Date: 20100602
Docket:
A-624-08
Citation: 2010 FCA 146
CORAM: LÉTOURNEAU J.A.
PELLETIER J.A.
STRATAS J.A.
BETWEEN:
JAMES
BROAD
Appellant
and
HER
MAJESTY THE QUEEN
Respondent
REASONS
FOR JUDGMENT
STRATAS
J.A.
[1]
This is an appeal from the judgment of Justice Campbell of the Tax
Court of Canada, rendered orally on November 26, 2008. The Tax Court ruled that
the appellant was not able to deduct support payments that he paid in 2005 to
the appellant’s former common law spouse, Ms. Randall.
[2]
In order for the appellant to be able to deduct the support
payments under paragraph 60(b) of the Income Tax Act, R.S.C.
1985, c. 1 (5th Supp.), among other things, they must be “receivable…under
a written agreement”: subsection 56.1(4) of the Act, made applicable to
paragraph 60(b) by subsection 60.1(4). The Tax Court found that the
payments made in 2005 were not receivable under a written agreement.
[3]
The facts giving rise to this issue can be simply stated. The
appellant cohabited with Ms. Randall from April 1, 1989 until July 1, 1990.
During that time, they had a son. On July 1, 1990, the appellant and Ms.
Randall separated. They later signed a written separation agreement, dated as
of July 1, 1990. That separation agreement contained the following non-termination
clause:
If James and Laurie hereafter
by mutual consent cohabit as man and wife, this Agreement and all the covenants
herein contained shall remain in force unless and until James and Laurie
mutually agree in writing to terminate or amend this agreement.
[4]
In August 1993, the appellant and Ms. Randall attempted a
reconciliation and resumed cohabitation. The appellant did not make support
payments during that time. In February 1995, the reconciliation ended and the
parties separated permanently. After that time, except for a very brief period during
which the parties were engaged in a custody and access dispute, the appellant
made, and Ms. Randall accepted, support payments in the exact amounts specified
in the earlier written separation agreement.
[5]
Did the brief period of reconciliation from 1993 to 1995 and the
appellant’s failure to make support payments during that period terminate the earlier
written support agreement, such that any later payments made were not
“receivable…under a written agreement”? The Tax Court answered that question in
the affirmative. As a result, according to the Tax Court, the support payments
paid by the appellant in 2005 were not “receivable…under a written agreement,”
and so the appellant could not deduct the payments under subsection 56.1(4) of
the Income Tax Act.
[6]
In support of its decision that the separation agreement had
terminated, the Tax Court relied upon the following proposition:
The general common law rule
is that a reconciliation, such as occurred in these facts, will terminate a
prior separation agreement between the parties.
[7]
This was an error of law. As the Minister conceded in oral
argument before us, that “general common law rule” is not as absolute as that –
case law qualifies it significantly.
[8]
The precise nature of the qualification appears to be uncertain. In
British Columbia, where a separation agreement contains a non-termination
clause, such as the agreement here, the parties’ intentions and subsequent
conduct are examined in order to ascertain whether the separation agreement remains
in force and to what extent: Aitken v. Aitken, 1999 BCCA 734. However,
in Ontario, the Court of Appeal has gone further and has held that “the
separation agreement is void upon reconciliation, subject to a specific clause
in the agreement that would override the common law”: Sydor v. Sydor
(2003), 178 O.A.C. 155 (C.A.).
[9]
In developing a proper approach to this issue, it must be
remembered that the question before us is whether, for the purposes of
subsection 56.1(4) of the Income Tax Act, the appellant was making
support payments receivable under a written agreement. In determining this, we
must also bear in mind the purpose of this subsection and the mischief that
Parliament was attempting to address: Canada Trustco Mortgage Co. v.
Canada, [2005] 2 S.C.R. 601, 2005 SCC 54 at paragraphs 10 and 13.
The purpose of this subsection is to avoid the problem of “loose and indefinite
structure[s]” between parties, “open[ing] the door to colourable and fraudulent
arrangements and schemes for tax avoidance”: Hodson v. The Queen, [1988]
1 C.T.C. 2 at page 5 (F.C.A.).
[10]
In addition, in another one of its statutes, Parliament has stated
repeatedly a very strong public policy in favour of encouraging reconciliation:
Divorce Act, R.S.C. 1985, c. 3 (2d Supp.), subparagraph 8(3)(b)(ii),
subsection 9(1), section 10 and subsection 11(3). An attempt at reconciliation
– consistent with Parliament’s public policy – should not work detrimental consequences.
Insofar as it is possible to be consistent with the text and scheme of the Income
Tax Act, the wording of subsection 56.1(4) of the Income Tax Act
should be interpreted in a manner consistent with that public policy.
[11]
These considerations suggest that a taxpayer in the appellant’s
circumstances need not show a “clear and specific intent that [the] agreement
was a continuing and binding agreement,” which was the burden imposed on the
appellant by the Tax Court in this case. That is too high a burden. Instead,
the taxpayer need only show that the parties continued to act under the earlier
written agreement, without material variation, such that the agreement still describes
their relationship. When that is shown, the support payments received by the
payee are not receivable under a colourable, fraudulent or gratuitous arrangement.
Rather, they are receivable under an earlier written agreement that still describes the parties’ relationship.
[12]
In this case, there are many facts that support a finding that the
parties continued to act under the earlier written separation agreement,
without material variation, such that the agreement still describes their
relationship. Three of the more significant facts are as follows:
(a)
In 2000, the appellant brought proceedings in the British Columbia
Supreme Court against Ms. Randall. In his statement of claim, he pleaded that
the July 1, 1990 written separation agreement still existed. Ms. Randall did
not admit or deny that allegation. This means that the Ms. Randall is deemed to
have admitted the allegation: see Supreme Court Rules, B.C.
Reg. 221/90, rule 19(19). In effect, in 2000, well after the
end of the reconciliation, the parties have formally agreed in court
proceedings that the earlier written separation agreement still existed.
(b)
After the failed reconciliation, the appellant continued to make, and
Ms. Randall continued to receive, support payments in the exact amounts
specified in the earlier written separation agreement, except for a very brief
period of protest by the appellant during a custody and access dispute.
(c)
There was an exchange of correspondence between counsel for the
parties that confirmed the support arrangements; although it is not necessary
to decide the matter, by themselves, this exchange of correspondence might itself
qualify as a written agreement under subsection 56.1(4) of the Income Tax
Act: Foley v. Canada, [2000] 4 C.T.C. 2016 (T.C.C.); Burgess v.
The Queen (1991), 91 D.T.C. 5076 (T.C.C.).
[13]
From this evidence, I conclude that the appellant’s support
payments made in 2005 were receivable by Ms. Randall under an earlier written
agreement that still describes the parties’ relationship. Therefore, the
appellant was entitled to deduct these support payments from his income in the
2005 taxation year.
[14]
I am aware that this result creates an inconsistency. The Tax
Court has ruled that the support payments in Ms. Randall’s hands were not
included in her income. But I have found that the support payments paid by the
appellant are deductible. This inconsistency is unfortunate. This would not
have happened had the Minister appealed the decision in Ms. Randall’s case.
Instead, the Minister chose to reassess the appellant. Perhaps the Minister had
some reason for proceeding in the manner that he did, but the Minister’s manner
of proceeding has caused an unnecessary loss of tax revenue.
[15]
Therefore, I would allow the appeal with costs and set aside the
decision of the Tax Court. Rendering the judgment that should have been
rendered by that court, I would allow with costs the appellant’s appeal to the
Tax Court and refer the matter back to the Minister for a new assessment
on the basis that the
appellant’s support payments for the 2005 taxation year were deductible from
his income.
"David
Stratas"
“I agree
Gilles Létourneau J.A.”
“I
agree
J.D. Denis Pelletier J.A.”
Email this Content