Date: 19990920
Docket: 98-2345-IT-I
BETWEEN:
IAN PERRIE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] These appeals concern the 1994, 1995 and 1996 taxation
years, by way of the informal procedure. The question at issue is
whether amounts paid to third parties pursuant to a Court Order
rendered on December 16, 1991 by the Superior Court of
Québec, was deductible in computing the Appellant's
income, pursuant to paragraph 60(b) or (c) and
subsection 60.1(1) of the Income Tax Act
(the "Act"). The Appellant selected the
informal procedure.
[2] The facts upon which the Minister of National Revenue
(the "Minister") relied on to reassess the
Appellant are described at paragraph 5 of the Reply to the
Notice of Appeal (the "Reply") as follows:
a) during the 1994, 1995 and 1996 taxation years, the
Appellant was living apart from his former spouse, Mrs. Evelyne
Serbey;
b) in conformity with a Court order rendered on
December 16, 1991 by the Honourable Judge J.-Claude Nolin,
the Appellant was required to make monthly alimony payments of
$1,550;
c) the monthly alimony payments of $1,550 was payable as
follows:
i) the Appellant withheld and paid himself maintenance
payments to third parties on behalf of his former spouse,
ii) the balance was paid directly to the former spouse;
d) on July 10, 1997, the former spouse made a request in order
to amend her Income Tax Returns for the 1992, 1993, 1994, 1995
and 1996 taxation years on the basis that the maintenance
payments paid to third parties by the Appellant should be
excluded from her income;
e) the Minister established the following breakdown of the
yearly payments paid by the Appellant on behalf of and to his
former spouse:
1994 1995 1996
i) third parties $8,602 $8,753 $8,456
ii) former spouse $9,998 $9,847
$8,744
$18,600 $18,600 $17,200
f) the judgment of the Honourable Judge J.-Claude Nolin did
not specifically state that subsections 60.1(2) and 56.1(2) of
the Income Tax Act (the "Act") are
to apply to the above payments to third parties;
g) the above payments to third parties are not deductible
since the Appellant's former spouse did not have discretion
as to the use of the amount within the meaning of subsection
56(12) of the Act.
[3] The Appellant admitted subparagraphs 5(a) to (c) and
5(e) and (f) of the Reply. The Appellant produced, as
Exhibit A-1, the judgment of
Justice J.-Claude Nolin of the Superior Court of
Québec. He referred, among other passages, to the
following:
...
ORDONNE que la garde des enfants mineurs Christopher Perrie et
Erik Perrie soit et elle est exercée conjointement par le
demandeur et la défenderesse, et ce de la manière
suivante :
...
AUTORISE la défenderesse, pendant l'instance,
à occuper le domicile conjugal situé au 475, rue
Mortlake à Saint-Lambert, et à avoir
l'usage en même temps des effets et articles de
ménage qui le garnissent, à charge pour cette
dernière d'en payer les frais d'entretien et de
réparations locatives;
AUTORISE la défenderesse, pendant l'instance,
à avoir l'usage de l'automobile Subaru 1988,
à charge d'en payer les frais d'usage et
d'entretien et les coûts de réparations;
CONDAMNE le demandeur à payer à la
défenderesse, à titre de pension alimentaire non
indexée pour les deux enfants mineurs, la somme de mille
cinq cents cinquante dollars (1 550 $) par mois, payable de la
façon suivante :
i) en retenant mensuellement les sommes nécessaires
pour acquitter lui-même les montants des redevances
hypothécaires du domicile conjugal, ceux ou celles des
taxes et impositions foncières, des assurances de maison,
de même que des paiements périodique et des
assurances pour l'automobile Subaru 1988;
ii) en remettant à la défenderesse à
l'avance, le premier de chaque mois, tout solde s'il y a
lieu non autrement exigible dudit montant de mille cinq cents
cinquante dollars (1 550 $);
...
[4] The Appellant produced as Exhibit A-2 the
judgment of Justice Jean-Guy Dubois of the Superior
Court of Québec on the divorce and accessory measures.
This judgement states, at page 14, that the Appellant's
ex-wife, by the intermediary of her accountant, had
requested on July 10, 1997 to vary her income tax returns
for the years 1992 to 1996 to revise her income by subtracting
the amounts paid to third parties by her ex-husband that
she had first included as alimony in her income tax returns. She
only kept the amounts that her ex-husband had paid directly
to her. According to the judgment, both governments, provincial
and federal, have accepted the Appellant's
ex-wife's request and according to the judgment, at
page 15, she received as a reimbursement from the Government
of Canada, the amount of $11,444.64 and from the Québec
Government, the amount of $11,529.
[5] The family house was registered in the name of the
Appellant's ex-wife. This is confirmed by the judgment
of Justice Dubois at page 22. The judgment
(page 38) declared the Appellant's ex-wife the
owner of the property.
[6] The Appellant submitted that his ex-wife, by
including the amounts in the calculation of her income tax,
showed that she agreed at first that these amounts were at her
disposal. He referred the Court to the decision of the Federal
Court of Appeal in The Queen v. Arsenault,
96 DTC 6131.
[7] Counsel for the Respondent referred the Court to two
decisions of the Federal Court of Appeal in Armstrong v.
The Queen, 96 DTC 6315 and to Larsson v. The
Queen, 97 DTC 5425; and to two decisions of this Court
in Minicozzi v. The Queen, 97 DTC 973 and Pierre
Jacques v. The Queen, [1995] 1 C.T.C. 2563.
[8] A reading of the decision of the Federal Court of Appeal
in Armstrong (supra) shows that the payments to
mortgagors were payments coming within the scope of
subsection 60.1(2) of the Act. The husband was
ordered to pay the monthly mortgage payments and in addition,
alimony of $400 per month per child. These facts can be found in
the decision of the Tax Court of Canada in Armstrong v.
The Queen [1995] 1 C.T.C. 2718, at page 2719,
which says:
The appellant separated from his former spouse. By an order of
the Court of Queen's Bench for the Province of Saskatchewan
dated August 6, 1987 the appellant was ordered to "pay
the monthly mortgage obligation with respect to the matrimonial
home."
By a further order of the said Court dated November 27,
1991 the appellant was ordered to pay the former spouse
maintenance of $400 per month per child in respect of three
children ... This order also provided that the appellant was
to "continue to pay the monthly mortgage obligations with
respect to the matrimonial home. ..."
[9] At trial the Tax Court Judge found in favour of the
taxpayer. The Federal Court of Appeal reversed this decision and
allowed the Minister's appeal on the basis that the wording
specified in subsection 60.1(2) of the Act was
absent.
[10] In Larsson (supra), the Crown's
application for judicial review was dismissed. This decision
pertains to the same type of payments as those in the
Armstrong case. These payments not being payments of a
periodic amount are within the scope of subsection 60.1(2)
and not 60.1(1). They were found to be deductible on the basis of
a fourth Court Order that continued the previous ones and used
the specific language provided for by subsection 60.1(2) of
the Act.
[11] I believe that in the instant case, the facts are similar
to the facts that were under study in the decision of
Bowman J. in Hak v. The Queen, 99 DTC 36. This
decision was followed by Sarchuk J. in Chute v. The
Queen [1999] 2 C.T.C. 2864. These decisions were
rendered pursuant to paragraph 60(b) or (c)
and subsection 60.1(1) of the Act.
[12] I quote extensively from Hak (supra)
because this judgment analyzes the jurisprudence cited to me by
counsel for the Respondent and by the Appellant and I am in
agreement with this analysis:
[3] The appellant testified that he and his wife separated on
January 2, 1995 and that on that day they signed a
separation agreement. I accept that the agreement was signed by
both spouses on January 2, 1995. It reads as follows:
We, ANWAR HAK and FAZIMA HAK mutually agree as follows:
...
5. That Anwar Hak will provide $1000 per month for alimony and
support, or
Pay apartment rent of
$455.00/month
Utility bills of approximately $200.00/month
Health care premium
approximately $100.00/month
Total $750.00/month
[sic]
...
[10] The respondent bases the denial of the deduction upon a
construction of paragraph 60(b), section 60.1
and subsection 56(12) and upon what she contends is the
effect of a decision of the Federal Court of Appeal in The
Queen v. Armstrong, 96 DTC 6315.
...
[12] Counsel for the respondent agreed that had Mr. Hak simply
paid his spouse $1,000 per month and let her pay the rent and
utilities and other expenses, there would be no question that he
could deduct it. Instead, however, the spouses agreed to an
arrangement whereby a portion of the $1,000 per month would be
paid directly to the gas and utility companies and the balance
would be paid to her. This method of payment was specifically set
out in the agreement as an alternative to paying her directly the
$1,000 per month. Although the agreement does not use the words
“on behalf of Fazima Hak” or “for the benefit
of Fazima Hak”, this is plainly the intent and effect of
the agreement and, in particular, paragraph 5 thereof.
Without more, I should have thought it obvious that the
appellant's making the payments on Fazima Hak's behalf
and for her benefit would constitute constructive receipt by her
and would be a payment by Mr. Hak of the type contemplated by
paragraph 60(b).
...
[15] The respondent relies upon subsection 56(12), which
provided:
Subject to paragraphs (1)(b), (c) and (c
.1) (in this subsection referred to as the “former
paragraphs”) and 60(b), (c) and (c.1)
(in this subsection referred to as the “latter
paragraphs”), “allowance” does not include any
amount that is received by a person, referred to in the former
paragraphs as “taxpayer” and in the latter paragraphs
as “the taxpayer” and in the latter paragraphs as
“the recipient”, unless that person has discretion as
to the use of the amount.
[16] This provision may have been introduced as the result of
the decision of the Supreme Court of Canada in J.-P. Gagnon v.
The Queen [86 DTC 6179], [1986] 1 C.T.C. 410.
[17] It appears quite obvious that Fazima Hak had a discretion
with respect to the entire $1,000, and she exercised that
discretion by constituting her husband her agent to pay on her
behalf certain expenses such as utility bills and rent. What
Fazima Hak is saying in effect is “You are to pay me $1,000
per month. You can satisfy part of that obligation by paying some
of my bills.”
[18] Counsel however argues that the failure to provide in the
agreement that subsections 56.1(1) and 60.1(2) apply is
fatal to the appellant's claim.
...
[31] I do not think that subsection 60.1(2) has any
application. The payment of the rent and utility expenses was
simply an alternative means, agreed to by the spouses, of
satisfying a portion of the appellant's obligation to pay his
spouse the periodic allowance of $1,000 per month. The failure to
mention in the agreement that a provision that has no application
in any event should apply to the payments cannot be fatal to
deductibility under paragraph 60(b).
[32] Counsel referred to the decision of the Federal Court of
Appeal in Armstrong. Before I discuss that case, I should
mention an earlier decision of the Federal Court of Appeal in
The Queen v. Arsenault, 96 DTC 6131.
[33] The headnote sets out the facts as follows:
Pursuant to a Separation Agreement dated June 26, 1984,
the taxpayer was require [sic], inter alia, to pay
maintenance in the amounts of $400 per month to his separated
spouse, S, and $100 per month for each of three children. Instead
of making such payments, the taxpayer provided S with monthly
cheques of $690 (later $760) made payable to the landlord, which
S delivered to the latter. In assessing the taxpayer for 1991 and
1992 the Minister disallowed the deductions which the taxpayer
had claimed in respect of these rental cheques. The
taxpayer's appeal to the Tax Court of Canada was allowed. The
Tax Court Judge concluded that the amounts paid by the taxpayer
were limited and predetermined, and that they represented a
certain type of expense which S was thereby enabled to discharge.
In addition, in the Tax Court Judge's view, S had
constructive receipt of the amounts involved, in that she had
acquiesced in the taxpayer's payment thereof to her landlord,
thus constituting the landlord as her agent for the receipt and
appropriate expenditure thereof. Hence, in the Tax Court
Judge's mind, all of the requirements of
paragraph 60(b) and subsection 56(12) had been
met, and this led him to the conclusion that the amounts in issue
were deductible. The Minister applied to the Federal Court of
Appeal for a judicial review of the Tax Court Judge's
findings.
[34] The oral judgment of the majority (Strayer and MacGuigan,
JJ.A.) was delivered by Strayer, J.A. as follows:
I am of the view that the applicant has not demonstrated any
reviewable error on the part of the learned Tax Court judge. I
believe he was right in concluding that the payments in question
came within paragraph 60(b) of the Income Tax Act
as on the facts of this case the respondent's former spouse
retained a discretion as to how the money was paid pursuant to
the separation agreement and judgment and thus as to the use of
that amount.
...
[36] Three months, later the issue of payments to third
parties again came before the Federal Court of Appeal in
Armstrong. The panel was Isaac, C.J., Stone and Linden,
JJ.A. The judgment was delivered by Stone, J.A. In that case, the
taxpayer was ordered by the Saskatchewan Court to make the
monthly mortgage payments on the matrimonial home in which his
wife continued to reside. The Court in ordering the payment had
not mentioned subsection 60.1(2). The Federal Court of
Appeal held that the taxpayer could not rely on the deeming
provision at the end of subsection 60.1(2) and further that
subsection 60.1(1) could not be relied upon as the merits
paid were not on “allowance” within
subsection 56(12) because the spouse had no discretion as to
the use of the mortgage payments.
[37] I am of course bound by that decision to the extent that
its ratio decidendi applies. It dealt with payments
specifically contemplated by subsection 60.1(2) that would
not otherwise fall within paragraph 60(b). Moreover,
the order was made by the Court and left, apparently, the spouse
with no discretion. Here we have payments that in my view, are
covered by paragraph 60(b) and an agreement between
the spouses that does no more than permit the appellant to fulfil
in part his obligation to pay the periodic amount of $1,000 by
paying certain bills that the wife would otherwise have to pay
out of the $1,000 monthly allowance. In my view, this case is
much more specifically covered by Arsenault. I cannot assume, in
the absence of a clear indication to the contrary, that the
Federal Court of Appeal in Armstrong intended to overrule
its own decision of three months earlier in Arsenault.
Indeed, this case is stronger than Arsenault. In
Arsenault, the husband unilaterally presented his wife
with cheques payable to third parties. In this case, the payments
were made with the wife's express consent.
[13] Subsections 60.1(1) and 56(12) of the Act
read as follows:
(1) Where a decree, order, judgment or written agreement
described in paragraph 60(b) or (c), or any
variation thereof, provides for the periodic payment of an amount
by a taxpayer
(a) to a person who is
(i) the taxpayer's spouse or former spouse, or
(ii) where the amount is paid under an order made by a
competent tribunal in accordance with the laws of a province, an
individual of the opposite sex who is the natural parent of a
child of the taxpayer, or
(b) for the benefit of the person, children in the
custody of the person or both the person and those children,
the amount or any part thereof, when paid, shall be deemed
for the purpose of paragraphs 60(b) and (c) to have
been paid to and received by that person.
(Emphasis added)
56(12) Subject to subsections 56.1(2) and 60.1(2), for the
purposes of paragraphs (1)(b), (c) and (c.1)
(hereinafter in this subsection referred to as the “former
paragraphs”) and 60(b), (c) and (c.1)
(hereinafter in this subsection referred to as the “latter
paragraphs”), “allowance” does not include any
amount that is received by a person, referred to in the former
paragraphs as “the taxpayer” and in the latter
paragraphs as “the recipient”, unless that person has
discretion as to the use of the amount.
[14] In my view, there is no doubt that the wording of the
relevant clause of the judgment of Justice Nolin of the
Superior Court, cited at paragraph [3] of these Reasons, is
within the ambit of subsections 60.1(1) and 56(12) of the
Act. If one reads that clause, it says that the Appellant
had to pay the periodic amount of $1,550 per month, payable to
the Appellant's ex-wife and that he had to pay this
amount in full. He was instructed to deduct from this amount some
amounts to third parties, but discretion remained in the
Appellant's ex-wife as to the outcome of these
payments. She could have paid herself the mortgage payments on a
house of which she was the owner and the Appellant would have had
then to pay to her the full amount of $1,550. She was entitled to
the payment of a periodic amount of $1,550 per month. I also find
that the deeming provision of subsection 60.1(1) of the
Act, which provides that such amount shall be deemed to
have been paid and received by the person for the benefit of whom
the amount is paid to third parties, should be given its
meaning as is any other enacted legislative provision. A person
to whom an amount is paid has discretion as to the use of this
amount.
[15] Consequently, the appeals are allowed, without costs, and
the assessments are referred to the Minister of National Revenue
for reconsideration and reassessment, in accordance with the
above reasons.
Signed at Ottawa, Canada, this 20th day of September,
1999.
"Louise Lamarre Proulx"
J.T.C.C.
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