Carmine Pallotto v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 3024

Bowman, T.C.C.J.:—This appeal involves a claim by Mr. Pallotto to deduct in computing his income for 1991 support payments of $3,600 made by him to his estranged wife for the support of his two children.

At the conclusion of argument I informed the appellant that rather than delivering judgment from the bench I would provide brief written reasons. To give effect to an alternative argument advanced by the respondent would adversely affect the appellant's claim for a similar deduction in 1992, a year that is not before the court. It is possible that the appellant, in consultation with his solicitors, might be able to take some corrective action for 1992.

Mr. Pallotto and his wife separated in June of 1991. They had two children. In August, Mr. Pallotto retained a lawyer to represent him.

During the protracted negotiations leading up to the signing of the minutes of settlement in February of 1993 and the order of the Supreme Court of British Columbia, Mr. Pallotto paid to his wife $600 per month, commencing in July, 1991, for the maintenance of their two children. There were substantial delays in settling the numerous matters outstanding between the husband and wife but finally on February 14, 1993 minutes of settlement were entered into and on February 16, 1993 the Supreme Court of British Columbia ordered that Carmine Pallotto and Janet Pallotto be divorced and ordered further that:

(d) The respondent shall take into her income for income tax purposes, the child maintenance payments in the sum of $600 per month made by the petitioner between July 1, 1991 and February 1, 1993, inclusive, and the petitioner shall be entitled to the corresponding deduction on his income tax returns, with the parties refilling their 1991 income tax returns accordingly.

This wording was identical to the wording in the minutes of settlement.

On April 12, 1993, Mrs. Janet Pallotto wrote two letters to the Department of National Revenue, as follows:

Please be advised that from July, 1991 to December 1991, I received from Mr. Carmine Pallotto, $3,600 for child maintenance I have added this amount to my 1997 tax return.

It was not originally added to the 1991 tax return because I was advised by your office that due to the fact that there was no signed agreement, I did not have to include this payment.

On February 16, 1993, the court order was signed and I have now amended my 1991 tax return.

Trusting this to be in order.

And

Please be advised that from January 1992 to December 1992, I received from Mr. Carmine Pallotto, $7,200 for child maintenance.

Patently, the parties acted in good faith in seeking to obtain a deduction of the amounts paid by Mr. Pallotto and a corresponding inclusion in Mrs. Pallotto's income.

Paragraph 60(b) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") reads as follows:

(b) 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.

By itself this paragraph provides no relief to the taxpayer who makes maintenance payments to his or her spouse prior to the entering into of a written agreement or the making of a court order since the payments are not made pursuant to the court order or the written agreement. Therefore, subsection 60.1(3) was added in 1984. It is a remedial section and it reads as follows:

(3) For the purposes of this section and section 60, where a decree, order or judgment of a competent tribunal or a written agreement made at any time ina taxation year provides that an amount paid before that time and in the year or the immediately preceding taxation year is to be considered as having been paid and received pursuant thereto, the following rules apply:

(a) the amount shall be deemed to have been paid pursuant thereto; and

(b) the person who made the payment shall be deemed to have been separated pursuant to a divorce, judicial separation or written separation agreement from his spouse or former spouse at the time the payment was made and throughout the remainder of the year.

Counsel for the respondent advanced two bases upon which the claim to deduct the payments made in 1991 should be denied:

(a) even if subsection 60.1(3) otherwise applied the amounts paid in 1991 were not made "in the year" in which the order was made by the Supreme Court of British Columbia "or the immediately preceding year”. I agree. An agreement or order made in 1993 could, for the purposes of subsection 60.1(3), have retroactive effect only back to the commencement of 1992.

This would be sufficient to dispose of the appeal for 1991. However counsel for the respondent has very fairly raised a second issue that could affect Mr. Pallotto’s claim for 1992 as well as 1991.

(b) Ms. Glover contends that quite apart from the matter of timing the order of the Supreme Court of British Columbia does not meet the requirements of subsection 60.1(3). While the high court of a province may purport to order parties to file their income tax returns in a particular way it is clearly beyond such a court's jurisdiction to state what entitlement to a deduction a taxpayer has under the Income Tax Act. In this case the British Columbia court has ordered Mrs. Pallotto to include the maintenance payments in her income and has provided further that Mr. Pallotto is entitled to a corresponding deduction in computing his income. Such a provision cannot bind the Minister of National Revenue or this court.

I do not think that the clause in the court order has the effect contemplated by subsection 60.1(3). It purports to grant Mr. Pallotto certain rights to a deduction under the Income Tax Act. Where an order or a written agreement seeks to make subsection 60.1(3) applicable, it should specify the amounts paid in the taxation year or an immediately preceding taxation year and it should provide that such amounts are to be considered as having been paid and received pursuant to the order or written agreement (Stewart v. M.N.R., [1990] 1 C.T.C. 2231, 90 D.T.C. 1110 (T.C.C.) at page 2235 (D.T.C. 1113); Aceti v. M.N.R., [1992] 2 C.T.C. 2282, 92 D.T.C. 1893 (T.C.C.) at pages 2285-86 (D.T.C. 1896)). The wording should follow as closely as possible that of subsection 60.1(3).

This is an unfortunate result. The parties relied upon their respective counsel and acted upon what they thought was a court order that would have the desired retroactive effect. The order was however not effective for the purposes of subsection 60.1(3) and it did not accomplish the result that the parties believed they were accomplishing.

I can do nothing for the appellant in respect of 1991.1992 is not before me but possibly before the end of 1993 the appellant can obtain an order that will be effective to invoke subsection 60.1(3) for 1992.

The appeal from the assessment for 1991 is dismissed.

Appeal dismissed.