Jacqueline Guerin v. Her Majesty the Queen, [1994] 1 CTC 2382, 94 DTC 1356

Archambault, J.T.C.C.:—These are appeals from reassessments for the 1987 and 1988 taxation years. The issue is whether the amounts of $2,757 received in 1987 and $3,010 in 1988 constitute taxable income in the hands of the appellant as alimony under subparagraph 56(1 )(b) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). These two amounts were paid pursuant to clause 24 of a separation agreement (the "agreement") entered into in December 1976. It reads as follows:

Notwithstanding anything to the contrary herein contained, the husband covenants and agrees to pay unto the wife such income tax as may be payable by her in respect of all or any payments received hereunder from the husband whether for the maintenance of herself or the child of the marriage. At any time after December 31 of each and every year the wife shall forward unto the husband a copy of her income tax return together with her calculations showing the income tax payable in respect of the payments received by her hereunder and the husband shall pay unto the wife the said amount of income tax payable on or before April 30 each and every year and so on from time to time. For the purposes of this paragraph the payments made by the husband hereunder shall be considered to be the last income or earnings of the wife and income tax thereon shall be computed accordingly.

Under the agreement, the appellant’s husband had to pay a sum of $300 per month for the maintenance of his wife and $200 per month for the maintenance of his child. However, there is no dispute on the taxability of these amounts.

The reassessments being appealed seem to result from a judgment rendered by this Court in favour of the appellant’s husband, Mr. Anthony N. Guerin, who had appealed reassessments made by the respondent for the 1985, 1986 and 1987 taxation years in which the latter had disallowed the amounts paid by Mr. Guerin to the appellant pursuant to clause 24 of the separation agreement (Guerin v. M.N.R., [1991] 1 C.T.C. 2634, 91 D.T.C. 855). It is very unfortunate that respondent did not deem it appropriate to apply to the Court for a reference of common questions pursuant to subsection 174(1) of the Act. In Mr. Guerin’s appeal, the appellant did not even testify. Judge Garon of this Court rendered a judgment confirming that the amount of $2,757 for the 1987 taxation year constituted alimony within the meaning of paragraph 60(b) of the Act. The 1988 taxation year was not an issue. In Mr. Guerin's case, the Department admitted that all of the conditions of paragraph 60(b) had been met except for one element. The only issue was whether or not the amount was paid for the maintenance of the recipient and the child of the marriage.

In this case, the appellant's counsel is challenging the reassessments of the respondent on several grounds. He argues that the amounts paid pursuant to clause 24 of the agreement do not constitute amounts paid for the maintenance of the appellant nor an allowance that is a limited predetermined sum of money. In addition, the amounts paid by Mr. Guerin were not at Mrs. Guerin’s complete disposition. Finally, he alleges that the amounts were not payable on a periodic basis.

Analysis

In addition to the decision rendered in Guerin, supra, two other federal decisions have held that the payment of taxes attributable to alimony or maintenance constitutes an amount deductible as alimony or maintenance payment within the meaning of paragraph 60(b) of the Act. (See Monette v. M.N.R., [1992] 1 C.T.C. 2341, 92 D.T.C. 1622; and Fortin v. M.N.R., [1979] C.T.C. 2907, 79 D.T.C. 751.) Furthermore, the Quebec Provincial Court in Thibert v. S.M.R.Q., [1981] R.D.F.Q. 61, has also rendered a similar judgment. The only case favouring the position of the appellant is a decision rendered by the Tax Review Board in Shaw v. M.N.R., [1978] C.T.C. 3220, 79 D.T.C. 26. In the latter case, there is no detailed analysis explaining the basis of the judgment on this point. I feel compelled to follow the more recent decisions. I

find it unfortunate that there has been so much litigation in the application of a provision which should have been fairly straightforward. The amount of taxes in issue are often not very substantial and appeals by taxpayers often involved substantial costs. I think it is important to adopt a consistent jurisprudence to ensure that taxpayers know what the law is on the taxability or deductibility of alimony or maintenance payments. Inconsistent interpretation of the Act is not in the best interest of justice.

Given the able arguments presented by the attorney for the appellant, I will express in more detail my views why the amount of taxes paid pursuant to clause 24 of the Agreement constitutes alimony or an allowance payable on a periodic basis for the maintenance of the appellant and her child.

The appellant's first argument was that the amounts paid do not constitute maintenance for her daily needs such as food and clothing. On this issue, I agree with the comments of Mr. Guy Tremblay (now Judge Tremblay of this Court) in Fortin, supra, when he states at page 2910 (D.T.C. 753):

The Board is of the opinion that the amounts provided for taxes form part of the alimony paid by the appellant, although the decree granting the alimony distinguished between the “alimony” and the taxes payable upon it.

In the most typical case, both the payor of the alimony and the beneficiary would take into account the amount of taxes to be paid by the beneficiary in determining the amount of alimony. If we were to push the argument of the appellant to its extreme, one could argue that the tax portion of the alimony determined by the two parties would not constitute alimony given the intent of the spouses to take into account the taxes. This cannot be so.

On whether or not the amount of taxes represents an allowance being a limited predetermined sum of money, I share the views of Judge Garon in Monette v. M.N.R., supra, at page 2345 (D.T.C. 1624):

In my view, paragraph 60(b) does not require that the amount of the allowance be predetermined with mathematical precision. It is enough if the amount of the allowance is determinable.

I would also add that the decision of the Supreme Court of Canada in Gagnon v. The Queen, [1986] 1 S.C.R. 264, [1986] 1 C.T.C. 410, 86 D.T.C. 6179 has cast serious restrictions on the application of the well-known decision of the Federal Court of Appeal in The Queen v. Pascoe, [1975] C.T.C. 656, 75 D.T.C. 5427. It seems to me that the Supreme Court of Canada did not only modify the scope of the third condition dealing with the requirement that the amount paid be at the complete disposition of the recipient who is not required to account for it, but also on the condition that the amount be limited and predetermined. Indeed, it is quite clear that the sum of $360 payable by Gagnon, as stated at page 266 (C.TC. 411, D.T.C. 6180) of the decision was not a fixed predetermined amount as interpreted by the appellant's counsel:

. . . the amount of the said monthly payments is at present $360 and can vary as foreseen in the said contract but represents the repayment in capital and interest of two hypothecs described therein as well as the repayment by monthly payments of municipal and school taxes affecting the said immovable. . . .

It is therefore quite clear that the amount paid by Gagnon was determinable and was considered by the Supreme Court of Canada as being an "allowance" for purposes of paragraphs 60(b) and 56(1 )(b) of the Act.

The appellant argued that because the clause 24 payments were committed to the taxman, they were not at her complete disposition and could not be included in her income. In his testimony, Mr. Guerin testified that he did not require any evidence of payment of taxes by Mrs. Guerin. She had to provide a copy of her tax return in order for him to compute the amount of taxes that he owed to her as part of his alimony obligations towards her. In her own testimony, Mrs. Guerin acknowledged that she was free to do whatever she wanted with the money, although she acknowledged her obligation to fulfil her obligations to pay taxes under the Act. In any event, the amount paid by Mr. Guerin under clause 24 meets, in my view, the requirement of the definition of allowance as interpreted by the Supreme Court of Canada in Gagnon, supra. As stated by Mr. Justice Beetz at pages 275-76 (C.T.C. 417, D.T.C. 6184):

The duty which she had to apply these amounts to particular purposes does not affect the benefit she derived from them. These amounts are in the nature of income for her, and qualify as "allowances" within the meaning of both paragraphs 60(b) and 56(1)(b) of the Income Tax Act.

Finally, the appellant argued that the amounts paid by Mr. Guerin were not payable on a periodic basis. This issue was addressed by Judge Garon in Monette. One of his reasons to conclude that the payment of taxes was payable on a periodic basis was the fact that the money paid was unequivocally connected to the monthly payments. I share this view.

For all these reasons, I will dismiss the appeals.

It would have been, in my view, preferable to have Mrs. Guerin join the appeal of her husband when his case was heard. The interest of justice would have been better served. I will therefore not grant any costs.

Appeals dismissed.