Clement v. The Queen, 2007 TCC 296 (Informal Procedure)

                                                                                            Court File No. 2005-4348 (IT) I

                                                                                                    CITATION: 2007TCC296

                                                 TAX COURT OF CANADA

                                                IN RE:   the Income Tax Act

BETWEEN:

ALLISON CLEMENT

Appellant

- and -

HER MAJESTY THE QUEEN

Respondent

- and -

                                                 ALESSANDRO D'OVIDIO

                                                                                                                             Third Party

REASONS FOR JUDGMENT DELIVERED

ORALLY FROM THE BENCH BY JUSTICE JOE E. HERSHFIELD

in the Courts Administration Service,

180 Queen Street West,

Toronto, Ontario

on Thursday, April 19, 2007 at 1:45 p.m.

APPEARANCES:

Mr. Theodore Cowdrey                                                                        Agent for the Appellant

Mr. Laurent Bartleman                                                                    Counsel for the Respondent

Also Present:

Mr. Alessandro D'Ovidio

                                       A.S.A.P. Reporting Services Inc. 8 2007

200 Elgin Street, Suite 1004              130 King Street West, Suite 1800

Ottawa, Ontario K2P 1L5                  Toronto, Ontario M5X 1E3

(613) 564-2727                                   (416) 861-8720

                                  Toronto, Ontario

REASONS FOR JUDGMENT

(Edited from the transcript of Reasons delivered orally from the Bench at

Toronto, Ontario on April 19, 2007)

JUSTICE HERSHFIELD:  The Appellant appeals a reassessment in respect of her 2003 taxation year which included in her income child support payments made by her former spouse in the amount of $9,600.  Pursuant to an order made under Subsection 174(3) of the Income Tax Act by Justice Bowie on January 4, 2007, the Appellant's former spouse, Alessandro D'Ovidio, was joined as a party to the appeal.

The Appellant and her former husband lived separate and apart since April 1996 because of the breakdown of their marriage.  A divorce judgment was issued in November 2002 by the Ontario Superior Court of Justice.  The Appellant and her former husband are the parents of three children over which they have joint custody, with the primary residence of the children being at the home of the Appellant.

A separation agreement was executed in 1996 pursuant to which the Appellant was required to pay for the support of the children the amount of $1,000 per month, $333 per child, with indexing.  Further contributions  towards certain child‑care costs were required as well.

The issue in this hearing is whether a commencement day was created after the 1996 agreement was entered into.  It is not in dispute that by oral agreement the fixed monthly payments reduced, in about June of 1998, to $800 per month or $266 per child per month.

There was an unsigned written amending agreement presented at the hearing.  This unsigned agreement reflects the change to the child support amount from $1,000 to $800.  The Appellant's testimony was that it reflected the amount of support being unilaterally imposed on her and was prepared on her husband's behalf.

Her ex‑husband testified that he had never seen the document.  He did acknowledge however that the support amount paid on a regular monthly basis or fixed monthly basis was reduced to $800 per month as per an oral agreement between them at that time, although he testified as well that he continued to pay other expenses for the children in various amounts which might have brought the total to some $1,000, or perhaps even in excess of $1,000 per month in some  years.

That was the state of affairs until November 2002 at the time of the petition for divorce.  As part of those proceedings in 2002 the parties signed an affidavit agreeing to support amounts of $266 per month per child.  A separate clause of the affidavit provided that based on costs for the children of approximately $800 per month it is agreed that the father pay $800 per month to the mother.

The affidavit and it's included written support payment agreement are witnessed by a commissioner for taking affidavits. There does not appear to be a disagreement that this agreement, reduced to writing, reflected the actual obligations accepted by and honoured by the parties since 1998.  This does not mean that they didn't disagree on a number of other points including in particular whether the change, even as far back as 1998, was intended to put the parties in the post‑1997 tax regime, which would deny child support deductions to the payer and allow receipts of child support amounts to be tax free to the recipient.

The Appellant's ex‑husband  says he was unaware of any such consequence then, in 1998, or later in 2002.  His suggestion is that his ex‑spouse unilaterally imposed the agreement on him to ensure a tax advantage to her.  The Appellant's testimony was that it was his idea in the first place and that he knew it was a change in the support obligations and even filed his post‑1998 tax returns claiming a reduced payment.

The Respondent's counsel pointed out inconsistencies in the Appellant's notice of objection relative to her testimony, and had the Appellant admit that she was now suing for arrears even though she testified that her ex had paid the $800 per month agreed upon.

I have listened to the witnesses.  I don't find either of them reliable. The hostility between them is still palpable and each spins testimony in a light believed at that moment to be favourable to their cause.  In these situations, the documents will speak for themselves.  Accordingly, I find that the November 2002 affidavit is a written agreement reducing child support from $1,000 to $800 per month and as such creates a commencement date as at November 18th, 2002, the date that the affidavit was sworn  before the commissioner.

I note here that it is Subsection 54.1(4) that defines when a commencement day is created.  It provides that such day, being the date the child support amounts commence being nondeductible and nontaxable, is created when the child support amount is varied.  Child support amount is also defined in that subsection as effectively being the amount received in the respect of the children under a written agreement.

The amount actually paid prior to December '02 and since the time of the oral agreement was arguably upward of $1,000 or more per month although the claim was only for $800 per month since the time of the oral agreement in about June of 1998.  This claim reflects the change in fixed monthly payments, whether or not it had to, based on the 1996 agreement. Whether or not it was so limited, would depend on whether the other expenses paid for the children, such as recreational expenses, could fall under the definition of child support even though they were not paid on a fixed periodic basis.

Regardless, what he is allowed or might have been allowed prior to November or December of 2002 is not an issue before me.  I am  concerned only with 2003 which will impact subsequent years as well as 2003.  If a commencement day is created, all payments in respect of the children are nondeductible and nontaxable at and from the commencement day.

Expanding the child support amount to include other expenses or limiting it to $800 makes no difference.  The question is whether the affidavit, the written agreement, changes the child support amount.  As stated, if it does, a commencement day is created and, as I've already stated, the affidavit does, in my view, meet the requirement for the creation of a commencement day. A Written agreement need not take any particular form.  The affidavit needed to include the written agreement as to support in order to get the divorce.  The divorce judgment itself says that the Judge grants the joint petition for divorce having read the affidavit of the petitioners.  An argument might even be made that it forms part of the order.  In any event, the Court needed the written undertaking that the parties were agreed as to the support, and the Court relied on it in giving or granting the petition of divorce.

There is no clearer case of where the statutory requirements have been met.  I also note before concluding that there are no mistakes here except perhaps in the mind of the Appellant's ex‑husband.  He says he didn't understand that signing the affidavit would have an adverse tax consequence.  This may or may not be true but that is not relevant.  He understood and intended the commercial result.  He understood and intended the family law result.  He knew that the new written understanding reflected the verbal agreement that he had honoured for four years. That he did not understand the tax results or intend the tax result is not relevant.  The motives of the parties are not relevant.

At the end of the day, the oral agreement did reduce the fixed amount that the Appellant's ex‑spouse had to pay.  It reduced it to the amount that both parties, reluctantly or not, had agreed to accept as child support.  They were bound in respect of this agreement, happily or unhappily, for four years.

However, for tax purposes, respecting the oral agreement at $800 per month did nothing to change the tax regime until it was rendered in writing.  For tax purposes, the regime changed when the agreement was reduced to writing and that happened in November 2002.

There is no doctrine of mistake or contract that can assist the Appellant's husband in these circumstances where there is a clash between the parties. Accordingly, the appeal and the joint application under Section 174 shall be disposed of on the basis that a commencement day was created on November 18th 2002, in effect, the Appellant has won her appeal.     That's my judgment and reasons, thank you.

‑‑‑ Upon concluding the Reasons for Judgment at 2:00 p.m.