Date: 20010309
Docket: 2000-1088-IT-I
BETWEEN:
EVELYNE SERBEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Archambault, J.T.C.C.
[1]
Ms. Evelyne Serbey is appealing a reassessment of income tax with
respect to the 1996 taxation year whereby the Minister of
National Revenue (Minister) included in her income an
amount of $8,456 as alimony or maintenance payments. This amount
represents payments made by Mr. Ian Perrie (ex-husband) to
third parties pursuant to an interim order of Mr. Justice Nolin
of the Quebec Superior Court dated December 16, 1991.
The relevant portion of the court order is the following:
CONDAMNE le demandeur à payer à la
défenderesse, à titre de pension alimentaire non
indexée pour les deux enfants mineurs, la somme de mille
cinq cents [sic] cinquante dollars (1 550 $) par
mois, payable de la façon suivante :
i)
en retenant mensuellement les sommes nécessaires pour
acquitter lui-même les montants des redevances
hypothécaires du domicile conjugal, ceux ou celles des
taxes et impositions foncières, des assurances de maison,
de même que des paiements périodiques et des
assurances pour l'automobile Subaru 1988;
ii)
en remettant à la défenderesse à
l'avance, le premier de chaque mois, tout solde s'il y a
lieu non autrement exigible dudit montant de mille cinq cents
[sic] cinquante dollars (1 550 $); [...]
[2]
The only issue raised by this appeal is whether the amounts paid
to the third parties as described in i) above meet the
requirements of subsection 56(12) of the Income Tax
Act (Act) as applicable in the relevant taxation year.
That subsection reads as follows:
(12)
Definition of "allowance". Subject to subsections
56.1(2) and 60.1(2), for the purposes of paragraphs (1)(b), (c)
and (c.1) (in this subsection referred to as the "former
paragraphs") and 60(b), (c) and (c.1) (in this subsection
referred to as the "latter paragraphs"),
"allowance" does not include any amount that is
received by a person, referred to in the former paragraphs as
"the taxpayer" and in the latter paragraphs as
"the recipient", unless that person has discretion as
to the use of the amount.
[3]
On July 10, 1997, Ms. Serbey requested the Minister to amend
her income tax returns for the 1992 to 1996 taxation years on the
basis that the maintenance payments made to third parties by her
ex-husband should be excluded from her income. On
September 8, 1997, the Minister issued for the 1996 taxation
year a notice of reassessment excluding the sum of $8,456.
[4]
Eventually, the Minister reassessed Ms. Serbey's
ex-husband and disallowed the deduction of $8,456 paid in
1996 to third parties. The ex-husband appealed to this
Court and my colleague Judge Lamarre Proulx allowed his
appeal on September 20, 1999. This decision is reported
as Perrie v. The Queen, 1999 CarswellNat 1790, [1999] 4
C.T.C. 2642, 1 R.F.L. 5th 75. Judge Lamarre Proulx
concluded that the facts in the ex-husband's case were
similar to those dealt with in the decisions of Judge Bowman
inHak v. The Queen, 99 DTC 36 and
Judge Sarchuk in Chute v. The Queen,
[1999] 2 C.T.C. 2864.
Judge Lamarre Proulx gave the following reasons for her
decision:
[14] In my
view, there is no doubt that the wording of the relevant clause
of the judgment of Justice Nolin of the Superior Court, cited at
paragraph [3] of these Reasons, is within the ambit of
subsections 60.1(1) and 56(12) of the Act. If one reads
that clause, it says that the Appellant had to pay the periodic
amount of $1,550 per month, payable to the Appellant's
ex-wife and that he had to pay this amount in full. He was
instructed to deduct from this amount some amounts to third
parties, but discretion remained in the Appellant's
ex-wife as to the outcome of these payments. She could have paid
herself the mortgage payments on a house of which she was the
owner and the Appellant would have had then to pay to her the
full amount of $1,550. She was entitled to the payment of a
periodic amount of $1,550 per month. I also find that the deeming
provision of subsection 60.1(1) of the Act, which provides
that such amount shall be deemed to have been paid and received
by the person for the benefit of whom the amount is paid to third
parties, should be given its meaning as is any other enacted
legislative provision. A person to whom an amount is paid has
discretion as to the use of this amount.
[5]
Following the Perrie decision of this Court, the Minister
reassessed Ms. Serbey on November 29, 1999.
Position of the Respondent
[6]
Obviously, the Minister reassessed Ms. Serbey as a result of
the decision rendered in Perrie. Counsel for the Minister
submits that the amount of $8,456 paid by Ms. Serbey's
ex-husband to third parties for the benefit of
Ms. Serbey during the 1996 taxation year is taxable pursuant
to subsections 56.1(1) and 56(12) of the Act. He
acknowledges that, in order for this amount to be taxable in
Ms. Serbey's hands, it must be an amount in respect of
which she had discretion as to its use as required by
subsection 56(12) of the Act. The Federal Court of
Appeal's decision in Armstrong v. R., 1996 Carswell
Nat 1281, [1996] 2 C.T.C. 266, is to that effect. In particular,
in paragraph 23, Stone, J.A. stated: "In my view, the
subsection 56(12) definition of "allowance" is to be
read together with subsection 60.1(1) of the Act and the
latter subsection construed accordingly." In that case, the
ex-husband had been ordered in the following terms to make
monthly mortgage payments
4. The petitioner, MURRAY ROBERT ARMSTRONG, shall pay the
monthly mortgage obligation with respect to the matrimonial home
and the Royal Bank loan payment as each falls due.
[7]
In the case at bar, counsel for the Minister is in agreement with
the Perrie decision. He contends that discretion remained
with Ms. Serbey as to the use of the payments to third
parties.
Position of Ms. Serbey
[8]
Ms. Serbey's counsel, who practises in the field of
matrimonial law, takes a contrary view as to Ms. Serbey's
discretion with respect to the payments to third parties. He
stated that Ms. Serbey could not have asked her ex-husband not to
pay the third parties described in the court order of Justice
Nolin without first having that order amended by the Superior
Court. Consequently, it could not be concluded that Ms. Serbey
had any discretion as to the use of the amount described in
paragraph i) of the court order.
Analysis
[9]
With respect for the contrary view, I believe that Ms. Serbey did
not have any discretion with regard to the payments made to third
parties. I agree with counsel for Ms. Serbey that she could
not have directed her ex-husband to stop making payments to the
third parties without having the court order amended. It is true
that Ms. Serbey could have herself made the mortgage payments on
the house which she owned, but it is unclear whether she could
then have claimed the equivalent amount from her husband.
[10] Had
Justice Nolin stated in his order that Ms. Serbey could have at
any time instructed her ex-husband to stop making payments to the
third parties and to make them instead to her, I would have
concluded without any hesitation that Ms. Serbey had discretion
over them. However, such is not the case. It is for this reason
that I conclude that Ms. Serbey did not have the discretion
required by subsection 56(12) of the Act.
[11] I should
point out that the decision in Perrie as well as the
decisions in Hak and Chute were rendered under the
informal procedure and, as provided in section 18.28 of the
Tax Court of Canada Act, they are not to be treated as
precedents for any other case. In addition, res judicata
cannot apply here because Ms. Serbey was not a party in the
Perrie case.
[12] In his
argument, counsel for Ms. Serbey suggested that the Hak
decision should be distinguished because there was in that case a
written agreement between the parties and not a court order as is
the case here. I do not believe that this is a valid distinction.
I fail to see what difference it makes whether the loss of
control of an ex-spouse over certain maintenance payments is
agreed to by that ex-spouse or is ordered by a court. A
distinction must be made between the time at which a maintenance
agreement is concluded and the time at which the maintenance
payments are made pursuant to such an agreement. For the purposes
of the relevant time of subsection 56(12) of the Act, for
determining whether a taxpayer has discretion as to the use of
maintenance payments is the time these payments are made. Once an
ex-spouse has agreed—whether voluntarily or
not—to a loss of control over maintenance payments, that
ex-spouse cannot thereafter exercise any discretion as to
the use of such payments, unless both parties to the agreement
consent to give the ex-spouse discretion or a court order
is issued giving such discretion.
[13] With
respect, I do not believe that Mrs. Hak had any more
discretion than Ms. Serbey in this case. Once Mrs. Hak
had agreed that her husband was to pay on her behalf certain
expenses such as utility bills and rent, she could not have
unilaterally given instructions to Mr. Hak to stop making these
payments to third parties. This appears to me to be consistent
with the intention of the parties. In paragraph 8 of the
Hak decision, we find the following explanation for the
agreement. Mr. Hak had testified that the payments to third
parties had been agreed upon "because his wife was totally
irresponsible about money and would simply take the cash and
spend it on something else and not pay the rent or utility bills
and would probably be evicted or have her utilities cut
off." The very purpose of the agreement was apparently to
remove any discretion in Mrs. Hak as to the use of the
money. In short, she had discretion to agree or not to agree to
this arrangement. However, once she had agreed to it, she could
not thereafter unilaterally instruct her ex-husband to stop
making the payments and, in my view, it cannot be said that she
had retained any discretion as to the use of the funds.
[14] Before
concluding, I should stress that it is not a condition of
maintenance payments being included in income under
paragraph 56(1)(b) and subsection 56.1(1) of the
Act that those payments be deducted by the payer. Equally,
in determining that such payments are non-taxable in the
recipient's hands and escape the application of paragraph
56(1)(b) and subsection 56.1(1) of the Act, it is
irrelevant that the payer was allowed to deduct them in computing
his income under paragraph 60(b) and subsection 60.1(1) of
the Act. In other words, although the provisions regarding the
inclusion of maintenance payments in income and their deduction
from income are similar, they are not interdependent.
[15] Finally,
it is unfortunate that the appeals of both Ms. Serbey and her
ex-husband were not heard together by this Court.[1] Had this been the case,
only one hearing would have been required and only one of these
two taxpayers would have won his or her appeal. As it is, they
have both won and it is the Canadian taxpayers who have lost.
[16] For all
these reasons, the appeal of Ms. Serbey with respect to the 1996
taxation year is allowed, with costs, and the reassessment is
referred back to the Minister for reconsideration and
reassessment on the basis that the sum of $8,456 does not
constitute taxable maintenance payments and should be excluded
from Ms. Serbey's income.
Signed at Ottawa, Canada, this 9th day of March 2001.
"Pierre Archambault"
J.T.C.C.
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