Perrie v. R., [1999] 4 CTC 2642 (Informal Procedure)

Lamarre Proulx T.C.J.:

These appeals concern the 1994, 1995 and 1996 taxation years, by way of the informal procedure. The question at issue is whether amounts paid to third parties pursuant to a Court Order rendered on December 16, 1991 by the Superior Court of Québec, was deductible in computing the Appellant’s income, pursuant to paragraph 60(b) or (c) and subsection 60.1(1) of the Income Tax Act (the “Act”). The Appellant selected the informal procedure.

The facts upon which the Minister of National Revenue (the “Minister”) relied on to reassess the Appellant are described at paragraph 5 of the Reply to the Notice of Appeal (the “Reply”) as follows:

a) during the 1994, 1995 and 1996 taxation years, the Appellant was living apart from his former spouse, Mrs. Evelyne Serbey;

b) in conformity with a Court order rendered on December 16, 1991 by the Honourable Judge J.-Claude Nolin, the Appellant was required to make monthly alimony payments of $1,550;

C) the monthly alimony payments of $1,550 was payable as follows:

i) the Appellant withheld and paid himself maintenance payments to third parties on behalf of his former spouse,

ii) the balance was paid directly to the former spouse;

d) on July 10, 1997, the former spouse made a request in order to amend her Income Tax Returns for the 1992, 1993, 1994, 1995 and 1996 taxation years on the basis that the maintenance payments paid to third parties by the Appellant should be excluded from her income;

e) the Minister established the following breakdown of the yearly payments paid by the Appellant on behalf of and to his former spouse: f) the judgment of the Honourable Judge J.-Claude Nolin did not specifically state that subsections 60.1(2) and 56.1(2) of the Income Tax Act (the “Ac/”) are to apply to the above payments to third parties;

		1994	1995	1996
i)	third parties	$ 8,602	$ 8,753	$ 8,456
ii) former spouse		$ 9,998	$ 9,847	$ 8,744
		$18,600	$18,600	$17,200

g) the above payments to third parties are not deductible since the Appellant’s former spouse did not have discretion as to the use of the amount within the meaning of subsection 56(12) of the Act.

The Appellant admitted subparagraphs 5(a) to (c) and 5(e) and (f) of the Reply. The Appellant produced, as Exhibit A-1, the judgment of Justice J.- Claude Nolin of the Superior Court of Québec. He referred, among other passages, to the following:

ORDONNE que la garde des enfants mineurs Christopher Perrie et Erik Perrie soit et elle est exercée conjointement par le demandeur et la défenderesse, et ce de la manière suivante:

AUTORISE la défenderesse, pendant l’instance, à occuper le domicile conjugal situé au 475, rue Mortlake à Saint-Lambert, et à avoir l’usage en même temps des effets et articles de ménage qui le garnissent, a charge pour cette dernière d’en payer les frais d’entretien et de réparations locatives;

AUTORISE la défenderesse, pendant l’instance, à avoir l’usage de l’automobile Subaru 1988, à charge d’en payer les frais d’usage et d’entretien et les coûts de réparations;

CONDAMNE le demandeur à payer à la défenderesse, à titre de pension alimentaire non indexée pour les deux enfants mineurs, la somme de mille cinq cents cinquante dollars (1 550 $) par mois, payable de la façon suivante:

i) en retenant mensuellement les sommes nécessaires pour acquitter lui-même les montants des redevances hypothécaires du domicile conjugal, ceux ou celles des taxes et impositions foncières, des assurances de maison, de même que des paiements périodique et des assurances pour l’automobile Subaru 1988;

ii) en remettant à la défenderesse à l’avance, le premier de chaque mois, tout solde s’il y a lieu non autrement exigible dudit montant de mille cinq cents cinquante dollars (1 550 $);

The Appellant produced as Exhibit A-2 the judgment of Justice Jean- Guy Dubois of the Superior Court of Québec on the divorce and accessory measures. This judgement states, at page 14, that the Appellant’s ex-wife, by the intermediary of her accountant, had requested on July 10, 1997 to vary her income tax returns for the years 1992 to 1996 to revise her income by subtracting the amounts paid to third parties by her ex-husband that she had first included as alimony in her income tax returns. She only kept the amounts that her ex-husband had paid directly to her. According to the judgment, both governments, provincial and federal, have accepted the Appellant’s ex-wife’s request and according to the judgment, at page 15, she received as a reimbursement from the Government of Canada, the amount of $11,444.64 and from the Québec Government, the amount of $11,529.

The family house was registered in the name of the Appellant’s ex-wife. This is confirmed by the judgment of Justice Dubois at page 22. The judgment (page 38) declared the Appellant’s ex-wife the owner of the property.

The Appellant submitted that his ex-wife, by including the amounts in the calculation of her income tax, showed that she agreed at first that these amounts were at her disposal. He referred the Court to the decision of the Federal Court of Appeal in Arsenault v. Minister of National Revenue (1996), 96 D.T.C. 6131 (Fed. C.A.).

Counsel for the Respondent referred the Court to two decisions of the Federal Court of Appeal in Armstrong v. R. (1996), 96 D.T.C. 6315 (Fed. C.A.) and to Larsson v. R. (1997), 97 D.T.C. 5425 (Fed. C.A.); and to two decisions of this Court in Minicozzi c. R. (1997), 97 D.T.C. 973 (Fr.) (T.C.C.) and Jacques c. R. (1994), [1995] 1 C.T.C. 2563 (T.C.C.) .

A reading of the decision of the Federal Court of Appeal in Armstrong (supra) shows that the payments to mortgagors were payments coming within the scope of subsection 60.1(2) of the Act. The husband was ordered to pay the monthly mortgage payments and in addition, alimony of $400 per month per child. These facts can be found in the decision of the Tax Court of Canada in Armstrong v. R., [1995] 1 C.T.C. 2718 (T.C.C.), at page 2719, which says:

The appellant separated from his former spouse. By an order of the Court of Queen’s Bench for the Province of Saskatchewan dated August 6, 1987 the appellant was ordered to “pay the monthly mortgage obligation with respect to the matrimonial home.”

By a further order of the said Court dated November 27, 1991 the appellant was ordered to pay the former spouse maintenance of $400 per month per child in respect of three children... This order also provided that the appellant was to “continue to pay the monthly mortgage obligations with respect to the matrimonial home....”

At trial the Tax Court Judge found in favour of the taxpayer. The Federal Court of Appeal reversed this decision and allowed the Minister’s appeal on the basis that the wording specified in subsection 60.1(2) of the Act was absent.

In Larsson (supra), the Crown’s application for judicial review was dismissed. This decision pertains to the same type of payments as those in the Armstrong case. These payments not being payments of a periodic amount are within the scope of subsection 60.1(2) and not 60.1(1). They were found to be deductible on the basis of a fourth Court Order that continued the previous ones and used the specific language provided for by subsection 60.1(2) of the Act.

I believe that in the instant case, the facts are similar to the facts that were under study in the decision of Bowman J. in Hak v. R. (1998), 99 D.T.C. 36 (T.C.C.). This decision was followed by Sarchuk J. in Chute v. R., [1999] 2 C.T.C. 2864 (T.C.C.). These decisions were rendered pursuant to paragraph 60(b) or (c) and subsection 60.1(1) of the Act.

I quote extensively from Hak (supra) because this judgment analyzes the jurisprudence cited to me by counsel for the Respondent and by the Appellant and I am in agreement with this analysis:

[3] The appellant testified that he and his wife separated on January 2, 1995 and that on that day they signed a separation agreement. I accept that the agreement was signed by both spouses on January 2, 1995. It reads as follows:

We, ANWAR HAK and FAZIMA HAK mutually agree as follows:

5. That Anwar Hak will provide $1000 per month for alimony
and support, or
Pay apartment rent of	$455.00/month
Utility bills of approximately	$200.00/month
Health care premium approximately	$100.00/month
Total	$750.00/month [sic]

[10] The respondent bases the denial of the deduction upon a construction of paragraph 60(b), section 60.1 and subsection 56(12) and upon what she contends is the effect of a decision of the Federal Court of Appeal in The Queen v. Armstrong 96 DTC 6315.

[12] Counsel for the respondent agreed that had Mr. Hak simply paid his spouse $1,000 per month and let her pay the rent and utilities and other expenses, there would be no question that he could deduct it. Instead, however, the spouses agreed to an arrangement whereby a portion of the $1,000 per month would be paid directly to the gas and utility companies and the balance would be paid to her. This method of payment was specifically set out in the agreement as an alternative to paying her directly the $1,000 per month. Although the agreement does not use the words “on behalf of Fazima Hak” or “for the benefit of Fazima Hak”, this is plainly the intent and effect of the agreement and, in particular, paragraph 5 thereof. Without more, I should have thought it obvious that the appellant’s making the payments on Fazima Hak’s behalf and for her benefit would constitute constructive receipt by her and would be a payment by Mr. Hak of the type contemplated by paragraph 60(b).

[15] The respondent relies upon subsection 56(12), which provided:

Subject to paragraphs (l)(b), (c) and (c .1) (in this subsection referred to as the “former paragraphs”) and 60(b), (c) and (c.1) (in this subsection referred to as the “latter paragraphs”), “allowance” does not include any amount that is received by a person, referred to in the former paragraphs as “taxpayer” and in the latter paragraphs as “the taxpayer” and in the latter paragraphs as “the recipient”, unless that person has discretion as to the use of the amount.

[16] This provision may have been introduced as the result of the decision of the Supreme Court of Canada in J.-P. Gagnon v. The Queen [86 D.T.C. 6179], [1986] 1 C.T.C. 410.

[17] It appears quite obvious that Fazima Hak had a discretion with respect to the entire $1,000, and she exercised that discretion by constituting her husband her agent to pay on her behalf certain expenses such as utility bills and rent. What Fazima Hak is saying in effect is “You are to pay me $1,000 per month. You can satisfy part of that obligation by paying some of my bills.”

[18] Counsel however argues that the failure to provide in the agreement that subsections 56.1(1) and 60.1(2) apply is fatal to the appellant’s claim.

[31] 1 do not think that subsection 60.1(2) has any application. The payment of the rent and utility expenses was simply an alternative means, agreed to by the spouses, of satisfying a portion of the appellant’s obligation to pay his spouse the periodic allowance of $1,000 per month. The failure to mention in the agreement that a provision that has no application in any event should apply to the payments cannot be fatal to deductibility under paragraph 60(b).

[32] Counsel referred to the decision of the Federal Court of Appeal in Armstrong. Before I discuss that case, I should mention an earlier decision of the Federal Court of Appeal in The Queen v. Arsenault 96 DTC 6131.

[33] The headnote sets out the facts as follows:

Pursuant to a Separation Agreement dated June 26, 1984, the taxpayer was require [sic], inter alia, to pay maintenance in the amounts of $400 per month to his separated spouse, S, and $100 per month for each of three children. Instead of making such payments, the taxpayer provided S with monthly cheques of $690 (later $760) made payable to the landlord, which S delivered to the latter. In assessing the taxpayer for 1991 and 1992 the Minister disallowed the deductions which the taxpayer had claimed in respect of these rental cheques. The taxpayer’s appeal to the Tax Court of Canada was allowed. The Tax Court Judge concluded that the amounts paid by the taxpayer were limited and predetermined, and that they represented a certain type of expense which S was thereby enabled to discharge. In addition, in the Tax Court Judge’s view, S had constructive receipt of the amounts involved, in that she had acquiesced in the taxpayer’s payment thereof to her landlord, thus constituting the landlord as her agent for the receipt and appropriate expenditure thereof. Hence, in the Tax Court Judge’s mind, all of the requirements of paragraph 60(b) and subsection 56(12) had been met, and this led him to the conclusion that the amounts in issue were deductible. The Minister applied to the Federal Court of Appeal for a judicial review of the Tax Court Judge’s findings.

[34] The oral judgment of the majority (Strayer and MacGuigan, J J. A.) was delivered by Strayer, J.A. as follows:

I am of the view that the applicant has not demonstrated any reviewable error on the part of the learned Tax Court judge. I believe he was right in concluding that the payments in question came within paragraph 60(b) of the Income Tax Act as on the facts of this case the respondent’s former spouse retained a discretion as to how the money was paid pursuant to the separation agreement and judgment and thus as to the use of that amount.

[36] Three months, later the issue of payments to third parties again came before the Federal Court of Appeal in Armstrong. The panel was Isaac, C.J., Stone and Linden, JJ.A. The judgment was delivered by Stone, J.A. In that case, the taxpayer was ordered by the Saskatchewan Court to make the monthly mortgage payments on the matrimonial home in which his wife continued to reside. The Court in ordering the payment had not mentioned subsection 60.1(2). The Federal Court of Appeal held that the taxpayer could not rely on the deeming provision at the end of subsection 60.1(2) and further that subsection 60.1(1) could not be relied upon as the merits paid were not on “allowance” within subsection 56(12) because the spouse had no discretion as to the use of the mortgage payments.

[37] I am of course bound by that decision to the extent that its ratio decidendi applies. It dealt with payments specifically contemplated by subsection 60.1(2) that would not otherwise fall within paragraph 60(b). Moreover, the order was made by the Court and left, apparently, the spouse with no discretion. Here we have payments that in my view, are covered by paragraph 60(b) and an agreement between the spouses that does no more than permit the appellant to fulfil in part his obligation to pay the periodic amount of $1,000 by paying certain bills that the wife would otherwise have to pay out of the $1,000 monthly allowance. In my view, this case is much more specifically covered by Arsenault. I cannot assume, in the absence of a clear indication to the contrary, that the Federal Court of Appeal in Armstrong intended to overrule its own decision of three months earlier in Arsenault. Indeed, this case is stronger than Arsenault. In Arsenault, the husband unilaterally presented his wife with cheques payable to third parties. In this case, the payments were made with the wife’s express consent.

Subsections 60.1(1) and 56(12) of the Act read as follows:

(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 pur- pose aragraphs o 60(b) and (c) to have been paid to and received by that person. (Emphasis added)

56(12) Subject to subsections 56.1(2) and 60.1(2), for the purposes of paragraphs (1)(b), (c) and (c.1) (hereinafter in this subsection referred to as the “former paragraphs”) and 60(b), (c) and (c.l) (hereinafter in this subsection referred to as the “latter paragraphs”), “allowance” does not include any amount that is received by a person, referred to in the former paragraphs as “the taxpayer” and in the latter paragraphs as “the recipient”, unless that person has discretion as to the use of the amount.

In my view, there is no doubt that the wording of the relevant clause of the judgment of Justice Nolin of the Superior Court, cited at paragraph [3] of these Reasons, is within the ambit of subsections 60.1(1) and 56(12) of the Act. If one reads that clause, it says that the Appellant had to pay the periodic amount of $1,550 per month, payable to the Appellant’s ex-wife and that he had to pay this amount in full. He was instructed to deduct from this amount some amounts to third parties, but discretion remained in the Appellant’s ex-wife as to the outcome of these payments. She could have paid herself the mortgage payments on a house of which she was the owner and the Appellant would have had then to pay to her the full amount of $1,550. She was entitled to the payment of a periodic amount of $1,550 per month. I also find that the deeming provision of subsection 60.1(1) of the Act, which provides that such amount shall be deemed to have been paid and received by the person for the benefit of whom the amount is paid to third parties, should be given its meaning as is any other enacted legislative provision. A person to whom an amount is paid has discretion as to the use of this amount.

Consequently, the appeals are allowed, without costs, and the assessments are referred to the Minister of National Revenue for reconsideration and reassessment, in accordance with the above reasons.

Appeal allowed.