Peter Langstaff v. Her Majesty the Queen, [1997] 1 CTC 2153 (Informal Procedure)

O’Connor J.T.C.C.:— This appeal was heard in Vancouver, British Columbia on September 20, 1996. The Appellant acted on his own behalf, gave evidence and presented exhibits.

Issues

The issues are whether the Appellant, in the taxation year 1992, was entitled to deduct as alimony or other allowance or as maintenance an R.R.S.P. spousal payment of $3,372 and payments totalling $15,600 made to the mortgage creditors holding mortgages on the former matrimonial home in which the Appellant’s separated spouse lived with the children of their marriage.

Facts

The Minister of National Revenue (“Minister”) assessed the Appellant to allow a deduction of $3,388 for support payments made directly to the Appellant’s spouse but to disallow the R.R.S.P. spousal payment of $3,372 and the mortgage payments of $15,600.

An Order of the Supreme Court of British Columbia (“Supreme Court”) dated November 7, 1991 (Exhibit A-l) (“Original Order”) provided as follows:

THIS COURT ORDERS that the Respondent pay to the Petitioner the sum of ONE THOUSAND, SEVEN HUNDRED ($1,700.00) DOLLARS per month for the interim support of herself and the three dependent children of the marriage, namely, TRACEY ALLISON LANGSTAFF, born May 21, 1975, STEPHEN TODD LANGSTAFF, born April 23, 1977, and ANDREW GREGORY LANGSTAFF, born December 12, 1980, commencing on November 1, 1991, provided that the Respondent may pay the mortgage payment in the amount of $1,300.00 directly, and pay the balance of support to the Petitioner; THIS COURT FURTHER ORDERS that the Respondent provide the Petitioner with a bank statement on a monthly basis to satisfy her that the mortgage is in good standing;

An Agreement dated December, 1992 (Exhibit A-2), signed by both the Appellant and his spouse, provided as follows:

AGREEMENT

Subject: Separation Payments

I, Peter Langstaff, have, since the separation from Joanne Langstaff, and will continue to pay the complete mortgage on our residence located at 311 Daniel Place, Victoria, British Columbia, V9C 1W2.

This Agreement will remain in effect until such time as the court arranges for a final property settlement and resolution of the Divorce proceedings. Peter Langstaff

Joanne Langstaff

December 1992

A further Order of the Supreme Court dated February 25, 1994 partitioning the family assets after the decree nisi of divorce dated January 25, 1993, ordered the Appellant to convey his interest in the matrimonial home to his spouse who thereafter was no longer entitled to any maintenance for herself.

Submissions of the Appellant

The Appellant submits that the R.R.S.P. and mortgage payments should have been deductible. He was not as adamant with respect to the R.R.S.P. payments as he was with respect to the mortgage payments.

Submissions of the Respondent

Counsel for the Respondent submits that, since the Appellant’s wife had no discretion as to the use of the monies, paragraph 56(12) of the Income Tax Act (“Act”) must govern so as to deny the Appellant the deductions claimed. He adds that the Original Order contained no reference to subsections 56.1(2) and 60.1(2) of the Act and consequently the Appellant cannot deduct the amounts claimed.

Law

The relevant provisions of the Act, so far as material, are:

56(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(b) any amount received by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other 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 the recipient was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, the spouse or former spouse required to make the payment at the time the payment was received and throughout the remainder of the year;

(c) any amount received 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 taxpayer, children of the taxpayer, or both the taxpayer and children of the taxpayer if, at the time the payment was received and throughout the remainder of the year, the taxpayer was living apart from his spouse who was required to make the payment;

56(12) Subject to subsections 56.1(2) and 60.1(2), for the purposes of paragraphs (1)(b), (c) and ... (hereinafter in this subsection referred to as the “former paragraphs”) and 60(b), (c) and ... (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.

56.1(1) Where, after May 6, 1974, a decree, order, judgment or written agreement described in paragraph 56(1 )(b), (c) or ..., or any variation thereof, has been made providing for the periodic payment of an amount

(a) to a taxpayer by a person who is

(i) the taxpayer’s spouse or former spouse, or...

(b) for the benefit of the taxpayer, children in the custody of the taxpayer or both the taxpayer and those children, the amount or any part thereof, when paid, shall be deemed, for the purposes of paragraphs 56(1 )(b), (c) and ... to have been paid to and received by the taxpayer.

(2) For the purposes of paragraphs 56(1 )(b), (c) and ... the amount, if any, by which

(a) the aggregate of all amounts each of which is an amount (other than an amount to which paragraph 56(1 )(b), (c) or ... otherwise applies) paid by a person in a taxation year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, in respect of an expense ... incurred in the year or the immediately preceding taxation year for maintenance of a taxpayer who is

(i) that person’s spouse or former spouse, or

or for the maintenance of children in the taxpayer’s custody or both the taxpayer and those children if, at the time the expense was incurred and throughout the remainder of the year, the taxpayer was living apart from that person

exceeds

[a formula follows]

shall, where the decree, order, judgment or written agreement, as the case may be, provides that this subsection and subsection 60.1(2) shall apply to any payment made pursuant thereto, be deemed to be an amount paid by that person and received by the taxpayer as an allowance payable on a periodic basis.

(3) For the purposes of this section and section 56, where a decree, order or judgment of a competent tribunal or a written agreement made at any time in a taxation year provides that an amount received before that time and in the year or the immediately preceding taxation year is to be considered as having been paid and received pursuant thereto, the following rules apply:

(a) the amount shall be deemed to have been received pursuant thereto; and

(b) the person who made the payment shall be deemed to have been separated pursuant to a divorce, judicial separation or written separation agreement from his spouse or former spouse at the time the payment was made and throughout the remainder of the year.

60 There may be deducted in computing a taxpayer’s income for a taxation year such of the following amounts as are applicable:

(b) an amount paid by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other 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, and was separated pursuant to a divorce, judicial separation or written separation agreement from, his spouse or former spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year;

(c) 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;

60.1(1) Where, after May 6, 1974, a decree, order, judgment or written agreement described in paragraph 60(b), (c) or ..., or any variation thereof, has been made providing for the periodic payment of an amount by a taxpayer

(a) to a person who is

(i) the taxpayer’s spouse or former spouse, or

(b) for the benefit of the person or children in the custody of the person, or both the person and those children,

the amount or any part thereof, when paid, shall be deemed, for the purposes of paragraphs 60(b), (c) and ... to have been paid to and received by that person.

(2) For the purposes of paragraphs 60(b), (c) and ... the amount, if any, by which

(a) the aggregate of all amounts each of which is an amount (other than an amount to which paragraphs 60(b), (c) or ... otherwise applies) paid by a taxpayer in a taxation year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, in respect of an expense ... incurred in the year or the immediately preceding taxation year for maintenance of a person who is

(i) the taxpayer’s spouse or former spouse, or

or for the maintenance of children in the person’s custody or both the person and those children if, at the time the expense was incurred and throughout the remainder of the year, the taxpayer was living apart from that person

exceeds

[a formula follows]

shall, where the decree, order, judgment or written agreement, as the case may be, provides that this subsection and subsection 56.1(2) shall apply to any payment made pursuant thereto, be deemed to be an amount paid by the taxpayer and received by that person as an allowance payable on a periodic basis.

(3) For the purposes of this section and section 60, where a decree, order or judgment of a competent tribunal or a written agreement made at any time in a taxation year provides that an amount paid before that time and in the year or the immediately preceding taxation year is to be considered as having been paid and received pursuant thereto the following rules apply:

(a) the amount shall be deemed to have been paid pursuant thereto; and

(b) the person who made the payment shall be deemed to have been separated pursuant to a divorce, judicial separation or written separation agreement from his spouse or former spouse at the time the payment was made and throughout the remainder of the year.

Analysis

Firstly, I am satisfied that the position of the Minister is correct with respect to the R.R.S.P. payments because there is no mention of them in the Original Order.

As to the mortgage payments, subsections 56.1 and 60.1 of the Act provide for an income inclusion and corresponding deduction from income for certain payments of an alimony or maintenance nature which are made to third parties rather than to the spouse or child or children who obtain the benefit of the payments. These payments are common in separation and divorce situations and often take the form of direct payments of items such as rent, mortgage payments, medical expenses, etc. These subsections do not specifically provide for the inclusion/deduction but simply state the payments are deemed for purposes of paragraphs 56(1 )(b) and (c) and 60(b) and (c) to have been paid to the recipient by the payor. ‘The courts therefore have decided that the definition of “allowance” in subsection 56(12) of the Act applies to these payments

This whole area as to whether certain amounts are includable and deductible under the above provisions has led to controversy and confusion. To discern this one need only examine the excellent and well-researched article of John W. Durnford and Stephen J. Toope entitled “Spousal Support in Family Law and Alimony in the Law of Taxation”, 1994 Canadian Tax Journal, page 1. Much of the confusion has been caused by the drafting of the provisions, the lack of definitions of “alimony”, “maintenance” and “periodic”, the constant references back and forth to the various provisions and the numerous deeming provisos. The said article states at pages 41 and 42:

THE CURRENT TAX PROVISIONS AND THEIR DEFECTS

The tax problems relating to the Act’s current alimony rules are surprisingly numerous. They include the following.

Fifth, the applicable provisions of the Act are difficult even for tax specialists to interpret, and this implies an intolerable burden on the parties and their lawyers practicing family law. We have seen that although the basic provisions-paragraphs 56(1 )(b) and 60(b)-appear simple, the large volume of the judgments applying them and the traditional attitude of severity on the part of the judiciary in this area of the law, coupled with some notable instances of changes of view, have led to a significant obscuring of meaning. Parliament’s efforts - consisting, in recent years, of the enactment of sections 56.1 and 60.1 - to liberalize the alimony provisions, by extending them (subject to the consent of the recipient of the alimony or to a judgment of the divorce court) to include certain categories of payments not made on a periodic basis or made directly to third parties, have to far too great an extent been defeated by the remarkably obtuse style of drafting employed. These two sections read as though the person responsible for drafting were purposely seeking to make a mystery out of what are in reality simple concepts.

Sixth, Revenue Canada has been unyielding in its strict application of the Act in relation to alimentary support payments. Indeed, the volume of reported judgments (being merely the tip of the iceberg) on what should be fairly simple provisions of the Act is staggering, particularly in view of the amount of tax revenues involved. What really shocks, however, is the way in which Revenue Canada has taken different sides on basic issues of principle simply, apparently, in order to win cases against individual taxpayers. This aggressive and arbitrary behaviour contrasts sharply with the purported intent of the alimony provisions, which is to assist custodial spouses and children in financial need.

[Emphasis added.]

There is little, if any, dispute that the provisions are ambiguous. I believe therefore that in interpreting them one must examine the purpose of the legislation, 1.e., follow the teleological approach which the Supreme Court of Canada has adopted. The main purpose of the provisions was to attempt to mitigate the increased financial burden that arises when one household ceases and two begin. Our legislators wished to reduce the overall tax burden of the family. This was accomplished by allowing the higher income earner to deduct alimony payments thereby reducing his tax and taxing those payments in the hands of the lower income earner. The amounts would thus be taxed at a lower rate. For many reasons the good intentions of the legislators have not, in many cases, produced the desired result. However the purpose was there and the provisions should be interpreted with that purpose in mind. I should think that if that were done, a court in an ambiguous case would tend to favour the income inclusion/deduction process. Notwithstanding the foregoing I realize I am bound by decisions of the Federal Court of Appeal unless they are distinguishable on the facts of this appeal.

Firstly, I do not believe subsections 56.1(2) and 60.1(2) are applicable to cases where one finds that the payments meet the tests in 56(1 )(b) or (c) and 60(b) or (c). This is clear from the words in 56.1(2) and 60.1(2) indicating they are addressing amounts other than those to which 56(1 )(b) or (c) and 60(b) and (c) apply.

Secondly, subsection 56(12) of the Act was enacted to overcome the interpretation given to the word “allowance” by the Supreme Court of Canada in Gagnon v. R., (sub nom. Gagnon v. The Queen) [1986] 1 S.C.R. 264, [1986] 1 C.T.C. 410. 86 D.T.C. 6179. The key words in subsection 56(12) are “allowance does not include any amount that is received by a person unless that person has discretion as to the use of the amount”. The subsection does not state “any amount that is received or deemed to have been received by a person”. I realize there are some authorities to the effect that the addition of the words “deemed to have been received” may not be required in certain cases. However in a situation such as the present, where we have convoluted provisions which refer back and forth to each other and since one must attempt to give effect to both subsection 56(12) and section 60.1 I believe it essential to examine the precise words used. Moreover the word “deemed” is used at least eight times in the provisions quoted above, but does not appear in subsection 56(12). In my view, therefore the only logical interpretation of subsection 56(12) when dealing with the deductibility of third party payments contemplated in section 60.1 is that the payments to which subsection 56(12) applies are those actually received by a spouse but earmarked for payment to third parties and not those paid, with the consent of the spouse, to a mortgage creditor on the matrimonial home occupied by her. I am comforted in this conclusion when it is realized that subsection 56(12) was enacted specifically in reaction to the Gagnon decision, and that case involved payments to the spouse earmarked for payment to a mortgage creditor and not payments made directly to a mortgage creditor with the consent of the spouse.

If the above analysis is not correct, I am nonetheless satisfied in the present case that the Appellant’s spouse agreed to the payments being made directly to the mortgage creditors as evidenced by the Original Order specifically approved by the Appellant and his spouse’s attorney. Therefore at a point in time she had discretion as to the use of the amounts and she exercised that discretion by agreeing they be paid directly to the mortgage creditor. The Original Order even obliged the Appellant to provide to his spouse a bank statement on a monthly basis so that she could verify the actual mortgage payments as they were made. Furthermore, the Appellant’s spouse signed the Agreement dated December, 1992 in effect ratifying and consenting to the mortgage payments in 1992 and for the future, until the final property settlement.

This case is distinguishable from that decided by the Federal Court of Appeal on May 10, 1996 in R. v. Armstrong, [1996] 2 C.T.C. 266(D), 96 D.T.C. 6315, and other similar decisions of the Federal Court of Appeal for the following reasons:

1. The Order of November 7, 1991 required the Appellant to pay support to his spouse of $1,700 per month, $1,300 of which support was to be paid to the mortgage creditor. This concept is dealt with in paragraph 16 of Interpretation Bulletin IT-118R3. It reads:

As noted in 15 above, even though subsection 60.1(1) deems the payment to be paid to and received by the recipient, the payment must still be an “allowance” in order to be deductible. Third party payments, made in compliance with a court order or separation agreement, for specific living expenses of the recipient (or the children in the recipient’s custody) such as medical, rent or mortgage expenses will not be deductible to the payer if the payments are in addition to any maintenance allowance specified in the order or agreement. This is because the recipient does not have discretion as to the use of the amount (see note below). Such third party payments would only be deductible if the amount is deducted from the maintenance otherwise payable with the express or implied concurrence of the recipient...

[Emphasis added. I

The mortgage payments in question comprised the major portion of the support the Appellant was obliged to pay. They were not “in addition to” any other spousal support.

2. The mortgage payments constituted “alimony” as the Appellant and his spouse were still married in 1992. Paragraph 60(b) permits a deduction for “alimony”. The word “alimony” is not defined in the Act. In the common law the word means financial support paid by one spouse to or for the benefit of the other while they are still married. It is clear therefore that the payments made by the Appellant were alimony and there is no need to consider whether or not they were also an allowance. The requirements of paragraph 60d(b) have been met simply because the payments qualified as alimony.

For the above reasons I have concluded that the deduction disallowed by the Minister in the 1992 taxation year with respect to the mortgage payments of $15,600 is to be allowed as a deduction in that year, but that the deduction disallowed in that year with respect to the R.R.S.P. spousal payment of $3,372 was correctly disallowed.

Consequently the appeal is allowed to the foregoing extent, without costs, and the assessment for 1992 is referred back to the Minister for reconsideration and reassessment accordingly.

Appeal allowed in part.