Carl Caleb Cotton v. Her Majesty the Queen, [1976] CTC 406, 76 DTC 6232

Dubé, J:—This is an appeal from a reassessment of the plaintiff’s income tax for the 1970 taxation year. By Notice of Reassessment dated August 9, 1974, the Minister confirmed that the amount of $774.69 claimed as deduction from income in respect of alimony does not come within the provisions of paragraph 11(1)(l) of the Income Tax Act “because said payments were not made to the spouse and were not alimony payments or other allowance payable on a periodic basis”. Paragraph 11 (1)(l) reads as follows:

11. (1) Notwithstanding paragraphs 12(1)(a), (b) and (g), the following amounts may be deducted in computing the income of a taxpayer for a taxation year:

(I) an amount paid by the taxpayer in the year, pursuant to an order of a competent tribunal, as an 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 his spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year;

By a Quebec Superior Court judgment dated December 15, 1969, plaintiff was ordered to pay $30 a week for his children and to maintain the family home. Plaintiff was allowed by the Minister to deduct the weekly payments but not the maintenance expenses.

It should be noted that, for reasons better known to himself, plaintiff refused to answer questions at his Examination for Discovery and was therefore put to the detailed proof of his expenses at the trial where he acted as his own counsel. He succeeded in proving maintenance expenditures totalling $674.69 (not $774.69 as claimed).

In a recent decision, The Queen v Morton Pascoe, [1975] CTC 656; 75 DTC 5427, the Federal Court of Appeal held that payments on account of educational and medical expenses were not “allowances” under paragraph 11(1)(l) because they were not fixed, limited, predetermined amounts payable on a periodic basis.

Pratte, J speaking on behalf of the Court said at page 658 [5428]:

First, we are of the opinion that the payment of those sums did not constitute the payment of an allowance within the meaning of paragraph 11(1)(1). 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 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 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.

That decision was applied shortly thereafter by the Federal Court of Appeal in Attorney General of Canada v James C Weaver and Freda J Weaver, [1975] CTC 646 at 649; 75 DTC 5462 at 5464. Pursuant to a written separation agreement the taxpayer paid certain utility bills and made mortgage payments amounting to $1,806. The Court held that the payments were to defray the wife’s actual expenses. They were not received by the wife as. alimony or other allowance on a periodic basis, since they were not amounts determined in advance. Referring to the Pascoe decision (supra) Thurlow, J, as he then was, Said:

While this interpretation of “other allowance” in its context may at first Sight seem narrow and restrictive it appears to me to leave: scope for the application of that expression since “alimony”, as I understand the term, refers only to an allowance paid under a decree for the maintenance of a wife whereas the statutory provisions are plainly intended to apply as well to allowances of the same nature for the maintenance of children and, conceivably, of a husband, and whether under a decree or pursuant to: the terms of an agreement for separation or even after the parties have ceased to be husband and wife.

The interpretation appeared indeed to be narrow and restrictive to the plaintiff. More so in view of the fact that his wife’s Petition asked for weekly allowances of $75 which would have been deductible being limited, predetermined sums of money on a periodic basis. According to his evidence, which I accept, it was decided that it would be preferable for the children to live in the family home. Thus the weekly payments were reduced by Court Order to $30 with the added obligation for the plaintiff to vacate and maintain the house, which he did. Plaintiff remarked that if his payments for maintenance were not periodic, the sum is and oil bills have to be paid.

The relevant paragraphs of the Order would confirm plaintiff's allegation:

THAT the Respondent be also ordered to pay your Petitioner an alimentary allowance of at least $75.00 per week for herself and their minor children, the said pension paid in advance weekly to the sum of $75.00, each on the first day of each week at your Petitioner’s residence.

WHEREAS that the Petitioner ‘‘Cour Tenante’’ has made a verbal demand to desist herself from her conclusions of living in the common domicile in Chateauguay and ask the authorisation to reside in Montreal, such verbal demand has been refused by the Court;

CONSIDERING the Petition is partly well founded;

FOR THESE REASONS:

DOTH AUTHORIZE the Petitioner to reside in the common domicile at 123 St Denis Street in the City of Chateauguay-Centre;

DOTH ORDER the Respondent to vacate the said common domicile;

DOTH AWARD to the Petitioner the provisional custody of the minor children Fay Ellen Cotton and Mona Louise Mary Cotton;

DOTH CONDEMN the Respondent to pay to the Petitioner an alimentary allowance of $30.00 weekly for the support of the minor children and the said pension, payable in advance by weekly payments, on the first day of each week at the Petitioner’s domicile;

DOTH CONDEMN the Respondent to pay for the maintenance of said common domicile;

Urie, J, in dissenting from the majority decision in the Weaver case (supra), would have allowed the mortgage payments as being fixed and predetermined. He said at pages 654 [5467]:

On the other hand, the mortgage payments do have this characteristic and I do not believe that the failure to specify in the agreement the amounts of such payments and the dates upon which they were to be paid precludes the application of the section to them. The agreement by implication incorporates the mortgage by reference. The mortgagee’s mortgage ledger card, adduced in evidence, verifies that monthly payments were required to be made on the 10th day of each month until the maturity of the mortgage in 1992. Clearly then the payments have the regularity of payment of an allowance that the section contemplates.

It was argued that even if this were so, the fact that the tax portion of the monthly payments varies from time to time deprives them of the element of a “limited predetermined sum” that Pratte, J, in the Pascoe case said was a characteristic of an allowance. I cannot agree with this submission, because the amount of that portion of the payment was in itself fixed in advance for fixed periods of time, probably a year. As a result, in my view, the requirements of the section are thus met.

Two difficulties still must be dealt with before it can be said that the mortgage payments were properly deducted by the Respondent. First, the payments were not made to the spouse but directly to the mortgage company. Does this affect their deductibility? In my view it does not. Reading paragraphs 3 and 4 of the agreement together it is, I think, clear that the expenses required to be paid by the husband were in fact part of the overall payments for the benefit of the wife and children. The opening words of paragraph 4 “The husband shall pay to the wife, in addition to the sum set out in paragraph 3 above . . ”, indicate that this is so. Moreover, while by paragraph 3 it is mandatory that the husband pay ail usual expenses relating to the house, it does not require him to make such payments directly to the creditors to whom monies are owing but simply to pay them. He could have complied with his obligations under the agreement equally well by paying the mortgage instalments to the wife for transmission to the mortgagee. If this is so he ought not to be deprived of his right to deductibility of the payments or part of them because he elected to make them directly to the mortgagee on her behalf.

Plaintiff in the case at Bar tabled his mortgage payment cheques made to the order of the Royal Bank of Canada. The first one for the year 1970 is in the amount of $99 and the other eleven are in the amount of $101. In view, however, of the majority decision in the Weaver appeal these mortgage payments cannot be held to be deductible. It has been often repeated that taxation is the rule and exemption the exception and therefore must be strictly construed. In order to benefit from a special deduction, the taxpayer must show that every constituent element necessary to the deduction is present in his case, that every condition required has been complied with and that he falls squarely within the four corners of the relevant provision of the Act.

The reassessment is therefore affirmed and the appeal dismissed with costs.