Robert Monette v. Minister of National Revenue and Francine Monette, [1992] 1 CTC 2341, 92 DTC 1622

Garon, T.C.C.J.:—This is an appeal from an income tax assessment made on May 23, 1988 for the 1986 taxation year. According to the amended reply to the notice of appeal, the Minister of National Revenue disallowed a deduction in the amount of $11,921. However, at the hearing of this appeal, counsel for the appellant and the respondent admitted that the amount of the deduction in issue was in fact $8,231.45.

It should also be noted that by an order dated March 19, 1991, issued under section 174 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), Judge Guy Tremblay of this Court ordered that Ms. Francine Monette be joined to this appeal.

The facts are not contested. The appellant and Ms. Francine Monette have been physically separated since May 30, 1982. On June 4,1982 the appellant and Ms. Monette entered into a written agreement, the “1982 agreement", providing for alimony of $2,300 per month on the following terms:

[Translation]

Montreal, June 4, 1982

Whereas the undersigned have been physically separated since May 30, 1982, we have agreed as follows:

—the mother shall have custody of the children, who shall continue to reside at 2 des Érables, Sainte-Julie;

—in order to provide for the maintenance of the mother and children, the father agrees to pay alimony of $2,300 per month, to cover, among other things, taxes and mortgage on the house, car and house insurance, electricity, heat- ing, telephone, food, college, tennis, vacation and other day-to-day expenses such as clothing, entertainment and upkeep.

It is agreed that the undersigned reserve the right to modify these arrangements in accordance with the needs and means of the parties and the welfare of the children.

In addition to the alimony payments pursuant to the terms of the 1982 agreement, the appellant also made payments to Ms. Monette of approximately $3,500 in 1983, $12,000 in 1984 and $14,000 in 1985, calculated on the basis of the income tax payable by Ms. Monette for the year preceding each of these payments. At least one of these payments, the $14,000, represented all of the income tax payable by Ms. Monette on ail of her income, and the appellant was reimbursed for the portion of the income tax which did not relate to the alimony payments he had made for the year in question. The evidence, which was relatively vague on this point, indicated that certain payments made in this way during 1983, 1984 and 1985, relating to the income tax payable by Ms. Monette for the preceding year may have been made directly to the income tax authorities concerned, while one or two of these payments were made to Ms. Monette herself so that she could pay the income tax relating to the alimony received. However, the evidence is unequivocal as to the fact that these payments, which the appellant made to Ms. Monette in 1983, 1984 and 1985, with partial reimbursements by Ms. Monette, where necessary, represented the portion of the income tax relating to the alimony she received from the appellant during the preceding year.

With respect to the payments by the appellant for Ms. Monette's benefit relating to income tax during 1983, 1984 and 1985, I am of the opinion that they were made without him having any legal obligation to do so. There was no provision in the agreement of June 4, 1982 with respect to these payments and no evidence was given as to the existence of a parallel agreement, whether oral or written.

On December 30, 1985 the appellant and Ms. Monette put their signatures to another agreement amending the terms of the appellant's obligation to pay alimony. This agreement read as follows:

[Translation)

Montreal, December 30, 1985

In accordance with the agreement of June 1982, R. Monette shall pay the sum of $3,585, from now on, including all taxes, to F. Monette each month.

R. Monette shall pay to F. Monette the portion of 1985 federal/provincial taxes relating to the alimony paid in 1985. Such payment shall be made in April 1986, with subsequent adjustments, if necessary, upon such adjustments being established.

In satisfaction of the obligation set out in the second paragraph of the agreement of December 30, 1985, the "1985 agreement", the appellant paid the following amounts on the dates shown below:

In reality, the $11,851.69 must be reduced to $8,231.45, the amount in dispute—so as to take into account the reimbursement to the appellant by Ms. Monette of the sum representing the difference between these two amounts. It is not disputed that in assessing the appellant the respondent allowed him a deduction for alimony payments in the 1986 taxation year of $43,020, representing the total of the monthly payments of $3,585 as provided in the first paragraph of the 1985 agreement.

The parties also admit that Ms. Monette did not include in computing her income for the 1986 taxation year the sum of $8,231.45 which was disallowed as a deduction to the appellant.

Counsel for the respondent and for Ms. Monette argued that two of the conditions required in order for paragraph 60(b) to apply have not been satisfied in the present case.

Paragraph 60(b) provides as follows:

There may be deducted in computing a taxpayer's income for a taxation year such of the following amounts as are applicable:

(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.

Counsel for the respondent and counsel for Ms. Monette argued that this paragraph requires that, to be entitled to a deduction, the amount of the alimony which is payable must be precisely determined in the written separation agreement. The second condition set out in paragraph 60(b) which was not fulfilled, again in the submission of counsel, deals with the fact that the payment set out in the second paragraph of the 1985 agreement was not periodic in nature.

I am going to undertake first to examine the condition relating to the requirement that the amount of the alimony payments to be made must be precisely determined.

In support of this requirement, counsel for the respondent relied on the decision of the Supreme Court of Canada in Jean-Paul Gagnon v. Her Majesty the Queen, [1986] 1 S.C.R. 264 [1986] 1 C.T.C. 410, 86 D.T.C. 6179. One must recall that in that last case the issue dealt with the concept of the term “allowance” referred to in this paragraph. It will be recalled that the Supreme Court of Canada then discussed the scope of the third condition contained in the definition of an allowance in the context of paragraph 60(b), according to which, in order for a sum to qualify as an allowance within the meaning of this paragraph, it must be at the complete disposition of the recipient. In that case, the Court decided that it was sufficient, to fulfil this condition, that the recipient be able to dispose of it entirely to her benefit, regardless of any restrictions imposed as to how she should dispose of and benefit from it. It will be recalled that in that case the taxpayer wished to deduct $360 which he had paid each month as reimbursement for municipal and school taxes, interest and principal on two mortgages relating in each case to the building where the recipient of the allowance lived.

In support of his submission that the allowance must be a precise, predetermined amount, counsel for the respondent referred to the following passage of the judgment in Gagnon, at page 272 (C.T.C. 415):

According to the definition in Pascoe, for a sum of money to be regarded as an “allowance” it must meet three conditions: (1) the amount must be limited and predetermined; (2) the amount must be paid to enable the recipient to discharge a certain type of expense; (3) the amount must be at the complete disposition of the recipient, who is not required to account for it to anyone.

The first two conditions may be understood by inference from paragraph 60(b) of the Income Tax Act. The amount must be limited and predetermined in accordance with the judgment, order or written agreement setting it. It must be paid to enable the recipient to discharge a certain type of expense, namely an expense incurred for the maintenance of the recipient.

On this point, it is also advisable to note what was said in the same judgment at page 269 (C.T.C. 413), when Beetz, J. commented on certain passages of the judgment of the trial judge, Walsh, J.:

Walsh J distinguished the circumstances of the case at bar from those of Pascoe and concluded that the amounts involved here were predetermined and at the complete disposition of the recipient, without the latter having to account for them to anyone.

On the first point, which is not in dispute, he properly held that the fact that these amounts were subject to slight variations did not mean that they were not predetermined. At page 256 [C.T.C. 328], he wrote:

Certainly in the present case it was intended that the payments were to be used by the former wife to make the monthly payments on the two mortgages and to pay the school and municipal taxes. The fact that they were subject to some slight variations foreseen by the judgment due to variable tax rates does not in my view prevent them from being considered as predetermined sums of money within the meaning of the Pascoe case.

In my view, paragraph 60(b) does not require that the amount of the allowance be predetermined with mathematical precision. It is enough if the amount of the allowance is determinable. The terminology used or the formula applied must be sufficiently precise to permit the parties, and ultimately the courts, to determine the precise size, in monetary terms, of the obligation imposed by the courts or, in the case of a written agreement, contacted by one of the parties. I see nothing in paragraph 60(b) which requires that the amount of the alimony be rigorously defined. On this point, I believe that it is sufficient if the quantity of the obligation can be ascertained. However, the obligation to make payments must be valid in law. It must comply with article 1060 of the Civil Code relating to the object of obligations. This article provides:

An obligation must have for its object something determinate at least as to its kind.

The quantity of the thing may be uncertain, provided it be capable of being ascertained.

In the volume written by Baudoin-Renaud, the annotated Civil Code, the following comments appear in the margin of article 1060 of the Code:

[Translation]

It is not necessary that the price be fixed in order for an obligation to be valid; it is sufficient if it is capable of being ascertained.

I refer again to Gagnon. The passage cited above from the judgment relied on in this case by counsel for the respondent, which appears to require that the amount be limited and predetermined, must be read with the other passage reproduced earlier, in which Beetz, J. stated, inter alia, referring to the comments of the trial judge, that he "properly held that the fact that these amounts were subject to slight variations did not mean that they were not predetermined" (emphasis added). These comments of Beetz, J. narrow the scope of the passage on which counsel for the respondent relied. Moreover, it must not be forgotten that these two passages are obiter dicta given that the issue did not relate to this aspect of the definition of an allowance.

It therefore seems that the judgment in the Gagnon case does not support the proposition that amounts payable as an allowance must be rigorously predetermined, to the extent submitted by counsel for the respondent.

I would add as well that the interpretation advanced by counsel for the respondent does not seem to me to take into account the provisions of subsections 56.1(2) and 60.1(2). These paragraphs deal with, inter alia, principal and interest payments on mortgages on the building where the recipient of the allowances in question resides, municipal and school taxes, medical expenses and educational expenses. All such expenditures, subject to certain restrictions, may be paid to third parties, for the benefit of the other spouse or former spouse or of children in that person's custody. Such payments are not known in advance with mathematical precision, but they are easily determin able during the year in question or shortly thereafter. For example, monthly mortgage payments may fluctuate over a year as a result of refinancing the mortgage or simply a fluctuation in the rate of interest in applying a clause in the contract creating the mortgage and the manner in which the mortgage debt will be paid. In the case of indexed payments, the rates of indexation are not known in advance. Municipal and school taxes may also be increased during a given year or even be subject to challenge in the courts.

If these payments to third parties of amounts which cannot be predetermined, for example, at the time a written agreement is reached on this point, may be deducted under subsections 56.1(2) and 60.1(2) in the framework of the system of including and deducting alimony payments, it would seem to be repugnant to the scheme of the Income Tax Act in this area if payments made directly to the recipients of the alimony or allowance could not be deducted in computing income solely because the payments in question were not precisely determined at the time when the written agreement was signed.

Counsel for Ms. Monette acknowledged that the amounts of the alimony or allowances may be deducted under section 60, even if they are subject to certain fluctuations, as was the case in the Gagnon case, cited above, but she argued that a base amount must be specified. This submission creates an element of artificiality and, in my view, is not supported by any decision of the courts.

It seems to me to be more coherent and reasonable to require, in terms of precision, that the alimony and allowance be determinable. I do not see, for example, why a distinction should be made, solely in respect of the degree of precision to be required, between municipal and school taxes, on the one hand, and income tax, on the other.

The foregoing observations are not inconsistent with Rice v. M.N.R., [1976] C.T.C. 2001, 76 D.T.C. 1017, and Snowden v. M.N.R., [1985] 2 C.T.C. 2043, 85

D. T.C. 422.

I therefore conclude that a taxpayer may deduct an amount paid during the year in the circumstances set out in paragraph 60(b) even if the amount in question was not predetermined in the judgment or written agreement, as the case may be, provided that such amount may be determined subsequently or, in other words, is determinable.

In the case at bar, there is no doubt that the amount of income tax relating to the alimony paid by the appellant to Ms. Monette during the year 1985 can normally be determined during the year 1986, in accordance with the income tax return filed by Ms. Monette for the year 1985 and the respondent's assessment for the same year, which should normally be established during the year 1986. The portion of the income tax payable in 1986 relating to the alimony paid to Ms. Monette during the 1985 taxation year, in relation to her income from other sources, may easily be calculated.

I therefore reject this first argument presented by counsel for the respondent and for Ms. Monette.

I must now consider the condition relating to the periodic nature of the allowance payable under the second paragraph of the 1985 agreement.

Counsel for the respondent and for Ms. Monette submitted that the allowance in question in the second paragraph of the 1985 agreement cannot be termed periodic, since the agreement provides for only one payment to be made. Counsel for the appellant, on the other hand, was of the view that this paragraph must be read with the first paragraph, which provides for a monthly payment of $3,585, including all taxes. He also added that the fact that the appellant had, during the years 1983, 1984 and 1985, made payments to Ms. Monette so that she could pay the income tax payable by her in respect of the alimony payments received from the appellant for the preceding year, had to be taken into account. These payments for income tax had, however, been made without there being any legal obligation on the part of the appellant, as I noted earlier. Counsel for the appellant added that the allowance payable in April 1986, in accordance with the 1985 agreement, had to be considered as being an interim measure because they were moving from the system in effect in 1982, 1983, 1984 and 1985 to the method of paying alimony provided in the first paragraph of the 1985 agreement.

I tend to believe that the allowance payable by the appellant in April 1986 to Ms. Monette, as stipulated in the second paragraph of the 1985 agreement, must be related to the alimony payments of $3,585 which had to be paid monthly starting on December 30, 1985, to the monthly payments of alimony which were paid under the agreement of June 4,1982 and to the voluntary payments made each year by the appellant of an amount representing the income tax payable by Ms. Monette in respect of the alimony received in the preceding year.

The allowance payable by the appellant to Ms. Monette in April 1986 seems to me to be of the same nature as the monthly allowances made under the first paragraph of the 1985 agreement. While the allowance payable in April 1986 was calculated exclusively on the basis of the income tax payable by the recipient for the year 1985, nonetheless the purpose of all these allowances, both the monthly allowances provided in the first paragraph of the agreement and the allowance in question in the second paragraph, is to provide for the needs of the appellant and the children. In my view, this point is essential to qualify and determine the nature of such a payment. In other words, the purpose is identical in both categories of allowances. The fact that the purpose is identical in these two categories of allowances is of greater importance than the method of calculating particular to each category. Thus the 1985 agreement provided for thirteen payments in the terms applicable to 1986, that is, 12 payments of $3,585 each, and a larger thirteenth payment payable in April 1986 calculated according to the second paragraph of this agreement.

Moreover, by the terms of the 1985 agreement this payment to be made in April 1986 is unequivocally connected to the monthly payments provided in the first paragraph of the agreement, in that the monthly payments in question had to include income tax payable by Ms. Monette for the year 1986 and the following years. This is how, in his testimony, the appellant explained the expression "all taxes included”, which appears in the first paragraph of the 1985 agreement. It may be inferred from the evidence that the parties intended to use this agreement to integrate the income tax payments into the monthly alimony payments to be made by the appellant. It is also clear from the circumstances of this case that the 1985 agreement was intended to correct a defect in the 1982 agreement. Thus the allowance payable in April 1986 was to be the final payment to Ms. Monette which was to be calculated exclusively on the basis of the portion of income tax attributable to the alimony payments received during the preceding year. That is to say that, in 1987, for example, the appellant would have only 12 alimony payments to make, instead of 13. Thus there was a change in the method of paying the alimony, from 13 payments to 12 payments. The evidence indicated that the allowance payable in April 1986 with respect to income tax payable by Ms. Monette for the year 1985 was to continue in another form for the years subsequent to 1985 and be incorporated into each monthly payment made after the 1985 agreement was signed. The appellants obligation with respect to the income tax payable by Ms. Monette relating to the alimony received ceased to be expressed in the form of a single annual payment to rather become a monthly obligation.

From the preceding observations, I conclude that the allowance payable in April 1986 under the second paragraph of the 1985 agreement participates in the element of periodicity attaching to the monthly payments to be made under the first paragraph of that agreement. This interpretation of the contract takes into account the provisions of Article 1018 of the Civil Code, which states: “All the clauses of a contract are interpreted the one by the other, giving to each the meaning derived from the entire act".

The element of periodicity attaching to the allowance payable in April 1986 may also be seen from another point of view. In fact, the allowance payable in April 1986 was in addition to the payments made for the same reason for the three preceding years. It is true that there was no legal obligation on the part of the appellant to make the payments made in 1983, 1984 and 1985, but the purpose achieved by these payments and the time periods when they were made makes them obviously similar to the allowance payable in April 1986. In concrete terms, the allowance payable in April 1986 was a de facto continuation of the method of paying alimony adopted by the appellant in the preceding years. Actually, the allowance paid during 1986 was the last of four annual payments made by the appellant which were established on the sole basis of the income tax attributable to the alimony payments received by Ms. Monette during 1982, 1983, 1984 and 1985.

I believe that I am to some extent supported in considering the periodic nature of the allowance payable in April 1986 in this manner by certain considerations put forward by the Federal Court of Appeal in The Queen v. McKimmon, [1990] 1 C.T.C. 109, and Michel Larivière v. The Queen, [1989] 1 C.T.C. 297, 89 D.T.C. 5176.

The decision of the Federal Court of Appeal in McKimmon is of some interest, although the issue in that case was not the same as the one that concerns us at present. In that case, the question considered by the Federal Court of Appeal was whether certain periodic payments amounted to allowances for maintenance or whether, on the contrary, the payments were made on account of a payment of capital or in a lump sum payment. Periodicity was assumed in McKimmon, while in this case it is not contested that the amount payable in April 1986 was a payment of an allowance for maintenance, although at one point counsel for Ms. Monette argued that the allowance payable in April 1986 was a payment of capital. Certain comments in that decision dealing with periodicity appeared to me to be useful in examining this case, even though, as I noted earlier, the issues were not the same. The following comments were made in that decision, inter alia, at page 112:

The length of the periods at which the payments are made. Amounts which are paid weekly or monthly are fairly easily characterized as allowances for maintenance. Where the payments are at longer intervals, the matter becomes less clear. While it is not impossible, it would appear to me to be difficult to envisage payments made at intervals of greater than one year as being allowances for maintenance.

I have also taken into account certain observations made by the Federal Court of Appeal in Larivière which shed valuable light on some aspects of this case. I refer in particular to the following comments by Mr. Justice Pratte at page 299:

As regards the statement that a judgment does not create an obligation to pay an allowance on a periodic basis if it does not require the payer to pay the same sum of money at regular intervals, I now feel this is incorrect. I now believe that an allowance payable on a periodic basis can be a variable amount.

The decision in William Keith Hanlin v. The Queen, [1985] 1 C.T.C. 54, 85 D.T.C. 5052, presents certain facts which are similar to those in the present case. In that case, the taxpayer undertook to pay to his ex-spouse, in addition to monthly alimony of $1,000 starting on February 1, 1980, the following

amounts: $18,000 in 1979, $19,000 in 1980 and $17,000 in 1981. The dispute concerned the deductibility of these three amounts. Dubé, J. of the Federal Court-Trial Division, concluded as follows at page 59:

I find in the case at bar that all the payments, including the three larger ones, belong to a series of payments payable on a periodic basis, that those payments being of the nature of alimony or maintenance were for the maintenance of the taxpayer's wife while she was living apart pursuant to an agreement and a decree. No evidence was adduced by the Crown to show that the three larger payments were not maintenance payments as provided by the agreement and the decree.

We might believe, from the reasons for this decision, that the learned judge would have come to the same conclusion even if the agreement had provided for only one of the three payments in question.

The decisions of the Tax Appeal Board and the Income Tax Appeal Board, depending on the case, in Leonard W. Wilton v. M.N.R., 87 D.T.C. 710, James Robert Stafford v. M.N.R., [1971] Tax A.B.C. 322, 71 D.T.C. 247, Richard W. McWhirter v. M.N.R., [1968] Tax A.B.C. 225, 68 D.T.C. 197, and No. 335 v. M.N.R., [1956] 14 Tax A.B.C. 449, 56 D.T.C. 175, on which Ms. Monette relied, did not appear to me to be useful in light of the more recent case law which is, as we know, abundant.

On the case as a whole, I therefore find that the amount payable in April 1986 in accordance with the second paragraph of the agreement of December 30, 1985 was sufficiently specified in the agreement and amounted to an allowance payable on a periodic basis within the meaning of paragraph 60(b) of the Income Tax Act.

For these reasons, the appeal is allowed with costs against the respondent and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the allowance payable by the appellant in April 1986 in the amount of $8,231.45 was deductible in computing the appellant's income for the year 1986.

DECISION:

The question set out in the respondent's request dated December 7, 1990, under section 174 of the Income Tax Act, was formulated as follows:

[Translation]

The common question in respect of which the respondent requests a determination by this Honourable Court is as follows, namely:

(a) whether or not the appellant was entitled to deduct from his income for the 1986 taxation year the amount of $11,921 as alimony, representing the income tax paid on the alimony he paid to the third party in 1985, under sections 60 and 60.1 of the Income Tax Act, and consequently,

(b) whether or not the third party Francine Monette must include in computing her income for the 1986 taxation year the amount of $11,921 as alimony, representing the income tax paid on the alimony which the appellant paid to her in 1985, the whole under sections 56 and 56.1.

For the reasons set out in the foregoing reasons for judgment, I hold that Ms. Monette must include in computing her income for the year 1986 the sum of $8,231.45 received from the appellant as alimony during that same year, in accordance with section 56 of the Income Tax Act.

Appeal allowed.