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Citation:2003TCC691
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Date: 20030925
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Docket: 2003-704(IT)I
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BETWEEN:
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PETER HOCK,
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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
Rowe, D.J.
[1] The appellant appealed from an
assessment of income tax with respect to his 2000 taxation year.
The Minister of National Revenue (the "Minister")
disallowed the appellant's claim for $12,206 spousal support on
the basis that a purported agreement between the appellant and
his spouse did not indicate what amounts the appellant was
required to pay nor to whom the third party and specific purpose
payments were to be made. As a consequence, the Minister took the
position the requirements of subsections 60.(1) and (2) of the
Income Tax Act (the "Act") had not been
met and the appellant was not entitled to the deduction, as
claimed.
[2] The appellant - Hock - testified
he is a Corrections Officer employed by the Province of British
Columbia in Nanaimo. He and Rebecca Hock are married and are the
parents of two children, a girl born on February 6, 1982 and a
boy born on April 23, 1984. The appellant and his wife had
separated in 1995 and continued to live separate and apart
throughout the 2000 taxation year. Pursuant to an Order of the
Provincial Court of British Columbia - registered on December 23,
1999 - the appellant was required to pay the sum of $578 per
month - commencing January 1, 2000 - for the support of his two
children. During 2000, the appellant paid the sum of $6,946 to
Rebecca Hock pursuant to said Order but the commencement date of
the Order precluded deductibility of payments on the part of the
appellant. The appellant stated he and Rebecca Hock entered into
an agreement - Exhibit A-1 - dated December 20, 1999, whereby he
agreed to pay additional payments " for the support of the
existing eligible children" in the form of both
"Specific-Purpose Payments and Periodic Payments". The
relevant final portion of their agreement stated: "The
payer, Peter Hock ... will deduct these amounts under
subsection 60.1(2) of the Income Tax Act". In a
preceding clause, Rebecca Hock agreed she would include the
payments as income under subsection 56.1(2) of the
Act.Also, in said agreement, the appellant and his wife
agreed they would continue to abide by the Order issued - upon
consent of both parties - and then registered on
December 23, 1999. Hock testified that his wife had lost her
job - in 1999 - and issues arose concerning their former
matrimonial home, the title to which was held in their joint
names. He stated he had never pursued a divorce due to the
implications of dividing their joint equity in that residential
property. In 1999, Hock had made certain payments to third
parties and at the end of that year it had become apparent his
wife would require additional financial support during 2000 as a
consequence of having lost her employment. Earlier, Hock and his
wife had both contributed to the mortgage payments on their
jointly-owned residence since they had earned more or less the
same annual wage. The appellant stated he was required to make
payments to BC Hydro in relation to a Power Smart program and he
prepared a sheet - Exhibit A-2 - on which he listed this
obligation together with other payments made by him - during 2000
- to several third parties. In his view, all of these payments
were made pursuant to the written agreement - Exhibit A-1 - that
he had entered into with his wife on December 20, 1999. Hock
stated he and his wife had a joint bank account which he never
used except to deposit funds for her use. However, since the
monthly mortgage payment on their jointly-owned residence was
taken from that account, there was rarely any excess accumulated
therein. The remaining payments by Hock during 2000 were made
from his own separate bank account and the telephone and hydro
bills were still issued in his name. He also paid for car
insurance in respect of a vehicle registered in the name of
Rebecca Hock. The appellant explained that he and his wife had
decided to participate in the Power Smart program - offered to
consumers by BC Hydro - pursuant to which homeowners could
upgrade their homes in order to make them more energy efficient.
Hock and his wife installed vinyl windows, steel doors,
insulation and generally improved the energy efficiency of the
house. The payment schedule to retire the cost of this upgrading
work was based on equal annual payments in the sum of $2,436.07
spread over 5 years, calculated monthly and included within the
regular equalized monthly bill - in the sum of $369.79 - issued
by BC Hydro for power consumption. A total sum of $1,917.62 -
charged to the appellant's Mastercard - was considered by him to
have been for the benefit of his children although he conceded it
is sometimes difficult to determine the true beneficiary if - for
example - birthday gifts or other presents were purchased by his
wife for the children and presented to them. Hock stated he
continued to make third party payments in 2001, 2002 and
currently abides by the same practice. Hock's wife and children
lived in the jointly-owned residence - in Campbell River, B.C. -
and in recent years the value has declined by approximately
$30,000 to a present value of $124,000. Hock stated that, prior
to entering into the written agreement with his wife, he had
obtained a pamphlet entitled Support Payments
- Exhibit A-3 - from the local office of Canada
Customs and Revenue Agency - CCRA - and considered
that he and his wife had abided by the terms of their agreement
in that she had reported - as income in her 2000 income tax
return - the identical amount he had claimed as a deduction in
the form of spousal support. Specifically, he relied on the
contents of page 29 of said pamphlet wherein certain payments
were referred to as being eligible for deduction on the part of
the payer. In 2000, Hock's gross salary was $41,000 and payments
to his spouse - or to third parties - for the benefit of his
children amounted to $19,152. Within the context of a net salary
of approximately $26,000 per year, Hock stated there was very
little to live on considering he had no other sources of revenue.
The appellant stated that prior to entering into the agreement
with his wife, he was aware he would be called upon to make
certain payments - during 2000 - in order to maintain the
residence and lifestyle of his wife and children but he had
realized that many of these financial demands were not
predictable. During a telephone conversation with an Appeals
Officer at CCRA, Hock stated he was advised that if he had only
inserted a minimum monthly amount into the written agreement, his
payments - during 2000 - would have been deductible. The
appellant stated he was aware his wife had health issues and
considered he was bound by their marriage status to assist her
through a period of trouble. At the time of entering into said
agreement, Hock stated he thought he may have been operating
within a "grey area" but had not wanted to bind himself
to an obligation to make mortgage payments on the house because
he was not certain of the ramifications - if any - of taking a
deduction on that basis and still retaining the tax-free status
with respect to his share of funds flowing from the eventual sale
of the former matrimonial home.
[3] In cross-examination by counsel
for the respondent, the appellant stated he deposited - in 2000 -
the sum of $3,900 into the joint account for the purpose of
paying the mortgage of their former matrimonial home which
remained the residence of his wife and two children.
[4] The appellant conceded he was not
certain of the tax implications arising from the mortgage
payments and other expenditures made by himself within the
context of the agreement entered into between himself and his
wife but considered them to have been for the benefit of his
children. Further, Rebecca Hock had claimed the sum of $12,206 as
income and the appellant submitted he should be entitled to the
corresponding deduction.
[5] Counsel for the respondent
submitted the agreement - Exhibit A-1 - was merely the expression
of a future intention on the part of the appellant and was not a
legally binding agreement. Counsel categorized the document as
nothing more than an agreement between the parties purporting to
determine the manner of reporting payments - if made - by the
appellant.
[6] The issue is whether the appellant
is entitled to deduct the sum of $12,206 as additional support
payments made to or on behalf of his wife for the benefit of
their children.
[7] The relevant legislation is
contained in subsections 60.1(1) and (2) of the Act and
reads:
SECTION
60.1:
Support.
(1) For the purposes of paragraph 60(b) and
subsection 118(5), where an order or agreement, or any variation
thereof, provides for the payment of an amount by a taxpayer to a
person or for the benefit of the person, children in the
person's custody or both the person and those children, the
amount or any part thereof
(a) when payable, is
deemed to be payable to and receivable by that person; and
(b) when paid,
is deemed to have been paid to and received by that person.
(2) AGREEMENT. For the purpose of section 60,
this section and subsection 118(5), the amount determined by the
formula
A - B
where
A is the total
of all amounts each of which is an amount (other than an amount
that is otherwise a support amount) that became payable by a
taxpayer in a taxation year, under an order of a competent
tribunal or under a written agreement, in respect of an expense
(other than an expenditure in respect of a self-contained
domestic establishment in which the taxpayer resides or an
expenditure for the acquisition of tangible property that is not
an expenditure on account of a medical or education expense or in
respect of the acquisition, improvement or maintenance of a
self-contained domestic establishment in which the person
described in paragraph (a) or (b) resides) incurred
in the year or the preceding taxation year for the maintenance of
a person, children in the person's custody or both the person
and those children, where the person is
(a) the
taxpayer's spouse or common-law partner or former spouse or
common-law partner, or
(b) where the
amount became payable under an order made by a competent tribunal
in accordance with the laws of a province, an individual who is a
parent of a child of whom the taxpayer is a natural parent,
and
B is the
amount, if any, by which
(a) the total of
all amounts each of which is an amount included in the total
determined for A in respect of the acquisition or improvement of
a self-contained domestic establishment in which that person
resides, including any payment of principal or interest in
respect of a loan made or indebtedness incurred to finance, in
any manner whatever, such acquisition or improvement
exceeds
(b) the total of
all amounts each of which is an amount equal to 1/5 of the
original principal amount of a loan or indebtedness described in
paragraph (a),
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.
[8] The basic requirements for
deductibility on the part of the appellant in the circumstances
of the within appeal are:
a) the parties were living
separate and apart when the payments were made;
b) the support amount is an
amount payable or receivable as an allowance on a periodic
basis;
c) the payments to the
recipient must have been for the benefit of the children;
d) the payments were made to
Rebecca Hock or were otherwise within the category of a
specific-purpose payment or a third-party payment.
[9] There is no doubt that the
appellant and his wife were living separate and apart during
2000. However, the only true periodic payments made by the
appellant were those issued pursuant to the Order dated December
23, 1999 and the deductibility of those amounts are not in issue
because they commenced on January 1, 2000 and are ineligible
due to 1997 amendments to the Act. As stated by the
appellant in his testimony, he had some doubts about the effect
of deducting mortgage payments on their jointly-owned home in
that he was concerned that course of action might have some
undesirable downstream effect when the time came to sell the
property that had been their former matrimonial home and
- following their marital breakup - had continued to
be the residence of his wife and children. A close reading of the
agreement - Exhibit A-1 - does not reveal any binding obligation
on the part of the appellant as payer. There is no consideration
flowing from Rebecca Hock in that she did not forego any right to
legal action - actual or contemplated - in return for
obtaining his promise to make certain payments on a periodic
basis or for any future specific purpose. The clause concerning
the additional payments read as follows:
Additional payments will be in the form of both
Specific-Purpose Payments and Periodic Payments. These additional
payments will all be Third Party Payments. All of these payments
are for the benefit of the recipient.
[10] In my view, the language utilized is
contemplative because - as the appellant stated in his testimony
- he was not certain of the exact nature and extent of the
financial demands about to be thrust upon him - in 2000 - due to
the changed circumstances flowing from the loss of his wife's
employment and the ability to earn an annual salary equal to his
own. In that sense, the appellant chose not to bind himself
specifically to any particular payment schedule and wanted to
maintain a certain amount of control over the manner in which any
payments would be made. The mortgage payment on the residence was
withdrawn from a joint account in the name of the appellant and
his wife and - generally - he ensured that only funds sufficient
for the purpose of said payment were deposited into that
account.
[11] In the case of Hoult v. R.,
[2000] 2 C.T.C. 2756, Margeson, T.C.J. dealt with the
issue whether certain payments made by the taxpayer were
"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 the children of the recipient".
Judge Margeson concluded that a certain amount paid as medical
insurance payments constituted support amounts and was deductible
under subsection 60(b) of the Act. However, an
additional amount of $460 was held not to be deductible for
reasons stated at paragraph 28 of the reasons for judgment:
With respect to the additional medical payments of $460.00 the
Court has no difficulty in deciding that those amounts are not
deductible under the provisions in question here. They were
clearly not amounts which were made pursuant to the agreement on
a periodic basis. Indeed, according to the evidence these amounts
were not even ascertainable at the time the agreement was made
and they were not made periodically. It is no answer to this
argument to say that the payments were made on an ongoing basis.
The Court is satisfied that these payments were not made
periodically and on that basis alone the appeal in that respect
is dismissed and the Minister's assessment is confirmed.
[12] In Skertchly v. R.,
[2000] 4 C.T.C. 2089, Rip, T.C.J. considered the appeal of
a taxpayer who had come to the assistance of his wife who had
encountered certain financial difficulties. On the advice of his
solicitor, the taxpayer had made three monthly payments to his
wife - each in the sum of $3,056 - but under the terms of a
separation agreement entered into on June 6, 1995, there was no
provision compelling him to make periodic payments to his wife
and the only discussion of payments was within the context of a
lump sum payment as one of the terms of a settlement by which the
taxpayer would obtain title to the family residence.
[13] In Milliron v. Canada, [2003]
F.C.J. No. 1004, 2003 FCA 283, the Federal Court of Appeal dealt
with a judicial review of a judgment dismissing an appeal from an
assessment wherein the Minister denied the claim of the taxpayer
to deduct certain child support payments made pursuant to a
second document, separate and apart from an original separation
agreement. The judgment of the Court was delivered by Sharlow,
J.A. and is reproduced below:
This is an application for judicial review of a Tax Court
judgment dated May 15, 2002 dismissing Mr. Milliron's income
tax appeal relating to 1998 and 1999: Milliron v. Canada,
[2002] T.C.J. No. 252 (QL). The issue before this Court is
whether the Tax Court Judge was correct when he concluded that
Mr. Milliron is not entitled to deduct child support payments
made in those years.
In February of 1997, Mr. Milliron and Ms. Jones, who was then his
spouse, entered into a separation agreement under which he was
obliged to pay Ms. Jones child support in a stipulated amount for
their two children:
...UNTIL THE WIFE is employed in a single, full-time
job, or until December, 1997, whichever comes first. AT THAT
TIME, these maintenance and support monies will be renegotiated
to a lesser amount.
In December of 1997, Mr. Milliron and Ms. Jones executed a second
document that reduced the child support payments by
one-half. The opening clause of that document reads as
follows:
By mutual consent ... Spousal Support and Child Support
payments have been altered. Beginning on November 15, 1997 the
following changes were mutually agreed upon: ...
There follows a list of changes, including two clauses that
reduce the child support payments by one-half.
There is no dispute as to the meaning of the provisions of the
Income Tax Act that are relevant to this case. They may be
summarized as follows. Until 1997, child support payments made
pursuant to a court order or written agreement were deductible by
the paying parent, provided certain conditions were met. The
Income Tax Act was amended in 1997 so that child support
payments are not deductible if they are made pursuant to an
agreement or court order made after April 1997, or if they are
made pursuant to an agreement or court order made in or before
April 1997 that is varied after April 1997 to change the amount
of child support.
It was the position of the Crown that the child support payments
Mr. Milliron made in 1998 and 1999 were made pursuant to the
December 1997 document, and are not deductible because the
December 1997 document is either a new agreement or a variation
of the February 1997 agreement.
Mr. Milliron argued in the Tax Court, and also in this Court,
that the child support payments were made pursuant to the
February 1997 agreement, and that the December 1997 document was
not a new agreement or a variation of the February 1997
agreement, but a document that merely recognizes or acknowledges
a 50% reduction in child support that was agreed to in February
1997, and is implicit in the February 1997 agreement. In that
regard, Mr. Milliron relies upon the renegotiation clause
referred to above.
The Tax Court Judge rejected Mr. Milliron's argument and
accepted the argument of the Crown. We are all of the view that
he was correct to do so. The flaw in Mr. Milliron's argument
is that the renegotiation clause in the February 1997 agreement
does not stipulate any amounts. It is at most an agreement to
renegotiate. Even if Mr. Milliron and Ms. Jones intended in
February of 1997 that child support would be reduced by one-half
in December of 1997, it was not until December of 1997 that the
parties made a written agreement giving effect to that
intention.
Mr. Milliron also argued that he was induced by Revenue Canada
officials to claim the deductions as he did, and that he should
be entitled to some relief for "officially induced
error". The Tax Court has no jurisdiction to give a remedy
for incorrect advice. The jurisdiction of the Tax Court in an
income tax appeal is limited to determining whether the
assessment under appeal is correct, based on the facts and the
relevant law. Therefore, the Tax Court Judge was correct to
disregard Mr. Milliron's request for relief on that
ground.
For these reasons, this application for judicial review will be
dismissed.
[14] Returning to the within appeal, it is
apparent the so-called agreement - Exhibit A-1 - did
not compel the appellant to make any additional payments
for any particular purpose on any basis, periodic or otherwise.
Instead, it was an expression of good will on his part and it
should be noted that he contributed a huge proportion of his net
pay to support his children and - indirectly - his wife. In my
view, had the agreement been worded properly by setting out the
amount and nature of the payments to BC Hydro with respect to not
only the monthly consumption bills but also the repayment of the
cost of the energy renovation loan, the appellant would have been
entitled to the deductibility sought. Similarly, the mechanism
for the monthly payment of the mortgage could have been set forth
in an agreement so as to make it clear that it was clearly a
support payment within the provisions of the Act. By
agreement, parties cannot bind the Minister to assessing a named
person in a specific manner in respect of monies paid and
received if the intended result is not supported by relevant
provisions of the Act.
[15] Even if I had been able to conclude
that the document - Exhibit A-1 - constituted a binding agreement
and that it had " provided " for the payment of an amount for the
benefit of the appellant's children, there were certain amounts
paid - as listed on the schedule - Exhibit A-2 - that I would not
have allowed as a deduction. The payments to Petro Canada - for
charges incurred on a gasoline credit card - and those payments
to Mastercard and Canadian Tire on credit cards are too remote
and were not linked in evidence to a benefit conferred on the
children as opposed to merely assisting his wife for her own
purposes by providing her with funds in order that she could
continue to operate a motor vehicle.
[16] It is unfortunate the appellant did not
seek competent advice to allay his misgivings about any
subsequent tax implications possibly arising out of his decision
to make mortgage and other payments related to their former
matrimonial home. Had he done so, his good-hearted and consistent
support of his children in the form of periodic, specific
payments would have been eligible for deductibility in accordance
with the provisions of the Act. The whole point of
specific-purpose payments is that they must be for a specific
purpose even if the amount is not known at the time the
commitment is made and the expenditure is of the sort generally
regarded as a one-time payment.
[17] The jurisdiction of this Court is to
determine whether the assessment issued by the Minister is a
valid assessment. Having regard to the evidence and taking into
account the relevant jurisprudence, I conclude the assessment is
proper. The appeal is hereby dismissed.
Signed at Sidney, British Columbia, this 25th day of September
2003.
Rowe, D.J.
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