Smith v. R., [1998] 1 CTC 2715

Taylor T.C.J.:

This is an appeal heard in Halifax, Nova Scotia on July 18, 1997 against an assessment under the Income Tax Act (the “Act”) in which the Respondent disallowed the deduction of an amount of $4,000 claimed for the year 1994 as maintenance support payments.

I will quote from the documentation filed to the extent that the particular point at issue is addressed — from the Notice of Appeal:

I still strongly disagree with this assessment and wish to file this Notice of Appeal on the grounds that I have been denied a legitimate TAX DEDUCTION by Revenue Canada. I feel I have been dealt with in an unfair and consistent [sic] manner. In the 1994 Tax Guide on page 20 it sets out the criteria for Alimony and Maintenance Payments to be Tax deductible and my payments meets all 4 requirements stated there.

In my Notification of Confirmation By The Minister it quotes paragraph 60(b) and paragraph 60(c) or section 60,1 of the Income Tax Act. I maintain that if the law states that then it should be included in the information in the Tax guide. Instead the Tax Guide states that if ALL these requirements are met then it is an allowable Tax Deduction.

From the Reply to Notice of Appeal:

6. In so reassessing the Appellant for the 1994 taxation year, the Minister made the following assumptions of fact:

(a) the Appellant separated from his former spouse, Ann, in October 1986;

(b) pursuant to the Separation Agreement the Appellant was required to pay to his former spouse the sum of $400 per month for the benefit of their child, Tara “until the child is no longer a child of the marriage as defined by the Divorce Act’;

(c) the Appellant’s daughter was 16 year old in 1994;

(d) the Appellant paid his former spouse the maintenance payments described in paragraph (b) until February 1994 and these amounted to $800;

(e) the Appellant’s daughter moved out of her mother’s home (the former spouse) and into an apartment of her own at that time;

(f) the former spouse was not in receipt of an amount for a child in her custody;

(g) the Appellant requested that the Family Court send his maintenance payments directly to his daughter and the Family Court agreed and these amounted to $4,000;

(h) the payments of $4,000 made directly to the daughter are not deductible as maintenance payments pursuant to paragraphs 60(b) and 60(c) or subsection 60.1 of the Income Tax Act (the “Art”).

B. Issue to be Decided

7. The issue to be decided is whether the Appellant is entitled to claim as a deduction from net and taxable income the amount of $4,000 paid directly to his daughter as a maintenance payment pursuant to paragraphs 60(b), 60(c) and subsection 60.1 of the Act.

C. Statutory Provisions, Grounds Relied on and Relief Sought

8. He relies on paragraphs 60(b), 60(c) and subsection 60.1 of the Act.

9. He submits that the Appellant is not entitled to claim the amount of $4,000 paid directly to his daughter as maintenance payments pursuant to a Separation Agreement as they were not paid to his former spouse as required by paragraphs 60(b) and 60(c) of the Act. He further submits that the maintenance payments are not deductible pursuant to subsection 60.1 of the Act as the child is no longer in the custody of his former spouse.

From the “Separation Agreement” dated October 26, 1988:

8. CUSTODY — The parties hereby agree that the Wife shall have sole custody, care and control of the child of the marriage, TARA DENISE SMITH, and that the Husband shall have liberal access to the said child at reasonable times provided reasonable notice has been given.

9. MAINTENANCE — The Husband agrees to pay the Wife the sum of Six Hundred Dollars ($600.00) per month for maintenance commencing the 15th day of JULY, A.D., 1988 to and including the 15th day of JULY, A.D., 1990 at which time maintenance for the Wife shall come to an end.

10. The Husband agrees to pay the Wife for the benefit of the child of the marriage, TARA DENISE SMITH, the sum of Four Hundred Dollars ($400.00) per month commencing the 15th day of JULY, A.D., 1988 and continuing until the child is no longer a child of the marriage as defined by the Divorce Act. In addition to the Four Hundred Dollars ($400.00) per month maintenance provided for the child of the marriage, the Husband hereby undertakes that he is more than prepared to financially assist with the costs of the child’s University Education if that be necessary, at that time.

From the “Corollary Relief Judgment” from the Supreme Court of Nova Scotia dated February 9, 1989, with Kenneth Foster Smith as the Petitioner and Maxine Ann Smith as the Respondent:

1. The Respondent shall have custody of the following children of the marriage:

Tara Denise Smith

[...]

4. The Petitioner shall pay to the Respondent wife for the support of the said child the sum of Four Hundred Dollars ($400.00) per month, to be paid to the Family Court, 10 Starrs Road, Yarmouth, Nova Scotia, BSA 4B4. The first payment shall be due and payable on the 15th day of July, 1988, and thereafter the payments shall be paid on the first day of each month thereafter. In addition to the Four Hundred Dollars ($400.00) per month maintenance provided for the child of the marriage, the Petitioner agrees to financially assist with the costs of the Child’s University Education if that be necessary, at that time.

The parts of the Act at issue were:

Section 60: Other deductions.

There may be deducted in computing a taxpayer’s income for a taxation year such of the following amounts as are applicable:

[...]

(b) Alimony payments - 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 made 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;

(c) Maintenance - an amount paid by the taxpayer in the year as an allowance payable on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient and the children, if

(i) at the time the amount was paid and throughout the remainder of the year the taxpayer was living separate and apart from the recipient,

(ii) the taxpayer is the natural parent of a child of the recipient, and

(iii) the amount was received under an order made by a competent tribunal in accordance with the laws of a province;

Section 60.1: Maintenance payments.

(1) Where a decree, order, judgment or written agreement described in paragraph 60(b) or (c), or any variation thereof, provides for the periodic payment of an amount by a taxpayer

(a) to a person who is

(i) the taxpayer’s spouse or former spouse, or

(ii) where the amount is paid under an order made by a competent tribunal in accordance with the laws of a province, an individual of the opposite sex who is the natural parent of a child of the taxpayer, or

(b) for the benefit of the person, children in the custody of the person or both the person and those children,

the amount or any part thereof, when paid, shall be deemed for the purposes of paragraphs 60(b) and (c) to have been paid to and received by that person.

At this point I note that the above seemed to be the major information available to the Respondent (Minister of National Revenue) in this case, at the time the reassessment was struck. However, during the trial, as a matter of fact during the summary of his position, when asked by the Court if there was anything at all further he wished to add or submit, Mr. Smith presented for consideration of the Court another Court Order dated February 25, 1994 with an attached letter dated February 21, 1994 both of which were previously unknown to the Respondent.

Those documents I reproduce in total — first the letter attached to it:

Chipman, Fraser, Pink & Nickerson Barristers and Solicitors

February 21, 1994

Mrs. Maxine Smith

Box 1589, RR#5

Yarmouth, NS BSA 4A9

Dear Mrs. Smith:

Re: Tara Smith

I am writing to you on behalf of your former husband, Kenneth Smith, in relation to your daughter, Tara Denise Smith. As you are well aware, Tara is no longer residing with yourself and Mr. Smith has been paying her directly in order to help her maintain herself. Given this fact, I think it would be appropriate, in the circumstances, that further payments be made directly to Tara. If this is acceptable to you then I would kindly request that either yourself or your solicitor advise Family Court that from this day forth Mr. Smith will be paying for Tara directly. This is required, of course, since the terms of the Divorce Order require him to pay you.

I would encourage you, very strongly, to solicit the views of your lawyer with respect to this matter and I can further advise you that if for some reason you are unwilling or unable to accede to this request, then I have further instructions to commence formal legal proceedings in this regard and other related matters.

In anticipation of an early reply.

Yours very truly,

CHIPMAN, FRASER, PINK & NICKERSON

Alban J. LeBlanc

I agree that payments be made payable to TARA until she returns to the home.

Maxine Smith

And the Court Order:

The Family Court for the Province of Nova Scotia Kenneth Foster Smith Applicant and Maxine Ann Smith Respondent

Order

BEFORE THE HONOURABLE JUDGE JOHN D. COMEAU JUDGE OF THE FAMILY COURT FOR THE PROVINCE OF NOVA SCOTIA.

Upon reading the Application and all other documents on file herein:

And upon it appearing that the proper persons have received notice of the hearing in accordance with the Family Court Rules:

And upon the parties, Kenneth Foster Smith - Applicant and Maxine Ann Smith - Respondent, consenting hereto:

Now upon motion:

IT IS ORDERED: that the Applicant, Kenneth Foster Smith, shall pay directly to the child, Tara Denise Smith, for her maintenance and support, instead of to the Respondent, Maxine Ann Smith, the sum of Four Hundred Dollars ($400.00) per month. First of said payments to be made on the 1st day of March 1994 and the subsequent payments to be made on the 1st day of each and every month thereafter.

Decision rendered at Yarmouth, Nova Scotia, the 25th day of February 1994.

Order issued at Yarmouth, Nova Scotia this 25th day of February 1994.

Family Court Officer

In my view, there was no major dispute with the basic facts upon which the reassessment as detailed by the Respondent in the Reply to Notice of Appeal, had been struck, and Mr. Smith’s presentation, while personal and emotional added little to the facts already established, other than the above letter and Court Order.

Argument

Counsel relied on the statutory provisions as outlined in the Reply to Notice of Appeal (supra):

9. He submits that the Appellant is not entitled to claim the amount of $4,000 paid directly to his daughter as maintenance payments pursuant to a Separation Agreement as they were not paid to his former spouse as required by paragraphs 60(b) and 60(c) of the Act. He further submits that the maintenance payments are not deductible pursuant to subsection 60.1 of the Act as the child is no longer in the custody of his former spouse.

Essentially the “custody” issue was the main thrust of the Respondent’s argument, although reference was made to the unusual nature of the circumstances, and even to the “inequity” which Mr. Smith might perceive and which might obtain according to Counsel. Counsel submitted to the Court two particular cases dealing with custody:

• R. v. Curzi (1994), 94 D.T.C. 6403 (Fed. T.D.), a judgment of the Federal Court - Trial Division dated February 8, 1994.

• Lafrenière c. R. - a judgment of the Tax Court of Canada dated (June 12, 1995), reference #94-2397(IT)I. [now reported (1995), [1996] 2 C.T.C. 2569 (T.C.C.)]

A further case — that of Sponagle v. R., also a judgment of this Court, dated May 2, 1997, reference #96-3715(IT)I [now reported [1997] 3 C.T.C. 2053 (T.C.C.)], was noted and filed by Counsel, but since it did not deal as specifically with the custody question, seen as critical by Counsel, it was not examined and compared in detail.

The Appellant repeated his disagreement with the process (as outlined in his Notice of Appeal) but now added basically that he had done all he could have done - in effect what more was possible he did not know. He had gone to Court - obtained a Court Order to support his daughter, and had complied with the Order.

Analysis

First, I will deal with the “custody” question - the main stay of the Respondent’s position. In my view it is not the issue - the child Tara was and remained in the custody of her mother as far as I can determine. The case law submitted by Counsel does not touch on the facts of this case, since in both Curzi (supra) and Lafrenière (supra) the children were over the age of majority — and the point to be determined in Curzi (supra) by the learned Justice Noël was whether the payments made by the father, continued or renewed or re-established custody, and such payments did not have that effect. Tara was sixteen - a minor child of the marriage and the age of majority in the Province of Nova Scotia is 19 years. I note this specifically since in the Sponagle case (supra) the children were over the age of majority — and Associate Chief Judge Christie still found as follows:

In particular it is my view that as a matter of law making the $125.00 payments to the Family Court was payment to Diane. The fact that she chose to constitute the Court as her agent to redirect the money under the circumstances described to Shane and Shannon cannot result in depriving Barry of the benefit of the deductions provided for in paragraph 60(b).

I am very impressed with this specific legal point.

Several comments from Curzi (supra) touch on this point - and I note in particular:

• It is clear, upon reading the provisions of the Civil Code, that the right to custody of the child is extinguished when the child attains the age of majority, which is fixed at 18 years in Quebec, and that the right to custody can be exercised only with respect to a minor child.

• Article 646 of the Civil Code of Quebec reads as follows:

646. A child remains subject to the authority of his father and mother until his majority or emancipation.

° Article 650 of the Civil Code of Quebec reads as follows:

650. No unemancipated minor may leave the family home without the consent of the person having parental authority.

• The order of the Quebec Superior Court dated May 17, 1974 granting custody of Stéphane to his mother was never varied. This order was still in force during years 1987 and 1988.

° A custody order confers a right on the parent who is granted custody. It is the parent who has custody of the children who has ultimate responsibility for the upbringing.

• In my view, the purpose of subsection 60.1(1) is to allow the deduction of amounts paid for the benefit of a child as long as the child is still in the custody of the former spouse or the former spouse remains under the duty of care which attaches to custody.

° Since Stéphane had left the custody of his mother at the relevant time, subsection 60.1(1) does not operate to deem the amounts he received from his father to have been received by his mother, with the result that they are not deductible under paragraph 60(b) of the Act.

Custody must entail more than direct constant physical contact. I see nothing in the documentation provided to the Court which would encroach on the legal custody under these circumstances, and I would not dismiss the claim on that account alone.

Leaving that point, I note that the Court was not provided with other arguments from Counsel, which could have dealt more directly with the elements of the facts which still might be disputed. Nor of course, since Mr. Smith was not represented by Counsel, did we have a strictly legal argument - based on the legislation and jurisprudence — in support of his claim for deductibility of the $4,000.00. I say this, because I am satisfied that a good case could be made for the deduction under subsection 60(c) of the Act, without relying on subsection 60.1 of the Act at all. In doing so, compliance with subsection 56(12) of the Act might be required, and determination made if Maxine Smith remained qualified as the “recipient”, even though payments were made to Tara. I do not find in Curzi (supra), Lafre- nière (supra) or Sponagle (supra) and others [2] any clear indication that the question of “recipient” as such was ever raised. In the case of a minor child, assuming that “child of the marriage” would not be regarded as a “third party” for purposes of subsections 60.1 and 60.1(2) of the Act, it remains a question in my mind whether Maxine Smith could shed the title “recipient” without shedding the role of custody.

A more complete argument on technical points, from the Respondent could also cover the question of whether the Family Court in its own right had the jurisdiction to alter the Supreme Court of Nova Scotia Order, even with the consent of both parties — including substituting Tara directly for Maxine Smith and reversing its own role as “agent” for Maxine Smith, essentially abandoning that role.

Further from Counsel, some reference to the fact that apparently Kenneth Smith had been paying Tara directly before the Family Court Order of February 25, 1994 (see lawyer’s letter above) should be made. Whether he was already in violation of the Supreme Court of Nova Scotia Order at that time, and the consequences therefrom could have been addressed. Finally in this list, the question of “discretion” as that is detailed in subsection 56(12) [3] of the Act, should be raised. At the same time it could be argued that Maxine Smith, in agreeing to the Order from the Family Court had exercised her discretion, and indeed there is no reason for me to assume that she did not continue to maintain necessary control or monitoring of Tara. The evidence was minimal, and all from Kenneth Smith, but is seems Tara lived (paying board and room) with an older female friend, and now some three years later is preparing to go to college, presumably with continuing help from the Appellant.

A favourable view of Mr. Smith’s appeal might well find some support even in the opinions expressed in the signal case of Thibaudeau v. R. (1995), 95 D.T.C. 5273 (S.C.C.), a judgment of the Supreme Court of Canada, although heard on almost exactly the opposite point, but I have made no attempt to research that in detail. Also I do note the caution that this appeal might still encounter the conditions outlined in subsection 60.1(2) of the Act - since a favourable decision for this Appellant unless based on a determination that Maxine Smith remained the “recipient” for purpose of subsection 60(c) of the Act alone, would require strict conformity. That subsection was dealt with explicitly in a recent judgment of the Federal Court of Appeal, Allison v. R. - A-83-96, [now reported [1997] 3 C.T.C. 1 (Fed. C.A.)]upholding a judgment of this Court of the same name — #95- 2365(IT)I [now reported (1995), [1996] 2 C.T.C. 2190 (T.C.C.)] in which Judge Beaubier commented in dismissing the appeal:

Neither Order specifically provides that subsection 60.1(2) or 56.1(2) of the Act shall apply as required by the words of the Income Tax Act at the end of subsection 60.1(2).

Clearly I am of the view that the Respondent has not made the case in support of the attacked assessment by relying in a major way on the question of custody. If that were the only possible flaw in Kenneth Smith’s appeal he could well be successful. However I am equally sure that this Appellant has not adequately made the case for deduction which he is required to do, and there are at least some aspects of these circumstances which could place him in a very favourable light, as I have noted above [4] .

The appeal is dismissed.

Appeal dismissed.