Date: 20011018
Docket: 2000-3841-IT-I
BETWEEN:
REID OLIVER SANDERS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Bonner, T.C.J.
[1] The Appellant appeals from assessments of Income Tax for the 1996, 1997 and 1998 taxation years. On assessment the Minister of National Revenue (the "Minister") disallowed claims made by the Appellant to deduct amounts paid pursuant to court orders in litigation between him and his then spouse.
[2] The Appellant and his spouse separated in July 1996. There was one child of the marriage. He was born about three years before the separation and continued to live with his mother thereafter.
[3] The payments in issue in this appeal were made pursuant to three orders of the Ontario Court of Justice General Division. Those orders read in part as follows:
a) Order of October 8, 1996
3. THIS COURT ORDERS THAT the matrimonial home at 18545 Centreville Creek Road, Caledon, Ontario shall be listed for sale immediately at a price to be agreed upon by the parties. Both parties shall cooperate with all aspects of the sale of the matrimonial home.
4. THIS COURT ORDERS THAT, in the meantime, a lump sum payment on account of support shall be made by the Husband to the Wife in the amount of $3,500.00 within two weeks hereof to cover the period October 8, 1996 to December 9, 1996.
5. THIS COURT ORDERS THAT the Wife shall have interim interim exclusive possession of the matrimonial home at 18545 Centreville Creek Road, Caledon, Ontario, pending the return of the interim motion or sale, whichever is earlier.
6. THIS COURT ORDERS THAT the Husband shall maintain the monthly payments regarding the matrimonial home until the motion or the sale of the matrimonial home.
The payments made pursuant to paragraphs 4 and 6 are in issue in this appeal.
b) Order of December 20, 1996
1. THIS COURT ORDERS THAT the Husband, Reid Oliver Sanders, shall continue to pay to the Wife interim interim child and spousal support of $1,750 each month, effective December 9, 1996.
2. THIS COURT ORDERS THAT the Husband shall continue to maintain the monthly payments regarding the matrimonial home.
3. THIS COURT ORDERS THAT the Husband's third party payments shall be tax deductible for the Husband.
The word "continue" in paragraph 1 is relevant to the interpretation of paragraph 4 of the October 8 agreement. Paragraph 3 of this order is, I assume, intended to relate to deductibility under the Income Tax Act of payments made under paragraph 2. The deductibility of such payments is in issue in this appeal.
c) Order of April 24, 1997
1. THIS COURT ORDERS AND ADJUDGES that the interim interim Order of Justice Jarvis shall terminate as of April 30, 1997.
2. THIS COURT ORDERS AND ADJUDGES that the Husband will pay child support in accordance with the Child Support Guidelines based on his current income of Seventy-Five Thousand Dollars ($75,000.00). The gross payment will be One Thousand, Two Hundred Dollars ($1,200.00) per month, until the changes to the Income Tax Act are proclaimed in force. When the changes are proclaimed, the net child support payment will be Six Hundred Dollars ($600.00) per month.
...
8. THIS COURT ORDERS AND ADJUDGES that the child of the marriage shall be enrolled immediately in daycare at Sunshine Daycare for the next four (4) years, that is, until April 30, 2001. The Husband shall pay the child's daycare costs and after school daycare program in the amount of no more than Six Hundred and Fifty Dollars ($650.00) per month. The Husband shall be entitled to claim the child care tax credit. As of May 1, 2001, the Husband and Wife shall share the cost of the daycare expense, in proportion to their net taxable incomes after deducting the Husband's child support payments, but not including the support in the Wife's income ...
A recital in this Order indicates that it was made pursuant to Minutes of Settlement. The minutes were not produced at the hearing of this appeal. The deductibility in computing income of the Sunshine Daycare payments is in issue. The Appellant does not claim any tax credit in relation to those payments.
[4] The Appellant's position in relation to payments to persons other than his spouse for daycare and for the maintenance of the matrimonial home is summarized in his Notice of Appeal as follows:
I disagree with Revenue Canada's decision based on the Interpretation Bulletin no. IT-118R3 which makes specific reference to paragraph 60.1(2). I believe that this subsection appropriately applies to this case for the following highlighted reasons:
"Subsection 60.1(2) permits the payer to deduct payments made either:
(a) directly to a spouse or former spouse or
(b) to a third party for the benefit of such person or the children in their custody, for specific expenses that are required to be paid pursuant to a decree, court order, judgement, or written agreement."
It further states that this rule applies if the expenditure is on account of the following deductible expenses:
(i) a medical or educational expense or an expense incurred for the maintenance of the dwelling in which the spouse or former spouse resides (including mortgage payments, property taxes, utility payments, etc.)
The Court Order clearly states that the Husband is to maintain the monthly payments regarding the matrimonial home and that these third party payments shall be tax deductible for the Husband.
It is obvious that the intention of the Court was to allow for the governing of the third party payments by subsection 60.1(2) and 56.1(2).
[5] The Minister disallowed the deduction of the $3,500 payment made pursuant to paragraph 4 of the order of October 8, 1996 on the basis that it was a lump sum payment and not paid as an "allowance payable on a periodic basis" within the meaning of paragraph 60(b) of the Act. Counsel for the Respondent argued that if the $3,500 payment was intended to be anything other than a lump sum the Court would have said so. In my view the Court did say so when, having directed the payment of $3,500 in respect of two one month periods ending December 9, 1996, it made a further direction that the Appellant " ... continue to pay to the wife interim interim child and spousal support of $1,750 each month ...". It is evident that what was continued was a requirement that the Appellant pay to his spouse on an interim basis a monthly allowance of $1,750. Such an allowance is obviously payable on a periodic basis within the meaning of paragraph 60(b). The reference in the order to "lump sum" is neither conclusive nor is it an accurate description of the nature of the payment. The Appellant is therefore entitled to succeed on this branch of the appeal.
[6] It was the position of the Respondent that the Appellant was not entitled to deduct the third party payments pursuant to paragraph 60(b) and 60(c). The payments were, after all, required to be made to third parties and Mrs. Sanders could not be said to have discretion as to the use of the amount as contemplated by ss. 56(12) of the Act. The Appellant did not really take issue with the Respondent on those points. Rather he relied on s. 60.1(2) a provision intended to deal specifically with payments which are required to be made to third parties. The place of this provision in the legislative scheme is set out in the Reasons for Judgment of the Federal Court of Appeal in the Queen v. Larson as follows[1]:
At all relevant times in this case, the Income Tax Act had a general system in place whereby spousal and child support payments were taxed in the hands of the recipient spouse and were deductible by the paying spouse. This was intended to reduce the overall tax burden borne by both spouses, as the support payment was deductible for the higher income-earning spouse and taxed at a lower rate in the hands of the recipient spouse.
This tax treatment was only available for periodic support payments which could be characterized as "allowances". The case law has established that, generally speaking, where a recipient spouse does not have discretion as to the use of the support payments, those payments will not be considered to be an allowance: Queen v. Armstrong, 96 DTC 6315 (F.C.A.). Thus, directed support payments such as those made in this case will generally not be subject to the tax treatment outlined above, and will be taxed in the hands of the paying spouse.
One exception to this general principle was found where a spouse makes directed support payments pursuant to an agreement or court order. In this situation, the Income Tax Act specified that such payments shall be deemed to be an allowance for purposes of the act where the agreement or court order specifically mentions subsections 60.1(2) and 56.1(2) of the Income Tax Act. If those sections are mentioned, the amount is deemed to be an allowance and is deductible by the payor spouse.
[7] S. 60.1(2) in both the version applicable to amounts received before 1997 and the version applicable to amounts received subsequently requires for its application a specific reference in the agreement or order which calls for the payments. The subsections read in part:
a) in the earlier version
... 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.
b) in the later version
... 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.
[8] In my opinion ss. 60.1(2) has no application. There is simply nothing in the orders entered in evidence which satisfies the requirement that there be reference not only to s. 60.1(2) but also to ss. 56.1(2). The reference to both provisions is an essential part of the scheme designed to maintain symmetry in both the deduction from income of the payor and inclusion in the income of the payee. The only thing which even remotely approaches the requirement that reference be made to the application of ss. 60.1(2) is the order that the Appellant's third party payments "shall be tax deductible for the Husband" in paragraph 3 of the order of December 20, 1996. Even giving the widest possible latitude to the requirement for a reference to s. 60.1, the fact remains that nothing whatever is said about s. 56.1. The third party payments are therefore not deductible.
Signed at Ottawa, Canada, this 18th day of October 2001.
"M.J. Bonner"
J.T.C.C.
COURT FILE NO.: 2000-3841(IT)I
STYLE OF CAUSE: Reid Oliver Sanders and H.M.Q.
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: May 7, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge M.J. Bonner
DATE OF JUDGMENT: October 18, 2001
APPEARANCES:
Agent for the Appellant: Concetta Sanders
Counsel for the Respondent: Kimberly Moldaver
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-3841(IT)I
BETWEEN:
REID OLIVER SANDERS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 7, 2001 at Toronto, Ontario, by
the Honourable Judge M.J. Bonner
Appearances
Agent for the Appellant: Concetta Sanders
Counsel for the Respondent: Kimberly Moldaver
JUDGMENT
The appeal from the assessment of income tax for the 1996 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reassessment on the basis that the Appellant is entitled to deduct the sum of $3,500 paid pursuant to paragraph 4 of the Order of October 8, 1996.
The appeals from the assessments for the 1997 and 1998 are dismissed.
Signed at Ottawa, Canada, this 18th day of October 2001.
|
"M.J. Bonner" |
J.T.C.C.