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Docket: 2002-4001(IT)I |
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BETWEEN: |
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DAVID CRANSWICK |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent, and
NANCY CRANSWICK, Party Added. |
____________________________________________________________________
Appeal heard on heard on November 6, 2003, at Toronto, Ontario,
By: The Honourable Justice E.A. Bowie |
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Appearances: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent For the Party Added: |
Eric Sherbert Nancy Cranswick herself |
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JUDGMENT ON DETERMINATION OF QUESTIONS
UNDER SECTION 174 OF THE INCOME TAX ACT
By Order dated August 14, 2003, Nancy Cranswick was added as a party to the appeal of David Cranswick for the purpose of determining the following questions:
(a) What amounts, if any, paid by the Appellant to Nancy Cranswick ("Nancy") in the 2000 taxation year, meet the definition of a "support amount" pursuant to subsection 56.1(4) of the Act?
(b) Whether any amount paid by the Appellant to Nancy are to be included in computing the income for Nancy Cranswick the years at issue pursuant to paragraph 56(1)(b) and subsections 56.1(1) and 56.1(2) of the Act?
And upon hearing submissions from all three parties;
It is determined that:
1. The answer to question (a) is the amount of $2,301.
2. The answer to question (b) is the amount of $1,500 paid by David to Nancy for spousal support in the 2000 taxation year.
The appeal from the assessment of tax made under the Act for the 2000 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to deduct the amount of $1,500 paid to Nancy Cranswick as spousal support.
Signed at Ottawa, Canada, this 13th day of February, 2004.
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"E.A. Bowie" |
Bowie J.
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Citation: 2004TCC143 |
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Date: 20040213 |
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Docket: 2002-4001(IT)I |
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BETWEEN: |
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DAVID CRANSWICK |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent, and
NANCY CRANSWICK, Party Added. |
REASONS FOR JUDGMENT
Bowie J.
[1] When he filed his income tax return for the 2000 taxation year, David Cranswick claimed to be entitled to deduct support payments totalling $16,500. He was assessed on that basis initially, but on January 28, 2002 the Minister of National Revenue (the Minister) reassessed him to disallow the deduction of support payments entirely. He has appealed from that reassessment, and on the application of the Attorney General his former spouse, Nancy Cranswick, has been added as a party to his appeal pursuant to section 174 of the Income Tax Act (the Act). The appeal was heard under the Court's informal procedure.
[2] The questions that I am to answer pursuant to the Order of O'Connor J. made on August 14, 2003 are:
a) What amounts, if any, paid by the Appellant to Nancy Cranswick ("Nancy") in the 2000 taxation year, meet the definition of a "support amount" pursuant to subsection 56.1(4) of the Act;
b) Whether any amounts paid by the Appellant to Nancy are be included in computing the income for Nancy Cranswick [for] the years at issue pursuant to paragraph 56(1)(b) and subsections 56.1(1) and 56.1(2) of the Act.
During the course of the hearing, counsel for the Crown conceded that the Appellant had in fact made payments totalling $16,500 to his former spouse for support in the year 2000, pursuant to an agreement between them.
[3] There are three documents that are relevant to the issues before me. The first is a separation agreement entered into between David Cranswick and Nancy Cranswick on March 12, 1997,[1] following the breakdown of their marriage. It was prepared by David, using a precedent sold commercially by a popular chain of book stores. The second is a handwritten document styled Definition Agreement and Consent.[2] Mr. Cranswick testified that when they first appeared before the Ontario Superior Court of Justice in connection with divorce proceedings begun by Ms. Cranswick, the presiding Justice directed them to enter into an agreement as to interim support. This document was negotiated by the parties and their respective counsel on February 14, 2000, in response to that direction. The third document is Minutes of Settlement[3] in that action, negotiated between the parties and signed by them on or about November 15, 2000. Ms. Cranswick was represented by counsel at that time, and Mr. Cranswick was not.
[4] The first document makes these provisions for support and maintenance:
Support and Maintenance;
The Husband and the Wife each acknowledge that they will come to a future agreement for spousal support once the marital children have left home or reached the age of 21.
...
Child Support:
Commencing January 15th, 1997 and on the 1st day of every month thereafter, the Husband shall pay the Wife child support in the amount of $500.00 per child, per month, which payments shall continue until the earliest of the following occur:
(1) the child reaches the age of 18 years and ceases to attend a full-time educational institution.
(2) the child reaches the age of 21 years.
(3) the child marries.
Support payments are to be mutually managed to provide living accommodation at 830 Reytan Blvd., Pickering for the Wife and children of the marriage. Other expenses and repairs, along with the children's education and leisure are to be mutually decided upon as to the payment or financial arrangements as they arise.
Variation;
the parties intend that Child support of this Agreement to be final, except for variation requested due to a material change in circumstances. In the event of a material change in circumstances, the party requesting the variation shall give the other party 30 days' notice of the variation sought during which time the parties shall attempt to negotiate an amendment to this Agreement. If no agreement is reached during the said period, either party shall be at liberty to apply to Court to obtain the relief sought.
[5] The following are the provisions of the second agreement which is styled Definition Agreement and Consent, that relate to the issue of maintenance and support:
1. This agreement is without prejudice to the wife moving to set aside the Separation Agreement dated 12 March 1997.
...
5. Parties agree that husband's obligation under agreement of 12 March 97 shall include the following which are tax deductible by the husband (all $ figures are approx):
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Property taxes |
$2,500 p.a. |
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a. Cash (tax liability) |
1,800 |
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b. Mortgage |
390 per mo. |
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c. Water |
429 per year |
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d. Electricity |
1,140 p.y. |
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e. Natural Gas |
1,000 p.y. |
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f. Home Insurance |
425 p.y. |
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g. Car Insurance, wife & Kiley |
150 p.m. |
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h. Children's Life Insurance |
20 p.m. |
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i. Line of Credit |
350 p.m. |
6. Husband to continue to pay credit card and other debts shown on his financial statement.
7. These payments are without prejudice to husband's argument at trial the further debts and expenses he is paying fall within 12 March 97 agreement and to argument by wife that child and spousal support amounts ought to be higher or differently structured.
8. Wife to give husband, through solicitors, bills as they come due and husband to pay same, husband to have credit for $865 paid 13 Feb 00 net of wife's actual payment of hydro & gas, $460.87.
[6] The Minutes of Settlement signed on November 15, 2000 include several clauses dealing with support payments.
1. David shall pay to Nancy spousal support in the sum of $1,000.00 per month commencing Nov 15, 2000 until either the wife cohabits with any other person at any time or dies, whichever occurs first.
2. The amount of spousal support shall be adjusted annually, that is, as at January 1st of each year, based on the CPI (All Items Toronto) as it may be in January of each year compared to the January of the immediately preceding year.
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5. David shall pay to Nancy child support in the amount of $534.00 a month, commencing November 15, 2000, for Michael Cranswick, the child of the marriage born the 15th day of July 1981, until:
[there follow seven conditions, none of which had occurred before the end of the year 2000]
The parents will contribute to the add-on expenses, including but not limited to tuition for education and books and supplies, as well as to extra-curricular expenses for the child proportionate to the parties' respective incomes.
6. The parties will exchange income tax returns by the 15th of June in each year, if requested. Child support may be reviewed upon the request of either party and shall be adjusted to reflect the payor's income pursuant to the provisions of the Federal Child Support Guidelines.
7. David will maintain the child as beneficiary of extended health insurance through his employment. The parties hereto agree to contribute proportionate to their respective incomes to medical/dental expenses incurred on behalf of the child not covered through an existing health insurance plan, and agree to obtain the other's consent in writing before incurring this expense. A party incurring non-emergency child medical expenses will obtain the other party's consent in advance in writing.
[7] The oldest child of the marriage was 22 years old and working full-time by January 1, 2000. The second child was 20 and was in university by that date. She became 21 on May 15, 2000. The youngest child was 18, and he continued to live at home throughout 2000.
[8] In order to qualify as a support amount, a payment made by one former spouse to the other must meet the definition that is found in subsection 56.1(4) of the Act. It reads:
56.1(4) The definitions in this subsection apply in this section and section 56.
"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
(a) the recipient is the spouse or common-law partner or former spouse or common-law partner of the payer, the recipient and payer are living separate and apart because of the breakdown of their marriage or common-law partnership and the amount is receivable under an order of a competent tribunal or under a written agreement; or
(b) the payer is a natural parent of a child of the recipient and the amount is receivable under an order made by a competent tribunal in accordance with the laws of a province.
[9] As the only year under appeal is 2000, we are concerned here only with payments made during that year. They may be divided into two categories. The first consists of the payments made prior to November 15, 2000, which must of necessity have been made pursuant to the first agreement, dated March 12, 1997, as further defined by the second agreement. The second consists of those payments made pursuant to the third agreement, on and after November 15, 2000.
[10] Dealing first with category one, these payments fail to meet the definition of support payments as they are not amounts as to which the payee, Nancy, had discretion. The language of the first agreement makes it clear that the payments are to be expended by her only in accordance with the agreement from time to time of the payor, David.
[11] David Cranswick argued that this requirement as to discretionary use of the payments was satisfied in the present case by the deeming provisions found in subsections 56.1(2) and 60.1(2) of the Act. The relevant words of those subsections are:
56.1(2) For the purposes of section 56, this section and subsection 118(5), the amount determined by the formula
A - B
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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.
60.1(2) For the purposes of section 60, this section and subsection 118(5), the amount determined by the formula
A - B
...
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.
It is not necessary that the written agreement contain the subsection numbers 56.1(2) and 60.1(2) in order for these deeming provisions to apply. In Pelchat v. M.N.R.[4] and Ferron v. The Queen,[5] Archambault J. explained that it is sufficient that the agreement should make clear that the parties intend that these subsections are to be applied to their agreement. This approach was approved by the Federal Court of Appeal in Veilleux v. M.N.R.[6] Letourneau J.A. said in that case at pages 333-334 that it is sufficient that the agreement makes it apparent that the parties to it understood and agreed to the tax consequences of their agreement for subsections 56.1(2) and 60.1(2) to be invoked. However, the only words in the second agreement relating to the tax consequences are "... which are tax deductable (sic) by the husband ...". This is inadequate to meet the requirement of the cases to which I have referred, as it does not make it at all apparent that the parties, and in particular Nancy, understood and agreed that these payments were to be taxable in her hands. The deeming provisions therefore do not apply and the payments made prior to November 15 are not support amounts, are not deductible by David, and are not income of Nancy.
[12] The second category of payments are those made pursuant to agreement no. 3 made on November 15, 2000. That agreement varied the amount of child support to be paid by David to Nancy in a number of respects, any one of which would be sufficient to create a new commencement date of November 15, 2000, which is the date on which the first payment of the varied amount was to be made. Under that agreement David was required to pay spousal support to Nancy, in addition to the child support, in the amount of $1,000 per month.
[13] By application of the formula A - (B + C) in paragraphs 56(b) and 60(b) of the Act, the amount that David may deduct and Nancy must include in her income is the $1,500 spousal support paid for November and December 2000.
[14] The child support amount paid under the third agreement in the year 2000 is 1.5 x $534 = $801. This amount is included in both A and B of the formula A - (B +C). It is not included in Nancy's income, and it is not deductible by David.
[15] The answer to question (a) therefore is $1,500 + $801 = $2,301.
[16] The answer to question (b) is that $1,500 paid by David to Nancy for spousal support is to be included in Nancy's income for the year 2000.
[17] For clarity, I add that the answer to question (a) does not determine the result of David Cranswick's appeal. He is entitled to a deduction of $1,500 in the 2000 taxation year. His appeal will be allowed and the assessment will be referred back to the Minister for reconsideration and reassessment on that basis.
Signed at Ottawa, Canada, this 13th day of February, 2004.
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"E.A. Bowie" |
J.T.C.C.
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CITATION: |
2004TCC143 |
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COURT FILE NOS.: |
2002-4001(IT)I |
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STYLE OF CAUSE: |
David Cranswick and Her Majesty the Queen and Nancy Cranswick |
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PLACE OF HEARING: |
Toronto, Ontario |
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DATE OF HEARING: |
November 6, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice E.A. Bowie |
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DATE OF JUDGMENT: |
February 13, 2004 |
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APPEARANCES: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Eric Sherbert |
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For the Party Added: |
Nancy Cranswick herself |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
N/A |
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Firm: |
N/A |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |