Date: 20001121
Docket: 1999-3605-IT-I,
1999-3606-IT-I
BETWEEN:
GASTON VEILLEUX,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] These appeals were heard on common evidence and concern the 1994 to 1997 taxation years. The appeal bearing number 1999-3605(IT)I concerns the 1994, 1995 and 1997 taxation years. The appeal bearing number 1999-3606 (IT)I concerns the 1996 taxation year.
[2] The issue is whether payments made by the appellant to third parties are deductible under subsection 60.1(2) of the Income Tax Act (the "Act"). With respect to the 1996 taxation year, there was an additional issue that was abandoned at the hearing and that had to do with the deduction of an amount of $10,759 as legal costs incurred to have the amount of maintenance payments reduced.
[3] In reassessing for the 1994, 1995 and 1997 taxation years, the Minister of National Revenue (the "Minister") relied on the facts set out in paragraph 22 of the Reply to the Notice of Appeal (the "Reply"):
[TRANSLATION]
(a) when filing his tax returns for the taxation years at issue, the appellant claimed the following amounts as deductions for maintenance payments (see details for the 1997 taxation year, annexed):
1994 1995 1997
$33,239 $34,935 $35,952
(b) in the divorce decree of the Superior Court, Family Division, dated December 20, 1989, there is a statement that it formally recognized the draft agreement dated December 1, 1989, between the appellant and his former spouse, Louise Ouellette;
(c) the agreement on corollary relief, dated December 1, 1989, stated that
(i) there were three children of the marriage, Sophie (6 years), Rémi (4 years) and Félix (17 months);
(ii) the maintenance payment for the children was $250 a week;
(iii) the said maintenance payment was to be indexed annually;
(iv) the appellant undertook to pay the expenses related to the family residence located at 7745 Croissant Salomon in Brossard;
(v) the expenses for the family residence were the mortgage payments, municipal and school taxes, insurance, electricity, heating, telephone, maintenance and the Vidéotron subscription;
(vi) with respect to the above-mentioned expenses, the appellant was to make the payments directly to the creditors concerned; and
(vii) the appellant was the sole owner of the family residence located at 7745 Croissant Salomon in Brossard, purchased before the marriage;
(d) in a supplementary agreement signed by the appellant and his former spouse and dated March 13, 1990, it is stated that the appellant undertook to pay any amounts of federal and provincial tax that might be owed by the former spouse as a result of the maintenance payments;
(e) it was stated neither in the agreement on corollary relief nor in the supplementary agreement that payments to a third party were taxable in the hands of the former spouse and deductible by the appellant in accordance with subsections 56.1(2) and 60.1(2) of the Act;
(f) the former spouse did not have discretion as to the use of the payments made by the appellant directly to third parties;
(g) consequently, as regards the amounts paid directly to third parties, the Minister disallowed their deduction by the appellant as maintenance or other allowance payable on a periodic basis in the taxation years at issue.
[4] With respect to the 1996 taxation year, the only difference from what was stated in the Reply reproduced above was that the amount claimed by the appellant as maintenance for 1996 was $35,400.
[5] Only the appellant testified. He admitted paragraphs 22(a), (b), (c)(i) to (c)(v) and (c)(vii). He denied paragraphs 22(e) and 22(f).
[6] The divorce decree and the agreement on corollary relief were filed as Exhibit A-1. Dated December 20, 1989, the divorce decree formally recognizes the draft agreement of December 1, 1989 between the appellant and his former spouse. The appellant explained that, when the time came to prepare his tax return, he realized that, if he wanted to deduct the payments to third parties, he had to prepare a supplementary agreement. The supplementary agreement, dated March 13, 1990, was filed in evidence as Exhibit A-2.
[7] According to the appellant, under the terms of the supplementary agreement, his former spouse had the discretion to herself take charge of the payments to third parties for which he would be providing the funds. The appellant relied in particular on the last paragraph of clause 3 of the said supplementary agreement, which clause was headed "Details" and read as follows:
[TRANSLATION]
Details
Any amounts that Gaston Veilleux undertakes to pay to Louise Ouellette are net of tax; accordingly, Gaston Veilleux undertakes to pay whatever federal and provincial tax amounts arising from payment of the said maintenance may be owed by Louise Ouellette.
All amounts paid to Louise Ouellette or to third parties on her behalf are considered to be part of the maintenance; included in this are expenses relating to the family residence (i.e. mortgage payments, municipal and school taxes, home insurance, electricity, heating, maintenance and cable), expenses relating to various family insurance plans (i.e. life insurance for dependants, survivor pension, hospitalization, medical expenses, paramedical expenses, dental insurance), provincial and federal tax and any other amount that may be agreed on by the two parties (automobile repairs, children's activities fees, etc.).
So that Louise Ouellette may devote the greatest amount of time possible to the children, the two parties agree to maintain the financial arrangement adopted since their separation, namely, that Gaston Veilleux will be responsible for the financial management, on behalf of Louise Ouellette, of certain sums of money agreed on by both; each year, management of the said amounts will be taken over in whole or in part by Louise Ouellette to the extent desired by her.
[8] The appellant stated that, in drafting that agreement, he relied on the Revenue Canada publication entitled "Alimony and Maintenance", which was revised in 1993. That publication was filed as Exhibit A-4. At the hearing, I was told that the publication made no mention of the fact that, in respect of payments to third parties, the judgment of the court or the written agreement had to state that such payments were to be included in income by the recipient in accordance with subsection 56.1(2) of the Act, and that the payer could deduct them under subsection 60.1(2) of the Act. The Minister was even criticized for misleading people with vague and incomplete publications. Yet, contrary to what was suggested, payments to third parties are dealt with, at page 17 of the publication in question. I quote:
Other payments that may be taxable or deductible
Under certain conditions, you, as the recipient, may have to include in your income the following types of specific-purpose payments and payments to third parties, and as the payer, you can deduct these payments:
payments that are not periodic, such as once-only expenses paid to an orthodontist or for tuition fees;
payments for certain tangible property (only certain costs for tangible property qualify, such as for medical or educational purposes, maintenance costs for the home in which you live, or up to 20% of the original principal amount of any debt from buying or improving the home you live in);
payments made to a third party if you cannot choose how to use them; or
payments made to you that are for a specific purpose, if you cannot choose how to use them.
You have to include these payments in income, or you can deduct them from income as the case may be, only if all three of the following conditions are met:
the first three basic requirements are met for alimony payments or for maintenance payments (see the sections in this pamphlet called "Alimony Payments," and "Maintenance Payments," for details);
the payments were for the recipient's maintenance, or for the maintenance of a child in the recipient's custody, or both, (as long as the child was not living with or in the charge of the person making the payment, or in that person's charge at the time of the expense); and
the court order or written agreement states that the recipient will include the payments in income under subsection 56.1(2) of the Income Tax Act and that the person making the payments can deduct them under subsection 60.1(2) of the Income Tax Act.
[9] Counsel for the appellant told the Court that the appellant had brought him the publication on the morning of the hearing. I have to believe that counsel did not have time to consult it before making the statement that it was misleading to taxpayers.
Argument
[10] Counsel for the appellant referred to the decision of this Court in Michel Pelchat v. The Queen, TCC, 96-518 (IT)G, November 22, 1996 (97 DTC 945). In that case, a judgment of the Superior Court of Quebec had confirmed an agreement reached by Mr. Pelchat and Sylvie Patry whereby the former agreed to pay certain expenses to third parties for the benefit of Sylvie Patry as support. The expenses totalled $963 per month. The judgment stated that "[t]he said support shall be taxable in the hands of the respondent and tax deductible for the petitioner." The judge of this Court was of the opinion that this language was equivalent to that required by subsections 56.1(2) and 60.1(2) of the Act.
[11] Counsel for the appellant also referred to two other decisions of this Court: Mambo v. The Queen, [1995] T.C.J. No. 931 and Pierre Mailloux v. The Queen, [1991] T.C.J. No. 641. He referred as well to two decisions of the Federal Court of Appeal: The Queen v. Arsenault, 96 DTC 6131 and Armstrong v. Canada, [1996] F.C.J. No. 599. These decisions make it clear that the purpose of subsections 56.1(2) and 60.1(2) of the Act is to ensure that the parties involved are aware of the tax consequences and agree to them.
[12] Counsel for the appellant submitted that the terms of the supplementary agreement made it clear that, on the one hand, the payments to third parties were to be included in the former spouse's maintenance and, on the other hand, that she had discretion with regard to those payments. On the latter aspect, counsel for the appellant maintained that his former spouse could at any time take over the management of the amounts he paid to third parties on her behalf. In that context, the appellant acted as an agent for his former spouse.
[13] Counsel for the respondent referred to two decisions, Armstrong (supra) and Kingsbury v. Canada, [2000] T.C.J. No. 141. From the decision of the Federal Court of Appeal in Armstrong, he cited the following passage:
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.
Conclusion
[14] The relevant portion of subsection 60.1(2) of the Act for the years prior to 1997 reads as follows:
60.1(2) For the purposes of paragraphs 60(b) and (c), the amount determined by the formula
. . .
shall, where the decree, order, judgment or written agreement, as the case may be, provides that this subsection and subsection 56.1(2) shall apply to any payment made thereunder, be deemed to be an amount paid by the taxpayer and received by that person as an allowance payable on a periodic basis.
For 1997, it reads as follows:
60.1(2) 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.
[15] Not all amounts paid as maintenance in civil law are necessarily deductible by the payer and to be included by the recipient in computing income for the purposes of the Act, which imposes certain conditions. The maintenance that is taxable in the hands of the recipient and deductible by the payer is a predetermined amount payable to the recipient on a periodic basis. In the case at bar, the payments in question are payments to third parties that are not predetermined amounts payable on a periodic basis although they are payments made for the benefit of the appellant's former spouse.
[16] It is such payments that are the subject of subsection 60.1(2) of the Act. In order for such payments to third parties to be deemed to be amounts payable to the recipient as an allowance on a periodic basis, the written agreement must provide that subsections 60.1(2) and 56.1(2) of the Act apply to those payments. This is a strict requirement. Unless, as in Pelchat (supra), the language employed states exactly the same thing, that requirement is not met.
[17] On reading the supplementary agreement, filed as Exhibit A-2, it is apparent that there is no reference to subsections 56.1(2) and 60.1(2) of the Act. There is also no clear reference to the tax treatment provided for in those provisions, unlike the situation in Pelchat (supra). In such circumstances, the Minister's reassessments are well-founded in fact and in law under the Act.
[18] The appeals are dismissed.
Signed at Montréal, Quebec, this 21st day of November 2000.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
1999-3605(IT)I
1999-3606(IT)I
BETWEEN:
GASTON VEILLEUX,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on July 27, 2000, at Montréal, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Counsel for the Appellant: Philip Nolan
Counsel for the Respondent: Mounes Ayadi
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1994, 1995, 1996 and 1997 taxation years are dismissed in accordance with the attached Reasons for Judgment.
Signed at Montréal, Quebec, this 21st day of November 2000.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]