Date: 19980220
Docket: 97-1568-IT-I
BETWEEN:
MICHAEL MOORE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
RIP, J.T.C.C.
[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.[1]
[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.[2]
[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 The Queen v. Murray Armstrong, 96 DTC 6315, 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 Pierre 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)
Judge Archambault then referred to budget papers tabled in the
House of Commons on February 10, 1988 by the Honourable Michael
H. Wilson, then the Minister of Finance. The budget papers, at
page 10, describe what amounts payable to third parties were
deductible:
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 concludethat 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, 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.
On appeal to the Federal Court of Appeal, Strayer, J.A.
speaking for the majority of the Court, upheld the finding by
Judge Brulé, and further stated at 6131:
... 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.
Signed at Ottawa, Canada this 20th day of February 1998.
"Gerald J. Rip"
J.T.C.C.
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