Pelchat v. R., [1998] 1 CTC 2741

Archambault T.C.J.:

Archambault T.C.J.

This is an appeal by Michel Pelchat from an income tax assessment made by the Minister of National Revenue (“the Minister”) for the 1993 taxation year. The Minister disallowed the deduction of part of an amount of $4,989 (“the reimbursement”) in support payments which Mr. Pelchat had claimed with respect to his ex-wife, Sylvie Patry. The Minister argued that a reimbursement paid pursuant to a divorce decree does not constitute an “allowance” and may not be deducted under paragraphs 60(b) and (c) of the Income Tax Act (“the Act”). [1] Further, and this is really the only point at issue, the Minister argued that subsection 60.1(2) of the Act does not apply because the decree in question does not expressly provide that this subsection and subsection 56.1(2) apply to this amount. Subsection 60.1(2) of the Act provides as follows:

(2) For the purposes of paragraphs 60(b), (c) and (c.1), the amount, if any, by which

(a) the aggregate of all amounts each of which is an amount (other than an amount to which paragraph 60(b), (c) or (c.1) otherwise applies) paid by a taxpayer in a taxation year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, in respect of an expense (other than an expenditure in respect of ...) incurred in the year or the immediately preceding taxation year for maintenance of a person who is

(i) the taxpayer’s spouse or former spouse... exceeds

(b) the amount, if any, by which

exceeds

shall, where the decree, order, judgment or written agreement, as the case may be, provides that this subsection and subsection 56.1(2) shall apply to any payment made pursuant thereto, be deemed to be an amount paid by the taxpayer and received by that person as an allowance payable on a periodic basis. [My emphasis.]

In his judgment granting Mr. Pelchat’s divorce on March 17, 1989, Galipeau J. of the Quebec Superior Court officially recognized an agreement whereby Mr. Pelchat undertook to reimburse Sylvie Patry for certain expenses, which reimbursement was by way of support. The relevant stipulation was as follows:

[TRANSLATION]

As support the petitioner shall pay the expenses set out below, calculated on a monthly basis:

The school fees of Josee Pelchat at Mont Notre-Dame:	$100
The following expenses for the family home:
payments of tax, principal and interest:	$688
insurance:	$ 30
heating and electricity:	$150
snow removal from the entranceway of Lucille	$	5
Pelchat:

The said support nall be taxable in the hands of the respondent and tax deductible for the petitioner. [My emphasis.]

Counsel for the Minister maintained that this stipulation did not meet the conditions of subsection 60.1(2) of the Act. In support of this argument he cited several judgments, including the judgment rendered by the Federal Court of Appeal in Armstrong v. R., (1996), 96 D.T.C. 6315, [1996] 2 C.T.C. 266 (Fed. C.A.) . In that judgment the Court of Appeal paraphrased the provision in subsection 60.1(2) and repeated that for an amount to be deductible under that subsection it is essential that the order, judgment or written agreement refer to subsections 56.1(2) and 60.1(2) of the Act. In that case, however, there was no provision regarding the tax treatment of the amounts to be paid by the taxpayer in the court’s order laying down the support obligation.

In its reasons the Court of Appeal cited the remarks of my brother Judge Beaubier in Mambo v. R., (1995), [1996] 1 C.T.C. 2388 (T.C.C.), explaining the reasons behind this condition stated in subsection 60.1(2) of the Act. The first reason given by him was as follows: “The first is to confirm that both parties know that there are tax consequences to such an order or agreement”.

Counsel for the Minister also cited the decision of Judge Garon of this Court in Mailloux v. R.(July 12, 1991), Doc. 91 -610(IT) (T.C.C.), in which he said the following:

I think it is likely that the legislature intended to ensure that the parties in question were fully aware of the fiscal consequences resulting from the payments made in accordance with a written agreement, a judgment or an order of a court for the specific purposes mentioned in that agreement, judgment or order.

In my opinion, the divorce decree by Galipeau J. indicates that the parties clearly recognized that the amount to be paid would be taxable in the hands of Ms. Patry and could be deducted in the computation of Mr. Pelchat’s income. I therefore think that the objective sought by the condition contained in subsection 60.1(2) of the Act was met, and counsel for the Minister recognized this. In such circumstances, why then disallow, in calculating Mr. Pelchat’s income, his deduction of the reimbursement? This point was not addressed at the hearing.

The only statutory provision I know of which might make Ms. Patry liable for tax on the reimbursement is subsection 56.1(2) of the Act. Similarly, the only statutory provision I know of which might permit the deduction of this reimbursement by Mr. Pelchat is subsection 60.1 (2) of the Act. I therefore have no doubt that when the decree speaks of the reimbursement as being taxable in the hands of Ms. Patry and as being deductible by Mr. Pelchat, it refers to these two relevant provisions of the Act. It follows that Mr. Pelchat met the above-stated condition of subsection 60.1(2) of the Act and that he is entitled to deduct the reimbursement in calculating his income.

Mr. Pelchat’s appeal is allowed and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that Mr. Pelchat is entitled to deduct the reimbursement from his income for 1993. Costs will be awarded to Mr. Pelchat.

Appeal allowed.