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Citation: 2005TCC699
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Date: 20051027
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Docket: 2003-485(IT)G
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BETWEEN:
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ROBERT SEBAG,
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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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and
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MICHÈLE SALCITO,
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Added Party.
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[OFFICIAL ENGLISH
TRANSLATION]
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REASONS FOR JUDGMENT
Lamarre
Proulx J.
[1] On November 8, 2004, this Court made an order under
section 174 of the Income Tax Act (the “Act”) joining
Michèle Salcito to the appeal by the appellant. As a result, in this
appeal we have an appellant, an added party and the respondent.
[2] The issue is whether
for the 2000 and 2001 taxation years an amount of $50,000 in 12 monthly
instalments of $4,166.66 and an amount of $33,333 also in monthly instalments of
$ 4,166.66, paid by the appellant to the added party, are in the nature of
support amounts within the meaning of subsection 56.1(4) of the Act. If
such be the case, the appellant could claim these amounts as tax deductions under
paragraph 60(b) of the Act and, conversely, the added party would
have to include them in her income under paragraph 56(1)(b) of the Act.
[3] The Minister of
National Revenue (the
“Minister”) denied the $50,000 and $33,333 deductions claimed by the appellant.
In so doing the Minister followed this Court's decision of July 4, 2002,
allowing the appeal of Michèle Salcito for the 1999 taxation year and
determined that the periodic payments totalling $50,000 were not in the nature
of support amounts.
[4] With regard to the
Tax Court decision, it must be noted that the appellant was not involved in the
appeal proceedings and that since that decision there has been a judgment of
the Superior Court of Quebec, rendered on June 5, 2005, after a lengthy hearing,
dealing in particular with an application for support. This judgment, to which
I will refer later, has been filed as Exhibit A‑5.
[5] In making his
assessments, the Minister relied on the facts set out in paragraph 21 of the Reply to the Notice of Appeal
(the “Reply”) as follows:
[TRANSLATION]
(a) the appellant and
Michèle Salcito (hereinafter “ex‑wife”) were married on June 26th,
1978, and separated in 1993;
(b) they had two
children, Alexandra and Yannick;
(c) during the 2000
and 2001 taxation years, the appellant and his ex-wife were living separate and
apart;
(d) on August 3rd,
1993, the appellant and his ex-wife, with the assistance of their respective lawyers,
signed a written agreement (see Appendix A);
(e) clause 7 of the
agreement states that:
[TRANSLATION]
Instead of paying her a lump sum of $400,000, the husband shall pay the wife
support of $4,166.66 monthly for a fixed period of eight (8) years,
effective August 1, 1993; this amount will not be indexed, however the support
payments will be deductible from the husband's taxable income and shall be
reported by the wife as income;
(f) clause 8 of
the agreement states that:
[TRANSLATION] Subject
to all the foregoing, the parties acknowledge that no support or lump sum shall
be payable by either spouse for the maintenance of the other, each party
declaring himself/herself to be self-sufficient and able to provide for himself/herself,
and that their mutual support obligations have been terminated once and for
all; accordingly, the parties waive irrevocably any present, past or future
right to support, notwithstanding any changes that may occur in their
circumstances;
(g) in clause 9 the
parties agreed that the appellant would cover reasonable expenses related to
schooling, recreational activities and clothing;
(h) on November 6,
1997, the Honourable Justice Jean‑Louis Léger of the Superior Court ruled
on a motion for corollary relief brought by the ex-wife, setting at $2,000 per
month the amount of support payable by the appellant to his ex-wife for their
two children;
(i) the appellant
deducted for the 2000 and 2001 taxation years the aggregate amount of $50,000 (for
2000) and $33,333 (for 2001) as support amounts or other allowance payable on a
periodic basis for the maintenance of his ex-wife;
(j) the ex-wife did
not include in her income the aggregate amount of $50,000 for the 2000 taxation
year or $33,333 for the 2001 taxation year as support amounts or other
allowance payable on a periodic basis for her own maintenance;
(k) on June 28, 2002,
the Honourable Judge Lamarre of the Tax Court of Canada allowed the appeal by
the ex-wife and ruled that the periodic payments totalling $50,000 made by the appellant
herein to his ex-wife in the 1999 taxation year were not to be included in the
ex-wife's income as support amounts or other allowance payable on a periodic
basis.
[6] Mr. Robert Sebag, as the appellant,
and Ms. Michèle Salcito, as the added party, both testified.
[7] Counsel for the appellant
first referred to the settlement agreement signed on August 3, 1993, filed as Exhibit A‑1. The payments at issue were
made pursuant to this agreement signed by both parties.
[8] Counsel referred
specifically to clauses 7 to 9 appearing under the heading [TRANSLATION]
“Support and Other Maintenance” and to clauses 11 and 12 titled “Compensatory
Allowance”:
[TRANSLATION]
SUPORT AND OTHER
MAINTENANCE
7. Instead of paying her a lump sum
of $400,000, the husband shall pay the wife support of $4,166.66 monthly for
a fixed period of eight (8) years, effective August 1, 1993; this amount will
not be indexed, however the support payments will be deductible from the
husband's taxable income and shall be reported by the wife as income;
8. Subject to all the foregoing,
the parties acknowledge that no support or lump sum shall be payable by either
spouse for the maintenance of the other, each party declaring himself/herself
to be self-sufficient and able to provide for himself/herself, and that their mutual
support obligations have been terminated once and for all; accordingly, the
parties waive irrevocably any present, past or future right to support,
notwithstanding any changes that may occur in their circumstances;
9. With regard to the maintenance
of the children, the husband alone shall cover reasonable expenses for
schooling, sports, recreational activities and clothing for the children;
. . .
COMPENSATORY ALLOWANCE
11. Instead of dividing up the family
assets and by way of compensatory allowance, the husband shall pay the wife an
aggregate amount of $550,000 as follows:
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(a)
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$250,000 within thirty (30) days;
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(b)
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$150,000 within six (6) months;
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(c)
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$150,000 within a year;
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12. Furthermore, within thirty (30)
days, the husband shall purchase in the wife's name a new car, namely, a Lumina
APV, of which he is to bear the cost.
[9] Counsel for the appellant
asked him to explain the apparent contradiction between clauses 7 and 8.
[10] The appellant
explained that at the time of the separation, his ex-wife was 40 years old.
There was an understanding between the parties to the agreement that the payment
of support for a period of eight years should allow her to achieve
self-sufficiency. This is what clause 8 states. Clause 8 is subject to clause 7.
It is subject to the payment of support in the amount of $50,000 per year over
a period of eight years. In clause 8, the parties acknowledge that they have no
entitlement to support and no obligations with respect to support, effective
immediately for the husband and in eight years for the wife.
[11] The appellant
explained that in eight years one of their children would have reached the age
of majority and that the other would be 16 years old. Furthermore, under clause
9 of the agreement, the appellant alone was to cover reasonable expenses for
schooling, sports, recreational activities and clothing for the children.
[12] The appellant
testified that when signing the agreement both parties had the assistance of
their respective lawyers.
[13] Ms. Salcito testified that the amount
of $400,000 represented a lump sum set in advance and payable on a periodic
basis. She explained that at the time of their separation Mr. Sebag was unable
to pay her the full amount of the compensatory allowance and that they thus agreed
to payment in instalments.
[14] She admits having included
the amounts so paid in the computation of her income starting in 1993, the year
that the agreement was signed. She did so because this was what was specified
in the agreement. However, in her mind, it was the payment of a lump sum. Her
attention was drawn to her mistake by Revenu Québec agents and agents from the
provincial office for the collection of support payments. In 1999, she received
a full refund of the overpaid income tax from the Quebec government.
Submissions
[15] Counsel for the appellant
referred to the decision of the Federal Court of Appeal in Gagné v. Canada, [2001] F.C.J. No. 1573 (Q.L.), and more
specifically to paragraph 10 of that decision:
10 It is settled law, in Quebec
civil law, that if the common intention of the parties in an agreement is
doubtful, the judge [TRANSLATION] “must try to find what the parties truly
intended by their agreement” (Jean-Louis Baudouin, Les Obligations, 4th Ed.,
1993, Les Éditions Yvon Blais, p. 255). The judge must [TRANSLATION] “place
greater weight on the real intention of the contracting parties than on the
apparent intention, objectively manifested by the formal expression” (p. 255),
and he must ascertain the effect that the parties intended the contract to have
(p. 256). To do so, the judge must have a [sic] overall picture of the
parties’ intention, which calls for an analysis of all of the clauses in the
contract in relation to one another (p. 258). If there is any remaining doubt
as to the parties’ real intention, the judge may [TRANSLATION] “examine the
manner in which the parties conducted themselves in relation to the contract,
in their negotiations, and most importantly their attitude after entering into
the contract, that is, the manner in which the parties have interpreted it in
the past...” (pp. 258-259).
[16] Counsel pointed out
that the conduct of the parties after signing the agreement was this: the added
party included the amount in computing her income and the appellant deducted
that same amount. Counsel for the appellant also observed that the amounts paid
were so paid in accordance with clause 7 of the agreement and that this clause
appeared under the heading “Support and Other Maintenance”.
[17] Counsel for the appellant
submitted as well regarding this Court's judgment for the 1999 taxation year
that the appellant was not involved in the hearing that led to the judgment
issued on July 4, 2002.
[18] Counsel referred to
the judgment of the Superior Court of Quebec rendered in 2005 following a
lengthy hearing and in which it is noted in a number of paragraphs that support
was paid.
[19] Counsel for the added
party submitted that it is not for the parties to stipulate what may be
deducted under the Act, that the entitlement to deduct and the
duty to include in income are provided for rather by the Act. Accordingly,
one must not rely on what the agreement says with respect to the deduction and
the inclusion of the amounts in question.
[20] Counsel submits that
in clause 7 of the agreement there may be an Anglicism in that the French words
“au lieu de” really mean “in lieu of”. These words actually mean in
French “au titre de”. Clause 7 would then read: “Au titre d’un montant global de 400 000 $,
Monsieur paiera à Madame une pension alimentaire.” Thus, the true purpose of this clause was
to effect the payment of a lump sum of $400,000 over a fixed period of eight
years.
Analysis and conclusion
[21] With respect to this
Court’s decision of July 4, 2002, the reasons for judgment were read from the bench
and no transcript was requested. The decision is accordingly short and reads as
follows:
[TRANSLATION] The appeal from the
assessment made under the Income Tax Act for the 1999 taxation year is
allowed, without costs, and the assessment is referred back to the Minister of
National Revenue for reconsideration and reassessment on the basis that the
amount of $50,000 received by the appellant in that year did not constitute an
amount received as a periodic allowance for the maintenance of the appellant
within the meaning of subsection 56.1(4).
[22] As mentioned earlier,
the appellant was not involved in that hearing either as a witness or as an
added party. It should be noted also in this regard that the decision of the
Superior Court of Quebec had not yet been issued.
[23] While this Court is
not bound by the Superior Court’s decision, it was rendered following a lengthy
hearing and it is most interesting to read the various findings of the Superior
Court judge. In this connection, I refer to paragraphs 63, 64, 67, 78, 85, 91, 93, 94, 104, 187 and 188:
[TRANSLATION]
63 Furthermore, although they
negotiated the terms of their agreement directly, the parties were being
assisted by their respective counsel, in whose presence the agreement was in
fact signed.
64 In view of the foregoing, the
Court fails to see in the circumstances surrounding the execution of the agreement
any reason to set it aside.
. . .
67 Under the agreement, the wife:
(a) received a lump
sum amount of $400,000 as support for herself payable in 96 monthly instalments
of $4,166,66 (clause 7);
(b) received a
compensatory allowance of $550,000 payable in full within 12 months (clause 11);
and
(c) retained the
amounts paid in her name in a Registered Retirement Savings Plan, estimated at
approximately $250,000.
These amounts total
$1,200,000.
. . .
78 She says that she has had to
liquidate all her assets and spend the monthly support amount, which she was
receiving for herself, to provide for the children.
. . .
85 For all these
reasons, in light of the criteria set out in the Miglin case, the Court can
find nothing in the evidence that would justify setting aside the agreement
dated August 3, 1993, and the agreement will accordingly be confirmed by the
Court.
. . .
91 It seems
obvious that at that time Madam Justice Zerbizias merely confirmed the agreement
between the parties and added nothing to the husband's obligations with respect
to the support he was to pay to the wife.
. . .
93 The evidence
shows that, since August 2001, the husband has been paying the wife support of
$3,000 per month under an agreement signed on September 10, 2003 (for five
months), $2,000 per month in accordance with the order issued by
Justice Mongeon (for nine months) and $2,000 per month in accordance
with the interim order issued during the hearing of this case (for
eight months), for an aggregate amount of $49,000.
94 He now seeks
permanent discharge from this support obligation, since he has met all the obligations
he assumed in this connection in the agreement of 1993.
. . .
104 It is clear that the husband was
required to remedy the economic hardship that the breakdown of the marriage
would cause the wife and this is what he did when the parties agreed on a support
amount of $400,000 for her payable over a period of eight years.
. . .
187 CONFIRMS and
RENDERS ENFORCEABLE the agreement on corollary relief signed by the parties
on August 3, 1993, and ORDERS them to comply therewith;
188 DISMISSES
the applicant’s application for support.
[24] In the fact situation
described by the judge in the decision of the Superior Court of Quebec, there
was no need to determine whether the amount at issue in the present case
represented support or not. However, the judge always referred to it as a support
amount, both in setting out the facts described by the parties and in his
analysis of the facts and the law.
[25] I refer now to the
definition of “support amount” in subsection 56.1(4) of the Act:
“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
(b) the payer is
a legal parent of a child of the recipient and the amount is receivable under
an order made by a competent tribunal in accordance with the laws of a
province.
[26] A support amount is
an amount payable or receivable as an allowance on a periodic basis for the
maintenance of the recipient, who must have discretion as to the use of the
amount.
[27] It is true, as
stated by counsel for the added party, that the parties cannot themselves determine
what may be deducted and what must be included in the computation of income. It
is the provisions of the Act that govern the method of computation of
income. However, the terms of an agreement may be taken into consideration as
showing the intent of the parties thereto when executing the agreement.
[28] According to the
Federal Court of Appeal in the Gagné decision (supra), the judge
must have an overall picture of the parties’ intention, which calls for an
analysis of all of the clauses in the contract in relation to one another.
[29] Looking at the
relevant clauses of the agreement, which are quoted earlier in these reasons
for judgment, it seems to me they clearly indicate that what was to be
immediately payable to the ex-wife was not a lump sum but a support amount.
Instead of a lump sum, a support amount was to be paid. Even if I were to
accept the submission of counsel that the French words “au lieu” must be
read as meaning “au titre de”, the result would be the same: we are
dealing here not with the payment of a lump sum but rather with the payment of a
support amount.
[30] The parties have divided
the agreement into various sections and given each of these a heading. The
headings under which are found the clauses of the agreement that are of
interest to us are: [TRANSLATION] “Support and Other Maintenance” and [TRANSLATION] “Compensatory
Allowance”. To hold that a payment coming under the “Support” heading and so characterized
in clause 7 is not a support amount but a payment that must be added to
the compensatory allowance would amount to changing the intention of the
parties.
[31] In my view, the
wording of clause 7 of the agreement can admit of only one interpretation, namely,
that we are dealing here with a support amount. This support is limited both as
to its duration and its amount, but that does not alter its nature as a support
amount. The ex-wife was not gainfully employed at the time of the separation.
The payment of a periodic allowance over a period of eight years would allow
her to support herself during the period deemed necessary for her to become
self-sufficient and she had full discretion as to the use of this money. See in
this connection the decision of the Federal Court of Appeal in McKimmon v. M.N.R. (C.A.), [1990] 1 F.C. 600.
[32] In conclusion, the appellant
is entitled to deduct in computing his income the amounts paid under clause 7
of the agreement. The added party must include those amounts in her income.
[33] The appeal is
allowed with costs.
Signed at Ottawa, Canada, this 27th day of October 2005.
Lamarre
Proulx J.
on this 15th
day of May 2007.
Erich Klein, Revisor
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