Burgess v. The Queen, 91 DTC 5076, [1991] 1 CTC 163 (FCTD)

Reed, J.:—This is an appeal from a judgment of the Tax Court of Canada dated March 25, 1987, dismissing the plaintiff's appeal from income tax assessments for the taxation years 1982 and 1983. The appeal concerns maintenance payments of $7,380 and $5,760, paid by the plaintiff to his former spouse in 1982 and 1983 respectively. The issue is whether these amounts are deductible as expenses from the plaintiff's income by virtue of paragraphs 60(b) or 60(c) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

Fact

The plaintiff separated from his wife in October 1980. He paid $400 a month into a joint bank account. Mortgage payments for the matrimonial home were automatically deducted from that account. The wife had access to any money in the account in excess of the amount needed for the mortgage payments. In February 1981, in response to a letter from his wife's lawyer, the plaintiff agreed to pay $600 per month into this account. The wife, through her lawyer, expressed a willingness to sign a written agreement regarding the maintenance which was being paid. The letter expressly noted that this was necessary for the plaintiff to obtain the tax deduction allowed by paragraph 60(b) of the Income Tax Act. No such agreement was ever signed.

In April 1981, the plaintiff returned to the matrimonial home and attempted a reconciliation with his wife. This was not successful and, in September of 1981, he again left to live separate and apart. In response to a letter from his wife's lawyer, in October 1981, he again began making the payments of $600 per month into the joint account. While a court action to compel payment of maintenance had been commenced, this was not proceeded with because the plaintiff voluntarily agreed to pay the $600 as requested.

The plaintiff sought an immediate settlement of the differences between himself and his wife including the division of the family assets. In December 1981, a letter containing a proposal for settlement was sent to his wife's counsel. The plaintiff's counsel ended that letter with the following paragraph:

Mr. Burgess is prepared to make this offer to your client on the basis that her claims be settled as expeditiously as possible. In return for a speedy settlement of this claim he is prepared to make a far more generous offer than would ever be awarded by a Judge under the Family Relations Act.

Apparently, relations between the plaintiff and his wife took on an acrimonious cast and there was no co-operation to facilitate a reasonable or expeditious settlement of their affairs. In January 1982, the plaintiff did not deposit $600 into the account as he had previously been doing. This led to another letter from his wife's lawyer threatening court action to compel such payments if they were not made voluntarily. The plaintiff's lawyer wrote back on January 26, 1982:

Enclosed is our client’s cheque made out to Mrs. Burgess in the amount of $600.00. These funds are sent on a strictly without prejudice basis and are not to be construed as an admission on the part of our client that Mrs. Burgess is entitled to or requires maintenance.

These funds are sent with the hope that they will facilitate the settlement that we have proposed and to indicate our client's good faith in this matter.

We state again, the offer that has been made to Mrs. Burgess is exceptionally generous and had it not been for our client's desire to see this matter settled quickly we would have recommended most strongly against it.

No resolution of the differences between the parties, was reached, however, and the plaintiff continued to make the monthly maintenance payments until December 1984. There was no court order requiring the plaintiff to make these payments. There was no written separation agreement governing the relationship of the parties. The plaintiff states that his wife would neither give him a written agreement regarding the maintenance payments nor accept his settlement offer. In his view, she insisted on dragging matters out. In February 1985, the plaintiff took the initiative and filed for divorce. A decree absolute was granted July 26, 1985.

In filing his income tax returns for 1982 and 1983, the plaintiff claimed deductions of $7,380 and $5,760, respectively, on account of the maintenance payments which had been made to his wife. By notice of reassessment dated March 14, 1985, the plaintiff's deduction was disallowed on the ground that the plaintiff had not provided "a copy of the court order, judgement [sic], decree or written agreement, which is dated and has been signed by both parties" to support the deduction. The plaintiff filed a notice of objection to this assessment, stating that he believed that letters between himself and Mrs. Burgess's solicitor indicating that he would pay a certain amount of maintenance per month would suffice as a written agreement for income tax purposes. By notice of confirmation dated July 4, 1985, the Minister of National Revenue confirmed the reassessment and disallowed the deduction on the ground that the payments had not been made pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement within the meaning of paragraphs 60(b) or 60(c) of the Income Tax Act.

Statutory Requirements

Under paragraphs 60(b) and 60(c) of the Income Tax Act, alimony and maintenance payments are deductible by the person making them if certain conditions are met. These provisions read as follows:

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.

(c) an amount paid by the taxpayer in the year, pursuant to an order of a competent tribunal, as an allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the recipient, or both the recipient and children of the recipient if, at the time the payment was made and throughout the remainder of the year, he was living apart from his spouse to whom he was required to make the payment.

[Emphasis added.]

It is apparent that there is no "decree, order or judgment of a competent tribunal" governing the payments made by the plaintiff.

It is first of all to be noted that paragraph 60(b) contains two requirements relevant to this case: (1) that the payments be made pursuant to a written agreement and (2) that the taxpayer be living apart from his spouse pursuant to a written separation agreement. If there were only a requirement that the payments be made pursuant to a written agreement, I would be inclined to agree with the plaintiff that such existed. The exchange of letters between counsel on their respective client's behalf would, in my view, constitute a written agreement. Whether the “ without prejudice” qualification in the letter of January 26, 1982 would vitiate the arrangement as an agreement is a question I have not addressed. At the very least, however, even with this clause being given full play, the agreement was to pay the wife maintenance pending final resolution of their matrimonial dispute.

I need not address the significance of the exchange of correspondence as an agreement, however, because it is clear from the text of paragraph 60(b), and the jurisprudence which has interpreted it, that more than a written agreement is required to satisfy paragraph 60(b). It is clear, from the underlined portions of paragraph 60(b), that the taxpayer must have been living apart and separated from his spouse "pursuant to . . . a judicial separation or written separation agreement'. To repeat, in order for the payments to be deductible, not only must they be made pursuant to a written agreement but there must be a written separation agreement in effect governing the relationship of the taxpayer to his spouse. An agreement by exchange of letters of the type which occurred in the present case does not satisfy that requirement of paragraph 60(b).

Having come to the above conclusion, on the basis of the wording of the statutory provision, it is not strictly necessary for me to consider other cases which have been decided concerning paragraph 60(b). Nevertheless, 1 shall do so. It is important to ensure consistency in judicial decision making and to ascertain whether the above reading of paragraph 60(b) accords with or differs from that of other judges. If a reading of the jurisprudence indicates that my interpretation of paragraph 60(b) differs from that of others and leads to the plaintiff being treated more harshly than other taxpayers then it would be necessary to reconsider what appears to be a plain reading of the paragraph.

Jurisprudence

In Kostiner v. M.N.R. (1963), 32 Tax A.B.C. 124; 63 D.T.C. 478, a 1963 Tax Appeal Board case, Mr. Fordham, Q.C. at 125 (D.T.C. 479), stated:

The Board has held consistently that informal writings such as correspondence and memoranda between a husband and wife, or between their respective solicitors, will not be acceptable as evidence of the right to deduct alimony or maintenance payments from the payer's taxable income. The wording of section 11(1)(l) [now paragraph 60(b)] is reasonably clear and means just what is implied and it contains no reference whatever to correspondence and other informal writings.

In Gagnon v. M.N.R. (1966), 41 Tax A.B.C. 58; 66 D.T.C. 319, the Tax Appeal Board dealt with the claim of a taxpayer to deduct maintenance payments made to his wife for the support of herself and her son. The parties at the time were neither divorced nor judicially separated. The taxpayer attempted to rely on three letters as evidence of a written agreement to pay. At pages 61-62 (D.T.C. 321), it was held:

The words "written agreement" and "written separation agreement" must be taken as meaning "instrument" which is "a formal or legal document in writing”. There was a situation of fact existing between the appellant and his wife, the evidence of it appears from the correspondence. The trouble was that they waited until the 1st day of January 1963 to join in a single "agreement in writing", . . .

And at page 63 (D.T.C. 322) of that case:

What was done by the appellant and his wife does not fulfil the requirements of Section 11(1)(l)—and amongst the requirements there is a specific one, i.e., to have at the time he was making the payment to his wife a written separation agreement from his spouse. In January 1962 no such agreement in writing existed, neither in February, nor in any other month of the taxation year 1962. To entertain the view that the evidence, in this appeal, is conclusive of an agreement to pay and to live separately, as contemplated by the section cited above, would make it easy to defeat the purpose of the section and to evade the burden of tax imposed upon the taxpayer. By an exchange of letters husband and wife could conceal taxable income under the pretence of a fake separation.

In Reid v. M.N.R., [1972] C.T.C. 2661; 72 D.T.C. 1540, a Tax Review Board case, it was held that the words “written agreement" meant a formal agreement between the parties, and than an undated, unsigned document would not be sufficient. A similar conclusion was reached by Bonner, T.C.J. in Kapel v. M.N.R., [1979] C.T.C. 2187; 79 D.T.C. 199; he stated at 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.” See also Volk v. M.N.R., [1977] C.T.C. 2012; 77 D.T.C. 12 (T.R.B.).

Horkins v. The Queen, [1976] C.T.C. 52; 76 D.T.C. 6043 (F.C.T.D.) dealt with an argument similar to that put forward by the plaintiff in the present case. The taxpayer claimed that draft separation agreements, correspondence and the acceptance of the maintenance cheques amounted to either a written separation agreement or a written agreement. Collier, J. stated at page 56 (D.T.C. 6046):

It was submitted the payments were made pursuant to an agreement in writing while the plaintiff was living apart from his wife and while he was separated from her pursuant to a written separation agreement. Counsel urged that the following facts when put all together amounted to a written separation agreement pursuant to which the plaintiff was separated and living apart, and the payments in question were made pursuant to a written agreement:

(a) husband and wife had orally agreed to live separate and apart.

(b) written draft separation agreements passed back and forth between their representatives, as well as correspondence on the same matters directly between the parties. Those documents and letters, it is said, confirmed in writing the separation and the living apart.

(c) the acceptance of the alimony cheques by the wife for the months in question, and the general reference to the payments in the letter earlier set out

In my opinion, no matter how hard one strains to find in favour of the plaintiff, those facts cannot be held to be an agreement in writing or a written separation agreement (or both). They do not, as I see it, meet the requirements of 11(1)(l).

See also Knapp v. M.N.R., [1985] 2 C.T.C. 2046; 85 D.T.C. 424 (T.C.C.), where it was held that an unexecuted separation agreement together with proof of actual payments of the amounts in question did not meet the requirements of paragraph 60(b), and Ardley v. M.N.R., [1980] C.T.C. 2126; 80 D.T.C. 1106 (T.R.B.), where similar informal, unexecuted arrangements were held not to meet the requirements of paragraph 60(b).

In Hodson v. The Queen, [1987] 1 C.T.C. 219; 87 D.T.C. 5113 (F.C.T.D.), Mr. Justice Strayer commented on the proper interpretative approach to be employed with respect to paragraph 60(b) and the underlying justification for applying a strict standard (pages 220-21 (D.T.C. 5114)):

The intention of Parliament as expressed in paragraph 60(b) is quite clear: either there must be a court order requiring such payments or else there must be a "written agreement" requiring them. If Parliament had intended to permit such deductions to be made on the basis of oral agreements or in respect of purely voluntary payments it would have said so. Having used the words "written agreement" it has clearly excluded other less formal arrangements.

Such an interpretation does not lead to an absurdity or manifest injustice. It must be kept in mind that normally spouses who live together cannot split their income so as to reduce total family taxation. Paragraph 60(b) creates an exception to the general rule, giving separated spouses who come within its terms a certain tax advantage. As the Supreme Court of Canada said in Gagnon v. The Queen, [1986] 1 C.T.C. 410 at 412; 86 D.T.C. 6179 at 6181:

The purpose of these provisions, by allowing income splitting between former spouses or separated spouses, is to distribute the tax burden between them. As C. Dawe wrote in an article titled "Section 60(b) of the Income Tax Act: An Analysis and some Proposals for Reform”, (1980) 5 Queen's L.J. 153:

(T)his allows the spouses greater financial resources than when living together, compensating in part for the lost economies of maintaining a single household.

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 payment must be made under a specific court order or a written agreement.

The reasoning of Strayer, J. was confirmed on appeal by Heald, J. in Hodson v. The Queen, [1988] 1 C.T.C. 2; 88 D.T.C. 6001 (F.C.A.), at 5 (D.T.C. 6003):

Parliament has spoken in clear and unmistakeable terms. Had Parliament wished to extend the benefit conferred by paragraph 60(b) on separated spouses who, as in this case, do not have either a court order or a written agreement, it would have said so. The rationale for not including separated spouses involved in payments made and received pursuant to a verbal understanding is readily apparent. Such a loose and indefinite structure might well open the door to colourable and fraudulent arrangements and schemes for tax avoidance. I hasten to add that there is no suggestion in the case at bar of any such fraudulent or colourable arrangement. The Minister agrees that, in the case at bar, the appellant has made the alimony payments to his spouse in good faith. Nevertheless, such a possible scenario in other cases commends itself to me as the rationale for the carefully worded restrictions set out in the paragraph. If the words used by Parliament create hardships, as suggested by the appellant, it is Parliament, and not the Court, that has the power to redress those hardships.

It is clear that the jurisprudence overwhelmingly supports the defendant's position. The plaintiff referred to the decisions in Zarbatany v. M.N.R., [1974] C.T.C. 2195; 74 D.T.C. 1134 (T.R.B.) and Kates v. M.N.R., [1968] Tax A.B.C. 209; 68 D.T.C. 219 (T.A.B.). The Zarbatany case dealt with a husband and wife living in Quebec where consensual separation agreements were not possible under the law. In that province a legal separation could only be obtained through a court order. The Tax Review Board accepted the documentation which was filed to commence judicial separation proceedings, as fulfilling the role of a written separation agreement for the purposes of paragraph 11 (1)(l) (now paragraph 60(b)) in that province. The Tax Review Board could not, however, find a formal written agreement pursuant to which the interim alimony in question had been paid and thus the taxpayer did not satisfy the requirements of paragraph 11(1) (I).

In the Kates decision, the spouses were involved in such acrimonious bickering that they left the negotiation and preparation of an interim settlement agreement to their respective counsel. The report of the decision indicates that the spouses could not be in the same room with each other without arguments breaking out. A “memorandum of interim settlement" was prepared by the lawyers which was extensive and detailed. It provided that the wife would commence divorce proceedings immediately and that the husband would undertake a variety of financial obligations. It set out provisions for access to the couple’s children. The lawyers for the respective parties signed on their client's behalf. The Tax Appeal Board held that the document was "comprehensive and covered all the chief points as usually found in a separation agreement". The Board was prepared, therefore, to hold that the agreement met the requirements of paragraph 11(1)(l) (now paragraph 60(b)). The Board was not prepared merely because the document carried the title "memorandum of interim settlement" instead of separation agreement" and because it had been signed by the solicitors on their client's behalf to disregard that document.

Conclusion

Unfortunately, the Zarbatany and Kates cases do not assist the plaintiff. The Zarbatany case is one where the Tax Review Board was attempting to interpret the then paragraph 11(1)(l) (now paragraph 60(b)) in a province where no consensual separation agreement was possible. The present plaintiff's situation is not of this nature and, in any event, an action for judicial separation was never commenced by him or by his wife. Thus, even if the Zarbatany decision were to be applied in provinces where consensual as well as judicial separation is possible the type of documentation which was placed before the Tax Review Board in the Zarbatany case does not exist in this case. The Zarbatany decision cannot be expanded to equate the commencement of court proceedings to obtain maintenance or the filing of petitions for divorce with the commence- ment of proceedings for a judicial separation. If the Zarbatany decision were so expanded it would render parts of paragraph 60(b) meaningless (i.e., those which provide consequences as a result of living apart pursuant to a divorce).

The Kates decision is also of little assistance to the plaintiff. In that case, an agreement existed which the Board found to be in substance, a separation agreement. It simply did not have the correct title. It was signed by counsel as agents for the parties; that would not undercut its validity. In the present case, however, no such comprehensive separation agreement exists. The correspondence between the solicitors simply cannot be equated to a separation agreement.

With respect to the jurisprudence which exists with respect to the interpretation or paragraph 60(b) and its predecessor 11(1)(I), a distinction is not always made in that jurisprudence between the requirements of a "written agreement" and the requirements of "a written separation agreement”. As a matter of statutory interpretation, I could accept that the first, a written agreement, could be entered into as a result of an exchange of letters between counsel, in the same way that contracts are often formed through an exchange of letters. And, in this case, it is at least arguable that such existed. There is, however, simply no documentation which could support an argument that"a written separation agreement" existed. Thus, even if the first requirement of paragraph 60(b) were met, the second is not.

The result in this case is an unfortunate one. The plaintiff clearly lost a tax advantage he could have had, through no fault of his own. He acted in a reasonable way in voluntarily agreeing to provide maintenance to his wife, without the necessity of being compelled to do so by court order. The statutory provisions in question, however, do not admit of an interpretation favourable to him. For the reasons given his appeal must be dismissed.

Appeal dismissed.