Moore v. R., [1998] 2 C.T.C. 2521, 98 D.T.C. 1479

Rip T.C.J.:

1 Michael Moore, the appellant, was married to Jennifer Moore in 1968. By order decree nisi of the Supreme Court of Ontario, dated September 30, 1982, Mr. Moore was ordered to pay to Mrs. Moore as and for her support and maintenance, and support and maintenance of the children as provided for in paragraph 2 of a Separation Agreement as follows:

• (a) to the wife, as and for the support of each of the children of the marriage, the sum of $300.00 per month per child, such payments to be made on the first day of each and every month commencing on the first day of the month immediately following the date of the signing of this agreement. These payments shall continue so long as the children continue to be children of the marriage as defined by The Divorce Act (Canada), provided such child resides with the wife. Provided however that such payment may be made in part directly to the wife's landlord.

• (b) to the wife, as and for her maintenance, Nil;

• (c) the husband and the wife hereby agree that the husband is to pay to the wife as and for her maintenance, the yearly increase in rent (limited to a maximum of 8% per year) on a monthly basis for the premises presently being occupied by the wife and the children of the marriage and known municipally as Unit F203, 2911 Bayview Mews Lane, Willowdale, Ontario; provided however, that should the wife reside elsewhere for whatever reason, the operation of this clause shall cease.

2 The appellant, in computing his taxable income for 1992, deducted an amount of $12,417 as alimony payments made pursuant to the decree nisi. The Minister of National Revenue (“Minister”) disallowed the payments since they were made to third parties and (a) “were not made according to judgments or agreements which have specific mentions to subsections 60.1(2) and 56.1(2) of the Income Tax Act” (“Act”) and (b) are not deductible “since the appellant's spouse did not have discretion as to the use of the amount within the meaning of subsection 56(12) of the Act”.

Paragraph 2(a) of the Agreement

3 Subsection 60(b) of the Act, as it applied in 1992, provided, amongst other things, that a taxpayer may deduct an amount paid by the taxpayer in the year pursuant to a decree, order or judgment of a competent tribunal or under a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the children of the marriage, or both the recipient and children of the marriage, if the taxpayer was living apart from, and was separated pursuant to a divorce from the taxpayer's former spouse to whom the taxpayer was required to make the payment at the time the payment was made and throughout the remainder of the year.

4 Subsection 60(c) permitted the taxpayer to deduct an amount paid by the taxpayer in the year pursuant to an order of competent tribunal as an allowance payable under a periodic basis for the maintenance of, amongst others, the children of the recipient if, at the time of the payment was made and throughout the remainder of the year, the taxpayer was living apart from the taxpayer's spouse to whom the taxpayer was required to make the payment.

5 There is no question in the appeal at bar that the taxpayer and his former spouse were living apart from each other and were divorced at the time the payments were made and throughout 1992 and that the taxpayer was required to make the payments in issue. The issue is whether the amount of $12,417 is deductible as alimony or other allowance since payments were made to a third party, the recipient's landlord. Did Mrs. Moore have discretion as to the use of the amounts paid to the landlord during 1992 within the meaning of subsection 56(12), as that provision read in 1992? If so, the payments constituted an allowance paid by Mr. Moore to Mrs. Moore. I refer to subsection 56(12) as it read in 1992.[FN1: <ul>Subsection 56(12) read as follows:<li><p>Subject to subsections 56.1(2) and 60.1(2), for the purposes of paragraphs (1)(<em>b</em>), (<em>c</em>) and (<em>c</em>.1) (hereinafter in this subsection referred to as the “former paragraphs”) and 60(<em>b</em>), (<em>c</em>) and (<em>c</em>.1) (hereinafter in this subsection referred to as the “latter paragraphs”), “allowance” does not include any amount that is received by a person, referred to in the former paragraphs as “the taxpayer” and in the latter paragraphs as “the recipient”, unless that person has discretion as to the use of the amount.</p></li></ul><p>See<em>Jacques c. R.</em>(1994), [1995] 1 C.T.C. 2563 (T.C.C.), for a history of subsection 56(12), per Archambault T.C.C.J.</p>]

6 I understand neither Mr. Moore nor Mrs. Moore have attempted to amend their agreement or to seek an amendment of the order of the Court to provide that subsection 60.1(2) and subsection 56.1(2) apply to any payment made by Mr. Moore.[FN2: <p>See subsection 60.1(2) of the<em>Act</em>as it read in 1992.</p>]

7 At first blush it appears that paragraph 2(a) of the Separation Agreement removes any discretion of Mrs. Moore and therefore the amount payable by the appellant would not be an allowable deduction under paragraphs 60(b), (c) or (c.1). However, under the peculiar facts of this appeal, there are several factors that compel me to conclude that Mrs. Moore did have discretion as to the amount payable by the appellant under paragraph 2(a).

8 Paragraph 2(a) of the Separation Agreement is a provision of support for the children of the marriage to be paid to Mrs. Moore in the sum of $300 per month per child. This paragraph allows the appellant to make such payment in part directly to the wife's landlord.

9 In 1992, subsection 60.1(1) provided that where the decree provides for payment to be made by the taxpayer to a person who is the taxpayer's spouse or former spouse for the benefit of the children, the amount shall be deemed, for the purpose of paragraphs 60(b), (c) or (c.1) to have been paid to and received by that person. The decree provides for payment by Mr. Moore to Mrs. Moore for the benefit of their children; the amount so paid is deemed to have been paid to and received by Mrs. Moore whether it is paid to Mrs. Moore or not, so long as it is paid for the benefit of the children.

10 However, the deductibility of the appellant's payments is dependent on the provisions of paragraphs 60(b), (c) or (c.1) of the Act, and subsection 56(12) as it defines an ‘allowance payable’. As stated by Stone, J.A. for the Federal Court of Appeal in Armstrong v. R. (1996), 96 D.T.C. 6315 (Fed. C.A.)at 6320:

Subsection 60.1(1) does not itself provide for the deduction of an amount paid and received. Instead, it enlarges the right of deduction made available under paragraphs 60(b), (c) or (c.1) by deeming “for the purposes of paragraphs 60(b), (c) and (c.1)” an amount “to have been paid and received by that person”. In my view, the subsection 56(12) definition of “allowance” is to be read together with subsection 60.1(1) of the Act and the latter subsection construed accordingly.

11 The next factor to be considered is the application of subsection 56(12) as it characterises the ‘allowance payable’ in paragraphs 60(b), (c) or (c.1). As the decree nisi adopting the Separation Agreement was granted in 1982, and subsection 56(12) was not added to the Act until 1988, it is necessary to understand the intent of subsection 56(12). In Jacques supra, Archambault T.C.C.J. states at paragraph 19:

...the Court must take this historical context and the Parliamentary intent into account in defining the scope of the amendment made to the concept of allowance by the addition of 56(12)

Before 1984, for an amount to be considered a deductible allowance, it must have been a fixed sum of money paid directly to the recipient for maintenance and support pursuant to a court order, decree or separation agreement. The amount must have been determined in advance and, once paid, the recipient must have had complete discretion as to its disposition. Where the court order or separation agreement provided that certain payments for the benefit of the spouse, former spouse or children of the marriage were to be made directly to a third party, the law permitted their deduction by the payor where the amount to be paid to the third party was deducted from the total amount required to be paid to the spouse or former spouse with the express or implied concurrence of the latter person. Amounts paid to third parties for actual expenses -- for example, educational, medical or heating costs -- did not qualify as an allowance. [Emphasis mine]

12 Thus, prior to 1984, amounts paid directly to a third party were permitted to be deducted by the payor in computing income so long as that they were not “actual expenses”. At bar, the appellant was required to pay support to Mrs. Moore in the amount of $300 per child. However, he was allowed to make payment, in part, directly to her landlord. In my view paragraph 2(a) of the Separation Agreement does not require Mr. Moore to pay any particular cost, namely Mrs. Moore's rent, which could be regarded as an actual expense. He was simply paying the landlord an amount payable under his obligation to pay Mrs. Moore support for the children.

13 Unless an amended statutory provision specifically requires taxpayers to do so, taxpayers in particular those of modest means, ought not to be put in a position where, because of an amendment to a statute, they are compelled, sometimes at significant cost, to amend agreements or decrees to comply with the amended legislation. (Also, the need to amend an agreement may unnecessarily reawaken any underlying animosity between the spouses or former spouses.) When it is clear what the intent of the parties is and if that intent can be reasonably reconciled, and is harmonious, with the amended legislation, even though the agreement is not on all fours with the amending legislation, the legislation should be interpreted to conform to the intent of the parties. The scheme of the Act contemplates, and Parliament intended, that payments of maintenance or alimony required to be made by the payor to a spouse, or former spouse, on a periodic basis for the benefit of the children may be deducted when the money is paid to third persons in certain circumstances, i.e. when it is for the good of the children. This is the case at bar.

14 One may also reasonably conclude that Mrs. Moore did exercise the requisite discretion regarding the amounts paid by the appellant to the landlord, pursuant to paragraph 2(a). In Arsenault v. Minister of National Revenue, [1995] 2 C.T.C. 2168 (T.C.C.), Brulé J.T.C.C. stated at paragraphs 21 and 22:

The appellant's former spouse had constructive receipt of the amounts involved. She had acquiesced in the appellant's payment thereof to her landlord, thereby effectively constituting the landlord as her agent for the receipt and appropriate expenditure of the amounts involved...

In this case the spouse had a legally enforceable right to demand payment to her, not to the landlord. This is where the discretion lies.

...the respondent's former spouse retained a discretion as to how the money was paid pursuant to the separation agreement and judgement and thus as to the use of that amount.

15 In agreeing to the separation agreement Mrs. Moore exercised her discretion, under paragraph 2(a) of the Separation Agreement, in how the payments to her may be paid by the payor. In this manner, she exercised her discretion as to the use of the amount. I do not believe it is necessary that she exercise her discretion at the time such payment is made. It is sufficient that her discretion was exercised in advance in an agreement entered into between her and the appellant. Thus the appellant may be said to have been paying Mrs. Moore alimony or an allowance within the meaning of subsections 60(b), (c) or (c.1) when he made payments pursuant to paragraph 2(a) of the Separation Agreement.

Paragraph 2(c) of the Agreement

16 The payment made under paragraph 2(c) is a payment in respect of an expense, albeit an expense in respect of a self-contained domestic establishment in which Mrs. Moore and the children resided. Although paragraph 2(c) states the amount is to be paid “to the wife as and for her maintenance, the yearly increase in rent...”, it is important to consider paragraph 2(c) in the context of paragraphs 2(a) and (b). Paragraph 2(b) states that the wife is not entitled to any maintenance, while paragraph 2(a) states the amount is for the support of the children. Giving effect to these paragraphs as a whole leads to the conclusion the payment required under paragraph 2(c) is directly related to the expense of rental increases, and not a payment for the benefit of the children or Mrs. Moore. As a payment in respect of an expense the appellant must comply with subsection 60.1(2) for the amounts paid to the landlord to be deemed paid and received by Mrs. Moore. Subsection 60.1(2) requires the decree or Separation Agreement to specify that subsections 60.1(2) and 56.1(2) shall apply to any such payments made. Such is not the case at hand. The intent of the parties in paragraph 2(c) is not similar to their intent in paragraph 2(a).

17 In any event, even if I were to find that the amounts paid by the appellant under paragraph 2(c) were payments for the benefit of either Mrs. Moore or the children, Mrs. Moore did not have the necessary discretion as to their use as required by subsection 56(12). Unlike paragraph 2(a) where Mrs. Moore has agreed to the amount being paid to her landlord, paragraph 2(c) does not contain a similar provision. The appellant made an arbitrary decision to pay this amount directly to the landlord rather than to Mrs. Moore for payment to the landlord. I cannot find that there existed the requisite amount of concurrence on the part of Mrs. Moore such that she can be said to have exercised her discretion with regards to the amounts payable under paragraph 2(c); these amounts must be paid to her and if paid to the landlord, as was the case, the amounts are not deductible under paragraphs 60(b), (c) or (c.1).

18 Accordingly, the appeal will be allowed and the assessment for 1992 will be referred back to the Minister for reconsideration and reassessment on the basis that payments made in 1992 by the appellant to his former spouse's landlord pursuant to paragraph 2(a) of the Separation Agreement be allowed as a deduction in computing the appellant's taxable income for 1992. There will be no costs.