Russell Zarbatany v. Minister of National Revenue, [1974] CTC 2195, [1974] DTC 1134

The Assistant Chairman:—This appeal is from income tax assessments dated February 7, 1973 of $983.87 for the 1970 taxation year and $328.75 for the 1971 taxation year.

The allegation contained in the notice of appeal that tax of $1312.62 had been established on the income for 1971 was recognized as being incorrect by counsel for the appellant, who admitted that this amount represented rather the tax for the two taxation years taken together. Thus there is no disagreement between the parties on the amount involved.

The point of law to be determined here is whether, at the time relevant to the appeal, the alimony payments made by the appellant to his wife after the separation from bed and board satisfy the requirements of paragraph 11 (1)(l) of the Income Tax Act. For these payments to be deductible, the section requires among other things: (a) the existence of a decree, order or judgment of a competent tribunal or a written agreement between the parties regarding the amount of the alimony payments, and (b) the separation of the taxpayer from his spouse pursuant to a divorce, judicial separation or written separation agreement. These two essential conditions must be fulfilled before these alimony payments may be deducted for taxation purposes.

However, paragraph 11 (1)(l) poses a genuine problem for taxpayers in the province of Quebec, who are subject to the provisions of the Civil Code, Article 186 of which stipulates that separation from bed and board cannot be based on the mutual consent of the parties, thus obliging these taxpayers to have recourse to legal separation procedures, which are of necessity longer and more complicated than a simple written agreement.

The facts of the case give a good indication of the problem. On March 23, 1970 the appellant entered, by means of a statement, an action for separation from bed and board (Exhibit A-2) and the appearance took place on April 1, 1970. On the same day, a petition for temporary measures was filed in the name of the wife requesting a weekly alimony of $250 (Exhibit A-4). The solicitors for the parties were authorized to set jointly the amount of the alimony payments to the wife, who had custody of the children. On April 28, 1970 counsel for the appellant, Mr Jacques Léger, sent the wife’s solicitors a letter stating that the appellant had undertaken to pay his wife an alimony of $117 a week (Exhibit A-5).

At the hearing, the appellant stated that before the separation he had paid in property costs, mortgages, principal and interest the sum of $123 a month on property belonging exclusively to his wife, and that the postdated cheques for this amount should therefore be considered alimony payments. In fact, alimony of $117 a week was paid by the appellant to his wife during the period relevant to the appeal. In this regard, the following is an excerpt from the letter the wife’s solicitors wrote to the appellant in reply to his letter under date of April 29, 1970 (Exhibits A-6 and A-7):

With respect to the remainder of your letter concerning the sum of $117.00 per week we wish to draw to your attention that this sum was arrived at not in the form of an agreement or as a definitive sum but simply as a temporary measure until such time as we had had the opportunity to examine your client as to his assets and income in order to determine whether this sum was reasonable or not under the circumstances.

Accordingly we cannot at this point enter into any formal agreement concerning this payment of $117.00 per week and simultaneously with the forwarding of this letter we are serving upon your client a subpoena with a notice to you to examine him under oath in this connection.

During a preliminary examination on May 7, 1970 (Exhibit A-9), the appellant was questioned about his income and expenses, but it was not until March 11, 1971, almost one year later, that Mr Justice André Demers of the Superior Court granted the parties separation from bed and board and fixed the amount to be paid in alimony to the wife and the children at $130 a week (Exhibit A-10). In fact, the separation from bed and board dated back at least to the beginning of the proceedings, that is to March 23, 1970, and since that time the appellant had been paying his wife $117 a week in alimony.

In view of the fact that the Civil Code of the province of Quebec stipulates that separation from bed and board cannot be based on mutual consent of the parties—a procedure which is permitted in the other provinces—and in view of the amount of time, namely a year, which elapsed between the institution and final settlement of the separation action, in my opinion it is prejudicial and unfair to Quebec taxpayers to require that only a decree, order or judgment of a competent tribunal on the separation from bed and board of the parties and on the amount of alimony granted can entitle a taxpayer to deduct his alimony payments for taxation purposes, when everywhere else in the country a simple written consent is sufficient.

Without attempting to determine whether it is the provisions of the Quebec Civil Code or those of a federal statute which take precedence where there appears to be a conflict, I think that a practical solution can often be found if consideration is given to the general aim of each of the laws. It is clear that the articles of the Civil Code were written from a completely different standpoint and for a completely different purpose from those of the Income Tax Act provisions.

Whereas Article 186 of the Civil Code was written in connection with the civil status of persons, the legislator’s intention, in the area of application of paragraph 11 (1)(l) of the Income Tax Act, is to restrict to alimony payments alone the deductions allowed to taxpayers, thus preventing abuse of such deductions. The legislator surely did not intend this section to be prejudicial to Quebec taxpayers.

Paragraph 11 (1)(l) must therefore be interpreted in terms of its spirit and purpose rather than literally and restrictively, since this could be prejudicial to Quebec taxpayers, who cannot avail themselves of the practical advantages of a separation from bed and board following mutual agreement, as this section specifically provides. In my interpretation of the section, I can easily conclude that in instituting separation proceedings, the parties in this case had consented to the separation, and that the related procedures taken on their behalf by their respective solicitors are equivalent to a written agreement as required by paragraph 11 (1)(l).

I am of the opinion that the appellant and his wife fulfilled this condition with respect to their separation, which in fact dated from the beginning of the legal proceedings. I am also of the opinion that a formal agreement concluded between the parties through their solicitors on the amount of alimony to be paid should take the place of a written agreement and should entitle the appellant to the deduction permitted in paragraph 11 (1)(l) of the Act, even if this means having to make the necessary changes in the alimony settlement after the decision and pursuant to a judgment of a competent tribunal.

However, although in this case the separation proceedings can be treated as the equivalent of a written agreement between the parties (paragraph 11 (1)(l)), the same does not apply to the amount of alimony the appellant paid his wife.

The letter of April 28, 1970 from the appellant’s solicitors to his wife’s solicitors (Exhibit A-5) clearly indicates that if there was an agreement regarding the amount of the alimony, it was only a verbal agreement between the solicitors. In the light of the reply by the wife’s solicitors dated April 30, 1970 (Exhibit A-6), however, it is evident that they refused categorically to negotiate a formal agreement whereby the appellant would pay a weekly alimony of $117. In fact the appellant had been notified that measures had been taken for a preliminary examination of his means with a view to fixing the amount of alimony payable.

In my opinion, there was no formal agreement between the parties’ solicitors on the payment of alimony by the appellant, and the weekly payment of $117 was only a unilateral commitment. From this, I conclude that these payments are not covered by paragraph 11(1)(l) of the Income Tax Act, even if the words “pursuant to a written agreement, as alimony” are given a broader interpretation. The situation would have been completely different, I believe, if the solicitors had agreed formally on the amount of the alimony.

Counsel for the appellant referred to the case of Eugene Kates v MNR, [1968] Tax ABC 209; 68 DTC 219. In that case, the parties had separated and the wife had agreed to seek a divorce. In the meantime, they had agreed on a weekly alimony payment of $100 pursuant to a Memorandum of Interim Settlement. The Kates case differs from the present one in that here there was no formal agreement between the parties or their solicitors on the amount of alimony to be paid. In their letter of April 30, 1970 (Exhibit A-6), the wife’s solicitors had written the following in the second paragraph:

With respect to the remainder of your letter concerning the sum of $117.00 per week we wish to draw to your attention that this sum was arrived at not in the form of an agreement or as a definitive sum but simply as a temporary measure.

Thus there was no formal agreement on alimony, and the amount of $117 which was established orally on a temporary basis pending further information on the appellant’s income with a view to determining the alimony satisfies neither the letter nor the spirit of paragraph 11(1)(l) of the Act. Since a taxpayer must satisfy both conditions required by this section before he can benefit from the deduction permitted and since the appeal meets only one of these, the appellant may not take advantage of the deduction permitted. The appeal must therefore be dismissed.

Appeal dismissed.