Ghislaine Tremblay v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 2184

Garon, T.C.C.J.:—This appeal is governed by the provisions of the Tax Court of Canada Act and the Tax Court of Canada Rules applicable to the informal procedure.

It concerns an appeal from an assessment issued by the Minister of National Revenue on January 4, 1991 for the 1988 taxation year. By that assessment, the Minister of National Revenue added $6,815 to the appellant's income on the ground that this amount should be included in the appellant's income pursuant to paragraph 56(1)(b) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") as alimony.

The facts are straightforward.

On May 23, 1989 the Superior Court of Quebec, following a divorce proceeding, dissolved the marriage between the appellant and Mr. Jean-Charles Thibault During the preceding year, the taxation year at issue, the appellant was separated from her former husband under a written agreement between the parties dated June 15, 1987. This agreement was approved by the Superior Court of Quebec, district of Rimouski, on June 18, 1987. The custody of the child, Marie-Josée, was awarded to the appellant by paragraph 1 of the agreement. In paragraph 6 of the agreement, in which Mr. Thibault is referred to as the petitioner, it states:

As maintenance for the child Marie-Josée, the petitioner undertakes to pay mortgage payments, school taxes, household insurance costs and three-fourths of the municipal taxes.

[Translation.]

These expenses were for the former marital residence, where the appellant and her daughter Marie-Josée lived during the year at issue. These expenses, amounting to a total of $6,815 for that year, were paid to the third parties concerned by Mr. Thibault.

The evidence further established that the former marital residence—a building located in the municipality of Pointe-au-Pére, not far from Rimouski— was purchased by the appellant and Mr. Jean-Charles Thibault jointly on February 2, 1978. A joint half of this property owned by Mr. Jean-Charles Thibault was sold to the appellant on June 29, 1989, as appears from the contract of sale concluded between the appellant and Mr. Thibault.

Appellant's arguments

In Part A of the notice of appeal, it states the following:

In this notice of confirmation, the Minister of National Revenue states that amounts received as maintenance, directly or indirectly, pursuant to a judgment of the Court are taxable under paragraph 56(1)(b). The appellant must accordingly include in her income the mortgage payments made by her former husband as maintenance in 1988. On the other hand, Mr. Thibault was owner of 50 per cent of the house and the related mortgage.

That is why we wish the appellant to add to her income only 50 per cent of the mortgage payments, insurance and taxes, as the other 50 per cent served to repay Mr. Thibault’s own debt and the insurance and taxes on his own real property.

[Translation.]

The words “we wish” in the last paragraph of the foregoing passage from the notice of appeal refer to counsel representing the appellant at that originating stage of the proceeding. It appears from this passage that the appellant was objecting only to the inclusion of half the sum of $6,815, which was added to the appellant's income by the assessment on appeal. The appellant, who acted for herself at the hearing of this appeal, maintained that position.

Respondent's arguments

In her reply to the notice of appeal, the respondent relied on paragraph 56(1)(b) and subsection 56.1(1) of the Income Tax Act, and argued that the sum of $6,815 should be included in calculating the appellant’s income.

Analysis

It is clear that if paragraph 56(1)(b) is taken in isolation, that is, not taking into account subsection 56.1(1), the amount paid by Mr. Thibault should not be included in the appellant’s income since at least one of the conditions stated in that paragraph was not met. Paragraph 56(1)(b) requires for its application that the payment be made directly to the spouse or former spouse. As we know, in the case at bar it was admitted by the parties that the $6,815 was paid by Mr. Thibault to third parties. This fact is alleged inter alia in paragraph 4(b) of the reply to the notice of appeal.

Subsection 56.1(1) must now be considered; it reads as follows:

56.1 (1) Where, after May 6, 1974, a decree, order, judgment or written agreement described in paragraph 56(1)(b), (c) or (c.1), or any variation thereof, has been made providing for the periodic payment of an amount

(a) to a taxpayer by 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 taxpayer, children in the custody of the taxpayer or both the taxpayer and those children,

the amount or any part thereof, when paid, shall be deemed, for the purposes of paragraphs 56(1)(b), (c) and (c.1), to have been paid to and received by the taxpayer.

If paragraph 56.1(1)(b) is applied to the case at bar—paragraph 56.1(1)(a) seems useless to me—it can be said that the sum of $6,815 paid by Mr. Thibault as maintenance for the child of the appellant and his former spouse is deemed, for the purposes of paragraph 56(1)(b), to have been paid to the appellant and received by her.

The only other condition in paragraph 56(1)(b) that could be a bar to the non-application of that paragraph concerns whether the sum of $6,815, representing the total of various payments made to third parties, is an allowance for the purposes of paragraph 56(1)(b). The word allowance” is defined in subsection 56(12). This subsection was added by subsection 34(6) of the 1988 Statutes of Canada, c. 55. Subsection 34(6) reads as follows:

(6) Section 56 of the said Act is further amended by adding thereto, immediately after subsection (11) thereof, the following subsection:

(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.1) (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.

The application of subsection (6) above is dealt with in subsection (12) of section 34 of the 1988 Statutes of Canada, c. 55. Subsection 34(12) provides:

(12) Subsection (6) is applicable, with respect to decrees, orders, judgments and written agreements made or entered into before March 28, 1986 or after 1987, to the 1986 and subsequent taxation years, except that, for the 1986 and 1987 taxation years, subsection 56(12) of the said Act, as enacted by subsection (6), shall be read as follows:

(12) Subject to subsections 56.1(2) and 60.1(2), for the purposes of paragraphs (1)(b), (c) and (c.1),"allowance" does not include any amount that is received by a person referred to in those paragraphs as "the taxpayer” unless that person has discretion as to the use of the amount.

As the judgment ordering the payment of maintenance for the appellant's daughter is dated June 18, 1987, it follows that subsection (6) of the 1988 amending Act applicable to the 1986 and subsequent taxation years with respect to decrees, orders and judgments made before March 28, 1986 or after 1987 (or written agreements concluded before March 28, 1986 or after 1987) does not apply here, as the judgment of June 18,1987 does not fall within one of the two periods covered by subsection 34(12) of the 1988 Statutes of Canada,

c. 55, since one of those periods covered by that subsection was prior to March 28, 1986 and the other subsequent to December 31, 1987. Subsection 56(12) of the Income Tax Act enacted by subsection 34(6) of the 1988 amending Act therefore does not have to be considered for the purposes of the instant case.

To determine whether the payments to third parties made by Mr. Thibault pursuant to the Quebec Superior Court judgment of June 18, 1987 are an “allowance” within the meaning of paragraph 56(1)(b) reference must be made, as there are no provisions in the Income Tax Act defining this concept, to the case law. The only decision that should be consulted in this regard is that 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. That case concerned a taxpayer who had paid his exspouse $360 a month as maintenance to repay the capital and interests on two mortgages applicable to the ex-spouse's property and municipal and school charges on the same property. In Gagnon the Federal Court of Appeal, following its judgment in The Queen v. Pascoe, [1975] C.T.C. 656, 75 D.T.C. 5427 disallowed the deduction of the monthly payments made by the taxpayer on the ground that the amounts were not allowances” within the meaning of paragraph 60(b) of the Income Tax Act. In Pascoe, the Federal Court of Appeal, as Beetz, J. of the Supreme Court of Canada mentioned in Gagnon at page 272 (C.T.C. 415, D.T.C. 6182), had described the three components of the "allowance" concept as follows:

. . . 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.

Beetz, J., speaking for the Supreme Court of Canada, altered the application of the third condition imposed by the Federal Court of Appeal in Pascoe, supra, as follows 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 subsection 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.

In Gagnon, supra, the Supreme Court of Canada thus held that the monthly payments in question made by the taxpayer were “ allowances” within the meaning of paragraph 60(b) of the Income Tax Act.

If we apply the rules stated by the Supreme Court of Canada in Gagnon as to the nature of an allowance in terms of paragraph 56(1)(b) in particular to the amounts paid as maintenance by the appellant's former husband, there seems to be no doubt that such amounts are an allowance since they are deemed to have been paid to the appellant and received by her pursuant to paragraph 56.1(1)(b) and are of the same nature as the payments at issue in Gagnon, which, in the latter case, were made directly to the recipient of the maintenance for the purpose of paying the mortgage debts and municipal and school taxes. In the case at bar, these amounts which are deemed to have been paid to the appellant in respect of the property in which she and her daughter resided during the taxation year at issue are payments to third parties which completely benefit the appellant, in that the payments enabled the appellant and her child to have the use of that property in 1988 without her possession being disturbed, as a result of the payment by Mr. Thibault of the amounts due in the year on the mortgage debt, the school taxes and three-fourths of the municipal taxes.

I note that it is definitely the total of the payments made to third parties by Mr. Thibault for the aforementioned purposes which must be included in the appellant’s income for the year at issue, not half those payments as the appellant suggests in her notice of appeal. The appellant received a definite economic advantage not only from the part of the payments relating to her joint half of the property, but also from the other part of those payments, relating to Mr. Thibault's joint half, in that the appellant was able to have possession of the property in question as a result of the other portion of the payments. It is true that by doing this Mr. Thibault paid off part of the debt on his joint half of the property, but at the same time, to the extent of the share he held in the property, he conferred an advantage on the child Marie-Josée and the appellant, who were able to occupy all of the property without making any monthly payments on the mortgage debt, school taxes and three-fourths of the municipal taxes. This definite economic advantage is income for the appellant within the meaning of the Supreme Court of Canada's judgment in Gagnon.

Considering the combined effect of the provisions of paragraphs 56(1)(b) and 56.1 (1)(b) in light of the judgment in Gagnon, therefore, we can conclude that the payments to third parties at issue in the instant case were allowances for the purposes inter alia of paragraph 56(1)(b).

During the hearing of this appeal, neither of the parties relied on subsection 56.1(2) of the Act. However, I think that subsection should be considered since in express language it accompanies paragraphs 56(1)(b), (c) and (c.1), as appears from the words '[F]or the purposes of paragraphs 56(1)(b), (c) and (c.1)" appearing at the very beginning of the subsection. Subsection 56.1(2) provides essentially that an amount paid by a person pursuant to a judgment of a competent tribunal or pursuant to a written agreement to discharge the expenses described in the subsection for the maintenance of a taxpayer who may, inter alia, be the present or former spouse of that person . . shall, where the decree, order, judgment or written agreement, as the case may be, provides that this subsection and subsection 60.1(2) shall apply to any payment made pursuant thereto, be deemed to be an amount paid by that person and received by the taxpayer as an allowance payable on a periodic basis”.

Without analysing all the aspects of this subsection, there would appear to be no doubt that the payments made by Mr. Thibault to third parties for mortgage payments, school taxes, household insurance costs and municipal taxes on the property in question are payments "in respect of an expense . . . incurred in the year . . . for maintenance of a taxpayer . . . ." It also seems clear that those payments are not excluded by any of the exceptions mentioned in the subsection. It is worth noting in this regard paragraph 18 of Interpretation Bulletin IT-118R3, dated December 21, 1990 which reads as follows:

Subsection 60.1(2) permits the payer to deduct payments made either

(a) directly to a spouse or former spouse or

(b) to a third party for the benefit of such person or the children in their custody,

for specific expenses that are required to be paid pursuant to a decree, court order, judgment or written agreement. This is achieved by deeming the payments to be paid and received by the spouse or former spouse of the payer as an allowance payable on a periodic basis. Subsection 60.1(2) will also permit a deduction for such payments made on behalf of a former common-law partner or children in the custody of such person if paid pursuant to an order made in accordance with the laws of Ontario after 1985, or an order in accordance with the laws of any other province or territory after February 10, 1988.

An exception to the rules in subsection 60.1(2) provides that the following amounts are specifically excluded from its application (and are thus not deductible):

(a) expenditures on a "self-contained domestic establishment” ("dwelling") as defined in subsection 248(1), in which the payer resides,

(b) expenditures on tangible property unless the expenditure is on account of the following deductible expenses:

(i) a medical or educational expense or an expense incurred for the maintenance of the dwelling in which the spouse or former spouse resides (including mortgage payments, property taxes, utility payments, etc.), or

(ii) expenditures for the purchase or improvement of the dwelling in which the spouse or former spouse resides. In this regard, the maximum deduction is 20 per cent of the original principal amount of the loan or indebtedness incurred to finance the purchase or improvement.

In order for these provisions to apply, the decree, order, judgment or written agreement must specifically state that subsections 60.1(2) and 56.1(2) are to apply to the above payments.

Subsection 56.1(2) was added by an Act amending the Income Tax Act applicable to payments made after 1983. The subsection has subsequently been amended, but those amendments do not present any problems of implementation in the instant case.

As in the instant appeal neither the agreement by the parties on June 15, 1987 nor the judgment of June 18, 1987 contains the statement mentioned at the end of subsections 56.1(2) and 60.1(2)—a statement providing that subsections 56.1(2) and 60.1(2) apply to certain payments made for specific expenses—it follows that subsection 56.1(2) does not apply to the payments at issue in this appeal, nor does subsection 60.1(2). Accordingly, the only provisions of the Income Tax Act that must be considered in deciding the instant case are paragraphs 56(1)(b) and 56.1 (1)(b). As I have already indicated, we must also keep in mind the definition of the word” allowance” given in the Supreme Court of Canada judgment in Gagnon, as the legislative definition of an “allowance” contained in subsection 56(12) does not apply to payments covered by written agreements or judgments concluded or rendered, as the case may be, any time during the period of some 21 months—the intermediary period—beginning on March 28, 1986 and ending on December 31, 1987.

I have already concluded that the payments to third parties by the appellant's former husband for maintenance were to be included in the appellant's income pursuant to paragraphs 56(1)(b) and 56.1(1)(b) of the Income Tax Act. In interpreting these provisions in this way and taking into account the Supreme Court of Canada’s judgment in Gagnon, I realize that the result is something of an anomaly. Where the payments covered by subsections 56.1(2) and 60.1(2) are concerned, it does not matter whether the statement that those subsections apply is in the judgments and written agreements made or concluded during this period which I have described as an intermediary one. In either case, the payment of expenses for certain purposes must be included in the income of the recipient of the maintenance and are deductible in calculating the income of the payer of the maintenance. This anomaly may be understandable during this period in which subsection 56(12) defining an allowance did not apply as the result of a clearly expressed intent by Parliament in the implementation provision contained in subsection 34(12) of the 1988 Statutes of Canada, c. 55.

As can be seen from the foregoing comments, this is legislation the ultra- technical drafting of which seems to me to be over-subtle and ill-advised—this can be seen simply from re-reading, inter alia, paragraph 56.1(1)(a) and subsection 56(2)—in areas affecting situations which are quite common in present-day life. Nevertheless, the courts have a duty to unravel this legislative conundrum and the purpose of the analysis I have just undertaken in these reasons is to identify the underlying scheme of the legislation on the point, or in other words, the legislative intent.

I therefore consider that the payments made by the appellant's former husband in accordance with the Quebec Superior Court judgment of June 18, 1987 were validly included in the appellant's income by the subject assessment of the Minister of National Revenue.

For these reasons, the appeal is dismissed.

Appeal dismissed.