Anne Cecilia Grace v. Minister of National Revenue, [1974] CTC 2322, 74 DTC 1248

The Assistant Chairman:—This is the appeal of Anne Cecilia Grace from an income tax assessment with respect to the 1971 taxation year.

By notice of reassessment dated May 1, 1973 the Minister included in the taxpayer’s income an amount of $813 which he considers was received by her as alimony.

The facts in this appeal are that the appellant is living apart from her husband and by a judgment of the Superior Court of the Province of Quebec dated April 12, 1966 the husband was ordered to pay to the appellant for her support the sum of $60 a week. The husband was also required to disburse an additional sum of $101 per month to pay the mortgage, the principal and the taxes on the house in which his wife resides.

In her 1971 return the appellant included as income an amount of $3,120 which she had received as alimony for her support but she did not include as income the amount of $813 which had been paid in respect of the mortgage, interest, and taxes on the house.

The point in issue, of course, is whether the amount of $813 paid to the mortgagee on a periodic basis by the husband on behalf of the appellant pursuant to a judgment of a competent tribunal for the mortgage, interest and taxes on the house in which she resided is an alimony payment taxable in the hands of the recipient.

The appellant claims that, being in community of property with her husband, the house is owned jointly by her husband and herself, and she considers it most unfair, in the circumstances, that she be called upon to pay taxes on the full amount of the mortgage payment on the house while her husband is allowed to deduct the full amount from his own income, particularly when, as claimed by the appellant, the husband’s income is far in excess of her own.

The amount of alimony required by the appellant and the ability of the husband to pay has already been decided by the Superior Court of Quebec, and that point is beyond the jurisdiction of this Board. The issue before the Board has, of course, nothing to do with the quantum of alimony paid to the appellant but deals only with the nature of the mortgage payments made by the appellant’s husband and their treatment for tax purposes.

At first glance it seems to me somewhat unusual, and indeed inequitable, that the appellant’s husband was allowed to deduct, in their entirety, amounts that were, in part at least, capital payments on a house jointly owned by his wife and himself, while the wife, in turn, had to pay tax on the total of such amounts. Strictly speaking, for income tax purposes such capital payments should be neither deductible from the income of the payer nor taxable as income in the hands of the person on whose behalf they are allegedly made.

Counsel for the respondent explained that the appellant had been so assessed largely on the strength of a decision rendered by Maurice Boisvert, Esq, QC a Member of the former Tax Appeal Board, in which the husband was the appellant and was allowed to deduct as alimony amounts of mortgage payments on a house which he owned and in which his wife resided and paid by him pursuant to a judgment of a competent tribunal (see Richard A Hastie v MNR, [1972] CTC 2383; 72 DTC 1335). The Minister then appealed the decision to the Trial Divi- sion of the Federal Court and Mr Justice Walsh, confirming Mr Boisvert’s decision, dismissed the Minister’s appeal ([1974] CTC 131; 74 DTC 6114).

It seems to me, however, that the only issue which was decided in that appeal was that mortgage payments made by the appellant pursuant to an order of a competent tribunal as alimony to his wife were deductible by the appellant even though the payments were not made directly to the spouse, but were made to the mortgagee.

In the appeal that concerns us here, the wife is the appellant, and although the mortgage payments in issue here were also made to the mortgagee directly and not to the wife, that issue was not raised. Consequently, the decisions in the Hastie case are not really applicable to the issue in this appeal.

It seems to me that the only issue that is presently before the Board is a direct question as to whether payments of mortgage principal and interest, with all they entail, can properly be considered as totally deductible as alimony by the husband and totally taxable in the hands of the wife, or whether that portion of each mortgage payment which should be attributed to the payor’s capital interest in the mortgaged property can properly be considered as part of the alimony paid to his wife within the meaning of paragraphs 6(1)(d) and 11 (1)(l) or

(la) of the old Act.

In dealing with the Hastie appeal in the Federal Court, Mr Justice Walsh, at page 137 [6119] of his reasons, although he did not decide the point, nevertheless touched upon some aspects of the question before us which are of considerable help in deciding the present issue.

In considering the Minister’s second argument in the Hastie case (supra) in which counsel referred to the benefit which might accrue to the husband as a result of making mortgage payments on a property which he himself owned, the learned judge, after basing his calculation as best he could on such pertinent figures as were available to him at the time, came to the conclusion that only a relatively small portion of the total amounts paid on the mortgage would be of sole benefit to the husband to the exclusion of his wife and children.

Mr Justice Walsh did suggest, however, that subsection 16(2) of the Act could possibly have been invoked and had it been applied, then that part of the mortgage payment which represents an increase in the capital asset could have been attributed to the husband and not deducted from his income while such portions of each payment as represented interest and taxes would have been attributable to the wife and taxed as income in her hands. However, since the issue was not raised, and in the absence of sufficient and adequate data, the learned judge did not render a decision on that point.

In my view, the learned judge touched upon the very issue that has to be decided here.

In principle and in law the insignificance of the amount of a payment on capital account cannot in any way change the nature of the payment and that portion of the $813 which went toward the amortization of the mortgage on the house, thereby increasing the capital interest in the house of both the husband and wife in the circumstances of this appeal, is a Capital payment benefiting both parties.

Mr Justice Walsh pointed out that paragraph 12(1)(b) which establishes the general rule prohibiting the deductions of payments made on capital account is inapplicable when paragraph 11(1)(la) comes into play. However, the payments referred to in paragraphs 6(1)(d), 11 (1)(l) and 11(1)(la) are consistently followed by the words “for the maintenance of the recipient”. This, in my view, is the essential condition of these sections. Although one aspect of the question before the Board has been answered, namely, that generally non-deductible Capital payments can properly be considered as deductible alimony payments if they are paid for the maintenance of the recipient, the question still remaining is whether a payment on a mortgage which increases, however infinitesimally, the capital interest of both the husband and wife, can be considered entirely as an alimony payment for the maintenance of the wife, totally deductible by the husband and taxable in full in the hands of the wife.

Following the reasoning of Mr Justice Walsh, and in the light of what I consider to be the intent of paragraph 11 (1)(l), I have come to the conclusion that, in theory at least, that portion of the payments which constitutes a capital increment to the husband should not be considered as a payment of maintenance for the wife, and should neither be deductible by the husband nor taxable for the wife.

In practice, however, the calculation of the portion of the mortgage payments that effectively accrues to the husband’s capital interest is difficult to determine, as pointed out by Mr Justice Walsh in the Hastie case. One would have to calculate which parts of the payment are made on account of (1) the principal loan secured by the mortgage,

(2) the interest on the mortgage, (3) the insurance on the mortgaged property, (4) local taxes thereon, and (5) depreciation on the house, etc in order to determine which portion of the payment actually represents an increment in the husband’s share in the residual value of the house. In the appeal before us, such a calculation would be even more difficult than in the Hastie case because in this case the wife is co-owner of the house.

However, no matter how difficult these calculations may prove to be in the process of assessing the precise treatment of mortgage payments in alimony cases, I am of the opinion that, in principle, an attempt should be made to achieve the desired result. Legal, and-in- deed iniquitous, anomalies could, in certain cases, result from the omission of making a distinction between those payments which can be considered to have been made for the maintenance of the recipient pursuant to paragraph 11(1)(l) and those which in fact increase the capital asset of the payor.

In its judgment of April 12, 1966 the Superior Court of Quebec permitted the appellant to continue to reside in the matrimonial home and ordered the appellant’s husband to continue making the mortgage payments on the house. The court rightly considered, from its point of view, that the mortgage payments by the appellant’s husband were payments “for alimentary allowance” and thus for the maintenance of the appellant.

However, the appellant owned half of the house in which she was to continue to reside and the mortgage payments, which would have had to be paid by the appellant in any event, went in part toward the amortization of the mortgage and thereby increased not only the appellant’s, but also the husband’s interest in the house. This, in my view, is a very different situation from what would have occurred if other lodgings had had to be found for the appellant and paid for by the appellant’s husband. From the Superior Court’s point of view, both of these payments, without distinction are “alimentary allowances”. I do not believe, however, that for federal tax purposes they are comparable.

There is no difficulty whatever in the application of paragraphs 6(1)(d), 11 (1)(l) and (la) when considering as alimony amounts paid by the husband for rented premises for his wife. However, if we attempt to apply those same provisions in exactly the same way to the circumstances of this appeal, we find ourselves allowing the husband to deduct the total amount of mortgage payments made by him on a property which is jointly owned by him and his wife, both of whom benefit from the said payments by way of increased equity in the building, and taxing the wife on the full amount of the payments as maintenance deemed to have been received by her by virtue of being a lowed to reside in a house of which she is already half owner.

Such a result, which, in my view, is contrary to both law and common sense, can only be avoided if that part of the total annual mortgage payments which increases the capital interest of the husband in the matrimonial home be excluded from the calculation of the amounts paid by him for the maintenance of his wife.

It appears to me that the assessment which gave rise to this appeal was based on the principle that any periodic mortgage payments made pursuant to an order of a competent court are automatically and totally deductible as alimony paid for the maintenance of the recipient. I do not believe that the law in this matter is that clear or its application that simple.

In the appeal before the Board, the appellant asks why she should be taxed in the total amount of mortgage payments on a house of which she is only half owner. Part of the answer, of course, is that she received the amount in the guise of alimony but, as I have attempted to explain here, I do not believe she was properly assessed when she was declared liable for tax on the full amount of the mortgage payments made in accordance with the judgment of the Quebec Superior Court.

However, since not one figure was produced by the appellant which might permit the taxation officials or the Board to establish what proportion of the mortgage payments went towards capital accretion and what proportion could properly be considered as alimony payments on which the appellant should properly be taxed, and since the onus of proving his point rests on the appellant, the Board has no alternative, though it is reluctant to do so, but to dismiss the appeal.

Appeal dismissed.