Date: 20000405
Docket: 1999-2153-IT-I
BETWEEN:
DAVID I. HOULT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Margeson, J.T.C.C.
[1] In reassessing the Appellant for the 1997 taxation year the Minister reduced the amount of support payments allegedly made by the taxpayer to his former spouse on the basis that the payments were not made as alimony or other allowance payable on a periodic basis for the maintenance of a former spouse, or for maintenance of the children. The Minister relied upon the provisions of subsection 60(b), section 60.1 and subsection 56.1(4) of the Income Tax Act, (the “Act”).
[2] In so doing, the Minister disallowed medical insurance payments to his former spouse totalling $6,980.00 and additional medical payments totalling $460.00.
Evidence
[3] David Ian Hoult was a resident of Maryland, United States of America and was married in the year 1977. In 1984 he and his spouse separated and on November 20th, 1986, they entered into a Separation and Property Settlement Agreement. This agreement was prepared by his lawyer. His wife did not have legal counsel. Paragraph 9 of the agreement provides as follows:
9. The husband shall maintain for the benefit of the children for so long as each may be covered under a family policy, and for the wife until such time as the parties are divorced, the hospitalization and medical insurance presently maintained and available to him by virtue of his employment. In the event that the husband shall change his employment or insurers, he shall maintain the maximum amount of such insurance available under any group plan of his employer in satisfaction of his obligation hereunder, or if none be available, he shall obtain and maintain equivalent private insurance so long as it is reasonably available. The husband agrees to pay 50% of the costs of any procedure or device medically required by the children and not covered by insurance (e.g. orthodontia), provided that the procedure or device is agreed to by both parties, and is not for purely cosmetic purposes.
[4] The Appellant considered that paragraph 9 was a very important part of the agreement. At the time of the execution of the agreement the coverage was provided through his employment and it was very important that some provision be made for continuation of such coverage.
[5] By Judgment of Absolute Divorce dated January 4th, 1989, it was ordered:
...that the provisions of the Separation and Property Settlement Agreement of the parties dated November 20, 1986, the letter agreement dated November 20, 1986, the Addendum of the parties dated June 28, 1988, and the Memorandum of Understanding of the parties dated September 1, 1988 be and the same are hereby incorporated, but not merged, in this judgment to the extent that the Court has jurisdiction, ...
[6] The Appellant was unable to specify what the letter agreement, the Addendum and the Memorandum of Understanding represented except to say that one of them had to do with life insurance for the wife after she retired. He did not know what the other two meant.
[7] The Appellant also introduced, through an agreed book of exhibits, a letter from his former spouse which was a response to a letter written by himself from the Netherlands. His letter was written because the insurance coverage in the United States was to expire in December of 1992. The Appellant attempted to obtain the insurance coverage in the Netherlands but found it to be impossible. He did not want his family to lose the insurance coverage so in accordance with paragraph 10 of the agreement, permitted his wife to obtain insurance coverage in the United States. The coverage which was obtained through Kaiser Health Insurance was actually less than the premium payable under the government plan. The Appellant believed that he should only pay three quarters of the cost of the premium believing that that was sufficient. He paid it in cash in January and February of 1993 to his wife. He paid it as part of the whole amount that he was required to pay under the Agreement.
[8] Following a letter he wrote to his ex-wife of March 23rd, 1993, he talked to her and agreed to pay the full premium of $408.00 per month which he did up until 1998. At the beginning and in the middle of 1994 he also paid fifty percent of the cost of other items not covered by the insurance plan but was not sure whether he increased the payment for the new premium to $420.55 per month.
[9] In 1994 he came to reside in Canada to work with the National Research Council at Winnipeg.
Argument of the Appellant
[10] The Appellant argued that the amounts claimed were deductible under the provisions of the above referred to sections as the amounts were paid under the agreement, the agreement was followed by the Order of Divorce dated January 4th, 1989. However, the payments were still made under the Separation Agreement and not under the Order for the Divorce because the Order says that the agreement is to be incorporated but not merged in the Order. Consequently, the medical insurance payments made to the former spouse totalling $6,980.00 are deductible under the agreement.
[11] With respect to the $419.56 in additional medical payments, counsel admitted that this was not spelled out in the Separation Agreement because the amount was not known at that time. However, the letters, etc. confirmed the amount. There was correspondence between the parties which, although it did not constitute a new agreement, it was correspondence in which the parties acknowledged liability under the old agreement. Payment was thereby made under the old agreement and not under the new agreement.
[12] Under the definition of support amount, the amount paid for the medical insurance payments was an allowance which was made periodically, it was for maintenance of the recipient and the children and they were living separate and apart at the time that the payments were made. This payment meets all of the requirements of the definition.
[13] Counsel referred to the case of Larsson v. The Queen, 3 C.T.C. 2430 which he said stood for the proposition that the Court should take a positive approach in matters of support payments where there is ambiguity. One should examine the purpose of the legislation which, O’Connor, J. found was to reduce the overall tax burden of the family. The purpose is there and the provision should be interpreted with that purpose in mind. Consequently, where there are ambiguous or doubtful circumstances, the Court should favour the income inclusion deduction process.
[14] Counsel was prepared to admit that the right of the Appellant to deduct the $460.00 in extra medical expenses was a more tenuous proposition and agreed that one could reasonably argue that the payments were not made on a periodic basis. The Appellant also had some difficulty in remembering the particulars. Counsel suggested that one might interpret the term “periodic” to mean something happening on an ongoing basis.
[15] In any event, counsel argued that the appeal should be allowed on both items and the matter referred back to the Minister for reconsideration and reassessment on that basis.
Argument of the Respondent
[16] According to counsel for the Respondent, the issue is whether or not the amounts paid were support payments under the legislation. In order for the amounts to be deductible they must have been payable as an allowance. Payments to be deductible must be payable under paragraph 9 of the Agreement and must meet the definition of “support amount” under the legislation. In the case at bar the questionable amounts were not paid as “an allowance” on “a periodic basis”. There was an amount specified to be paid in such a way but the amounts in question are not those amounts. What is involved here is a liability to pay insurance. The amounts paid were not paid pursuant to a written agreement.
[17] Counsel argued that the amount claimed here was an expense payable under subsection 60.1(2) but it was not support payments. It might be deductible under that section provided it meets the requisite requirements. However, that is not an issue before this Court.
[18] What is involved here is an expense payment.
[19] Counsel took the position that the factual situation in the case at bar is indistinguishable from the facts in Armstrong v. Canada, [1996] F.C.J. No. 599, Court File No. A-189-95, although in the case at bar the issue of the wife’s discretion to the use of the funds is not in issue. However, to be deductible it must have been under subsection 60.1(2) as in Armstrong, supra. In that case the mortgage payments were held not to be support payments. The section under which the Appellant claims the deduction is not meant to accommodate it.
[20] It may very well be that the problem lies in the drafting of the Agreement but that is not something that this Court can do anything about. In the end result, the amount sought to be deducted was not payable as an allowance on a periodic basis under a written agreement.
[21] The appeal should be dismissed.
[22] In reply, counsel for the Appellant argued that the approach taken by counsel for the Respondent was rejected by the Tax Court of Canada in Hak v. R. [1999] 1 C.T.C. 2633.
[23] Counsel was prepared to admit that the agreement in Hak, supra, and the agreement in the case at bar are different in that the agreement in Hak, supra, provided that the health payments were to be made and the amount of the payments, whereas the agreement in the case at bar does not. However, it did provide for insurance coverage and the correspondence between the parties later finalized it. Hak, supra, says that the payments are expenses but nonetheless they are still deductible. It would be over legalistic to distinguish the Hak, supra, case from the facts in the case at bar and it would be inequitable.
[24] In surrebuttal, counsel for the Respondent said that Hak, supra, was distinguishable as can be seen from the agreement. That agreement set out what was to be paid and the only difference was the method of payment. In the case at bar, the amount paid is not related back to the maintenance amount.
[25] In further reply, counsel for the Appellant said that the health care premiums paid in the case at bar were maintenance.
Analysis and Decision
[26] With respect to the disputed amounts, the sole question is whether or not the amounts paid were:
... an amount payable or receivable as an allowance on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient and children of the recipient.
Those are the most important words with respect to the definition of “support amount” as found in subsection 56.1(4). If the payments fall under that provision then they are deductible under subsection 60(b) of the Act.
[27] It is true that if the agreement had been more specifically worded then the task of the Court might have been easier. However, it is necessary that this Court interpret the agreement realistically in light of the facts as disclosed in this case and be certain that it does not perform a disservice by disallowing the deduction. If such, the result would be unreasonable and contrary to the intent of the legislators insofar as that intent can be determined. It would serve no purpose to be unduly legalistic in interpreting either the appropriate sections of the Act nor cases which have considered it. One must also bear in mind that this agreement was drafted in the United States of America without any contemplation by the parties that it would have to be interpreted in another jurisdiction and one must bear in mind that the drafters of the agreement could not be deemed to have been aware of the provisions of the Act in question here.
[28] With respect to the additional medical payments of $460.00 the Court has no difficulty in deciding that those amounts are not deductible under the provisions in question here. They were clearly not amounts which were made pursuant to the agreement on a periodic basis. Indeed, according to the evidence these amounts were not even ascertainable at the time the agreement was made and they were not made periodically. It is no answer to this argument to say that the payments were made on an ongoing basis. The Court is satisfied that these payments were not made periodically and on that basis alone the appeal in that respect is dismissed and the Minister’s assessment is confirmed.
[29] With respect to the amount of $6,980.00 for medical insurance payments the decision is not so simple. The same rule applies in that the payments to be deductible must meet the definition as referred to above and the Court must be able to find that the payments were made pursuant to the agreement, they must have been amounts payable or receivable as an allowance and they must have been paid on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient and children of the recipient. The Court must look at what was actually done, how the payments were made, what the payments were for and to whom they were made in answering this question.
[30] Counsel for the Appellant indicated that the answer to this question is found in Hak, supra, and counsel for the Respondent argued that the answer to the question is found in the consideration of Armstrong, supra. However, this Court finds that although both of these cases are significant and are helpful in determining the issue in the case at bar but neither case is on all fours with the facts found in the present case and as usual the answer in the case at bar must depend upon its own particular facts.
[31] In Armstrong, supra, the main issue before the Court was the inability of the recipient to exercise discretion as to the use of the funds. That is not an issue in this case. It is true that the Court discussed at some length the provisions of subsection 60.1(1) and the definition of allowance contained in subsection 56(12), but on the facts of the present case one must still look to the words contained in the agreement in question and decide whether or not the payments made were in accordance with the definition of “support amount” contained in subsection 56.1(4).
[32] As counsel for the Respondent argued, the amounts in issue here might very well have been expenses but that does not necessarily mean that they do not meet the definition of “support amount” under the Act. This Court does not believe that it is necessary to completely specify that these particular amounts are support amounts if a reading of the whole agreement makes it clear that this is what they were intended to be.
[33] As Bowman, T.C.J. concluded in Hak, supra, at page 2637:
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).
[34] That being said, this Court also concludes that Hak, supra, is not on all fours with the facts in the case at bar. As counsel for the Appellant admitted, in the case at bar the agreement does not specifically set out what is to be paid, whereas the agreement in Hak, supra, did as it specifically referred to “Health care premium-approximately $100.00 /month”.
[35] Further, in the case of Hak, supra, the main issue was with respect to deductibility of the amount because it was paid to a third party rather than to the recipient under the agreement. That does not seem to be an issue in this case.
[36] What the Court observes to be the thrust of one of the significant arguments of counsel for the Respondent is that the amounts that were paid in the case at bar were not support payments because they are not specifically set out as support payments. Further, they were not support payments because they were expenses and the argument was that the section in question is not made for this type of payment. If the result of the argument is that the payment cannot be deducted unless it is specifically set out as being a payment of maintenance, this Court does not accept that argument and the above quotation from the judgment of Bowman, T.C.C. is applicable thereto.
[37] In considering the provisions of the Statute and in interpreting the provisions of the agreement in relation thereto the Court must be careful not to be disjunctive of the agreement and it must interpret the definition of “support payment” in light of the whole agreement.
[38] Paragraph 9 of the agreement clearly provides that if the insurance obtained on behalf of the recipient through the Appellant’s employment is not available then the obligation upon the Appellant is to obtain and maintain equivalent private insurance so long as it is reasonably available, in satisfaction of the Appellant’s obligation under the agreement. The definition of “support amount” means an amount payable and received as an allowance on a periodic basis for the maintenance of the recipient and her children and neither that provision nor the provisions of section 60 require that the agreement specify that the amounts be set out in the agreement as being paid periodically. In the case at bar the Court is satisfied that the payments were made periodically, unlike the extra payments that were made. The Court does not believe that this case can be distinguished from Hak, supra, as counsel for the Respondent suggested, even though in that case the agreement did provide that the total of $1,000.00 would be payable for alimony and support and then proceeded to list the various components of the $1,000.00. In the case at bar the agreement provided that the insurance payments would be made under paragraph 9 of the agreement. Paragraph 2(a) referred to alimony and paragraph 6 referred to child support. The Court is satisfied that all of these amounts come within the definition of “support amount” under the appropriate provision of the Act.
[39] In the end result the Court is satisfied that the amount of $6,980.00 paid by the Appellant in the 1997 taxation year as medical insurance payments were support amounts and are deductible under the provisions of subsection 60(b) of the Act.
[40] The appeal is allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment based upon the Court’s findings that the $6,980.00 amount is deductible and the $460.00 amount is not deductible.
[41] The Appellant has been substantially successful in this appeal and he shall be entitled to his costs, to be taxed.
Signed at Ottawa, Canada, this 5th day of April 2000
"T.E. Margeson"
J.T.C.C.