Barker v. R., [1998] 1 CTC 2538

Garon T.C.J.:

These are appeals from reassessments made by the Minister of National Revenue for the 1991 and 1992 taxation years. By his reassessments, the Minister of National Revenue disallowed mortgage payments made by the Appellant totalling $6,532.69 in 1991 and $25,678.46 in 1992 as deductions from income for the 1991 and 1992 taxation years.

The Appellant and the Respondent have agreed as to the facts relevant to the determination of these appeals in a document entitled “Statement of Agreed Facts, Evidence and Issue to be Determined”, (the “Statement of Agreed Facts”). The body of this document is reproduced in extenso:

The Appellant and the Respondent have agreed as follows:

Statement of Facts

1. The Appellant and his former wife, Yvonne Syllaba (“Syllaba”), separated in or about June, 1990.

2. On or about June 30, 1990, the Appellant and Syllaba signed a written separation agreement (the “Original Agreement”), a copy of which is attached as Schedule “A” to this Statement of Agreed Facts, Evidence and Issue to be Determined.

3. At all times in 1991 and 1992 the Appellant and Syllaba were living separate and apart because of the breakdown of the marriage and were divorced effective October 17, 1992 by Order of the Supreme Court of British Columbia dated September 16, 1992.

4. On or about May 28, 1991, the parties amended the Original Agreement by executing another document (the “Amending Agreement”). Before executing the Amending Agreement, Syllaba obtained independent legal advice as evidenced by a certificate attached to the Amending Agreement. A copy of the executed Amending Agreement is attached as Schedule “B” to this Statement of Agreed Facts, Evidence and Issue to be Determined.

5. In accordance with Amending Agreement, the Appellant arranged financing to enable Syllaba to acquire, in 1991, a “self-contained domestic establishment” (as defined in subsection 248(1) of the Income Tax Act (the “Act”) located at Suite 108 - 1859 Spyglass Place, Vancouver, British Columbia (the “Spyglass Residence”).

6. During the 1991 and 1992 taxation years, the Appellant paid monthly principal and interest payments (“Mortgage Payments”) aggregating $6,532.69 and $25,678.46, respectively, pursuant to Clauses and I and 2 of the Amending Agreement which required that he make all principal and interest payments with respect to all financing obtained to satisfy the purchase price of the Spyglass Residence.

7. Clause 8 of the Amending Agreement stated that:

The Husband will deduct all principal and interest payments with respect to all financing obtained by him or the Wife to pay the purchase price of the Wife’s residence located at Suite 108 - 1859 Spyglass Place, Vancouver, British Columbia under subsection 60.1(2) of the Income Tax Act (Canada) as amended from time to time. The Wife agrees to report the deductions claimed by the Husband related to the purchase price of her new residence as income under subsection 56.1(2) of the Income Tax Act (Canada) as amended from time to time.

8. The Mortgage Payments were deemed to be an allowance payable on a periodic basis by virtue of the reference in the Amending Agreement to subsections 56.1(2) and 60.1(2) of the Act and there is no dispute regarding the calculation of the Mortgage Payments as an allowance for the purpose of subsection 60.1(2) of the Act.

9. The Appellant deducted the Mortgage Payments in his tax returns for the 1991 and 1992 taxation years.

10. The Minister of National Revenue initially assessed the Appellant’s 1991 and 1992 tax returns on August 17, 1992 and May 14, 1993, respectively.

11. By way of Notices of Reassessment dated January 5, 1995, the Minister reassessed the Appellants 1991 and 1992 tax returns to disallow the Mortgage Payments as deductions from income for the 1991 and 1992 taxation years.

12. The Minister issued a Notification of Confirmation dated July 24, 1996.

Issued to be Determined

The Appellant and the Respondent respectfully submit that the sole issue to be determined by this Honourable Court is whether the Mortgage Payments made by the Appellant in 1991 and 1992 were paid as alimony or other allowance or as an allowance for the maintenance of Syllaba pursuant to paragraphs 60(b) or (c) of the Act. The Appellant and Respondent agree that the Appeal should be allowed if the Mortgage Payments were paid as alimony or other allowance for the maintenance of Syllaba or as an allowance for the maintenance of Syllaba pursuant to paragraphs 60(b) or (c) of the Act.

As mentioned in the above Statement of Agreed Facts, the Appellant and his former wife, Ms. Yvonne Syllaba, entered into a written separation agreement, (the “Original Agreement”), dated June 30, 1990. The Original Agreement was modified about 11 months later by an “Amending Agreement” made on May 28, 1991.

The recitals of the Amending Agreement summarize the relevant financial stipulations of the Original Agreement in the following terms :

A. By an Agreement made as of June 30, 1990, between the Husband and Wife, the Husband agreed to:

5(a) allow the Wife exclusive occupancy and possession of the matrimonial

home at 2251 Heather Street, Vancouver, British Columbia until July 15, 1991;

(b) pay the Wife $150,000 on or before July 15, 1991 upon the Wife transferring all of her right, title and interest in and to the matrimonial home to the Husband and vacating the same at the time of payment; and

6(a) pay the sum of $1,800.00 per month maintenance for the Wife commencing

July 1, 1990 and ceasing on July 1,1991. The Husband also agreed to pay to the Wife the sum of $1,000.00 per month maintenance for Wife commencing August 1, 1991 and ceasing August 1, 1992.

All the operative clauses of the Amending Agreement are hereafter found:

I. The Husband will use a current fair market value appraisal of the matrimonial home located at 2251 Heather Street, Vancouver, British Columbia to obtain funds to pay the Wife a portion of the $150,000.00. The Wife will use these funds as a down payment for the purchase by the Wife of a new residence located at Suite 108 - 1859 Spyglass Place, Vancouver, British Columbia. The Husband will be responsible for the repayment of these funds including any interest costs related thereto.

2. The Wife will secure additional financing by way of a first mortgage against the residence located at Suite 108 - 1859 Spyglass Place, Vancouver, British Columbia in order to pay out the Vendor the full purchase price of the residence. The Husband agrees to pay the principal and interest on this first mortgage to the mortgagee.

3. The Husband agrees to pay the Wife any unpaid balance of the $150,000.00 after deducting the amount of funds obtained by refinancing his residence at 2251 Heather Street, Vancouver, British Columbia and the funds obtained by way of a first mortgage on his Wife’s residence at Suite 108 - 1859 Spyglass Place, Vancouver, British Columbia no later than July 1, 1993 without interest.

4. The Wife will remove any and all mortgages, liens or charges against the matrimonial home located at 2251 Heather Street, Vancouver, British Columbia before the close of business on June 12, 1991.

5. The Wife will vacate the matrimonial home located at 2251 Heather Street, Vancouver, British Columbia on or before July 1, 1991.

6. The payment of the sum of $1,800.00 monthly as maintenance for the Wife will cease with the final payment being made on June 1, 1991.

7. The payment of the sum of $1,000.00 monthly as maintenance for the Wife will commence July 1, 1992 for a period of twelve months with the final payment being made to the Wife on June 1, 1993.

8. The Husband will deduct all principal and interest payments with respect to all financing obtained by him or the Wife to pay the purchase price of the Wife’s residence located at Suite 108 - 1859 Spyglass Place, Vancouver, British Columbia under subsection 60.1(2) of the Income Tax Act (Canada) as amended from time to time. The Wife agrees to report the deductions claimed by the Husband related to the purchase price of her new residence as income under subsection 56.1(2) of the Income Tax Act (Canada) as amended from time to time.

9. The Husband agrees to reimburse the Wife either by grossing up the monthly maintenance payments or by way of a lump sum payment on or before April 30 of each calendar year following the preceding taxation year an amount which will compensate the Wife for any additional federal and provincial income taxes that are required to be paid by her as a result of including the Husband’s deductions of principal and interest on the loans used to acquire her new residence at Suite 108 - 1859 Spyglass Place, Vancouver, British Columbia, in her income under subsection 56.1(2) of the Income Tax Act (Canada). The Husband will not be responsible for any penalty, interest or taxes related to the Wife’s failure to report the income or by not filing her personal income tax return on time as required under paragraph 150(1)(d) of the Income Tax Act (Canada) as amended from time to time.

The Appellant’s submission

The Appellant’s position is well summarized in the following excerpts from his written submission:

2.2 Subsection 60.1 (2) of the Act deems specific types of payments made to third parties, including mortgage payments, to be “an allowance payable on a periodic basis” if the payments meet the criteria in that subsection. Subsection 60.1(2) of the Act was enacted to allow a taxpayer, subject to greater financial burdens arising from the maintenance of two households created by the breakdown of a marriage, to deduct principal and interest payments in respect of the acquisition of a residence by a former spouse. The subsection was added in 1984 to clarify that mortgage payments are specifically included in the class of deductions in paragraphs 60(b) and ( c) of the Act.

2.3 Mortgage payments are contemplated to be for the maintenance of a spouse or former spouse in subsection 60.1(2) of the Act because they are expressly mentioned in that subsection which applies for purposes of paragraphs 60(b) and (c) of the Act. The courts have held that mortgage payments are for the maintenance of a spouse or former spouse.

On the basis of these propositions, the Appellant concluded that paragraphs 60(b) and 60 (c) of the Income Tax Act allowed the Appellant to deduct the subject mortgage payments made by him in 1991 and 1992.

Reference was made by Counsel for the Appellant to a number of decisions of the Courts and he relied more particularly on the decisions of this Court in the case of Crewe v. Minister of National Revenue (September 10, 1992), Doc. 92-1200(IT) (T.C.C.) and Larsson v. R. (1996), 3 C.T.C. 2430 (T.C.C.). The recent decision of the Federal Court of Appeal in the Larsson case was brought to the attention of the Court and to Counsel for the Respondent some time ago while the present matter was under advisement.

The Respondent’s submission

In his submission, the Respondent started with the basic proposition that in order for an amount to be deductible under paragraph 60(b) or paragraph 60(c) of the Income Tax Act,the amount must be for the maintenance of the recipient or the children of the marriage. He went to add that paragraphs 60( b) and 60(c) do not contemplate the deduction of payments made on account of the division of matrimonial assets or on account of the settlement of a divorce claim.

With respect to subsection 60.1(2) of the Act, the Respondent agreed with the Appellant that it is a deeming provision but suggested that it deals with two aspects of maintenance payments. First, it deems payments to be made to and received by the party whom they benefit. Secondly, it deems payments to be an allowance payable on a periodic basis.

Counsel for the Respondent in his review of the Original Agreement made reference to paragraph D of the recitals and clauses 5(a), (b), (c), 6(a) and 8(e) thereof and went on to say that the $150,000.00 lump sum amount provided in the Original Agreement represents a division of the matrimonial assets. Then, turning to the Amending Agreement, Counsel for the Respondent, put forward the proposition that clauses 1 to 4 of the Amending Agreement and in particular clause I provide in essence an alternate method by which the Appellant could pay the $150,000.00 owing by him under the Original Agreement. According to Counsel for the Respondent, the net effect of these four clauses is that, instead of having to pay his former wife on July 15, 1991, $150,000.00, the Appellant was able first of all to refinance a mortgage on his own home and pay her a certain amount. Secondly, Ms. Syllaba would finance the new home she purchased and she would have the benefit of that amount, which could be counted against the $150,000.00 that the Appellant owed. Then, the Appellant, as a third source, after accounting for those other two amounts, will have to pay a lump amount to make up for the rest of the $150,000.00.

Counsel for the Respondent added this in oral argument!:

If you have in the original agreement an agreement which contemplates clearly the division of assets by paying a lump sum of $150,000 and a separate amount for maintenance, and then later an amending agreement is entered into whereby the payment of that $150,000, which achieved the objective of dividing the assets and changed the mechanism by which that amount is paid, it doesn’t change the nature of the payments or the nature of the amounts which are being paid. That $150,000, in my submission, represents a division of the assets.

Counsel for the Respondent invited the Court to consider not the form of the mortgage payments in issue but the nature of these payments made to a third party and not to accept as a blanket proposition that all mortgage payments to third parties constitute maintenance. According to Counsel for the Respondent, the question that should be addressed is the following: Are such payments in their nature maintenance payments or are they designed to achieve a division of the assets of the parties? To stress this point, Counsel for the Respondent urged the Court that paragraphs 60(b) and 60(c) should never be expanded to contemplate payments which represent a division of assets between the parties.

The Respondent relied notably on the decisions of Trottier v. Minister of National Revenue (1968), 68 D.T.C. 5216 (S.C.C.) , McKimmon v. Minister of National Revenue (1989), 90 D.T.C. 6088 (Fed. C.A.) and Urichuk v. R. (1993), 93 D.T.C. 5120 (Fed. C.A.) .

Counsel for the Respondent suggested that in the Amending Agreement “there was a refinancing to enable the Appellant to pay the $150,000.00 in a different form”. This was done to achieve a division of assets. According to him, and he relied more particularly on the McKimmon case referred to earlier, the subject mortgage payments must be considered “as part and parcel of or as a method of financing the payment of this $150,000.00”. On behalf of the Respondent, it was also pointed out that generally a maintenance payment does not survive the death of the person who is obligated to make the maintenance payments. Here the obligation to make the mortgage payments are to survive the Appellant.

The point was made that there was an original obligation to pay $150,000.00 and thus shortly before the due date of this obligation a negotiation took place to pay that $150,000.00 in a different way with a view to achieving a tax advantage.

Finally, it was submitted by the Respondent that subsection 60.1(2) of the Income Tax Act does not have the effect of deeming the payments to be in the nature of maintenance.

Analysis

As mentioned in the Agreed Statement of Facts, the sole issue to be determined is whether the subject mortgage payments made in 1991 and 1992 “were paid as alimony or other allowance or as an allowance for the maintenance of Syllaba pursuant to paragraphs 60(b) or (c) of the Act’. In short, are these mortgage payments of principal and interest maintenance payments?

In the Original Agreement, it was provided, inter alia, that the Appellant was to pay Ms. Syllaba the amount of $150,000.00 on or before July 15, 1991, upon the wife transferring all her interest in the matrimonial home to the Appellant. The Appellant was also obligated to pay the sum of $1,800.00 per month for maintenance for the first year commencing July 1, 1990 and $1,000.00 per month for the second year commencing August 1, 1991. Under the Amending Agreement, the Appellant agreed to advance to Ms. Syllaba funds, the amount of which was not determined in the Agreement, which were to be used by Ms. Syllaba as a down payment to acquire the Spyglass residence. The Appellant further agreed to make payments to the mortgagee in respect of the principal and interest on the first mortgage granted by Ms. Syllaba against the Spyglass residence to secure additional financing in order to pay out the Vendor the full purchase price on her new residence. The Appellant also agreed to pay Ms. Syllaba any unpaid balance in respect of the $150,000.00 after deducting the down payment for the acquisition of the Spyglass residence and the principal of the first mortgage on the latter residence. The Appellant’s additional obligations to make monthly payments were modified by the Amending Agreement in two respects: a) with regard to the first year after separation, the obligation to pay $1,800.00 per month was cut down time-wise by one month to end July 1, 1991; and b) with regard to the second year, the monthly payments were to commence July 1, 1992 rather than August 1, 1991.

From these facts, it is apparent that, in addition to the monthly payments of $1,800.00 and $1,000.00 that he was required to make to Ms. Syllaba pursuant to the Amending Agreement over a period of two years with a gap of 11 months between the two periods, the Appellant was also bound to pay the principal and interest on the loans used by Ms. Syllaba to acquire the Spyglass residence where Ms. Syllaba was to reside plus the amount representing the difference between $150,000.00 on the one hand and, on the other hand, the total of a) the down payment on the Spyglass residence and b) the principal of the first mortgage on the latter property.

Counsel for the Respondent viewed these mortgage payments of principal and interest made in 1991 and 1992 in respect of the acquisition of the Spyglass residence by Ms. Syllaba as intimately tied in to the division of matrimonial assets and for this reason he argued that these payments could not be considered as maintenance payments.

It is settled law that, in the context of the dissolution of marriage, maintenance refers in a general way to the provision by a former spouse of the requisites or conveniences of life. Maintenance is defined in The Dictionary of Canadian Law, by Daphne A. Dukelow and Betsy Nuse, in part as follows: “Pecuniary support including support or alimony to be paid to someone who is not a spouse. [...] Includes shelter, clothing, nursing support, medical treatment, necessary training, instruction and transportation”. Thus, lodging is a form of maintenance as is the supply of food, clothing and other means of subsistence. Moreover, the undertaking by a person in a written separation agreement to arrange for the acquisition of a place of residence for a former spouse’s Own use is a widespread form of assistance. Since it is clear that the payments of principal and interest on the loans used to acquire the Spyglass residence were made for the purpose of enabling Ms. Syllaba to acquire a residence for her own personal use, it follows that the Appellant was providing support or maintenance to his former wife at least within the general understanding of this term, in family law.

While it cannot be disputed in the present case that these payments were related to the $150,000.00 owed by the Appellant under the Original Agreement and that the payments of principal reduced to that extent the amount of $150,000.00, the fact remains that the financing of a residence by a person to his former spouse is done frequently and is a form of maintenance. In the same vein, it is fair to say that in any written separation agreement all clauses dealing with the division of property, the monthly payments and other financial aspects of the separation are part and parcel of the overall arrangements made between the spouses or former spouses. I find it difficult to conceive a situation where the acquisition of a place of residence for the benefit of the supported person would not be related to the sharing of property between these two persons and would not be taken into account in settling the whole of their financial affairs. How can it be otherwise?

Looking at the matter realistically, it seems to me that, as a rule, in the context of the dissolution of the marriage, the payments by a taxpayer of principal or interest in respect of an indebtedness incurred to finance the acquisition of a place of residence for a former spouse in which the latter resides possess a dual character:

a) they are no doubt payments on account of capital since they are made for the purpose of permitting the former spouse to acquire and continue to have the ownership of a capital asset, a place of residence. Also, these payments of principal and interest are part and parcel of the overall financial arrangements involving the division of assets between the former spouses;

b) these payments of principal and interest also take on the quality of maintenance payments, that is, payments made in the context of the breakdown of the marriage for the purpose of providing the former spouse with a basic requirement of life, namely the provision of shelter.

Counsel for the Respondent has contrasted a capital payment with a maintenance payment in a tax law context. In my view, there is an error in this approach since the enactment of subsections 56.1(2) and 60.1(2) of the Income Tax Act. If the payor of an allowance, in a case of the dissolution of the marriage, supplies a former spouse with a basic necessity of life by the acquisition of a capital asset, it does not cease to be maintenance. Justice Hugessen in the judgment of the Federal Court of Appeal in the case McK- immon v. Minister of National Revenue (1989), 90 D.T.C. 6088 (Fed. C.A.) , recognized this as page 6091 in paragraph numbered 5 when he said: “Clearly not every capital payment is excluded from an allowance for maintenance”.

I am strengthened in my conviction that the mortgage payments herein are maintenance payments because the type of payments having this dual character is clearly contemplated by subsection 60.1(2) of the Income Tax Act and for that matter by subsection 56.1(2) of the Act. In this regard, a close examination of subsection 60.1(2) is required.

First, the “A” portion of the formula A-B, referred to in subsection 60.1(2), provides, inter alia, that the positive element of the formula cannot include an expenditure for the acquisition, improvement or maintenance in respect of a self-contained domestic establishment in which the payor himself of the alimony or allowance resides. Secondly, the “B” portion of the formula, that is, the negative element, makes it clear that expenses in respect of the acquisition or improvement of a self-contained domestic establishment, in which the supported person resides, are included in the total determined in the “A” portion of the formula, subject however to the 20% limitation set out in paragraph (b) of the “B” portion of the formula. The “B” portion of the formula makes specific provision for the inclusion in the “A” portion of the formula of any expense in respect of the acquisition or improvement of a self-contained domestic establishment in which the supported person resides including any payment of principal or interest in respect of a loan made or indebtedness incurred to finance, in any manner whatever, such acquisition or improvement.

It follows from the perusal of subsection 60.1(2) that a taxpayer can for instance, acquire a capital asset, namely a place of residence, for a supported person in the context of the dissolution of a marriage. If, for the purpose of financing the acquisition of such dwelling house, he makes a loan or incurs an expenditure he is entitled to the deduction of payments of principal or interest on such loans or indebtedness by virtue of the combined operation of subsection 60.1(2) and paragraph 60(b) of the Income Tax Act. In this connection, I find it significant that in support of his position Counsel for the Respondent has not relied on any decisions of the courts involving the application of subsection 60.1(2) (or the parallel subsection 56.1(2)) but on decisions dealing with situations that have occurred prior to the enactment of subsection 60.1(2) of the Act.

The above approach to the construction of subsection 60.1(2) of the Act is not inconsistent with the reasoning adopted by Judge Sobier of this Court in the case of Crewe v. Minister of National Revenue (September 10, 1992), Doc. 92-1200(IT) (T.C.C.), who held that the taxpayer had received income when her husband made third party mortgage payments directly to the mortgagee because she received “readily recognizable economic value” when the payments were made. As pointed by Counsel for the Appellant, the mortgage payments were considered to be maintenance payments even though the taxpayer was receiving two other forms of maintenance payments from the former husband, including a monthly amount for the support and maintenance of the taxpayer. With respect to the Crewe case, I should add that in his judgment, Judge Sobier did not discuss the application of subsection 56.1(2) since the debate centred on whether the payments from whom the spouse benefited constituted an allowance within paragraph 56(1 )(b), bearing in mind the provisions of subsection 56.1(1). However, in view of the correlation between paragraph 56(1 )(b) and section 56.1 on the one hand and paragraph 60(b) and section 60.1 on the other hand, I find this judgment to be of interest. In effect, given the factual situation in the present case, if I had to consider whether the mortgage payments herein were income to the Appellant’s former wife, I would find myself in the precise situation dealt with in the Crewedecision and I would come to the same conclusion as Judge Sobier in the latter decision for the reasons he had given and the reasons formulated in the present case. I would have concluded that these mortgage payments were properly includable in the income of the Appellant’s former wife.

I am therefore of the opinion that the mortgage payments in respect of the indebtedness incurred by the Appellant to finance the acquisition of the Spyglass Residence in the 1991 and 1992 taxation years come within the purview of subsection 60.1(2) of the Income Tax Act and are deductible by virtue of paragraph 60(b) of the Income Tax Act.

For these reasons, the appeals are allowed, with costs, and the assessments for the 1991 and 1992 taxation years are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to the deduction of the mortgage payments aggregating $6,532.69 in 1991 and $25,678.46 in 1992 in computing his income for the 1991 and 1992 taxation years.

Appeal allowed.