Date: 20000126
Dockets: 1999-231-IT-I; 1999-233-IT-I
BETWEEN:
LILIANE NAGY, ADAM NAGY,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent,
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] These appeals were heard on common evidence and, in both
cases, concern the 1994, 1995 and 1996 taxation years. The issue
is whether, under paragraph 56(1)(b) or (c) of
the Income Tax Act (the "Act"), the
periodic amounts paid by Adam Nagy to Liliane Nagy
under an agreement for corollary relief following the separation
of the two spouses should be included in Ms. Nagy's
income as alimony or other allowance.
[2] The facts of the two appeals are set out in the replies to
the notices of appeal and, in the case of Ms. Nagy, are as
follows:
[TRANSLATION]
. . .
3. In calculating her income for the 1994, 1995 and 1996
taxation years, the appellant did not declare any amount as
alimony or other allowance payable on a periodic basis.
4. By notices of reassessment dated January 30, 1998, the
Minister of National Revenue (the "Minister"), in
calculating the appellant's income, added the amounts of
$29,700, $28,600 and $12,100, respectively, as alimony or other
allowance payable on a periodic basis, for the 1994, 1995 and
1996 taxation years.
5. On February 18, 1998, the appellant served notices of
objection on the Minister in relation to the 1994, 1995 and 1996
taxation years.
6. On September 3, 1998, the Minister confirmed the notices of
reassessment, dated January 30, 1998, for the 1994, 1995 and 1996
taxation years.
7. In making the reassessments dated January 30, 1998, the
Minister assumed the following facts, inter alia:
(a) the appellant and Adam Nagy were married on February 10,
1962, in Toulouse, France;
(b) two children were born of the marriage of the appellant
and Adam Nagy:
(i) Murielle, on July 23, 1962
(ii) Patricia, on July 13, 1971;
(c) the appellant and Adam Nagy have lived separate and apart
since September 2, 1993;
(d) under a consent to corollary relief, dated June 16, 1994,
and confirmed by the Honourable Judge Claude Larouche of the
Superior Court on August 30, 1994, the parties agreed, among
other things, to the following relief:
(i) Adam Nagy undertakes to pay to the appellant $1,100, net
of tax, every two weeks,
(ii) should the appellant be required to pay tax on the amount
referred to in the preceding paragraph, Adam Nagy undertakes to
reimburse the appellant an equivalent amount;
(iii) the amount provided for in (i) above shall be indexed in
accordance with article 590 of the Civil Code of
Quebec;
(e) the amounts of $29,700, $28,600 and $12,100 were assessed
as having been paid to the appellant for the 1994, 1995 and 1996
taxation years respectively;
. . .
[3] The appellant's Notice of Appeal stated:
[TRANSLATION]
. . .
THE APPELLANT intends to plead that the amounts that she
received under the corollary relief agreement confirmed by a
decree of judicial separation on August 30, 1994, cannot be
characterized as alimony within the meaning of the Act and
are not in fact alimony and, therefore, are not taxable in the
hands of the appellant.
. . .
[4] In the case of Mr. Nagy, the Reply to the Notice of Appeal
repeats the facts set out with respect to Ms. Nagy's
appeal and in addition states the following:
[TRANSLATION]
. . .
3. In calculating his income for the 1994, 1995 and 1996
taxation years, the appellant claimed the amounts of $29,700,
$28,600 and $12,100 respectively as alimony or other allowance
payable on a periodic basis.
4. By notices of reassessment dated October 21, 1997, the
Minister of National Revenue (the "Minister"), in
calculating the appellant's income, disallowed in respect of
the 1994, 1995 and 1996 taxation years the amounts of $29,700,
$28,600 and $12,100 respectively claimed as alimony or other
allowance payable on a periodic basis.
5. By notices of reassessment dated February 4, 1998, the
Minister, in calculating the appellant's income, allowed in
respect of the 1994, 1995 and 1996 taxation years amounts of
$29,700, $28,600 and $12,100 respectively as alimony or other
allowance payable on a periodic basis.
8. . . .
(g) the appellant made an assignment in bankruptcy on October
21, 1997, and was discharged from bankruptcy on July 21,
1998.
[5] The two notices of appeal have the same thrust: the
periodic amounts paid and received were not paid and received as
alimony but strictly for the education of their daughters.
Therefore, the appellant Liliane Nagy was not required to
include them as alimony in calculating her income and the
appellant Adam Nagy was not required to deduct them.
[6] Mr. Nagy, Ms. Nagy and Fabien Tremblay, trustee
in bankruptcy, testified at the request of counsel for the
appellants. Nadia Assan and Rémy Harvey
testified at the request of the agent for the respondent.
[7] Mr. Nagy said that the periodic payments to his
former spouse were for the education of his daughters.
Ms. Nagy also testified that the money received was for the
education of their daughters and not for her maintenance.
[8] As stated in paragraph 4 of the Reply with respect to Mr.
Nagy's appeal, on October 21, 1997, the Minister of National
Revenue (the "Minister") disallowed the deductions
claimed by Mr. Nagy in respect of the 1994, 1995 and 1996
taxation years and reassessed him accordingly. Because of the
large amounts of money claimed from him in these assessments,
Mr. Nagy went to see a trustee in bankruptcy,
Fabien Tremblay, and made an assignment in bankruptcy on the
very day of the assessments.
[9] Nadia Assan explained that there was an agreement for
the exchange of information between Revenu Québec and
Revenue Canada and that the assessments of October 21, 1997, were
based on such an exchange. In these reassessments, the Minister,
in calculating Mr. Nagy's income, disallowed the
deduction for the amounts paid in respect of the years in
question since Ms. Nagy had not included them in calculating
her income for those years because she did not consider them as
alimony payments.
[10] The collection agent, Rémy Harvey, asked
Nadia Assan to verify whether the reassessments in respect
of Adam Nagy were really valid. Ms. Assan thereupon had
all the relevant documents brought to her and determined that the
initial assessments were correct and that the appellant was
entitled to deduct the amounts in question as payments of alimony
or other allowance to his former spouse. The trustee in
bankruptcy was so notified, and the tax liability was reduced to
almost nothing.
[11] Reassessments were issued for the two appellants. These
were dated January 30, 1998, in the case of Ms. Nagy
and February 4, 1998 in the case of Mr. Nagy. Ms. Nagy
objected on February 18, 1998. Mr. Nagy also objected to the
reassessments in respect of his former spouse and served his
notice of objection on February 18, 1998. He did not bother to
serve a notice of objection in respect of any of his own
assessments because he had made an assignment in bankruptcy, and
the agent for the respondent consequently raised the issue of
whether his appeal was valid.
[12] The agreement on corollary relief referred to in
paragraph 7(d) of the Reply was produced as
Exhibit A-1. Among the whereases and the various
undertakings, the following appears:
[TRANSLATION]
WHEREAS the two (2) children of the parties are still
full-time students;
. . .
1. The defendant shall pay to the petitioner the net
amount of $1,100.00 every two weeks, such payment to be made
every other Thursday by a bank transfer to an account to be
designated by the petitioner;
Should the petitioner be required to pay income tax in respect
of the amount referred to in the preceding paragraph, the
defendant undertakes to reimburse the petitioner, within fifteen
(15) days of a claim being made by the petitioner, an amount
equivalent to the amount of income tax paid by the petitioner in
respect of the amount referred to above;
2. The amount provided for in paragraph 1 herein shall
be indexed in accordance with article 590 of the Civil
Code of Quebec;
[13] Exhibit A-2 is the divorce decree, dated May 21,
1996. It contains the following:
[TRANSLATION]
WHEREAS Patricia, the child of the parties, is still a
full-time student;
. . .
1. The petitioner agrees to pay to Patricia the monthly
amount of $645 net, representing the cost of her living
accommodation, until April 30, 1998, inclusive;
This amount shall be paid into Patricia's bank account on
the first day of each month.
2. The amount provided for in paragraph 1 herein shall
not be indexed.
Argument
[14] Counsel for the appellants argued that the divorce decree
awarding support only to the daughter who was still a student
makes it clear that the amounts received by Ms. Nagy were
for specific purposes, i.e., the university education of her two
daughters and that she had no discretion to use these amounts for
other purposes. The appellants' counsel cited the decision of
this Court in Assaf v. Canada, [1992] T.C.J. No. 46,
and referred to the following passages in particular:
[TRANSLATION] The taxpayer appealed from the decision of the
Minister disallowing the deduction of an amount of $10,000 paid
to his former spouse as alimony.
. . . The Court determined that, since the amounts paid were
intended to defray part of the cost of the children's
university costs, they did not constitute alimony under
subsection 56(12) of the Income Tax Act because the former
spouse had no discretion as to the use of the payments.
. . .
It will be noted in particular in the wording of this
agreement that it provides that the $10,000 would be paid by the
appellant to his former spouse [TRANSLATION] "to defray part
of the cost of the children's university education".
On reading this agreement, it can also be seen that there is
no indication that subs. 56.1(2) and 60.1(2) of the Income Tax
Act apply to the payments made under the agreement.
As the $10,000 paid under the agreement must be used for a
certain purpose, namely to defray part of the cost of the
children's university education, it is therefore not an
allowance for the purposes of, inter alia, s. 60(b)
or (c) of the Income Tax Act, in view of the
provisions of subs. 56(12) of that Act. . . .
. . .
In interpreting subs. 56(12) it should be noted that, for
amounts received for example by a spouse or former spouse to be
an allowance within the meaning of this subsection, it does not
matter that the person paying the alimony does not control or
attempt to control the use of the money in question. However, the
judgment or agreement, as the case may be, must not specify the
use to be made of these amounts. If there is such an indication,
it follows that if the spouse or former spouse receiving the
money in question does not use it in the way specified in the
judgment or agreement, he or she will be failing to perform the
obligation contained in the judgment or agreement. It is in this
sense that the recipient of the amounts in question does not
legally have discretion as to their use under subs. 56(12).
[15] The agent for the respondent referred to the decision of
the Federal Court of Appeal in Hamer v. Canada, [1998]
F.C.J. No. 829 and, more specifically, to the following
passages:
. . . Again the issue was whether the fact that the sums
received were exclusively for the maintenance of the children
deprived the recipient of the discretion that was necessary in
order for these payments to be considered as allowances within
the meaning of subsection 56(12) of the Act, and consequently
should not be included in the custodial former spouse's
income under paragraphs 56(1)(b), (c) or
(c.1) of the Act.
We are all of the view that the argument of counsel for the
applicants, which in a nutshell would insert the adjective
"absolute" before the word "discretion" in
subsection 56(12) of the Act so that the slightest general
earmarking of a support payment would mean that it could no
longer be characterized as a taxable allowance, is untenable
given the context in which the provision is found. . . .
Conclusion
[16] Paragraph 56(1)(b) and subsection 56(12) of the
Act read as follows:
56(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) Alimony — an amount received by the
taxpayer in the year as alimony or other allowance payable on a
periodic basis for the maintenance of the taxpayer, children of
the taxpayer or both the taxpayer and the children if the
taxpayer, because of the breakdown of the taxpayer's
marriage, was living separate and apart from the spouse or former
spouse who was required to make the payment at the time the
payment was received and throughout the remainder of the year and
the amount was received under a decree, order or judgment of a
competent tribunal or under a written agreement;
56(12) Definition of "allowance". Subject to
subsections 56.1(2) and 60.1(2), for the purposes of 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
"the taxpayer" and in the latter paragraphs as
"the recipient", unless that person has discretion as
to the use of the amount.
[17] In Assaf (supra), this Court had to
consider the payment of an annual amount and not a periodic
payment. That case involved the application of subsection 56.1(2)
and not paragraph 56(1)(b) of the Act. Moreover, it
should be noted that that decision, in the last paragraph cited
in paragraph 14 of these Reasons, states that the recipient has
discretion within the meaning of subsection 56(12) of the
Act if the wording of the judgment or agreement does not
specify the use that is to be made of the funds. That is the
situation in the case at bar.
[18] The decision of the Federal Court of Appeal in
Hamer is binding on this Court. According to that
decision, the fact that the amounts received may have been
intended for the education of the appellants' daughters does
not deprive the recipient of the requisite discretion for these
payments to be considered as allowances within the meaning of
subsection 56(12) of the Act. Counsel for the appellants
presented a very clever argument, but one that is contradicted by
the decision of the Federal Court of Appeal and, I would say, by
the legal reality of Ms. Nagy's circumstances.
Ms. Nagy could use the amounts in question at her discretion
in the same manner as her income from employment.
[19] With respect to Adam Nagy's appeal, the agent for the
respondent argued that notices of objection to the reassessments
dated February 4, 1998, were not served by the trustee in
bankruptcy, yet Mr. Nagy had made an assignment in
bankruptcy at that time. In fact, Mr. Nagy did not want to
file an objection to his own assessments. Rather, he joined his
former wife in objecting to her assessments. On this ground
alone, the appeal must be dismissed. In any case, since I have
determined that the amounts of $29,700, $28,600 and $12,100 were
required to be included in calculating Ms. Nagy's income
under paragraph 56(1)(b) of the Act, Mr. Nagy
was correctly assessed when he was allowed the deduction of these
amounts by the reassessments issued on February 4, 1998.
[20] The appeals are accordingly dismissed.
Signed at Ottawa, Canada, this 26th day of January 2000.
"Louise Lamarre Proulx"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
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