29 September 1986 Income Tax Severed Letter

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

REVENU CANADA TAXATION MEMORANDUM

DATE SEP 29 1986

TO PUBLICATIONS DIVISION

FROM SPECIALTY RULING DIRECTORATE Farms, Personal & General Section N.M. Sheerin 957-2135

ATTENTION Mr. Don Joy, Director

RE: Interpretation Bulletin Project No. 1420 Alimony and Maintenance Special Release to IT-118R2

This is in reply to your memorandum of August 6, 1986, in which you requested our comments concerning your proposed Special Release to IT-118R2 .

Please note we are concerned that some of the results of this bulletin release may be contrary to tax policy. In addition, we feel that this revision will create administrative problems. See paragraph 2 below.

We have now reviewed the draft and our comments are as follows:

1. Paragraph 5. This revision agrees with our understanding of the change in Departmental position which was adopted in December 1985 to reflect the decisions in the Thiessen ( 77 DTC 59) and Crosby ( 77 DTC 219) cases.

2. Paragraph 6 and 18. Basically we agree with the changes made to these paragraphs to reflect the decision of the Supreme Court of Canada in Gagnon and the Department's consent to judgment in the Bryce appeal (taxpayer's appeal from decision of the Federal Court of Appeal,

82 DTC 6126). There appears to be one point of disagreement, however; that is, the effect of the ownership of a residence on the deductibility of amounts paid in respect of mortgage payments. In your draft of paragraph 6, you specifically mention that where the mortgage payments are made "on a property owned by the recipient, the payment is for the benefit of the recipient and thus will be considered an allowance". Our interpretation of the Gagnon decision is somewhat different.

In view of the Supreme Court's less restrictive definition of "allowance", it is our opinion that where a taxpayer is required by a court order or written agreement to pay the mortgage payments on a residence in which his spouse or former spouse is living, those payments are deductible as an allowance payable on a periodic basis for the maintenance of the recipient and the ownership of the residence is not a factor to be considered in determining the deductibility of such payments.

This position is based on the comments of Beetz, J. in the Gagnon judgment ( 86 DTC 6179) at page 6184. You will recall that Mrs. Gagnon was the owner of the property, the house having been transferred to her in the course of the divorce settlement, and that Mr. Gagnon remained liable to pay off the mortgage. The Department had objected to allowing the mortgage payments as a deduction of alimony on the grounds (among other reasons) that in making the payments Mr. Gagnon was discharging a personal obligation he had undertaken towards the mortgage creditor. In refuting that objection Beetz, J. stated:

"In my opinion, this does not in any way alter the fact that the amounts were also paid pursuant to a divorce decree, as required by s.60(b)."

He went on to refer to the judgment of Walsh, J. in MNR v. Hastie

74 DTC 6114, who in dealing with the same point wrote that the repayment by Mr. Hastie of this personal debt was:

"... strictly incidental to the fact that by making these payments ... he was maintaining a home for his wife and his children commensurate with their standard of living."

It is to be noted that in Hastie the husband was the sole owner of the matrimonial home, which the wife and children continued to occupy after the separation.

For the reasons outlined above, it is our opinion that the payer's ownership or part-ownership of the residence in which his spouse or former spouse is living will not preclude an otherwise valid deduction in respect of mortgage payments under paragraph 60(b), or paragraph 60(b) and subsection 60.1(1). We have asked Current Amendments Division to advise Finance of our proposed interpretation of the effect of Gagnon on alimony and maintenance payments and to report back to us. In the meantime, since you may wish to proceed with the Special Release we suggest that you delete the reference to "a property owned by the recipient" in paragraph 6 and substitute "a property occupied by the recipient".

However, our suggested wording coupled with the Gagnon decision, will in all likelihood lead many taxpayers and practicioners to the same conclusion as we have reached, i.e. that ownership is not a factor in determining the deductibility of mortgage payments. The overall effect of the Gagnon decision further complicates matters in that payor spouses may now be entitled to deduct mortgage payments (regardless of who owns the residence) under subsection 60.1(1) where such payments were not deductible before because the parties involved structured their agreements or court orders on the basis of the previous interpretation of subsection 60.1(1) or in contemplation of the non-application of subsection 60.1(2) by intentially omitting the final step outlined in the postamble to the latter subsection. Should payor spouses start to take advantage of this new position, the outcry on behalf of recipient spouses will be loud and justifiable.

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3. Paragraph 7. Revision requested in our memorandum of July 14, 1986 (copy attached) to be incorporated into this paragraph.

Director General Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

Enclosure