Date: 20011018
Docket: 2000-3841-IT-I
BETWEEN:
REID OLIVER SANDERS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Bonner, T.C.J.
[1]
The Appellant appeals from assessments of Income Tax for the
1996, 1997 and 1998 taxation years. On assessment the Minister of
National Revenue (the "Minister") disallowed claims
made by the Appellant to deduct amounts paid pursuant to court
orders in litigation between him and his then spouse.
[2]
The Appellant and his spouse separated in July 1996. There was
one child of the marriage. He was born about three years before
the separation and continued to live with his mother
thereafter.
[3]
The payments in issue in this appeal were made pursuant to three
orders of the Ontario Court of Justice General Division. Those
orders read in part as follows:
a)
Order of October 8, 1996
3.
THIS COURT ORDERS THAT the matrimonial home at 18545 Centreville
Creek Road, Caledon, Ontario shall be listed for sale immediately
at a price to be agreed upon by the parties. Both parties shall
cooperate with all aspects of the sale of the matrimonial
home.
4.
THIS COURT ORDERS THAT, in the meantime, a lump sum payment on
account of support shall be made by the Husband to the Wife in
the amount of $3,500.00 within two weeks hereof to cover the
period October 8, 1996 to December 9, 1996.
5.
THIS COURT ORDERS THAT the Wife shall have interim interim
exclusive possession of the matrimonial home at 18545 Centreville
Creek Road, Caledon, Ontario, pending the return of the interim
motion or sale, whichever is earlier.
6.
THIS COURT ORDERS THAT the Husband shall maintain the monthly
payments regarding the matrimonial home until the motion or the
sale of the matrimonial home.
The payments made pursuant to paragraphs 4 and 6 are in issue
in this appeal.
b)
Order of December 20, 1996
1.
THIS COURT ORDERS THAT the Husband, Reid Oliver Sanders, shall
continue to pay to the Wife interim interim child and spousal
support of $1,750 each month, effective December 9, 1996.
2.
THIS COURT ORDERS THAT the Husband shall continue to maintain the
monthly payments regarding the matrimonial home.
3.
THIS COURT ORDERS THAT the Husband's third party payments
shall be tax deductible for the Husband.
The word "continue" in paragraph 1 is relevant to
the interpretation of paragraph 4 of the October 8
agreement. Paragraph 3 of this order is, I assume, intended to
relate to deductibility under the Income Tax Act of
payments made under paragraph 2. The deductibility of such
payments is in issue in this appeal.
c)
Order of April 24, 1997
1.
THIS COURT ORDERS AND ADJUDGES that the interim interim Order of
Justice Jarvis shall terminate as of April 30, 1997.
2.
THIS COURT ORDERS AND ADJUDGES that the Husband will pay child
support in accordance with the Child Support Guidelines based on
his current income of Seventy-Five Thousand Dollars
($75,000.00). The gross payment will be One Thousand, Two Hundred
Dollars ($1,200.00) per month, until the changes to the Income
Tax Act are proclaimed in force. When the changes are
proclaimed, the net child support payment will be Six Hundred
Dollars ($600.00) per month.
...
8.
THIS COURT ORDERS AND ADJUDGES that the child of the marriage
shall be enrolled immediately in daycare at Sunshine Daycare for
the next four (4) years, that is, until April 30, 2001. The
Husband shall pay the child's daycare costs and after school
daycare program in the amount of no more than Six Hundred
and Fifty Dollars ($650.00) per month. The Husband shall be
entitled to claim the child care tax credit. As of May 1, 2001,
the Husband and Wife shall share the cost of the daycare expense,
in proportion to their net taxable incomes after deducting the
Husband's child support payments, but not including the
support in the Wife's income ...
A recital in this Order indicates that it was made pursuant to
Minutes of Settlement. The minutes were not produced at the
hearing of this appeal. The deductibility in computing income of
the Sunshine Daycare payments is in issue. The Appellant does not
claim any tax credit in relation to those payments.
[4]
The Appellant's position in relation to payments to persons
other than his spouse for daycare and for the maintenance of the
matrimonial home is summarized in his Notice of Appeal as
follows:
I disagree with Revenue Canada's decision based on the
Interpretation Bulletin no. IT-118R3 which makes specific
reference to paragraph 60.1(2). I believe that this subsection
appropriately applies to this case for the following highlighted
reasons:
"Subsection 60.1(2) permits the payer to deduct payments
made either:
(a)
directly to a spouse or former spouse or
(b)
to a third party for the benefit of such person or the children
in their custody, for specific expenses that are required to be
paid pursuant to a decree, court order, judgement, or written
agreement."
It further states that this rule applies if the expenditure is
on account of the following deductible expenses:
(i) a medical or educational expense or an expense incurred for
the maintenance of the dwelling in which the spouse or former
spouse resides (including mortgage payments, property taxes,
utility payments, etc.)
The Court Order clearly states that the Husband is to maintain
the monthly payments regarding the matrimonial home and that
these third party payments shall be tax deductible for the
Husband.
It is obvious that the intention of the Court was to allow for
the governing of the third party payments by subsection 60.1(2)
and 56.1(2).
[5]
The Minister disallowed the deduction of the $3,500 payment made
pursuant to paragraph 4 of the order of October 8, 1996 on the
basis that it was a lump sum payment and not paid as an
"allowance payable on a periodic basis" within the
meaning of paragraph 60(b) of the Act. Counsel for
the Respondent argued that if the $3,500 payment was intended to
be anything other than a lump sum the Court would have said so.
In my view the Court did say so when, having directed the payment
of $3,500 in respect of two one month periods ending December 9,
1996, it made a further direction that the Appellant " ...
continue to pay to the wife interim interim child and spousal
support of $1,750 each month ...". It is evident that
what was continued was a requirement that the Appellant pay to
his spouse on an interim basis a monthly allowance of $1,750.
Such an allowance is obviously payable on a periodic basis within
the meaning of paragraph 60(b). The reference in the order
to "lump sum" is neither conclusive nor is it an
accurate description of the nature of the payment. The Appellant
is therefore entitled to succeed on this branch of the
appeal.
[6]
It was the position of the Respondent that the Appellant was not
entitled to deduct the third party payments pursuant to paragraph
60(b) and 60(c). The payments were, after all,
required to be made to third parties and Mrs. Sanders could not
be said to have discretion as to the use of the amount as
contemplated by ss. 56(12) of the Act. The Appellant did
not really take issue with the Respondent on those points. Rather
he relied on s. 60.1(2) a provision intended to deal specifically
with payments which are required to be made to third parties. The
place of this provision in the legislative scheme is set out in
the Reasons for Judgment of the Federal Court of Appeal in the
Queen v. Larson as follows[1]:
At all relevant times in this case, the Income Tax Act had
a general system in place whereby spousal and child support
payments were taxed in the hands of the recipient spouse and were
deductible by the paying spouse. This was intended to reduce the
overall tax burden borne by both spouses, as the support payment
was deductible for the higher income-earning spouse and taxed at
a lower rate in the hands of the recipient spouse.
This tax treatment was only available for periodic support
payments which could be characterized as "allowances".
The case law has established that, generally speaking, where a
recipient spouse does not have discretion as to the use of the
support payments, those payments will not be considered to be an
allowance: Queen v. Armstrong, 96 DTC 6315 (F.C.A.). Thus,
directed support payments such as those made in this case will
generally not be subject to the tax treatment outlined above, and
will be taxed in the hands of the paying spouse.
One exception to this general principle was found where a spouse
makes directed support payments pursuant to an agreement or court
order. In this situation, the Income Tax Act specified
that such payments shall be deemed to be an allowance for
purposes of the act where the agreement or court order
specifically mentions subsections 60.1(2) and 56.1(2) of the
Income Tax Act. If those sections are mentioned, the
amount is deemed to be an allowance and is deductible by the
payor spouse.
[7]
S. 60.1(2) in both the version applicable to amounts received
before 1997 and the version applicable to amounts received
subsequently requires for its application a specific reference in
the agreement or order which calls for the payments. The
subsections read in part:
a)
in the earlier version
... 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 thereunder, be
deemed to be an amount paid by the taxpayer and received by that
person as an allowance payable on a periodic basis.
b)
in the later version
... 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.
[8]
In my opinion ss. 60.1(2) has no application. There is simply
nothing in the orders entered in evidence which satisfies the
requirement that there be reference not only to s. 60.1(2) but
also to ss. 56.1(2). The reference to both provisions is an
essential part of the scheme designed to maintain symmetry in
both the deduction from income of the payor and inclusion in the
income of the payee. The only thing which even remotely
approaches the requirement that reference be made to the
application of ss. 60.1(2) is the order that the Appellant's
third party payments "shall be tax deductible for the
Husband" in paragraph 3 of the order of December 20, 1996.
Even giving the widest possible latitude to the requirement for a
reference to s. 60.1, the fact remains that nothing whatever is
said about s. 56.1. The third party payments are therefore not
deductible.
Signed at Ottawa, Canada, this 18th day of October 2001.
"M.J. Bonner"
J.T.C.C.
COURT FILE
NO.:
2000-3841(IT)I
STYLE OF
CAUSE:
Reid Oliver Sanders and H.M.Q.
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
May 7, 2001
REASONS FOR JUDGMENT BY: The
Honourable Judge M.J. Bonner
DATE OF
JUDGMENT:
October 18, 2001
APPEARANCES:
Agent for the Appellant:
Concetta Sanders
Counsel for the
Respondent:
Kimberly Moldaver
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-3841(IT)I
BETWEEN:
REID OLIVER SANDERS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 7, 2001 at Toronto,
Ontario, by
the Honourable Judge M.J. Bonner
Appearances
Agent for the
Appellant:
Concetta Sanders
Counsel for the
Respondent:
Kimberly Moldaver
JUDGMENT
The
appeal from the assessment of income tax for the 1996 taxation
year is allowed and the assessment is referred back to the
Minister of National Revenue for reassessment on the basis that
the Appellant is entitled to deduct the sum of $3,500 paid
pursuant to paragraph 4 of the Order of October 8, 1996.
The appeals from the assessments for the 1997 and 1998 are
dismissed.
Signed at Ottawa, Canada, this 18th day of October 2001.
J.T.C.C.
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