Citation: 2010TCC48
Date: 20100127
Docket: 2009-1534(IT)I
BETWEEN:
ELIZABETH A. WOODS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan, J.
Issue
[1] The issue in
this appeal is whether a 1994 separation agreement between the Appellant and
her former spouse was varied after 1997 thus triggering a “commencement day” as
defined in subsection 56.1(4) of the Income Tax Act (the “Act”)
and relieving the Appellant from including in her 2007 income a payment of
$9,036 received from her former spouse in that year.
Background
[2] The Appellant
and Mr. Reckenberg were married in 1987 and had two children. Following the
breakdown of their marriage, they entered into a separation agreement dated
December 22, 1994 (“1994 Separation Agreement”) pursuant to which Mr.
Reckenberg paid $600 per month in child support. Clause 6 of the 1994
Separation Agreement provided for an annual Cost of Living Adjustment to that
amount but that term was never given effect. In July 2006, after an exchange of
correspondence between the Appellant and Mr. Reckenberg, he began making
payments of $753 per month. He continued to do so until 2009.
[3] The only
taxation year under appeal is 2007. During that year, the Appellant received
from Mr. Reckenberg a total of $9,036 ($753 per month x 12 months), none of
which was reported as income. The Minister reassessed to include the $9,036
payment in her 2007 income as a child support amount under subsection 56.1(1)
of the Act.
Appellant’s
Position
[4] The Appellant’s
position is that the $9,036 received from Mr. Reckenberg ought not to be
included in her 2007 income firstly, because it was paid pursuant to a new
agreement which varied the child support payable under the 1994 Separation
Agreement. According to the Appellant, the agreement to vary was embodied in an
exchange of correspondence in 2006 between the Appellant and counsel for
Mr. Reckenberg. Its effect was to trigger a “commencement day” under subparagraph
(b)(ii) of the definition in subsection 56.1(4); accordingly, the child
support payments were no longer subject to the pre-1997 regime of inclusion and
deductibility.
[5] The Appellant
argues alternatively, that even if there was no agreement to vary the 1994
Separation Agreement and it continued to be in effect in 2007, it cannot be
said that the $9,036 payment was paid pursuant to the terms of that document.
The 1994 Separation Agreement provided for payments of $600 per month; in 2007,
Mr. Reckenberg was paying $753 per month. As shown by the 2006 exchange of
correspondence, that amount was based on the application of the Child
Support Guidelines to his income for 2005. Thus, the $9,036 was, at best, an
ad hoc payment not caught by the definition of “support amount”; for
that reason, she was not required to include it in her 2007 income.
Respondent’s
Position
[6] The Minister
contends that because there was no written agreement to vary the 1994
Separation Agreement, it remained in force in 2007 and the $9,036 payment the
Appellant received from Mr. Reckenberg was properly included in her income.
Facts
[7] The Appellant represented herself and testified at the hearing.
Mr. Reckenberg was not a party to the proceedings; rather, he was called
as the Crown’s only witness. Both were credible in their evidence.
[8] Clauses 5 and 6
of the 1994 Separation Agreement read as follows:
5.
CHILD SUPPORT
(a)
Effective July 15, 1994, and on the fifteenth day of each and every
month thereafter, the Husband shall pay to the Wife the sum of THREE HUNDRED
DOLLAR ($300.00) per month, per child, (for a total of $600.00 per month) for
child support.
(b)
Such payments for child support shall continue until one of the
following events occurs:
(i)
the child ceases to reside primarily with the Wife (The child shall be
deemed to “reside primarily with the Wife” if the child lives away from the
Wife’s residence for the purpose of attending an education institution, working
in the summer or taking a vacation, but otherwise resides with the Wife);
(ii)
the child becomes 18 years of age and ceases to be in full time
attendance at an educational institution;
(iii)
the child becomes 22 years of age;
(iv)
the child marries;
(v)
the Wife dies;
(vi)
the Husband dies, provided that the life insurance to be maintained by
the Husband at paragraph 11 herein remains in effect;
(c)
The spouses acknowledge and agree that all child support payments made
by the Husband pursuant to this Agreement shall be deemed deductible by him or
includable by the Wife in the calculation of their income for tax purpose. Such
payments shall be considered as having been paid and received pursuant to the
provisions of sub-section 56.1(3) and 60.1(3) of the Income Tax Act, including
any payments referred to above made prior to the date of this Agreement.
(d)
The Wife specifically acknowledges receipt of $600.00 per month in child
support payments for the months of July, August, September, October, November,
and December, 1994, for a total of $3600.00.
(e)
The parties specifically acknowledge that the quantum of child support
determined under this Agreement is made on the assumption that the Husband will
be entitled to deduct the child support payments made by him and the Wife will
be required to include such payments in the calculation of her taxable income.
In the event that the decision in Thibaudau vs. M.N.R. is
sustained by the Supreme Court of Canada (ie. that the Wife is not required to
include the amount of child support so paid to her in the calculation of her
taxable income), such an event may constitute a material change in
circumstances warranting a downward variation in the quantum of support paid.
In such event, the parties agree to follow the procedures as outlined under the
heading “MATERIAL CHANGE IN CIRCUMSTANCES”.
6. ANNUAL
COST OF LIVING ADJUSTMENT IN SUPPORT
Payment of
child support pursuant to paragraph 5 herein shall be adjusted annually, each
July 15th, commencing July 15, 1995, in accordance with the lessor
of:
(a)
The annual percentage increase, if any, in the Consumer Price Index of
Canada for prices of all items for the previous calendar year; or
(b)
The percentage increase (if any) in the husband’s gross income from all
sources for the previous calendar year, as determined by the Husband’s income
tax returns;
…
[9] As it is pivotal
to the issue of the existence of an agreement to vary the 1994 Separation
Agreement, the relevant portions of the 2006 correspondence between the
Appellant and Mr. Reckenberg are set out below.
[10] On March 20,
2006, the Appellant wrote to Mr. Reckenberg regarding, among other things, the
Cost of Living Adjustment clause:
… the primary
issue is that [the 1994 Separation Agreement’s] provision for the child support
payments to be adjusted annually to reflect the ‘Cost of Living Adjustment’ has
not been realized since the agreement was signed in December 1994. This has
created a deficit in what [the children] received in the years since then,
compared to what they have been entitled to. This inequity is further
exacerbated by the fact that the payments are still governed by the pre- May 1997
tax law that decrees them as taxable income for me. I pay a substantial amount
of tax on the support payments over and above the appropriate amount of
employment income tax that is already deducted from my pay. The support amount
is therefore significantly diminished causing direct financial punishment for
the children.
[11] Mr. Reckenberg
responded through his lawyer on April 18, 2006 as follows:
Mr. Reckenberg
has provided me with a copy of your correspondence dated March 20, 2006, for
reply. Mr. Reckenberg is prepared to negotiate any outstanding issues, as is
noted below.
Mr. Reckenberg
acknowledges that you are entitled to financial documentation to determine
whether a change in support arrangements is appropriate. Mr. Reckenberg
would like to obtain the same from you as well.
[12] The Appellant
(who told the Court that while she had chosen to represent herself in her
discussions with Mr. Reckenberg, she had been, during that time, consulting
with a lawyer friend on an informal basis) responded to Mr. Reckenberg’s
lawyer on June 13, 2006:
I am writing
in response to the above-noted letter that was accompanied by Randy
Reckenberg’s employment income information following my request for variation
in the amount of child support paid.
I have been
further advised by [J.B.] that I need to receive financial disclosure as to
Randy’s current salary as it appears that his income increases fairly
substantially every year. As previously requested of Randy in my March 20, 2006
letter to him, I am again requesting his three most recent pay stubs.
At the very
least, child support should be based on his 2005 employment income of
$61,165.03 and will be subject to further adjustment when I learn of his 2006
income. As outlined in the newest child support tables, for two children, the
base table amount is $919 per month. As Randy’s support obligation is at least
$919 per month, his payments should reflect this amount right away. However, I
am comfortable with him beginning the new payment amounts effective July 15,
2006.
[13] By letter dated
June 22, 2006, Mr. Reckenberg’s lawyer replied as follows:
Further to
your correspondence of June 13, 2006, please note that since forwarding Mr.
Reckenberg’s financial documentation, he has received his 2005 Notice of
Assessment, which I enclose for your review.
Please note
that in accordance with an annual income of $50,002.02 per annum, pursuant to
line 150 of the Notice of Assessment, Mr. Reckenberg’s child support payment
would be $753.00 per month, in accordance with the Child Support Guidelines.
I would
propose that in order to move this matter forward in a timely manner, that we
schedule a meeting for all parties to discuss the outstanding issues in this
matter. However, this would only be a viable option if you were represented by
counsel at the meeting. Kindly advise if you intend to retain counsel in this
matter and further, if you are agreeable to scheduling a meeting at this time.
I look forward
to hearing from you.
[14] The Appellant
replied by letter dated July 10, 2006 in which she began by setting out the
basis for doubting the accuracy of Mr. Reckenberg’s disclosed income for 2005
and citing the advice she had received from her lawyer friend. She then went on
to say:
…
Therefore,
please be advised that at this time, in light of the above as well as by
failing to receive copies of Mr. Reckenberg’s last three pay stubs as has been
requested twice, I am not in agreement as to what Mr. Reckenberg’s actual
income is nor am I confident that this matter is being handled in transparency
and in good faith.
As I am yet to
receive child support cheques for July 15, 2006 through to December 15, 2006
(as has been general practice, I receive child support cheques from Mr.
Reckenberg in six-month increments and I anticipate that he will deliver these
cheques to me this coming Friday), I will accept payment of $753.00 monthly
(the amount based on $50,002.00) which may be subject to retroactive change
upon final agreement of Mr. Reckenberg’s actual income. Please note that I am
hopeful that we will resolve this issue through this latest correspondence,
however, if not, I am prepared to take legal proceedings next.
The
Appellant concluded by rejecting the invitation of counsel for Mr. Reckenberg
to meet on the basis that “… it does not appear that such a meeting is
warranted.”
[15] On July 12, 2006,
Mr. Reckenberg’s lawyer responded with what was to be the last word on this
matter until sometime in 2009 when the Appellant instituted family court
proceedings in respect of child support:
We are in
receipt of your letter dated July 10, 2006 and we have reviewed the contents
therein with Mr. Reckenberg.
Please find
enclosed six child support cheques for July to December, each made payable to
you in the amount of $753.00. As you will note, the support amount has been
adjusted to reflect the child support due in accordance with line 150 of
Mr. Reckenberg’s 2005 Notice of Assessment. It is not our position that
child support would be determined on any other basis.
Should you
wish to further pursue this issue, please be advised that we are prepared to
defend this position vigorously.
Also enclosed
herein are the pay stubs you requested for your records.
[16] The Appellant did
not respond to this letter and no meeting between the parties, with or without
counsel, occurred. However, Mr. Reckenberg made and the Appellant accepted
payments of $753 per month from July 2006 to sometime in 2009.
[17] On December 8,
2008 the Minister reassessed the Appellant’s 2007 taxation year and included
the $9,036 received from Mr. Reckenberg in her income as child support. The
reassessment motivated the Appellant to commence proceedings in family court to
clarify any ambiguity surrounding what she believed had been their agreement in
2006 to increase the child support. To their credit, the Appellant and Mr.
Reckenberg were able to settle all outstanding child support matters without
litigation; indeed, their actions throughout seem to have been guided by their
concerns for their children’s best interest.
[18] In
preparation for the family court matter, a blank standard form court document
entitled “Conference Brief”
was completed, apparently by the Appellant or perhaps, upon her instruction to
a court official. It was signed by Mr. Reckenberg’s counsel upon his
instruction. The Appellant put this document in evidence in further support of
her contention that she and Mr. Reckenberg had agreed in 2006 to vary the
amount of child support payable under the 1994 Separation Agreement. She
relied, in particular, on the first sentence in the response to the questions
in paragraph 11 of that document:
11. What are
the issues for this case conference? What are the important facts for this case
conference?
[Response:] The
parties entered into an amended agreement in 2006 with adjusted child support
to the guideline amount. Child support was payable for 2 children at that
time. Since that time one of the children finished full-time education and did
not return. The Respondent Father continued to pay child support for 2 children
for an extra year, until Dec 2008. Child support is now payable for 1 child.
Respondent has earned income from employment as well as running a home based
business. The Home base business has continued to run in a deficit and for 2009
is being wound down. Income for the Respondent will be based on Employment
income only for 2009 which is currently estimated to be $56,000.00.
[Emphasis added.]
Analysis
1. Was there an agreement to vary
the 1994 Separation Agreement which triggered a “commencement day”?
[19] The relevant
portion of the definition of that term appears in subparagraph (b)(ii)
of the definition of “commencement day” in subsection 56.1(4) of the Act:
(b) where
the agreement … is made before May 1997, the day, if any, that is after April
1997 and
…
(ii) where the
agreement … is varied after April 1997 to change the child support amounts
payable to the recipient, the day on which the first payment of the varied
amount is required to be made,
[20] The “agreement”
referred to in subparagraph (b)(ii) is the “written agreement” referred
to in the definition of “support amount”, also set out in subsection 56.1(4):
“support
amount” means an amount payable or receivable as an allowance on a periodic
basis for the maintenance of the recipient, children of the recipient or both
the recipient and children of the recipient, if the recipient has discretion as
to the use of the amount, and
(a) the
recipient is the spouse or common-law partner or former spouse or common-law
partner of the payer, the recipient and payer are living separate and apart
because of the breakdown of their marriage or common-law partnership and the
amount is receivable under an order of a competent tribunal or under a written
agreement; or [Emphasis added.]
…
[21] The Appellant’s
position is that the letters between her and Mr. Reckenberg constituted an “agreement”
capable of varying the 1994 Separation Agreement. In support of her contention,
she cited Paul M. MacDonald v. Her Majesty the Queen. In that case, Sarchuk, J. applied Foley v. R., a decision in which former Chief Justice Bowman held that, depending
on the facts, an exchange of correspondence might be a “written agreement” but
concluded that the “… word ‘agreement’ denotes at least a binding obligation.”
[22] Justice Sarchuk
took the same approach in Paul M. MacDonald, ultimately holding that, on
the facts of that case, there was “… no evidence to support a conclusion that
the letters in issue were written with the intent and effect of binding the
respective clients.”
[23] In the present
case, I am not persuaded that the 2006 correspondence between the Appellant and
Mr. Reckenberg constituted an agreement to vary the 1994 Separation Agreement.
It comes close: the Appellant and Mr. Reckenberg got as far as acknowledging that
the Cost of Living Adjustment clause in the 1994 Separation Agreement had not
been respected and that the Child Support Guidelines (which had come
into effect in 1997, after the 1994 Separation Agreement had been executed) should
be used as the basis for the determination of an increased amount. After that
point, however, their negotiations hit a snag. The Appellant was not convinced
that Mr. Reckenberg’s 2005 income, as disclosed, was accurate. After raising
the issue in some detail and being unsatisfied with Mr. Reckenberg’s response,
the Appellant agreed to accept monthly payments of $753 per month commencing
July 15, 2006 but expressly reserved her right to challenge the basis for
that payment and to collect additional amounts retroactively if her suspicions
proved to be true. The Appellant threatened legal action to enforce her
position. For his part, Mr. Reckenberg was reluctant to conclude
negotiations unless the Appellant was represented by counsel. He also
maintained his 2005 income was correct, as reported, and invited the Appellant
to challenge it at her peril. There things stood.
[24] In these
circumstances, I am unable to conclude that the 2006 correspondence reveals a meeting
of the minds capable of converting their letters into a binding agreement to
vary the 1994 Separation Agreement by increasing the child support from $600 to
$753 per month.
[25] The Appellant
also argued that the cheques Mr. Reckenberg gave her constituted a binding written
agreement citing, in support, my decision in Thomson v. Her Majesty the
Queen. The Thomson case does not assist the
Appellant’s argument. First, it involved quite unusual facts that are not
present here. Further, my finding of a written agreement was not based solely
on the cheques the father had paid to the mother for child support; their
effect was considered as a whole along with the oral evidence and handwritten
entries in the standard form agreement that had been provided to the parties
for their completion.
[26] A further
weakness of the Appellant’s argument is that if the parties had truly agreed
that as of July 2006 the quantum of child support would be calculated in
accordance with the Child Support Guidelines, then presumably it would
have had to be redetermined each year depending on their respective incomes. There
is no evidence that this was, in fact, done for 2007.
[27] Turning, finally,
to paragraph 11 of the Conference Brief, the bare statement that the “parties entered
into an amended agreement in 2006 with adjusted child support to the guideline
amount” falls far short of proving the existence of a binding agreement to vary
according to precise terms. This sentence appears in a document prepared in the
context of laying the foundation for what was to become an agreement to change
child support provisions under the 1994 Separation Agreement. In these
circumstances, I am unable to read it as an admission by Mr. Reckenberg of
the existence of a binding agreement to vary dating back to 2006.
[28] For these
reasons, I find that there was no “agreement” to vary the 1994 Separation
Agreement as contemplated by subparagraph (b)(ii) of the definition of
“commencement day” in subsection 56.1(4).
2. Was
the $9,036 paid pursuant to the 1994 Separation Agreement?
[29] The Appellant’s
position is that even if there was no agreement to vary the 1994 Separation
Agreement, the $9,036 amount was not paid pursuant to that document and
accordingly, was merely an ad hoc payment not caught by the definition
of “support amount”. Again, the Appellant relied on Paul M. MacDonald,
cited above. In that case, Sarchuk, J. found that the provisions of the
original written agreement pertaining to child support were no longer operative
at the time the former spouse made the payments under appeal and concluded as
follows:
The relevant
provisions of the Income Tax Act, i.e. section 56.1 and paragraph 60(b),
clearly establish that there must be a written agreement. This requirement is
also set out in the definition of support amount. If there is no written
agreement, the amounts are not includable in the recipient’s income, and are
not deductible in computing the taxpayer’s income. I have concluded that the
payments made by Carol are not support payments as defined by the Act, as they
are not amounts payable pursuant to a court order or agreement. Rather, they
can best be described as ad hoc payments made by Carol to the Appellant.
[30] In the present
case, having found that the 1994 Separation Agreement was not amended by the
correspondence in 2006, the question is whether it was still in force in 2007.
The events of termination are set out in Clause 5(b); there being no evidence
adduced to show that any of these had occurred, I am satisfied that the 1994
Separation Agreement remained in effect in 2007. That being the case, the only
amount which Mr. Reckenberg was obliged to pay under Clause 5(a) was $600 per
month. In these circumstances, the additional amount of $153 per month was not
paid “under a written agreement” as contemplated by the definition of “support
amount” in subsection 56.1(4) but rather, on a voluntary or ad hoc
basis. For that reason, the additional $1,836 ($153 x 12 months) was not
properly included in the Appellant’s 2007 income.
[31] The appeal is
allowed and referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that in 2007, the Appellant
received child support of $7,200 pursuant to the 1994 Separation Agreement.
Signed at Ottawa,
Canada this 27th day of January, 2010.
“G. A. Sheridan”
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