Lamarche v. R., [1996] 2 CTC 2062, 95 DTC 469 (Informal Procedure)

Lamarre J.T.C.C.: — This is an appeal from an assessment respecting the 1989 taxation year notice of which was sent to the appellant on June 12, 1990. The appellant had deducted the amount of $6,000 as support payments in computing his income for the 1989 taxation year.

In assessing the appellant, the Minister of National Revenue (“the Minister”) reduced this amount by $2,170,00 on the ground that the latter amount had not been paid by the appellant to his former wife during the 1989 taxation year and did not meet the requirements of section 60.1 and paragraphs 60(b) and 60(c) of the Income Tax Act (“the Act’).

FACTS

To make this assessment, the Minister took for granted the following facts, which are stated at paragraph 5 of the Reply to the Notice of Appeal:

(a) the appellant is divorced from Louise Lamarche, now known as Louise Larouche (his “former spouse”), pursuant to a Divorce Judgment taking effect on June 26, 1987;

(b) during the 1989 taxation year, the appellant deducted in computing his income the amount of $6,000 as support payments made to his former spouse;

(c) the appellant paid his former spouse $3,830.10 in support during the 1989 taxation year;

(d) the former spouse included an amount of $3,830.10 as support payments received from the appellant in computing her income for the 1989 taxation year;

(e) the appellant did not pay any amount in excess of that amount of $3,830.10 paid to his former spouse during the 1989 taxation year;

(f) all amounts, if there were any amounts paid in excess of that amount of $3,830.10 were not amounts paid as support or maintenance payments and were not deductible by the appellant.

[Translation.]

The appellant testified at the hearing and admitted paragraphs (a), (b) and (c) cited above. He claimed, however, that he had in fact paid a total of $6,000 to his ex-wife in the 1989 taxation year. To support his position, he filed a set of documents jointly as Exhibit A-l at the start of the hearing with the consent of counsel for the respondent. Miss Larouche also testified to say that she had received only an amount of $3,830.10 from the appellant during that same taxation year.

In a divorce judgment rendered on May 22, 1987 by Soubliere J. of the Supreme Court of Ontario, which forms part of Exhibit A-l, the appellant undertook to pay Miss Larouche support of $1,000 per month until June 1, 1989 inclusive. On this point, subparagraphs 3(d) and 3(e) of that judgment provide as follows:

3. THIS COURT ORDERS AND ADJUDGES that child and spousal support and maintenance shall be payable in accordance with paragraphs 17 to 32 of the

Separation Agreement herein dated October 14, 1986, as follows:

d. The husband shall pay the wife $1,000 each month for the support of the wife commencing September 1, 1986 and continuing until and including June 1, 1989, at which time the husband’s obligation to support the wife will cease absolutely.

e. Except as specifically provided in paragraph 3(d) above, each party hereby releases the other from all claims and causes of action in regard to spousal support and interim spousal support under the present and future laws of Ontario and Canada and under the present and future laws of any other jurisdiction.

That same judgment provided moreover that the two parents had joint custody of the children and that each of them had to provide in equal shares for the children’s current expenditures. Subparagraphs 3(a), (b) and

(h) address this matter and read as follows:

a. The parties agree that each shall contribute to the support of each child in accordance with their ability to do so until one or more of the following events occurs:

(1) the child marries;

(2) the child dies;

(3) the child ceases to maintain a home with either the husband or the wife (provided that “ceases to maintain a home with either the husband or the wife” does not include the situation of the child living away from a parent’s home in order to attend an educational institution, pursue summer employment or enjoy a holiday of reasonable length);

(4) the child attains the age of eighteen years and ceases to be in full-time attendance at an educational institution (provided that “ceases to be in full-time attendance at an educational institution” does not include the situation of the child working one semester each year);

(5) the child obtains his or her first post- secondary degree, certificate or diploma (provided the child continues with his or her studies immediately upon graduation from secondary school and does not interrupt his or her studies).

b. For the time being, the parties agree that each will pay for the ongoing expenses (such as shelter, food, transportation, entertainment, casual babysitting, etc.) associated with a child while the child is residing with that party; and both will contribute equally to such major expenses associated with a child such as daycare charges; medical, hospital or dental expenses (including orthodontic expenses) not covered by any insurance plans; the cost of extracurricular recreational programs; and the cost of summer camps. A party shall not be responsible for any major expenses associated with a child unless that party has given his or her prior consent to the expenditure, such consent not to be unreasonably withheld.

h. The husband and the wife shall share equally the cost of maintaining hospital and medical insurance under the Ontario Hospital Insurance Plan (OHIP) for the benefit of the children for as long as they are obliged to support the children pursuant to this separation agreement, any amendments thereto or any court order.

On January 24, 1990, the terms of this divorce judgment were amended in respect of the custody of the children by a new judgment rendered by Flanigan J. of the Supreme Court of Ontario which also formed part of Exhibit A-1. The children went to take up their principal residence at the home of their father, the appellant, and Miss Larouche undertook to pay the appellant the sum of $75 per month for her children’s benefit starting on February 1, 1990. Furthermore, the provision for the payment of support by the appellant to Miss Larouche was not renewed. However, the same clause appeared as had appeared in the first divorce judgment in which the two parties mutually waived all claims for support other than what was specifically provided by that judgment. Subparagraphs 2(a) and 2(c) of this new judgment address this point and read as follows:

2. THIS COURT ORDERS that paragraph 3 of the Divorce Judgment shall be deleted and in its place, paragraph 3 shall provide as follows:

(a) Commencing the 1st of February, 1990, the parties agree that the mother will pay to the father, for the children’s activities, the sum of $75 per month per child for so long as the children are children of the marriage within the meaning of the Divorce Act.

(c) Except as specifically provided in paragraph 3(a) [sic] above, each party hereby releases the other from all claims and causes of action in regard to spousal support and interim spousal support under the present and future laws of Ontario and Canada and under the present and future laws of any other jurisdiction.

In Exhibit A-l, the appellant also filed a document entitled “Schedule I” in which he established the sum of the amounts actually paid to his ex-wife in 1989 and the sum of the amounts which he allegedly paid for her for the children’s benefit and which he said he deducted from the amounts which he had had to pay her as support in 1989.1 reproduce this schedule below:

SCHEDULE 1

Payments/Deductions Made

MONTH: DEDUCTIONS: PAYMENT

January 8, 1989: $1,000: 0

February, 1989: $ 377.66: $ 622.34

March, 1989: $ 717.75: $ 282.25

April, 1989:$ 29.87: $ 970.13

May, 1989:$ 14.87: $985.13

June, 1989:$ 29.75: $ 970.25

TOTAL: $2,169.90: $3,830.10

It is this amount of $2,168.90 which the appellant claimed as a deduction in addition to the amount of $3,830.10 in support for the 1989 taxation year. These expenses incurred by the appellant for the children were alleged to be a portion of the educational, medical and dental expenses paid from 1986 to 1989. They also included expenses incurred in the same years in respect of the sports played by the children. The appellant claimed that the sum of $2,169.90 which he thus paid during the years corresponded to the share which was supposed to be assumed by Miss Larouche and which she allegedly had not paid. He further contended that she had admitted that those amounts had been paid for her and that she had agreed to compensate and to reduce the support payment of $1,000 per month which she was to receive in 1989 to take into account those amounts which had been paid for the children. In support of his claims, he drew the Court’s attention to a document which was part of Exhibit A-l, entitled “Acknowledgement”, signed by Miss Larouche on July 3, 1992 and which reads as follows:

ACKNOWLEDGEMENT

WHEREAS LOUISE LAROUCHE was entitled to support payments from MICHEL LAMARCHE pursuant to a divorce judgment dated May 26th, 1987;

AND WHEREAS LOUISE LAROUCHE and MICHEL LAMARCHE entered into Minutes of Settlement in January of 1990, which were approved by way of an Order of Judge Flanigan dated January 24, 1990, wherein each of LOUISE LAROUCHE and MICHEL LAMARCHE released the other from all claims and causes of actions in regard to spousal support;

AND WHEREAS, as of July 2, 1992, notwithstanding the records of the organization responsible for administering the Family Orders and Agreements Enforcement Assistance Act, there are no support payments owing by MICHEL LAMARCHE to LOUISE LAROUCHE;

THEREFORE, LOUISE LAROUCHE acknowledges that she has no present claim against MICHEL LAMARCHE for support payments not made by MICHEL LAMARCHE as required by any order for support between the parties.

DATED this 3rd day of July, 1992.

WITNESS LOUISE LAROUCHE

The appellant also relied on another untitled and undated document forming part of Exhibit A-1 whereby Miss Larouche apparently admitted the following:

I LOUISE LAMARCHE LAROUCHE certify that I have received all of the amount and interest which MICHEL LAMARCHE owed me.

Signature:

[Translation.]

Miss Larouche said in her testimony that she had always paid the expenses relating to her children when she had had custody of them.

She did not admit that the appellant was right to compensate her support payments for the expenditures which, according to him, she should have made for the children. She mentioned that she herself had paid certain expenses in respect of the sports played by the children. She also mentioned that she had been taking courses during the years following their divorce. She further admitted that she had received the sum of $3,830.10 from the appellant by cheque in five payments in 1989. Two of those five cheques totalling $1,607.47 went through the Support and Custody Orders Enforcement Program of the Ministry of the Attorney General. She herself added income from the support payments of $3,830.10 in her 1989 income tax return.

Mr. Kevin Nearing, a lawyer, testified for the appellant. He had represented the appellant in the divorce proceedings. His testimony was that Miss Larouche had discontinued the action she had wanted to institute against the appellant for the amount of $2,169.90, hence the existence of the document entitled “Acknowledgement”. He answered in examination- in-chief that the amount of $1,000 per month had been considered paid (in his own terms, “The obligation of $1,000 per month was deemed satisfied”). He referred to the final judgment of January 24, 1990 in which the two parties had released each other from all support payments. At the appellant’s request, he also referred to a letter dated February 23, 1994 which he had sent to Christine Charbonneau of Revenue Canada and which was also part of Exhibit A-l. In that letter, he wrote, among other things, the following:

..please find enclosed the Order of the Honourable Judge Flanigan dated January 24, 1990.... In subparagraph (c) on page 9, the parties released each other from all claims and causes of actions in regard to spousal support and interim spousal support. This finalized the issue of whether or not payments had been made in 1989 pursuant to the Separation Agreement and Divorce Judgment....

[Emphasis added.]

In cross-examination, Mr. Nearing admitted that the judgment of January 24, 1990 made no reference to and did not provide for any compensation for the amounts which had allegedly been paid by the appellant for the children against the support payment which he had to pay Miss Larouche pursuant to the first divorce judgment.

ANALYSIS

The question that arises is whether the appellant was entitled to deduct an amount of $6,000 as support payments from his income in his 1989 taxation year. Paragraphs 60(b), 60(c) and 60(c.l) and section 60.1 of the Act, as applicable for the 1989 taxation year, govern the deductibility of support payments. They read as follows:

SECTION 60: Other deductions.

There may be deducted in computing a taxpayer’s income for a taxation year such of the following amounts as are applicable:

(b) an amount paid by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if he was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, his spouse or former spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year;

(c) an amount paid by the taxpayer in the year, pursuant to an order of a competent tribunal, as an allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the recipient, or both the recipient and children of the recipient if, at the time the payment was made and throughout the remainder of the year, he was living apart from his spouse to whom he was required to make the payment;

(c. 1 ) an amount paid by the taxpayer in the year, pursuant to an order made by a competent tribunal in accordance with the laws of a province, as an allowance payable on a periodic basis, for the maintenance of the recipient thereof, children of the recipient, or both the recipient and children of the recipient if

(i) the order was made

(A) after February 10, 1988, or

(B) before February 11, 1988 and the taxpayer and the recipient jointly elected before the end of the year to have this para- graph and paragraph 56( l)(c. 1 ) apply with respect to the payment,

(ii) at the time the payment was made and throughout the remainder of the year, the taxpayer was living apart from the recipient, and

(iii) the taxpayer required to pay the amount is an individual of the opposite sex who

(A) before the date of the order cohabited with the recipient in a conjugal relationship, or

(B) is the natural parent of a child of the recipient;

SECTION 60.1: Maintenance payments.

(1) Where, after May 6, 1974, a decree, order, judgment or written agreement described in paragraph 60(b), (c) or (c.l), or any variation thereof, has been made providing for the periodic payment of an amount by a taxpayer:

(a) to a person who is

(i) the taxpayer’s spouse or former spouse, or

(ii) where the amount is paid pursuant to an order made by a competent tribunal after February 10, 1988 in accordance with the laws of a province, an individual of the opposite sex who

(A) before the date of the order cohabited with the taxpayer in a conjugal relationship, or

(B) is the natural parent of a child of the taxpayer, or

(b) for the benefit of the person or children in the custody of the person, or both the person and those children,

the amount or any part thereof, when paid, shall be deemed, for the purposes of paragraphs 60(b), (c) and (c.l), to have been paid to and received by that person.

(2) For the purposes of paragraphs 60(b), (c) and (c.l), the amount, if any, by which

(a) the aggregate of all amounts each of which is an amount (other than an amount to which paragraph 60(b), (c) or (c.l) otherwise applies) paid by a taxpayer in a taxation year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, in respect of an expense ... incurred in the year or the immediately preceding taxation year for maintenance of a person ...

shall, where the decree, order, judgment or written agreement, as the case may be, provides that this subsection and subsection 56.1(2) shall apply to any payment made pursuant thereto, be deemed to be an amount paid by the taxpayer and received by that person as an allowance payable on a periodic basis.

(3) For the purposes of this section and section 60, where a decree, order or judgment of a competent tribunal or a written agreement made at any time in a taxation year provides that an amount paid before that time and in the year or the immediately preceding taxation year is to be considered as having been paid and received pursuant thereto, the following rules apply:

(a) the amount shall be deemed to have been paid pursuant thereto; and

(b) the person who made the payment shall be deemed to have been separated pursuant to a divorce, judicial separation or written separation agreement from his spouse or former spouse at the time the payment was made and throughout the remainder of the year.

[Emphasis added.]

Thus the question that arises is whether the sum of $6,000 claimed by the appellant meets all these conditions. With respect to the amount of $3,830.10 which was paid directly to Miss Larouche, that amount was not disputed by the Minister. It is with respect to the sum of $2,169.90, which the appellant himself admits he did not pay directly to Miss Larouche, that the question arises. Can the appellant claim that the amounts totalling $2,169.90 paid to third parties for the benefit of his children can be the equivalent of the payment of support which he had to pay to Miss Larouche pursuant to the divorce judgment of May 26, 1987?

On the one hand, can these amounts be considered as constituting an allowance payable on a periodic basis pursuant to the divorce judgment as required by paragraphs 60(b), 60(c) and 60(c.1) of the Act and, on the other hand, even if those sums cannot be so characterized, can it be said that they compensated an allowance payable on a periodic basis?

A. Allowance Payable on a Periodic Basis

It goes without saying that, if the appellant had paid the sum of $1,000 per month to Miss Larouche in 1989 as he was required to do by the divorce judgment, he would have been entitled to deduct the full amount of $6,000 in his 1989 taxation year. Clause 3(d) of the first divorce judgment met all the necessary conditions of an allowance payable on a periodic basis. This was not what he did, however. He reduced the allowance of $1,000 per month which he had to pay to Miss Larouche pursuant to the divorce judgment by this sum of $2,169.90. The appellant claimed that this sum corresponded to the amount which should have been paid by Miss Larouche in respect of the children pursuant to the divorce judgment and which she did not pay. If such was the case, it is my view that this sum does not meet the definition of an allowance payable on a periodic basis as it must be understood in paragraphs 60(b), 60(c) and 60(c.l) of the Act. The Supreme Court of Canada ruled on the meaning to be given to the word “allowance” in Gagnon v. R. [1986] 1 S.C.R. 264 [1986] 1 C.T.C. 410, 86 D.T.C. 6179. To be characterized as an allowance within the meaning of paragraph 60(b) of the Act, a sum of money must meet three conditions: (1) it must be limited and predetermined pursuant to a decree, order or judgment or a written agreement, (2) it must be paid to support the beneficiary and (3) it must be at the latter’s complete disposition. Payments made for the children’s education as well as dental care and medical expenses incurred for them were considered by the Federal Court of Appeal in R. v. Pascoe, [1975] C.T.C. 656, 75 D.T.C. 5427, as not meeting the tests of an allowance payable on a periodic basis. Pratte J.A. wrote as follows at page 658 (D.T.C. 5428):

First, we are of opinion that the payment of those sums did not constitute the payment of an allowance within the meaning of section 11(1)(1). An allowance is, in our view, a limited predetermined sum of money paid to enable the recipient to provide for certain kinds of expense; its amount is determined in advance and, once paid, it is at the complete disposition of the recipient ...

Furthermore, even if the payment of the expenses here in question could be construed as the payment of an allowance, it was not, in our view, an allowance “payable on a periodic basis” as required by section 11 ( 1 )(1). The payment was not determined by the separation agreement and the decree nisi to be at fixed recurring intervals of time. Indeed, the agreement and decree said nothing about when payment of the expenses must be made. It is not relevant that the educational expenses may, in fact, have been paid on a periodic basis since the periodicity required by the statute refers to the manner in which the allowance is payable, not to the manner in which it is in fact paid.

This analysis was upheld by the Supreme Court in Gagnon, supra, at page 272 (C.T.C. 415, D.T.C. 6182):

According to the definition in Pascoe, for a sum of money to be regarded as an “allowance” it must meet three conditions: (1) the amount must be limited and predetermined; (2) the amount must be paid to enable the recipient to discharge a certain type of expense; (3) the amount must be at the complete disposition of the recipient, who is not required to account for it to anyone.

It was only in respect of the third condition that the Supreme Court amended the Federal Court of Appeal’s interpretation in Pascoe, supra. For an amount to be an allowance within the meaning of paragraph 60(b) of the Act, the recipient must be able to dispose of it completely for his own benefit, regardless of the restrictions imposed on him as to the way in which he disposes of it and benefits from it. Gagnon v. R., supra, page 275 (C.T.C. 417, D.T.C. 6184). Subsection 56(12) of the Act, added by 1988,

c. 55, subsection 34(6), also appears to have been adopted to this end. The decision in Gagnon thus does not in any way affect the analysis made in Pascoe as to the characterization of the payments made by a parent for the children’s education or for their medical and dental care.

I therefore conclude that the payments totalling the sum of $2,169.90 made by the appellant for his children do not meet the definition of allowance payable on a periodic basis within the meaning of paragraph 60(b) of the Act. The same conclusion also arises from the analysis of paragraph 60(c) and 60(c.l) of the Act.

Moreover, expenditures made to third parties to support children could have been deemed to be an amount paid by the appellant and received by his ex-wife as an allowance payable on a periodic basis if the divorce judgment had so provided. This is precisely the object of section 60.1 of the Act. In the instant situation, however, neither of the two judgments filed in evidence governing the support to be paid by either party refers to these expenses as having to be considered as the payment of an allowance payable on a periodic basis pursuant to the Act. Section 60.1 of the Act therefore cannot be of any help here for the appellant.

B. Compensation

The final issue remaining to be addressed is whether the payments made by the appellant to third parties for his children’s benefit can compensate the amount of the allowance payable on a periodic basis of $1,000 per month which the appellant had to pay to his ex-wife. In other words, can the appellant argue that Miss Larouche received payment by compensation of the sum of $2,169.90 as support during the 1989 taxation year?

My colleague Judge Garon analyzed the matter in the decision which he rendered in Blais v. Minister of National Revenue, [1990] 2 C.T.C. 2005, 90 D.T.C. 1499. He had to determine whether the deduction claimed for alimony by the appellant Poliquin in computing his income from the sum which he should have paid in alimony to the appellant Miss Blais, but which, according to the appellant Poliquin, had been applied to reduce a claim which he had against his former wife, was valid under paragraph 60(b) of the Act. Judge Garon came to the conclusion that the compensation, if there had been any compensation, could not be considered as a deemed payment of the alimony otherwise payable. He wrote as follows at page 2011 (D.T.C. 1504):

...1 am of the opinion that even if the agreement of September 20, 1984 had established compensation, this point was not decisive because I believe that in interpreting paragraph 56(1 )(b) and 60(b) we must keep to the common or usual meaning of the words “paid and “received” that are used in these paragraphs.

However, Judge Garon had previously established the following at page 2008 (D.T.C. 1502):

If I rely only on the common meaning of the word “paid”, I must find that the legal acts set out in paragraph 4 of the agreement in question, or in other words the operations contemplated by the deductions provided for therein, do not constitute payment of amounts by the appellant Poliquin to the appellant Blais.

Judge Garon subsequently drew a distinction with another decision of our Court in Armstrong v. Minister of National Revenue, [1988] 1 C.T.C. 2019, 88 D.T.C. 1015. In that case, Judge Bonner had concluded that, as a result of the common law “set-off’, the husband had thus discharged the obligation he had contracted in a written separation agreement and that his wife had therefore received taxable amounts. In Armstrong, the wife admitted that she owed her former husband a debt and it was on this initial premise that Judge Bonner recognized that there had been a “set-off’ and that the husband had paid the alimony. It is my view in the instant case that the evidence did not show that Miss Larouche had admitted that she owed sums of money which the appellant had applied to her alimony. Her testimony was rather to the effect that she had paid for the children when she had had custody of them and that she herself had paid certain expenses relating to her children’s activities. Furthermore, I note from a reading of the introductory sentence of clause 3(a) of the first divorce judgment that the spouses had to contribute to their children’s support in accordance with their ability. However, Miss Larouche said that she had been taking courses during that period. This leads me to believe that she was not required to pay the expenses thus incurred for her children by the appellant.

As to the document entitled “Acknowledgement”, as well as to the other, undated document signed by Miss Larouche, I do not see from a reading of them any element enabling me to conclude that Miss Larouche recognized that she had received payment of the sum of $2,169.90. Rather I understand from these documents, as well as from the letter to Revenue Canada from the lawyer Mr. Nearing and from Miss Larouche’s testimony, that Miss Larouche waived payment of that sum in order to put an end to any action between the appellant and herself. It is for this reason that I conclude that there was no compensation and that, accordingly the sum of $2,169.90 paid by the appellant for the benefit of his children does not meet the tests set by paragraphs 60(b) and 60(c) of the Act to entitle him to a deduction from his income for the 1989 taxation year.

The appeal is therefore dismissed.

Appeal dismissed.