Peter J Appleby v. Minister of National Revenue, [1979] CTC 2168, 79 DTC 172

Delmer E Taylor:—This is an appeal heard in the City of Edmonton, in the Province of Alberta, against income tax assessments for the taxation years 1973, 1974, 1975 and 1976. The appellant was requesting that certain amounts allegedly paid as “alimony or maintenance payments’’ during these years be allowed to him as deductions from income. In the Amended Reply to Notice of Appeal, the respondent relied, inter alia, upon sections 3, 4, 5 and paragraph 60(b) of the Income Tax Act, SC 1970-71-72, c 63 as amended.

Facts

The appellant was engaged in the mining industry during the years in question, and was divorced from his wife who lived in the United Kingdom (UK).

Contentions

The appellant asserted:

— I was divorced in 1972 in UK and under the terms of the divorce, I was obliged to pay a small weekly maintenance payment for each of my three children and school fees for the two oldest. This was in lieu of alimony.

— In 1974 and 1975 Canada Revenue Taxation allowed me to use the school fees and maintenance payments as tax deductions but in 1976 changed their minds when I inquired about claiming for 1973.

— I have paid every cent under the divorce agreements.

For the respondent, the position was:

—The appellant filed his 1973 income tax return on March 4, 1974, which return was assessed by the respondent on June 17,1974. No objection to that assessment was filed within the 90-day period provided by subsection 165(1) of the Income Tax Act, nor within any time period thereafter within which an extension of time for filing an objection could have been applied for or granted by virtue of section 167 of the Act. The appeal therefore, so far as it purports to appeal the assessment for 1973, is invalid and a nullity.

—This appeal being a nullity to the extent to which it pertains to the 1973 tax year of the appellant, the Tax Review Board has no jurisdiction to hear the same. Accordingly, a motion to quash the appeal with respect to that year is made.

—The appellant’s allegations with respect to his 1974,1975 and 1976 taxation years are admitted but they do not determine the issue.

— In his returns for those years, the appellant claimed the deductions from income set out below:

—The assessment for 1974 disallowed the deduction of school fees claimed allowing only maintenance payments required under the Court Order of May 8, 1972 in the amount of $1,382.

—The assessment for 1975 similarly disallowed school fees, allowing the required maintenance payments only in the amount of $1,382.

—The 1976 assessment disallowed school fees, allowing only the required maintenance payments in the amount of $839.80.

—The deduction of school fees for the years 1974, 1975 and 1976 was disallowed on the assumption that they did not qualify as “alimony payments” under the Income Tax Act or as judicially defined.

Evidence and Argument

The appellant testified that his ex-wife was paying income tax in the UK on the funds in question, and he rested his case on the application of the Canada-UK Tax Agreement (hereinafter referred to as the “Agreement”), particularly Article 20 (Alimony):

(1) Any alimony or other maintenance payment received from a resident of one of the territories by a resident of the other territory who is subject to tax there in respect thereof shall be taxable only in that other territory.

(2) The term “maintenance payment” means a payment made pursuant to an order of a competent tribunal or to a written separation agreement by one of the parties to a marriage (including a marriage which has been dissolved or annulled)

(a) to or for the benefit of the other party to that marriage or children of the marriage; or

(b) to any person for the benefit of, or for the maintenance or education of, a person under twenty-one years of age.

Counsel for the Minister noted that the alleged ‘school fees”were in reality now [sic] deductible reimbursements for the education of the children (see Her Majesty The Queen v Morton Pascoe, [1975] CTC 58; 75 DTC 5024, [1975] CTC 656; 75 DTC 5427; (Crown’s appeal allowed-FCA) and Gerald G Fisch v MNR, [1977] CTC 2335; 77 DTC 241, [1978] CTC 438; 78 DTC 6332; (Crown’s appeal allowed)). Further, counsel noted that the agreement was not applicable since it dealt only with the avoidance of double taxation and there was no intent here to tax the appellant both in Canada and in the UK

Findings

The Board has only a limited amount of information available upon which to make a judgment. Nevertheless, it would appear to me that the fun- damental requirements under Article 20 of the Agreement have been met by the appellant. Substituting the elements of this case for the critical wording of that Article, one could read it as follows:

Any payment—for—the—education of (the appellant’s children)—received from (the appellant—a resident of Canada) by (his ex-wife—a resident of the UK) who is subject to tax (in the UK) in respect thereof, shall be taxable only in (the UK).

Counsel for the respondent seemed to interpret that Article (if I followed him correctly) to mean that the payments in question would not be subject to double taxation in the hands of the appellant (in Canada, and also in the UK) in the event that he would be required to file income tax returns in both places—a situation not relevant to this appeal. In my view, however, the Article can only be read to mean that there are no circumstances under which an amount so qualifying is taxable in the country of origin (in this case Canada)—it is only taxable in the country of receipt (in this case the UK). By not allowing the appellant to deduct the payments from his Canadian income before payment of Canadian income tax on them, the respondent is axiomatically taxing the appellant on the amount of the payments and is therefore in conflict with the said Article.

It would appear to me that the difficulty in the Minister’s assessments arises from the fact that the Minister has permitted the amounts he did allow (paid directly to the appellant’s ex-wife as an allowance—$1,382 in 1974 and $1,382 in 1975, and $839.80 in 1976) as maintenance payments deductible under paragraphs 60(b) or (c) of the Act. It might well be sustained that they are indeed deductible under such a section but it is equally probably that they are deductible by virtue of Article 20 of the Agreement, and I would find it difficult to further distinguish between such payments made to the ex-wife and those made “to any person for the benefit of, or for the maintenance or education of, a person under twenty-one years of age”.

As a final note, the argument of counsel for the respondent might be interpreted as purporting that since the amounts of “school fees” here in question would not qualify as allowances in Canada as a result of the jurisprudence cited, they should not be regarded as alimony or maintenance payments for purposes of Article 20 of the Agreement. I would have considerable difficulty with that viewpoint since, in my opinion, the operative words are “alimony or maintenance payment received”. By the evidence they are treated for income tax purposes in the UK as maintenance payments, and it would probably be the legal basis upon which they were “received” in the UK that would be critical, not the legal basis upon which they were “paid” from Canada.

Decision

With respect to the taxation year 1973, the Board has no jurisdiction to hear the appeal as no notice of objection was filed as prescribed by the Act. The motion of counsel for the respondent to quash the appeal with respect to the year 1973 is granted.

With respect to the years 1974, 1975 and 1976, the appeal is allowed so that the appellant may claim as deductions the amounts of $3,923.65, $5,118.00 and $4,075.50 respectively for the years in question.

The entire matter is referred back to the respondent for reassessment accordingly.

Appeal allowed.