The Assistant Chairman:
1 This is the appeal of David A K Payne from income tax assessments in respect of the appellant's 1971, 1972 and 1973 taxation years.
2 The issues in this appeal are first, whether in the pertinent taxation years the appellant's children were wholly dependent on him within the meaning of paragraph 109(1)(d) of the Income Tax Act, and secondly, whether the appellant paid to his wife, or to a third party, any amounts within the meaning and purport of paragraph 60(b) of the Act which are by law deductible.
3 On February 16, 1970 a separation agreement was signed by the appellant and his wife which agreement referred to a declaration of trust between the appellant and his wife also signed by them on the same date.
4 In the declaration of trust it was agreed by the parties that the appellant's spouse was to have the custody of their two children and the husband was solely responsible for all payments and obligations under the existing mortgage on the property in which the appellant's wife and children continued to reside. The appellant was further liable for the municipal taxes, fire insurance and outside maintenance of the dwelling.
5 As far as I can deduce from the appellant's income tax returns, and from the testimony at the hearing, it would appear that the appellant in first filing his income tax returns for the years 1971 and 1972 had claimed a deduction of $300 for each of his two children in these two years as provided for in the Act, and for the 1973 taxation year he claimed a deduction of $621.83.
6 The respondent disallowed all the deductions claimed by the appellant in 1971, 1972 and 1973, but instead allowed the deductions of $825.69, $1,500 and $621.83 for each of these years respectively.
7 Subsequently the respondent disallowed the deductions of $825.69, $1,500 and $621.83 for each of the years pertinent to this appeal, allowing nothing for the dependent children or for payments to the wife or to third parties with the wife's consent.
8 Since the separation agreement granting the custody of the children to the wife and the trust deed providing for living accommodation for the wife and children in the family home were both duly and formally signed on February 16, 1970, there can therefore be no question that, as of that date, the children were not wholly dependent on the father within the meaning of paragraph 26(1)(c) of the former Income Tax Act and no statutory deductions can therefore be claimed by the appellant for dependent children in that respect.
9 Although none of the documents filed with the Board and no written evidence given by either parties established the exact amount of mortgage payments made by the husband pursuant to the trust deed in the 1971, 1972 and 1973 years, the assessors from their files apparently found that amounts of $825.69, $1,500 and $621.83 could be deducted in each of the years pertinent to the appeal. These latter amounts were at a subsequent reassessment disallowed by the respondent permitting the appellant no deductions whatever.
10 By way of obiter dictum, I would say that it would appear to me to be imperative that the Board be provided with evidence of the exact amounts paid by the appellant toward the mortgage on the house in which his wife and children were permitted to reside as part of the separation agreement. In the absence of such evidence, the Board can only assume that the amounts of $825.69 and $621.83 which were allowed by the respondent in 1971 and 1973 respectively were mortgage payments made by the appellant in those years and subsequently, for some reason, disallowed by the respondent.
11 As far as the $1,500 allowed by the respondent for the 1972 taxation year in one assessment and disallowed in a subsequent reassessment is concerned, the appellant claims that that amount was the basic statutory deduction allowed to all taxpayers. In the 1972 tax return filed with the Board, there appears to have been but one deduction for $1,500 as “basic personal exemption” and although counsel for the respondent claims that the “basic personal exemption” had already been allowed, there is no evidence before me to that effect.
12 In rendering my decision in this appeal, I cannot be any more specific than the evidence before me permits, and I can only base my decision on those established principles which I believe to be applicable in this instance.
13 In my view, the appellant cannot deduct any amount as an exemption for wholly dependent children after the signing of the separation agreement and declaration of trust by the parties in which the wife was granted custody of the children. However, notwithstanding the decree absolute which was promulgated on October 9, 1973 and made effective the appellant's divorce from his wife, the separation agree ment between the appellant and his wife and the declaration of trust of February 1970 are valid and binding on the parties. All periodic payments, therefore, that might have been made by the appellant on the mortgage of the mutually-owned family home in which, pursuant to the declaration of trust, the appellant's separated wife and children were permitted to reside would, in my opinion, fall within the meaning and intent of paragraph 60(b) of the Income Tax Act as amended and would be deductible by the husband. I do not believe that the decree absolute of October 1973 (Exhibit A-1) is in any way material to the issue in this appeal.
14 The appeal, therefore, is allowed in part and the matter referred back to the Minister for reconsideration and reassessment in order that no exemption for wholly dependent children be allowed the appellant in the 1971, 1972 and 1973 taxation years, but that the basic personal exemption of $1,500 be allowed for the 1972 taxation year if this amount has not already been claimed and allowed, and finally, that mortgage payments made by the appellant on the family home pursuant to the separation agreement and declaration of trust, if any such payments were made, be allowed for the 1971, 1972 and 1973 taxation years.
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