Her Majesty the Queen v. Gordon a Bryce, [1980] CTC 401, 80 DTC 6304

Collier, J:—The defendant and his former wife were divorced on March 20, 1975. The decree nisi of the Supreme Court of British Columbia incorporated the terms of maintenance agreement between the defendant and his wife. Pursuant to that decree, and the incorporated agreement, the defendant was required to make certain payments, as maintenance, on behalf of his wife. He did so. For his 1975 taxation year he claimed a deduction of $1,256.20.

The Minister of National Revenue disallowed his claim.

The defendant appealed to the Tax Review Board. The Assistant Chairmant allowed the appeal, holding the payments made by the defendant to be deductible, [1978] CTC 3144; 78 DTC 1833. This appeal by the plaintiff followed.

The real issue here is as to the interpretation to be given to section 60.1 of the Income Tax Act in the light of the well known case of The Queen v M Pascoe, [1976] 1 FC 372; [1975] CTC 656; 75 DTC 5427.

section 60.1, and a companion section, 56.1, were enacted by SC 1974-75-76, c 26 (see section 31 and section 28). Those new sections were assented to on March 13, 1975.

At the time the new sections were enacted the Pascoe case was on its way through the divisions of this Court. The taxation years there involved were 1969 and 1971. Sections 56.1 and 60.1 had no application and, accordingly, were not considered by the Federal Court of Appeal. The issue in the Pascoe case was to the deductibility of certain amounts paid by the taxpayer to his former wife. By the decree nisi, the husband was ordered to pay all medical, hospital and dental accounts on behalf of his wife and children, as well as all educational expenses for the children. Pascoe sought pursuant to paragraph 60(b) of the Income Tax Act RSC, 1952, c 148, as amended by SC 1970-71-72, to deduct those amounts. The paragraph is as follows:

Subdivision e

Deductions in Computing Income

60. 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 throughout the remainder of the year; . . .

The Court of Appeal gave, what has been said to be, a restrictive interpretation to paragraph 60(b), formerly paragraph (11 )(1 )(l). The Court said, at 374:

In our view, neither the sums paid by the respondent for the education of his children nor those paid for the medical expenses were deductible.

First, we are of opinion that the payment of those sums did not constitute the payment of an allowance within the meaning of section 11 (1 )(l). An allowance is, in our view, a limited predetermined sum of money paid to enable the recipient to provide for certain kinds of expense; 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.

Furthermore, even if the payment of the expenses here in question could be construed as the payment of an allowance, it was not, in our view, an allowance “payable on a periodic basis” as required by section 11(1)(l). The payment was not determined by the separation agreement and the decree nisi to be at fixed recurring intervals of time. Indeed, the agreement and decree said nothing about when payment of the expenses must be made. It is not relevant that the educational expenses may, in fact, have been paid on a periodic basis since the periodicity required by the statute refers to the manner in which the allowance is payable, not to the manner in which it is in fact paid.

I turn now to the facts of this case. The decree nisi provided that a duplex in the municipality of Matsqui, BC should be transferred to joint tenancy in the names of the defendant and his former wife. The defendant agreed to

. . . make all payments on the mortgage as they become due and payable, and will not further encumber the duplex property. He will also maintain the duplex in good condition at his expense, and pay all the land taxes, sewer rates, water rates and cablevision levy as they fall due. None of the foregoing expenses will be charged to Mrs Bryce and Mr Bryce will save her harmless therefrom.

His former wife agreed to:

... forego any claim for monthly support from the Petitioner (Respondent by Counter-Petition) other than that provided by his paying for her benefit one-half the monthly instalments for mortgage, land taxes, water rates, cablevision levy, and maintenance in respect of the said duplex.

The defendant, in 1975, paid the following:

One-half of those amounts were paid for the benefit of the defendant’s former wife. It was agreed by the parties that, for the taxation year 1975 and if the defendant is entitled to any deduction at all, the sum of $1,256.20 is the amount in issue.

I go back to the Pascoe decision. If, in this case, section 60.1 and section 56.1 are put aside, and only paragraph 60(b) is considered, then the amounts paid by the defendant Bryce for the benefit of his wife would not be deductible. They were, in my view, limited predetermined sums of money. But they were payable to third parties, not to the former wife. The allowance was not, as required by the Pascoe decision, . . at the complete disposition of the . . . [wife] . . . who is not required to account for it”. The amounts were not sums . . allowed to the recipient to be applied in ... [her] . . . discretion to certain kinds of expense”.

It was, in argument, conceded by counsel for the Crown that the test of “periodicity”, as set out in the Pascoe judgment, had been met in this case. In paragraph 5 of the maintenance agreement, incorporated into the decree nisi, there is reference to the payment of the monthly instalments for mortgage, land taxes, water rates, cablevision and maintenance.

The question, then, is to the effect to be given to the additions, made in1975, to the Income Tax Act.

I set out the enacting provisions in respect of section 60.1:

31.(1) The said Act is further amended by adding thereto, immediately after section 60 thereof, the following section

60.1 Where, after May 6, 1974, a decree, order, judgment or written agreement described in paragraph 60(b) or (c) or any variation thereof, has been made providing for the periodic payment of an amount by the taxpayer to or for the benefit of his spouse, former spouse or children of the marriage in the custody of the spouse or former spouse, the amount or any part thereof, when paid, shall be deemed to have been paid to and received by the spouse or former spouse if the taxpayer was living apart from the spouse or former spouse at the time the payment was received and throughout the remainder of the year in which the payment was received.

(2) This section is applicable in respect of amounts paid after May 6, 1974.

I reproduce here paragraph 56(1 )(b), as it stood when the new Act came into force and as it was at all times material in this case, plus the enacting provisions of section 56.1:

Subdivision d

Other Sources of Income

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

(b) 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.

28.(1) The said Act is further amended by adding thereto, immediately after section 56 thereof, the following section:

56.1 Where, after May 6, 1974, a decree, order, judgment or written agreement described in paragraph 56(1 )(b) or (c), or any variation thereof, has been made providing for the periodic payment of an amount to the taxpayer by his spouse or former spouse or for the benefit of the taxpayer or children of the marriage in the custody of the taxpayer, the amount or any part thereof, when paid, shall be deemed to have been paid to and received by the taxpayer if the taxpayer was living apart from the spouse or former spouse at the time the amount was paid and throughout the remainder of the year in which the amount was paid.

(2) This section is applicable in respect of amounts paid after May 6, 1974.

I note, at the outset, that section 60.1 does not in words provide for a deduction. I contrast that with paragraph 60(b). But section 60.1 is part of subdivision (e)—“deductions in computing income”.

Similar comments apply to paragraph 56(1)(b) and section 56.1. The latter section does not, in words, provide the amounts shall be included in the computation of income of the taxpayer to whom, or for whose benefit, they were paid. But the section is part of subdivision (d)—“other sources of income”.

The whole intent of the legislation, including the 1975 enactments, when all are read together, appears to be this. Alimony or maintenance payments, or allowances, made in accordance with the description in the statute, are deductible by the payor spouse or former spouse. On the other hand, the recipient, or person for whose benefit the payments, or allowances, were made, is taxed on the amounts so paid.

What effect, in this case, is to be given to section 60.1? It, and section 56.1, are, as I view them, poorly drafted provisions. But it is my function to try and interpret them.

The argument put forward by the Crown is that the requirements for deductibility set out in the Pascoe decision apply equally to the amounts paid to or for the benefit of a spouse or children pursuant to section 60.1: The amounts paid must be limited, predetermined sums; but while the decree or agreement may permit them to be paid to third persons for the benefit of the spouse, former spouse or children, the control over the actual disposition of those amounts must remain in the person or persons for whose benefit payments are made; in other words, even though Mr Bryce made the payments, as required by the incorporated separation agreement, to the mortgagee, and others, for the benefit of his former wife, she must, for them to be deductible by the defendant, have had complete discretion as to whether they would actually be applied in the manner contemplated.

To put the Crown’s argument another way: The post-May 6, 1974 .. decree, order, judgment or written agreement described in paragraph 56(1)(b) ...” must be of the quality and kind defined in Pascoe; the allowance must be of a limited, predetermined sum which is at the complete disposition of the recipient or of the person for whose benefit it is paid; the decree or agreement must also, itself, provide the allowance be paid at fixed recurring intervals of time. The only effect of section 56.1, it is said, is to make the allowances deductible, if paid to third parties for the benefit of a spouse or former spouse, or children, rather than directly to the spouse, former spouse or children.

I cannot read the 1975 legislation in that way. It is both illogical and unwarranted, to my mind, to incorporate the Pascoe strictures into section 60.1.

The decree, order, judgment or written agreement referred to in section 60.1 is, in my opinion, the .. decree, order or judgment of a competent tribunal, or pursuant to a written agreement . . in the first four lines of paragraph 60(b). The reference in section 60.1 to paragraph 60(b), as I see it, stops there. Section 60.1 does not, as contended by the Crown, bring in, from paragraph 60(b), the words . . as alimony or other allowance payable on a periodic basis for the maintenance of..There would, otherwise, be no reason, in section 60.1, for specific reference to “providing for the periodic payment of an amount to or for the benefit of.. . his former spouse

Paragraph 60(b) deals with amounts paid as alimony or other allowance for maintenance, to the recipient, children of the marriage, or both. Section 60.1, as I interpret it, deals with amounts, stipulated in a decree, order, judgment (of a competent tribunal) or pursuant to a written agreement, periodically paid to, or for the benefit of, the taxpayer’s spouse, former spouse or children of the marriage.

There are other differences between paragraph 60(b) and section 60.1. In the former, payments for the maintenance of the children of the marriage are deductible even though the children may not be in the custody of the former spouse. In the latter, any amounts paid for the benefit of the children shall be deemed to have been made to the spouse or former spouse, only if the latter has custody of the children. In paragraph 60(b), the payor must be living apart from his spouse or former spouse and be separated pursuant to a divorce, judicial separation or written separation agreement. The stipulation in section 60.1 is merely that the payor must be living apart from his spouse or former spouse.

If the legislators had intended to place in section 60.1 the restrictions the Federal Court of Appeal found they had in mind when paragraph 60(b) was enacted, then the legislators could easily have said so, and in my view, would have said so.

I shall digress slightly.

The Crown contended, based on the Pascoe ruling, that the mortgage and other payments made here, were not, in the incorporated maintenance agreement, “limited predetermined sums’’. I do not accept that argument. They were easily limited and predetermined by the parties. The monthly mortgage payments were ascertainable and determinable, in advance at any time. The same comments apply, in my view, to the monthly amounts payable for land taxes, water rates and cablevision. There was no claim, advanced by the taxpayer defendant, for deductions in respect of maintenance of the duplex. For similar reasoning, see J-P Gagnon v The Queen* [1] and the dissenting reasons, on the facts, of Urie, J in A G of Canada v Weaver et al, [1967] 1 FC 423 at 433-435.

I go not to the Crown’s final submission: Even if the Bryce payments were, by the incorporated maintenance agreement, limited, predetermined sums payable on a periodic basis, they were not unencumbered, as per Pascoe, as to Mrs Bryce’s right to do whatever she pleased with them.

I cannot agree with that interpretation of section 60.1

I am unable to conceive the legislators intended to make amounts paid to third parties, for the benefit of a spouse, former spouse or children of the marriage, deemed payable to those persons themselves, only if, at the same time, the document specified that the spouse, former spouse or children of the marriage could, at any time, direct the payments be made to different persons, or to themselves, or for other purposes than those Stipulated in the document. It would, it seems to me, be inconsistent for the legislators to endorse maintenance agreements where payments for the benefit of the person or persons to be maintained were stipulated to be made to third parties, and at the same time, require the agreement to give the recipient of the benefit, complete control of the actual destination and purpose of the benefit payments.

For all of the above reasons, I dismiss the plaintiff’s action. The judgment of the Assistant Chairman is upheld. His ruling that the assessment be referred back to the Minister of National Revenue with a direction that the defendant is, for his 1975 taxation year, entitled to a deduction from income of $1,256.20, is confirmed.

I assume the amount of tax in controversy here does not exceed $2,500. If that is so, then subsection 178(2) of the Income Tax Act and the Queen v Creamer, [1977] CTC 20; 77 DTC 5025 apply. If counsel agree on this point, please advise the Registry and I shall include the necessary cost directions in the pronouncements.