Margaret E. Anderson v. Minister of National Revenue, [1988] 1 CTC 2293, 88 DTC 1198

Tremblay, T.C.J.:—This appeal was heard on September 25, 1987 at the City of Calgary, Alberta. It was taken under advisement, on receiving the respondent's written submission, on October 21, 1987.

1. The Point at Issue

The point at issue is whether the appellant is correct in the computation of her income for the 1984 taxation year in not including $1,150 paid by her ex-spouse to the Alberta Social Services and Community Health of Calgary during that year, in view to reimburse payments made to the appellant in former years by those Social Services.

The appellant contends she never touched the said amount of money in 1984 and that she is not taxable on that amount.

The respondent's contention is that the appellant is deemed by virtue of provision 56.1(1) of the Income Tax Act (the Act) to have received the said amount of $1,150 as alimony, and to have received it in 1984.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent's reassessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his reassessment are also deemed to be correct. In the present case, the assumed facts are described in paragraphs 4(a) to (f) of the reply to notice of appeal as follows:

4. In assessing the Appellant as he did, the Respondent relied, inter alia, upon the following assumptions of fact:

(a) that the Appellant was divorced from her former spouse in June 1978;

(b) that the Appellant's former spouse was required to pay maintenance for two children to the Appellant commencing June 1, 1978 pursuant to Minutes of Settlement dated May 31, 1978;

(c) that the Appellant's spouse failed to make the payments referred to in paragraph 4(b) herein;

(d) that the Appellant received social assistance from the Province of Alberta, Social Services and Community Health between November, 1977 and December, 1983;

(e) that pursuant to an Order of the Provincial Court of Alberta, dated June 12, 1978 the Appellant's former spouse was ordered to pay the amount of $50.00 per month to the Government of Alberta;

(f) that in the 1984 taxation year, the Appellant's former spouse paid the amount of $1,150.00 to the Government of Alberta for the benefit of the taxpayer.

3. The Facts

3.01 The facts are not in dispute. They are well described in the respondent's assumptions of facts quoted heretofore (para. 2.02).

3.02 The appellant admitted all of them except the last words of paragraph 4(f), "for the benefit of the taxpayer."

3.03 A Decree Nisi for Divorce was filed as Exhibit R-1 and an Order of Arrears as Exhibit R-2.

3.04 Between 1984 and 1986, Mr. Anderson paid to the Provincial Treasurer the amount of $5,500. In 1984, Mr. Anderson paid $1,150: $600 in October, $500 in November and $50 in December.

4. Law — Precedents — Analysis

4.01 Law

The main provisions of the Income Tax Act (the "Act") involved in this appeal are paragraph 56(1)(b) and subsection 56.1(1), and section 14 of the Social Development Act of Alberta, R.S.A. 1980, c. S-16. They read as follows:

56. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(b) any amount received 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 the recipient was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, the spouse or former spouse required to make the payment at the time the payment was received and throughout the remainder of the year;

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 to a taxpayer by a person who is his spouse, former spouse or, where the amount was paid pursuant to an order made in accordance with the laws of a province, an individual within a prescribed class of persons described in the laws of the province, or for the benefit of the taxpayer or children in the custody of the taxpayer, 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, at the time the amount was paid and throughout the remainder of the year in which the amount was paid, the taxpayer was living apart from that person.

56.1 (1) Quand, après le 6 mai 1974, il est intervenu un arrêt, une ordonnance, un jugement ou un accord écrit visé à l'alinéa 56(1)(b), (c), ou (c.1), ou une modification s'y rattachant, prévoyant le versement périodique d'une certaine somme à un contribuable par une personne qui est son conjoint ou son ancien conjoint ou, si le montant a été payé en vertu d'une ordonnance établie conformément aux lois d'une province, un particulier appartenant à une catégorie prescrite de personnes prévue dans la loi de cette province ou au profit du contribuable ou d'enfants confiés à la garde du contribuable, cette somme ou toute partie de celle-ci est, lorsque payée, réputée, pour l'application des alinéas 56(1)(b), (c) et (c.1), avoir été payée au contribuable et reçue par lui s'il vivait séparé de cette personne à la date du versement de cette somme et jusqu'à la fin de l'année où le versement a été effectué.

The Social Development Act of Alberta

14 (1) Where a social allowance is paid to or on behalf of a person who has a right to maintenance or alimony for himself or his dependent children or both under an Act, order of a court or agreement, the Government is subrogated to all of the rights to maintenance or alimony of that person under the Act, order or agreement.

(2) The subrogation under this section applies to a right to maintenance or alimony payable in a period during which a social allowance is paid whether the period occurs before or after the commencement of this section.

(3) If the Government is subrogated to any right pursuant to this section it may bring an action or make an application in its own name or the name of the person to whose rights the Government is subrogated.

(4) Notwithstanding subsection (1), if any amount is paid as maintenance or alimony to the person entitled to receive it under the Act, order or agreement within the time specified by the Act, order or agreement, the Government is not subrogated to the right to receive payment of that amount.

4.02 Precedents

The precedents referred to by the parties are as follows:

1. Gagnon v. The Queen, [1986] 1 C.T.C. 410; 86 D.T.C. 6179 (S.C.C.);

2. Rutkin v. The United States, 343 U.S. 130 (1952);

3. The Queen v. Sills, [1985] 1 C.T.C. 49; 85 D.T.C. 5096 (F.C.A.);

4. M.N.R. v. Armstrong, [1956] C.T.C. 93; 56 D.T.C. 1044 (S.C.C.);

5. The Queen v. Bryce, [1980] C.T.C. 401; 80 D.T.C. 6304 (F.C.T.D.);

6. Bryce v. The Queen, a decision of the Supreme Court of Canada, unreported, August 6, 1987.

4.03 Analysis

4.03.1 The main arguments of the appellant concerning the application of subsection 56.1(1) are:

(a) that the payments made by her spouse do not constitute periodic payments as required by paragraph 56(1)(b);

(b) that neither the appellant nor her children received the benefit of the payments as required by paragraph 56(1)(b);

(c) that the payments are not an allowance as required by paragraph 56(1)(b).

At first glance, these arguments seem obvious. They are detailed in a letter dated April 13, 1987, sent to Alberta Attorney General by the legal firm Ballem, McDill & Maclnnes.

4.03.2 A written submission was sent by the respondent following the hearing. The document was received by the Court on October 21, 1987.

4.03.2(1) To the first argument of the appellant that the payments made by Mr. Anderson do not constitute periodic payments, the respondent refers to the Sills case (para. 4.02(3)) at page 52 (D.T.C. 5098):

So long as the agreement provides that the moneys are payable on a periodic basis, the requirement of the subsection is met. The payments do not change in character merely because they are not made on time.

Moreover, the respondent argues that the amount paid by Mr. Anderson was not a lump sum payment in view to settle in full all amounts payable in the future as in the Armstrong case (para. 4.02(4)). In that case, the Supreme Court disallowed the deduction of $4,000 claimed by the husband as a lump sum payment because such payment was not provided in the agreement. In the present case, the payments were made in view of paying arrears.

Pursuant to the minutes of settlement, Mr. Anderson was required to pay $200 per month to the appellant and pursuant to the order of the Provincial Court, he was obliged to pay $50 per month to the Government of Alberta.

4.03.2 (2) Concerning the appellant's second argument, that neither herself nor her children received the benefit of the payment, the respondent submits that between November 1977 and December 1983, she received social assistance payments. Such payments were not taxable. Moreover, he submits that if the arrears paid by Mr. Anderson had been made to the appellant, the latter would have been obliged to pay them, in toto, to the Provincial Government pursuant to subsection 14(1) of the Social Development Act of Alberta quoted above (para. 4.01) and she would have been taxable on the moneys received.

Although the moneys are paid to a third party, they are deemed to have been received by the appellant pursuant to the Act.

4.03.2 (3) The respondent submits that the third argument of the appellant, to the effect that the payment made by Mr. Anderson is not an allowance within the meaning of paragraph 56(1)(b), cannot stand because of the Bryce decision (para. 4.02(5)). It was rendered by Mr. Justice Collier of the Federal Court, Trial Division. This decision was confirmed by the Supreme Court of Canada (para. 4.02(6)). The facts in that case and the decision are summarized as follows at page 6034 D.T.C.:

The taxpayer made payments to third parties in 1975 for the benefit of his wife, pursuant to a decree nisi of divorce. His expenditures related to mortgage payments, land taxes, water and sewer rates and the cost of cablevision service. He claimed a deduction for part of those expenditures. When the Minister disallowed the deduction, the taxpayer appealed successfully to the Tax Review Board (78 D.T.C. 1833). The Crown then appealed to the Federal Court-Trial Division, contending that the payments were not deductible because they were not limited, predetermined sums of money and because the wife had no discretion as to how the funds would be applied.

Held: The Crown's appeal was dismissed. The payments made by the taxpayer were clearly limited, predetermined sums. The Court found that it would be illogical to interpret section 60.1 of the Income Tax Act as endorsing maintenance payments made directly to third parties while still clothing the recipient of the benefit of such payments with control over the destination and purpose of the payments. Accordingly, deductibility of the benefit payments did not depend on the wife having discretion as to the application of the payments. The taxpayer's claim for a deduction was therefore proper, and the Crown's appeal was dismissed.

4.03.2 (4) In my opinion, the respondent's arguments are correct inasmuch as provision 56.1(1) is clearly expressed. This provision indeed is a taxing section. As such, if it was not clearly expressed, it would have no taxing effect.

4.03.3 After having read the said provision several times, I could not understand its meaning. So, stating first that there is only one sentence and it contains the word "or" seven times, I decided to rewrite the subsection by subdividing it, using the "or" to clarify the situation. The results are as follows:

Where, after May 6, 1974,

(A) (a) a decree, order, judgment

(b) or written agreement described in paragraphs 56(1)(b), (c) or (c.1),

(c) or any variation thereof,

has been providing for the periodic payment of any amount to a taxpayer by a person who is his spouse, former spouse,

(B) or, where the amount was paid pursuant to an order made in accordance with the laws of a province, an individual within a prescribed class of persons described in the laws of the province,

(C) or for the benefit of the taxpayer or children in the custody of the taxpayer,

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 at the time the amount was paid and throughout the remainder of the year in which the amount was paid, the taxpayer was living apart from that person.

4.03.4 In subdividing the provision as above, I cannot find the verb to which "an individual within . . ." is the subject or the object.

Secondly, I cannot see the usefulness of the words "or for the benefit of the taxpayer. . ." located where they are in the sentence.

Again, after reading the provision many times, I thought that "or for the benefit of the taxpayer. . .” must be matched with the words ”. . . payment of an amount to a taxpayer. . .” a few lines above.

So I rewrote the provision subdividing it as follows:

Where, after May 6, 1974,

1. a decree, order, judgment

2. or written agreement described in paragraphs 56(1)(b), (c) or (c.1),

3. or any variation thereof,

has been made providing for the periodic payment of an amount

— to a taxpayer

by a person who is his spouse, former spouse or, where the amount was paid pursuant to an order made in accordance with the laws of a province, an individual within a prescribed class of persons described in the laws of the province,

— or for the benefit of the taxpayer or children in the custody of the taxpayer,

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, at the time the amount was paid and throughout the remainder of the year in which the amount was paid, the taxpayer was living apart from that person.

4.03.5 The said provision as divided above, if correct, may explain the words "or for the benefit of the taxpayer. . .." And I am not sure it is correct. In the French version, after the word "province" and before the words "ou au profit du contribuable ou d'enfants . . .”, there is no comma!,) as found in the English version. Therefore, it seems difficult to think that the phrase "or for the benefit of the taxpayer. . .” is concerned with the words "paid to the taxpayer. . . ."

However, I do not yet have the solution to the other problem : where is the verb to which "an individual within . . ." is the subject or the object? This seems important, especially when I state that the said words are located after the words "pursuant to an order made in accordance with the laws of a province". In this appeal, indeed, it is pursuant to the Social Development Act of Alberta that an order was issued by the Provincial Court. Therefore, the ambiguity of the text at this level is crucial.

4.03.6 I arrive at the conclusion that this sentence of over 145 words lacks the one or two words or commas necessary to make this charging provision a clear provision.

In my view, on this basis, the appeal must be allowed.

5. Conclusion

For these reasons, the appeal is allowed with costs and the matter is referred back to the respondent for reconsideration and reassessment.

Appeal allowed.