The Queen v. Gerald G Fisch, [1978] CTC 438

Collier, J:—For this taxation year 1972, the defendant sought to deduct, in calculating his income tax, an amount of $4,420. He relied On paragraph 60(b) of the Income Tax Act. That provision is as follows:

60. There may be deducted in computing a taxpayer’s income for a taxation year such of the following amounts as are applicable:

(b) an amount paid 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 he was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, his spouse or former spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year; . . .

The Minister of National Revenue, in his assessment, disallowed the deduction. The defendant appealed to the Tax Review Board. The Board allowed the appeal in part: It permitted a deduction of $1,050. The plaintiff now appeals to this court. The defendant,,in his defence, asserts the full amount of $4,420 was properly deductible. He claims relief accordingly.

The essential facts are not in dispute.

In 1967, the defendant was married with three children, then six- four and 3 years old. Two of them were attending a private school. I shall sometimes refer to the defendant’s wife as “White”. That is how she is designated in the key agreement in this suit. The defendant and his wife, were in 1967, divorced by a resolution of the Senate. They have lived apart ever since.

On April 25, 1967 they executed an agreement providing for custody, monetary payments by the defendant, and other matters. The mother was given custody of the children. The defendant had specified visiting privileges.

I set out clauses 4 and 5 of the document in full:

4. Fisch, in consideration of the mutual covenants and undertakings herein contained. shall make payments to White. subject to the terms and conditions of this Agreement; of a sum of $15.200 per annum, plus the sum mentioned in paragraph 5, payment whereof shall be made in the following manner:

(a) The sum of $533.34 shall be payable on the first and fifteenth days of each and every month by the deposit by Fisch of such sums to the credit of White in a bank account to be maintained. for such purpose by White;

(b) The sum of $2,400 per annum shall be payable to Messrs Lafleur & Brown, the Attorneys of White or such other nominees, in trust, as White may from time to time direct. upon demand during but not before the months of March or April of each year, White acknowledging that such Sum is calculated on a basis of $200 per month in respect of each month for which payments have been made hereunder in the previous calendar year and further declaring and agreeing that such sum shall be forthwith upon receipt by her said attorneys be employed by them to pay, to the extent such amount may be sufficient, the income taxes due by her on the said sum of $15.200 plus the sum mentioned in paragraph 5.

5. In addition to the payment hereinabove provided on paragraph 4, Fisch shall pay the educational costs of the said minor children. The current costs of school fees for the education of Susan Eleanor and Michael Gerald amount of $1,050 and payment thereof shall be made by Fisch on behalf of White directly to the school concerned. It is hereby acknowledged and agreed that the sum payable for educational purposes for future years may vary according to the educational needs of the children and the means of Fisch. In order to provide for payment of such sum, White hereby undertakes to inform Fisch in writing on or before February 1st of each year of the approximate amounts that will be required for the children's education in the school year commencing in September of such year and Fisch shall be obliged to reply to such letter not later than May 1st in such year.

The $15,200 sum is the annual total of the bi-monthly payments of $533.34 and the $2,400 set out in paragraph (b) of Clause 4.

The parties agreed the wife was liable to pay income tax on that amount, as well as on the educational costs. Further clauses in the agreement provided for reduction, on certain specified eventualities, of the amounts to be paid by the defendant in the future.

The defendant, up to and including 1972, complied with the terms of the agreement. He paid, each year, in accordance with clause 5, the educational costs of the children. The youngest child had also become enrolled in the private school. In 1972, the educational costs were $4,420, the sum the defendant sought to deduct. He had paid that amount directly to the school.

The sitting member of the Tax Review Board found the educational costs were within paragraph 60(b) of the statute, as it has been interpreted, and the boundaries staked out by the Federal Court of Appeal in The Queen v Pascoe, [1976] 1 FC 372; [1975] CTC 656; 75 DTC 5427. He held the educational expenses to be “alimony or other allowance’’. But he limited the amount deductible to $1,050, the school fees prevailing in 1967.

I am unable to agree with the presiding member in his conclusion that the educational costs here were paid as alimony or other allowance. Nor am I able to accede to the arguments advanced by counsel for the defendant.

The facts of the “Pascoe’’ case must not be lost sight of. The taxpayer-husband there agreed, pursuant to a separation agreement, to pay $200 per month to his wife, and $270 per month to her for the maintenance of their three children. He also agreed to provide all educational expenses for the children. He, as well, promised to pay all medical and dental expenses of the wife and children. There was ultimately a divorce. The provisions of the separation agreement were incorporated into the final decree. The educational and medical expenses were never predetermined, nor was there anything in the decree providing a method for predetermination or ascertainment. But the mother, who had custody, at first paid the school expenses and then was reimbursed by the husband. Later, the defendant ascertained from the school the approximate expenses and paid them, roughly on a monthly basis, to his former wife.

The trial judge found the school expenses to be deductible. He ruled against the medical and dental expenses. The court of appeal found none of the expenses to be deductible. Their reasons were as follows (page 374):

First. we are of opinion that the payment of those sums did not constitute the payment of an allowance within the meaning of paragraph 11(1)(l) [now 60(b)]. 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.

Furthermore, even if the payment of the expense here in question could be construed as the payment of an allowance. it was not. in our view. an allowance “payable on a periodic basis” as required by paragraph 11(1)(l). The payment was not determined by the separation agreement and the decree nisi to be at fixed recurring intervals of time. Indeed, the agreement and decree said nothing about when payment of the expenses must be made. It is not relevant that the educational expenses may. in fact, have been paid on a periodic basis since the periodicity required by the statute refers to the manner in which the allowance is payable, not to the manner in which it is in fact paid.

For these reasons. the appeal will be allowed and the cross-appeal will be dismissed.

The "Pascoe” decision has been applied in a number of later cases, A-G Canada v Weaver et al, [1976] 1 FC 423: [1975] CTC 646; 75 DTC 5462: Cotton v The Queen, [1976] CTC 406: 76 DTC 6232; Roper v MNR, [1977] CTC 602; 77 DTC 5408. See also The Queen v J Guay, [1977] CTC 266; 77 DTC 5420, reversing the Trial Division, [1975] CTC 88: 75 DTC 5044, where expenses, similar to those in issue here, were held not deductible.

The educational costs paid by. the defendant in this suit were a limited predetermined sum of money to enable the mother to meet the school fees. The monies paid were channelled and restricted to that particular purpose. But the sum was not at the former wife’s complete discretion as to how the money was to be applied by her. It was, in substance, a reimbursement of expenses incurred by the wife in the educating of the children. The payment is not within the "Pascoe” guidelines.

I allow the appeal with some regret. The agreement in question was drawn long before the restrictions on paragraph 60(b) imposed by the "Pascoe” case were known. If the defendant had agreed merely to pay to the wife a fixed sum larger than the bi-monthly amount of $533.34, (based on an arbitrary estimate of education costs), there would have been no tax difficulty. In this case, the evidence shows the defendant’s former wife has, sadly, a history of emotional and psychiatric disorders. It was because of fear of financial irresponsibility by her, and the father’s desire to see the children properly attended to and educated at the private school, that the educational costs were handled in this special way.

Those considerations cannot, however, change what I. understand to be the law, or avoid its application.

The appeal of the plaintiff is allowed. The assessment of the Minister dated March 18, 1975, confirmed by the Minister on March 4, 1976, is restored.

The amount of tax involved here was less than $2,500. Although the defendant filed what might be termed a counterclaim, or a crossappeal from the decision of the Tax Review Board, the real and sole issue between the parties was the deductibility of $4,420; not $1,050. In those circumstances, it is my view subsection 178(2) of the statute IS applicable.

The defendant will, therefore, recover from the Minister all his reasonable and proper costs in connection with this appeal. (See The Queen v Creamer, [1977] CTC 20; 75 DTC 5367.)

Appeal allowed.