deduction of third party maintenance payments.
Under section 60 the Appellant's former spouse must be the
recipient of the Appellant's maintenance payments.
Further, section 60 requires that the payment be an allowance,
which prior to the 1997 amendments was defined in subsection
56(12) to exclude an amount received by the former spouse unless
such recipient has discretion as to the use of the amount.
So there are two requirements in this situation. One is
that the Appellant's former spouse be the recipient of the
payment and the other is that she must have discretion over the
use of the amounts.
[27]
In respect of third party payments, the problem is if such
payments are made directly to a third party such as in this case
to a mortgagee, how can it be said that the recipient was in this
case the taxpayer's former spouse? Literally she was
not the recipient, the mortgagee was. In this context
subsection 60.1(1) provides the answer. It provides that
regardless of who the actual recipient of the payment is, if it
benefits the mother, or her children or both as the case may be,
the payment is deemed to be the receipt of the mother. Such
deeming constitutes the mother, in this case, a recipient for the
purposes of section 60. The Respondent took no issue with
this.
[28]
But as pointed out in Armstrong, that is not the end of
the analysis, it must go further. In addition to
establishing that in this case the spouse is the recipient of the
third party payment, the requirement that it be an allowance with
discretion as to use must still be met. Subsection 60.1(1)
does not deem that. The Armstrong decision clearly
states that subsection 60.1(2) cannot be of assistance in meeting
this requirement. Since that subsection and subsection 56.1(2)
are not expressly referred to in the Order. I am bound by that
decision and incidentally I am in concurrence with it. But
I don't think Armstrong goes further than to say that
subsection 60.1(2) is of no assistance to the Appellant in this
case.
[29]
That still leaves the remaining issue as to the application of
section 60 to third party payments. That is, did the
recipient of the payment, deemed to be the Appellant's former
spouse in this case by subsection 60.1(1), have discretion as to
the use of the amounts that were paid to the mortgagee?
[30]
The Respondent's position is that these payments were made
because of paragraph 3 of the Subject Order and not because of
the exercise of any discretion. That it's to the
benefit of the Appellant's former spouse or the children of
the marriage would not matter in the Respondent's view.
But I don't agree that the analysis stops there if there is a
benefit here to the Appellant's former spouse which there clearly
seems to be from the documents submitted (mortgage payments on
property she owns are paid by him to her benefit). In such case
the analysis goes on. Indeed, as acknowledged at the
outset, this Court has found that third party payments can be
given deduction treatment under section 60 where the facts,
distinguished from Armstrong, reflect that the parties
intended a constructive recipient to be benefited by those
payments. The Appellant's former spouse in this case,
clearly agreed to exercise her discretion over the use of the
payments by consenting to such payments being directly paid to
the third party. Whether that consent is given one payment
at a time or given in respect of a series of future payments does
not matter in my view. That consent can be given in an
agreement, inferred from circumstances or can be taken from
consent to an order that directs that third party payment.
[31]
There should also, following post Armstrong decisions, be
a clear intention that the consent or agreement be given with the
full knowledge of the party benefiting from the payment as to the
consequences of the application of that discretion in that
way. That includes a clear understanding and intention as
to the income tax consequences. These are evidentiary
matters and there is no automatic safe harbour here in respect of
third party deductions under section 60. The criteria for
allowing third party payments under such provision has strong
evidentiary requirements.
[32]
As I stated at the outset, I think it's regrettable in this
case that I've been asked by the Appellant to apply these
post Armstrong cases in a matter where I have virtually no
first hand evidence. However the inferences that I can draw
and have drawn from the documents are sufficiently strong to
approach the question of intent and understanding. I will
now consider then the ways in which the Tax Court of Canada has
approached the application of 60 in these circumstances. I think
they can be divided into two approaches. But the criteria
I've mentioned are similar in both approaches.
[33]
In Moore v. Canada, [1998] T.C.J. No. 148, Judge Rip dealt
with an order made pursuant to the consent of the parties, and he
found the intent of the parties clear; that they were for the
benefit of the intended recipient spouse; and further, as to the
element of discretion, at paragraph 15 of that judgment, Judge
Rip said as follows:
In agreeing to the separation agreement Mrs. Moore exercised
her discretion, ...
... in how the payments to her may be paid by the payor.
In this manner, she exercised her discretion as to the use of the
amount. I do not believe it is necessary that she exercise
her discretion at the time such payment is made. It is
sufficient that her discretion was exercised in advance in an
agreement entered into between her and the Appellant. Thus
the Appellant may be said to have been paying Mrs. Moore alimony
or an allowance within the meaning of subsections 60(b),
(c) or (c.1) when he made the payments pursuant to
paragraph 2(a) of the Separation Agreement.
[34]
I agree with the import of this finding. To find otherwise
would mean that the discretion would have to apply to each
payment separately. "I consent to your sending the
January cheque directly to the mortgage company", should not
produce a different result, in my view than "I consent to
your paying the next six cheques directly to the mortgage
company". Each is an exercise of discretion.
Provided that there is evidence, as I have stated, that the
beneficiary of the payment intended that by agreeing to that
series that they were exercising their discretion in respect of
all of the payments. And that includes an understanding of
the tax consequences. These are difficult evidentiary matters, in
my view.
[35]
Referring now to Chute v. Canada, [1999] T.C.J. No.
173. Judge Sarchuk, paragraph 7 of his judgment found:
... I am also satisfied that the payments in issue in the
present appeal are covered by paragraph 60(b) in that the
Appellant's former spouse exercised her discretion as to how
the money was to be paid by consenting to the 1994 Order.
These payments to the daughter were made unquestionably with the
wife's express consent and with the approval of the
Court.
[36]
In Upshaw v. Canada, [2000] T.C.J. No. 468, Judge Hamlyn
at paragraphs 19 and 21 found:
As evidenced in the letter of September 7, 1993, the
Appellant's former spouse consented to the Appellant making
third party payments. Justice Bateman's judgment was
made pursuant to this letter between the Appellant and his former
spouse agreeing as to the method of third party payments, as well
as the resulting tax consequences.
He goes on in paragraph 21:
And further I conclude the consent of the Appellant's
spouse to the third party payment order, as well as the
acknowledgement of the tax implications from the correspondence
to the Justice of the Supreme Court of Nova Scotia indicates that
the third party payments were within the discretionary use of the
Appellant's spouse. The payments, therefore, are
allowances under subsection 56(12) of the Act that are for
the discretionary use of the Appellant's former spouse for
the purpose of section 60.1
While Judge Hamlyn refers to section 60.1, it seems it would
have been sufficient to refer to section 60 since that's where
the discretion requirement is unless deemed in subsection 60.1(2)
to be satisfied.
[37]
As I stated the approach reflected in these post Armstrong
decisions allowing third party payment deductions under section
60 raise strong evidentiary requirements as to intent and that
applies not only to an intent to exercise discretion, as to one
payment or a series of payments, but an intent as to the tax
consequences that follow.
[38]
The next approach adopts an agency analysis. While the approach
is different from a legal perspective it would apply the same
criteria as stated above. The agency approach is set out by now
Associate Chief Justice Bowman in the Hak v. Canada
decision, [1998] T.C.J. No. 921. In that decision, at
paragraph 17, Judge Bowman says,
It appears quite obvious that Fazima Hak had a discretion with
respect to the entire $1,000.00, and she exercised that
discretion by constituting her husband her agent to pay on her
behalf certain expenses such as utility bills and rent.
What Fazima Hak is saying in effect is, "You are to pay me
$1,000.00 per month. You can satisfy part of that
obligation by paying some of the bills.
[39]
It's interesting to note that Judge Bowman felt he did not
have to rely on section 60.1(1) in finding the spouse the
recipient of a third party payment. He rather felt it was
clear at law that in such cases the doctrine or law of
constructive receipt would apply, and that even without 60.1(1)
constructive receipt in cases like this would make the intended
beneficiary the actual beneficiary for the purposes of section
60.
[40]
Accordingly, I do not find any of these cases, or for that matter
either these approaches inconsistent with Armstrong.
There were no consents in that case, no clear indication on the
facts what the parties intended in agreeing to a series of third
party payments. Nothing that would allude to the likelihood
that there was an understanding of the tax consequences, and on
that basis I don't believe that the Armstrong decision
is at odds with the Tax Court cases that I have just referred
to. While Armstrong suggests there may be a negative
inference if the parties have not expressly referred to a
60.1(2), I wouldn't go so far as saying that that is a
mandatory negative inference.
[41]
That concludes my analysis, and although, I repeat, I'm not
comfortable that as a trier of fact that I have not heard the
testimony of the parties, I am of the view that the tax clause
contained in the settlement agreement in 1995 cannot be said,
based on the documents I have reviewed, to have been intended to
replace or overrule by the Subject Order.
[42]
I believe the Subject Order was intended primarily, if not
exclusively, to deal with the situation of arrears and how to
credit third party mortgage payments as between rents and
maintenance. There's evidence that the former spouse
has reported considerably more income than has been allowed as a
deduction to the Appellant which, I take it reflects that she
understood that her inclusion obligation, even after the Subject
Order, was based on the agreement and commitment to include third
party maintenance payments as per the original agreement entered
into at her discretion. The Subject Order was a consent order.
Like cases of this Court that I have cited, such orders can
evidence an intention to use discretion in the direction of funds
to third parties.
[43]
Accordingly I allow the appeals in part. I say "in
part", because as I've already described, the appeals
have largely been disposed of by consent. To summarize
where we are I would state the outcome of the appeal as
follows: the Appellant will be allowed his appeal in
respect of 1995, so as to permit in that year a maintenance
deduction of $6,893.23. Further, the Appellant will be
similarly allowed his appeal in 1996, so as to permit in that
year a maintenance deduction of $6,323.25, plus the December 1996
third party payment of $545.00. Further, for the 1997 and
'98 years, the amount of the maintenance deduction is the
amount allowed in the reassessment for those years, plus the
third party payments of $545.00 per month until the mortgage was
paid off in full. Lastly I reiterate that in respect of
1997, in accordance with the agreement of counsel, the Appellant
be allowed an additional deduction of $614.00.
[44]
It appears then that the Appellant has been successful as to more
than half of the amount of tax, and accordingly I give costs to
the Appellant as per the tariff or schedule as provided in the
Rules.
Signed at Ottawa, Canada, this 20th day of May 2003.
J.T.C.C.
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