Tax Court of Canada Judgments

Date: 20020524

Docket: 2001-989-IT-i

BETWEEN:

BRUCE ROSENBERG,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent,

and

NANCI PACH,

Joined Party.

Reasonsfor Judgment on a Determination of

QuestionsUnder Section 174 of the IncomeTax Act

Sarchuk J.

[1]            In computing income for the 1997 and 1998 taxation years, the Appellant, Bruce Rosenberg, deducted the amounts of $27,000 and $37,793 as support payments made to Nanci Pach. In reassessing the Appellant, the Minister of National Revenue (Minister) disallowed the deduction of support payments to the extent of $15,000 and $25,793, respectively.

[2]            On June 20, 2001, the Minister made an application under section 174 of the Income Tax Act (the Act) for an order joining Nanci Pach to the appeals of Bruce Rosenberg and for the determination of questions in respect of the:

(a)            Notices of Reassessment dated May 24, 2000 in respect of the 1997 and 1998 taxation years of Mr. Rosenberg; and

(b)            Proposed Reassessments in respect of the 1997 and 1998 taxation years of Ms. Pach.

On August 16, 2001, an Order was made by Lamarre Proulx J. joining Nanci Pach as a party to the appeals of Bruce Rosenberg.

[3]            The questions in respect of which a determination is sought is:

(a)            Whether the amounts paid by Bruce Rosenberg to Nanci Pach, or paid to third parties, were paid pursuant to a written agreement;

(b)            Whether the amounts paid by Bruce Rosenberg to Nanci Pach, or paid to third parties, are deductible by Bruce Rosenberg, pursuant to paragraph 60(b), and subsections 60.1(1) and 60.1(2), of the Act; and

(c)            Whether the amounts paid by Bruce Rosenberg to Nanci Pach, or paid to third parties, are to be included in computing Nanci Pach's income pursuant to paragraph 56(1)(b) and subsections 56.1(1) and 56.1(2) of the Act.

[4]            At the commencement of the trial, the parties filed an Agreed Statement of Facts as follows:

BACKGROUND

1.              The taxation years under appeal are 1997 and 1998;

2.              Both Nanci Pach and the Appellant were residents of Canada for purposes of the Income Tax Act (herein 'the Act');

3.              Nanci Pach and the Appellant were married on September 15, 1983 and separated on September 1, 1994 with the Appellant leaving the matrimonial home (that being the property located at 137 Westmoreland Ave. - herein referred to as 'the Property');

4.              At all material times since September 1, 1994, the Appellant has lived separate and apart from Nanci Pach;

5.              There are three children of the marriage, aged 16, 13, and 8. These children reside with Nanci Pach at the Property;

6.              The Appellant and Nanci Pach executed a written separation agreement dated April 17, 1994;

7.              The Appellant in computing his income for the 1997 and 1998 taxation years deducted the amounts of $27,000 and $37,793 as support payments paid;

8.              Nanci Pach in computing her income for the 1997 and 1998 taxation years included the amounts of $27,000 and $37,793 as support payments received;

9.              The Minister of National Revenue (herein 'the Minister') assessed the Appellant for the 1997 and 1998 taxation years by Notices of Assessment mailed on May 19, 1998 and May 13, 1999, respectively;

10.            The Minister assessed Nanci Pach for the 1997 and 1998 taxation years by Notices of Assessment mailed on November 9, 1998 and May 20, 1999, respectively;

11.            On December 21, 1999 Nanci Pach filed a T1 Adjustment request in respect of the 1997 taxation year requesting the deletion of the "alimony/maintenance income" of $27,000. The explanation/detail provided for this request was "support payments received were not subject to a court order or written separation agreement. The previous accountant erred in reporting this amount as taxable income";

12.            On December 21, 1999 Nanci Pach filed a T1 Adjustment request in respect of the 1998 taxation year requesting the deletion of the "alimony/maintenance income" of $37,793. The explanation/detail provided for this request was "support payments received were not subject to a court order or written separation agreement. The previous accountant erred in reporting this amount as taxable income";

13.            The Minister reassessed the Appellant for the 1997 and 1998 taxation years by concurrent Notices of Reassessment mailed on May 24, 2000, disallowing the deduction of support payments to the extent of $15,000 and $25,793, respectively;

14.            The Minister reassessed Nanci Pach for the 1997 and 1998 taxation years by Notices of Reassessment mailed on July 24, 2000;

15.            The Minister confirmed its reassessments for the 1997 and 1998 taxation years by Notice of Confirmation dated January 12, 2001;

16.            On March 16, 2001 the Appellant filed an appeal with the Tax Court of Canada;

17.            Pursuant to section 174 of the Income Tax Act (herein 'the Act') the Respondent made awn application dated July 18, 2001 to have Nanci Pach joined as a Party to the appeal of Bruce Rosenberg;

18.            On August 15, 2001, Acting Chief Judge Lamarre Proulx of the Tax Court of Canada ordered that Nanci Pach be joined as a Party in the current appeal;

19.            The written separation agreement referred to in #6 above required the Appellant to pay for various expenses that were identified for the Property, but not quantified and described. Such expenses included "mortgage payments, monthly expenses for 137 Westmoreland Ave. including realty taxes, hydro, gas, telephone, insurance, cable, auto expenses (including gas and insurance), domestic help, and other expenses not expressly listed". In addition the agreement provided that the Appellant pay to Nanci Pach a further "$1,000 support per month";

PAYMENTS AGREED TO

1997

20.            Nanci Pach received direct payments from the Appellant in the amount of $36,800 in the 1997 taxation year;

21.            The Appellant paid to the National Bank the amount of $4,291.36 in the 1997 taxation year;

22.            The Appellant paid to Canada Trust the amount of $3,512.84 in the 1997 taxation year;

23.            The Appellant paid to Monnex Insurance the amount of $1,150.62 in the 1997 taxation year;

24.            The Appellant paid to Dominion Insurance the amount of $847.49 in the 1997 taxation year;

25.            The Appellant paid to the Receiver General of Canada the amount of $2,600 in the 1997 taxation year;

1998

26.            Nanci Pach received direct payments from the Appellant in the amount of $34,889.56 in the 1998 taxation year;

27.            The Appellant paid to Monnex Insurance the amount of $1,006.84 in the 1998 taxation year;

28.            The Appellant paid to Dominion Insurance the amount of $883.56 in the 1998 taxation year;

In addition to the facts admitted, evidence was adduced from both the Appellant and Nanci Pach.

Background

[5]            The Appellant and Nanci Pach were married in September 1983. By 1994, the marriage had floundered and the Appellant and Pach were in the process of separating. At this point of time, the Appellant was still resident in the family home and was being urged to move out. At or about the same time, the mortgage on the family home (title to which was in Pach's name) came up for renewal and Pach refused to execute any of the relevant documents until the Appellant agreed to leave. This impasse led to the drafting of the separation agreement (the agreement) and the reciprocal execution of the mortgage documents followed by the Appellant's move out of the residence. The agreement dated April 17, 1994 provides as follows:

I, Bruce Rosenberg, agree to pay the mortgage payments for 137 Westmorland Ave., Toronto, after separation from Nanci Pach up until a period of five years or until Nanci Pach releases me in writing. I also agree to give $1,000.00 support per month & monthly expenses for 137 Westmorland Ave., including realty taxes, hydro, gas, telephone, insurance, cable, auto expenses (including gas, insurance), domestic help & other expenses not expressly listed.

I also acknowledge that I declined to list or verbally state an interest in taking any property i.e. furniture when invited to do so for Nanci Pach instead I leave such allocation responsibilities to Nanci Pach.

Dated at Toronto, this 17th day of April, 1994.

Witness:

                                                                                                "Nanci Pach"

                                                                                                "Bruce Rosenberg"

[6]            According to the Appellant, the agreement was designed to confirm their mutual understanding that, because Pach had no source of income at that particular time, he would shoulder all of the financial burdens of maintaining the family until Pach was in a position to take responsibility for some of it. Her testimony confirmed that the agreement required the Appellant to provide support in the amounts set out therein. However, she maintained that the Appellant's direct payments of the household expenses were always intended to be an interim measure designed to enable her to "get my feet back on the ground". Accordingly, as agreed, during the initial stage Pach received $1,000 per month directly while other expenses enumerated in the agreement were paid by the Appellant. Some three or four months after the agreement was executed, she insisted that it was time to "have the payments come directly to me so that I can be self-sufficient". Pach was very clear that the payments she referred to reflected the expenses necessary to maintain the customary style of living of the family. In her words: "whatever cost it cost him to run the house for the three months, that's what I would require". The Appellant agreed and from that point on in accordance with their agreement, the amounts required were paid directly to her.[1] The sole exception reflected the third party payments most of which he continued to make in both 1997 and 1998.[2]

[7]            The Appellant testified that in 1997 his law practice was not doing well and the payments had become a burden. He says that in or about January 1998, Pach agreed to lower the payments to $3,200 per month less an agreed deduction for certain other payments such as her income tax, car insurance, house insurance, etc. The Appellant maintains this was reduced to writing but no document was produced. Pach, for her part, denies that any such agreement, oral or written, took place. The examination and cross-examination on this issue consumed a good deal of time but produced little information of value and, on balance, fell short of establishing the existence of a new or amended agreement. In any event, the parties do not dispute that any such agreement would have affected the amount only and not the underlying basis upon which the payments were being made pursuant to the 1994 agreement.

Analysis

[8]            The first question: Were the amounts paid by the Appellant to Pach or to third parties paid pursuant to a written agreement?

The evidence clearly establishes that the terms set out in the agreement were understood and accepted by both parties. It was suggested by counsel for Pach that her lack of experience and knowledge regarding tax matters led her to accept the terms without realizing their full consequences. I am unable to agree. Pach is an intelligent and articulate young woman and in the course of her testimony demonstrated, in my view, an adequate appreciation not only of the amount required for the support of herself and the children, but also the firm conviction that the amounts were to be paid to her directly so that she could exercise her discretion as to their disposition. I am satisfied the document filed as Exhibit A-4 cannot be construed as anything other than a written recording of the support payments agreed upon by the Appellant and Pach.

[9]            The second and third questions: Are the amounts paid by Rosenberg to Pach or paid to third parties deductible by him pursuant to paragraph 60(b) and subsections 60.1(1) and 60.1(2) of the Act and thus, are they to be included in computing Pach's income pursuant to paragraph 56(1)(b) and subsections 56.1(1) and 56.1(2) of the Act?

Position of the Joined Party, Nanci Pach

[10]          (a)            Relying on the provisions of subsection 56.1(4) and the definitions of "support amount" and "child support amount", her counsel argued that "in order to be deductible, the amount must be expressed and identified as solely for the support of the spouse".[3] These definitions, he argued, make it clear that since the amounts set out in the agreement were not identified as being payable as an allowance to the spouse, then it becomes a "child support amount" and is not deductible to the Appellant. On this basis, counsel contends that the Appellant is only entitled to deduct the amount of $4,000 in 1997[4] and is not entitled to any deduction in 1998.

(b)            Counsel further argued that the only limited and predetermined amount of support paid pursuant to the agreement was the $1,000 fixed amount and contends that there being no limitation as to the balance the amounts of which are neither specified nor quantified, they are not allowable as a deduction for the purposes of the Act.

(c)            It was further submitted that the specific third party payments itemized in paragraphs 21 to 25, 27 and 28 of the Agreed Statement of Facts are not deductible since that required an express reference to subsections 60.1(2) and 56.1(2) in the agreement. Since they are not referred to in the agreement, the third party payments must be shown to be a support amount and given the evidence, counsel argued that they were not.

Analysis

[11]          Before dealing with the submissions advanced on behalf of Pach, the question whether the deductions claimed by the Appellant can be supported by the provisions of subsection 60.1(2) of the Act must be considered. This subsection and its alter ego, subsection 56.1(2), mandates that the agreement must have in it clear and unequivocal language from which it can be taken that both parties to the agreement meant that the amount in issue would be tax deductible and tax includable. The agreement in issue does not utilize the statutory language required by subsection 60.1(2) and thus it has no application. Since there is no specific language nor implicit statements in the agreement as required by the Act,[5] the response to the first part of question two is that the Appellant is not entitled to a deduction based on the provisions in subsection 60.1(2).

[12]          The first issue raised on behalf of Pach is that the amounts paid were "child support amounts" and thus not deductible to the Appellant. The definitions relied upon by her counsel form part of amendments made by 1998 c. 19, subsection 97(2) applicable to amounts received after 1996. In order to determine the tax treatment of a support payment received after 1996, it is necessary to find that the amount constitutes a "support amount" or a "child support amount" as defined in subsection 56.1(4). By virtue of this subsection after 1996 the term "child support amount" means any support amount that is not identified in the agreement as being solely for the support of the spousal recipient. Although there is no mention or reference to the children in the agreement before this Court it would be difficult to argue that the payments were made solely for the support of Pach. Thus, the amounts paid are, by definition, a "child support amount" and pursuant to the 1998 amendment, would not be taxable to the recipient or deductible to the payer. However, that is not the end of the matter since the argument advanced does not take into account the fact that although the "child support amounts" in issue were received after 1996, the agreement between the parties predates the amending legislation. To be subtracted in accordance with the formula in paragraph 56(1)(b) of the Act, the "child support amount" must be one that became receivable under an agreement on or after its "commencement day". The legislation also provides that the "child support amount" does not include an amount that was received under a written agreement that does not have a "commencement day" as that term is defined in the Act.[6] For orders and agreements made before May 1997, the prior provisions apply. Thus, in applying the formula set out in paragraph 56(1)(b), "child support amounts" receivable under pre-May 1997 Orders without a "commencement day" are not to be included in B of the formula and would not reduce the total support amounts described in A of paragraph 56(1)(b).[7] In such cases, "child support amounts" continue to be includable in computing the recipient's income.

[13]          Counsel for Pach further contends that the payments made, other than the $1,000 fixed amount, were neither predetermined nor limited. Although the evidence is not as clear and precise as it might have been, I am unable to reach the same conclusion. Although the balance of the support payments over and above the $1,000 fixed amount were not specifically quantified in the agreement, the evidence indicates that they were thoroughly discussed and by the very nature of the expenses were in a general sense predetermined and limited. I refer particularly to the Appellant's testimony that they "talked about the amounts to be paid directly per month" and his recollection that "it was generally a set amount in the neighbourhood, around $3,200". Furthermore, Pach does not dispute that direct payments of $3,200 and $3,000 per month were made to her in 1997 and 1998, respectively. Furthermore, the cheques provided to Pach by the Appellant on a regular basis were payable to her and were not directed or intended to be used for a particular payment. Indeed, the evidence is clear that as the recipient of these cheques, Pach was not in any manner precluded from exercising her discretion in allocating the funds available to her to specific accounts or deciding when or if they were to be paid. Since these child support amounts arise from an agreement that does not have a "commencement day", they do not reduce the total support amounts described in clause 60(b)(A) of the Act.[8]

[14]          The last issue to be considered is whether the payments made by the Appellant to third parties in the 1997 and 1998 taxation years were made on account of "support payments" to Pach within the meaning of paragraph 60(b) of the Act. The agreement itself does not directly or by inference allow the Appellant to fulfil his obligation thereunder by making payments to third parties. As well, the evidence adduced by him falls short of establishing that those payments were made with the express consent of Pach. His testimony in this context was equivocal at best, leaving the Court with the distinct impression that it was more a matter of convenience to the Appellant. It is not possible on the evidence before me to conclude that these payments were made at Pach's discretion or that she had given express consent thereto. I conclude that the payments made to third parties in the 1997 and 1998 taxation years were not support payments within paragraph 60(b) of the Act.

[15]          Answers

1               Were the amounts paid by Bruce Rosenberg to Nanci Pach, or paid to third parties, paid pursuant to a written agreement? - Yes.

2(a)          Are the amounts paid by Bruce Rosenberg to Nanci Pach or paid to third parties deductible by Bruce Rosenberg pursuant to subsections 60.1(1) and (2) of the Act? - No.

2(b)          Are the amounts paid by Bruce Rosenberg to Nanci Pach deductible by Bruce Rosenberg pursuant to paragraph 60(b)? - Yes.

2(c)          Are the amounts paid by Bruce Rosenberg to third parties deductible by Bruce Rosenberg pursuant to paragraph 60(b)? - No.

3(a)          Are the amounts paid by Bruce Rosenberg to Nanci Pach or to third parties to be included in computing Nanci Pach's income pursuant to subsections 56.1(1) and 56.1(2) of the Act? - No.

3(b)          Are the amounts paid by Bruce Rosenberg to Nanci Pach to be included in computing Nanci Pach's income pursuant to paragraph 56(1)(b)? - Yes.

3(c)          Are the amounts paid by Bruce Rosenberg to third parties to be included in computing Nanci Pach's income pursuant to paragraph 56(1)(b)? - No.

Signed at Ottawa, Canada, this 24th day of May, 2002.

"A.A. Sarchuk"

J.T.C.C.

COURT FILE NO.:                                                 2001-989(IT)I

STYLE OF CAUSE:                                                               Bruce Rosenberg and Her Majesty the Queen and Nanci Pach

PLACE OF HEARING:                                         Toronto, Ontario

DATE OF HEARING:                                           November 9, 2001 and January 16, 2002

REASONS FOR DETERMINATION

OF QUESTIONS BY:                            The Honourable Judge A.A. Sarchuk

DATE OF DETERMINATION:           May 24, 2002

APPEARANCES:

For the Appellant:                                                 The Appellant himself

Counsel for the Respondent:              James Rhodes

Counsel for the Third Party:                Michael F. Charles

COUNSEL OF RECORD:

For the Appellant:                                                 The Appellant himself

For the Third Party:

Name:                                Michael F. Charles

Firm:                  David Eklov Charles

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2001-989(IT)I

BETWEEN:

BRUCE ROSENBERG,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent,

and

NANCI PACH,

Third Party.

Appeals heard on November 9, 2001 and January 16, 2002, at Toronto, Ontario,

by the Honourable Judge A.A. Sarchuk

Appearances

For the Appellant:                                The Appellant himself

Counsel for the Respondent:                James Rhodes

Counsel for the Third Party:                 Michael F. Charles

JUDGMENT ON A DETERMINATION OF QUESTIONS

UNDER SECTION 174 OF THE INCOME TAX ACT

          By Order dated August 16, 2001, Nanci Pach was added as a Third Party to the appeals of Richard Rosenberg for the purpose of determining the following questions:

1.        Whether the amounts paid by Bruce Rosenberg to Nanci Pach, or paid to third parties were paid pursuant to a written agreement?

2.        Whether the amounts paid by Bruce Rosenberg to Nanci Pach, or paid to third parties, are deductible by Bruce Rosenberg, pursuant to paragraph 60(b) and subsections 60.1(1) and 60.1(2) of the Act? and

3.        Whether the amounts paid by Bruce Rosenberg to Nanci Pach, or paid to third parties, are to be included in computing Nanci Pach's income pursuant to paragraph 56(1)(b) and subsections 56.1(1) and 56.1(2) of the Act?

Upon hearing the evidence of the Appellant and the Third Party; and upon hearing submissions from all three parties;

It is determined that:

1.        The answer to question 1 is yes.

2.        The answers to question 2 are as follows:

(a)       Are the amounts paid by Bruce Rosenberg to Nanci Pach or paid to third parties deductible by Bruce Rosenberg pursuant to subsections 60.1(1) and (2) of the Act? - No.

(b)      Are the amounts paid by Bruce Rosenberg to Nanci Pach deductible by Bruce Rosenberg pursuant to paragraph 60(b)? - Yes.

(c)      Are the amounts paid by Bruce Rosenberg to third parties deductible by Bruce Rosenberg pursuant to paragraph 60(b)? - No.

3.        The answers to question 3 are as follows:

(a)       Are the amounts paid by Bruce Rosenberg to Nanci Pach or to third parties to be included in computing Nanci Pach's income pursuant to subsections 56.1(1) and 56.1(2) of the Act? - No.

(b)      Are the amounts paid by Bruce Rosenberg to Nanci Pach to be included in computing Nanci Pach's income pursuant to paragraph 56(1)(b)? - Yes.

(c)      Are the amounts paid by Bruce Rosenberg to third parties to be included in computing Nanci Pach's income pursuant to paragraph 56(1)(b)? - No.

Signed at Ottawa, Canada, this 24th day of May, 2002.

"A.A. Sarchuk"

J.T.C.C.