Principal Issue: [TaxInterpretations translation]
Do the payments made by Monsieur to third parties for expenses related to the marital home qualify as support payments for the XXXXXXXXXX and XXXXXXXXXX taxation years?
Position:
No.
Reasons:
The payments made by Monsieur to third parties for expenses related to the matrimonial home do not have the attributes of support, that is, a periodic allowance paid to the wife that is not at her disposal. Furthermore, the text of the order did not provide for the application of subsections 56.1(2) and 60.1(2) to such payments.
February 3, 2003
Ms. Danielle Gélinas Headquarters T1 Client Services (541 3-1) Danielle Bouffard Shawinigan-Sud Tax Centre (613) 957-8953
2002-016831
Support payments-Payments of expenses to third parties
This is further to your memo of October 10, 2002 in which you asked for our opinion on the above subject in relation to the situation described below. We have taken into account the additional information we received from the legal representative on January 16, 2003.
Facts
1. On XXXXXXXXXX, a judgment was rendered by the Honourable Mr. Justice Cliche of the Superior Court (the "XXXXXXXXXX judgment") ordering Monsieur to pay, as support, all expenses related to the marital home and an amount of $XXXXXXXXXX per week for Madame and the children. The following is an extract from the XXXXXXXXXX judgment relating to the payment of support:
XXXXXXXXXX; ...
2. On XXXXXXXXXX, a divorce decree was issued giving effect to the terms of the agreement on ancillary relief signed on the same day by Monsieur and Madame and ordering the parties to comply with it. This agreement provides that Monsieur must pay child support of $XXXXXXXXXX per week for the children only. Monsieur transferred the matrimonial home to Madame, and Madame had to assume the mortgage and all charges and release Monsieur from them.
3. Monsieur received notices of reassessment on XXXXXXXXXX for the XXXXXXXXXX and XXXXXXXXXX taxation years denying him part of the amount claimed as support payments and, more specifically, the amount relating to the expenses related to the matrimonial home described in paragraph 1.
Question
Do the payments, for expenses relating to the matrimonial home described in paragraph 1, made by Monsieur to third parties, for the XXXXXXXXXX and XXXXXXXXXX taxation years, qualify as support payments?
Our Comments
During the XXXXXXXXXX and XXXXXXXXXX years, subsection 56(12) of the Income Tax Act (the "Act") specified, for the purposes of paragraphs 56(1)(b) and (c) and 60(b) and (c), that an amount received by a taxpayer was an allowance only if that person has discretion as to the use of the amount.
The term "discretion" was examined inter alia in Hamer and Serra v. The Queen (98 DTC 6422 (FCA) and 97 DTC 1273 (TCC)). In that case, the application of paragraph 56(1)(b) of the Act was challenged by the appellants, who had received sums that were to be used to pay for the needs of the children in their care, without any specific indication as to how the sums were to be used. The court clarified that the term "has discretion" was not equivalent to "absolute discretion". Furthermore, in that case, the judge of the Tax Court of Canada said that “s. 56(12) in its context leads to the conclusion that the purpose of adopting it was simply to exclude from the word "allowance" … any amount the use of which was specified in this way, with the obvious consequence of substituting the payer's wishes for the free will of the recipient as to the manner in which the money should be used.” It also held that the amounts received constituted an allowance because "the appellants had this power of controlling the use of the money received and in fact exercised this power". The Federal Court of Appeal adopted the trial judge's reasons.
In Assaf v. The Queen (unreported), a written agreement provided for the payment of $10,000 to the ex-spouse to cover a portion of the children's university expenses. In concluding that the sums received did not constitute an allowance, Garon J. stated:
In interpreting subs. 56(12) it should be noted that, for amounts received for example by a spouse or former spouse to be an allowance within the meaning of this subsection, it does not matter that the person paying the alimony does not control or attempt to control the use of the money in question. However, the judgment or agreement, as the case may be, must not specify the use to be made of these amounts. If there is such an indication, it follows that if the spouse or former spouse receiving the money in question does not use it in the way specified in the judgment or agreement, he or she will be failing to perform the obligation contained in the judgment or agreement. It is in this sense that the recipient of the amounts in question does not legally have discretion as to their use under subs. 56(12).
The Federal Court of Appeal in Armstrong v. Canada, 96 DTC 6315, held that the definition of "allowance" in subsection 56(12) applied to amounts otherwise covered by subsection 60.1(1) of the Act. In that case, the appellant had been ordered to pay the mortgage on the family home. Since Mr. Armstrong's ex-wife had no discretion as to the use of the amounts paid to the third party, he was unable to deduct them from his taxable income.
In view of the foregoing, it is not clear from examining the facts described in the situation under review that Madame had any discretion or could exercise any discretion with respect to the payments made by Monsieur for expenses relating to the marital home. It is clear that the expenses relating to the matrimonial home that Monsieur paid to third parties were paid for the benefit of Madame and her children and were paid in fulfilment of a support obligation on the part of Monsieur. However, those expenses did not have the attributes of a support allowance, i.e., a periodic allowance paid to a person. Even if we assume that Madame could, at her discretion, have requested that the expenses be paid to her rather than to third parties, she could not have used the sums at her sole discretion but would have had to use them to pay specific expenses, namely expenses related to the marital home. Furthermore, it is not clear that if she had paid the expenses relating to the matrimonial home herself, she would have been able to claim an equivalent amount from Monsieur. Finally, given that nothing in the XXXXXXXXXX judgment (or any other document that may have been exchanged between Monsieur and Madame) clearly indicates that Mrs. Armstrong would have given her consent at the time the judgment was drafted to payments being made directly to third parties, we are of the opinion that subsections 56.1(1) and 60.1(1) do not apply in this case.
Subsections 56.1(2) and 60.1(2) of the Act
As you know, subsections 56.1(2) and 60.1(2) provide for the tax treatment of payments for certain expenses made to third parties. Where all of the conditions of those subsections are satisfied, under a deeming rule the amounts paid by the payer are deemed to be an allowance payable periodically and received as such by the recipient.
Our position on the application of those provisions has been expressed in numerous sources, including paragraph 29 of Interpretation Bulletin IT-530, as follows:
Generally, in order for this provision to apply, the court order or written agreement must explicitly state that subsections 60.1(2) and 56.1(2) are to apply to the above amounts.
This position, supported by numerous court cases, applied to the taxation years under review. Since the XXXXXXXXXX judgment is silent on the application of those provisions, the amounts paid by Monsieur for expenses related to the matrimonial home are not deemed to be amounts paid by Monsieur and received by Madame as an allowance payable periodically.
Conclusion
The taxpayer is not entitled to claim a deduction pursuant to paragraphs 60(b), (c) and (c.1) for the XXXXXXXXXX and XXXXXXXXXX taxation years in respect of payments made to third parties for expenses related to the matrimonial home.
Additional Information
As you requested, we are presenting below comments made by the courts regarding the interpretation of subsections 56.1(2) and 60.1(2).
In recent years, the interpretation of those subsections was considered to be too strict inter alia in Ferron v. The Queen (TCC), 2001 DTC 230, and more recently in Gaston Veilleux, Federal Court of Appeal, 2002 FCA 201. As stated in that case by the Honourable Justice Létourneau:
The purpose of subsections 56.1(2) and 60.1(2) is to allow the payer to deduct payments made to third parties for the benefit of his or her former spouse, provided that those amounts are included in the former spouse's income. The purpose of the requirement that the written agreement state that those subsections shall apply seems to be "to ensure that the parties in question were fully aware of the fiscal consequences resulting from the payments made in accordance with a written agreement, a judgment or an order of a court for the specific purposes mentioned in that agreement, judgment or order": Mailloux v. Canada, [1991] T.C.J. No. 641, at page 3 (T.C.C.) per Chief Judge Garon; Mambo v. The Queen, [1996] 1 T.C.J. 2388 (T.C.C.); Pelchat v. The Queen, 97 DTC 945 (T.C.C.); Jenkins v. Canada, [1999] T.C.J. No. 742. [Informal Procedure]... .
[…]
[A]n express reference to the numbers of subsections 56.1(2) and 60.1(2) is not required in the written agreement; it need only be apparent from the written agreement that the parties have understood the tax consequences of that agreement. A mere reference to the numbers of the subsections in the agreement is no better guarantee that the parties to the agreement understood their duties and their rights.
In light of the foregoing, we have qualified our position to take into account the comments of the judges in Ferron and Veilleux. The express mention of subsections 56.1(2) and 60.1(2) is no longer required in the written agreement, order or judgment. It is important, however, to ensure that the purpose of subsections 56.1(2) and 60.1(2) is reflected in the wording of those documents and, among other things, that the recipient knowingly assumes a tax burden related to the payment to third parties by the payer of expenses coming within subsections 56.1(2) and 60.1(2). Guide P102, Support Payments, revised in 2002, reflects this change. Interpretation Bulletin IT-530 should be amended shortly.
Please note that this new position, even if it were applicable to the current case, would not change the treatment of payments made to third parties.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope you find these comments of assistance. We are enclosing a copy of all the documents sent to us by the legal representative. Should you require additional information regarding the content of this document, please do not hesitate to contact us.
Ghislaine Landry, CGA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
Encl.
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