Pierre Jacques v. Her Majesty the Queen (Informal Procedure)., [1995] 1 CTC 2563

Archambault J.T.C.C.:-These are appeals in accordance with the informal notice of income tax reassessment procedure for the 1989 and 1990 taxation years. The Minister of National Revenue (the ’’Minister”) refused the deduction of certain sums on the ground that they were not alimony or other allowance within the meaning of paragraph 60(b) or (c) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the ’’Act”).

Facts

The appellant and Mrs. Irène Hivon were married on March 13, 1976. They had two children together. Each of them already had a child from a previous marriage. In 1989, the couple experienced financial management problems that caused serious tensions. In March 1989, the couple separated. On April 14, 1989 Mrs. Hivon filed an application for interim relief in which she requested, as alimony for herself and the children, that the appellant pay the taxes and the mortgage (the "mortgage loan”) on the conjugal home and that he alone repay a loan owed by the couple (the "personal loan") owing to the Bank of Nova Scotia.

On May 30, 1989 and June 6, 1989 Mrs. Hivon and the appellant respectively signed a consent that was filed in the Superior Court. Pursuant to this agreement, Mrs. Hivon had custody of the four children and Mr. Jacques was to make the monthly payments on the mortgage loan and the personal loan as alimony.

On October 3, 1989, the appellant and Mrs. Hivon signed a draft agreement that provided:

1. Mrs. Hivon shall have legal and physical custody of her four children.

6. As alimony, Mr. Pierre Jacques shall pay the mortgage and the municipal, school and other taxes on the conjugal home.

7. Mr. Pierre Jacques alone shall pay the debt owing to the Bank of Nova Scotia.

The draft agreement was approved by Jean Frappier J. of the Quebec Superior Court on the same day. Neither the draft agreement nor the judgment of the Superior Court stated that the agreement was retroactive to an earlier date. Furthermore, they did not contain any provision that sections 56.1 and 60.1 of the Act should apply to the payments provided for in the agreement.

Arguments of the parties

According to the parties, the solution to the issue raised on this appeal depends on the interpretation the Court gives to subsection 56(12) of the Act, which provides as follows:

56(12) Subject. to subsections 56.1(2) and 60.1(2), for the purposes of paragraphs (1)(b), (c) and (c.1) (hereinafter in this subsection referred to as the "former paragraphs") and 60(b), (c) and (c.l) (hereinafter 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.

[Emphasis added.]

According to the appellant’s submissions, the point at which it must be determined whether a person has discretion as to the use of the amount received is the point when the application for this amount is made. In the instant case, according to the appellant, this was when Mrs. Hivon filed her application for interim relief or when the agreement was approved by the Quebec Superior Court. According to him, in both these cases Mrs. Hivon exercised her discretion and the appellant responded to her requests by repaying the mortgage loan and the personal loan. Furthermore, Mrs. Hivon is free to apply to the Superior Court of Quebec for a variation of the alimony.

The Minister disputes this interpretation of subsection 56(12) of the Act. He maintains that this section is clear and that the discretion must be assessed at the point when the sums received are used and not at the time of the application for alimony.

Analysis

Allowance

In order for a taxpayer to be able to deduct a sum as alimony, it is important that he or she satisfy the conditions set forth in paragraph 60(b) or (c) of the Act, including the requirement that this sum be an "allowance". [1] The respondent maintains that the sums paid by the appellant do not satisfy the definition of "allowance". There is a long line of authority concerning the concept of allowance for the purposes of paragraph 60(b). A rapid overview of the development of the case law is useful for a better understanding of the scope of subsection 56(12), which was enacted to modify the interpretation given by the courts. The first decision that should be referred to is that of the Federal Court of Appeal in The Queen v. Pascoe, [1975] C.T.C. 656, 75 D.T.C. 5427. Speaking on behalf of the Court, Pratte J. gave the following definition of allowance:

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 who is not required to account for it. A payment in satisfaction of an obligation to indemnify or reimburse someone or to defray his or her actual expenses is not an allowance; it is not a sum allowed to the recipient to be applied in his or her discretion to certain kinds of expense.

[Emphasis added.]

In that case the Court of Appeal held that the necessary sums paid by the taxpayer to his wife to defray specific expenses, including, in particular, medical and educational expenses, did not constitute an allowance. The wife did not have sufficient discretion as to the use of the sums in question. She had to use them for specific purposes. This strict interpretation also raised a doubt in the mind of Pratte J. One month later, however, the Federal Court of Appeal rendered another decision in Canada (A.G.) v. Weaver, [1975] C.T.C. 646, 75 D.T.C. 5462, confirming the restrictive interpretation adopted in Pascoe, supra. In this second decision, the Court of Appeal held that the taxes and the mortgage paid by a taxpayer to his wife’s creditors did not constitute an allowance.

This strict interpretation by the Federal Court of Appeal was reversed by the Supreme Court of Canada on March 27, 1986 in Gagnon v. The Queen, [1986] 1 S.C.R. 264, [1986] 1 C.T.C. 410, 86 D.T.C. 6179. In effect, the Court held that the allowance concept should be broadened. Beetz J., stated the following at page 275 (C.T.C. 417, D.T.C. 6184):

Seen in this context, the third condition imposed by Pascoe must be corrected: for an amount to be an allowance within the meaning of paragraph 60(b) of the Income Tax 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.

For the Supreme Court, a sum of $360 paid in 1974 by a taxpayer to his ex-wife to enable her to pay the mortgage on the family residence constituted an allowance.

On February 10, 1988, the Minister of Finance proposed that the Act be amended by the addition of subsection 56(12) (quoted earlier). It is clear that the measure announced in 1988, which applied to the 1986 and subsequent taxation years, was designed to re- establish the definition of. allowance adopted in Pascoe and to ignore that adopted by the Supreme Court on March 27, 1986 in Gagnon. We note in the transitional provisions that subsection 56(12) applies to decrees, orders or judgments issued or agreements concluded prior to "March 28, 1986" or after 1987. Furthermore the budget papers tabled in the House of Commons on February 10, 1988 by the Honourable Michael H. Wilson, the Minister of Finance, confirm this intention. The situation that existed prior to 1984 is described there as follows at page 10:

Before 1984, for an amount to be considered a deductible allowance, it must have been a fixed sum of money paid directly to the recipient for maintenance and support pursuant to a court order, decree or separation agreement. The amount must have been determined in advance and, once paid, the recipient must have had complete discretion as to its disposition. Where the court order or separation agreement provided that certain payments for the benefit of the spouse, former spouse or children of the marriage were to be made directly to a third party, the law permitted their deduction by the payor where the amount to be paid to the third party was deducted from the total amount required to be paid to the spouse or former spouse with the express or implied concurrence of the latter person. Amounts paid to third parties for actual expenses-for example, educational, medical or heating costs—did not qualify as an allowance.

[Emphasis added.]

The scope of the proposed amendment is explained as follows at page 11:

For the 1988 and subsequent taxation years, the amendments will restore the status quo prior to the Gagnon decision. Thus, third party payments after 1987 will fall within the rules set out in sections 56.1 and 60.1 of the Act.

In my opinion, the Court must take this historical context and the Parliamentary intent into account in defining the scope of the amendment made to the concept of allowance by the addition of subsection 56(12). This subsection provides that the "amount that is received" constitutes an allowance only if this person has discretion as to the use of the amount. The amount that is subject to this discretion is the amount received. We must accordingly consider the point at which the amount is received and not, as the appellant maintains, that at which the obligation to pay this amount is created, in determining whether the recipient has discretion as to its use. No mention is made in subsection 56(12) of an application for alimony and even less of the time at which it is made. The appellant’s interpretation seems to me to be simply untenable. The wording of this provision is, moreover, similar to that used by the Court of Appeal in Pascoe concerning the "allowance" concept: "once paid, it is at the complete disposition of the recipient" (supra, page 657 (D.T.C. 5428) ). The beneficiary must be able to use the amount received at the time it is received in order for it to constitute an allowance. In conclusion, this interpretation seems to me to be in accordance not only with the legislative intent but also with the wording of this subsection.

Alimony

In order to be deductible under paragraph 60(b) of the Act, a sum must be paid as alimony or other allowance. Is it possible to maintain that the sums paid by the appellant constitute alimony without being an allowance? There are few decisions dealing with the scope of the expression "alimony", as used in paragraph 60(b). In Weaver, Thurlow J. defined "alimony" as an "allowance" paid pursuant to an order for the maintenance of a spouse. [2] Since "alimony" is not defined in the Act, we must refer to the law of the jurisdiction in which the dispute arose in order to determine the scope of the concept, in this case Quebec. Article 534 of the Civil Code of Lower Canada, applicable during the relevant taxation years, provided as follows:

Art 534. The Court, when granting a separation as to bed and board or subsequently, may order either spouse to pay support to the other.

Since the Civil Code does not use the expression "alimony", we must look to the everyday definition. In the Nouveau Petit Robert several defini-

tions are given of the word "pension". The first is as follows: "periodic allowance paid regularly to a person. CIVIL LAW-Alimentary pension". It would accordingly appear that the concept of "alimentary pension" in civil law has at least one thing in common with that of alimony in the common law: it is an allowance. Moreover, Parliament seems to have adopted this notion since it speaks in paragraph 60(b) of alimony or "other" allowance payable on a periodic basis.

Since an alimentary pension is an allowance, it is not possible to avoid the application of subsection 56(12). The sums paid by the appellant do not constitute alimony or other allowance for the purposes of paragraph 60(b) or (c) of the Act and cannot be deducted pursuant to these provisions.

For all these reasons, the appeals are dismissed, without costs.

Appeals dismissed without costs.