Date: 19981016
Docket: 97-2572-IT-I
BETWEEN:
ANWAR HAK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, J.T.C.C.
[1] This appeal is from reassessment for the 1995 taxation year whereby the Minister of National Revenue disallowed the sum of $12,000 claimed by the appellant as alimony or maintenance paid to his estranged spouse under paragraph 60(b) of the Income Tax Act.
[2] The appellant and his spouse had a history of matrimonial difficulties. They have separated and attempted reconciliation on at least two occasions. They are now in the process of obtaining a divorce.
[3] The appellant testified that he and his wife separated on January 2, 1995 and that on that day they signed a separation agreement. I accept that the agreement was signed by both spouses on January 2, 1995. It reads as follows:
We, ANWAR HAK and FAZIMA HAK mutually agree as follows:
1. That we will be separated and living apart effective January 2, 1995.
2. That Fazima Hak will continue to reside at 13862 - 27 Street, Apt. 302, Edmonton. Alberta.
3. That Anwar Hak will reside at various job locations across Canada and upon his rotation at 2516-143 Avenue, Edmonton, Alberta.
4. That my son Sahyad Hak will remain with Fazima Hak until an equitable settlement is reached.
5. That Anwar Hak will provide $1000 per month for alimony and support, or
Pay apartment rent of $455.00/month
Utility bills of approximately $200.00/month
Health care premium
approximately $100.00/month
Total $750.00/month [sic]
and the remainder of $245/month for miscellaneous expenses for a total of $1,000 per month.
6. Fazima Hak will continue to receive and keep the family allowance cheque every month.
7. Any additional expenses to be provided by Anwar Hak at this [sic] discretion.
8. That Sahyad Hak should not be removed from the Edmonton jurisdiction unless ordered by a competent court.
9. That Anwar Hak is entitled to liberal access and telephone communication with his son having provided 24 hours advance notice.
10. That these agreements were made without prejudice.
WITNESS: Sheik Habil Signed:_______________
Anwar Hak
Signed:_______________
Fazima Hak
[4] The agreement appears to have been prepared without legal advice. The spouses lived separate and apart throughout the remainder of 1995. It is accepted by the Minister that the appellant in fact paid rent of $455 per month on the apartments where his wife resided for all of 1995, for a total of $5,460. A receipt from the landlord was attached to the notice of appeal.
[5] It was also established by the appellant, through the production of receipts, that he paid a total of $296.08 to Northwest Utilities for gas to heat the apartment, and that he paid $1,304.42 for electricity and water. He also paid $800 in health care premiums on behalf of his wife as well as $290.74 to Shaw for cable service. The total payments made under the agreement for rent, health care premiums and utilities amounted to $8,151.24.
[6] The appellant testified as well that he made cash payments to his wife that with the rent and utility payments probably exceeded the $1,000 per month contemplated by the agreement and I daresay he did, particularly if one takes into account his spouse's access to his Visa card. He struck me as an honest man who took his responsibilities to his wife and children seriously. However, the proof of the additional cash payments was much too vague and unsatisfactory to enable me to form any conclusion, and accordingly, I shall treat only the amounts totalling $8,151.24 as having been clearly proved. The question of their deductibility remains.
[7] In filing his return of income for 1995, the appellant claimed $14,000 as a deduction for alimony and maintenance, made up of $2,000 paid to a former common-law spouse and $12,000 paid to his wife Fazima Hak. On objection, the Minister allowed only the $2,000 paid to the former common-law spouse but continued to deny the deduction of the $12,000 even though he was satisfied at least to the extent of the $5,460 rent paid.
[8] The appellant testified that the alternative method of payment whereby, instead of paying his wife $1,000 per month, he would pay the apartment rent, utility bills and health care premiums and the balance in cash was agreed upon because his wife was totally irresponsible about money and would simply take the cash and spend it on something else and not pay the rent or utility bills and would probably be evicted or have her utilities cut off. This is, in fact, what happened during a previous separation, and so the solution was a sensible one.
[9] There is one final point of evidence that I mention for the sake of completeness although it may, strictly speaking, be irrelevant. In 1996, the spouses again attempted, unsuccessfully, to effect a reconciliation, and were living together when Fazima Hak was preparing her 1995 income tax return. The appellant testified from his own knowledge that his spouse in fact included about $12,000 in her 1995 income as alimony on maintenance. The evidence is reliable and I accept it. It is arguable that it is not germane to this appeal, but it at least demonstrates that the parties intended the agreement to have the effect for which Mr. Hak contends.
[10] The respondent bases the denial of the deduction upon a construction of paragraph 60(b), section 60.1 and subsection 56(12) and upon what she contends is the effect of a decision of the Federal Court of Appeal in The Queen v. Armstrong, 96 DTC 6315.
[11] Paragraph 60(b) reads as follows in 1995:
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 as alimony or other allowance payable on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient and the children, if the taxpayer, because of the breakdown of the taxpayer's marriage, was living separate and apart from the spouse or former spouse to whom the taxpayer was required to make the payment at the time the payment was made and throughout the remainder of the year and the amount was paid under a decree, order or judgement of a competent tribunal or under a written agreement.
[12] Counsel for the respondent agreed that had Mr. Hak simply paid his spouse $1,000 per month and let her pay the rent and utilities and other expenses, there would be no question that he could deduct it. Instead, however, the spouses agreed to an arrangement whereby a portion of the $1,000 per month would be paid directly to the gas and utility companies and the balance would be paid to her. This method of payment was specifically set out in the agreement as an alternative to paying her directly the $1,000 per month. Although the agreement does not use the words "on behalf of Fazima Hak" or "for the benefit of Fazima Hak", this is plainly the intent and effect of the agreement and, in particular, paragraph 5 thereof. Without more, I should have thought it obvious that the appellant's making the payments on Fazima Hak's behalf and for her benefit would constitute constructive receipt by her and would be a payment by Mr. Hak of the type contemplated by paragraph 60(b).
[13] Subsection 60.1(1) reads as follows:
60.1 (1) — Where a decree, order, judgment or written agreement described in paragraphs 60(b) or (c), or any variation thereof, provides for the periodic payment of an amount by a taxpayer
(a) to a person who is
(i) the taxpayer's spouse or former spouse, or
(ii) where the amount is paid under an order made by a competent tribunal in accordance with the laws of a province, an individual of the opposite sex who is the natural parent of a child of the taxpayer, or
(b) for the benefit of the person, children in the custody of the person or both the person and those children,
the amount or any part thereof, when paid, shall be deemed for the purposes of paragraphs 60(b) and (c) to have been paid to and received by that person.
[14] It is not clear what paragraph 60.1(1)(b) added to what was already provided by the law of constructive receipt. It will be noted that the focus of subsection 60.1(1) is on the recipient, not the payor. It is the recipient who is deemed to have been paid and to have received the amount. It is possible that subsection 60.1(1) was inserted into the Act to ensure that the recipient could not avoid taxation on amounts paid to third parties on his or her behalf, on the basis that he or she did not "receive" them. It is interesting to note that paragraph 60(b) requires that the amount be paid as alimony or maintenance. It does not, in so many words, say to whom they have to be paid.
[15] The respondent relies upon subsection 56(12), which provided:
Subject to paragraphs (1)(b), (c) and (c.1) (in this subsection referred to as the "former paragraphs") and 60(b), (c) and (c.1) (in this subsection referred to as the "latter paragraphs"), "allowance" does not include any amount that is received by a person, referred to in the former paragraphs as "taxpayer" and in the latter paragraphs as "the taxpayer" and in the latter paragraphs as "the recipient", unless that person has discretion as to the use of the amount.
[16] This provision may have been introduced as the result of the decision of the Supreme Court of Canada in J.-P. Gagnon v. The Queen, [1986] 1 C.T.C. 410.
[17] It appears quite obvious that Fazima Hak had a discretion with respect to the entire $1,000, and she exercised that discretion by constituting her husband her agent to pay on her behalf certain expenses such as utility bills and rent. What Fazima Hak is saying in effect is "You are to pay me $1,000 per month. You can satisfy part of that obligation by paying some of my bills."
[18] Counsel however argues that the failure to provide in the agreement that subsections 56.1(1) and 60.1(2) apply is fatal to the appellant's claim.
[19] Subsection 60.1(2) reads as follows:
(2) For the purposes of paragraphs 60(b) and (c), the amount determined by the formula
A — B
where
A is the total of all amounts each of which is an amount (other than an amount to which paragraph 60(b) or (c) otherwise applies) paid by a taxpayer in a taxation year, under a decree, order or judgment of a competent tribunal or under a written agreement, is respect of an expense (other than an expenditure in respect of a self-contained domestic establishment in which the taxpayer resides or an expenditure for the acquisition of tangible property that is not an expenditure on account of a medical or education expense or in respect of the acquisition, improvement or maintenance of a self contained domestic establishment in which the person described in paragraph (a) or (b) resides) incurred in the year or the preceding taxation year for maintenance of a person who is
(a) the taxpayer's spouse or former spouse, or
(b) where the amount is paid under an order made by a competent tribunal in accordance with the laws of a province, an individual of the opposite sex who is the natural parent of a child of the taxpayer,
or for the maintenance of children in the person's custody or both the person and those children if, at the time the expense was incurred and throughout the remainder of the year, the taxpayer was living separate and apart from that person, and
B is the amount, if any, by which
(a) the total of all amounts each of which is an amount included in the total determined for A in respect of the acquisition or improvement of a self-contained domestic establishment in which that person resides, including any payment of principal or interest in respect of a loan made or indebtedness incurred to finance, in any manner whatever, such acquisition or improvement
exceeds
(b) the total of all amounts each of which is an amount equal to 1/5 of the original principal amount of a loan or indebtedness described in paragraph (a),
shall, where the decree, order, judgment or written agreement, as the case may be, provides that this subsection and subsection 56.1(2) shall apply to any payment made thereunder, be deemed to be an amount paid by the taxpayer and received by that person as an allowance payable on a periodic basis.
[20] In assessing the force of this argument, it is necessary to consider just what this somewhat convoluted provision is intended to accomplish.
[21] It provides a formula for the purposes of paragraphs 60(b) and (c) to determine additional amounts that are deductible under those paragraphs and deem them to be an allowance payable on a periodic basis. There are specifically excluded from the operation of the formula amounts to which paragraphs 60(b) and (c) otherwise apply. It makes amounts deductible that are not otherwise deductible.
[22] It allows a deduction of an amount determined using the formula A — B. A is the total of all amounts paid by a taxpayer (the "payor") under a decree, order or judgment of a competent tribunal or a written agreement incurred in the year or a preceding year for the maintenance of the payor's spouse or former spouse or, if paid under an order of a competent tribunal in accordance with applicable provincial law, to an individual of the opposite sex who is the natural parent of the payor's child.
[23] From the total in A are excluded:
(a) amounts to which paragraphs 60(b) or (c) apply;
(b) expenditures in respect of a self-contained domestic establishment where the payor lives;
(c) expenditures for the acquisition of tangible property;
From the exclusion in (b) and (c) there are to be excluded (and therefore included in the total in A):
(d) expenditures on account of a medical or education expense or;
(e) expenditures in respect of the acquisition, improvement or maintenance of a self-contained domestic establishment in which a person described in paragraph (a) or (b) of subsection 60.1(2) resides. I shall call the person described in paragraphs 60.1(2)(a) or (b) the "payee". Also there are to be included in A payments for the maintenance of children in the payee's custody or for the maintenance of those children and the payee.
[24] From the total arrived at under A, we deduct the figure arrived at under B. B is determined by:
(i) totalling the amounts referred to in (e) above that are for the acquisition or improvement (but not, it should be noted, maintenance, a word used in A) of a self-contained domestic establishment in which the payee resides, (including principal and interest payments in respect of a loan or indebtedness incurred to finance the acquisition or improvement of that domestic establishment) and;
(ii) determining the amount by which that total exceeds one-fifth of the original amount of the loan or indebtedness incurred to finance the acquisition of the domestic establishment where the payee resides.
[25] The figure so determined (A — B) is then deemed to be an amount paid by the payor and received by the payee as an allowance payable on a periodic basis if the agreement, judgment, decree or order says that subsections 60.1(2) and 56.1(2) apply.
[26] No provision of the Income Tax Act should require this type of parsing. This subsection illustrates a style of legislative drafting that started with tax reform in 1972 in which the drafter of the Act considered it clever to reduce complex algebraic or mathematical formulae to a single page-long sentence. It is high time our legislative drafters eliminated this type of obfuscation from what they expect the public to digest. The drafting of legislation should have as its object the articulation of principles that are reasonably comprehensible to an intelligent non-specialist.
[27] An example of the way the subsection works may help to clarify it. Assume that a separation agreement provides that the payor spouse will make the mortgage payments on the house where the payee spouse lives, as well as all maintenance payments on it, buy her a new car, pay tuition fees at a private school for the child who is in the payee spouse's custody as well as medical expenses. Assume further that there was originally a $350,000 mortgage on the house, and the principal and interest payments amounted to $30,000 per year, maintenance on the house was $5,000, tuition fees were $10,000 per year, and the new car cost $25,000.
[28] The figure under A would be $30,000 + $10,000 + $5,000 totalling $45,000 but would not include the $25,000 for the car.
[29] The figure under B would be the amount by which $30,000 exceeds one-fifth of $350,000, ($70,000) which, in this case, is zero. Thus, A — B is $45,000 - 0 = $45,000.
[30] The payor spouse could deduct $45,000 and the payee would have to include it in income provided they thought to mention that subsections 60.1(2) and 56.1(2) applied to the payments. It is interesting to note that title to the house need not be in the payee. It could remain in the payor.
[31] I do not think that subsection 60.1(2) has any application. The payment of the rent and utility expenses was simply an alternative means, agreed to by the spouses, of satisfying a portion of the appellant's obligation to pay his spouse the periodic allowance of $1,000 per month. The failure to mention in the agreement that a provision that has no application in any event should apply to the payments cannot be fatal to deductibility under paragraph 60(b).
[32] Counsel referred to the decision of the Federal Court of Appeal in Armstrong. Before I discuss that case, I should mention an earlier decision of the Federal Court of Appeal in The Queen v. Arsenault, 96 DTC 6131.
[33] The headnote sets out the facts as follows:
Pursuant to a Separation Agreement dated June 26, 1984, the taxpayer was require, inter alia, to pay maintenance in the amounts of $400 per month to his separated spouse, S, and $100 per month for each of three children. Instead of making such payments, the taxpayer provided S with monthly cheques of $690 (later $760) made payable to the landlord, which S delivered to the latter. In assessing the taxpayer for 1991 and 1992 the Minister disallowed the deductions which the taxpayer had claimed in respect of these rental cheques. The taxpayer's appeal to the Tax Court of Canada was allowed. The Tax Court Judge concluded that the amounts paid by the taxpayer were limited and predetermined, and that they represented a certain type of expense which S was thereby enabled to discharge. In addition, in the Tax Court Judge's view, S had constructive receipt of the amounts involved, in that she had acquiesced in the taxpayer's payment thereof to her landlord, thus constituting the landlord as her agent for the receipt and appropriate expenditure thereof. Hence, in the Tax Court Judge's mind, all of the requirements of paragraph 60(b) and subsection 56(12) had been met, and this led him to the conclusion that the amounts in issue were deductible. The Minister applied to the Federal Court of Appeal for a judicial review of the Tax Court Judge's findings.
[34] The oral judgment of the majority (Strayer and MacGuigan JJ.A.) was delivered by Strayer J.A. as follows:
I am of the view that the applicant has not demonstrated any reviewable error on the part of the learned Tax Court judge. I believe he was right in concluding that the payments in question came within paragraph 60(b) of the Income Tax Act as on the facts of this case the respondent's former spouse retained a discretion as to how the money was paid pursuant to the separation agreement and judgment and thus as to the use of that amount.
[35] Stone J.A. dissented. He said:
I am not persuaded that the former spouse had "discretion as to the use of the amount" at the time she received it within the meaning of the "allowance" definition in subsection 56(12) of the Income Tax Act, (1) when it is clear that each of the cheques she received was payable to a third party and could be applied for (2) no other purpose, even though it could be said that she had discretion to use each amount in that manner or to return it to the appellant and demand of him that the cheques be made payable to her in accordance with the court order and separation agreement.
I am not satisfied that the case is covered by subsection 60.1(1) of the statute (3) as neither the divorce judgment nor the separation agreement provides for these amounts to be paid for the benefit of the former spouse or her children. Subsection 60.1(2), (4) I would accordingly allow the application and set aside the judgment of the Tax Court of Canada.
[36] Three months, later the issue of payments to third parties again came before the Federal Court of Appeal in Armstrong. The panel was Isaac C.J., Stone and Linden JJ.A. The judgment was delivered by Stone J.A. In that case, the taxpayer was ordered by the Saskatchewan Court to make the monthly mortgage payments on the matrimonial home in which his wife continued to reside. The Court in ordering the payment had not mentioned subsection 60.1(2). The Federal Court of Appeal held that the taxpayer could not rely on the deeming provision at the end of subsection 60.1(2) and further that subsection 60.1(1) could not be relied upon as the merits paid were not on "allowance" within subsection 56(12) because the spouse had no discretion as to the use of the mortgage payments.
[37] I am of course bound by that decision to the extent that its ratio decidendi applies. It dealt with payments specifically contemplated by subsection 60.1(2) that would not otherwise fall within paragraph 60(b). Moreover, the order was made by the Court and left, apparently, the spouse with no discretion. Here we have payments that in my view, are covered by paragraph 60(b) and an agreement between the spouses that does no more than permit the appellant to fulfil in part his obligation to pay the periodic amount of $1,000 by paying certain bills that the wife would otherwise have to pay out of the $1,000 monthly allowance. In my view, this case is much more specifically covered by Arsenault. I cannot assume, in the absence of a clear indication to the contrary, that the Federal Court of Appeal in Armstrong intended to overrule its own decision of three months earlier in Arsenault. Indeed, this case is stronger than Arsenault. In Arsenault, the husband unilaterally presented his wife with cheques payable to third parties. In this case, the payments were made with the wife's express consent.
[38] The appeal is allowed and the assessment for 1995 is referred back to the Minister of National Revenue for reconsideration and reassessment to allow the appellant a deduction of $8,151.24 under paragraph 60(b) of the Income Tax Act.
[39] The appellant is entitled to his costs, if any, in accordance with the tariff.
Signed at Ottawa, Canada, this 16th day of October 1998.
"D.G.H. Bowman"
J.T.C.C.