Garland Babcock v. Minister of National Revenue, [1980] CTC 2535, 80 DTC 1470

M J Bonner:—These are appeals from assessments of income tax for the 1975 and 1976 taxation years. On assessment the respondent disallowed deductions of $1,101 and $1,278 respectively, each being part of a larger amount claimed by the appellant in his returns of income as alimony payments paid to Mrs Babcock.

The amounts disallowed were portions of claims made in respect of payments made by the appellant to the mortgagee of the home occupied by the appellant’s spouse.

The appellant and his wife separated in 1969. On January 8, 1975, they entered into a separation agreement. Paragraph 5 of that agreement provided as follows:

The husband will pay or cause to be paid on behalf of the wife, the monthly payments required to be made under the London Life Insurance Company mortgage of approximately $99 per month, so long as Ronald shall be attending Secondary School and living with the party hereto of the second part.

The party of the second part, of course, was the appellant’s spouse.

Paragraph 8 of that agreement provided:

The parties agree that until such time as the house shall be sold, as herein provided, the wife and Ronald shall have the use of the house.

On May 27, 1975, the appellant and his spouse executed a written addendum to the separation agreement. It recited that the appellant had commenced an action for divorce and provided in paragraph 1 as follows:

That the arrangements made between the parties with respect to the house at 26 Ellis Street, Chatham, Ontario, shall be binding upon the parties hereto and shall survive and exist subsequent to any judgment that may be granted with respect to the marriage between the parties hereto, . . .

On June 3, 1975, a decree nisi of divorce was granted. It was silent on the arrangements made as to the house and the mortgage indebtedness, although it did make other provision for maintenance payments to the former wife and for Ronald, who is a child of the marriage.

The appellant’s agent directed his argument at the hearing of these appeals to an income tax bulletin published by the Department of National Revenue. He asserted that the assessments in issue were inconsistent with dogma as laid down in the bulletin and that they were therefore “unfair”. That argument is irrelevant, at least where an appeal is brought to this Board. The sole issue in an appeal from an income tax assessment is whether, when the relevant provisions of the Income Tax Act are considered in relation to the facts established at the hearing, the assessment is too high.

The respondent’s representative advanced three arguments in support of the assessments. First, he submitted that section 60.1 of the Act does not permit a deduction, but simply serves to deem that payments made in the circumstances described in the section were received by the person for whose benefit they were made. It followed, so that submission went, that the appellant had to look to the provisions of either paragraph 60(b) or paragraph 60(c) of the Act for the right to make the deductions in question.

The difficulty which the appellant faced, the respondent argued, was that the payments in question here were made by the appellant to the mortgagee and could not be regarded as an “allowance” within the meaning of paragraph 60(b). The respondent relied on the construction placed on the word “allowance” by the Federal Court of Appeal in Her Majesty the Queen v Morton Pascoe, [1975] CTC; 75 DTC 5427 at 658 [5428]. There Mr Justice Pratte said:

In our view, neither the sums paid by the Respondent for the education of his children nor those paid for the medical expenses were deductible.

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)(l). An allowance is, in our view, a limited predetermined sum of money paid to enable the recipient to provide for certain kinds of expenses; 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.

Certainly the payments here, although admitted by the Minister to have been made for the benefit of the appellant’s spouse, were not paid as an allowance within the definition quoted.

Section 60.1 is a somewhat wretched piece of legislative drafting. Read literally, it does not appear to have any greater effect than suggested by the respondent’s representative, that is to say, it seems to be effective only to deem the payor’s spouse to be the recipient when, in fact, the spouse is not.

Were I approach this case unaided by authority, I would be inclined to think that section 60.1 does not operate to convert to an “allowance” a payment which, on the Pascoe definition, is not an allowance. I say this despite the fact that such a reading of the section would result in it having a much narrower remedial scope than was, I believe, generally regarded as intended by Parliament.

However, the point appears to have been decided by the Assistant Chairman of this Board in Gordon A Bryce v MNR, [1978] CTC 3144; 78 DTC 1833, where an identical argument on behalf of the Minister was advanced and was rejected.

I must, therefore, follow the decision in the Bryce case and reject the respondent’s first submission.

I do not follow an earlier decision of this Board in Gerhard Hausman v MNR, [1978] CTC 3038; 78 DTC 1757. The brief reasons given in the Hausman case do not refer to the extent of the change wrought by the introduction of section 60.1, a section which, incidentally, was not in question at the time or rather was not applicable at the time the Pascoe case arose.

The respondent’s second argument was that the decree nisi was silent on the question of mortgage payments, that the decree in effect defined all of the appellant’s obligations to his spouse despite the specific words of the May 27 addendum and thus that the payments were gratuitous. No authority was cited for the proposition thus advanced. I cannot conceive of any logical reason why a decree must be taken to eradicate an otherwise binding contractual obligation arising under a separation agreement just because that obligation is not referred to in the decree.

The respondent’s final argument was that paragraph 60(c) applied to the exclusion of paragraph 60(b) in the case of payments made by the former spouse to the other following the dissolution of the marriage. References made in paragraph 60(b) to “divorce” and to “former spouse” in my view completely negative that argument.

In the result, then, the appeals will be allowed and the assessments referred back to the respondent for reconsideration and reassessment to permit the deduction of the amounts previously disallowed.

Appeal allowed.