Erik Lindgren v. Minister of National Revenue, [1980] CTC 2482, 80 DTC 1407

The Chairman:—The appeal of Erik Lindgren is from an assessment in respect of the 1975 and 1976 taxation years by which amounts of $1,989 and $2,473 respectively, claimed as alimony and maintenance payments were disallowed by the Minister.

Facts

The facts are not in dispute and are usefully summarized in paragraph 5 of the respondent’s reply.

5.(a) the appellant and his spouse, Hazel Lindgren, lived separate and apart throughout the years in question;

(b) on May 20,1969, the appellant and his spouse executed a written separation agreement; one of the clauses of the said agreement stipulated that:

“in order to provide for the support and welfare of his children the husband agrees to pay the following expenses . . .

(a) the mortgage and tax payments in respect of the said premises amounting to approximately $109 per month and any increases that there may be in the same;

(b) the cost of heating the said premises and for fire insurance on the premises.”

(c) these payments were not made to the wife, but paid directly by the appellant.

In his evidence the appellant who represented himself, testified that the marital home was held in an equally divided ownership between himself and his estranged wife. Although he did not produce evidence to that effect the appellant stated that he had not included in his claim the payment on the principal of the mortgage, but claimed only the interest, the taxes, the cost of heating and the fire insurance. That statement was unchallenged by the Minister.

Submissions

The appellant supported his appeal on a decision of the Tax Review Board, JAC Belanger v MNR, [1974] CTC 2170; 74 DTC 1130.

The respondent on the other hand held that the payments claimed were not paid by the appellant as alimony or other allowance payable on a periodic basis for the maintenance of the spouse or the children and that the payments were not made to the wife, but paid directly by the appellant. Counsel referred the Board to several cases on point in supporting the Minister’s assessment to which I will presently refer.

Issue

The real question as I see it is whether the mortgage payments and utility payments claimed by the appellant are deductible pursuant to paragraphs 60(b) and (c) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Finding In Law

It is surely an understatement to observe that the point in issue is in an area of law which as yet appears to be unsettled. It would perhaps be useful to review briefly some of the principles on which relatively recent decisions on alimony payments have been based.

The appellant relied on a decision of Judge K A Flanigan, QC, then Chairman of the Tax Review Board in J A C Belanger v MNR, (supra), in which mortgage fees, taxes and maintenance costs in respect of the matrimonial home were allowed as alimony payments. The learned judge held:

The payments in question were made pursuant to a decree and, in law, went where they belonged in order to assure the spouse a place of residence in the common domicile. It made no difference how the payments were made as long as the wife benefited from them.

In his reasons the then chairman stated at 2170 and 1130:

I agree with the general maxim that: “All taxing statutes must be strictly construed”, but I add: “in the light of the changing social circumstances of the day”. If one looks at the cases over the past years, one finds instances where moneys that have been paid for the furtherance of the education of the children have not been allowed as deductions because they were not paid to the spouse. However, in the decision of the Board in Hastie v MNR, [1972] CTC 2383; 72 DTC 1335, subsequently appealed by the Minister of National Revenue to the Federal Court of Canada, and in the decision of Mr Justice Walsh [1974] CTC 131; 74 DTC 6114, section 11(1)(l) has, in my view, been interpreted in the manner that I feel certain the drafters of the legislation intended it to be interpreted, and has been interpreted in the way that it should be in our modern day society.

I believe that statement to be legally sound and applicable “a fortiori” to the facts of this appeal, because of the subsequent introduction of section 60.1 of the Income Tax Act, SC 1970-71-72, c 63, as amended, which appears to enact the basis of the decisions in the Hastie and Belanger cases.

The respondent’s position if I understood it correctly, is that section 60.1 of the Income Tax Act has no relationship with paragraphs 56(1)(b) and 56(1)(c) of the Income Tax Act, SC 1970-71-72, c 63 as amended, dealing with the inclusion of alimony and maintenance payments in the income of recipients, nor with paragraphs 60(b) and 60(c) of the Income Tax Act which refers to the deduction of such payments by the taxpayer, because it is contended, section 60.1 of the Income Tax Act gives no direction to either include or exclude the payments. Counsel suggests that section 60.1 of the Income Tax Act stands by itself and must be interpreted restrictively which would exclude any authority for including, deducting alimony or maintenance payments. She holds that the payments claimed are not allowances within the meaning of paragraphs 60(b) and 60(c) of the Income Tax Act and not deductible notwithstanding the existence of section 60.1 of the Income Tax Act.

In support of her position, counsel cited the decision of the Federal Court of Appeal in Her Majesty The Queen v Morton Pascoe, [1975] CTC 656; 75 DTC 5428, in which educational and medical expenses were disallowed because “they were not fixed, limited predetermined amounts payable on a periodic basis.” In his reasons Mr Justice Pratte stated at pp 658 and 5428 of CTC and DTC respectively:

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 the case of The Attorney General of Canada v James C Weaver and Freda J Weaver, [1975] CTC 646; 75 DTC 5462, also cited by counsel for the respondent, the mortgage and utility payments were disallowed because “they were not received by the wife as alimony or other allowance on a periodic basis, since it was not an amount determined in advance.”

The interpretation of Mr Justice Pratte in the Pascoe case cited above, was adopted in the Weaver case.

I believe it is significant that the assessment appealed from in the Pascoe case was for the 1969, 1970 and 1971 taxation years. In the Weaver case the assessment was in respect of the 1972 taxation year. In neither of these appeals was section 60.1 of the Income Tax Act applicable and therefore rightly not considered by the learned Justice of the Federal Court of Appeal.

The gradually more flexible approach to the concept of alimony and maintenance which is evident in the Hastie and Belanger cases, as indeed it was in several other decisions rendered in that period, was also reflected in Mr Justice Urie’s remarks in his dissenting judgment in the Weaver case when he stated at pp 654 and 5467 of CTC and DTC respectively:

None, except the mortgage payments meet the requirement of regularity of payment that is an essential characteristic of payment on a periodic basis.

Further Mr Justice Urie stated:

On the other hand, the mortgage payments do have this characteristic and I do not believe that the failure to specify in the agreement the amounts of such payments and the dates upon which they were to be paid precludes the application of the section to them. The agreement by implication incorporates the mortgage by reference.

The learned Justice concludes:

Clearly then the payments have the regularity of payment of an allowance that the section contemplates.

I find it difficult to interpret section 60.1 of the Income Tax Act as being unrelated to other sections of the Act dealing with alimony and maintenance payments, not only because section 60.1 of the Income Tax Act specifically refers to paragraphs 60(b) and 60(c) of the Income Tax Act, but more particularly because in those sections, as well as in paragraphs 56(1 )(b) and 56(1)(c) of the Income Tax Act, the legislators, in implementing the basic taxing principles to a specific area of income and expenses, established the conditions under which the payments are taxable by the recipient and deductible by the taxpayer.

Section 60.1 of the Income Tax Act does not, in my opinion, merely rescind the rule that such payments must be paid directly to the spouse, but it introduces the basic concept of “benefit” received by the spouse as another criteria, to be added to those already established in determining what constitute alimony and maintenance payments, in evidence the interpretation to be given to paragraphs 56(1 )(b) and 56(1)(c) of the Income Tax Act, as well as, paragraphs 60(b) and 60(c) of the Income Tax Act.

The conditions of these sections must of course still be met, but the legislators can and in my opinion did by section 60.1 of the Income Tax Act, further qualifly the conditions of paragraphs 56(b) and (c) and paragraphs 60(b) and (c) of the Income Tax Act, by including in the concept of alimony and maintenance, those payments which were “of benefit” to the spouse even though made to third parties.

As I see it, the authority for taxing and deducting the payments is to be found in subsection 56(1) and section 60 of the Income Tax Act respectively, but the conditions under which they can be either taxed or deducted are spelled out in paragraphs 56(1)(b) and 56(1 (c); paragraphs 60(b) and 60(c) of the Income Tax Act, as well as, section 60.1 of the Income Tax Act.

Counsel for the respondent in rightly making a distinction between an allowance and a benefit, however, contended that mortgage payments made by the appellant though they may have been of benefit to the spouse, were not allowances and were not deductible. That of course is the heart of the issue.

It would appear to me in interpreting section 60.1 of the Income Tax Act, that amounts paid by a taxpayer for the benefit of his spouse are deductible if they meet the conditions and the criteria set out in paragraphs 60(b) and 60(c) of the Income Tax Act. It can be inferred however from section 60.1 of the Income Tax Act, that some payments though of benefit to the spouse might not qualify as alimony or maintenance allowances. The variety of provisions to be found in a decree or judgment of a tribunal or in a valid written separation agreement require that the courts be given some flexibility in interpreting the basic criteria of “periodicity,” “predetermined amounts” and “necessities of life”, if the Act is to be reasonably consistent with changing circumstances. This in my view is the whole purpose and meaning of the words the drafters of the legislation used in enacting section 60.1 of the Income Tax Act.

The question in this appeal is whether mortgage interest payments, the cost of heating the matrimonial home jointly owned by the taxpayer and his spouse, and the fire insurance cost on the property come within the meaning of paragraphs 60(b) and 60(c) of the Income Tax Act.

I am satisfied that the appellant was living separate from his spouse; that all the claims made by the appellant were paid pursuant to a valid written separation agreement; that they were amounts payable on a periodic basis; that the amount of $109 per month (with a provision for possible increases) is reasonable; that is is a predetermined amount and that all the payments come well within the concept of necessities of life.

Since it is no longer mandatory for the payments to be made directly to the spouse, there remains, in my view, three points to be considered before a deduction can be made pursuant to paragraphs 60(b) and 60(c) of the Income Tax Act:

1. Do the payments meet the general conditions of alimony or maintenance allowances?

2. Were the payments of benefit to the spouse?

3. To what extent were the payments of benefit to the spouse as opposed to that of the taxpayer?

In my opinion, all the payments claimed by the appellant, viz mortgage interests, municipal taxes, cost of heating and fire insurance, are predetermined periodic payments which can reasonably be included in “necessaries of life.” Secondly, all the payments were necessarily of benefit to the spouse. Lastly, the cost of heating the matrimonial home were entirely for the benefit of the spouse as alimony or maintenance allowances. However, since the appellant is half-owner of the property, the interest payments on the mortgage, the municipal taxes and the fire insurances premiums paid by the taxpayer also benefited him personally to the extent of one-half of the payments. Only the other half of the said payments benefited the spouse as alimony or maintenance payments. It would appear to me that only one-half of the interests, taxes and fire insurance payments paid are deductible pursuant to paragraphs 60(b) and 60(c) of the Income Tax Act, and one-half of these payments are to be included in income by the spouse as alimony or maintenance allowances under paragraphs 56(1)(b) and 56(1)(c) of the Income Tax Act.

I hold therefore that the appeal should be allowed and the matter referred back to the Minister for reassessment on the basis that the heating costs claimed by the appellant be allowed in full, but that only one-half of the mortgage interest payments, the municipal taxes and fire insurance premiums paid by the appellant, be deductible as being of benefit to his spouse pursuant to paragraphs 60(b), 60(c) and section 60.1 of the Income Tax Act.

Appeal allowed.