Judgments

Decision Information

Decision Content

T-2280-72
Minister of National Revenue (Plaintiff)
v .
Richard E. Hastie (Defendant)
Trial Division, Walsh J.—Montreal, December 19, 1973; Ottawa, January 10, 1974.
Income tax—Deductions—Payments to hypothecary credi tor in addition to alimentary payments to wife—Income Tax Act, ss. 6(1Xda), 11(1)(la), 16(1).
The Minister disallowed as deductions from the defend ant's income for the years 1967 and 1968 the sums of $1,440 and $1,616. These were part of the deductions claimed as alimentary allowance, payable for the support of his wife and the dependant children of the marriage, by virtue of interlocutory judgments in the course of separation proceedings. The disallowed portions represented payments by the defendant to the hypothecary creditor on the matrimonial domicile, which the judgments ordered the defendant to pay his wife, in addition to other amounts allowed to the wife and dependant children as a modus vivendi. The defendant's appeal to the Tax Review Board was allowed.
Held, dismissing the appeal, sections 6(1)(da), 11(1)(1a) and 16(1) read together, indicate the intention of the Act that periodic (as distinguished from lump sum) payments made by the husband as alimentary allowance for the ben efit of his wife and dependant children, are deductible by him and taxable in his wife's hands.
The effect of the defendant's making the payments direct ly to the hypothecary creditor is the same as if he had made them to his wife in the literal terms of the judgments.
The fact that in making these payments the defendant increased his equity in the property is strictly incidental to the fact that by making these payments to the hypothecary creditor he was maintaining a home for his wife and children.
While it was true that the defendant was obliged to make the payments on account of the hypothec, whether or not he was separated from his wife, the effect of his payments, in so far as his wife is concerned, is that she had an additional alimentary allowance of an equivalent value resulting from the court order that she should continue to occupy the common domicile. The registration of the judgment against the property reinforced her claim, as her husband could not sell the property without providing its equivalent: art. 2036 Civil Code.
Cussion v. M.N.R. 66 DTC 297; Trottier v. M.N.R. [1968] S.C.R. 728; Brown v. M.N.R. 64 DTC 812, aff'd. [1966] Ex.C.R. 289; M.N.R. v. Sproston [1970] Ex.C.R. 602; M.N.R. v. Armstrong [1956] S.C.R. 446; Foxcroft v. M.N.R. (1963) 33 Tax A.B.C. 415, considered.
INCOME tax appeal. COUNSEL:
Hugues Richard for plaintiff. Daniel Phelan for defendant.
SOLICITORS:
Deputy Attorney General of Canada for plaintiff.
Stewart, McKenna and Co., Montreal, for defendant.
WALSH J.—This is an appeal by the Minister of National Revenue from a judgment of the Tax Review Board dated April 26, 1972 allow ing defendant's appeal from assessments dated July 14, 1970 for the taxation years 1967 and 1968 whereby the sums of $1,440 and $1,616 respectively were disallowed as deductions from his income. He had claimed deductions of $2,915 for the taxation year 1967 and $3,380 for the taxation year 1968 pursuant to section 11(1)(1a) of the former Income Tax Act, R.S.C. 1952, c. 148 as amended as alimentary allow ance payable for the support of his wife and dependant children of the marriage by virtue of interlocutory judgments rendered in the course of legal separation proceedings between them. The portions of the said payments disallowed by the Minister represented payments made to the hypothecary creditor on the former common domicile owned by him which the wife and children continue to occupy in accordance with the said judgments. In the first interlocutory judgment dated January 26, 1967 the Court order in the judgment with respect to alimony read as follows:
DOTH CONDEMN Respondent to pay to Petitioner as a provisional alimentary allowance for herself and the minor children of the parties a sum of $83.50 per week being $33.50 for the hypothec, taxes and upkeep of the domicile and $50.00 as s "Modus Vivendi" for Petitioner and the children.
The judgment also stated:
DOTE GRANT to Petitioner the right to reside during the pendency of the suit in the common domicile at Alder- crest Street in Dollard des Ormeaux, P.Q.
This judgment was registered by the wife's attorney against the property. A second inter locutory judgment was rendered on May 31, 1967 increasing the allowance. The conclusions read as follows:
DOTH INCREASE the provisional alimentary allowance aforesaid to $65.00 per week, as a modus vivendi for the support of the Plaintiff and the four minor children of the parties in her custody; and, in addition, Defendant shall pay to the Plaintiff the sum of $33.50 for the hypothec, taxes and the upkeep of the domicile, making a total payment of $98.50 per week to be paid by Defendant to Plaintiff, at her domicile;
A final judgment was rendered on October 28, 1969 which does not directly concern the present action which deals only with the 1967 and 1968 taxation years but is of some signifi cance in indicating what the various judges of the Quebec Superior Court who dealt with the matter considered as being the nature of the payments made. The conclusion of this judg ment granting the wife a legal separation from bed and board reads as follows:
CONDEMNS Defendant to pay Plaintiff the sum of $85.00 each and every week for the support of herself and her minor children, payable in advance at Plaintiff's domicile;
GRANTS Plaintiff the right to reside in the former common domicile of the parties located at 39 Aldercrest Street, Dollard des Ormeaux, and Orders Defendant to pay $33.50 per week to cover the hypothec and taxes on the said property, the whole with costs.
The section of the Income Tax Act on which defendant relies in claiming the said deduction
reads as follows:
11. (1) Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year:
(la) an amount paid by the taxpayer in the year, pursuant to an order of a competent tribunal, as an allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the
recipient and children of the marriage, if he was living apart from his spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year;
This section operates in conjunction with sec tion 6(1)(da) which reads:
6. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpay er for a taxation year
(da) an amount received by the taxpayer in the year, pursuant to an order of a competent tribunal, as an allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if the recipient was living apart from the spouse required to make the payment at the time the payment was received and throughout the remainder of the year;
so that on the one hand the husband is permit ted to deduct from his income the amount he is directed to pay on a periodic basis as alimony for the maintenance of the wife and children from whom he is living apart and on the other hand the wife must add the amounts so received to her income for taxation purposes. The amount so paid will therefore not escape taxa tion altogether although the tax payable on same may be somewhat less if it is paid by the wife rather than the husband as, having been ordered to pay an allowance, he will probably be in a higher tax bracket before the deduction from his income is made. Counsel for the Minister stated that as a matter of precaution in the present case the wife has been taxed on the total amounts received including the payments made by the husband to the hypothecary creditor and she had appealed this assessment to the Tax Review Board but the hearing has been delayed pending a decision in the present case. He declared further that there is no intention of duplicating the taxes payable on the amounts in controversy and that if the Minister succeeds in the present appeal so that defendant is not allowed to deduct these payments from his income, then the assessment of these amounts as part of the wife's income will be cancelled. In the present case it is, of course, only the taxa-
tion of defendant with which we are concerned and the issue must be decided with reference to his liability for taxation on the sums in contro versy, whatever may be the consequences of the outcome on the wife's tax liability.
In addition to section 11(lxla) defendant relies on section 16(1) which reads as follows:
16. (1) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer's income to the extent that it would be if the payment or transfer had been made to him.
I am not unmindful of the fact that in the present case it is the defendant husband who is the "taxpayer" but in view of the provisions of section 6(1)(da) the wife is also a "taxpayer" and if the payments were made with her concur rence on her behalf to the hypothecary creditor, section 16 would be applicable to her and con versely by virtue of section 11(1)(1a) defendant could make the deductions. Since the wife testi fied that she had no objection to the payments being made directly to the hypothecary creditor, although the judgments in question indicated that the payments should be made to her and, in fact, she had never given this any consideration, it is not unreasonable to say that the payments were made with the concurrence of the wife although paid directly by the husband to the hypothecary creditor to whom he was, in any event, obligated to make these payments by virtue of the hypothec.
Plaintiff has a two fold argument in opposing the deductibility of the hypothecary payments made by the husband to the hypothecary credi tor, first, that these are not payments made to his spouse to whom he was required to make the payment and, secondly, that they are pay ments which he was contractually obligated to make in any event to the said creditor and that they enure in part to his benefit since a portion of them is in reduction of capital of the hypo- thec on the property which is owned by him. While I was referred by counsel for plaintiff to some jurisprudence of the Tax Appeal Board and of the Courts giving a narrow and restric-
tive interpretation to section 11(1)(1) 1 , I believe that on close examination the facts of this case are sufficiently different as to make most of this jurisprudence distinguishable.
In the Tax Appeal Board case of Brown v. M.N.R. 64 DTC 812 the husband was not allowed to deduct a lump sum payment of $1,170 which he was ordered to pay to his wife's father as reimbursement of rent owing by her to her parents, nor a lump sum payment of $10,000 which he was ordered to pay to her, but he was allowed to deduct weekly alimony pay ments which were also ordered. The basis of this decision was that the $10,000 payment was not a payment payable on a periodic basis within the terms of section 11(1)(1) and the $1,170 payment paid to the wife's father was not an allowance payable for the maintenance "of the recipient thereof". This decision was upheld in the Exchequer Court [1966] Ex.C.R. 289 which accepted the reasoning and conclu sions of the Tax Appeal Board.
The case of Cussion v. M.N.R. 66 DTC 297 resembles the present case more closely in that in addition to alimony of $250 a month the separation agreement between the husband and wife provided that she would continue to have the use of the matrimonial domicile and he would continue to make the mortgage payments of $84 per month on it. The house was owned jointly by the two of them and he attempted to deduct one-half of the payments or $42 a month
1 Section 11(1)(1) is substantially the same as section 11(1)(1a) which I believe is more applicable to the present case, the former dealing with judgments or written agree ments respecting alimony when the parties are separated "pursuant to a divorce, judicial separation or written separa tion agreement" whereas the latter is the situation when the parties are merely living apart which is the present case prior to the judgment granting the separation from bed and board in 1969. Similarly, section 6(1)(d) makes the wife taxable on the payments received pursuant to a judgment or agreement following a divorce, judicial separation or written separation agreement whereas section 6(1)(da) with which we are presently concerned deals with the situation when they are merely living apart prior to a final separation or divorce judgment and without any written separation agreement.
in addition to the alimony payment. The deci sion refused to permit him to do so on the ground that the payments were neither made to the wife nor were they for her maintenance, the mortgage payments being made to protect a capital asset, namely the house owned jointly by them. In this case, however, the separation agreement provided that he was to make the mortgage payments to the mortgagee. The deci sion seems to lay great stress on the fact that it would be improper to require the wife under section 6(1)(c) to pay a tax on money which she had never received, one-half of the mortgage payments being for the benefit of the husband. Neither of these judgments discussed the possi ble application of section 16 dealing with indi rect payments by virtue of which a payment can, with the concurrence of a taxpayer, (in this case the wife) be made to some other person for the benefit of the taxpayer and this payment is then included in the taxpayer's income to the extent that it would have been if the payment had been made to him.
In the case of M.N.R. v. Sproston [1970] Ex.C.R. 602, a court order resulting from a judicial separation required periodic payments to be made to the wife for alimony and child maintenance. The husband made alimony cheques out to his wife and maintenance cheques to the children who endorsed these cheques to the wife who then cashed them and used the funds to maintain the home. Sheppard DJ. refused to allow the deduction of the pay ments made to the children but it is clear that in doing so he reached this conclusion because they were not made "pursuant to" the court order within the meaning of section 11(1)0. The husband's obligation was to pay all the money to the wife and she alone could enforce the order to pay. This judgment referred to the Brown case (supra) and to two Supreme Court judgments in the cases of Trottier v. M.N.R. [1968] S.C.R. 728 and M.N.R. v. Armstrong [1956] S.C.R. 446, neither of which are appli cable to the facts of the present case. In con cluding his judgment Sheppard D.J. stated at page 610:
It follows that the section requires the payment to be made to the wife before they may be deducted by the respondent as taxpayer. That has not been done. Therefore, the respondent is not permitted to deduct the payments made to the children.
Again this judgment did not discuss the possible modifying effect of section 16 read in conjunc tion with section 11(1)(n. The Trottier case (supra) dealt with a situation where in a separa tion agreement the husband accepted his wife's claim that she was entitled to half of the value of an hotel which they had operated and he agreed to pay her the sum of $45,000 in settle ment of this claim guaranteed by a mortgage on the hotel property which was in his name. Monthly instalments of $350 were to be paid on account of this including interest on the out standing balance. The husband's attempt to deduct these monthly payments as alimony was disallowed, Cattanach J. finding that the pay ments were made on account of the mortgage and not as alimony. The mortgage was not given as collateral security for periodic payments to be made under the separation agreement but was given in discharge of his obligation to sup port his wife, the terms of the separation agree ment indicating that the mortgage was given in "full settlement of all claims for an allowance for herself from her husband". There was an absolute obligation upon respondent to pay the sum of $45,000 regardless of any changes in the financial or marital status of his wife and wheth er she lived or died and for this reason they could not be classified as maintenance. The Exchequer Court decision is reported at [1967] 2 Ex.C.R. 268 and confirmed in the Supreme Court (supra).
The Armstrong case (supra) is also distin guishable since it too dealt with a lump sum payment. In it a divorce decree provided for the payment of $100 monthly to the wife for the maintenance of herself and daughter and after accepting these payments for two years the wife then accepted a lump sum in full settlement of
all future payments. In rendering judgment Kel- lock J. stated at page 448:
If, for example, the respondent had agreed with his wife that he should purchase for her a house in return for a release of all further liability under the decree, the purchase price could not, by any stretch of language, be brought within the section. The same principle must equally apply to a lump sum paid directly to the wife to purchase the release. Such an outlay made in commutation of the periodic sums payable under the decree is in the nature of a capital payment to which the statute does not extend.
In the present case we are not dealing with a lump sum payment but with periodic monthly payments which, although they may after the passage of a considerable number of years result In the completion of the purchase of a common domicile, cannot be, in my view, assimilated to a lump sum payment laid out to buy a house for the wife to live in. Plaintiff's counsel conceded in argument that had the premises been leased premises and the husband continued to make the rental payments to which he as the lessee was obligated under the lease while the wife continued to reside in the former common domicile pursuant to the judgment of the Court, the Minister would not have objected to his deduction of these monthly rental pay ments as part of the alimentary allowance he was forced to provide for his wife and children.
In the Tax Appeal Board case of Foxcroft v. M.N.R. 33 Tax A.B.C. 415 referred to by defendant the appellant had been ordered to pay $40 a month for the maintenance of his wife and child by the Family Court. In addition he agreed to pay a sum toward the mortgage pay ments and taxes on the common domicile which the wife continued to occupy but this latter payment was disallowed as a deduction from his income. In rendering his decision Maurice Bois - vert Q.C., stated at page 418:
There is no doubt that the appellant undertook to pay the periodic instalments to hold their property in order to assure a place where his wife could live with their child; the undertaking was a consideration to fix the alimony to $40 per month.
A consideration is not a decree nor an order of a tribunal. The Court did not order the appellant to pay the amount of
$44.27 per month. The appellant has shown his willingness to assume the payment but the Court did not adjudge on it, therefore, that amount was not paid "pursuant to an order" and is not "an allowance" for the maintenance of the recipi ent. Moreover, the payments were made to a third parson and for the mutual benefit of both, appellant and his wife.
In the present case there was a court order confirming the right of the wife to continue to remain in the common domicile and directing the husband to pay the $33.50 a week due for the hypothec, taxes and upkeep of same which was incorporated in the total to be paid to his spouse as alimentary allowance. It appears to me to be too fine a distinction to state that if the husband had paid this to her and she had then used it to make these hypothecary payments it would all have been considered as alimentary allowance paid to her but merely because the husband made the payments himself direct to the hypothecary creditor it should no longer be so considered, and I believe that the justifica tion for refusing to make this fine distinction can perhaps be found in section 16 which none of these judgments appears to have considered. It is also of interest to note the wording of section 11(1)(1a) which permits the deduction of "an amount paid by the taxpayer in the year, pursuant to an order of a competent tribunal" and concludes with the words "if he was living apart from his spouse to whom he was required to make the payment" (italics mine). While he did not make the payment to her directly it might be said that he did so constructively with her concurrence by applying the provisions of section 16(1), and it is common ground that the amount was in fact "paid". I cannot sustain plaintiff's first argument therefore.
The second argument is far more troublesome in that there is no doubt that the payments so made do enure in part for the benefit of the husband himself as owner of the property. The hypothec arose when defendant purchased the property on March 18, 1963 and assumed pay ment of a balance of $14,450 with interest at
6i% payable by monthly instalments at $96.79 to the hypothecary creditor, the London Life Assurance Company by virtue of a C.M.H.C. loan. In addition defendant was obliged to pay by monthly instalments one-twelfth of the estimated taxes. While only the deed of sale was produced from the Belcourt Construction Com pany, the builders, and not the deed of loan to them by London Life, this deed would certainly have also required that insurance be maintained on the property to protect the loan. Although the two provisional judgments in 1967 and 1968 refer to the payment of $33.50 weekly as being for hypothec, taxes and upkeep of the domicile, defendant's wife testified that no maintenance was required in those years. It can be presumed that the difference between the $1,742 per annum which the weekly instalments ordered by the Court of $33.50 amount to and the $1,161.48 which the twelve monthly payments on account of capital and interest at the rate of $96.79 amounted to would represent approxi mately the amount due for insurance and taxes. Since the interest alone at 6i% on $14,450 would amount to $939.25 per annum, the differ ence between this and the $1,161.48 which the twelve monthly payments on the hypothec itself total, would represent the capital reduction from which defendant would benefit. With each monthly payment of $96.79 the portion of inter est on the balance would reduce slightly and the capital portion increase to the same extent, but in the five years from 1963 to 1968 being the earlier years of the loan, the portion of the monthly payments attributable to the capital would be relatively insignificant. In the absence of production of the deed of loan or of any tables showing the attribution of the payments, exact calculation cannot be made. It is likely, however, that the loan would be amortized over a period of not less than 30 years. As a rough approximation it can be estimated that the por tion of the monthly payments attributable to the capital for each of the years 1967 and 1968 would be in a range between $250 and $300 and this would be the only portion of the payments from which defendant would benefit to the exclusion of his wife and children. While the issue was not raised and I am not called upon to decide same, and in any event could not do so
definitively in the absence of exact figures, it is possible that the provisions of section 16(2) could have been invoked. This section reads as follows:
16. (2) For the purposes of this Part, a payment or trans fer in a taxation year of property made to the taxpayer or some other person for the benefit of the taxpayer and other persons jointly or a profit made by the taxpayer and other persons jointly in a taxation year shall be deemed to have been received by the taxpayer in the year to the extent of his interest therein notwithstanding that there was no distri bution or division thereof in that year.
If it were applied the portion of the payments made in 1967 and 1968 which represent the capital could have been attributed to defendant and not deductible from his income while the portions representing interest and taxes would in this event have been attributable to the wife.
I do not believe that it is necessary to consid er the case from this point of view, however. Reading sections 11(1)(!a), 6(1)(da) and 16 to gether it appears to me to be the intention of the Act that periodic (as distinguished from lump sum) payments made by the husband as alimen tary allowance for the benefit of the wife and dependant children are deductible by him and taxable in her hands. The courts, in deciding the amount of alimentary allowance she required, clearly took into consideration the fact that she was to continue in occupancy of the common domicile at defendant's expense which repre sented a total alimentary allowance of a value of $83.50 a week in accordance with the judgment of January 26, 1967 and of $98.50 a week in accordance with the judgment of May 31, 1967. Certainly, defendant could not have provided a comparable residence for his wife and four minor children at a cost of less than $33.50 a week which works out at a monthly rental of about $145 per month, and she required this in addition to the portion of the alimentary allow ance paid directly to her in cash. The fact that defendant built up his equity in the property to the extent of perhaps a total of $500 to $600 in the two years in question (leaving aside such extraneous factors as possible increases in value of property due to inflation which we cannot take into consideration) is strictly incidental to the fact that by making these payments to the hypothecary creditor he was maintaining a
home for his wife and children commensurate with their standard of living.
In this connection reference might be made to section 12(1)(b) of the Act which reads as follows:
12. (1) In computing income, no deduction shall be made in respect of
(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as express ly permitted by this Part,
It must be noted that section 11(1)(1a) com mences with the words "Notwithstanding para graphs (a), (b) and (h) of subsection (1) of section 12" so that whereas the normal rule therefore is that a taxpayer can make no deduc tion of payments made on account of capital, this limitation does not apply when section 11(1)(1a) takes effect.
Plaintiff contends that defendant was obliged to make the payments on account of the hypo- thee whether or not he was separated from his wife, obligated to pay an alimentary allowance, or even whether or not she lived or he himself lived as the payments would continue to be an obligation of his estate. While this is undoubted ly true as between him and the hypothecary creditor, the effect of these payments in so far as the wife is concerned is that she had an additional alimentary allowance of an equivalent value resulting from the Court order that she should continue to occupy the common domi cile. The fact that the judgment was registered against the property reinforced her claim as her husband could not, if he wished, have sold the property without providing equivalent accom modation. The third paragraph of article 2036 of the Quebec Civil Code reads as follows:
In the case of judgment for alimentary pension, the Supe rior Court, upon petition therefor on behalf of the party against whom the judgment was rendered, may, from time to time, determine the immoveable or immoveables of the debtor upon which the judicial hypothec may be exercised, and order at the costs of the petitioner, the radiation of any
such hypothec taken or registered in conformity with the provisions of this article.
The only effect of this article is that the defend ant could have substituted another property against which the judgment could have been registered, but only with the approval of the Court. Certainly, no purchaser would buy the property as long as the judicial hypothec result ing from the judgment establishing the alimen tary allowance was registered against it.
I am aware that this decision is in conflict with that of the Tax Appeal Board in the case of Cussion (supra) and with certain statements in both the Exchequer Court and Supreme Court decisions in the case of Trottier (supra), which statements were, however, somewhat of an obiter nature in that it was clear in that case that in lieu of alimony the husband had given to his wife a mortgage on his property repayable in monthly instalments of capital and interest. There was no question of the wife continuing to live in the property, the only question being whether the payments were on account of a mortgage, which the courts very properly found, rather than on account of alimony. Further more, as previously indicated, none of these cases considered the possible application of sec tion 16 of the Act or the fact that section 12(1)(b) is specifically excluded from applica tion by section 11(1)(1a) both of which sections are in my view significant in determining the true intention of the Act. The courts, in fixing the terms of an alimentary allowance order, may properly take into consideration the taxation consequences of same, and if, as a result of this judgment, the net cost to the husband of the payments he was ` ordered to pay and the net benefits of the receipt .of same by the wife, including the occupancy of the house, are less than anticipated` ' after taking ' the tax conse quences into consideration, then an application can be made to the Court making the alimentary order for an increase in same, but this is not a matter for decision in this Court. The appeal is therefore dismissed with costs and the assess ment referred back to the Minister for correc
tion accordingly. -
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