Tax Court of Canada Judgments

Date: 20010309

Docket: 2000-1088-IT-I

BETWEEN:

EVELYNE SERBEY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Archambault, J.T.C.C.

[1]            Ms. Evelyne Serbey is appealing a reassessment of income tax with respect to the 1996 taxation year whereby the Minister of National Revenue (Minister) included in her income an amount of $8,456 as alimony or maintenance payments. This amount represents payments made by Mr. Ian Perrie (ex-husband) to third parties pursuant to an interim order of Mr. Justice Nolin of the Quebec Superior Court dated December 16, 1991. The relevant portion of the court order is the following:

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 [sic] 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 périodiques 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 [sic] cinquante dollars (1 550 $); [...]

[2]            The only issue raised by this appeal is whether the amounts paid to the third parties as described in i) above meet the requirements of subsection 56(12) of the Income Tax Act (Act) as applicable in the relevant taxation year. That subsection reads as follows:

(12)          Definition of "allowance". Subject to subsections 56.1(2) and 60.1(2), for the purposes of paragraphs (1)(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 "the taxpayer" and in the latter paragraphs as "the recipient", unless that person has discretion as to the use of the amount.

[3]            On July 10, 1997, Ms. Serbey requested the Minister to amend her income tax returns for the 1992 to 1996 taxation years on the basis that the maintenance payments made to third parties by her ex-husband should be excluded from her income. On September 8, 1997, the Minister issued for the 1996 taxation year a notice of reassessment excluding the sum of $8,456.

[4]            Eventually, the Minister reassessed Ms. Serbey's ex-husband and disallowed the deduction of $8,456 paid in 1996 to third parties. The ex-husband appealed to this Court and my colleague Judge Lamarre Proulx allowed his appeal on September 20, 1999. This decision is reported as Perrie v. The Queen, 1999 CarswellNat 1790, [1999] 4 C.T.C. 2642, 1 R.F.L. 5th 75. Judge Lamarre Proulx concluded that the facts in the ex-husband's case were similar to those dealt with in the decisions of Judge Bowman inHak v. The Queen, 99 DTC 36 and Judge Sarchuk in Chute v. The Queen, [1999] 2 C.T.C. 2864. Judge Lamarre Proulx gave the following reasons for her decision:

[14]          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.

[5]            Following the Perrie decision of this Court, the Minister reassessed Ms. Serbey on November 29, 1999.

Position of the Respondent

[6]            Obviously, the Minister reassessed Ms. Serbey as a result of the decision rendered in Perrie. Counsel for the Minister submits that the amount of $8,456 paid by Ms. Serbey's ex-husband to third parties for the benefit of Ms. Serbey during the 1996 taxation year is taxable pursuant to subsections 56.1(1) and 56(12) of the Act. He acknowledges that, in order for this amount to be taxable in Ms. Serbey's hands, it must be an amount in respect of which she had discretion as to its use as required by subsection 56(12) of the Act. The Federal Court of Appeal's decision in Armstrong v. R., 1996 Carswell Nat 1281, [1996] 2 C.T.C. 266, is to that effect. In particular, in paragraph 23, Stone, J.A. stated: "In my view, the subsection 56(12) definition of "allowance" is to be read together with subsection 60.1(1) of the Act and the latter subsection construed accordingly." In that case, the ex-husband had been ordered in the following terms to make monthly mortgage payments

4. The petitioner, MURRAY ROBERT ARMSTRONG, shall pay the monthly mortgage obligation with respect to the matrimonial home and the Royal Bank loan payment as each falls due.

[7]            In the case at bar, counsel for the Minister is in agreement with the Perrie decision. He contends that discretion remained with Ms. Serbey as to the use of the payments to third parties.

Position of Ms. Serbey

[8]            Ms. Serbey's counsel, who practises in the field of matrimonial law, takes a contrary view as to Ms. Serbey's discretion with respect to the payments to third parties. He stated that Ms. Serbey could not have asked her ex-husband not to pay the third parties described in the court order of Justice Nolin without first having that order amended by the Superior Court. Consequently, it could not be concluded that Ms. Serbey had any discretion as to the use of the amount described in paragraph i) of the court order.

Analysis

[9]            With respect for the contrary view, I believe that Ms. Serbey did not have any discretion with regard to the payments made to third parties. I agree with counsel for Ms. Serbey that she could not have directed her ex-husband to stop making payments to the third parties without having the court order amended. It is true that Ms. Serbey could have herself made the mortgage payments on the house which she owned, but it is unclear whether she could then have claimed the equivalent amount from her husband.

[10]          Had Justice Nolin stated in his order that Ms. Serbey could have at any time instructed her ex-husband to stop making payments to the third parties and to make them instead to her, I would have concluded without any hesitation that Ms. Serbey had discretion over them. However, such is not the case. It is for this reason that I conclude that Ms. Serbey did not have the discretion required by subsection 56(12) of the Act.

[11]          I should point out that the decision in Perrie as well as the decisions in Hak and Chute were rendered under the informal procedure and, as provided in section 18.28 of the Tax Court of Canada Act, they are not to be treated as precedents for any other case. In addition, res judicata cannot apply here because Ms. Serbey was not a party in the Perrie case.

[12]          In his argument, counsel for Ms. Serbey suggested that the Hak decision should be distinguished because there was in that case a written agreement between the parties and not a court order as is the case here. I do not believe that this is a valid distinction. I fail to see what difference it makes whether the loss of control of an ex-spouse over certain maintenance payments is agreed to by that ex-spouse or is ordered by a court. A distinction must be made between the time at which a maintenance agreement is concluded and the time at which the maintenance payments are made pursuant to such an agreement. For the purposes of the relevant time of subsection 56(12) of the Act, for determining whether a taxpayer has discretion as to the use of maintenance payments is the time these payments are made. Once an ex-spouse has agreed—whether voluntarily or not—to a loss of control over maintenance payments, that ex-spouse cannot thereafter exercise any discretion as to the use of such payments, unless both parties to the agreement consent to give the ex-spouse discretion or a court order is issued giving such discretion.

[13]          With respect, I do not believe that Mrs. Hak had any more discretion than Ms. Serbey in this case. Once Mrs. Hak had agreed that her husband was to pay on her behalf certain expenses such as utility bills and rent, she could not have unilaterally given instructions to Mr. Hak to stop making these payments to third parties. This appears to me to be consistent with the intention of the parties. In paragraph 8 of the Hak decision, we find the following explanation for the agreement. Mr. Hak had testified that the payments to third parties had been agreed upon "because his wife was totally irresponsible about money and would simply take the cash and spend it on something else and not pay the rent or utility bills and would probably be evicted or have her utilities cut off." The very purpose of the agreement was apparently to remove any discretion in Mrs. Hak as to the use of the money. In short, she had discretion to agree or not to agree to this arrangement. However, once she had agreed to it, she could not thereafter unilaterally instruct her ex-husband to stop making the payments and, in my view, it cannot be said that she had retained any discretion as to the use of the funds.

[14]          Before concluding, I should stress that it is not a condition of maintenance payments being included in income under paragraph 56(1)(b) and subsection 56.1(1) of the Act that those payments be deducted by the payer. Equally, in determining that such payments are non-taxable in the recipient's hands and escape the application of paragraph 56(1)(b) and subsection 56.1(1) of the Act, it is irrelevant that the payer was allowed to deduct them in computing his income under paragraph 60(b) and subsection 60.1(1) of the Act. In other words, although the provisions regarding the inclusion of maintenance payments in income and their deduction from income are similar, they are not interdependent.

[15]          Finally, it is unfortunate that the appeals of both Ms. Serbey and her ex-husband were not heard together by this Court.[1] Had this been the case, only one hearing would have been required and only one of these two taxpayers would have won his or her appeal. As it is, they have both won and it is the Canadian taxpayers who have lost.

[16]          For all these reasons, the appeal of Ms. Serbey with respect to the 1996 taxation year is allowed, with costs, and the reassessment is referred back to the Minister for reconsideration and reassessment on the basis that the sum of $8,456 does not constitute taxable maintenance payments and should be excluded from Ms. Serbey's income.

Signed at Ottawa, Canada, this 9th day of March 2001.

"Pierre Archambault"

J.T.C.C.

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