Pepper v. R., [1997] 1 CTC 2716 (Informal Procedure)

Garon J.T.C.C.: - These are appeals from reassessments dated January 26, 1995 made by the Minister of National of Revenue for the 1992 and 1993 taxation years. By these reassessments, the Minister of National Revenue disallowed maintenance payments in respect of the Appellant’s children claimed as deductions from his income for the years in question.

The Appellant was the only one who testified at the hearing of these appeals. The Appellant and Mrs. Carolyn Tracy Pepper were married on May 8, 1982. They separated in October or November of 1990. No Court Order was issued at the time. They were divorced by judgment granted on March 1, 1991. By this judgment, Mrs. Pepper was given custody of the three children of the marriage. Pursuant to paragraph numbered 3 of the judgment, the Appellant was ordered to pay to Mrs. Pepper $125.00 per week in respect of support for the three children. The latter amount was to “be increased annually in accordance with section 34(6) of the Family Law Act, 1986.” Paragraph 7 of the divorce judgment is also of some interest; it reads as follows:

This Court orders and adjudges that unless the Support Order is withdrawn from the Office of the Director of Support and Custody Enforcement, it shall be enforced by the Director and amounts owing under the Support Order shall be paid to the Director who shall pay them to the person to whom they are owed.

The Appellant fell in arrears on his support payments. The Appellant started paying directly to the Family Support Branch of the Ministry of the Attorney General on March 14, 1991.

At some point, Mrs. Pepper sought and obtained social assistance payments. As a pre-condition to the receipt of such payments, Mrs. Pepper assigned her right to receive support payments to the Minister of Community and Social Services. The assignment was made on November 1, 1991. Pursuant to the latter contract, the assignment could not be ended by Mrs. Pepper except as provided by paragraph 5 of the agreement.

Mr. Pepper paid to the Family Support Plan the sum of $5,126.11 in 1992 and the sum of $9,703.13 in 1993, roughly $15,000.00 for those two years. During 1993, it was admitted by the Respondent that the Appellant made, in addition to these sums, other payments directly to Mrs. Pepper. These payments totalled $1,153.00.! [1] The summary of payments mandated by the divorce judgment of March 1, 1991 and of payments actually made by the Appellant in 1992 and 1993, is hereafter set out:

Payments mandated in 1992: $6,725.75

Payments mandated in 1993: $7,000.49

Payments made in 1992: $5,126.11

Payments made in 1993: $9,703.13 [2]

The position of the Respondent is that the amounts paid by the Appellant pursuant to the assignment made to the Minister of Community and Social Services did not constitute alimony or maintenance payments during the 1992 and 1993 taxation years. In support of this position counsel for the Respondent relied on the decision of this Court in the case Bishop v. Minister of National Revenue} [3] In that case, it was held that the support payments by the ex-husband to the Ministry of Community and Social Services were not made on behalf of his ex-wife or for her benefit under the Support Order. Rather, in the view of the Court, these payments were made to discharge the ex-husband’s indebtedness to the Ministry which arose in consequence of the decree nisi rather than pursuant to it within the meaning of paragraph 60(b) of the Income Tax Act.

Analysis

First, the source of the Appellant’s obligation in law to make the required support payments to his wife in respect of his children arises from the divorce judgment of March 1, 1991. The nature of the payments made by the Appellant to the Minister of Community and Social Services by reason of the assignment made by Mrs. Pepper to the latter Minister on November 1, 1991 is not changed as a result of an act done by Mrs. Pepper. The nature of the Appellant’s indebtedness remains the same. There is no novation of the debt. The same debt continues to exist; it is simply transferred to another person. If any further evidence was required in support of this proposition, one only has to peruse the first two numbered paragraphs of the assignment. These two paragraphs of the assignment read as follows:

1. In this Assignment “support order” means a provision in an order for the payment of money as support or maintenance and includes, but is not limited to:

(a) periodic payments; (b) lump sum payments; (c) arrears; (d) interest on arrears.

2. For consideration received, the Recipient [4] assigns to the Assignee [5] the support order made in favour of the Recipient and/or the child(ren) on March 1, 1991 in Ontario Court (General Division) at Sarnia-Clearwater, Ontario against Chris Pepper.

In view of the above, it can therefore be said that in making the payments in question to the Ministry of Community and Social Services, the Appellant was in a real sense discharging his legal obligation pursuant to paragraph 3 of the divorce judgment. By the same token, the Appellant was making the type of payments contemplated by paragraph 60(b) of the Income Tax Act as it stood at the relevant time. In effect 60(b) of the Income Tax Act speaks of “an amount paid by the taxpayer in the year as alimony or other allowance payable on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient and the children, if the taxpayer, because of the breakdown of the taxpayer’s marriage, was living separate and apart from the spouse or former spouse to whom the taxpayer was required to make the payment at the time the payment was paid and throughout the remainder of the year and the amount was paid under a decree, order or judgment of a competent tribunal or under a written agreement.”

The foregoing observations dispose, in my view, of the only argument set out in Part C of the Reply to the Notice of Appeal that “the amounts assigned to the Ministry of Community and Social Services ... did not constitute alimony or maintenance payments during the 1992 and 1993 taxation years and were not deductible in those years under paragraph 60(b) or 60(c) or section 60.1 of the Act.”

Although I believe I could dispense with any further comments, I wish to stress the point that the support payments were made to the Minister of Community and Social Services as a result of the assignment made by Mrs. Pepper on November 1, 1991. The payments are therefore made to the Minister of Community and Social Services pursuant to a decision made by Mrs. Pepper who was required to make an assignment of the moneys pursuant to the Support Order in question, because she wanted to benefit by and receive social assistance payments. Such payments are caught by the “constructive receipt” provisions of subsection 56(2) of the Act. In effect, it is clear that the payments in question were “made pursuant to the direction of, or with the concurrence of a taxpayer (Mrs. Pepper) to some other person (the Minister of Community and Social Services) for the benefit of the taxpayer” (Mrs. Pepper). In such a case, the income is imputed to the taxpayer to the extent that it would be income for the taxpayer if the payments had been made to the taxpayer. It is common ground that paragraphs 56(1 )(b) and 60(b) of the Act would be applicable here if such payments had been received directly by Mrs. Pepper.

Furthermore, I am fortified in the validity of the conclusion that the Appellant is entitled to the deduction of the payments made to the Minister of Community and Social Services in considering the scheme of the Income Tax Act. In effect, it would seem preposterous that the person entitled to receive support payments contemplated by paragraphs 56(1 )(b), 56(1 )(c), 60(b) and 60(c) of the Income Tax Act could by his own act deprive the payor of support payments of the benefit of the deductions to which he would otherwise be entitled under the provisions of paragraphs 60(b) and 60(c) of the Income Tax Act by simply making an assignment to a third party of the right to receive such payments, or otherwise by making a direction that the support payments should be paid to somebody else.

Also, I do not believe that subsection 60.1(1) has any application to the present matter as I am of the view that this subsection applies, where, for instance, the Order itself providing for support payments directs that such payments be made to a third party. In such cases, the payments to another person described in this subsection is deemed to be a payment to the spouse or ex-spouse of the payor, as the case may be.

I am therefore of the opinion that the Appellant is entitled to the deduction of support payments made to the Minister of Community and Social Services in the years in issue.

It is also to be noted that the Respondent has recognized in paragraphs 11(f) and 16 of the Reply to Notice of Appeal that the Appellant, in computing his income for the 1993 taxation year, is entitled to the deduction of certain maintenance payments totalling $1,153.00 that the Appellant had made directly to Mrs. Pepper.

For these reasons, the appeals are allowed, with costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled in computing his income for the 1992 and 1993 taxation years to the deduction of support payments made either directly to Mrs. Pepper or to the Ministry of Community and Social Services.

Appeal allowed.