A-
623-96
CORAM:STRAYER J.A.
MacGUIGAN J.A.
McDONALD J.A.
BETWEEN:
HER
MAJESTY THE QUEEN
Applicant
-
and -
LARS
ERIC LARSSON
Respondent
REASONS
FOR JUDGMENT
McDONALD J.A.
This
case deals with taxation of support payments which are paid to third parties.
At trial, the Tax Court Judge found in favour of the taxpayer in part. The
Crown has brought an application for judicial review to this Court, claiming
that the Tax Court Judge erred in law in his disposition of the case with
respect to taxation of directed support payments. It also appears that the
Respondent has attempted to, in effect, seek judicial review of that part of
the decision which went against him, as well as the Tax Court's decision with
respect to costs.
For
the reasons which I outline below, I am of the view that the Crown's
application for judicial review must be dismissed. I am also of the view that
the taxpayer cannot seek judicial review of that portion of the decision which
was decided in the Crown's favour without having brought his own application
for judicial review.
FACTS
The
taxpayer and his former wife separated. By order of the British Columbia
Supreme Court dated November 14, 1989 (the "first order"), custody of
the children was awarded to the taxpayer's spouse and the taxpayer was ordered
to pay interim spousal maintenance in the form of monthly mortgage payments as
well as interim child support.
Nearly
two years later, the British Columbia Supreme Court issued a second order dated
September 27, 1991 (the "second order") which provided for the sale
of the matrimonial home and specific terms for the closing of the sale. The
Court also ordered that the taxpayer was to pay lump sum spousal maintenance as
well as maintenance arrears. In this order, the Court also went on to state
that "any and all spousal and child support payments made by the Defendant
[the taxpayer] to the Plaintiff in 1989 by way of mortgage payments on the
former matrimonial property, are to be deemed periodic maintenance payments
pursuant to the Income Tax Act."
In
November 1993, more than two years after the second order, the taxpayer brought
an ex parte application to the British Columbia Supreme Court for a
further order ("the third order"). The third order provided that the
second order be amended to include all mortgage payments made between the years
1989 and 1990, having the result that all such payments were deemed to be
periodic maintenance payments.
Finally,
on March 3, 1994, the British Columbia Supreme Court issued a further order
("the fourth order") which provided that the first order:
is hereby amended . . . to read
as follows:
THIS COURT FURTHER ORDERS that the
Defendant [the taxpayer] do pay interim spousal maintenance for the support of
the Plaintiff in the form of monthly mortgage payments on the matrimonial home
commencing with a payment for the month of November, 1989, and such payments
are to be deemed periodic maintenance payments pursuant to the Income Tax Act
. . . s.60.1(2) and 56.1(2) and amending acts thereto.
DECISION OF THE COURT BELOW
The
Tax Court was asked to consider: (1) whether the mortgage payments made by the
taxpayer on his spouse's behalf should have been deductible; and (2) whether
the arrears paid by the taxpayer in a lump sum should be considered to be
regular maintenance.
On
the issue of whether the mortgage payments made in 1990 and 1991 were
deductible, the Tax Court Judge found in favour of the taxpayer. In reaching
this conclusion, the Court stated that in his view, the Income Tax Act
provisions relating to the taxation of support payments were
"ambiguous." Faced with this ambiguity, the Court looked to the
underlying purpose of the legislation as an aid in interpreting the relevant
provisions. The Court concluded that as the underlying purpose of the provisions
was to mitigate the increased financial burden that arises when one household
ceases and two begin, the payments could properly be characterized as an
allowance.
The
Tax Court Judge went on to note that subsection 56(12) indicates that
"allowance" does not include any amount received by a person unless
that person has discretion as to the use of the amount. The amount paid in
this case was deemed to be received by the recipient spouse as a support
payment under the terms of the second and third orders. The Tax Court Judge
relied on the fact that subsection 56.1(2) does not specifically state that it
applies to amounts deemed to be received by a person. The Tax Court
Judge went on to state:
In my view, the only logical
interpretation of s.56.1(2) when dealing with third party payments contemplated
in s.60.1 is that the payments contemplated in s.56(12) are those actually
received by a spouse but earmarked for payment to third parties and not those
paid, with the consent of the spouse, to a mortgage creditor on the matrimonial
home occupied by her.
In
any event, the Tax Court Judge went on to conclude that the recipient spouse
had discretion at the time the taxpayer and recipient spouse entered into the
support agreement. The Tax Court Judge was of the view that this discretion
was sufficient to characterize the support payment as
"discretionary," thus bringing the payments within the deduction
framework laid out in subsection 60.1(1) of the Act. The Minister of
National Revenue seeks judicial review of this conclusion.
With
respect to the lump sum payment of arrears, the Tax Court found that the
payment was capital in nature and thus not deductible. The taxpayer has
argued before the Court that this Court should review this part of the
decision, while upholding that portion which the Crown disputes.
ANALYSIS
1. The legislative scheme
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.
Upon
reading subsections 60.1(1) and 60.1(2), one is compelled to agree with the Tax
Court Judge's observation that these provisions are ambiguous. The provisions
are replete with references to other sections, reference to undefined terms,
and are qualified by many circuitous subclauses. Indeed, subsection 60.1(2) is
so unwieldy that its 1994 incarnation prompted one author to state:
"The governing provision,
subsection 60.1(2), is the quintessence of Canadian tax legislation:
Long-winded ... , replete with double negatives, layered with qualifying
clauses designed to block every avenue of fiscal escape, and crafted so that a
minimum number of people can understand it in either official language."
(Krishna on Income Tax, 5th ed, 1995 at page 552)
While
this is strong language, it is not entirely inappropriate.
Subsection
60.1(2) goes on to allow for deductibility of certain amounts where the court
order or support agreement makes specific mention of subsections 56.1(2) and
60.1(2). The one clear thread from all of this seems to be that to ensure
deductibility of support payments, the order or agreement should mention
subsections 56.1(2) and 60.1(2).
2. Deductibility of the mortgage payments made in 1990 and 1991
In
the case at bar, the British Columbia Supreme Court made a support order which
directed the payor spouse to make his support payments in the form of mortgage
payments for the home in which the recipient spouse was living with the
children of the marriage. However, the fourth order was the only order in which
subsections 60.1(2) and 56.1(2) of the Income Tax Act were mentioned.
The
Crown contends that since the support payments were made directly to a third
party pursuant to the first order, and the first order did not specifically
mention the subsections 56.1(2) and 60.1(2), the resulting payments cannot be
said to have been at the discretion of the recipient. In this situation, it
is argued, the mortgage payments cannot qualify as an allowance.
In
response, the taxpayer contends that the fourth court order was intended to
apply retroactively. Under the fourth order, subsections 60.1(2) and 56.1(2)
were specifically invoked, so the payments made under the Court order are
properly deemed to be allowance payments.
As
can be seen, much turns on whether the fourth order of the British Columbia
Supreme Court was intended to apply retroactively. The question for this
Court, then, is whether the fourth order ought to be deemed to have been made
nunc pro tunc.
It
is the usual rule that an order of a court is effective from the date on which
it is made unless it provides otherwise. Thus, where a court does not
explicitly state that it intends for its order to apply retroactively, it will
be assumed that the order does not so apply. In this case, the British
Columbia Supreme Court did not explicitly state that the fourth order was to
apply retroactively.
This
cannot, however, be the end of the analysis. While one must assume that a
court order is effective from the date on which it is entered, it is equally
reasonable to assume that when courts make orders, those orders are intended to
be of some force or effect at the time they are made. In the case at bar, the
fourth order specifically contemplates the nature of mortgage payments made
since 1989 by the taxpayer. At the time the fourth order was made in 1993,
though, the matrimonial home had been sold and no more mortgage payments would
be made by the taxpayer. It is clear on these facts that if the fourth order
were not intended to be of retroactive effect, it would be moot. This is at
least an indicator of retroactivity, and may even defeat the presumption
against retroactivity.
In
my view, it would be perverse to interpret a court's ruling in such a way as to
render it moot from its inception. In the case at bar, if the fourth order is
not interpreted retroactively, it is of no force or effect from the day it was
entered. In such a situation, I can see no other reasonable interpretation than
to assume that the British Columbia Supreme Court intended the fourth order to
have been made nunc pro tunc.
Once
the fourth order is deemed to have been made nunc pro tunc, all of the
mortgage payments made pursuant to the first, second, or third orders are all
deemed to be allowances under subsection 60.1(2) of the Income Tax Act.
In this respect, the disposition of the case by the Tax Court Judge is correct:
the mortgage payments made pursuant to the Court order, as amended are
deductible by the taxpayer.
3. Deductibility of lump sum arrears
The
taxpayer has argued that the Tax Court Judge erred in concluding that the lump
sum payments were properly characterized as capital in nature and were thus not
deductible. It is my view that it is inappropriate to comment on this issue,
as this issue is not properly before this court.
The
application for judicial review of the Tax Court's decision was brought by the
Minister of National Revenue. While the review is of the decision, the grounds
for review are those set out in the Minister's application. In this case, the
application for review was only with respect to the deductibility of the
mortgage payments.
Had
the taxpayer wished to dispute the Tax Court Judge's decision on the lump sum
payment issue, it was entirely open to him to have brought his own application
for judicial review. Under Rule 1620 of the Federal Court Rules, a motion
could have been brought to have the two applications for judicial review heard
together. I agree with the submissions of the Minister Representative that
this rule at least implies that there is an obligation on the respondent in an
application for judicial review to bring his own application for judicial
review where the respondent wishes to review the decision on different grounds
than those proposed by the applicant.
Consequently,
I make no comment on the merits of the taxpayer's submissions with respect to
the taxation of the lump sum payments. Had the taxpayer wished this to be a
subject of judicial review, it was incumbent upon him to bring his own
application for judicial review.
CONCLUSION
For
the foregoing reasons, I am of the view that the application for judicial
review should be dismissed.
"F.J. McDonald"
J.A.
"I agree
B.L.S."
"I agree
M.R.M."
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