Aaron Wasserman v. Minister of National Revenue, [1987] 1 CTC 2066, 87 DTC 22

Taylor, T.C.J.:—This is an appeal against income tax assessments for the years 1980 and 1981, heard in Montréal, Québec, on October 29, 1986, in which the Minister of National Revenue disallowed certain amounts claimed by the taxpayer as “‘alimony or maintenance payments”. There was very little dispute about the facts, and these are generally detailed in the reply to notice of appeal:

7. (a) At some time prior to the Appellant’s 1980 taxation year the Appellant's

former wife, Judith Parnis, commenced divorce proceedings against him;

(b) The Appellant and his former wife signed a Consent to Provisional Judgment dated April 28, 1980 which provided, inter alia/.

4. That the Respondent shall pay to the Petitioner for herself and the minor children a provisional alimentary allowance in the sum of $800.00 per month, payable in advance at her residence on the first day at each month;

5. That in addition, the Respondent shall pay for the costs incurred as of February 12th, 1980, with respect to the mortgage, electricity, heating and property insurance relating to the aforesaid common domicile located at 4610 Mariette Avenue, in the City and District of Montreal;

(c) The aforementioned agreement also provided that the provisional care and custody of the three children of the marriage shall be awarded to the Appellant's former wife;

(d) By Agreement to Postpone dated April 6, 1981, it was agreed by the Appellant and his former wife that the terms of the aforementioned Provisional Judgment shall continue during the six months period for which the Appellant’s former wife [sic] petition for divorce was postponed;

(e) In calculating his income for the 1980 taxation year, the Appellant claimed

a deduction of $13,516.19 as alimony payments broken down as follows:

$3,116.19	—	House payments paid to third parties
		(Clause 5)
$9,600.00	—	Alimony (Clause 4)
$ 800.00	—	Legal fees

(f) In calculating his income for the 1981 taxation year, the Appellant claimed

a deduction of $16,154.19 as alimony payments broken down as follows:

$4,864.19	—	House payments paid to third parties
		(Clause 5)
$9,400.00	—	Alimony (Clause 4)
$1,890.00	—	Legal fees

(g) Of the $9,400.00 claimed by the Appellant in his 1981 taxation year as an alimony payment provided for by Clause 4 of the Consent to Provinsional (sic) Judgment, a sum of $600.00 was paid by cheque dated December 31st, 1981 but with references to alimony due for the month of January 1982;

(h) The Appellant did not make any alimony payments with reference to his eldest son, Joseph, for the months of September, October, November and December of the 1981 taxation year;

(i) Only the amounts of $9,600.00 in 1980 and $8,800.00 in 1981, paid by the Appellant pursuant to Clause 4 of the Provisional Judgment of April 28, 1980 are amounts paid by the Appellant 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;

(j) Any house payments made to third parties pursuant to clause 5 of the Consent Judgment of April 28, 1980 or legal fees claimed by the Appellant in his 1980 and 1981 taxation years as alimony payments are not amounts paid by him 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;

(k) In calculating his tax for income [sic] the 1981 taxation year, the Appellant claimed an wholly dependent person exemption with respect to his son Joseph;

(l) During his 1981 taxation year, the Appellant made and claimed a deduction for alimony payments paid to his former wife with reference to his son Joseph for the months of January to August inclusive;

At the start of the hearing, counsel for the Minister conceded that amounts of $1,709.38 and $3,161.93, representing mortgage, electricity, heating and property insurance payments made to third parties should be allowed to the appellant for the years 1980 and 1981 respectively — such agreement arising out of the Supreme Court of Canada judgment in Jean- Paul Gagnon v. The Queen, [1986] 1 C.T.C. 410; 86 D.T.C. 6179. The differences of $1,407.81 and $1,702.20 between these amounts and the total third party payments disallowed (supra) represented payments made by the appellant for property taxes, and remained disallowed by the Minister. Counsel for the appellant stated that the appellant was no longer contesting the amount of $600 (reply to notice of appeal — item (g) above). That left in issue these amounts:

On agreement between counsel, the following documents were introduced:

We estimate that approximately 80% of this amount may be attributed to services rendered in establishing the alimentary allowance payable by yourself to Dame Judith Parnis. We suggest that approximately 80% of the amount of $1,000.00 represents deductible legal fees.

Exhibit A-2	— Letter from Mr. Wasserman’s legal firm
	stating that 1981 legal fees were
	$2,700.00 and it contained the following paragraph:

In our opinion 70% of this amount may be attributed to services rendered in establishing the alimentary allowance payable by yourself to DAME JUDITH PARNIS.

Exhibits A-1 and A-2 above were accepted for filing with the Court, on the proviso that a decision would be made before judgment as to their admissibility.

The testimony of Mr. Wasserman was to the effect that he had paid the disputed "property taxes"’ directly to the Municipality, separate from the payment of the "mortgage" requirements. He stated he had always understood that this was mandated as a result of Exhibit R-3 above, and he knew of no way to avoid payment of municipal taxes in any event. His son Joseph born in 1965, stayed with his mother for a while after the separation, but moved in with his father in August 1981 — hence in Mr. Wasserman's mind the claim for dependency. The legal fees had been paid to control or at least minimize his "alimony" obligations and he had no choice but to defend himself against the demands of his former spouse (the Petitioner in the “legal actions" taken).

On the matter of the "dependency" claim, counsel for the appellant relied upon the following two paragraphs from the Consent to Provisional Judgment Exhibit R-3 above:

(2) THAT the Petitioner and the minor children shall reside in the common domicile located at 4610 Mariette Avenue, in the City and District of Montreal, to the complete exclusion of the Respondent herein and further, the minor children shall all live together and not be parted from each other;

(4) THAT the Respondent shall pay to the Petitioner for herself and the minor children a provisional alimentary allowance in the sum of $800.00 per month, payable in advance at her residence on the first day of each month;

Counsel also asserted that the alimentary allowance of $800 per month was not "divisible" (as allegedly the Minister had done) into four parts of $200 each, there being the former wife and two children besides Joseph. The amount was “all inclusive", and was simply "for herself and the minor children", requiring continued payment.

On the "property taxes" point, counsel relied upon paragraph 5 of the above agreement which reads as follows:

THAT in addition, the Respondent shall pay for the costs incurred as of February 12th, 1980, with respect to the mortgage, electricity, heating and property insurance relating to the aforesaid common domicile located at 4610 Mariette Avenue in the City and District of Montreal;

With regard to the “legal fees" counsel argued that the payments made were not dissimilar to other legal defence costs, or expenses incurred for retaining income, or reducing expenses.

In counsel's view, it was clearly intended that the costs of upkeep for the family home — including property taxes — would be paid by virtue of clause 5 (supra) and in any event the usual procedure for payments of "mortgage" included payment (often concurrent) of property taxes. Counsel did not provide the Court with a copy of the mortgage document in support of such a contention, mandating such payment by Mr. Wasserman. The Court should read Exhibit R-3 (supra) in a reasonable, common sense way according to counsel, and if the Superior Court had intended the "property taxes" to be excluded, it would have so stated.

Counsel for the Minister noted that Exhibit R-3 simply did not call for "property taxes”, and while Mr. Wasserman may have felt obligated to pay them, and indeed did so, there was no agreement between the parties respecting that item and providing for its classification as "alimony". On the "legal fees" counsel pointed out that there was no provision in the Income Tax Act for such payments and to whatever degree one could use an Interpretation Bulletin, they were specifically denied as a deduction in Interpretation Bulletin IT-99R2. Regarding the dependency question, it was the position of counsel that Mr. Wasserman no longer had the opportunity available to him of classifying his son as a “dependant” after the legal agreements noted in Exhibit R-3 above. His claim for a deduction of any kind regarding his family now rested in the characterization of the alimony payment. Counsel presented for the Court's review the following jurisprudence:

Analysis

In my view, the remaining issues (above) can be dealt with directly:

Property Taxes

Paragraph 5 of the agreement (Exhibit R-3) is less than crystal clear and this Court is being asked by the appellant to read into it a specific payment which is not contained therein. It is quite clear from the wording of paragraph 5 (above) that maintenance costs for the house are not included — and one might therefore argue that this could be the responsibility of the former wife — whether or not she already paid them. Equally, from a different perspective, there is no provision therein for “education” costs of the children. For whatever reason, Mr. Wasserman's agreement with his former wife, did not include as an “alimentary allowance” the costs of property taxes and this Court has been given no reason to expand the agreement to provide for such inclusion. I would also note that an opportunity was provided on April 6, 1981 (see Agreement to Postpone, (Exhibit R-3) above), for Mr. Wasserman to amend the clause for such inclusion, but this was not done. Finally, and in my view quite convincingly, the above “Agreement to Postpone” dated April 6, 1981, contains a clause calling for the transfer to the former spouse of a 50 per cent interest in the home, to constitute her as joint owner thereof. Even with that additional clause, Mr. Wasserman did not count on any amendment to include “property taxes” (or a portion thereof) as alimony.

Legal Fees

I completely adopt the reasoning in Robert C. Ivey (supra), wherein a similar claim was rejected. The rationale put forward on behalf of the appellant that these costs were somewhere aligned to a reduction of the appellant’s expenditures or an increase in his income, escapes me. That view, which might have some application under a business structure — thereby falling under section 18 of the Act, — appears to have no application in a personal — salary income structure, wherein deductible expenses fall under section 8 of the Act.

With regard to Exhibit A-1 and A-2 (supra), since I have reached the above conclusion — that the claim for legal expenses in this situation has no merit — the information which might be gathered from these exhibits would be irrelevant, since such information reflected only the view of Mr. Wasserman’s counsel as to the portion of the total accounts which related to the “alimony” proceedings, and that it was his counsel's opinion these amounts were deductible.

Dependant claim

I believe that it would be quite possible to reject the taxpayer's claim based simply on the reasoning advanced by counsel for the respondent alone — that such an option no longer existed for him — the “dependency” relationship having been transferred to and assumed by his former wife completely as a result of the legal agreements under Exhibit R-3 (above). While Mr. Wasserman perhaps deserves commendation for providing shelter and subsistence to his son Joseph after April 1, 1981 (and it continues to this day) only a re-negotiation of the legal agreement (Exhibit R-3) would provide him with a deduction greater than that provided therein. Further, it appears to me that Mr. Wasserman's direct actions in arbitrarily reducing the “alimentary allowance” of $800 per month (Exhibit R-3) by $200 per month, when Joseph came to live with him is in direct conflict with the position and argument advanced in Court by the counsel that the $800 was a fixed, non-changeable amount, which should not affect the other claim for dependency.

All of the matters remaining in dispute at the hearing are dismissed.

The appeal is allowed in part, in order that the appellant may claim as deductible expenses the amounts of $1,709.38 and $3,161.93 for the years 1980 and 1981 respectively. On all other issues the appeal is dismissed. There will be no award of costs.

Appeal allowed in part.