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Docket: 2002-1797(IT)I |
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BETWEEN: |
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DIANA MILLWOOD, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeals heard on April 7, 2003 at Edmonton, Alberta
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By: The Honourable Judge Campbell J. Miller |
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Appearances: |
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Counsel for the Appellant: |
K. Peddie |
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Counsel for the Respondent: |
Mark Heseltine |
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JUDGMENT
The appeals from assessments of tax made under the Income Tax Act for the 1997 and 1998 taxation years are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant need not include in her income in 1997 and 1998 the mortgage payments made by Mr. Kolakis in accordance with the November 8, 1996 consent order. The Appellant is entitled to costs in the amount of $200.
Signed at Ottawa, Canada this 20th day of May, 2003.
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"Campbell J. Miller" |
J.T.C.C.
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Citation: 2003TCC293 |
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Date: 20030520 |
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Docket: 2002-1797(IT)I
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BETWEEN:
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DIANA MILLWOOD,
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Appellant, |
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and |
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HER MAJESTY THE QUEEN,
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Respondent. |
REASONS FOR JUDGMENT
Miller, J.
[1] Diana Millwood appeals, by way of the informal procedure, the assessments of Minister of National Revenue's (the "Minister") of her 1997 and 1998 taxation years. The Minister included in Ms. Millwood's income support amounts of $8,594 in 1997 and $10,016 in 1998. In the Tax Court of Canada case of Kolakis v. The Queen, (2003TCC355), delivered from the Bench on September 22, 2000, Ms. Millwood's ex-husband, Mr. Kolakis, was allowed the deduction of theses amounts. It is important to know that in that case no oral evidence was presented, and Judge Hershfield was left to decide on the basis of inferences from agreed upon documentary evidence.
[2] Ms. Millwood married Evangelos Kolakis in 1984. They had three children born in 1985, 1986 and 1988, respectively. They separated in 1993 and divorced in 1995. The children always remained with Ms. Millwood. She and her ex-spouse agreed to Minutes of Settlement dated March 7, 1995 (Exhibit A-1), some of the terms of which are as follows:
1) Mr. Kolakis was to provide child support of $250 per month per child, or $750 a month, such maintenance to be deductible by Mr. Kolakis and taxable in Ms. Millwood's hands;
2) He was to transfer to his wife certain agricultural property, acknowledging and agreeing that Ms. Millwood "intends to actively market the property set out above". Also, she agreed to grant to Mr. Kolakis a right of first refusal with respect to the property. This property was subject to a mortgage; and
3) Ms. Millwood was to transfer certain other property to Mr. Kolakis.
[3] In November 1996, Ms. Millwood and Mr. Kolakis agreed to a consent order (Exhibit A-2), which included the following provisions:
1. That the child support arrears owing by the Respondent are hereby confirmed in the total sum of $3,000.00.
2. That there shall be a stay of execution upon the foregoing child support arrears against the Director of Maintenance Enforcement and the Petitioner until the Respondent sells his lands legally described as Plan 862 2261, Block 1, Lot 22 (N.E. 15-50-22-W4th), Plan 2252 Mc, Lot C (N.E. 17-51-22-W4th), County of Leduc N.E. 15-50-22-W4th.
3. That commencing December 1996, in lieu of child support, the Respondent shall pay directly to the Alberta Treasury Branches the monthly mortgage of the Petitioner for the lands legally described as the N.E. 21 and E. 1/2 of S.E. 21-50-22-W4th until further Order of this Court. In addition, the Respondent shall pay to the Petitioner $205.00 commencing January 15, 1997 and continuing on the 15th day of each and every month thereafter until further Order of this Court.
4. That upon the Respondent providing to the Petitioner 12 postdated cheques for the monthly payment of $205.00 the Petitioner shall advise the Maintenance Enforcement Program accordingly.
[4] Mr. Kolakis was in arrears at this point. Ms. Millwood was not making mortgage payments on the agricultural property because, as she put it, her ex-spouse would not let her, and also, the bank would not agree with her carrying on the mortgage. The bank was prepared to foreclose. Her evidence in this regard was somewhat sketchy. She felt Mr. Kolakis would not let her control the property, as he ultimately wanted the property for himself. She felt forced into agreeing to the consent order, which reduced the child support, but ensured that the mortgage payments would be made. She explained this was Mr. Kolakis' way of ensuring he could ultimately get the property through his right of first refusal. Throughout 1997 and 1998, Mr. Kolakis made the mortgage payments of approximately $556 a month.
[5] Ms. Millwood sold the agricultural property at the end of 1998 and realized some cash from the sale, though she had indicated she had lost a lot of money on the property due to Mr. Kolakis' interference. The nature of that interference was not clear. Ms. Millwood obtained an order in 1999 that Mr. Kolakis make $556 a month payments commencing March 1, 1999 for child support.
[6] Ms. Millwood's counsel argued that the mortgage payments in 1997 and 1998, made directly by Mr. Kolakis, do not constitute child support amounts for the following reasons:
1) the order specifically refers to the payments being "in lieu of child support", that is, something instead of, or other than, child support;
2) the amounts were not intended to be used nor were they used for the maintenance of the children - they were to keep the farm property in good standing; and
3) Ms. Millwood did not have any discretion as to the use of the payments, as required by the definition of "support amount" in subsection 56.1(4) of the Income Tax Act (the "Act").
[7] The Respondent relies on the case of Kolakis in which Mr. Kolakis was allowed the deduction of the amounts now sought by Ms. Millwood to be excluded from her income.
[8] The Respondent addresses the Appellant's first two arguments together on the basis that a payment to relieve Ms. Millwood of a legal obligation to make monthly mortgage payments is still maintenance for the children. It is an expense she would otherwise have to make.
[9] With respect to the Appellant's position that Ms. Millwood had no discretion, the Respondent argued that in consenting to the November 1996 order, Ms. Millwood was estopped from then saying she had no discretion. She exercised her discretion at that point, and it was unnecessary to exercise it at the time of each and every payment.
[10] Support payment legislation is, at best, difficult, especially when faced with a prior decision dealing with the same circumstances, though presented quite differently, in which the tax result differs. In Kolakis, Judge Hershfield was very clear of the risk the parties ran in presenting no witnesses. He acknowledged he was forced to draw inferences without testimony of any witnesses, including Mr. Kolakis. In the case before me, I had the benefit of Mr. Kolakis' former spouse, Ms. Millwood, the Appellant in the case before me, explaining her situation. This difference allows Ms. Millwood to succeed, and not to have to include third party payments in income, notwithstanding Mr. Kolakis was allowed the deduction of such payments. Different findings of fact lead to conflicting outcomes. I am satisfied as to the reliability of the evidence before me, that leads to a judgment conflicting with Judge Hershfield's, who expressed reservations as to the reliability of the fact finding process.
[11] The starting point for the determination of whether the third party mortgage payments should fall into Ms. Millwood's income is paragraph 56(1)(b) and subsection 56.1(1) of the Act which read:
56(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,
(a) ...
(b) the total of all amounts each of which is an amount determined by the formula
A - (B + C)
where
A is the total of all amounts each of which is a support amount received after 1996 and before the end of the year by the taxpayer from a particular person where the taxpayer and the particular person were living separate and apart at the time the amount was received,
B is the total of all amounts each of which is a child support amount that became receivable by the taxpayer from the particular person under an agreement or order on or after its commencement day and before the end of the year in respect of a period that began on or after its commencement day, and
C is the total of all amounts each of which is a support amount received after 1996 by the taxpayer from the particular person and included in the taxpayer's income for a preceding taxation year;
56.1(1) For the purposes of paragraph 56(1)(b) and subsection 118(5), where an order or agreement, or any variation thereof, provides for the payment of an amount to a taxpayer or for the benefit of the taxpayer, children in the taxpayer's custody or both the taxpayer and those children, the amount or any part thereof
(a) when payable, is deemed to be payable to and receivable by the taxpayer; and
(b) when paid, is deemed to have been paid to and received by the taxpayer.
[12] Third party payments for support are either brought into income pursuant to the application of paragraph 56(1)(b) and subsection 56.1(1) or through the application of subsection 56.1(2). In Kolakis, Judge Hershfield examined the flipside of these provisions (60(b) and 60.1(1) on the one hand and 60.1(2) on the other), referring to the payor's reliance for deductibility on subsection 60.1(2) as the safe harbour provision, but clarifying that the deductibility of third party payments is not limited to subsection 60.1(2).
[13] I shall review firstly whether paragraph 56(1)(b) applies to the circumstances before me. This section brings into income support amounts received by the taxpayer. A support amount, defined in subsection 56.1(4) of the Act means, in part, an amount receivable as an allowance on a periodic basis for the maintenance of the recipient, children of the recipient or both, if the recipient has discretion as to the use of the amount. Certainly the payments were periodic, but were they an allowance for the maintenance of Ms. Millwood's children? I do not believe they were.
[14] The mortgage payments went to a property that was agricultural land over which Mr. Kolakis had a right of first refusal. This was not property which in any way was for the benefit of the children. Ms. Millwood's evidence was that the payments were for Mr. Kolakis' benefit only. While her evidence was not as clear as it might have been in this respect, I accept that the mortgage payments were made by Mr. Kolakis on undeveloped land, land on which he wanted to exercise a right of first refusal. I also accept that Ms. Millwood consented to the new arrangement, believing it was a reduction of her children's maintenance. The wording of the order that such mortgage payments were in lieu of child support, while somewhat ambiguous, can be interpreted to mean "instead of child support", or "not representing child support". They were intended to serve some other purpose. After the property was sold, child support payments were reinstituted.
[15] The Respondent argues that because Ms. Millwood had an obligation to make the mortgage payments, the direct payment by her ex-husband for those mortgage amounts, freed up other monies, which could support the children. I disagree. In receiving the payments directly, Ms. Millwood had a choice - she could apply the payments to the mortgage or risk losing the property to foreclosure. The evidence was that she was facing such a risk, one which Mr. Kolakis found unacceptable and caused the alteration of the arrangement. Payments for the maintenance of children must be just that; they should not be made for any other ulterior or indirect purpose. Here, I am satisfied, on balance, the payments were not made for the benefit of the children. There was no suggestion by either side that payments were maintenance for Ms. Millwood herself. This is a critical finding, as if they were neither for the children nor Ms. Millwood, they cannot constitute support payments as defined.
[16] However, even if the facts supported a finding that the payments somehow were intended to benefit Ms. Millwood, I would not find that they should be included in her income for the following reason. Paragraph 56(1)(b) requires receipt by Ms. Millwood, real, or deemed pursuant to subsection 56.1(1). As she did not receive the payments directly herself, the deeming provision reproduced earlier comes into play.
[17] Judge Hershfield was very clear in Kolakis that for a payor to rely upon the deeming provision for support to claim deductibility of third party payments (and conversely the recipient to have to include in income), requires strong evidence of intent to exercise discretion to benefit the recipient and an intent as to the tax consequences that flow. As I have already indicated, the evidence, on balance, suggests no intent to benefit the children or Ms. Millwood. Further, the evidence before me does not support any finding there was an intent that Ms. Millwood would bring these payments into income. The order of November 1996 was silent on that point and the circumstances surrounding the consent to that order suggest these payments were very different from the child maintenance payments, the subject of the Minutes of Settlement of March 7, 1995. Those payments were agreed to be included in Ms. Millwood's income. The mortgage payments were not. Subsection 56.1(1) does not therefore apply to deem Ms. Millwood to have received those payments.
[18] Turning now to the second possibility, is Ms. Millwood caught by subsection 56.1(2) which reads:
56.1(2) For the purposes of section 56, this section and subsection 118(5), 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 that is otherwise a support amount) that became payable by a person in a taxation year, under an order of a competent tribunal or under a written agreement, in respect of an expense (other than an expenditure in respect of a self-contained domestic establishment in which the person 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 taxpayer described in paragraph (a) or (b) resides) incurred in the year or the preceding taxation year for the maintenance of a taxpayer, children in the taxpayer's custody or both the taxpayer and those children, where the taxpayer is
(a) the person's spouse or common-law partner or former spouse or common-law partner, or
(b) where the amount became payable under an order made by a competent tribunal in accordance with the laws of a province, an individual who is the parent of a child of whom the person is a natural parent,
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 the taxpayer 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),
is, where the order or written agreement, as the case may be, provides that this subsection and subsection 60.1(2) shall apply to any amount paid or payable thereunder, deemed to be an amount payable to and receivable by the taxpayer as an allowance on a periodic basis, and the taxpayer is deemed to have discretion as to the use of that amount.
As there was no "support amount" (a prerequisite to the application of this section), it is in order to review the requirements of subsection 56.1(2). I reach the same conclusion as Judge Hershfield in Kolakis in this regard; that is, the section requires express reference to subsection 60.1(2) and 56.1(2) to apply - there is no such express reference in the November 1996 order. Subsection 56.1(2) is therefore not applicable.
[19] I therefore allow the appeal and refer the matter back to the Minister for reconsideration and reassessment on the basis that Ms. Millwood need not include in her income in 1997 and 1998 the mortgage payments made by Mr. Kolakis in accordance with the November 8, 1996 consent order. Ms. Millwood is entitled to costs of $200.
Signed at Ottawa, Canada this 20th day of May 2003.
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"Campbell J. Miller" |
J.T.C.C.
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CITATION: |
2003TCC293 |
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COURT FILE NO.: |
2002-1797(IT)I |
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STYLE OF CAUSE: |
Diana Millwood and Her Majesty the Queen |
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PLACE OF HEARING: |
Edmonton, Alberta |
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DATE OF HEARING: |
April 7, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Judge Campbell J. Miller |
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DATE OF JUDGMENT: |
May 20, 2003 |
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APPEARANCES: |
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Counsel for the Appellant: |
K. Peddie |
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Counsel for the Respondent: |
Mark Heseltine |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
K. Peddie |
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Firm: |
Barry Elgert Kraus & Peddie Edmonton, Alberta |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |