|
Docket: 2004-4243(IT)I
|
|
BETWEEN:
|
|
PAUL M. MacDONALD,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent,
|
|
and
|
|
CAROL MacDONALD,
|
|
Third Party.
|
____________________________________________________________________
Appeals heard on September 16, 2005, at Toronto, Ontario, by
|
The Honourable Justice A.A. Sarchuk
|
|
|
|
Appearances:
|
|
|
|
For the
Appellant:
|
The Appellant
himself
|
|
Counsel for the
Respondent:
|
Jenny
Mboutsiadis
|
|
For the Third
Party:
|
The Third Party
herself
|
____________________________________________________________________
JUDGMENT
ON A DETERMINATION OF QUESTIONS
UNDER
SECTION 174 OF THE INCOME TAX ACT
By Order dated May 25, 2005, Carol MacDonald was added as a Third
Party to the appeal of Paul M. MacDonald for the purpose of determining the
following questions:
(a) Whether Carol MacDonald paid Child Support to the Appellant
in the 2000, 2001 and 2002 taxation years in the amounts of $6,072, $5,286 and
$3,184, respectively;
(b) Whether Child Support payments in the amounts of $6,072, $5,286
and $3,184 in the 2000, 2001 and 2002 taxation years, respectively, if paid,
were payable pursuant to a written agreement or order on or after its
commencement day;
(c) Whether the Child Support payments in the amounts of $6,072,
$5,268 and $3,184 in the 2000, 2001 and 2002 taxation years, respectively, if
paid by Carol MacDonald to the Appellant, are to be included in computing the
Appellant’s income pursuant to paragraph 56(1)(b) of the Act; and
(d) Whether the Child Support payments in the amounts of $6,072,
$5,268 and $3,184 in the 2000, 2001 and 2002 taxation years, respectively, if
paid by Carol MacDonald to the Appellant, are deductible in computing Carol
MacDonald’s income in the 2001 and 2002 taxation years pursuant to paragraph
60(b) of the Act.
Upon hearing the evidence of
the Appellant and the Third Party; and upon hearing submissions from all three
parties;
It is determined that the answer to question
(a) is yes; the answer to question (b) is no; the answer to question (c) is no;
and the answer to question (d) is no.
The appeals from
assessments of tax made under the Income Tax Act for the 2000, 2001 and
2002 taxation years are allowed, and the assessments are referred back to the
Minister of National Revenue for reconsideration and reassessment on the basis
that the Child Support payments in the amounts of $6,072, $5,268 and $3,184,
respectively, received by the Appellant are not to be included in computing his
income for those years
Signed at Ottawa, Canada,
this 1st day of November, 2005.
Sarchuk
J.
|
Citation: 2005TCC707
|
|
Date: 20051101
|
|
Docket: 2004-4243(IT)I
|
|
BETWEEN:
|
|
PAUL M. MacDONALD,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent,
|
|
and
|
|
|
|
CAROL MacDONALD,
|
|
Third Party.
|
REASONS FOR JUDGMENT
Sarchuk J.
[1] On
April 7, 2005, the Minister of National Revenue made an application pursuant to
section 174 of the Income Tax Act joining Carol MacDonald as a party to
the appeals of Paul M. MacDonald for the determination of questions in respect
of the:
(a) Notice of Reassessment dated
March 4, 2004, for the 2000, 2001 and 2002 taxation years, respectively; and
(b) A proposed reassessment in
respect of Carol MacDonald’s 2001 and 2002 taxation years (the 2000 taxation
year being statute-barred;).
On May 25, 2005, an Order was made by Bowman C.J. joining
Carol MacDonald as a party to the appeals of Paul M. MacDonald.
[2] The
questions in respect of which a determination is sought are:
(a) Whether Carol MacDonald paid Child Support to the Appellant
in the 2000, 2001 and 2002 taxation years in the amounts of $6,072, $5,286 and
$3,184, respectively;
(b) Whether Child Support payments in the amounts of $6,072,
$5,286 and $3,184 in the 2000, 2001 and 2002 taxation years, respectively, if
paid, were payable pursuant to a written agreement or order on or after its
commencement day;
(c) Whether the Child Support payments in the amounts of $6,072,
$5,268 and $3,184 in the 2000, 2001 and 2002 taxation years, respectively, if
paid by Carol MacDonald to the Appellant, are to be included in computing the
Appellant’s income pursuant to paragraph 56(1)(b) of the Act; and
(d) Whether the Child Support payments in the amounts of $6,072,
$5,268 and $3,184 in the 2000, 2001 and 2002 taxation years, respectively, if
paid by Carol MacDonald to the Appellant, are deductible in computing Carol
MacDonald’s income in the 2001 and 2002 taxation years pursuant to paragraph
60(b) of the Act.
Background
[3] The
Appellant, Paul MacDonald and Carol MacDonald (Carol) have been living separate
and apart from each other since November 18, 1993. They are the parents of two
children, Wesley, born July 27, 1983, and Loren, born March 6, 1986. On July
16, 1996, a separation agreement
was executed by the Appellant and Carol, the relevant portions of which provide
as follows:
7.1 The husband and the wife
have joint custody of the children, and the children will have their primary
residence in the home of the husband, and the husband will have the day-to-day
care and control of the children.
10 Child Support
10.1 Commencing on the 1st
day of May, 1996, the wife will pay to the husband for the support of the
children, the sum of $50.00 per month, per child (making a total of $100.00)
payable in advance on the 1st day of each month, until June 30,
1996.
10.2 The parties acknowledge
that the wife is no longer employed after June 30, 1996, and thereafter
child support will cease until such time as the wife obtains employment or the
wife has an annual income in excess of $10,000.00.
10.3 The wife will provide full
and complete financial disclosure to the husband and provide written notice to
the husband of her income from all sources commencing when she obtains
employment and annually thereafter by May 1st of each year.
10.4 It is the parties’
intention that the wife will resume paying ongoing monthly child support in
accordance with the Federal Child Support Guidelines, and indexed
annually in accordance with the cost of living, when her income from any source
exceeds $10,000.00 per annum. When the income of the wife exceeds $10,000.00
per annum, the parties will enter into an agreement amending this separation
agreement, to provide for the payment of child support. In the event that the
parties cannot agree on the appropriate amount of child support, either party
may resort to the provisions of this agreement with respect to dispute
resolution.
30.2 Any amendment of this
agreement will be unenforceable unless made in writing and signed by each party
before a witness.
[4] Carol
made no further contribution in 1996, albeit it is alleged that her earnings in
that year exceeded $20,000. In
1997, the first year following the execution of the separation agreement, an
issue arose as to the resumption of child support payments. The issue was considered
by both parties and on December 2, 1997, Carol’s solicitor advised the
Appellant’s solicitor that her client had obtained a fulltime position as at
December 15, 1997, and was prepared to pay child support pursuant to the Guidelines
in the amount of $285 per month. A series of post-dated cheques were enclosed,
dated for the first day of each month beginning January 1, 1998. The evidence is unclear as to what, if
any, payments were made in 1999, but there is no dispute that payments were
made by Carol in 2000, 2001 and 2002 in the amounts of $6,072, $5,268 and
$3,184, respectively. It is these amounts that are in issue.
Appellant’s position
[5] The
Appellant contends that paragraph 10.2 of the separation agreement clearly
establishes that as of June 30, 1996, child support ceased being paid by Carol.
He further maintains that paragraph 10.4 reflects their agreement that once
Carol was employed and earned an income in excess of $10,000 per year she would
resume paying child support in accordance with the Federal Child Support
Guidelines and that the parties would enter into a further agreement once
the appropriate quantum of child support was established. The Appellant
contends that it was understood by all of the parties at the time the original
agreement was entered into, that any child support which might subsequently be
paid by her would be in accordance with the new Guidelines and on “a tax‑neutral
basis to both parties”. The Appellant does not dispute that since
January 1, 1998, Carol made what he described as ad hoc payments on
account of support for the children, but says that these amounts were
determined at her sole discretion since there has never been an amending
agreement or court order with respect to her post-March 1997 child support obligations,
as was mandated by the original separation agreement.
Carol’s position
[6] The
separation agreement executed July 16, 1996 is still intact, and the support
payments were initiated and continued as intended therein. There was no
amendment to the agreement to provide for the payment of child support as
required by paragraph 10.4. Thus, she maintains that all of the subsequent
support payments were made according to the Federal Guidelines and
indexed annually as set out in paragraph 10.4 of the separation agreement. As
well, since the separation agreement was dated prior to the changes in the Income
Tax Act, it remained in force since any change in the agreement with
respect to child support would have to be by mutual consent or Court order.
That, she said, was not done.
Analysis
[7] The
issue before the Court is whether certain child support payments made in
taxation years 2000, 2001 and 2002 are to be included in computing the
Appellant’s income as required by paragraph 56(1)(b) of the Act,
and are deductible in computing Carol’s income in the 2001 and 2002
taxation years in accordance with paragraph 60(b) of the Act. The
answer to these questions depends whether the payments were (a) made pursuant
to a separation agreement signed July 16, 1996; (b) were made pursuant to an
agreement, or to an amendment thereto, made after April 30, 1997; or (c) were ad hoc payments.
[8] Payments
for the support of a child are deductible by the payer under paragraph 60(b)
and must be included in the income of the recipient under paragraph 56(1)(b).
However, these rules do not apply to child support payments required to be made
under agreements or orders made or varied after April 30, 1997. Payments made
pursuant to such orders will not be taxable in the hands of the recipient and
will not be deductible in the hands of the payer. Paragraphs 56(1)(b)
and 60(b) contain the formula “A - (B + C)” to describe the payments
that they cover. Amount “B” in the formula is the total of “child support
amounts” that became receivable during the year under an agreement or order
made or varied after April 30, 1997. The net result of the formula is that all
support amounts are deductible by the payer and included in the income of the
recipient except for the child support amounts described in B.
[9] Two
issues must be determined. First, was a commencement day as provided in
subsection 56.1(4) of the Act actually established; and second, if a
commencement day has not been established and the original separation agreement
remains in force, whether the child support payments made by Carol after 1997
were in fact child support payments made pursuant to that written agreement, or
whether they were ad hoc payments. The definition of commencement day is
found in subsection 56.1(4). It reads:
"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.
[10] In the present case, given the evidence, there can be no dispute that
subparagraph 56.1(4)(b)(i) is not relevant to the issue before the
Court. With respect to paragraphs (b)(ii) and (iii), the following
evidence must be considered. In a letter dated October 31, 1997, the Appellant’s solicitor appears to
have responded to an offer made by Carol’s solicitor by rejecting the amount of
child support offered as being well below the Guidelines in force at that time. On December 2, 1997, Carol’s solicitor
forwarded a letter to the Appellant’s solicitor, the relevant portions of which
read:
Further to our telephone
conversation of November 13, 1997, my client has just advised me that she has
obtained a full time position with a company in Richmond Hill as a Data Entry Clerk
in Customer Service beginning December 15, 1997.
…
As you were advised earlier, now
that my client has a full time position, she is prepared to pay child
support pursuant to the amount under the Child Support Guidelines. My
client’s annual earnings will be $20,800 per year. Pursuant to the Federal
Child Support Guidelines, the amount of child support payable for a payor
with two children with those earnings is $285 per month.
Therefore, I enclose a series of 12
post-dated cheques payable to your client, in the amount of $285 dated for the
1st day of each month, beginning January 1, 1998.
There is no
evidence of the existence of a written acceptance of these “terms”, however it is
not disputed that these cheques were accepted and cashed by the Appellant.
[11] The first question is whether the exchange of these two letters and
the cashed cheques can be read to have created a new agreement or varied the
existing separation agreement, in which case, either subparagraph 56.1(4)(b)(ii)
or 56.1(4)(b)(iii) of the definition of “commencement day” would apply.
I note that in either instance, if such a conclusion is warranted, the support
amounts would not be deductible to Carol or included in the Appellant’s income.
The July 16, 1996 agreement provided that once Carol was employed and
earned an income in excess of $10,000 per annum, she would commence paying
child support in accordance with the Federal Child Support Guidelines. It
was understood and indeed, it was clearly set out in paragraph 10.4 of the
agreement that it was necessary for the parties to enter into an agreement
amending the original separation agreement to provide for the renewal of
payments of child support. There is no dispute that a subsequent written
agreement or variation of the agreement, does not exist. Counsel for the
Respondent, who quite properly took a neutral role in the course of this
hearing, made reference to decisions of both the Tax Court and the Federal Court
to the effect that a written agreement does not necessarily require the
affixing of signatures of the parties and, that in certain circumstances, an
exchange of letters signed by solicitors of the taxpayer and the spouse with
the intent and effect of binding both the taxpayer and the spouse, was
considered to be adequate.
However, there is no evidence to support a conclusion that the letters in issue
were written with the intent and effect of binding the respective clients.
Furthermore, I am of the view that these decisions are distinguishable in that
paragraph 30.2 of the agreement in issue specifically provided that any
amendment thereto is “unenforceable unless made in writing, and signed by each
party before a witness”. That was not done.
[12] As a result of the foregoing, it becomes necessary to determine
whether the provisions found in paragraph 10.4 of the 1996 separation agreement
are still operative for this purpose. The evidence before the Court clearly
establishes that while those provisions of the separation agreement disclose an
“intention” that Carol would resume paying monthly child support when her
income reached a certain level, the language used does no more than set the
stage for the execution of a new agreement, or for a variation by way of an
amendment of the existing separation agreement with respect to the payment of
child support. That, as I noted earlier, was not done.
[13] 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.
[14] Accordingly, the answer to question (a) is yes; the answer to question
(b) is no; the answer to question (c) is no; and the answer to questions (d) is
no.
[15] The appeals for the
2000, 2001 and 2002 taxation years are allowed on the basis that the Child
Support payments in the amounts of $6,072, $5,268 and $3,184, respectively,
received by the Appellant are not to be included in computing his income for
those years
Signed at Ottawa, Canada, this 1st day of November, 2005.
Sarchuk
J.
Email this Content