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Citation: 2003TCC293
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Date: 20030520
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Docket: 2002-1797(IT)I
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BETWEEN:
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DIANA MILLWOOD,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Miller, J.
[1] Diana Millwood appeals, by
way of the informal procedure, the assessments of Minister of
National Revenue's (the "Minister") of her
1997 and 1998 taxation years. The Minister included in
Ms. Millwood's income support amounts of $8,594 in 1997
and $10,016 in 1998. In the Tax Court of Canada case of
Kolakis v. The Queen, (2003TCC355), delivered
from the Bench on September 22, 2000,
Ms. Millwood's ex-husband, Mr. Kolakis, was
allowed the deduction of theses amounts. It is important to know
that in that case no oral evidence was presented, and
Judge Hershfield was left to decide on the basis of
inferences from agreed upon documentary evidence.
[2] Ms. Millwood married
Evangelos Kolakis in 1984. They had three children born in
1985, 1986 and 1988, respectively. They separated in 1993 and
divorced in 1995. The children always remained with
Ms. Millwood. She and her ex-spouse agreed to
Minutes of Settlement dated March 7, 1995
(Exhibit A-1), some of the terms of which are as
follows:
1) Mr. Kolakis was to
provide child support of $250 per month per child, or $750 a
month, such maintenance to be deductible by Mr. Kolakis and
taxable in Ms. Millwood's hands;
2) He was to transfer to
his wife certain agricultural property, acknowledging and
agreeing that Ms. Millwood "intends to actively market
the property set out above". Also, she agreed to grant to
Mr. Kolakis a right of first refusal with respect to the
property. This property was subject to a mortgage; and
3) Ms. Millwood was
to transfer certain other property to Mr. Kolakis.
[3] In November 1996,
Ms. Millwood and Mr. Kolakis agreed to a consent order
(Exhibit A-2), which included the following provisions:
1. That the
child support arrears owing by the Respondent are hereby
confirmed in the total sum of $3,000.00.
2. That there
shall be a stay of execution upon the foregoing child support
arrears against the Director of Maintenance Enforcement and the
Petitioner until the Respondent sells his lands legally described
as Plan 862 2261, Block 1, Lot 22
(N.E. 15-50-22-W4th), Plan 2252 Mc,
Lot C (N.E. 17-51-22-W4th), County of
Leduc N.E. 15-50-22-W4th.
3. That
commencing December 1996, in lieu of child support, the
Respondent shall pay directly to the Alberta Treasury Branches
the monthly mortgage of the Petitioner for the lands legally
described as the N.E. 21 and E. 1/2 of
S.E. 21-50-22-W4th until further Order of
this Court. In addition, the Respondent shall pay to the
Petitioner $205.00 commencing January 15, 1997 and
continuing on the 15th day of each and every month thereafter
until further Order of this Court.
4. That upon
the Respondent providing to the Petitioner 12 postdated cheques
for the monthly payment of $205.00 the Petitioner shall advise
the Maintenance Enforcement Program accordingly.
[4] Mr. Kolakis was in arrears at
this point. Ms. Millwood was not making mortgage payments on
the agricultural property because, as she put it, her
ex-spouse would not let her, and also, the bank would not
agree with her carrying on the mortgage. The bank was prepared to
foreclose. Her evidence in this regard was somewhat sketchy. She
felt Mr. Kolakis would not let her control the property, as
he ultimately wanted the property for himself. She felt forced
into agreeing to the consent order, which reduced the child
support, but ensured that the mortgage payments would be made.
She explained this was Mr. Kolakis' way of ensuring he
could ultimately get the property through his right of first
refusal. Throughout 1997 and 1998, Mr. Kolakis made the
mortgage payments of approximately $556 a month.
[5] Ms. Millwood sold the
agricultural property at the end of 1998 and realized some cash
from the sale, though she had indicated she had lost a lot of
money on the property due to Mr. Kolakis' interference.
The nature of that interference was not clear. Ms. Millwood
obtained an order in 1999 that Mr. Kolakis make $556 a month
payments commencing March 1, 1999 for child support.
[6] Ms. Millwood's counsel
argued that the mortgage payments in 1997 and 1998, made directly
by Mr. Kolakis, do not constitute child support amounts for
the following reasons:
1) the order specifically
refers to the payments being "in lieu of child
support", that is, something instead of, or other than,
child support;
2) the amounts were not
intended to be used nor were they used for the maintenance of the
children - they were to keep the farm property in good standing;
and
3) Ms. Millwood did
not have any discretion as to the use of the payments, as
required by the definition of "support amount" in
subsection 56.1(4) of the Income Tax Act
(the "Act").
[7] The Respondent relies on the case
of Kolakis in which Mr. Kolakis was allowed the
deduction of the amounts now sought by Ms. Millwood to be
excluded from her income.
[8] The Respondent addresses the
Appellant's first two arguments together on the basis that a
payment to relieve Ms. Millwood of a legal obligation to
make monthly mortgage payments is still maintenance for the
children. It is an expense she would otherwise have to make.
[9] With respect to the
Appellant's position that Ms. Millwood had no
discretion, the Respondent argued that in consenting to the
November 1996 order, Ms. Millwood was estopped from then
saying she had no discretion. She exercised her discretion at
that point, and it was unnecessary to exercise it at the time of
each and every payment.
[10] Support payment legislation is, at
best, difficult, especially when faced with a prior decision
dealing with the same circumstances, though presented quite
differently, in which the tax result differs. In Kolakis,
Judge Hershfield was very clear of the risk the parties ran
in presenting no witnesses. He acknowledged he was forced to draw
inferences without testimony of any witnesses, including
Mr. Kolakis. In the case before me, I had the benefit of
Mr. Kolakis' former spouse, Ms. Millwood, the
Appellant in the case before me, explaining her situation. This
difference allows Ms. Millwood to succeed, and not to have
to include third party payments in income, notwithstanding
Mr. Kolakis was allowed the deduction of such payments.
Different findings of fact lead to conflicting outcomes. I am
satisfied as to the reliability of the evidence before me, that
leads to a judgment conflicting with Judge Hershfield's, who
expressed reservations as to the reliability of the fact finding
process.
[11] The starting point for the
determination of whether the third party mortgage payments should
fall into Ms. Millwood's income is
paragraph 56(1)(b) and subsection 56.1(1) of
the Act which read:
56(1) Without restricting the generality of
section 3, there shall be included in computing the income of a
taxpayer for a taxation year,
(a) ...
(b) 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;
56.1(1) For the purposes of paragraph 56(1)(b)
and subsection 118(5), where an order or agreement, or any
variation thereof, provides for the payment of an amount to a
taxpayer or for the benefit of the taxpayer, children in the
taxpayer's custody or both the taxpayer and those children,
the amount or any part thereof
(a) when
payable, is deemed to be payable to and receivable by the
taxpayer; and
(b) when
paid, is deemed to have been paid to and received by the
taxpayer.
[12] Third party payments for support are
either brought into income pursuant to the application of
paragraph 56(1)(b) and subsection 56.1(1) or
through the application of subsection 56.1(2). In
Kolakis, Judge Hershfield examined the flipside of
these provisions (60(b) and 60.1(1) on the one hand and
60.1(2) on the other), referring to the payor's reliance for
deductibility on subsection 60.1(2) as the safe harbour
provision, but clarifying that the deductibility of third party
payments is not limited to subsection 60.1(2).
[13] I shall review firstly whether
paragraph 56(1)(b) applies to the circumstances
before me. This section brings into income support amounts
received by the taxpayer. A support amount, defined in
subsection 56.1(4) of the Act means, in part, an
amount receivable as an allowance on a periodic basis for the
maintenance of the recipient, children of the recipient or both,
if the recipient has discretion as to the use of the amount.
Certainly the payments were periodic, but were they an allowance
for the maintenance of Ms. Millwood's children? I do not
believe they were.
[14] The mortgage payments went to a
property that was agricultural land over which Mr. Kolakis
had a right of first refusal. This was not property which in any
way was for the benefit of the children. Ms. Millwood's
evidence was that the payments were for Mr. Kolakis'
benefit only. While her evidence was not as clear as it might
have been in this respect, I accept that the mortgage payments
were made by Mr. Kolakis on undeveloped land, land on which
he wanted to exercise a right of first refusal. I also accept
that Ms. Millwood consented to the new arrangement,
believing it was a reduction of her children's maintenance.
The wording of the order that such mortgage payments were in lieu
of child support, while somewhat ambiguous, can be interpreted to
mean "instead of child support", or "not
representing child support". They were intended to serve
some other purpose. After the property was sold, child support
payments were reinstituted.
[15] The Respondent argues that because
Ms. Millwood had an obligation to make the mortgage
payments, the direct payment by her ex-husband for those
mortgage amounts, freed up other monies, which could support the
children. I disagree. In receiving the payments directly,
Ms. Millwood had a choice - she could apply the payments to
the mortgage or risk losing the property to foreclosure. The
evidence was that she was facing such a risk, one which
Mr. Kolakis found unacceptable and caused the alteration of
the arrangement. Payments for the maintenance of children must be
just that; they should not be made for any other ulterior or
indirect purpose. Here, I am satisfied, on balance, the payments
were not made for the benefit of the children. There was no
suggestion by either side that payments were maintenance for
Ms. Millwood herself. This is a critical finding, as if they
were neither for the children nor Ms. Millwood, they cannot
constitute support payments as defined.
[16] However, even if the facts supported a
finding that the payments somehow were intended to benefit
Ms. Millwood, I would not find that they should be included
in her income for the following reason.
Paragraph 56(1)(b) requires receipt by
Ms. Millwood, real, or deemed pursuant to
subsection 56.1(1). As she did not receive the payments
directly herself, the deeming provision reproduced earlier comes
into play.
[17] Judge Hershfield was very clear in
Kolakis that for a payor to rely upon the deeming
provision for support to claim deductibility of third party
payments (and conversely the recipient to have to include in
income), requires strong evidence of intent to exercise
discretion to benefit the recipient and an intent as to the tax
consequences that flow. As I have already indicated, the
evidence, on balance, suggests no intent to benefit the children
or Ms. Millwood. Further, the evidence before me does not
support any finding there was an intent that Ms. Millwood
would bring these payments into income. The order of
November 1996 was silent on that point and the circumstances
surrounding the consent to that order suggest these payments were
very different from the child maintenance payments, the subject
of the Minutes of Settlement of March 7, 1995. Those
payments were agreed to be included in Ms. Millwood's
income. The mortgage payments were not. Subsection 56.1(1)
does not therefore apply to deem Ms. Millwood to have
received those payments.
[18] Turning now to the second possibility,
is Ms. Millwood caught by subsection 56.1(2) which reads:
56.1(2) For the purposes of section 56, 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
person 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 person 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 taxpayer described in
paragraph (a) or (b) resides) incurred in the year
or the preceding taxation year for the maintenance of a taxpayer,
children in the taxpayer's custody or both the taxpayer and
those children, where the taxpayer is
(a) the
person'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
the parent of a child of whom the person is a natural 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 the taxpayer
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 60.1(2) shall apply
to any amount paid or payable thereunder, deemed to be an amount
payable to and receivable by the taxpayer as an allowance on a
periodic basis, and the taxpayer is deemed to have discretion as
to the use of that amount.
As there was no "support amount" (a prerequisite to
the application of this section), it is in order to review the
requirements of subsection 56.1(2). I reach the same
conclusion as Judge Hershfield in Kolakis in this
regard; that is, the section requires express reference to
subsection 60.1(2) and 56.1(2) to apply - there is no such
express reference in the November 1996 order.
Subsection 56.1(2) is therefore not applicable.
[19] I therefore allow the appeal and refer
the matter back to the Minister for reconsideration and
reassessment on the basis that Ms. Millwood need not include
in her income in 1997 and 1998 the mortgage payments made by
Mr. Kolakis in accordance with the November 8, 1996
consent order. Ms. Millwood is entitled to costs of
$200.
Signed at Ottawa, Canada this 20th day of May 2003.
J.T.C.C.
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