Gerald G Fisch v. Minister of National Revenue, [1977] CTC 2335, 77 DTC 241

Delmer E Taylor:—This is an appeal against an income tax reassessment for the year 1972 in which the Minister of National Revenue disallowed a deduction of $4,420 claimed by the appellant as part of the total alimony of $19,620 paid under an agreement with his former spouse—Mrs Jean Fisch (also called Dame Jean Eleanor White, and referred to hereinafter as “White”). Both the appellant and the respondent rely on paragraph 60(b) of the Income Tax Act, SC 1970- 71-72, c 63, as amended.

Facts

The appellant is resident and domiciled in the City of Montreal, Province of Quebec. He was formerly married to White, the marriage between them having been dissolved pursuant and subsequent to a resolution of the Senate of Canada dated March 3, 1967. Financial and custody arrangements between the appellant and his former wife were governed at all relevant times by the terms of an agreement dated April 25, 1967 executed before Notary Theodore D Laberge, bearing his minute number 8685 (herein referred to as the “agreement”). The agreement provided, inter alia, for the payment of:

(a) per paragraph 4, $15,200 per annum; and

(b) per paragraph 5, payment of educational costs in respect of the children then estimated at $1,050 per annum, which payments were to be made by the appellant on behalf of his former wife directly to the school or schools concerned.

The amount of $4,420 was paid by the appellant pursuant to paragraph 5 of the agreement.

Contentions

The appellant contended that the sum of $4,420 was paid as alimony or other allowance payable on a periodic basis. It was paid by the appellant as agent of his former wife. Under the terms of the agreement, it was contemplated and intended that appellant’s former wife would include the said sum of $4,420 in computing her income in respect of the 1972 taxation year. The amount in question was one properly included in the computation of an alimentary allowance of the nature appellant was required to pay under the terms of the agreement. In the absence of an automatic mechanism in the agreement for determining the amount payable on a periodic basis in respect of educational costs, the appellant and his former wife would have been in a position of constantly appearing before the courts in order to obtain and reobtain a suitable award by way of alimentary allowance. It would be contrary to public order to read the Act so as to force a taxpayer to have continual recourse to the courts solely for the purpose of establishing a single amount as an alimentary allowance so as to entitle the taxpayer to claim a deduction for income tax purposes.

The respondent’s position was that the educational costs amounting to $4,420 in the 1972 taxation year were not paid by the appellant, as alimony or other allowance payable on a periodic basis, for the maintenance of his wife and his children.

Evidence

The appellant submitted as Exhibit A-1 a copy of the agreement, and gave verbal evidence regarding the difficulties of dealing with White subsequent to the divorce as to implementation of the agree- ment and with respect to visitation arrangements and the general welfare of his children. It was under these circumstances that the appellant assumed the responsibility of ensuring that the children were enrolled at St-Georges School in Montreal, Quebec, a particular institution that provided for them appropriately. The costs at the school for enrolment had gradually increased over the years, from the level of $1,050 indicated in the agreement, to the amount of $4,420 claimed in 1972. The appellant contended that only in this manner could he have fulfilled his total responsibilities. For record purposes the following clauses (italics mine) are taken from the agreement:

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 Fifteen Thousand Two Hundred Dollars ($15,200) per annum, plus the sum mentioned in paragraph 5, payment whereof shall be made in the following manner:

(a) The sum of Five Hundred and Thirty-three Dollars and Thirty-four Cents ($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 Two Thousand Four Hundred Dollars ($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 Two Hundred Dollars ($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 Fifteen Thousand Two Hundred Dollars ($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 One Thousand and Fifty Dollars ($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.

6. White hereby acknowledges and confirms that she is liable for and will pay all income taxes payable with respect to the aforesaid sums of Fifteen Thousand Two Hundred Dollars ($15,200) and One Thousand and Fifty Dollars ($1,050) as well as such greater or lesser sums as might at any time be paid under the terms of the preceding paragraph in respect of future calendar years.

White acknowledges that the foregoing payments cover all payments due or to become due by Fisch to her or on her behalf, whether directly or indirectly, including any and all liabilities, for which he may be a guarantor, the whole subject to such further sums as may be paid by Fisch relating to the education of the children.

Argument

The position taken by counsel for the appellant was essentially that although there might be a slight distinction that could be made between the payment of $15,200 and the $4,420, both constituted alimony and as such were deductible by the appellant; but in the event that the $4,420 was not alimony in the same sense as the amount of $15,200, it was certainly an allowance covered under the same section of the Income Tax Act. The Board quotes from a written submission prepared by counsel:

The basic argument which I had raised was that:

(a) if the word “alimony” is taken in its usual or general sense, rather than in a technical sense, and

(b) if you were satisfied that the amounts paid by the Plaintiff pursuant to the notarial agreement (Exhibit A-1) fell with that general meaning, it was not necessary for you to consider whether what was paid fell within the definition of “allowance” as developed by the Federal Court of Appeal in the Weaver and Pascoe decisions.

The purpose for this distinction is not clear, except possibly to indicate that the classical legal definition of alimony, as something paid during the litigation only, has been intended. This is a very narrow meaning of “alimony” and not the general sense of the term which would be understood if the term were used absent a strictly technical examination of the history of divorce legislation. If you conclude that the technical term has been incorporated as a term of art in paragraph 60(b) of the Act, the argument I made before you at trial would be seriously weakened. In that event, payments of alimony could only be made in the period between institution of the action for divorce and the granting of the decree nisi. This would mean that all other payments, in order to be deductible, would fail to be covered in the “or other allowance” language of paragraph 60(b) of the Act. My submission is that this would be unreasonable, given the clear public policy behind the legislation (which permits deduction by the payer, combined with inclusion by the receiver), namely to ease the financial consequences of the social and family upheaval of divorce. In addition, the fact that such payments can be agreed upon between the parties, pursuant to a written agreement (as is the case in this appeal) belies any intention in the legislation to restrict “alimony” to its narrow technical sense, which sense could only be deduced from a careful study of the arcana of ancient divorce law and common-law rights of the parties.

In support of his position, counsel cited the following cases: O’Connor et al v MNR, [1943] CTC 255; 2 DTC 637; Morch v MNR, [1949] CTC 250; 4 DTC 649; McLeod v Minister of Customs and Excise, [1917-27] CTC 282: 1 DTC 73; aff'd [1917-27] CTC 290; 1 DTC 85 (SCC); Eastern Trust Co v Royal Bank of Canada, [1950] CTC 216; 4 DTC 831.

Counsel for the respondent argued that the term “alimony” was specific, and not enlarged by the addition of “or other allowance” in the Act. In the words of counsel:

According to a well-known principle of interpretation in tax matter, we submit that the Income Tax Act, and particularly the word “alimony” in section 60(b) should be strictly construed contrary to the appellant’s argument based on section 11 of the Interpretation Act.

However, we submit, on the basis of a grammatical rule, that whatever meaning may generally be given to the word “alimony”, its meaning must be restricted to an allowance under section 60(b) because it is followed by the expression “other allowance”. It appears that “alimony” is a specific word followed by a generic word that included the first one.

Therefore, we suggest that the expression “alimony” in this context refers restrictively to a particular type of allowance because otherwise the addition of the word “other” does not make sense.

For these reasons, we submit that alimony must be an allowance. Therefore, the amount paid by the appellant not being an allowance, the appeal Should be dismissed.

In support the following cases were cited to the Board: W A Sheaffer Pen Co of Canada Ltd v MNR, [1953] CTC 345; 53 DTC 1223; Wylie v City of Montreal (1885), 12 SCR 384 at 386; The Queen v Scheller, [1975] CTC 601; 75 DTC 5406; The Queen v Walsh, 1 CCC 109 at 110; Attorney General of Canada v James C Weaver and Freda J Weaver, [1975] CTC 646; 75 DTC 5462.

Findings

The question for the Board, according to counsel for the appellant, would be resolved if the Board accepted that the amount paid ($4,420), in dispute, was “alimony”, while counsel for the respondent holds it could not have been alimony, since it was not first an allowance.

First, dealing with the point made by counsel for the respondent, the amount of $15,200 paid by the appellant to White has been allowed as a deduction by the Minister and, accordingly, must have been regarded as falling within the terminology “alimony or other allowance”. Since the word “alimony” itself is nowhere to be found in the agreement, this amount must have been recognized by the respondent as “alimony” simply on its own merits, or it must have been recognized first as an “allowance”, because of certain characteristics (following the line of thought expressed by counsel for the respondent), and then recognized as a particular kind of allowance, ie “alimony”. Otherwise the amount by which the appellant identified this deduction in the income tax return—‘"Alimony—Jean Fisch—$19,620.00” (italics mine) might have been altered to show it was not regarded by the Minister as alimony, but as an allowance.

Second, turning to the fundamental point raised by counsel for the appellant, it is noted that he appeared to accept that the deduction of the $15,200 was permitted as “alimony”, and stressed that the balance of the total payment ($4,420) should be treated in the same manner—as “alimony”.

With regard to the terms “alimony” and “other allowance”, I would suggest that the decisions in Weaver (supra) and The Queen v Pascoe, [1975] CTC 656; 75 DTC 5427, support the view held by counsel for the respondent. In my opinion this is further reinforced by a careful reading of paragraphs (b) and (c) of section 60 of the Act. It would appear to me that had the legislators intended there to be two different kinds of payments deductible under paragraph 60(b), the expression “alimony or allowance’’ might have served that purpose, rather than “alimony or other allowance’’. Without coming to any final conclusion on that precise point, it might be suggested that the inserted word “other” serves to provide for deductibility where the conditions prerequisite as an “allowance” (Weaver and Pascoe, supra) are fulfilled but the precise term “alimony” has not been used as part of the formal context. This was the situation in the agreement in this matter, and that fact has been noted earlier.

There would appear to be three points which differentiate the $4,420 from the $15,200, as far as treating it as alimony is concerned. First, the amount of $4,420 is not mentioned in the agreement; second, it was paid to a third party rather than to White directly; and third, it was designated for a specific purpose—the education of the children. The agreement must be viewed in its entirety and it is a document of some substance, filling 9 pages. Prepared in 1967, long in advance of some of the recent and detailed judgments dealing with the applicable sections of the Act, it nevertheless covers in clear and unambiguous language the understanding and intention of the two

parties, including definite responsibility for income tax liability on the part of White. Viewed from this perspective, I cannot accept that payment of the $4,420 to a third party, or for a specific purpose, should distinguish the amount from the balance of the $15,200. Particularly this is so, when clause 4(b) of the agreement (supra) makes provision for payment of a portion ($2,400) of the said $15,200 to a third party— a nominee of White for a specific purpose—the assurance that the income taxes due by White on “the said . . . $15,200.00, plus the sum mentioned in clause 5” would be paid.

However, the fact that the $4,420 is not referred to in the agreement is quite different. The sum mentioned in clause 5 was $1,050. Its relationship to the amount of the appeal will be dealt with later but for now the Board will deal with that amount. There is no question in my mind that White and the children of the marriage benefited from the payment of ‘‘the sum mentioned in clause 5’’. I am sorely tempted to leave the matter rest there—the “sum mentioned in clause 5” falling into the same classification, for whatever reason, deemed by the Minister proper for the $2,400 portion of the $15,200, all of which has been allowed. But the question could be raised—was the “sum mentioned in clause 5” deductible completely on its own merits, whether or not distinguishable from the $2,400? The conditions necessary for it to be viewed as an allowance must be met, and I quote from The Queen v Pascoe at page 658 [5428]:

An allowance is, in our view, a limited predetermined sum of money paid to enable the recipient to provide for certain kinds of expense; 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 satis- faction 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 expenses 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.

I am satisfied that it was a limited predetermined sum ($1,050) and that it was payable on a periodic basis—annually. This is borne out in my view by the reference in the second paragraph of clause 5 of the agreement by the words “future years”, “each year” and “such year”. Referring once again to Pascoe quoted above, “since the periodicity required by the statute refers to the manner in which the allowance is payable, not the manner in which it is in fact paid”, it is therefore not significant to me that the school was in fact paid by the appellant monthly, quarterly or annually. His obligation on behalf of White was $1,050 annually.

Turning then to the far more critical point which the respondent might appear to regard very narrowly and against which there has been no argument advanced for the appellant—the significance of the word “recipient” in the relevant section of the Act—I see nothing in the decisions quoted above which would persuade me that payment under the clear direction of the beneficiary would alter the character of such a payment otherwise falling within the definition given for a deductible allowance under this section. To deny a taxpayer such a claim because the payment was not made directly to the second party to such an agreement but was made under the specific direction of that second party would, in my opinion, go beyond any intent of Parliament related to this section of the Act. I believe this view can be read into the phrase used by the learned judge in Pascoe (supra) “to enable the recipient”. The recipient in that context should not be read as the individual, corporation or institution actually accepting the payment but as the recipient of the benefits and rights flowing from any agreement falling within the ambit of paragraph 60(b) of the Act. Further, there is strong support for the position that the recipient of the sums paid under such an agreement need not in every instance be the recipient of the rights under the agreement, as seen in the version of paragraph 60(b) given in the French text of the Income Tax Act:

Pensions alimentaires

b) toute somme payée dans l’année par le contribuable, en vertu d’un arrêt, d'une ordonnance ou d’un jugement rendus par un tribunal compétent ou en vertu d’un accord écrit, à titre de pension alimentaire ou autre alloca- tion payable périodiquement pour subvenir aux besoins du bénéficiaire, des enfants issus du mariage ou à la fois du bénéficiaire et des enfants issus du mariage, si le contribuable vivait séparé, en vertu d’un divorce, d’une séparation judiciaire ou d’un accord écrit de séparation, du conjoint ou de l’ex-conjoint à qui il était tenu de faire le paiement, le jour où le paiement a été effectué et durant le reste de l’année;

Attention should be directed to the use of the word “bénéficiaire” as the equivalent of “recipient” in the English text.

For these reasons I find that the “sum mentioned in clause 5” is deductible as “alimony or other allowance”. However, that sum is not the $4,420 which is the subject of this appeal. While the Board can appreciate the motivation of the appellant to ensure the well-being of his children and accepts the argument that there could have been difficulties in making arrangements with White for increases in the amount of $1,050 to accommodate changing circumstances from year to year, the Board, nevertheless, can only conclude that since the “periodic basis” of the payment was founded in the wording of the second paragraph of clause 5 of the agreement, then any change in that sum must be based on implementing and fulfilling the conditions outlined therein. This was not done—that was no agreement from White to accept income tax liability for a sum greater than $1,050. This Board cannot so prescribe.

Decision

The appeal is allowed in part so that the amount of $1,050 shall be deductible as ‘‘alimony or other allowance” from the income of the appellant. The matter is referred back to the respondent for reconsideration and reassessment on that basis. In all other respects the appeal is dismissed.

Appeal allowed in part.