Upshaw v. The Queen, docket 1999-2640-IT-I (Informal Procedure)

Date: 20000728

Docket: 1999-2640-IT-I

BETWEEN:

ROBERT UPSHAW,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Hamlyn, J.T.C.C.

[1] This is an appeal with respect to the 1993 and 1994 taxation years.

[2] The Minister of National Revenue (the “Minister”) assessed the Appellant’s 1993 and 1994 income tax liability on March 31, 1994 and May 30, 1995 respectively, allowing deductions for alimony in the amount of $17,000 in 1993 and $19,000 in 1994 ("the disputed amounts").

[3] The Appellant’s 1993 and 1994 income tax liability was reassessed by Notices of Reassessment dated September 10, 1996 to disallow alimony deductions of $12,000 in 1993 and $4,050 in 1994.

[4] The Appellant filed a valid Notice of Objection to the 1993 and 1994 assessments and the Minister confirmed assessments by Notice of Confirmation dated February 4, 1998.

[5] In assessing the 1993 and 1994 taxation years, the Minister relied on the following: (These assumptions were essentially accepted by the Appellant.)

(a)                  the Appellant left the matrimonial home on December 31, 1992;

(b)                  an interim order dated March 16, 1993 gave interim custody of the one child to the Appellant’s spouse, Sheila Earlene Upshaw, and required the Appellant to pay interim maintenance for the child in the amount of $500 per month;

(c)                  an order dated January 5, 1994 granted custody of the child and a second child, born in June of 1993, to Sheila Upshaw and required the Appellant to take steps to deal with his debts “with a view to making more funds available monthly to the Applicant and the children ...”;

(d)                  that same order dated January 5, 1994 required the Appellant to continue to pay interim maintenance in the amount of $500 per month for the support of the children and to continue to pay for the benefit of the Applicant and the children of the marriage all of the expenses related to maintenance and upkeep to the matrimonial home including mortgage, property taxes, heat, lights, telephone and house insurance until further ordered by the Court (approximately $1,200 per month);

(e)                  the Appellant and Sheila Upshaw were divorced on November 3, 1994;

(f)                   The Appellant’s former spouse moved out of the matrimonial home in May of 1994 at which time full ownership of the home was returned to the Appellant.

OTHER EVIDENCE

[6] The disputed amounts were paid between March 1993 and May 1994 pursuant to a judge's in court order of the Family Court for the Province of Nova Scotia (Judge Deborah Gass, March 16, 1993) and pursuant to the signed order of Justice Nancy J. Bateman of the Supreme Court of Nova Scotia, dated January 5, 1994.

[7] The disputed amounts covered expenses payable to third parties related to the maintenance and upkeep of the matrimonial home. The payments included mortgage payments, property taxes, heat, lights, telephone and house insurance of the matrimonial home.

[8] The Interim Order from Judge Deborah Gass regarding support payments dated March 16, 1993 did not make any reference to the disputed amounts and did not make any reference to subsection 60.1(2) or subsection 56.1(2) of the Income Tax Act, R.S.C. 1985, c. 1 (5^th Supp.) (the “Act”).

[9] The signed Order of Justice Nancy J. Bateman of the Supreme Court of Nova Scotia, dated January 5, 1994, did not make any reference to subsection 60.1(2) or subsection 56.1(2) of the Act.

[10] With respect to the January 5, 1994 order, there was a letter filed from the Appellant's spouse's counsel to Justice Nancy Bateman (September 7, 1993) with a copy to the Appellant's counsel indicating a consent to an order for the disputed amounts and acknowledging the tax consequences to both parties. This letter led to the order of January 5, 1994.

APPELLANT’S POSITION

[11] The Appellant’s position is that from March 16, 1993 to May 2, 1994 he was ordered by the Family Court for the Province of Nova Scotia and Supreme Court of Nova Scotia to pay all of the expenses related to the maintenance and upkeep of the matrimonial home including mortgage, property taxes, heat, lights and house insurance, which items amounted to $1,200 per month. The Appellant further states that this aspect of the order by the Family Court for the Province of Nova Scotia was not part of the written order of the court of March 16, 1993 but was orally directed by the presiding judge. As indicated, he did file with this court a letter to a Justice of the Supreme Court of Nova Scotia dated September 7, 1993 from the counsel for his spouse with a copy to his counsel indicating all parties consent to this particular order and indicating therein acknowledgement of the income tax aspects of such an order to the respective parties. The order of January 5, 1994 of the Supreme Court of Nova Scotia reflected the consent of the solicitors for both parties but did not reflect the acknowledgement of the income tax aspects.

[12] The Appellant paid $1,200 per month from March 1993 to May 1994. It is to be noted, that the Respondent in this proceeding did not dispute the $1,200 per month that was paid for the expenses as indicated.

RESPONDENT’S POSITION

[13] The position of the Respondent is that the disputed amounts are not deductible from the Appellant’s income for the taxation years 1993 and 1994.

[14] The payments made by the Appellant to third parties did not fall within the provisions of subsections 60.1(1), 60.1(2) and 56.1(2) of the Act and the payments made do not qualify as an allowance defined by subsection 56(12) of the Act.

ANALYSIS

[15] Subsections 56.1(1) and 60.1(1) are reciprocal provisions which extend the scope of paragraph 60(b) to payments made to third parties for the benefit of a person and/or children in the custody of that person. By virtue of subsections 56.1(1) and 60.1(1), payments made to a third party for the benefit of the Appellant's former spouse and/or children in her custody could be deemed to have been paid by the Appellant and received by the Appellant's spouse.

[16] Subsections 60.1(2) and 56.1(2) of the Act are also reciprocal provisions which may deem the disputed third party payments as allowances for the discretionary use of the Appellant’s former spouse of the purposes of subsection 60.1.

[17] Pursuant to the Court of Appeal decision in Armstrong v. The Queen, 96 DTC 6315, subsections 60.1(1) and 56(12) must be read together. As such, even though subsection 60.1(1) does not specifically allude to "allowance", any payment that would otherwise be deductible under subsection 60.1(1) must also qualify as an "allowance" within the meaning of subsection 56(12) of the Act. Therefore, in this case, to allow the Appellant to deduct the disputed payments pursuant to subsection 60.1(1), the court must be satisfied that the payments in question were allowances as pursuant to subsection 56(12) of the Act.

[18] Allowances as defined by subsection 56(12) exclude amounts over which the taxpayer did not have discretion as to its use.

[19] 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. In her judgment, Justice Bateman specifically wrote “... continue to pay ...”, alluding to, I conclude, the in court order of the Family Court for the Province of Nova Scotia and the pre-judgment agreement made between the Appellant and his former spouse in respect of the third party payments. As such, the letter dated September 7, 1993 and the payment order of January 5, 1994 did recognize those previous payments by the use of the words "continue to pay". Therefore, the disputed third party payments were originally made by the Appellant, as a result of the pronouncement by the judge in court in March of 1993 to make the payments, although that specific order was never signed by the court it was incorporated into the order by the Supreme Court of Nova Scotia.

[20] Based on the consent of the parties, these payments were made for the benefit of the Appellant's spouse and the Appellant's children in the custody of the Appellant's spouse within the meaning of subsection 60.1(1) of the Act.

[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 the third party payments were within the discretionary use of the Appellant's spouse. The payments, therefore, are allowances within 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.

DECISION

[22] The appeal is allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the payments made to third parties in the 1993 (an additional $12,000) and 1994 (an additional $4,050) for expenses related to the maintenance and upkeep of the matrimonial home where the former spouse and children resided are allowances and deductible.

Signed at Ottawa, Canada, this 28th day of July 2000.

"D. Hamlyn"

J.T.C.C.