Jean-Paul Gagnon v. Her Majesty the Queen, [1980] CTC 324, 80 DTC 6256

Walsh, J:—In the present appeal against income tax assessments for the years 1974,1975 and 1976 the facts are not in dispute. Plaintiff was married on December 19, 1948, to Mary Edith Laughlin and of the children of the marriage only one is still a minor. On March 29, 1972 the marriage was terminated by a judgment of divorce the pertinent portion of which reads as follows (translated):

(C) As alimentary pension for herself and for her children petitioner agrees to pay and respondent accepts

1. a monthly amount payable in advance on the first day of each month at the residence of respondent of $300 Canadian;

2. For the benefit of respondent petitioner will pay the monthly payments due or to become due with respect to the immovable which becomes the property of the respondent, the obligation with respect to the said monthly payments being more fully described in the agreement; the amount of the said monthly payments is at present $360 and can vary as foreseen in the said contract but represents the repayment in capital and interest of two hypothecs described therein as well as the repayment by monthly payments of municipal and school taxes affecting the said immovable, payable the first of each month, directly to respondent commencing June 1, 1971.

In accordance with this judgment plaintiff paid to his former wife alimony of $8,190 in 1974, $8,400 in 1975, and $8,400 in 1976.* [1] He claimed credit for these in his income tax returns for the said years. In his assessments the Minister reduced the deductions claimed to the sum of $3,600 a year representing the $300 a month, payable pursuant to paragraph (C) 1 of the aforementioned judgment. It is this decision which is now under appeal.

Paragraphs 60(b) and (c) of the Income Tax Act] [2] which are in issue read 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;

(c) an amount paid by the taxpayer in the year, pursuant to an order of a competent tribunal, as an 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 his spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year.

Plaintiff contends that the payments pursuant to the judgment were made periodically by monthly instalments first in the amount of $660 and subsequently $700 to provide for the needs of the former wife and children of the marriage, at a time when he was living separated from her by virtue of the divorce and hence comply with the said sections and are deductible. Documentary proof reveals there were two hypothecs on the immovable formerly the common domicile which by virtue of the divorce became the property of the wife. The first in the amount of $15,000 was placed on the property by virtue of a Deed of Hypothec dated August 16, 1960 which provided for interest at 7 /4%, interest and capital to be paid in 240 monthly instalments in the amount of $117.59 each commencing on December 5, 1960, the last payment become due on November 5, 1980. The second hypothec dated April 26, 1968 was in the amount of $9,000 with interest at 15% payable in capital and interest by 120 monthly instalments of $142.75 each commencing May 25, 1968 and terminating on April 25, 1978.

These monthly payments total $260.34 and the difference between that and the sum of $360 a month, later increased to $400 a month paid by plaintiff to defendant pursuant to the divorce judgment is no doubt accounted for by municipal and school taxes. The figure of $360 per month was presumably the amount which would cover all these expenses at the date of the judgment which foresaw however that this amount could vary. The said judgment was based on an agreement between the parties dated December 15, 1971, to dissolve the legal community of property between them, the marriage having been entered into without contract establishing separation as to property, the relevant terms of the said agreement being incorporated in the judgment. The agreement conveyed the common domicile in Laval to the wife and in turn the husband, the petitioner in the divorce proceedings, accepted as his full share of the community a country property in Magog, Quebec, also described in the agreement and judgment.

The payments due on the mortgages were of course personal liability of plaintiff and each payment contained a capital element reducing the balance due which became nil in the case of the second mortgage on April 25, 1978 and in the case of the first mortgage will become nil on November 5, 1980. Both mortgages remained on the property for the taxation years in question however, and as the property had been conveyed to the wife as a result of the dissolution of the community following the divorce any capital element in the payments from the date plaintiff commenced paying them to her pursuant to the judgment accrued to her benefit.

One other factual element was brought out during plaintiff’s testimony namely that the second hypothec of $9,000 was to provide funds for his use in his business. His wife joined in the deed, consenting to the loan. He stated that subsequently and before the divorce the business was dissolved so that it did not enter into any partition of the community. The legal issue is one which has frequently been before the Court and unless this case can be distinguished on the facts the decision must go against plaintiff on the basis of the findings of the Court of Appeal in the case of Her Majesty The Queen v Morton Pascoe, [1975] CTC 656; 75 DTC 5427. In that case the defendant taxpayer had paid certain sums of money to his ex-wife towards educational and medical expenses of the children pursuant to a separation agreement and subsequent decree nisi which payments were disallowed by the Minister on the basis that they were not allowances because they were not fixed amounts payable on a periodic basis. In rendering the judgment of the Court of Appeal Pratte, J stated at 656 [5428]:

... An allowance is, in our view, a limited predetermined sum of money paid to enable the recipient to provide for certain kinds of expenses; its amount is determined in advance and, once paid, it is at the complete disposition of the recipient who is not required to account for it. A payment in satisfaction of an obligation to indemnify or reimburse someone or to defray his or her actual expenses is not an allowance; it is not a sum allowed to the recipient to be applied in his or her discretion to certain kinds of expense.

In that case however the facts were somewhat different in that the payment was not determined by the separation agreement and the decree nisi to be at fixed recurring intervals of time. Nothing was said about when payment of the expense must be made. This case was followed by the case of The Attorney General of Canada v James C Weaver and Freda J Weaver, [1975] CTC 646; 75 DTC 5462, with Urie, J dissenting. In that case pursuant to a written separation agreement the taxpayer had paid utility bills and mortgage payments for the benefit of the wife. Urie, J in his dissent found that mortgage payments have the characteristic of being made on a periodic basis and even though the agreement in that case did not specify the amount of the payment the terms of the mortgage would by implication be incorporated in the agreement. It was argued that the tax portion of the monthly payments varies from time to time and therefore they were not a “limited predetermined sum’’ a term used in the Pascoe case. Urie, J disagreed stating that this amount would be fixed in advance for a period of time, probably a year, meeting the requirements of the section. He was even prepared to excuse the fact that the payments were not made directly to the wife but to the mortgage company, but on the basis that the marital home was jointly owned by the husband and wife the benefit of the principal por- tion of the mortgage payments accrued equally to both. He therefore allowed the deduction of only one-half of the principal portion of the mortgage payments made by the husband in the year in question. The majority judgment disallowed any such deductions but in the present case the facts are substantially different in that the house belonged to the wife following the dissolution of the community so that any payments on account of the mortgage in the taxation years in question whether on account of interest or principal accrued wholly to her benefit, and furthermore the amount was predetermined and fixed by the judgment at $360 from the date of the judgment, providing for variation thereafter if monthly payments changed as they did as a result of variations in municipal and school taxes. The payments were made to the wife and not to the mortgage creditor nor to the municipal or school authorities and the portion of the judgment providing for them sets out clearly in the preamble that they are alimentary allowance as well for herself as for the children.

In the case of Peter D L Roper v MNR, [1977] CTC 602; 77 DTC 5408, Marceau, J again followed with regret the decision of the Court of Appeal in the Pascoe case. In that case the husband had paid a substantial amount in addition to paying alimony to his wife as required by the court order which also required him to pay expenses for the maintenance of the house and school fees of the children. He made the latter payments direct to the creditors rather than to his wife, and the deductibility was disallowed. He had allegedly done it in this manner because his former wife was in his view unable to properly manage her own affairs. At 606 [5411] Marceau, J stated:

. . . The order in pursuance of which the payments were made did not leave any choice: the payments were not to be made to the wife but directly to the creditors. Moreover, the payments, those pertaining to educational expenses as well as those pertaining to the maintenance of the house, were certainly not fixed, predetermined, and made on a periodic basis.

Neither of these reasons is applicable in the present case.

In the case of Her Majesty The Queen v Gerald G Fisch, [1978] CTC 438; 78 DTC 6332, Collier, J had to deal with an agreement prior to a divorce which, in additon to annual payments set out, provided that the husband would pay direct to the schools concerned the children’s school fees. Collier, J following the Pascoe case stated at 441 [6335]:

The educational costs paid by the defendant in this suit were a limited predetermined sum of money to enable the mother to meet the school fees. The monies paid were channelled and restricted to that particular purpose. But the sum was not at the former wife’s complete discretion as to how the money was to be applied by her. It was, in substance, a reimbursement of expenses incurred by the wife in the educating of the children. The payment is not within the Pascoe guidelines.

He added however:

I allow the appeal with some regret. The agreement in question was drawn long before the restrictions on paragraph 60(b) imposed by the Pascoe case were known. If the defendant had agreed merely to pay to the wife a fixed sum larger than the bi-monthly amount of $533.34, (based on an arbitrary estimate of education costs), there would have been no tax difficulty. In this case, the evidence shows the defendant’s former wife has, sadly, a history of emotional and psychiatric disorders. It was because of fear of financial irresponsibility by her, that the father’s desire to see the children properly attended to and educated at the private school, that the educational costs were handled in this special way.

In the present case payments were not only made to the wife but in fixed predetermined sums pursuant to the judgment confirming the agreement. The Fisch judgment has been maintained in the Court of Appeal without reasons. While in it a fixed sum was payable for the mortgage payments and taxes Collier, J made this distinction “If the defendant had agreed merely to pay to the wife a fixed sum larger than the bi-monthly amount of $533.34 (based on an arbitrary estimate of education costs) there would have been no tax difficulty’’. This appears somewhat in conflict however with his earlier statement that although the educational costs were a limited predetermined sum the monies were channelled and restricted to that particular purpose and the sum was not at the former wife’s complete discretion as to how the money was to be applied but was rather a reimbursement of expenses incurred by the wife in the education of the children and hence not within the Pascoe guidelines. Certinly 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. Any amount awarded as alimony can of course be eventually varied if the needs of the recipient or the ability to pay of the donor change with the passage of time. Children come of age and become independent and the ex wife may secure employment and no longer need as much allowance, or conversely the former husband may suffer financial reverses or diminution in earnings making it impossible for him to continue the payments awarded by the agreement or judgment. These payments can then be varied by order of the court. The fact that this can take place does not prevent them from being considered as fixed predetermined payments for the taxation years in question during which the payments were made pursuant to the divorce order. The fact that in due course, therefore, one hypothec has been repaid and the other nearly repaid does not affect the situation in the taxation years 1974, 1975 and 1976 which are before the Court but merely gave the former husband the right to have judgment revised so as to free him from these payments or to reduce them to the amount required to cover taxes only. Similarly, as was argued, there was nothing to prevent the wife from selling the house which became her property following the dissolution of the community. In that event also presumably the husband could properly have sought a judgment from the court to be releived of the said portion of the alimony payment. As long as she continued to live in the house however with the minor child or children and these payments were still due and payable to the mortgage creditors the husband was obliged by the judgment to continue to make these payments to her. However there was at least an implied obligation on her part to use them in order to pay the mortgage creditors and taxes, since if she did not do so they could then come against the ex husband as a result of his personal liability on the loans. If this took place he would then have a recourse against her for having failed to make the payments for which the money had been provided. It was argued therefore that she did not have the free disposal and use of this portion of the payments received from him.

Respondent concedes that the payments due to provide for the wife’s and children’s needs but disputes that they were paid as alimentary pension despite the wording of the judgment, relying solely on the Pascoe case and the judgments which have followed it.

Plaintiff’s counsel contends that since the judgment specifically awarded these amounts as alimentary pension for herself and her children she was under no legal obligation upon receiving them to make the payments on the hypothecs and taxes, always subject of course to the consequences if she failed to do so. It was contended that the establishing in the judgment, which incorporated the agreement between the parties to this effect, of the amount to be paid was merely a calculation of the sum necessary to cover these payments. There is I believe some legal force to this argument. While the court is of course bound by the very strict interpretation given in the Pascoe case, which was disagreed with by at least one judge of the Court of Appeal in the Weaver case and followed with some reluctance by Marceau, J in the Roper case and Collier, J in the Fisch case, the circumstances in these latter cases as well as in the Pascoe case itself are sufficiently different from those in the present case, where there is a much stronger claim for deductibility, as to permit them to be distinguished. There is no question here, as already pointed out, as to the payments not being made on a periodic basis, the fixed amounts of them, nor their not having been made directly to the ex wife herself, and the judgment itself specifically states that both types of payment were to be made as alimentary pension for herself and the children. The fact that in determining the amount of the payment it was necessary to calculate what monthly payments would be required for the mortgage payments and taxes on the property, which it must be emphasized is now solely her property, appears to me to indicate that the sums paid were at her complete disposition even if it were assumed that she would use them to satisfy the obligations which they were designed to cover and thereby relieve the ex husband of personal claims against him for them. If she did not choose to do so she would suffer the consequence of possibly losing her property, or alternatively if creditors came against the ex husband he would then certainly deduct any sums which he had to pay from future alimentary pension payments to her, claiming compensation.

Reading paragraphs 60(b) and (c) of the Income Tax Act (supra) it would appear that the payments comply in all respects with the provisions of those sections, unlike the situation in the Pascoe and subsequent cases which were of a different nature, educational and medical expenses not being predetermined especially as regards the latter nor payable on a periodic basis.

For the above reasons therefore I would maintain the appeal from the assessments for the years 1974, 1975 and 1976, and refer them back to the Minister for reassessment on the basis of allowing deduction of the payments to the ex wife pursuant to Clause C(2) of the divorce judgment in addition to the amounts of $3,600 allowed in each year for payments pursuant to Clause C(1) instead of the amounts of $3,600 allowed for each of the said years with costs.