Citation: 2012 TCC 454
Date: 20121218
Docket: 2011-3782(IT)I
BETWEEN:
JOHN E. KUCH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1]
John Kuch made spousal support
payments pursuant to a court order that he thought would be deductible under
the Income Tax Act. The deductions were partially disallowed by the Minister
of National Revenue for the 2008 and 2009 taxation years, and Mr. Kuch has
appealed to this Court.
[2]
The amounts that have been
disallowed are $4,990 for the 2008 taxation year and $21,215 for the 2009
taxation year.
[3]
The Crown submits that the amounts
were properly disallowed because Mr. Kuch was required to make these
payments directly to third parties for specific expenses rather than paying the
former spouse. As such, the Crown submits that the former spouse did not have
discretion over the use of the funds as required by the definition of “support
amount” in s. 56.1(4) of the Act. The Crown further submits that the
deeming rule in s. 60.1(2) does not apply because the court order does not
speak to the tax consequences.
[4]
Mr. Kuch did not express disagreement
with the above. He submits, though, that the lawyers who drafted the court
order believed that the payments would be taxable to the former spouse and
deductible to him. He further submits that he was unfairly treated by the
Canada Revenue Agency.
Analysis
[5]
I would first comment that this
Court cannot provide relief based on unfair treatment by the Canada Revenue
Agency. An assessment can be varied by this Court only if the relief sought is permitted
by the relevant legislation.
[6]
Three legislative provisions are
particularly relevant to this appeal.
[7]
The first is the definition of “support
amount,” which provides that the recipient must have discretion as to use of
the funds. The second provision is s. 60(b), which provides a deduction to
the payor of spousal support. As a consequence of these provisions, generally a
deduction is permitted only if the recipient has discretion as to use of the
funds.
[8]
The third provision, s. 60.1(2),
is an exception to the general rule that the recipient have discretion as to
use. It permits a deduction for payments to third parties if the relevant
written agreement or court order specifies that the payments are to be taxable
to the recipient and deductible to the payor. The relevant written agreement or
court order is the document that provides for the support payment.
[9]
The provisions are reproduced
below, with relevant parts underlined.
56.1
(4)
“support amount” means an amount payable or
receivable as an allowance on a periodic basis for the maintenance of the
recipient, children of the recipient or both the recipient and children of the
recipient, if the recipient has discretion as to the use of the amount,
and
(a) the recipient is the spouse
or common-law partner or former spouse or common-law partner of the payer, the
recipient and payer are living separate and apart because of the breakdown of
their marriage or common‑law partnership and the amount is receivable
under an order of a competent tribunal or under a written agreement; or
(b) the payer is a legal parent
of a child of the recipient and the amount is receivable under an order made by
a competent tribunal in accordance with the laws of a province.
60. Other deductions - There may be deducted in
computing a taxpayer’s income for a taxation year such of the following amounts
as are applicable:
[…]
(b) [spousal or child] support - the
total of all amounts each of which is an amount determined by the formula
A - (B + C)
where
A is the
total of all amounts each of which is a support amount paid after 1996
and before the end of the year by the taxpayer to a particular person, where
the taxpayer and the particular person were living separate and apart at the
time the amount was paid,
B is
the total of all amounts each of which is a child support amount that became
payable by the taxpayer to the particular person under an agreement or order on
or after its commencement day and before the end of the year in respect of a
period that began on or after its commencement day, and
C is the total of all amounts each
of which is a support amount paid by the taxpayer to the particular person
after 1996 and deductible in computing the taxpayer’s income for a preceding
taxation year;
60.1
(2) Agreement - For the purposes of section 60, this
section and subsection 118(5), the amount determined by the formula
A - B
where
A is the total
of all amounts each of which is an amount (other than an amount that is
otherwise a support amount) that became payable by a taxpayer in a
taxation year, under an order of a competent tribunal or under a written
agreement, in respect of an expense (other than an expenditure in
respect of a self-contained domestic establishment in which the taxpayer
resides or an expenditure for the acquisition of tangible property that is not
an expenditure on account of a medical or education expense or in respect of
the acquisition, improvement or maintenance of a self-contained domestic
establishment in which the person described in paragraph (a) or (b) resides) incurred
in the year or the preceding taxation year for the maintenance of a person,
children in the person’s custody or both the person and those children, where
the person is
(a) the taxpayer’s spouse or common-law
partner or former spouse or common-law partner, or
(b) where the amount became payable under an
order made by a competent tribunal in accordance with the laws of a province,
an individual who is a parent of a child of whom the taxpayer is a legal
parent,
and
B is the
amount, if any, by which
(a) the total of all amounts each of which
is an amount included in the total determined for A in respect of the
acquisition or improvement of a self-contained domestic establishment in which
that person resides, including any payment of principal or interest in respect
of a loan made or indebtedness incurred to finance, in any manner whatever,
such acquisition or improvement
exceeds
(b) the total of all amounts each of which
is an amount equal to 1/5 of the original principal amount of a loan or
indebtedness described in paragraph (a),
is, where the order or written agreement,
as the case may be, provides that this subsection and subsection 56.1(2) shall
apply to any amount paid or payable thereunder, deemed to be an amount
payable by the taxpayer to that person and receivable by that person as an
allowance on a periodic basis, and that person is deemed to have discretion as
to the use of that amount.
[10]
It is clear that Mr. Kuch’s appeal can succeed only if
the deeming rule in s. 60.1(2) applies. The reason for this is that the former
spouse did not have discretion as to use of the amounts that were disallowed.
[11]
The question, then, is whether the
deeming rule in s. 60.1(2) applies. Unfortunately for Mr. Kuch, s. 60.1(2)
does not apply because the relevant court order does not consider the tax
consequences of the payments.
[12]
The relevant court order is an
Order of The Supreme Court of British Columbia which was entered in the
Registry on January 30, 2009. It is under this Order that the spousal payments
became payable.
[13]
The deeming rule in s. 60.1(2)
applies only if this Order specifies that the payments are to be tax deductible
to the payor and taxable to the recipient. The relevant parts of s. 60.1(2)
have been underlined above. Unfortunately for Mr. Kuch, the Order is
silent as to the tax treatment of the payments.
[14]
Mr. Kuch referred to other
documents at the hearing in support of his position that the tax consequences
were agreed by the parties. These documents do not assist because these are not
the documents by which the support payments became payable. It is only the Order
entered on January 30, 2009 that is relevant.
[15]
The reason that the Order required
that payments be made directly to third parties was explained by Justice Groves
in the oral reasons to his Order. The relevant excerpt from the transcript of
the oral reasons is reproduced below.
In most
circumstances, I would order a spousal support payment to be made directly to
allow Mr. Kuch to have some tax deductibility and to put it in taxable income
in Mrs. Kuch’s hand, but her level of directness on financial issues is
lacking, and I am not satisfied that the payments would be made.
[16]
This comment strikes me as odd. Justice
Groves is conscious that his decision deviates from a typical order which give
tax deductibility to the payor. However, he states that he is making the Order
in this manner because the former spouse was not credible in her testimony. It
seems as if the decision results in punishment to the innocent party, Mr. Kuch.
[17]
If Justice Groves was hoping that
his oral reasons would prompt the lawyers to consider the tax consequences when
they drafted the final order, it appears that this did not happen. No mention
was made of tax consequences in the formal order even though Mr. Kuch provided
strong evidence at the hearing that the lawyers thought that the payments would
be taxable to the former spouse and deductible to him. Mr. Kuch even paid his
former spouse the amount of the tax payable with respect to the payments.
[18]
Unfortunately for Mr. Kuch, an
agreement with his former spouse is not sufficient to enable him to deduct the
payments. It is necessary that the agreement be reflected in the Order of Justice
Groves, and it was not.
[19]
This is a very unfortunate outcome for Mr. Kuch. Although I
have great sympathy for his circumstances, I must dismiss the appeal.
Signed at Toronto, Ontario this 18th day of December
2012.
“J. M. Woods”
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