Pierrette Fontaine v. Her Majesty the Queen, [1994] 1 CTC 2297, 94 DTC 1173

Tremblay, J.T.C.C.:—This appeal was heard on June 15, 1993, in Montréal, Quebec.

1. Point at issue

The point at issue is whether the appellant was entitled, in computing her income for the 1989 taxation year, to include only the sum of $7,816.26, not the total of $16,265 received as alimony under a Quebec Superior Court judgment permitting her to live in the matrimonial home.

According to the appellant, this judgment also provided that she would pay the mortgage, tax and heating costs and all expenses related to her home. However, these expenses totalling $8,438.74 were not, according to her, fully at her disposal [sic] and should not therefore be considered as a taxable allowance.

Furthermore, according to the appellant, by paying these various expenses herself, she had to pay an “allowance” within the meaning of paragraph 60(b) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

According to the respondent, the entire amount of $16,265 constitutes an allowance and therefore a taxable income. The respondent relied on subsection 56(12) of the Act.

2. Burden of proof

In cases where the facts are disputed, the burden of proof is on the appellant taxpayer concerning the facts.

The facts were not disputed in the instant case.

3. Facts

3.01 The relevant facts are described at subparagraphs (a), (b) and (c) of paragraph 7 of the respondent's reply to the notice of appeal and in paragraph 3 of the appellant’s notice of appeal.

7. In making the reassessment respecting the appellant’s 1989 taxation year, the Minister of National Revenue took tor granted inter alia the following facts:

(a) In a judgment on a motion for interim relief dated February 14, 1984, Mr. Justice Claude Benoît of the Quebec Superior Court approved certain clauses of a consent signed by the appellant and her husband, Mr. Alain Péloquin, on that same date; [admitted]

(b) The said judgment approved inter alia paragraph 2 of the said consent providing for the payment by Mr. Alain Péloquin of alimony of $255 per week for the appellant and the two children, the said alimony to be indexed each year on the anniversary date of the judgment, the whole pursuant to section 638 of the Civil Code; [admitted]

(c) Pursuant to this judgment, the appellant received alimony totalling $16,265 in 1989. . . . [admitted]

[Translation.]

Subparagraph (d) was obviously denied since it concerns the point at issue. It reads as follows:

(d) The whole amount received by the appellant as alimony in 1989, that is $16,265, constituted taxable income and should therefore have been included in the appellant’s income for that year. . . .

[Translation.]

3.02 Clauses 2 and 5 of the judgment here in question read as follows:

2. The respondent agrees to pay for the plaintiff and her two children alimony of $255 a week payable in advance on the fifteenth of each month at the plaintiff's home, the said alimony to be indexed each year on the anniversary date of the judgment, the whole pursuant to section 638 of the Civil Code;

5. The plaintiff will pay the mortgage, tax and heating costs and all expenses relating to her home as long as she shall live in the matrimonial home.

[Translation.]

4. Act—case law—analysis

4.01 Act

The provisions of the Income Tax Act to which the parties referred are paragraph 56(1)(b), subsection 56(12) and paragraph 60(b), which are cited below.

4.02 Case Law

The Court reviewed the following cases:

1. Gagnon v. The Queen, [1986] 1 S.C.R. 264, [1986] 1 C.T.C. 410, 86 D.T.C. 6179;

2. Byers v. M.N.R., [1985] 1 C.T.C. 2146, 85 D.T.C. 129 (T.C.C.);

3. Tremblay v. Canada, [1993] 2 C.T.C. 2184 (T.C.C.);

4, Assafv. Canada, January 29, 1992 (unreported) (T.C.C.);

5. Brooke v. M.N.R., [1980] C.T.C. 2857, 80 D.T.C. 1754 (T.R.B.).

4.03 Analysis

4.03.1 The appellant's two arguments were as follows.

1. The appellant did not have discretion as to the use of the money received as alimony. Clause 5 of the Quebec Superior Court judgment (3.02) is clear that the expenses related to the house lived in and belonging to her former husband would have to be paid by the appellant as long as she lived there.

2. The appellant’s second argument was that the expenses paid constituted a deductible allowance within the meaning of paragraph 60(b) of the Act.

4.03.2 With respect to the first argument, consideration must be given to paragraph 5 6(1 )(b) of the Act which reads as follows:

56. Amounts to be included in income for year.

(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(b) Alimony.—any amount received by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if the recipient was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, the spouse or former spouse required to make the payment at the time the payment was received and throughout the remainder of the year. . . .

4.03.2(1) The only condition of paragraph 56(1)(b) that could prevent this section from not [sic] applying concerns the question whether the total sum received by the appellant as alimony constituted an allowance under paragraph 56(1 )(b). The term "allowance" is defined at subsection 56(12). This subsection 56(12), recently studied in Tremblay, supra, rendered on September 29, 1992, was added by subsection 34(6) of chapter 55 of the Statutes of Canada 1988. Subsection 34(6) reads as follows:

34 (6) Section 56 of the said Act is further amended by adding thereto, immediately after subsection (11) thereof, the following subsection:

(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.

It is subsection 12 of the same section 34 of chapter 55 of the Statutes of Canada, 1988 which addresses the application of the aforementioned subsection 6. Subsection 34(12) provides as follows:

34 (12) Subsection (6) is applicable, with respect to decrees, orders, judgments and written agreements made or entered into before March 28, 1986 or after 1987, to the 1986 and subsequent taxation years, except that, for the 1986 and 1987 taxation years, subsection 56(12) of the said Act, as enacted by subsection (6), shall be read as follows:

56 (12) Subject to subsections 56.1(2) and 60.1(2), for the purposes of paragraphs (1)(b), (c) and (c.1), “allowance” does not include any amount that is received by a person referred to in those paragraphs as “the taxpayer" unless that person has discretion as to the use of the amount.

Since the judgment on a motion for interim relief ordering payment of alimony for the appellant's benefit is dated February 14, 1984, it follows that subsection 6 of the amending Act applies, given that the judgment falls within one of the two periods concerned in subsection 34(12) of chapter 55 of the Statutes of Canada, 1988 (one of the two periods contemplated by this last subsection having to be prior to March 28, 1986).

4.03.2(2) It is interesting on this point to examine paragraphs 6, 7 and 8 of the Interpretation Bulletin IT-118R3 entitled Alimony and Maintenance, dated December 21, 1990:

MEANING OF ALLOWANCE

6. For the purposes of paragraphs 60(b), (c) and (c.1). . . an allowance is a specified sum of money which has been established in advance of payment by the court or the parties as being the required payment to be made by the payer to a spouse, former spouse or former common-law partner for the maintenance of the recipient, or a child of the recipient or both. A key factor in determining whether a payment is an allowance is whether the recipient has discretion as to the use of the amount. . . .

Discretion as to the Use of the Amount

7. Prior to March 28, 1986—Prior to the Supreme Court of Canada decision in Gagnon, supra, payments made to a recipient for “earmarked expenses" (i.e., where the recipient has no discretion as to the use of the payments) were not considered to be allowances and thus were not deductible by the payer. . . . This is referred to as the pre-Gagnon definition of allowance.

March 28, 1986—December 31, 1987—The Gagnon decision had the effect of broadening the meaning of allowance to encompass amounts for particular items which the recipient could dispose of for his or her benefit, notwithstanding restrictions imposed as to the manner of disposing of them ("Gagnon definition of allowance"). For example, the Gagnon decision allowed amounts paid directly to the recipient for mortgage payments, property taxes, utilities, medical expenses, etc. to be deductible to the payer as an allowance that was otherwise deductible under paragraph 60(b), (c) or (c.1). The Gagnon definition of allowance applies to court orders or written agreements entered into or last amended after the time of this decision (March 27, 1986) and before 1988.

For 1988 and Subsequent Years—Subsection 56(12) specifically provides that for court orders or written agreements entered into after 1987 the pre-Gagnon definition of allowance will apply.

8. Subsection 56(12) provides special rules for the 1986 and 1987 taxation years to payments made pursuant to orders made before the Gagnon decision. For these payments, the Gagnon definition of allowance applies, entitling the payer to claim a deduction of the maintenance type payments discussed in 6 above under paragraph 60(b), (c) or (c.1). However, a corresponding amount is not required to be included in the income of the recipient under paragraph 56(1)(b), (c) or (c.1) for the 1986 and 1987 taxation years.

4.03.2(3) Judge Dussault has addressed subsection 56(12) in his volume, L'impôt sur le revenu au Canada (Editions Revue de droit, Université de Sherbrooke, 1990). I take the liberty of citing the following passage at page 5-65:

The sum received must constitute alimony or an allowance payable on a periodic basis and not a reimbursement of expenses. Subsection 56(12) recently passed establishes that an amount received by a person does not constitute an allowance for the purposes of the relevant paragraphs of sections 56 and 60 unless that person has discretion as to the use of that amount. This definition nullifies the effect of the Supreme Court of Canada judgment rendered on March 28, 1986 in Gagnon, supra, in which it was established that a sum constitutes an allowance provided the recipient can dispose of it completely for his or her benefit, notwithstanding restrictions imposed as to the manner of disposing of it and benefitting from it. Subsection 56(12) restores the concept of an allowance as defined by the Federal Court of Appeal in R. v. Pascoe, [1975] C.T.C. 656, 75 D.T.C. 5427.

The new definition of subsection 56(12) I.T.A. applies for the 1986 and subsequent taxation years in respect of decrees, orders and judgments rendered and written agreements entered into before March 28, 1986 or after 1987, except that, for 1986 and 1987, it applies only for the purposes of paragraphs 56(1 )(b), (c) and (c.1), that is solely for the purpose of computing the recipient's income.

[Translation.]

4.03.2(4) It is quite clear that the definition of the word "allowance" given by the Supreme Court of Canada in Gagnon [4.02(1)] cannot be referred to in the instant case. It is "the pre-Gagnon definition” that must be referred to, as indicated in paragraph 7 of Interpretation Bulletin IT-118R3 cited above.

Even if the adequate definition of the word "allowance" were applied, however, the appellant could not be given judgment on the ground that she did not have discretion as to the use of the sum received as alimony. The case law must be consulted on this point.

In Assaf [4.02(4)] delivered on January 29, 1992, it was found that a sum paid under an agreement "to defray part of the cost of the children's university education" did not constitute an allowance under subsection 56(12). Although the Court came to this conclusion, Judge Garon made the following remarks on the interpretation of this last subsection:

In interpreting subsection 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 subsection 56(12).

4.03.2(5) Lastly, let us emphasize Brooke [4.02(5)], in which the arguments of the alimony recipient, who was responsible for paying the expenses related to the matrimonial home, were similar to those of the appellant. In that case, the taxpayer had deducted half of the house maintenance costs from her income, and in the written separation agreement between the parties the following provision was made:

[T]he wife would be entitled to remain in sole occupancy of the former matrimonial home presently registered in the name of the husband alone so long as the wife was entitled to maintenance or until the youngest child attained the age of eighteen years whichever would occur first.

So long as the wife was in occupancy of the home, she would be entirely responsible for payments of mortgage, principal and interest, municipal realty taxes, and routine maintenance, but the husband would be responsible for any major repairs. . . .

The Court dismissed the taxpayer's appeal, finding that these were personal expenses and that no provision of the Act authorized such a deduction.

The same reasoning must be adopted in the instant case, which settles the matter of the appellant’s first argument.

4.03.3 In her second argument, the appellant contended that she was entitled to deduct from the total sum of $16,265 [included in income under paragraph 56(1 )(b)] the expenses related to her house because those expenses totalling $8,438.74 had to be considered as an “allowance” under paragraph 60(b) of the Act. It is difficult to accept this argument as well.

For an amount to be deductible under paragraph 60(b) of the Act, the said amount must, among other conditions, be payable pursuant to a judgment to the payer’s spouse or former spouse. This conclusion is inferred from the very text of paragraph 60(b), which read as follows for the 1989 taxation year:

(b) Alimony payments—an amount paid by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if he was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, his spouse or former spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year.

[Emphasis added.]

As it is clear that the payments provided under clause 5 of the separation judgment were not payable under the said judgment to the spouse or former spouse of the appellant, the latter may not deduct them under paragraph 60(b) of the Act.

Lastly, even if, by some legal reasoning, this expense [sic] had to be considered an “allowance”, it would also in turn have to be included in the income of the former spouse, the very one who paid the alimony.

It is hard to believe that this type of situation is among the objects sought by the Act's provisions governing alimony.

5. Conclusion

The appeal is dismissed for the above reasons.

Appeal dismissed.