Date: 20020516
Docket: A-816-00
Ottawa, Ontario, May 16, 2002
CORAM: DESJARDINS J.A.
LÉTOURNEAUJ.A.
PELLETIERJ.A.
BETWEEN:
GASTON VEILLEUX
Applicant
and
HER MAJESTY THE QUEEN
Respondent
JUDGMENT
The application for judicial review is allowed with costs in this Court and in the Tax Court of Canada, the decision of the Tax Court of Canada is set aside, and the matter is referred back to the Tax Court for redetermination on the basis that the taxpayer's appeal must be allowed and the assessment referred back to the Minister for reconsideration and reassessment, taking these reasons into account.
"Alice Desjardins"
J.A.
Certified true translation
S. Debbané, LLB
Date: 20020516
Docket: A-817-00
Ottawa, Ontario, May 16, 2002
CORAM: DESJARDINS J.A.
LÉTOURNEAU J.A.
PELLETIER J.A.
BETWEEN:
GASTON VEILLEUX
Applicant
and
HER MAJESTY THE QUEEN
Respondent
JUDGMENT
The application for judicial review is allowed, the decision of the Tax Court of Canada is set aside, and the matter is referred back to the Tax Court for redetermination on the basis that the taxpayer's appeal must be allowed and the assessment referred back to the Minister for reconsideration and reassessment, taking these reasons into account.
"Alice Desjardins"
J.A.
Certified true translation
S. Debbané, LLB
Date: 20020516
Docket: A-816-00
Neutral citation: 2002 FCA 201
CORAM: DESJARDINS J.A.
LÉTOURNEAUJ.A.
PELLETIERJ.A.
BETWEEN:
GASTON VEILLEUX
Applicant
and
HER MAJESTY THE QUEEN
Respondent
Hearing held at Montréal, Quebec, on May 8, 2002
Judgment delivered at Ottawa, Ontario, on May 16, 2002.
REASONS FOR JUDGMENT: LÉTOURNEAU J.A.
CONCURRED IN BY: DESJARDINS J.A.
PELLETIER J.A.
Date: 20020516
Docket: A-816-00
Neutral citation: 2002 FCA 201
CORAM: DESJARDINS J.A.
LÉTOURNEAUJ.A.
PELLETIERJ.A.
BETWEEN:
GASTON VEILLEUX
Applicant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
LÉTOURNEAU J.A.
[1] Was the applicant justified, under section 60 and subsection 60.1(2) of the Income Tax Act (the Act), in deducting payments he made to third parties pursuant to an agreement with his former spouse resulting from their divorce? That question was answered in the negative by the Tax Court of Canada in the following context.
Facts and procedure
[2] The applicant was divorced in 1989 and judgment was rendered on December 20 of that year. An agreement on corollary relief was filed in the Superior Court, district of Longueuil, to be incorporated into the divorce judgment.
[3] Under that agreement, the applicant agreed to pay his former spouse support of $250 a week, indexed annually. He also agreed to pay all of the expenses relating to the family residence in which his former spouse and their three children continued to live. Those payments were made directly to the creditors.
[4] On March 13, 1990, the former spouse and the applicant signed a supplementary agreement prepared by the applicant to provide for the tax treatment of the amounts the applicant paid to third parties. The agreement on corollary relief that had accompanied the divorce judgment of the Superior Court and provided for those payments was silent on that point. For 1994, 1995, 1996, and 1997, the years in issue, the amounts paid by the applicant on that basis totalled $17,369, $19,265, $20,104 and $19,921 respectively.
[5] It was admitted that the applicant deducted those amounts from his income and that his former spouse included them in hers starting in 1990 and, at least, it seems, until the Minister of National Revenue (the Minister) made the reassessments.
[6] In fact, on May 15, 1998, eight years after the applicant filed his first return claiming a deduction for payments made to third parties, Revenue Canada reassessed the applicant for the years 1990 to 1997 on the ground that the deduction was not permissible.
[7] The assessments for the years 1990 to 1993 were abandoned because they were out of time. The applicant objected to the assessments for the period in issue and his appeals to the Tax Court of Canada in docket nos.1999-3605 (IT) and 1999-3606 (IT) were dismissed on November 21, 2000. This application for judicial review was then made to this Court under section 28 of the Federal Court Act.
Relevant statutory provisions
[8] The statutory provisions out of which this case arose and which the Tax Court of Canada relied on to render its decision are reproduced below:
|
56.(1) Amounts to be included in income for year. Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year, ... |
56.(1) Sommes à inclure dans le revenu de l'année. Sans préjudice de la portée générale de l'article 3, sont à inclure dans le calcul du revenu d'un contribuable pour une année d'imposition : ... |
|
56.1(2) Agreement. For the purposes of section 56, this section and subsection 118(5), the amount determined by the formula ... is, where the order or written agreement, as the case may be, provides that this subsection and subsection 60.1(2) shall apply to any amount paid or payable thereunder, deemed to be an amount payable to and receivable by the taxpayer as an allowance on a periodic basis, and the taxpayer is deemed to have discretion as to the use of that amount. |
56.1(2) Entente. Pour l'application de l'article 56, du présent article et du paragraphe 118(5), le résultat du calcul suivant : ... est réputé, lorsque l'ordonnance ou l'accord écrit prévoir que le présent paragraphe et le paragraphe 60.1(2) s'appliquent à un montant payé ou payable à leur titre, être un montant payable au contribuable et à recevoir par lui à titre d'allocation périodique, qu'il peut utiliser à sa discrétion. |
|
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: ... |
60. Autres déductions. Peuvent être déduites dans le calcul du revenu d'un contribuable pour une année d'imposition les sommes suivantes qui sont appropriées : ... |
|
60.1(2) Agreement. For the purposes of section 60, this section and subsection 118(5), the amount determined by the formula ... is, where the order or written agreement, as the case may be, provides that this subsection and subsection 56.1(2) shall apply to any amount paid or payable thereunder, deemed to be an amount payable by the taxpayer to that person and receivable by that person as an allowance on a periodic basis, and that person is deemed to have discretion as to the use of that amount. (Emphasis added) |
60.1(2) Entente. Pour l'application de l'article 60, du présent article et du paragraphe 118(5), le résultat du calcul suivant : ... est réputé, lorsque l'ordonnance ou l'accord écrit prévoit que le présent paragraphe et le paragraphe 56.1(2) s'appliquent à un montant payé ou payable à leur titre, être un montant payable par le contribuable à cette personne et à recevoir par celle-ci à titre d'allocation périodique, que cette personne peut utiliser à sa discrétion. (le souligné est mien) |
The decision of the Tax Court of Canada
[9] Essentially, the Court dismissed the applicant's claims because it was of the opinion that the supplementary agreement drafted by the applicant did not specify that subsections 56.1(2) and 60.1(2) of the Act applied to the payments made to third parties when that was, in the words of the Court, a strict requirement. As in Pelchat v. The Queen, 97 DTC 945 (T.C.C.), the Court was prepared to accept that the failure to refer expressly to subsections 56.1(2) and 60.1(2) could be remedied by language reflecting the substance of those subsections, that is, that the amounts paid to third parties are taxable in the hands of the recipient of the support payments and that the amounts paid by the payer may be deducted in computing his income.
[10] After reviewing the supplementary agreement, the Court was of the opinion that there was no clear reference in the agreement to the tax treatment provided in subsections 56.1(2) and 60.1(2), as there was in Pelchat. I will address the alternative that was accepted by Judge Archambault in Pelchat later.
The respondent's position in this case
[11] At this point, I would note that the respondent took a very strict position in relation to the interpretation of subsections 56.1(2) and 60.1(2). In her opinion, payments made to third parties cannot be considered to be amounts payable as an allowance to the recipient and therefore deductible by the payer, unless the subsection numbers are expressly stated in the written agreement. In other words, wording that is similar in substance to those subsections is not sufficient.
[12] The respondent explained her position by citing two decisions of this Court: Armstrong v. Canada, [1996] F.C.J. No. 599 (F.C.A) and Larsson v. Canada, [1997] F.C.J. No. 1044 (F.C.A). Before discussing those two decisions and the merits of the respondent's position, we must briefly consider the purpose for which Parliament enacted those subsections.
The purpose for which Parliament used the words "where the order or written agreement provides that subsections 56.1(2) and 60.1(2) shall apply"
[13] The purpose of subsections 56.1(2) and 60.1(2) is to allow the payer to deduct payments made to third parties for the benefit of his or her former spouse, provided that those amounts are included in the former spouse's income. The purpose of the requirement that the written agreement state that those subsections shall apply seems to be "to ensure that the parties in question were fully aware of the fiscal consequences resulting from the payments made in accordance with a written agreement, a judgment or an order of a court for the specific purposes mentioned in that agreement, judgment or order": Mailloux v. Canada, [1991] T.C.J. No. 641, at page 3 (T.C.C.) per Chief Judge Garon; Mambo v. The Queen, [1996] 1 T.C.J. 2388 (T.C.C.); Pelchat v. The Queen, 97 DTC 945 (T.C.C.); Jenkins v. Canada, [1999] T.C.J. No. 742.
[14] It is easy to understand why it is necessary to inform the person who benefits from those payments that he or she must include the amounts in his or her income and of the fact that he or she must pay the taxes owing on those amounts. I acknowledge however that the requirement that subsection 60.1(2) be referred to in the written agreement, particularly where the taxpayer will otherwise lose the entitlement to the deduction, seems to me to be less obvious and less necessary. In fact, unlike section 56, section 60 does not impose any obligation on the payer. It merely gives the payer the option of deducting the amounts paid if he or she wishes. Why then penalize the payer if he knew, although the written agreement made no reference to subsection 60.1(2), that he could exercise that option and in fact did so? Why then penalize the payer for his knowledge of his right to the deduction, if the purpose of that provision was to inform the payer of that right? Worse still, why penalize the payer if the court referred to subsection 56.1(2) in its divorce judgment but failed, by sheer inadvertence, to specify the magic words "subsection 60.1(2)"? Perhaps the reference to subsection 60.1(2) was also intended to inform the person for whose benefit the payments are made that, in that entire process, the payer is given a tax advantage. Whatever the case, even though Parliament did require that the written agreement specify that subsection 60.1(2) applies to the amount paid, I do not believe that its intention was to deprive the taxpayer of an option available to the taxpayer because he or she failed to refer to an option, in the written agreement, that he or she already knew existed or because the court failed to inform the taxpayer of that option. This brings me to the nature of the requirement that the written agreement refer to those paragraphs.
Must the written agreement refer expressly to subsections 56.1(2) and 60.1(2), or may it refer to the substance of those provisions?
[15] As noted earlier, the respondent adopted a very strict interpretation of subsections 56.1(2) and 60.1(2) which, she argued, was dictated by the decision of this Court in Armstrong and Larsson, supra. We will begin by analyzing Armstrong, on which Larsson subsequently relied.
[16] The relevant passage in Armstrong is very short and is worth reproducing. At page 6, paragraph 16 of the decision, our colleague Stone J.A. wrote:
The view that subsection 60.1(2) applies can be dealt with shortly. In my view, the deeming provision employed by Parliament at the end of this subsection applies only "where the decree, order, judgment or written agreement...provides that this subsection and section 56.1(2) shall apply to any payment made pursuant thereto." No such statutory language appears in either of the court orders. It follows, therefore, that subsection 60.1(2) can have no application in allowing the amounts to be deducted from the respondent's income.2
(Emphasis added)
In footnote 2 to that passage, Stone J.A. referred to Mambo, supra, which states that the valid purpose of those provisions is to "confirm that both parties know that there are tax consequences to such an order or agreement."
[17] With respect, I do not believe that what Stone J.A. said has the meaning attributed to it by the respondent. He did not say that the agreement had to refer to the numbers of the sections. On the contrary, he said "no such statutory language appears in either of the court orders." "Such statutory language" must be taken to mean language that shows or confirms that the parties are aware of the tax consequences of the order.
[18] I acknowledge that McDonald J.A. seems to have gone further in Larsson than Stone J.A. did in Armstrong. At page 4 of the decision, in paragraph 16, after pointing out that subsection 60.1(2) is ambiguous, McDonald J.A. wrote:
Subsection 60.1(2) goes on to allow for deductibility of certain amounts where the court order or support agreement makes specific mention of subsections 56.1(2) and 60.1(2). The one clear thread from all of this seems to be that to ensure deductibility of support payments, the order or agreement should mention subsections 56.1(2) and 60.1(2).
[19] Three comments should be made. First, that assertion by McDonald J.A. was not necessary to the decision made in that case, since the fourth order made by the Court referred expressly to subsections 56.1(2) and 60.1(2), and so the payments made in accordance with that order were correctly deemed to be allowances.
[20] Second, the real issue, rather, was whether that fourth order should be applied retroactively. This is apparent from paragraph 20 of the decision:
As can be seen, much turns on whether the fourth order of the British Columbia Supreme Court was intended to apply retroactively. The question for this Court, then, is whether the fourth order ought to be deemed to have been made nunc pro tunc.
[21] Third, the actual wording of subsection 60.1(2) does not require that the written agreement refer expressly to that subsection, to subsection 56.1(2), and to their numbers. The agreement need only say that those subsections apply. And as can be imagined, there are several ways of saying that the content of a numbered passage applies that are often more informative and useful, other than simply by referring to the number.
[22] I do not think it is irrelevant to recall the fiscal and social context of which sections 56 and 60 and subsections 56.1(2) and 60.1(2) of the Act are a part.
[23] Sections 56 and 60 allow a taxpayer to split his or her income for tax purposes. In this case, their purpose is to minimize the negative and in some cases devastating financial effects of a divorce for spouses and their children. They are intended to provide some assistance when the family unit breaks up. As a result of an unduly strict interpretation of subsections 56.1(2) and 60.1(2), a legislative measure enacted for the benefit of the family after the breakdown is becoming a measure for the benefit of the government, one that is adverse to the interests of the distraught family that Parliament wanted to assist financially.
[24] I prefer the approach taken by Judge Archambault of the Tax Court of Canada in Pelchat, supra, and Ferron v. Her Majesty the Queen, 2001 DTC 230, which is more representative of Parliament's intention, consistent with the wording itself of the statutory provisions, and humane: an express reference to the numbers of subsections 56.1(2) and 60.1(2) is not required in the written agreement; it need only be apparent from the written agreement that the parties have understood the tax consequences of that agreement. A mere reference to the numbers of the subsections in the agreement is no better guarantee that the parties to the agreement understood their duties and their rights. On that point, stating and describing those duties and rights in the written agreement seems, in my view, to achieve Parliament's objective just as well as, if not better than, a mere magical reference to numbers of sections the substance of which is not stated in the agreement.
[25] Moreover, having regard to Parliament's objective in enacting sections 56 and 60, the parties' intention when they draft and sign the written agreement that will govern their financial relations after the divorce must be taken into account in interpreting subsections 56.1(2) and 60.1(2), which are tools for implementing the principle in sections 56 and 60. In Gagné v. Her Majesty the Queen, 2001 DTC 5639, at paragraph 10 (F.C.A), which also involved the interpretation, in a divorce situation, of an interim relief agreement that was ratified by a court, Décary J.A, writing for this Court, correctly summarized the principles that apply in such a case:
It is settled law, in Quebec civil law, that if the common intention of the parties in an agreement is doubtful, the judge [TRANSLATION] "must try to find what the parties truly intended by their agreement"(Jean-Louis Baudouin, Les Obligations, 4th Ed., 1993, Les Éditions Yvon Blais, p. 255). The judge must [TRANSLATION] "place greater weight on the real intention of the contracting parties than on the apparent intention, objectively manifested by the formal expression" (p. 255), and he must ascertain the effect that the parties intended the contract to have (p. 256). To do so, the judge must have a overall picture of the parties' intention, which calls for an analysis of all of the clauses in the contract in relation to one another (p. 258). If there is any remaining doubt as to the parties' real intention, the judge may [TRANSLATION] "examine the manner in which the parties conducted themselves in relation to the contract, in their negotiations, and most importantly their attitude after entering into the contract, that is, the manner in which the parties have interpreted it in the past..." (pp. 258-259).
In determining that intention, and consequently the parties' knowledge and understanding of their duties and rights, the written agreement, if it is clear, plays a crucial role. However, if the agreement is ambiguous or silent, the circumstances in which it was drafted and entered into and the parties' conduct after it was signed become relevant in determining that intention and knowledge. It will be recalled that the combined purposes of sections 56 and 60 and subsections 56.1(2) and 60.1(2) are to give divorced couples the option of reducing their tax burdens and to ensure that they are aware and informed of the consequences for both of them of doing so.
Application of these principles to the written agreement in this case
[26] Counsel for the applicant conceded that in this case, the agreement that was drafted by Mr. Veilleux, an engineer by profession, and accepted by his former spouse, is ambiguous, but not to the point that it fails to reveal the knowledge and understanding of the parties to the agreement with respect to their respective duties and rights. He submitted that the former spouse knew that she would be taxed on her declared income for the amounts Mr. Veilleux paid as an allowance on a periodic basis and as support, and that he would reimburse her for the taxes paid. Mr. Veilleux would deduct from his income the amounts paid for his former spouse's benefit. The evidence, in fact, shows that this is what they did for ten years.
[27] The following two paragraphs of the agreement are central to the applicant's claim:
[TRANSLATION] All amounts that Gaston Veilleux agrees to pay to Louise Ouellette are net of tax; accordingly, Gaston Veilleux agrees to pay any federal and provincial taxes that may be owed by Louise Ouellette arising from the payment of the said maintenance.
All amounts paid to Louise Ouellette or to third parties on her behalf shall be deemed to be part of the support; those amounts shall include the expenses relating to the family residence (i.e. mortgage payments, municipal and school taxes, home insurance, electricity, heating, maintenance and cable), expenses relating to the various family insurance plans (i.e. life insurance for dependants, survivor pension, hospitalization, medical expenses, paramedical expenses, dental insurance), provincial and federal income tax and any other amount that may be agreed on by the two parties (automobile repairs, children's activity fees, etc.).
[28] What the first paragraph tells us is that Ms. Ouellette, Mr. Veilleux's former spouse, will pay taxes arising from the support she will be paid but that Mr. Veilleux will reimuburse her for the taxes she pays.
[29] The second paragraph informs the former spouse that payments made to third parties on her behalf are part of the support she will receive and therefore are included in the amounts on which she will be required to pay taxes.
[30] In my humble opinion, the wording of those two paragraphs was undoubtedly not the best or the clearest but, read together, they inform Mr. Veilleux's former spouse that she will be taxed on amounts paid to third parties on her behalf, which is the substance of subsection 56.1(2).
[31] The respondent argued that if the Court determined that the requirements of subsection 56.1(2) had been met, there is still nothing in the agreement relating to subsection 60.1(2) and informing Mr. Veilleux of the option available to him of deducting from his income amounts paid to third parties. As a result, she said, Mr. Veilleux could not deduct those amounts. I admit that this conclusion is indeed surprising particularly in the context of this case.
[32] First, as I noted earlier, section 60 is not mandatory but merely permissive. It does not create an obligation. As in this case, if the applicant both has knowledge of the tax consequences of the agreement for his spouse and also not only knows the consequences for himself but demonstrates that by exercising his right to the deduction, how can it be said that the objectives of subsection 60.1(2) have not been achieved in respect of him?
[33] The uncontradicted evidence before the Court shows that the applicant wrote the agreement in question as a result of the divorce judgment, and precisely so that he could benefit from the tax relief provided by Parliament. He did so using pamphlets from the Department informing taxpayers of this option, among other things: transcript, pages 13 to 16 and 27.
[34] Given the context in which this agreement was entered into and written, not only did the applicant implicitly reserve the right to claim the tax advantages that resulted when he assumed obligations to make payments to third parties for the benefit of his former spouse, but he clearly stated in his testimony that he was aware of those advantages, and was seeking them:
[TRANSLATION]
Q. And your objective in entering into a written agreement after the Superior Court rendered judgment was to ensure that the amounts paid directly to your wife and to third parties as support could be deducted?
A. That's right.
[35] For the purposes of section 56, the definition of "support amount" in subsection 56.1(4) includes amounts payable or receivable as an allowance on a periodic basis:
|
"support amount" means an amount payable or receivable as an allowance on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient and children of the recipient, if the recipient has discretion as to the use of the amount, and |
"Pension alimentaire" Montant payable ou à recevoir à titre d'allocation périodique pour subvenir aux besoins du bénéficiaire et de ses enfants, si le bénéficiaire peut utiliser le montant à sa discrétion... |
Subsection 60.1(4) provides that the definitions in subsection 56.1(4) apply to section 60.
[36] It is apparent from subsections 56.1(4) and 60.1(4) that as long as the recipient has discretion as to the use of amounts paid and received as an allowance on a periodic basis, these amounts constitute support amounts that the recipient must include in his or her income under section 56 and that the payer may deduct under section 60. Subsection 60.1(2) creates a presumption that payments made to third parties by the taxpayer for the benefit of the recipient constitute an allowance on a periodic basis that the recipient may use at his or her discretion and are therefore support amounts.
[37] When the second paragraph of the written agreement prepared by Mr. Veilleux and the context in which it was concluded are examined closely, the amounts he paid to third persons were clearly deemed to be part of the support amount and thus constituted allowances on a periodic basis within the meaning of subsections 56.1(4), 60.1(4) and 60.1(2), which his former spouse would be receiving and on which she would be taxed. In my humble opinion, the parties' written agreement reflects the substance of subsections 56.1(2) and 60.1(2) and the definition of "support amount" in subsection 56.1(4) and 60.1(4), which themselves refer to 56.1(2) and 60.1(2), to a sufficient extent for the applicant in this case to be able to benefit from the presumption provided in those latter two subsections.
[38] Disallowing the deductions claimed by the applicant, in the circumstances, amounts to penalizing him unfairly by denying him a right that is the corollary of all the support obligations that he assumed and carried out in good faith. When we consider the many difficulties the
government and creditors have in collecting amounts owed, it seems important to me that a statutory provision not be interpreted so strictly that it both hampers Parliament's intention with respect to that provision and discourages debtors from assuming their support obligations, as Parliament also intended that they do. That is undoubtedly why Revenue-Québec accepted the applicant's written agreement, after a scrupulous review, and why it allowed the deductions claimed by the applicant despite the shortcomings in the wording of the agreement.
[39] For these reasons, I am of the opinion that the applicant is entitled to the deductions claimed for the years in issue, 1994 to 1997. Accordingly, I would allow the application for judicial review with costs in this Court and in the Tax Court of Canada, set aside the decision of the Tax Court of Canada and refer the matter back to it for redetermination on the basis that the taxpayer's appeal must be allowed and the assessment referred back to the Minister for reconsideration and reassessment, taking these reasons into account. I would file a copy of these reasons in docket no. A-817-00 in support of the judgment allowing the applicant's application
for judicial review but I would not award costs in docket no. A-817-00 given that the cases were heard together in this court and in the Tax Court of Canada.
"Gilles Létourneau"
J.A.
"I concur with these reasons.
Alice Desjardins J.A."
"I concur.
J.D. Denis Pelletier J.A."
Certified true translation
S. Debbané, LLB
FEDERAL COURT OF APPEAL
SOLICITORS OF RECORD
DOCKET: A-816-00
STYLE OF CAUSE: GASTON VEILLEUX
Applicant
- and -
HER MAJESTY THE QUEEN
Respondent
PLACE OF HEARING: Montréal, Quebec
DATE OF HEARING: May 8, 2002
REASONS FOR JUDGMENT: Létourneau J.A.
CONCURRED IN BY: Desjardins J.A.
Pelletier J.A.
DATE OF REASONS: May 16, 2002
APPEARANCES:
Philip Nolan FOR THE APPLICANT
Johanne M. Boudreau FOR THE RESPONDENT
Mounes Ayadi
SOLICITORS OF RECORD:
Lavery, De Billy FOR THE APPLICANT
Montréal, Quebec
Morris Rosenberg FOR THE RESPONDENT
Deputy Attorney General of Canada
Montréal, Quebec