Date: 20000126
Dockets: 1999-231-IT-I; 1999-233-IT-I
BETWEEN:
LILIANE NAGY, ADAM NAGY,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent,
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] These appeals were heard on common evidence and, in both cases, concern the 1994, 1995 and 1996 taxation years. The issue is whether, under paragraph 56(1)(b) or (c) of the Income Tax Act (the "Act"), the periodic amounts paid by Adam Nagy to Liliane Nagy under an agreement for corollary relief following the separation of the two spouses should be included in Ms. Nagy's income as alimony or other allowance.
[2] The facts of the two appeals are set out in the replies to the notices of appeal and, in the case of Ms. Nagy, are as follows:
[TRANSLATION]
. . .
3. In calculating her income for the 1994, 1995 and 1996 taxation years, the appellant did not declare any amount as alimony or other allowance payable on a periodic basis.
4. By notices of reassessment dated January 30, 1998, the Minister of National Revenue (the "Minister"), in calculating the appellant's income, added the amounts of $29,700, $28,600 and $12,100, respectively, as alimony or other allowance payable on a periodic basis, for the 1994, 1995 and 1996 taxation years.
5. On February 18, 1998, the appellant served notices of objection on the Minister in relation to the 1994, 1995 and 1996 taxation years.
6. On September 3, 1998, the Minister confirmed the notices of reassessment, dated January 30, 1998, for the 1994, 1995 and 1996 taxation years.
7. In making the reassessments dated January 30, 1998, the Minister assumed the following facts, inter alia:
(a) the appellant and Adam Nagy were married on February 10, 1962, in Toulouse, France;
(b) two children were born of the marriage of the appellant and Adam Nagy:
(i) Murielle, on July 23, 1962
(ii) Patricia, on July 13, 1971;
(c) the appellant and Adam Nagy have lived separate and apart since September 2, 1993;
(d) under a consent to corollary relief, dated June 16, 1994, and confirmed by the Honourable Judge Claude Larouche of the Superior Court on August 30, 1994, the parties agreed, among other things, to the following relief:
(i) Adam Nagy undertakes to pay to the appellant $1,100, net of tax, every two weeks,
(ii) should the appellant be required to pay tax on the amount referred to in the preceding paragraph, Adam Nagy undertakes to reimburse the appellant an equivalent amount;
(iii) the amount provided for in (i) above shall be indexed in accordance with article 590 of the Civil Code of Quebec;
(e) the amounts of $29,700, $28,600 and $12,100 were assessed as having been paid to the appellant for the 1994, 1995 and 1996 taxation years respectively;
. . .
[3] The appellant's Notice of Appeal stated:
[TRANSLATION]
. . .
THE APPELLANT intends to plead that the amounts that she received under the corollary relief agreement confirmed by a decree of judicial separation on August 30, 1994, cannot be characterized as alimony within the meaning of the Act and are not in fact alimony and, therefore, are not taxable in the hands of the appellant.
. . .
[4] In the case of Mr. Nagy, the Reply to the Notice of Appeal repeats the facts set out with respect to Ms. Nagy's appeal and in addition states the following:
[TRANSLATION]
. . .
3. In calculating his income for the 1994, 1995 and 1996 taxation years, the appellant claimed the amounts of $29,700, $28,600 and $12,100 respectively as alimony or other allowance payable on a periodic basis.
4. By notices of reassessment dated October 21, 1997, the Minister of National Revenue (the "Minister"), in calculating the appellant's income, disallowed in respect of the 1994, 1995 and 1996 taxation years the amounts of $29,700, $28,600 and $12,100 respectively claimed as alimony or other allowance payable on a periodic basis.
5. By notices of reassessment dated February 4, 1998, the Minister, in calculating the appellant's income, allowed in respect of the 1994, 1995 and 1996 taxation years amounts of $29,700, $28,600 and $12,100 respectively as alimony or other allowance payable on a periodic basis.
8. . . .
(g) the appellant made an assignment in bankruptcy on October 21, 1997, and was discharged from bankruptcy on July 21, 1998.
[5] The two notices of appeal have the same thrust: the periodic amounts paid and received were not paid and received as alimony but strictly for the education of their daughters. Therefore, the appellant Liliane Nagy was not required to include them as alimony in calculating her income and the appellant Adam Nagy was not required to deduct them.
[6] Mr. Nagy, Ms. Nagy and Fabien Tremblay, trustee in bankruptcy, testified at the request of counsel for the appellants. Nadia Assan and Rémy Harvey testified at the request of the agent for the respondent.
[7] Mr. Nagy said that the periodic payments to his former spouse were for the education of his daughters. Ms. Nagy also testified that the money received was for the education of their daughters and not for her maintenance.
[8] As stated in paragraph 4 of the Reply with respect to Mr. Nagy's appeal, on October 21, 1997, the Minister of National Revenue (the "Minister") disallowed the deductions claimed by Mr. Nagy in respect of the 1994, 1995 and 1996 taxation years and reassessed him accordingly. Because of the large amounts of money claimed from him in these assessments, Mr. Nagy went to see a trustee in bankruptcy, Fabien Tremblay, and made an assignment in bankruptcy on the very day of the assessments.
[9] Nadia Assan explained that there was an agreement for the exchange of information between Revenu Québec and Revenue Canada and that the assessments of October 21, 1997, were based on such an exchange. In these reassessments, the Minister, in calculating Mr. Nagy's income, disallowed the deduction for the amounts paid in respect of the years in question since Ms. Nagy had not included them in calculating her income for those years because she did not consider them as alimony payments.
[10] The collection agent, Rémy Harvey, asked Nadia Assan to verify whether the reassessments in respect of Adam Nagy were really valid. Ms. Assan thereupon had all the relevant documents brought to her and determined that the initial assessments were correct and that the appellant was entitled to deduct the amounts in question as payments of alimony or other allowance to his former spouse. The trustee in bankruptcy was so notified, and the tax liability was reduced to almost nothing.
[11] Reassessments were issued for the two appellants. These were dated January 30, 1998, in the case of Ms. Nagy and February 4, 1998 in the case of Mr. Nagy. Ms. Nagy objected on February 18, 1998. Mr. Nagy also objected to the reassessments in respect of his former spouse and served his notice of objection on February 18, 1998. He did not bother to serve a notice of objection in respect of any of his own assessments because he had made an assignment in bankruptcy, and the agent for the respondent consequently raised the issue of whether his appeal was valid.
[12] The agreement on corollary relief referred to in paragraph 7(d) of the Reply was produced as Exhibit A-1. Among the whereases and the various undertakings, the following appears:
[TRANSLATION]
WHEREAS the two (2) children of the parties are still full-time students;
. . .
1. The defendant shall pay to the petitioner the net amount of $1,100.00 every two weeks, such payment to be made every other Thursday by a bank transfer to an account to be designated by the petitioner;
Should the petitioner be required to pay income tax in respect of the amount referred to in the preceding paragraph, the defendant undertakes to reimburse the petitioner, within fifteen (15) days of a claim being made by the petitioner, an amount equivalent to the amount of income tax paid by the petitioner in respect of the amount referred to above;
2. The amount provided for in paragraph 1 herein shall be indexed in accordance with article 590 of the Civil Code of Quebec;
[13] Exhibit A-2 is the divorce decree, dated May 21, 1996. It contains the following:
[TRANSLATION]
WHEREAS Patricia, the child of the parties, is still a full-time student;
. . .
1. The petitioner agrees to pay to Patricia the monthly amount of $645 net, representing the cost of her living accommodation, until April 30, 1998, inclusive;
This amount shall be paid into Patricia's bank account on the first day of each month.
2. The amount provided for in paragraph 1 herein shall not be indexed.
Argument
[14] Counsel for the appellants argued that the divorce decree awarding support only to the daughter who was still a student makes it clear that the amounts received by Ms. Nagy were for specific purposes, i.e., the university education of her two daughters and that she had no discretion to use these amounts for other purposes. The appellants' counsel cited the decision of this Court in Assaf v. Canada, [1992] T.C.J. No. 46, and referred to the following passages in particular:
[TRANSLATION] The taxpayer appealed from the decision of the Minister disallowing the deduction of an amount of $10,000 paid to his former spouse as alimony.
. . . The Court determined that, since the amounts paid were intended to defray part of the cost of the children's university costs, they did not constitute alimony under subsection 56(12) of the Income Tax Act because the former spouse had no discretion as to the use of the payments.
. . .
It will be noted in particular in the wording of this agreement that it provides that the $10,000 would be paid by the appellant to his former spouse [TRANSLATION] "to defray part of the cost of the children's university education".
On reading this agreement, it can also be seen that there is no indication that subs. 56.1(2) and 60.1(2) of the Income Tax Act apply to the payments made under the agreement.
As the $10,000 paid under the agreement must be used for a certain purpose, namely to defray part of the cost of the children's university education, it is therefore not an allowance for the purposes of, inter alia, s. 60(b) or (c) of the Income Tax Act, in view of the provisions of subs. 56(12) of that Act. . . .
. . .
In interpreting subs. 56(12) it should be noted that, for amounts received for example by a spouse or former spouse to be an allowance within the meaning of this subsection, it does not matter that the person paying the alimony does not control or attempt to control the use of the money in question. However, the judgment or agreement, as the case may be, must not specify the use to be made of these amounts. If there is such an indication, it follows that if the spouse or former spouse receiving the money in question does not use it in the way specified in the judgment or agreement, he or she will be failing to perform the obligation contained in the judgment or agreement. It is in this sense that the recipient of the amounts in question does not legally have discretion as to their use under subs. 56(12).
[15] The agent for the respondent referred to the decision of the Federal Court of Appeal in Hamer v. Canada, [1998] F.C.J. No. 829 and, more specifically, to the following passages:
. . . Again the issue was whether the fact that the sums received were exclusively for the maintenance of the children deprived the recipient of the discretion that was necessary in order for these payments to be considered as allowances within the meaning of subsection 56(12) of the Act, and consequently should not be included in the custodial former spouse's income under paragraphs 56(1)(b), (c) or (c.1) of the Act.
We are all of the view that the argument of counsel for the applicants, which in a nutshell would insert the adjective "absolute" before the word "discretion" in subsection 56(12) of the Act so that the slightest general earmarking of a support payment would mean that it could no longer be characterized as a taxable allowance, is untenable given the context in which the provision is found. . . .
Conclusion
[16] Paragraph 56(1)(b) and subsection 56(12) of the Act read as follows:
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,
. . .
(b) Alimony — an amount received by the taxpayer in the year as alimony or other allowance payable on a periodic basis for the maintenance of the taxpayer, children of the taxpayer or both the taxpayer and the children if the taxpayer, because of the breakdown of the taxpayer's marriage, was living separate and apart from the spouse or former spouse who was required to make the payment at the time the payment was received and throughout the remainder of the year and the amount was received under a decree, order or judgment of a competent tribunal or under a written agreement;
56(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.
[17] In Assaf (supra), this Court had to consider the payment of an annual amount and not a periodic payment. That case involved the application of subsection 56.1(2) and not paragraph 56(1)(b) of the Act. Moreover, it should be noted that that decision, in the last paragraph cited in paragraph 14 of these Reasons, states that the recipient has discretion within the meaning of subsection 56(12) of the Act if the wording of the judgment or agreement does not specify the use that is to be made of the funds. That is the situation in the case at bar.
[18] The decision of the Federal Court of Appeal in Hamer is binding on this Court. According to that decision, the fact that the amounts received may have been intended for the education of the appellants' daughters does not deprive the recipient of the requisite discretion for these payments to be considered as allowances within the meaning of subsection 56(12) of the Act. Counsel for the appellants presented a very clever argument, but one that is contradicted by the decision of the Federal Court of Appeal and, I would say, by the legal reality of Ms. Nagy's circumstances. Ms. Nagy could use the amounts in question at her discretion in the same manner as her income from employment.
[19] With respect to Adam Nagy's appeal, the agent for the respondent argued that notices of objection to the reassessments dated February 4, 1998, were not served by the trustee in bankruptcy, yet Mr. Nagy had made an assignment in bankruptcy at that time. In fact, Mr. Nagy did not want to file an objection to his own assessments. Rather, he joined his former wife in objecting to her assessments. On this ground alone, the appeal must be dismissed. In any case, since I have determined that the amounts of $29,700, $28,600 and $12,100 were required to be included in calculating Ms. Nagy's income under paragraph 56(1)(b) of the Act, Mr. Nagy was correctly assessed when he was allowed the deduction of these amounts by the reassessments issued on February 4, 1998.
[20] The appeals are accordingly dismissed.
Signed at Ottawa, Canada, this 26th day of January 2000.
"Louise Lamarre Proulx"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]