Lay v. The Queen, 95 DTC 272, [1993] 2 CTC 2916 (TCC)

Mogan, T.C.C.J.:—This is an appeal in respect of the 1989 and 1990 taxation years. In those years the appellant caused certain amounts to be paid to his separated wife and he deducted those amounts in computing his income on the basis that they were periodic payments for the maintenance of the wife. The deductibility of those amounts was challenged by the Minister of National Revenue and upon assessment the appellant was disallowed the deductions. The appellant brings an appeal to this Court in respect of those assessments, and he has elected the informal procedure.

The appellant testified on his own behalf and the facts may be summarized as follows. The appellant and his wife separated in June of 1989 and, in his own very frank words, he stated that the separation arose because at that time they had concluded they could not live together. There were three children of the marriage who in 1989 were of ages, ten, seven and five. At the time of separation, the appellant (either alone or together with his wife Yvonne) had three different dwellings in Melville, Saskatchewan. They owned a house which he referred to as a revenue house which apparently had a main floor and a self-contained unit on the second floor. It was rented out to strangers. He said they also owned two separate apartments in one apartment building. Upon separation, they had been living in one of those apartments, but he moved to one of the units in the revenue house which he described as being on the other side of town so that they did live separate and apart from June 1989.

In the summer of 1990, the wife decided to move to Regina and so they made different arrangements commencing that summer. When she moved into Regina, he moved out of the revenue house and back into the apartment which she had occupied in Melville. I will refer to those addresses later.

He said upon separation there was a verbal agreement between him and his wife for support, but a friend had told him that it should be in writing if he wanted to deduct the amounts for income tax purposes. He went to the Income Tax Office of Revenue Canada and obtained a booklet which was actually entered in evidence, a small paperback of about forty pages or less published by Revenue Canada and the title was, "Are You Separated or Divorced?" Basically it is a handbook for individuals who are in the position of being separated or divorced, informing them of the tax consequences of their changed status from being married, and informing them of what has to be done if there are going to be payments made, and how the person making the payments can satisfy certain conditions to achieve their deductibility, and when the payments must be reported by the person receiving them.

Having got the booklet, he then wrote up a separation agreement following the various points given in the booklet, and the separation agreement was signed by both him and his wife. Actually there were two agreements. The first agreement was dated June 1,1989. At the top there is the wife's name and her address on 4th Avenue East in Melville, Saskatchewan, and then the husband's name with his address on 5th Avenue West in Melville. The agreement is short and I shall set it out in its entirety:

I Jim Lay agree to let Yvonne Lay write cheques and/or receive $800 cash, eight hundred dollars, a month begining [sic] June 1-1989.

The above monthly total to include cable T.V. and a car payment for her car of $223, two hundred and twenty-three, each month until the car is sold or payed [sic] off.

That document is signed at the bottom "Jim Lay and Yvonne Lay”.

He stated that when she decided to move to Regina, they had to change the arrangement because she was no longer going to be living in one of the units they owned, and I guess she was going to have to rent space in Regina. And so there was a second agreement, handwritten again, dated September 2, 1990. At the top of the page are the names Yvonne Lay, with her address on Murphy Crescent in Regina, and Jim Lay with his new address on 4th Avenue East in Melville. The second agreement is also short and simply states:

I Jim Lay agree to let Yvonne Lay write cheques and/or receive cash in the sum of $700, seven hundred dollars, a month begining [sic] Sept 1-1990.

Also I agree to let her write a cheque or receive cash of up to $510, five hundred and ten dollars, a month through our Sterling Court Bank Account in Melville depending upon vacancy and money coming in with our apartment block.

The second agreement is also signed at the bottom Jim Lay”, and with her signature,"Yvonne Lay”.

The appellant also testified that they did indeed live separate and apart from June 1, 1989 and they were still living separate and apart through the rest of 1989 and all of 1990, although there was evidence that after 1990 they commenced living together again as husband and wife. In any event the evidence is clear that for the two taxation years under appeal the appellantand his wife were living separate and apart during the relevant periods.

When the appellant was cross-examined, he acknowledged that he did not seek legal advice with respect to the separation agreement. He thought that he could not afford legal advice, and he also said that there was no divorce discussion at the time. He stated that his wife would write cheques on their joint account up to the amount which was fixed in the two written agreements. She honoured the agreements in the sense that although she drew the amounts out of this joint account up to the level fixed in the written agreements, she never attempted to encroach on the account above the amounts in the two written agreements. He also stated, I guess because of his salary and wage cheques, that there was only so much in that account at any time anyway. That is to say, it was not an account in which there were unlimited funds, and if she had tried to withdraw much more, there simply would not have been much more to withdraw. Those are the basic facts in this case.

The Minister has invoked the provisions of paragraph 60(b) of the Income Tax Act to disallow the payments. This is a well known provision. It has been litigated many times. There are countless cases involving the deductibility of amounts in the circumstances of the appellant in this case.

60. 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, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if he was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, his spouse or former spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year;

The Minister rests his case on three basic propositions: (i) that the agreement must state that the parties have undertaken to live separate and apart; (ii) that the payments must be on a periodic basis; and (iii) that they must be for the maintenance of the wife or the children of the marriage, or both the wife and the children of the marriage.

On those points, counsel for the Minister has gone through the agreements and demonstrated that there is no covenant in the two agreements, Exhibits A-1 and A-2, by either of the parties, to live separate and apart from the other. Also there is nostatement in those agreements that the payments are for the maintenance of the wife or the children of the marriage, or both the wife and the children of the marriage, although the first agreement of 1989 does refer to the amount including monthly payments for cable television and a car payment. Lastly counsel indicates that although the agreements are written in the permissive form, that Yvonne Lay may write cheques up to a specific amount each month, there does not appear to be a covenant by the husband to pay those specific amounts on a periodic basis. Those are serious arguments and, if they stand up, they would undermine the effectiveness of these agreements.

Counsel has brought to my attention three decisions of the Court which are on point. l will refer to them briefly. Firstly there is a decision of Mr. Justice Strayer in the Federal Court, Trial Division in a case called Hodson v. The Queen, [1987] 1 C.T.C. 219, 87 D.T.C. 5113; aff’d [1988] 1 C.T.C. 2, 88 D.T.C. 6001 (F.C.A.). That case is easily distinguished from this appeal because there was no written agreement between the husband and wife. In Hodson, the wife refused to sign any agreement because of her belief that it was contrary to the teachings of her faith to permit a marriage to be separated or dissolved. She just would not sign, and of course in those circumstances her husband's appeal was dismissed. Although the case is easily distinguished on the basis that there was no signed agreement, Strayer, J. does make some interesting statements about paragraph 60(b). He reviews the intention of Parliament and concludes, after quoting from a judgment of the Supreme Court of Canada, by stating at page 221 (D.T.C. 5114):

It is no doubt for this reason that the courts have accepted what appears to be the literal meaning of paragraph 60(b), that is that to be deductible from income any such payments must be made under a specific court order or under a written agreement.

That is no doubt a fair comment on the status of the law as the courts have looked at 60(b). The courts have given a literal meaning, that a taxpayer must come within the four corners of the section.

Two other cases referred to by the respondent are decisions of the Tax Review Board. In Kapel v. M.N.R., [1979] C.T.C. 2187, 79 D.T.C. 199, Mr. Bonner, who is now a Judge of this Court, dismissed an appeal because primarily in that case the document which appeared to contain the covenant to make payments was signed only by the husband and not by the wife. Judge Bonner stated at page 2188 (D.T.C. 200):

In my view whatever else may be required to constitute a written separation agreement for purposes of paragraph 60(b), the signature of both parties to an agreement is an irreducible minimum.

That was his basic reason for dismissing the appeal but he did go on to make a further statement in the same paragraph:

However, I will observe that one of the further difficulties which lay in the appellant's way was the failure of Mrs. Kapel to agree in writing to live separate and apart from her husband.

That statement is by way of obiter in the Kapel decision, but Judge Bonner added the statement as a further reason in that important paragraph.

In the third case referred to by the respondent, Smith v. M.N.R., [1979] C.T.C. 3055, 79 D.T.C. 827, also a decision of the Tax Review Board, Mr. Goetz, who is now a Judge of this Court, heard a case that is much closer to the decision before me here. In Smith, the husband and wife had both signed their own informal type of separation agreement and the husband had made the payments provided for in the agreement. The agreement (set out at page 3055 (D.T.C. 828)) is in the form of a letter written by the husband dated March 17, 1974, and it states:

Dear Reen,

I hereby agree to pay you $475 on the first of every month beginning April 1, 1974.

I further agree to increase this amount annually if I receive salary increases.

Yours truly,

P. C. Smith

It is signed "P.C. Smith”, and then underneath are the words "Accepted, Signed: Anne M.J. Smith". The written agreement in Smith is shorter than the two that are before me today, but along the same lines. At page 3057 (D.T.C. 829) Judge Goetz made this statement:

I regret that I must come to the conclusion that it does not fit into the strict wording of the Act, namely that it is "a written separation agreement". Nowhere in the letter is there any mention of agreement to live separate and apart which I consider to be an essential ingredient in a separation agreement, this ingredient Kapel v. M.N.R., supra.

And so, in the Smith case, Judge Goetz picked up on the statement by Judge Bonner in Kapel and made it the basis of his decision.

It really comes down to a question of whether the written agreement must contain a covenant to live separate and apart; and that brings me to the precise wording of paragraph (b) of section60. The introductory words say that there may be deducted in computing a taxpayer's income for a taxation year such of the following amounts as are applicable:

60(b) an amount paid by the taxpayer in the year, pursuant to a decree, order or

Notwithstanding the decision in Smith, there is no provision in paragraph 60(b) that the written agreement must contain a covenant to live separate and apart, although I would clearly agree with Judge Goetz that it is an essential ingredient that the parties have agreed to live separate and apart. Paragraph 60(b) simply states“. . . if he was living apart from, and was separated pursuant to a . . . written separation agreement from, his spouse . . .”. In this appeal, it is implicit from the terms of the two written agreements that the appellant and his wife have agreed to live apart.

There is a further decision of the Exchequer Court which in my opinion has a bearing on this appeal. I refer to the case of M.N.R. v. Ouellette and Brett, [1971] C.T.C. 121, 71 D.T.C. 5094. The parol evidence rule provides that if A and B have an agreement in writing, and if they have a dispute involving their agreement, oral evidence is not admissible to change the terms of the agreement. In Ouellette and Brett, Walsh, J. referred at page 134 (D.T.C. 5102) to an earlier decision of the Exchequer Court (Sa/ter v. M.N.R., [1947] C.T.C. 29, 2 D.T.C. 918), and held that the parol evidence rule did not apply. In an income tax appeal, if the taxpayer was appealing from an assessment in connection with payments made between him and some third party in accordance with an agreement he had with the third party, he could give evidence to explain the agreement. He could give the kind of background evidence in his income tax appeal which he could not give if he were in Court against the third party.

I rely on the decision in Ouellette and Brett to permit the appellant here to give additional evidence which, in my view, may be used to explain his written agreement with Yvonne Lay and provide what otherwise might be some of the missing links in terms of the conditions of paragraph 60(b). In particular, he may explain whether they were living separate and apart; the absence of a covenant by either one of them to live separate and apart; and whether the payments were conditional upon their living separate and apart.

The appellant stated that he put the separate addresses of himself and his wife in both documents as an indication of where each of them was living at the time, and that they were living separate and apart. He also stated that they did in fact live separate and apart. Therefore I think the appellant has overcome what otherwise might have been a defect in his agreement according to the decision of the Tax Review Board in Smith.

On the question of whether there were periodic payments, the appellant has also overcome that hurdle because both agreements provide for the wife to receive a certain minimum amount being $800 a month beginning June 1, 1989 and subsequently reduced to $700 a month beginning September 1, 1990 (to be increased by an additional $510 a month so long as one of the apartments in the Sterling Court apartment building is not vacant). I regard that term as a commitment by the appellant to his wife.

Although 1 do not have much experience in the area of family law or what a Family Court would do, I assume that, in the circumstances of the appellant and his wife in the last seven months of 1989 and throughout 1990, if she was living separate and apart from him and had custody and maintenance of the children, and if he had cut off their bank account so that she could not draw funds from it, she could have taken him to the Family Court in the Province of Saskatchewan and she could have obtained an order requiring him to pay her $800 a month in accordance with the first agreement; and then $700 a month (plus the possibility of another $510 if there was no vacancy) in accordance with the second agreement. In other words, I think the bare bones are in these two documents for her to have obtained an enforceable order if he had not made the agreed payments. On that basis he has overcome the condition for periodic payments.

As to whether the payments were for the maintenance of the appellants wife and children, I rely on the statement in Ouellette and Brett at page 135 (D.T.C. 5102-03). It is perfectly obvious that these amounts were paid by him to his wife for the maintenance of her and the children because she had the custody of the children.

In my opinion, the appellant has overcome the three conditions which the Minister argued were missing from this agreement: (i) that the parties had not in specific words covenanted to live separate and apart; (ii) that there did not appear to be a specific obligation on the appellant to pay these amounts to his wife; and (iii) that they were for the maintenance of her and the children.

There are two other matters I should refer to in allowing this appeal. I have relied on statements in Ouellette and Brett. Once the door is open for parol evidence to be admitted to explain and perhaps alter the apparent meaning of a written agreement, a judge must determine what weight he will attach to that evidence. In my view, a judge must consider the integrity of the evidence as to whether the witness is trying to warp an agreement to his advantage, or whether he is providing genuine background to the words that are apparent in the document. Having observed the appellant giving evidence in this case, I have no hesitation in accepting the integrity of his evidence as being an honest explanation of why these documents read the way they do.

Secondly, in support of his drafting of the documents, the appellant went to the Revenue Canada office and obtained this booklet “Are You Separated or Divorced?". He explained how he went through the various headings in that booklet like "Are You Living Separate and Apart?” and why he put the two addresses on each document. He saw that the payments must be periodic and that is why he provided that they would be on a monthly basis. He saw that they must be in a fixed amount and that is why he fixed them at $700 or $800. Basically, he received a document from Revenue Canada, Taxation and made what I hold to be a genuine layman's attempt to follow the booklet. Having followed it, he then made the payments and attempted to deduct them.

The appellant stated that his wife reported these amounts in her income for 1989 and 1990. That may be hearsay evidence but the Minister did not challenge that statement. It is within the Minister's knowledge as to whether the wife had volunteered these amounts as part of her income for 1989 and 1990. I accept the unchallenged statement of the appellant that his wife reported these amounts as part of her income for 1989 and 1990. That being so, it adds to what I would call the integrity of the picture as to where they thought they stood vis- a-vis the booklet published by Revenue Canada stating what they had to do to deduct and to report the relevant amounts.

On the totality of the evidence to which I attach great weight, I accept the two written agreements as satisfying the conditions of paragraph 60(b); and I will allow the appeals with respect to 1989 and 1990.

Appeal allowed.