Citation: 2007TCC361
Date: 20070618
Docket: 2004-2395(IT)I
BETWEEN:
PIERRETTE G. DESHARNAIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
LÉO PELLETIER,
Added Party.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Lamarre Proulx J.
[1] The Appellant’s
assessments under appeal are for the 1998 to 2001 taxation years.
[2] By order of this
Court, rendered on November 9, 2005, pursuant to section 174 of the Income
Tax Act (the “Act”), Léo Pelletier is an added party to the assessments for
the 1998 to 2001 taxation years and projected assessments for the 2002 and 2003
taxation years.
[3] The common issue is
whether the amounts paid to Pierrette G. Desharnais by her former
spouse, Léo Pelletier, during those years, are amounts in the nature of
support.
[4] There is another
issue in this case, but it only concerns the Appellant. It involves the
imposition of penalties for the late filing of income tax returns.
[5] With respect to the
primary issue, that is the inclusion of the support amount in computing the
Appellant’s income and the deduction of the payment of the support amount in
computing the payer’s income, counsel for the Appellant mentioned to the Court,
at the beginning of the hearing, that the Appellant accepted the inclusion of
60% of the support amount. The other 40% should not have been included in
computing the Appellant’s income, as according to counsel, Ms.
Desharnais did not have discretion over that amount. That amount was to be used
to pay the mortgage on the family home.
[6] The interim
agreement under which the payments were made was filed as Exhibit A‑1.
It is dated July 29, 1998.
[7] Articles 2, 3
and 7 are important. They read as follows:
[TRANSLATION]
- The Respondent shall pay the Applicant, on an interim basis, a
support amount of $1,290.00 per month until a final ruling is made on the
Applicant’s motion;
- The Applicant shall continue to live in the parties’ residence
on the condition that she incur the household expenses (mortgage, taxes,
telephone, heating, insurance) with the exception of extraordinary
maintenance expenses;
. . .
- The support amount will be deposited into the accounts every
two weeks in accordance with the following terms and conditions on the
Respondent’s paydays;
-
$225.00, every two weeks in the special savings
account at the Caisse populaire de Québec bearing number 38380
-
$370.00, every two weeks at the Caisse populaire
de Ste‑Foy bearing number 815 20248 021294.
[8] It is on the basis
of article 7 that the Appellant allocates the support amount in the
proposed manner. She explains that the first account mentioned was the one from
which the mortgage and property tax payments were made. It was a no withdrawal
account. The Appellant submitted in that respect a letter from the Caisse
populaire Desjardins dated January 12, 2007, Exhibit A‑4, which reads as
follows:
[TRANSLATION]
This is to confirm that the 38380-ES-l
stable savings account which was used to pay future taxes and where necessary
the mortgage payment was a NO WITHDRAWAL ACCOUNT,
since December 1985. The holders could not access that money except to pay
taxes.
[9] Johanne Carrier,
an advisor at the Caisse populaire de Québec testified at the Respondent’s
request. She explained that the account was not used much and that it was, in
fact, a no withdrawal account. However, either party could, on their own
initiative and without the consent of the other, modify that condition.
[10] With respect to
article 7 of the interim agreement, Mr. Pelletier stated that it was at
the Appellant’s request that this clause was added to the agreement.
[11] It is admitted that
the ex-spouses co-owned the house.
[12] Shortly after the
signing of the interim agreement, Ms. Desharnais requested that the Ministère
du Revenu du Québec collect the support. A letter in that regard was sent to
her on October 23, 1998, Exhibit A‑5, informing her that, as of November
1, 1998, the $1,290 in support per month would be paid to her in two equal
payments of $645, that is on the first and sixteenth of each month, pursuant to
An Act to facilitate the payment of support.
[13] I quote a few
paragraphs from that letter:
[TRANSLATION]
We hereby wish to advise you
that we have assessed your case under An Act to facilitate the
payment of support.
According to the order issued
by the court, your support was set at $1,290.00 per month, to be indexed each
year, with effect from January 1, 1999.
. . .
Following a review of your
case, it was established that your situation authorizes us to make such
advances. As a result, your support payments will be paid as follows:
- Effective November 1, 1998, the support
in the amount of $1,290.00 per month will be paid to you in two equal payments
of $645.00, that is on the
first and sixteenth of each month.
. . .
To conclude, please note
that we have established the amount of your support arrears on the basis of the
information contained in our files. As of October 31, 1998, the arrears
amounted to $2,040.00. These sums will be paid to you as soon as they are
collected.
[14] It is an admitted
fact that said sums of money were deposited by Quebec into the Appellant’s
personal account.
[15] The Appellant did
not file her income tax returns within the prescribed time limit for the 1998
to 2001 taxation years. The income tax returns were made by the Minister of
National Revenue (the “Minister”) for each of those years. The assessments are
dated January 31, 2003. For the 1998, 1999 and 2001 taxation years, a
late-filing penalty in the respective amounts of $10.19, $214.20 and $140.78
was imposed. For the 2000 taxation year, a penalty in the amount of $900.62 was
imposed for failure to file a return of income (repeated failure to file). For
the 2000 taxation year, the Minister sent the Appellant a demand for return.
[16] In that regard, the
Appellant filed a certificate (Exhibit A-6) from a psychiatrist attesting that
she had been under his care since December 19, 2000, and that [translation]
“ . . . the depression and anxiety she has been suffering from for
years, the traumatizing events she has endured all these years and the presence
of a personality disorder which leads to procrastination, that is postponing
things that need to be done, contributed to her not filing her income tax
returns within the required time limit.”
Arguments
[17] Counsel for the
Appellant argues that the payer cannot do indirectly what he cannot do
directly, that is, deduct mortgage payments in computing his income.
[18] Counsel for the
Respondent argues that article 7 of the interim agreement is only a method
of payment for the support and does not at all take away the Appellant’s
discretion to use the amount paid to her.
Analysis and conclusion
[19] Paragraph 56(1)(b)
and the definition of “support amount” in subsection 56.1(4) of the Act read as
follows:
(1) Amounts to be included in income for year -- Without restricting
the generality of section 3, there shall be included in computing the income of
a taxpayer for a taxation year:
. .
.
(b) Support [spouse or child] -- 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 received after 1996 and before the end of the year by the taxpayer from
a particular person where the taxpayer and the particular person were living
separate and apart at the time the amount was received,
B is the total of all amounts each of which is a child
support amount that became receivable by the taxpayer from 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 received after 1996 by the taxpayer from the
particular person and included in the taxpayer’s income for a preceding
taxation year;
“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 natural 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.
[20] For the following
reasons, I am of the opinion that the evidence revealed that throughout the
years in issue, the Appellant had discretion as to the use of the amounts paid
to her by her former spouse. Those amounts were therefore amounts in the nature
of support within the meaning of the above definition.
[21] In reading the
interim agreement, the support provisions and the fact of ensuring that household expenses are paid set out distinct
obligations. Article 2 provides for the payment of support by the former
spouse to the applicant. Article 3 provides that the applicant may
continue to live in the parties’ residence, but that it is up to her to incur
ordinary expenses. The amounts paid under article 2 are therefore at her
full disposal.
[22] Does article 7
of the agreement between the parties modify that discretion? On the one hand,
the evidence shows that the account in which part of the amount had to be
deposited was a no withdrawal account. But on the other hand, the evidence is
that each of the parties could remove that condition. Furthermore, the amounts
collected by Quebec for the Appellant and paid to her were deposited into her
personal bank account. Neither the former spouse, nor the Appellant were
concerned with this variation from article 7 of the interim agreement. This
shows that this article was never regarded by the parties as having the
limiting and binding nature the Appellant now wishes to attribute to it.
[23] Counsel for the
Appellant argued that a taxpayer cannot do indirectly what he or she cannot do
directly and that allowing the former spouse to deduct the entire support
amounts would allow him to benefit from a deduction for mortgage payments.
First, it was not he who, according to the interim agreement, was responsible
for the mortgage payments but the Appellant who lived on the common property.
But in any event, there is a provision that provides for the deduction of the
payment of support amounts that are not child support amounts. If the former
spouse paid such support amounts, he is entitled to deduct them under
paragraph 60(b) of the Act. He does directly what the Act entitles
him to do.
[24] Now let us consider
the imposition of penalties for late filing.
[25] Subsections 162(1)
and 162(2) of the Act read as follows:
(1) Failure to file return of income -- Every person who fails to file a return of income for a
taxation year as and when required by subsection 150(1) is liable to a penalty
equal to the total of
(a) an amount equal to 5% of the person's tax
payable under this Part for the year that was unpaid when the return was
required to be filed, and
(b) the product obtained when 1% of the person's tax
payable under this Part for the year that was unpaid when the return was
required to be filed is multiplied by the number of complete months, not
exceeding 12, from the date on which the return was required to be filed to the
date on which the return was filed.
(2) Repeated failure to file -- Every person
(a) who fails to file a
return of income for a taxation year as and when required by subsection 150(1),
(b) on whom a demand for a
return for the year has been served under subsection 150(2), and
(c) by whom, before the time
of failure, a penalty was payable under this subsection or subsection 162(1) in
respect of a return of income for any of the 3 preceding taxation years
is liable to a penalty
equal to the total of
(d) an amount equal to 10% of
the person's tax payable under this Part for the year that was unpaid when the
return was required to be filed, and
(e) the product obtained when
2% of the person's tax payable under this Part for the year that was unpaid
when the return was required to be filed is multiplied by the number of
complete months, not exceeding 20, from the date on which the return was
required to be filed to the date on which the return was filed.
[26] Subsection 150(1),
paragraph 150(1)(d) and subsections 150(1.1) and 150(2) of the Act
read as follows:
150(1) Filing returns of income – general rule -- Subject to subsection
(1.1), a return of income that is in prescribed form and that contains
prescribed information shall be filed with the Minister, without notice or
demand for the return, for each taxation year of a taxpayer,
. . .
(d) Individuals -- in the case of any other person, on or before
(i)
the following April 30 by that person
or, if the person is unable for any reason to file the return, by the person's
guardian, committee or other legal representative (in this paragraph referred
to as the person's "guardian"),
(ii) the following June 15 by that person or, if the
person is unable for any reason to file the return, by the person's guardian
where the person is
(A) an individual who
carried on a business in the year, unless the expenditures made in the course
of carrying on the business were primarily the cost or capital cost of tax
shelter investments (as defined in subsection 143.2(1)), or
(B) at any time in the
year a cohabiting spouse or common-law partner (within the meaning assigned by
section 122.6) of an individual to whom clause 150(1)(d)(ii)(A) applies, or
(iii) where at any time
in the year the person is a cohabiting spouse or common-law partner (within the
meaning assigned by section 122.6) of an individual to whom paragraph 150(1)(b)
applies for the year, on or before the day that is the later of the day on or before
which the person's return would otherwise be required to be filed and the day
that is 6 months after the day of the individual's death;
150(1.1) Exception -- Subsection (1) does
not apply to a taxation year of a taxpayer if
(a) the taxpayer is a corporation that was a
registered charity throughout the year; or
(b) the taxpayer is an
individual unless
(i) tax
is payable under this Part by the individual for the year,
. . .
150(2) Demands for returns – Every person, whether or not the person is liable
to pay tax under this Part for a taxation year and whether or not a return has
been filed under subsection 150(1) or 150(3), shall, on demand from the
Minister, served personally or by registered letter, file, within such
reasonable time as may be stipulated in the demand, with the Minister in
prescribed form and containing prescribed information a return of the income
for the taxation year designated in the demand.
[27] According to
subsection 150(1.1) of the Act, an individual is not obliged to
file a return of income if no tax is payable by the individual for the year.
[28] However,
subsection 150(2) of the Act provides for the possibility of demands for returns whether or not the person is liable to pay
tax and whether or not a return has been filed. Such a demand was made to the
Appellant for the 2000 taxation year.
[29] For the years in
issue for which a late-filing penalty was imposed, the income added by the
Minister consisted of little more than the support amount received from
Léo Pelletier. The only year where another substantial amount was added is
the 2000 taxation year, where the amount of $7,052 was cashed out of a registered retirement savings plan. Source deductions in
the amount $353 were made on the amount cashed out.
[30] The Appellant
challenged the inclusion of the support amount paid to her by her former spouse
in computing her income. There was no evidence that had it not been for that
amount, tax would have been payable by the Appellant. We are not dealing here
with income that was knowingly unreported. I am therefore of the opinion that
the Appellant is not liable to the imposition of the late-filing penalty as I
am not certain that for the 1998, 1999 and 2001 taxation years, tax was payable
by her. As for the lack of response to the demand for return, I accept the
doctor’s certificate which states that the Appellant was in a state of
depression or mental confusion and incapable of managing her affairs.
[31] Following the
hearing, counsel for the Respondent, on her own initiative, sent a letter to
the Court allowing the Appellant certain deductions:
[TRANSLATION]
The Respondent concedes that
the Appellant is entitled to the following deductions and credits:
For the year 2000:
·
Medical expenses of $1368.
·
Tuition and education amounts of $457.
·
Eligible donations of $5.
For the year 2001:
·
Tuition fees of $187.
·
Education amounts of $480.
·
Medical expenses of $470 .
·
Eligible donations of $5.
[32] To conclude, for
each of the years in issue, the Appellant must include the total support amount
paid by her former spouse and her former spouse may deduct the same amount in
computing his income for each of those years. The imposition of penalties for
late filing and repeated failure to file is
cancelled. The appeal is allowed in that regard and also with respect to the
deductions set out in the letter of counsel for the Respondent.
Signed at Ottawa, Canada, this 18th day of
June 2007.
“Louise Lamarre Proulx”
Translation
certified true
on this 17th day of
September 2007.
Daniela Possamai,
Translator
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