DR L R Barron v. Minister of National Revenue, [1978] CTC 3162, [1978] DTC 1856

Guy Tremblay [TRANSLATION]:—This case was heard on November 16, 1977 in Montreal, Quebec.

1. Point at Issue

The question here is whether, for the 1971 and 1972 taxation years, the respondent was justified

(a) first of all, in only allowing one-third of the automobile expenses of the appellant, an obstetrician who owns two automobiles, one a Jaguar used exclusively for professional purposes;

(b) in disallowing as a deduction the expenses incurred to maintain the domicile where his wife and children live; the whole in accordance with two judgments of the Superior Court of Montreal.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in R IV S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.1 The appellant is an obstetrician.

(A) Automobile expenses

3.2 In 1970, the appellant owned a Thunderbird for six months. In had been purchased in 1968 for $6,000. In July of 1970, he purchased a Jaguar for $7,000 which he still owned in 1972 and 1973.

3.3 According to his testimony, the appellant who lives in Montreal, regularly used his Jaguar for his professional needs. The other automobile was used for her personal needs. He also used this automobile for his professional needs when the Jaguar was being repaired. He was the sole driver of the two automobiles.

3.4 During the years concerned, the appellant had offices in St- Laurent, Pierrefond and Dorval. He was associated with the Ste-Claire Hospital.

He began visiting his patients at the hospital at approximately 7:30 or 8:00 am and then went round his offices. Three evenings a week, he did office work. In addition, he was on emergency call.

3.5 Owing to the distances involved, the appellant stated that he did between 150 and 200 miles a day, five days a week.

3.6 For the years concerned, the automobile expenses (depreciation included) and the amounts claimed as deductions were as follows:

(B) Maintenance expenses of domicile

3.7 In a separation from bed and board dated September 11, 1970, the Superior Court of Montreal (No 777,984) ordered the appellant to pay alimony of $200 per week to his wife effective immediately, for her benefit and that of their two children. In addition, the decree stipulated the following clause: “the respondent shall maintain the building in question and its outbuildings and keep it in good condition fit for habitation, at his expense, for the benefit of the two children”.

3.8 In a decree absolute of divorce dated June 29, 1972, the Superior Court of Montreal (No 137555) ordered the appellant to pay alimony of $175 per week, effective immediately, to his wife. In addition, the decree contained the following clause:

maintenance

The petitioner is order to look after the maintenance of the. said former common domicile, pay all taxes and other incidental expenses, for the benefit of the two minor children.

3.9 During the years concerned, the appellant made the following payments to third parties as interest, taxes and insurance for the domicile where his wife and children were living:

These expenses were claimed by the appellant as part of his alimony or other allowance of the same nature.

(C) Assessment—objection—appeal

3.10 On June 20, 1975, the respondent issued a notice of reassessment for the 1970, 1971 and 1972 taxation years, reducing the automobile expenses claimed by two-thirds and disallowing the maintenance expenses for the residence where his wife and children were living.

3.11 On August 5, 1975, a notice of objection was filed with the Minister.

3.12 On December 26, 1976, as the respondent had still not answered the notice of objection, the appellant filed an appeal with the Tax Review Board since the legal time limit of 180 days from the date of the notice of objection had passed.

4. Act, Case Law and Comments

4.1 Maintenance expenses of the residence

4.1.1 The section of the Income Tax Act relative to alimony as deductible expenses is paragraph 11 (1)(l) of the old Act for 1970 and 1971, and paragraph 60(b) of the new Act for 1972. These sections read as follows:

11. (1) Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may de decuted in computing the income of a taxpayer for a taxation year:

(I) an amount paid by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if he was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, his spouse or former spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year.

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, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if he was living apart from, and was separated pursuant to a divorce, judicial separation or written agreement from, his spouse or former spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year.

4.1.2 The parties cited the following precedents:

Richard A Hastie v MNR, [1972] CTC 2383; 72 DTC 1335;

Her Majesty the Queen v Morton Pascoe, [1975] CTC 656; 75 DTC 5427;

Attorney General of Canada v James C Weaver and Freda J Weaver, [1975] CTC 646; 75 DTC 5462:

Carl Caleb Cotton v Her Majesty the Queen, [1976] CTC 406; 76 DTC 6232;

John Douglas Rice v MNR, [1976] CTC 2001 ; 76 DTC 1017;

J V R Gagné v MNR, [1976] CTC 2163; 76 DTC 1125;

Geoffrey F Brooks v MNR, [1977] CTC 2048; 77 DTC 38.

In the first case, that of Richard A Hastie v MNR, Mr Boisvert, a Member of the Board, made a decision on facts similar to those set out in this case. By judgment of the Court, the taxpayer was ordered to pay alimony and, in addition, an amount to cover the hypothec, taxes and maintenance expenses. With his wife’s consent, the husband made the required payments directly to the hypothecary creditors. The Department of National Revenue disallowed as expenses of the taxpayer the amounts paid to the hypothecary creditors. Mr Boisvert authorized them on the grounds, inter alia, that the wife had agreed to and benefited from the payment, and that under the Civil Code, Art 1144, payment made to a person authorized to receive it for the creditor is valid.

Since this judgment was handed down in 1972, the Federal Court of Canada and the Federal Court of Appeal of Canada have handed down decisions to the contrary. They are to the effect that even if an agreement or judgment requires the husband to pay, or to make payments (education expenses, medical fees, taxes and so forth), these sums cannot be allowed as a deduction in computing the net income of the person paying because they are not paid to the spouse on a periodic basis, as prescribed by the Act.

In Her Majesty the Queen v Morton Pascoe, [1975] CTC 656: 75 DTC 5427; Pratte, J states:

An allowance is, in our view, a. limited predetermined sum of money paid to enable the recipient to provide for certain Kinds of expense; its amount is determined in advance and, once paid, it is at the complete disposition of the recipient who is not required to account for it. A payment in satisfaction of an obligation to indemnify or reimburse someone or to defray his or her actual expenses is not an allowance; it is not a sum allowed to the recipient to be applied in his or her discretion to certain kinds of expenses.

In the case at bar, the Board must follow this strict interpretation. The Income Tax Act, being a public policy statute, should be interpreted restrictively.

In the case at bar, hypothec payments and taxes are periodic payments but they were not made to the spouse.

However, since May 16, 1974 the legislator has mitigated the unfair consequences for the taxpayer of the strict interpretation which must be given. Thus section 60.1 was added to the Act, authorizing the deduction of periodic expenses made to third parties for the benefit of the spouse or children, these expenses being deemed to have been paid to the spouse.

Unfortunately, section 60.1 cannot apply to this case, since the years concerned are prior to May 16, 1974.

Thus, the Board cannot allow the expenses listed in paragraph 3.9 of the facts as deductions in the calculation of income.

4.2 Automobile expenses

The respondent does not question whether the amounts of the expenses listed in paragraph 3.6 of the facts were incurred by the appellant for professional purposes. The only item under dispute is that the appellant claimed 90% of his expenses and the respondent only allowed one-third of that amount.

In view of the evidence given and described above, the Board is of the opinion that 80% of the expenses incurred for professional purposes should be allowed as a deduction. The only personal expenses are those incurred in the use of the car from his residence to the hospital.

5. Conclusion

The appeal is allowed in part and the matter is referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed in part.