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Citation: 2007TCC209
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Date: 20070508
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Docket: 2006-2048(IT)I
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BETWEEN:
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STUART M. MCLAUGHLAN
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
(Delivered
from the Bench on May, 4, 2007 at Toronto, Ontario)
Hershfield
J.
[1] The Appellant
appeals reassessments in respect of his 2002, 2003 and 2004 taxation years
which disallowed the deduction of child support payments made by him in the
respective amounts of $11,343.00, $11,400.00, and $9,840.00.
[2] The Appellant and
his wife have been living separate and apart since October 1, 1994 because of
the breakdown of their marriage. They are the parents of two children, one born
September 1, 1987 and the other born April 27, 1991. At all relevant times the
children resided with the Appellant’s wife after the marriage breakdown.
[3] A document titled a
“Financial Agreement” was executed on October 1, 1994, pursuant to which the
Appellant was required to pay to his wife for support of the children an
unallocated total amount of $820.00 per month payable in bi-monthly amounts commencing
October 16, 1994.
[4] It is the
Respondent’s position that the 1994 Financial Agreement was amended on January
1, 1999, to increase support for the children to $850.00 per month so as to
create a “commencement day” as defined in subsection 56.1(4) of the Income
Tax Act (“Act”). A change on the face of the Financial Agreement was
marked by hand by crossing out the number $820.00 and inserting $850.00. The
change was initialled and dated 1-1-99. If this handwritten notation creates a “commencement
day” as asserted by the Respondent, all of the payments made on or after that
day, January 1, 1999, are “child support amounts” as defined in that subsection
and are not deductible pursuant to paragraph (60)(b) of the Act.
[5] The Appellant acknowledged
that the notations referred to were made on January 1, 1999, but testified that
they reflected a change made to his support payment obligations in January
1997. The evidence supporting this testimony is uncontested and more than
sufficient to support a finding that the notations on the Financial Agreement reflected
a change in support obligations agreed to in January 1997. Actual payments
increased at this time as confirmed by the Appellant’s wife who also appeared
as a witness and gave testimony. She confirmed as well that by oral agreement she
and her husband changed the support amount payable in January 1997, not January
1999. As well, a 2005 letter signed by both the Appellant and his wife confirmed
that the increase in child support was agreed to in January 1997, that the
Appellant’s wife had included the increased amounts in her income from that
time forward, and, that the handwritten date of January 1, 1999 on the Financial
Agreement was only a confirmation of the child support obligation and did not
constitute an effective date of a change in the support amount payable.
[6] It is clear that
the Appellant and his spouse did not change the amount of support payable in
1999. The change had already been made at the beginning of 1997. However, by
the end of 1998 they became aware that the support payments actually being made
would not be deductible, at least as to the $30.00 per month increase, since
that amount was not paid pursuant to a written agreement or order as required
in the definition of “support amount” in subsection 56.1(4) of the Act.
Believing that the deduction of the full amount being paid would be allowed if
the Financial Agreement was changed to reflect the prior oral agreement, they
made the notation on that agreement as referred to above. That change was not
meant as a change in the support payable. The obligation to pay $850.00 already
existed. The change to that amount had been made in January 1997 under an oral
agreement. Under common law principles, the 1999 amendment had no legal impact
– any consideration between the parties was past consideration, which is no
consideration at all. That is, it appears open to the Appellant to argue that there
was no new contract made in 1999 pursuant to or under which a payment can be
made. However, unless the 1999 amendment is set aside, its existence
underlines that there has been a change in the form of the agreement (oral
versus written). Clearly the Act puts emphasis on form and to suggest
that changes in form have no effect for tax purposes in the context of
subsection 60(b) would cut at the very heart of that provision.
[7] Further,
citing Nanci Pach v. Her Majesty the
Queen and Bruce Rosenberg as authority,
the Respondent argues that an
amendment to a “support amount” can only be made in writing and that,
accordingly, the 1999 amendment was the first amending agreement between the
parties, not a second redundant agreement. If that is the case, the variation
in the support amount, for tax purposes, according to Pach, did not
occur until 1999 regardless that the change did in fact occur at an earlier
date as intended by the parties.
[8] The
Pach decision is based on the application of a common law principle as
well as on a factual finding that the change in child support in that case was
unilaterally imposed and therefore could not be found to be a variation of the
agreement. The common law principle applied was that a contract that varies an
earlier agreement must be reduced to writing if the original contract had to be
in writing.
[9] That
decision however does not fully explore the statutory context in which an
amending agreement might be analyzed and, in particular, does not expressly
address the question as to the effective date of a change made in writing. In
the case at bar the January 1997 change was reduced to writing in 1999 with a
common intention that the writing reflect the 1997 change. In such case, where
the intended effective date of the written change corresponds with the date the
parties agreed to the change and with the date the change was acted on, it
might be open to find that the effective date of the written change was when
the change was agreed to, even though the written form requirement was only met
after that time. This is essentially the argument that the Appellant makes.
[10] Whether that argument can succeed depends on whether the statutory
provisions leave room to give effect to the party’s intentions.
[11] With this in mind the definition of
“commencement day” requires close scrutiny. The definition reads as follows:
56.1(4)
…
“commencement day" at any time
of an agreement or order means
(a) where the
agreement or order is made after April 1997, the day it is made; and
(b) where the
agreement or order is made before May 1997, the day, if any, that
is after April 1997 and is the earliest of
(i) the day specified as the
commencement day of the agreement or order by the payer and
recipient under the agreement or order in a joint election filed with the Minister
in prescribed form and manner,
(ii) where the agreement or
order 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,
(iii) where a subsequent agreement or order is made
after April 1997, the effect of which is to change the total child support
amounts payable to the recipient by the payer, the commencement day of the
first such subsequent agreement or order, and
(iv) the day specified in the agreement or order, or any
variation thereof, as the commencement day of the agreement or order for the
purposes of this Act.
[12] The date prescribed by paragraph (a) is not expressly dictated by a reference
to written agreements. In the case at bar there is an agreement, albeit oral,
to pay $850.00 per month made before May 1997. Hence no “commencement day” is
created on the express terms of that paragraph.
[13] The preamble to the dates prescribed by paragraph (b) does not
expressly refer to only written agreements made before May 1997 so the dates
prescribed in the subparagraphs following paragraph (b) are not yet at least expressly
dictated by a reference to written agreements.
[14] Of the subparagraphs following paragraph (b), it appears that the
Respondent relies on subparagraphs (ii) and/or (iii). The date prescribed by
these subparagraphs is not expressly dictated by a reference to written
agreements. However, the wording in both subparagraphs does refer to a
variation or change in the “child support amount” and a “child support amount”
only exists if there is a written agreement setting out the amount. The “child support amount” at December
31, 1998, was $820.00 per month. That is the only amount set out in a written
agreement. It was changed on January 1, 1999. The “child support amount” became
$850.00 per month on that date. That is, even if the handwritten change was only
to recognize a prior change in the agreed payment obligation, such prior
obligation of $850.00 did not become a “child support amount” until rendered to
written form. Upon being rendered to writing on January 1, 1999, the “child
support amount” as defined in the Act changed so as to create a “commencement day”. Neither
the actual date of the change nor the intended effective date of rendering the
agreed change to writing, technically at least, change this result. Parties to
an agreement cannot by agreement change the reality of when an agreement is
rendered to written form. This does mean that there is no other recourse
available that would change this result.
[15] One such recourse is to have the Appellant seek a rectification order
or an order to have the 1999 amending agreement set aside. The order needed to achieve the result intended by
the parties would be one that pronounced that the child support payments are
$850.00 per month and that it, the order, was retroactive to and effective on
January 1997. Such order would give effect to the intentions and actions of the
parties, and to the legally binding oral agreement entered into between them on
that date.
[20] While this Court is not a Court of equity,
there is little to distinguish equitable remedies in Canada from common law in general. This Court must recognize common law
(see Will-Kare Paving & Contracting Limited v. Her Majesty the Queen)
and if rectification or an order setting aside a document or transaction is
available in these circumstances from an Ontario Superior Court in order to give
effect to the intentions of the parties, this Court, arguably at least, need
not sit idly by and not recognize the law that provides for such result.
[21] In his article “Many Questions (and a Few Possible
Answers) about the Application of Rectification in Tax Law”,
Joel Nitikman, an author on tax topics, suggests, notwithstanding authorities
to the contrary, the
following:
Can the Tax Court rectify an instrument?
Not in the usual sense: the Tax Court is not a court of equity [See section 12
of the Tax Court of Canada Act RSC 1985 c. T-2, as amended.], and in
general only one of the parties to a contract will be a party before the Tax
Court; the other party to the contract will not have been assessed and will not
be seeking rectification. In my view, however, the Tax Court can decide a case
as if the instrument had been rectified: the Tax Court has the implied
jurisdiction to decide provincial legal matters in the course of exercising its
exclusive jurisdiction to decide tax cases [ITO Ltd. v. Miida Electronics
Inc. (1986), 28 D.L.R. (4th) 641, at 662 (S.C.C.)]. The Tax Court often
applies equitable principles in the course of deciding a tax matter [See, for
example, Datacalc Research Corporation v. The Queen, 2002 D.T.C. 1479 at
paragraph 58 (T.C.C.)].
[22] Mr. Nitikman goes on to recognize that while it seems that
this Court may (and perhaps should) decide whether to treat a document as
having been rectified in the course of deciding a tax case, the Court has
expressed the preference that taxpayers apply first to the provincial Superior
Court for rectification. However, that is not always the case. In Zdislav Kovarik
v. Her Majesty the Queen,
Chief Justice Bowman (as he is now) not only did not treat a document as
rectified but refused to grant time for the Appellant to seek a rectification
order from a provincial Superior Court. That case dealt with a commencement day
issue, but there the Appellant was in an adverse position to his former spouse
which is not the case in the current appeal. In the case at bar the parties to
the document in question are in total agreement as to the mistake made and they
can, in my view, rely on Juliar.
[23] Such reliance begs the question as to what this Court
should do in these circumstances. In David A. Lloyd v. Her Majesty the Queen
Chief Justice Bowman acknowledged that this Court had no jurisdiction or
power to rectify transactions but nonetheless relying in part on the Federal
Court of Appeal decision in Her Majesty the Queen v. Jerrold D. Paxton
he observed at paragraph 19 that it was open for this Court to treat an
instrument as ineffective:
Obviously this court cannot make
declarations that bind the parties to a transaction, or set aside or rectify
transactions as between parties. That is a matter for the courts of the
provinces or territories. Nonetheless, this does not mean that this court must,
where the validity of a transaction is relevant to the determination of a tax
dispute between a taxpayer and the Government of Canada, stand impotently by
and decline to make a determination that is essential to the exercise of its
jurisdiction. Clearly our court must decide the validity or legal effect of a
transaction between subjects in the context of a determination of its tax
consequences.
[24] In Lloyd it was recognized that a legally
ineffective document can be recognized as such by this Court without going to a
provincial Superior Court to have the document set aside. He treated the
document in question as if it was set aside. I do not agree that this
principle goes so far as to suggest that this Court has jurisdiction to
re-write history in the sense done in Juliar. Further, Lloyd
would not be authority for me to give effect to the intentions of the parties
by dealing with this appeal as if a retroactive order had been issued by the
appropriate Court changing support payments from $820.00 per month to $850.00
per month effective January 1, 1997. This would attribute a wider jurisdiction
to this Court than recognized in Lloyd.
[25] However applying the principle in Lloyd to the
case at bar, this Court has jurisdiction to recognize that the 1999
amending document was not legally effective and thereby treat it as set aside. To confirm the 1997 oral agreement
in writing in 1999 is not a contract. That the oral agreement is not a change
in the “child support amount” under the Act does not change the contract
law consequence that the 1999 confirmation adds nothing to the legal obligations
between the parties even though the form of the confirmation creates a new “child
support amount” under the Act. As noted earlier there is no fresh
consideration between the parties in respect of the 1999 notation. As a
contract, it is ineffective. Setting aside the “written form” leaves the 1994
Financial Agreement as the only written source of a payment obligation – that
obligation being $820.00 per month. As per Pach, that there is an
overriding oral agreement to pay an additional $30 does not change the tax
result that the “child support amount” under the Act is that shown on
the 1994 Financial Agreement.
[26] Considering the alternatives mentioned above, in the circumstances of
this case, I find that holding this appeal in abeyance to permit the Appellant
an opportunity to seek a rectification remedy that might arguably permit the
deduction of the $850.00 per month is not warranted. On this point, I am
inclined to agree with the reasoning in Kovarik, which is that this Court cannot defer making a decision
and grant a stay every time a taxpayer expects that he might get a
better tax result if afforded the chance to seek a particular type of
rectification order from another Court. The Appellant has cast his lot in this Court
and the best this Court can do is recognize that the 1999 agreement is not
legally effective and thereby treat it as having been set aside. In my view
this is in accord with the principle applied in Lloyd. The result of
that is that there is no commencement day created.
[27] Setting aside the 1999 agreement, or more particularly,
treating it as set aside, simply recognizes its ineffectiveness as a matter of
contract law. Setting it aside does not
re-write history. This is not what has been referred to as fiscal revisionism
as discussed in Dunfield. Furthermore, there
appears to be a double tax consequence if the appeal is not allowed. Both parties to
all the agreements in question challenge the effect of the 1999 document. They
appeared in Court and are in agreement. They did not have a Court order or a
properly drawn amending agreement in January 1997 because they were not at each
others throats. Not to give the Appellant the benefit of any doubt as to the
application of a principle that at least restores the parties to the position
they were in before their ill-fated attempt to formalize a prior change in
support obligations, embarked on under a mutual mistake as to the consequences
of their actions, is to penalize harmonious separations that should be
applauded for their civility and respect for the best interests of their
children.
[28] For these reasons the
appeals are allowed on the basis that no commencement day has been created by
the notations made in 1999 on the 1994 Financial Agreement. The only agreement
under which deductible “child support amounts” could have been made was the
1994 Financial Agreement. Payments under that agreement were $820.00 per month.
Accordingly, the deductible “child support amount” in each of the subject years
is $820.00 per month, or $9,840.00 in each such year.
Signed at Ottawa, Canada this
8th day of May 2007.
Hershfield
J.
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