T-3543-79
Jean-Paul Gagnon (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Walsh J.—Montreal, June 5;
Ottawa, June 13, 1980.
Income tax — Income calculation -- Deductions — Appeal
from assessments by Minister of National Revenue reducing
deductions claimed by plaintiff— Whether payments made by
husband to ex-wife to pay for mortgage payments pursuant to
a judgment of divorce were paid as an "allowance" and hence
deductible — Income Tax Act, S.C. 1970-71-72, c. 63, s.
60(b), (c).
In accordance with a judgment of divorce, plaintiff paid to
his former wife, as alimony, certain amounts for which he
claimed credit for the taxation years 1974, 1975 and 1976. In
his assessments, the Minister of National Revenue reduced the
deductions by disallowing the mortgage payments which repre
sented a portion of the total amount claimed by the plaintiff for
each of the said years. Plaintiff contends that since the judg
ment specifically awarded these amounts as alimentary pension
for his former wife and the children of the marriage, she was
under no legal obligation upon receiving them to make the
payments in the hypothecs and taxes: those amounts were at
her complete disposition. The question is whether that portion
of the payments made by the husband is an allowance, i.e. a
limited predetermined sum at the complete disposition of the
recipient, and hence deductible.
Held, the appeal is maintained. There is no question here as
to the payments not being made on a periodic basis, the fixed
amounts of them (despite the variations foreseen by the judg
ment of divorce due to variable tax rates), nor their not having
been made directly to the ex-wife herself. The fact that in
determining the amount of the payment, it was necessary to
calculate what monthly payments would be required for the
mortgage payments and taxes on the property, which is now
solely the ex-wife's property, indicates that the sums paid were
at her complete disposition even if it were assumed that she
would use them to satisfy the obligations which they were
designed to cover and thereby relieve the ex-husband of person
al claims against him for them. The payments comply in all
respects with the provisions of section 60(b) and (c) of the
Income Tax Act.
R. v. Pascoe [1976] 1 F.C. 372, distinguished. Attorney
General of Canada v. Weaver [1976] 1 F.C. 423, distin
guished. Roper v. Minister of National Revenue 77 DTC
5408, distinguished. R. v. Fisch 78 DTC 6332,
distinguished.
INCOME tax appeal.
COUNSEL:
C. A. Blanchard for plaintiff.
J. Côté for defendant.
SOLICITORS:
Amyot, Lesage, Bernard, Drolet & Sirois,
Quebec City, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
WALSH J.: In the present appeal against income
tax assessments for the years 1974, 1975 and 1976
the facts are not in dispute. Plaintiff was married
on December 29, 1948, to Mary Edith Laughlin
and of the children of the marriage only one is still
a minor. On March 29, 1972 the marriage was
terminated by a judgment of divorce the pertinent
portion of which reads as follows:
[TRANSLATION] C) As alimentary pension for herself and for
her children petitioner agrees to pay and respondent accepts
1. A monthly amount payable in advance on the first day of
each month at the residence of respondent of $300.00
Canadian;
2. For the benefit of respondent petitioner will pay the
monthly payments due or to become due with respect to the
immovable which becomes the property of the respondent,
the obligation with respect to the said monthly payments
being more fully described in the agreement; the amount of
the said monthly payments is at present $360.00 and can
vary as foreseen in the said contract but represents the
repayment in capital and interest of two hypothecs described
therein as well as the repayment by monthly payments of
municipal and school taxes affecting the said immovable,
payable the first of each month, directly to respondent
commencing June 1, 1971.
In accordance with this judgment plaintiff paid
to his former wife alimony of $8,190 in 1974,
$8,400 in 1975, and $8,400 in 1976.' He claimed
credit for these in his income tax returns for the
said years. In his assessments the Minister reduced
the deductions claimed to the sum of $3,600 a year
representing the $300 a month, payable pursuant
to Clause C)1 of the aforementioned judgment. It
is this decision which is now under appeal.
' The Minister claims documents submitted indicate pay
ments of $7,690 in 1974 and $8,500 in 1975. The exact
amounts can be verified on reassessment.
Section 60(b) and (c) of the Income Tax Act 2
which is in issue reads as follows:
60. There may be deducted in computing a taxpayer's income
for a taxation year such of the following amounts as are
applicable:
(b) an amount paid by the taxpayer in the year, pursuant to
a decree, order or judgment of a competent tribunal or
pursuant to a written agreement, as alimony or other allow
ance 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, and was separated pursuant to a divorce, judicial
separation or written separation agreement from, his spouse
or former spouse to whom he was required to make the
payment at the time the payment was made and throughout
the remainder of the year;
(e) 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.
Plaintiff contends that the payments pursuant to
the judgment were made periodically by monthly
instalments first in the amount of $660 and subse
quently $700 to provide for the needs of the former
wife and children of the marriage, at a time when
he was living separated from her by virtue of the
divorce and hence comply with the said section
and are deductible. Documentary proof reveals
there were two hypothecs on the immovable for
merly the common domicile which by virtue of the
divorce became the property of the wife. The first
in the amount of $15,000 was placed on the prop
erty by virtue of a deed of hypothec dated August
16, 1960 which provided for interest at 7 1 / 4 %,
interest and capital to be paid in 240 monthly
instalments in the amount of $117.59 each com
mencing on December 5, 1960, the last payment
becoming due on November 5, 1980. The second
hypothec dated April 26, 1968 was in the amount
of $9,000 with interest at 15% payable in capital
and interest by 120 monthly instalments of
$142.75 each commencing May 25, 1968 and ter
minating on April 25, 1978.
These monthly payments total $260.34 and the
difference between that and the sum of $360 a
month, later increased to $400 a month paid by
2 S.C. 1970-71-72, c. 63.
plaintiff to his former wife pursuant to the divorce
judgment is no doubt accounted for by municipal
and school taxes. The figure of $360 per month
was presumably the amount which would cover all
these expenses at the date of the judgment which
foresaw however that this amount could vary. The
said judgment was based on an agreement between
the parties dated December 15, 1971, to dissolve
the legal community of property between them,
the marriage having been entered into without a
marriage contract establishing separation as to
property, the relevant terms of the said agreement
being incorporated in the judgment. The agree
ment conveyed the common domicile in Laval to
the wife and in turn the husband, the petitioner in
the divorce proceedings, accepted as his full share
of the community a country property in Magog,
Quebec, also described in the agreement and
judgment.
The payments due on the mortgages were of
course personal liability of plaintiff and each pay
ment contained a capital element reducing the
balance due which became nil in the case of the
second mortgage on April 25, 1978 and in the case
of the first mortgage will become nil on November
5, 1980. Both mortgages remained on the property
for the taxation years in question however, and as
the property had been conveyed to the wife as a
result of the dissolution of the community follow
ing the divorce any capital element in the pay
ments from the date plaintiff commenced paying
them to her pursuant to the judgment accrued to
her benefit.
One other factual element was brought out
during plaintiff's testimony namely that the second
hypothec of $9,000 was to provide funds for his
use in his business. His wife joined in the deed,
consenting to the loan. He stated that subsequently
and before the divorce the business was dissolved
so that it did not enter into any partition of the
community. The legal issue is one which has fre
quently been before the Court and unless this case
can be distinguished on the facts the decision must
go against plaintiff on the basis of the findings of
the Court of Appeal in the case of The Queen v.
Pascoe 3 . In that case the defendant taxpayer had
paid certain sums of money to his ex-wife toward
educational and medical expenses of their children
pursuant to a separation agreement and subse
quent decree nisi which payments were disallowed
by the Minister on the basis that they were not
allowances because they were not fixed amounts
payable on a periodic basis. In rendering the judg
ment of the Court of Appeal Pratte J. stated at
page 374:
An allowance is, in our view, a limited predetermined sum of
money paid to enable the recipient to provide for certain kinds
of expense; its amount is determined in advance and, once paid,
it is at the complete disposition of the recipient who is not
required to account for it. A payment in satisfaction of an
obligation to indemnify or reimburse someone or to defray his
or her actual expenses is not an allowance; it is not a sum
allowed to the recipient to be applied in his or her discretion to
certain kinds of expense.
In that case however the facts were somewhat
different in that the payment was not determined
by the separation agreement and the decree nisi to
be at fixed recurring intervals of time. Nothing
was said about when payment of the expenses
must be made. This case was followed by the case
of Attorney General of Canada v. Weaver 4 with
Urie J. dissenting. In that case pursuant to a
written separation agreement the taxpayer had
paid utility bills and mortgage payments for the
benefit of the wife. Urie J. in his dissent found that
mortgage payments have the characteristic of
being made on a periodic basis and even though
the agreement in that case did not specify the
amount of the payment the terms of the mortgage
would by implication be incorporated in the agree
ment. It was argued that the tax portion of the
monthly payments varies from time to time and
therefore they were not a "limited predetermined
sum" a term used in the Pascoe case. Urie J.
disagreed stating that this amount would be fixed
in advance for a period of time, probably a year,
meeting the requirements of the section. He was
even prepared to excuse the fact that the payments
were not made directly to the wife but to the
mortgage company, but on the basis that since the
marital home was jointly owned by the husband
3 [ 1976] 1 F.C. 372.
4 [1976] 1 F.C. 423.
and wife the benefit of the principal portion of the
mortgage payments accrued equally to both. He
therefore allowed the deduction of only one-half of
the principal portion of the mortgage payments
made by the husband in the year in question. The
majority judgment disallowed any such deductions
but in the present case the facts are substantially
different in that the house belonged to the wife
following the dissolution of the community so that
any payments on account of the mortgage in the
taxation years in question whether on account of
interest or principal accrued wholly to her benefit,
and furthermore the amount was predetermined
and fixed by the judgment at $360 from the date
of the judgment, providing for variation thereafter
if monthly payments changed as they did as a
result of variations in municipal and school taxes.
The payments were made to the wife and not to
the mortgage creditor nor to the municipal or
school authorities and the portion of the judgment
providing for them sets out clearly in the preamble
that they are alimentary allowance as well for
herself as for the children.
In the case of Roper v. M.N.R. 5 Marceau J.
again followed with regret the decision of the
Court of Appeal in the Pascoe case. In that case
the husband had paid a substantial amount in
addition to paying alimony to his wife as required
by the court order which also required him to pay
expenses for the maintenance of the house and
school fees of the children. He made the latter
payments direct to the creditors rather than to his
wife, and the deductibility was disallowed. He had
allegedly done it in this manner because his former
wife was in his view unable to properly manage her
own affairs. At page 5411 Marceau J. stated:
The order in pursuance of which the payments were made did
not leave any choice: the payments were not to be made to the
wife but directly to the creditors. Moreover, the payments,
those pertaining to educational expenses as well as those per
taining to the maintenance of the house, were certainly not
fixed, predetermined, and made on a periodic basis ....
5 77 DTC 5408.
Neither of these reasons is applicable in the
present case.
In the case of The Queen v. Fisch 6 Collier J.
had to deal with an agreement prior to a divorce
which, in addition to annual payments set out,
provided that the husband would pay direct to the
schools concerned the children's school fees. Col
lier J. following the Pascoe case stated at page
6335:
The educational costs paid by the defendant in this suit were
a limited predetermined sum of money to enable the mother to
meet the school fees. The monies paid were channelled and
restricted to that particular purpose. But the sum was not at the
former wife's complete discretion as to how the money was to
be applied by her. It was, in substance, a reimbursement of
expenses incurred by the wife in the educating of the children.
The payment is not within the Pascoe guidelines.
He added however:
I allow the appeal with some regret. The agreement in
question was drawn long before the restrictions on paragraph
60(b) imposed by the Pascoe case were known. If the defendant
had agreed merely to pay to the wife a fixed sum larger than
the bi -monthly amount of $533.34, (based on an arbitrary
estimate of education costs), there would have been no tax
difficulty. In this case, the evidence shows the defendant's
former wife has, sadly, a history of emotional and psychiatric
disorders. It was because of fear of financial irresponsibility by
her, that the father's desire to see the children properly attend
ed to and educated at the private school, that the educational
costs were handled in this special way.
In the present case payments were not only made
to the wife but in fixed predetermined sums pursu
ant to the judgment confirming the agreement.
The Fisch judgment has been maintained in the
Court of Appeal without reasons. While in it a
fixed sum was payable for the mortgage payments
and taxes Collier J. made this distinction: "If the
defendant had agreed merely to pay to the wife a
fixed sum larger than the bi -monthly amount of
$533.34, (based on an arbitrary estimate of educa
tion costs), there would have been no tax difficul
ty". This appears somewhat in conflict however
with his earlier statement that although the educa
tional costs were a limited predetermined sum the
monies were channelled and restricted to that par
ticular purpose and the sum was not at the former
wife's complete discretion as to how the money
was to be applied but was rather a reimbursement
of expenses incurred by the wife in the education
6 78 DTC 6332.
of the children and hence not within the Pascoe
guidelines. Certainly in the present case it was
intended that the payments were to be used by the
former wife to make the monthly payments on the
two mortgages and to pay the school and munic
ipal taxes. The fact that they were subject to some
slight variations foreseen by the judgment due to
variable tax rates does not in my view prevent
them from being considered as predetermined
sums of money within the meaning of the Pascoe
case. Any amount awarded as alimony can of
course be eventually varied if the needs of the
recipient or the ability to pay of the donor change
with the passage of time. Children come of age
and become independent and the ex-wife may
secure employment and no longer need as much
allowance, or conversely the former husband may
suffer financial reverses of diminution in earnings
making it impossible for him to continue the pay
ments awarded by the agreement or judgment.
These payments can then be varied by order of the
Court. The fact that this can take place does not
prevent them from being considered as fixed
predetermined payments for the taxation years in
question during which the payments were made
pursuant to the divorce order. The fact that in due
course, therefore, one hypothec has been repaid
and the other nearly repaid does not affect the
situation in the taxation years 1974, 1975 and
1976 which are before the Court but merely gave
the former husband the right to have judgment
revised so as to free him from these payments or to
reduce them to the amount required to cover taxes
only. Similarly, as was argued, there was nothing
to prevent the wife from selling the house which
became her property following the dissolution of
the community. In that event also presumably the
husband could properly have sought a judgment
from the Court to be relieved of the said portion of
the alimony payment. As long as she continued to
live in the house however with the minor child or
children and these payments were still due and
payable to the mortgage creditors the husband was
obliged by the judgment to continue to make these
payments to her. However there was at least an
implied obligation on her part to use them in order
to pay the mortgage creditors and taxes, since if
she did not do so they could then come against the
ex-husband as a result of his personal liability on
the loans. If this took place he would then have a
recourse against her for having failed to make the
payments for which the money had been provided.
It was argued therefore that she did not have the
free disposal and use of this portion of the pay
ments received from him.
Defendant concedes that the payments were to
provide for the wife's and children's needs but
disputes that they were paid as alimentary pension
despite the wording of the judgment, relying solely
on the Pascoe case and the judgments which have
followed it.
Plaintiff's counsel contends that since the judg
ment specifically awarded these amounts as ali
mentary pension for the wife and the children she
was under no legal obligation upon receiving them
to make the payments on the hypothecs and taxes,
always subject of course to the consequences if she
failed to do so. It was contended that the establish
ing in the judgment, which incorporated the agree
ment between the parties to this effect, of the
amount to be paid was merely a calculation of the
sum necessary to cover these payments. There is I
believe some legal force to this argument. While
the Court is of course bound by the very strict
interpretation given in the Pascoe case, which was
disagreed with by at least one judge of the Court
of Appeal in the Weaver case and followed with
some reluctance by Marceau J. in the Roper case
and Collier J. in the Fisch case, the circumstances
in these latter cases as well as in the Pascoe case
itself are sufficiently different from those in the
present case, where there is a much stronger claim
for deductibility, as to permit them to be distin
guished. There is no question here, as already
pointed out, as to the payments not being made on
a periodic basis, the fixed amounts of them, nor
their not having been made directly to the ex-wife
herself, and the judgment itself specifically states
that both types of payments were to be made as
alimentary pension for herself and the children.
The fact that in determining the amount of the
payment it was necessary to calculate what month
ly payments would be required for the mortgage
payments and taxes on the property, which it must
be emphasized is now solely her property, appears
to me to indicate that the sums paid were at her
complete disposition even if it were assumed that
she would use them to satisfy the obligations which
they were designed to cover and thereby relieve the
ex-husband of personal claims against him for
them. If she did not choose to do so she would
suffer the consequence of possibly losing her prop
erty, or alternatively if creditors came against the
ex-husband he would then certainly deduct any
sums which he had to pay from future alimentary
pension payments to her, claiming compensation.
Reading section 60(b) and (c) of the Income
Tax Act (supra) it would appear that the pay
ments comply in all respects with the provisions of
the section, unlike the situation in the Pascoe and
subsequent cases which were of a different nature,
educational and medical expenses not being prede-
terminable especially as regards the latter nor
payable on a periodic basis.
For the above reasons therefore I would main
tain the appeal from the assessments for the years
1974, 1975 and 1976, and refer them back to the
Minister for reassessment on the basis of allowing
deduction of the payments to the ex-wife pursuant
to Clause C)2 of the divorce judgment in addition
to the amounts of $3,600 allowed in each year for
payments pursuant to Clause C)1 instead of the
amounts of $3,600 allowed for each of the said
years with costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.