|
Citation: 2003TCC712
|
|
Date: 20031008
|
|
Docket: 2000-2170(IT)G
|
|
BETWEEN:
|
|
LARRY PETERSON,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent,
98-2469(IT)I
2000-3286(IT)I
AND BETWEEN:
PATRICIA TOSSELL,
and
HER MAJESTY THE QUEEN,
Respondent.
|
REASONS FOR JUDGMENT
Mogan J.
[1] Larry Peterson married Patricia
Boyd in Ontario in 1970. There were three daughters born of the
marriage: Dana (1975), Lisa (1977) and Caroline (1981). Larry and
Patricia separated in 1991 and were divorced in 1995 or 1996. As
a result of the separation, Larry made monthly payments of $2,000
to Patricia from late 1991 to 1996; and he made a single payment
of $36,000 to Patricia in December 1996.
[2] When filing his income tax returns
for 1995 and 1996, Larry deducted $24,000 as maintenance paid in
each year and, for 1996, he also deducted $36,000 as maintenance
paid. By Notices of Reassessment the Minister of National Revenue
("the Minister") disallowed as deductions in computing
Larry's income the following amounts paid to Patricia:
$24,000 paid in 1995; $24,000 paid in 1996; and $36,000 paid in
December 1996. Larry has appealed to this Court from those
assessments (Court file 2000-2170).
[3] When filing her income tax returns
for 1995 and 1996, Patricia did not include in computing income
the $24,000 received on a monthly basis in each year; and she did
not include the single payment of $36,000 received in December
1996. By Notices of Reassessment the Minister included in the
computation of income the following amounts which Patricia
received from Larry: $24,000 received in 1995; $24,000 received
in 1996; and $36,000 received in December 1996. Patricia has
appealed to this Court from those assessments (Court files
98-2469 and 2000-3286).
[4] On March 13, 2002 the Minister
made an application to this Court under subsection 174(3) of the
Income Tax Act to join Patricia Tossell to the appeal of
Larry Peterson. By an Order issued on March 26, 2002, this Court
joined Patricia Tossell to the appeal of Larry Peterson with
respect to assessments of tax made for the 1995 and 1996 taxation
years for the purpose of the following four questions:
1. Are the
aggregate payments of $24,000 received by Patricia Peterson
(Tossell) from Larry Peterson in each of the 1995 and 1996
taxation years to be included in computing Patricia Peterson
(Tossell)'s income on the basis that they were payments
within the meaning of paragraph 56(1)(b) of the
Act?
2. Are the
aggregate payments of $24,000 paid by Larry Peterson to Patricia
Peterson (Tossell) in each of the 1995 and 1996 taxation years
deductible in computing Larry Peterson's income as payments
within the meaning of paragraph 60(b) of the
Act?
3. Is the
payment of $36,000 received by Patricia Peterson (Tossell) from
Larry Peterson in the 1996 taxation year to be included in
computing Patricia Peterson (Tossell)'s income on the basis
that it was a payment within the meaning of paragraph
56(1)(b) and subsection 56.1(3) of the Act?
4. Is the
payment of $36,000 paid by Larry Peterson to Patricia Peterson
(Tossell) in the 1996 taxation year deductible in computing
Larry Peterson's income on the basis that it was a
payment within the meaning of paragraphs 60(b) and
60(c) of the Act?
[5] The appeals of Larry Peterson and
Patricia Tossell were set down for hearing at Sault Ste. Marie
commencing on September 15, 2003, with the understanding that
evidence would be presented with respect to the four questions
asked in the Minister's application under subsection 174(3).
At the commencement of the hearing, counsel for the Minister and
Larry Peterson stated that all issues raised in his appeal with
respect to the 1997 taxation year had been settled on terms which
were recited in Court. Therefore, the only issues remaining to be
decided were the four questions set out in the Minister's
application under subsection 174(3).
The Facts
[6] The parties filed as Exhibit 1 a
document entitled "Statement of Admitted Facts" signed
by the three counsel for Larry Peterson, Patricia Tossell and the
Minister, respectively, on September 15, 2003, the first day of
the hearing. The first 18 paragraphs of Exhibit 1 contain only
facts. Paragraphs 19 to 30 of Exhibit 1 contain a summary of the
positions of the three parties with respect to the four questions
to be answered. Exhibit 2 is a binder with 11 tabs A to K
inclusive containing the documents referred to in Exhibit 1.
Although the basic facts are already recited above, I will set
out in full the content of Exhibit 1:
STATEMENT OF ADMITTED FACTS
1. Patricia
Jean Peterson, now Tossell ("Patricia"), and Larry
Douglas Peterson ("Larry") were married on August 29,
1970 and separated on January 1, 1991.
2. Patricia
and Larry had three children of the marriage a) Dana Patricia
Peterson born July 5, 1975; b) Lisa Maureen Peterson born
November 1, 1977; c) Caroline Jane Peterson born April 30,
1981.
3. On
September 5, 1991, Patricia and Larry entered into a written
separation agreement (the "Separation Agreement") in
which Larry was required to pay and Patricia entitled to receive
child support in the amount of $24,000 for the period from
September 1, 1991 to August 31, 1992. Pursuant to the Separation
Agreement, the amount of child support payable by Larry to
Patricia, would increase to $36,000 in the event that Patricia is
employed by someone other than the Peterson & Peterson law
firm. The Separation Agreement provided for an annual increase in
child support based on the increase in the cost of living index.
Tab A.
4. On or about
March 22, 1993, Larry began making payments that were less than
the amounts provided for in the Separation Agreement.
5. In May
1993, Patricia applied to the Family Support Plan Northern Region
to enforce the payment required under the Separation
Agreement.
6. Commencing
June 1993, Larry made payments of $1,000 twice a month to
Patricia's account in the Plan. The Plan paid to Patricia the
amounts collected on her behalf. Tab B.
7. On March 9,
1994, Patricia commenced an action by Statement of Claim in the
Ontario Court General Division against Larry to have the terms of
the Separation Agreement enforced. Larry filed a Defence and
Counterclaim on April 21, 1994. Tabs C and D.
8. By Petition
for Divorce dated June 1, 1995, Larry commenced divorce
proceedings against Patricia. Tab E.
9. The action
referred to in paragraph 7 was settled by Minutes of Settlement
dated and filed December 16, 1996 and resulted in an order dated
December 16, 1996 and March 27, 1997 (the "Order")
issued by Madam Justice Pardu. Tabs F and G.
10. Pursuant to paragraph
6 of the Order, Larry made a $36,000 payment to the Plan in
December 1996 in respect of retroactive additional periodic child
support for the twelve months from January 1, 1996 to and
including December 1, 1996;
11. At the time of this
$36,000 payment, the amount of arrears owing under the terms of
the Separation Agreement was of approximately $56,000;
12. Larry paid and
Patricia received monthly payments of $2,000 for a total of
$24,000 in each of the 1994, 1995 and 1996 taxation years;
13. In filing her 1994
income tax return, Patricia reported as income $24,000 child
support payments received from Larry;
14. In filing his 1994
income tax return, Larry deducted from income $24,000 child
support payments paid to Patricia;
15. In filing her 1995 and
1996 income tax returns, Patricia did not report as income the
$24,000 payments received from Larry in those years. Tabs H
and I.
16. In filing his 1995 and
1996 income tax returns, Larry deducted the $24,000 he paid to
Patricia as child support amount. Tabs J and K.
17. In filing her 1996
income tax return, Patricia did not report as income the $36,000
payment she had received from Larry in December 1996. Tab I.
18. In filing his 1996
income tax return, Larry deducted the $36,000 payment he made to
Patricia in December 1996. Tab K.
POSITION OF THE PARTIES
Patricia
19. Patricia takes the
position that the separation agreement was an interlinked
contractual arrangement for transfer of partnership and business
assets and liabilities, future employment of Patricia by Larry,
termination of the parties' law partnership, payments in lieu
of employment as well as child support dependant in level on
other terms of the contract, as set out at paragraphs 2 to 10 of
the agreement at Tab A.
20. Patricia alleges that
Larry breached the 1991 agreement on or about March 22, 1993
and repudiated the agreement on or before 1995, and again in
1996, and therefore it was not valid in respect of the 1995, 1996
and 1997 taxation years.
21. Patricia takes the
position that the aggregate payments of $24,000 she received in
each of the 1995 and 1996 taxation years and the $36,000 payment
she received in December 1996 were not received under a valid
order or agreement and are not to be included in income pursuant
to paragraph 56(1)(b) of the Act.
22. Patricia also alleges
that the $36,000 payment received in December 1996 was a single
payment.
23. Patricia takes the
position that as the $36,000 payment was not paid on a periodic
basis and therefore is not to be included in her income for 1996
pursuant to paragraph 56(1)(b) of the Act.
Ŀarry
24. Larry alleges that the
aggregate payments of $24,000 made in each of the 1995 and 1996
taxation years were paid under a valid order or agreement and are
deductible pursuant to paragraph 60(b) of the
Act.
25. Larry also takes the
position that the $36,000 payment is deductible pursuant to
paragraph 60(b) of the Act.
The Minister
26. The Minister takes the
position that the $24,000 payments made by Larry to Patricia in
each of the 1995 and 1996 taxation years were paid under a valid
order or agreement and are deductible pursuant to paragraph
60(b) of the Act.
27. The Minister takes the
position that Patricia is required to include the $24,000
payments she received in each of the 1995 and 1996 taxation years
on the basis that the amounts are within the meaning of paragraph
56(1)(b) of the Act.
28. The Minister also
takes the position that Larry is entitled to deduct $24,000 from
his income for each of the 1995 and 1996 taxation years on the
basis that the payments are within the meaning of paragraph
60(b) of the Act.
29. The Minister takes the
position that the $36,000 payment was not paid on a period basis
and therefore is not to be included in Patricia's income for
the 1996 taxation year on the basis that the amount is not within
the meaning of paragraph 56(1)(b) of the Act.
30. The Minister also
takes the position that Larry is not entitled to deduct the
$36,000 payment from his income in the 1996 taxation year on the
basis that the payment is not within the meaning of paragraph
60(b) of the Act.
[7] The most important issue in this
proceeding is raised in paragraph 20 of Exhibit 1 set out above:
whether Larry Peterson repudiated the separation agreement of
September 5, 1991 (Exhibit 2, Tab A) before 1995. Most of the
evidence was directed to that issue. For convenience, I shall
refer to the male Appellant as "Larry"; the female
Appellant as "Patricia"; and the agreement (Exhibit 2,
Tab A) of September 5, 1991 as the "Separation
Agreement". There is no other separation agreement.
[8] In these appeals, it is an
important fact that both Larry and Patricia are lawyers. They
were married in 1970 before they started law school. They
attended law school together and were both called to the bar of
Ontario in 1976. They were practising law in partnership in
1990-1991 when their marriage came apart. Their main office was
in Sault Ste. Marie but there were branch offices in Bruce Mines
and Blind River serviced only by Larry. He said that he would be
in the Sault Ste. Marie office on Monday, in Bruce Mines on
Tuesday, in Blind River on Wednesday, in Sault Ste. Marie on
Thursday and in Bruce Mines on Friday. Larry's father had
practised law in Bruce Mines. Patricia practised only in the
Sault Ste. Marie office on somewhat reduced hours because she was
the main provider of child care for their three daughters.
[9] On January 2, 1991, Patricia
informed Larry that she wanted to separate from him; that she
wanted the separation to be discreet and confidential in the
sense that they would continue to share the same dwelling but not
the same bedroom for the next few months; and that she wanted the
separation to be amicable in the sense that they would both give
priority to the interests of their three daughters. Larry agreed
to Patricia's proposal. They continued to reside in the
family home at 25 Alworth Place, Sault Ste. Marie until September
1, 1991 when Larry moved out but their marriage, as such,
effectively ended on January 2, 1991 when Patricia disclosed
for the first time her wish to separate.
[10] In April 1991 and again in August 1991,
Patricia attended two continuing education courses at York
University on the subject "Family Mediation". Although
she was not specialized in family law, she knew more about it
than Larry. In the summer of 1991, Patricia wrote out in hand
what was to become the Separation Agreement. Because their
separation was not yet public knowledge, the Separation Agreement
was not drafted or typed at the office. Near the end of August,
Larry brought home to 25 Alworth Place his computer and typed the
Separation Agreement from Patricia's handwritten notes. Larry
is an experienced typist. He testified that there was some
discussion/negotiation between him and Patricia as he typed but
he claimed that the only material change which he made to her
handwritten draft was to add the last sentence to paragraph
8.
[11] The Separation Agreement contains much
detail but it is not well drafted because it is too imprecise.
The quality of drafting is understandable when one considers the
anxiety and tensions which must have been present in the Peterson
home in July and August when Larry and Patricia were still under
the same roof but their de facto separation was in its
seventh and eighth month. Larry moved out on September 1, 1991.
The provisions for child support are intermingled with the
provisions for Patricia's continuation as a lawyer employed
in her husband's law firm. The most relevant provisions of
the Separation Agreement concerning child support are set out
below:
Joint Parenting to Continue:
Patricia and Larry have decided to separate from their marriage
to each other and are committed to continue in parenting the
children of the marriage.
Principal Residence
The children will have their principal residence with Patricia
and will spend time with Larry at their mutual convenience.
Patricia and Larry both love the children of the marriage and are
committed to minimizing the effect of the divorce on the children
and to ensuring that the children grow up in a secure and loving
environment.
...
1. Larry will
be the sole owner of his interest in Bruce-Algo Enterprises
Limited - Patricia releases her interest in this property - 1/5th
current FMV of $300,000.00.
Patricia will be the sole owner of the home and contents at 25
Alworth Place, Sault Ste. Marie - FMV $300,000.00.
...
PETERSON & PETERSON LAW PRACTICE
4. Patricia
will withdraw from the partnership known as Peterson &
Peterson. All professional fees and liability coverages shall be
paid by the firm.
5. As of
September 01, 1991 Patricia will become an employee of the law
firm Peterson & Peterson with a starting salary of $50,000
plus $24,000 (allowed for child support) per year and will be
guaranteed a position with the firm so long as Larry is a partner
in the firm and until Patricia reaches the age of 65 years in
lieu of a complete buy-out. Patricia's interest in the law
practice shall be transferred to Larry in trust and a pro-rata
portion of the capital will become Larry's absolutely for
each year Patricia remains an employee of the firm.
6. In the
event Patricia finds other suitable employment in Sault Ste.
Marie, at a minimum salary of $50,000 she will then receive
$36,000 from Larry as child support and other compensation from
Larry when funds are available for her equity in the law
practice.
6.1 The income tax
liability incurred during the fiscal year of September 1,
1990 to August 31, 1991 by Patricia shall be paid by the firm.
All income tax and other employee deductions on Patricia's
salary commencing September 1, 1991 shall be deducted from her
salary and remitted to Revenue Canada.
CHILD SUPPORT
7. For the
first year (September 1, 1991 to August 31, 1992) Larry, either
through the firm or personally, will pay Patricia, provided she
is an employee of the Peterson & Peterson law firm, $24,000
per year ($2,000 per month or $461.53 per week) child
support.
8. If Patricia
becomes employed by another employer, Larry will pay Patricia
$36,000 per year in child support and supplement Patricia's
income to $50,000 in the event her annual salary is less than
$50,000. It is agreed that should Patricia assume an employment
position which pays less than $50,000 per year that such position
will be mutually agreed upon by both Patricia and Larry.
8.1 Support for each child
shall continue until one of the following events occur:
-
child completes her first undergraduate degree or diploma
-
child attains the age of 22 years
-
child marries
-
child becomes self-supporting
-
child dies
8.2 The child support will
be increased annually based on the cost of living index.
Patricia's salary with the firm will be reviewed and
increased when agreed upon by Patricia and Larry but shall not be
less than $50,000 per year.
POST SECONDARY EDUCATION
9. It is
agreed that Larry will continue to pay the educational trust
funds established for each of the children including the lump sum
for Lisa and Caroline.
10. Patricia and Larry
will divide the additional costs of post secondary education for
the children.
[12] Patricia and Larry each testified at
length concerning the above provisions and the parol evidence
rule was, wisely in my view, never invoked. They were more in
agreement than disagreement on the meaning of the above
provisions. Relying on the above provisions and the oral
testimony of both Patricia and Larry, I find that the basic
agreement for child support in September 1991 was as follows:
(a) Larry was required to pay
$24,000 per year commencing September 1, 1991 so long as
Patricia was employed by Larry's law firm.
(b) If Patricia ceased to be employed
by Larry's law firm for any reason, Larry was required to pay
$36,000 per year.
(c) The references to Patricia having
a minimum lawyer salary of $50,000 per year whether working for
Larry or otherwise were not, directly or indirectly, any form of
child support because those references had three other
objectives: (i) Patricia's earnings as a lawyer; (ii) Larry
acquiring Patricia's interest in the law practice (see
paragraphs 5 and 6); and (iii) Patricia having a minimum
level of spousal support like alimony or maintenance (see
paragraphs 8 and 8.2 plus oral testimony of Patricia).
[13] Starting in September 1991, the minimum
salary of $50,000 and the child support of $24,000 were both paid
out of the Peterson law firm as if Patricia's gross annual
compensation were $74,000. The actual monthly payments were
complicated by the fact that Patricia had the use of a firm car
for which she was charged $6,000 per year. Therefore, the cash
payments to her on a monthly basis were determined by the
following computation:
|
Annual Salary
|
$50,000
|
|
Less car allowance
|
6,000
|
|
Subtotal
|
44,000
|
|
Plus child support
|
24,000
|
|
Net paid over 12 months
|
$68,000
|
Larry explained that the law firm held back source deductions
(income tax, EI and CPP) on only $50,000 and that only the
$50,000 was charged as an expense in computing the profit of the
law firm even though the firm had been the source of the child
support payments. I assume that each monthly payment of $2,000 by
the law firm for child support was charged to Larry as a draw but
there was no specific evidence on this point.
[14] The Separation Agreement appears to
have worked smoothly from September 1991 until March 1993. Larry
paid the child support of $2,000 per month; he deducted those
amounts in computing his income; and Patricia reported those
amounts as part of her income. In March 1993, Larry concluded
that he had a cash crisis in his law practice. He called a
meeting for Saturday, March 20 but Patricia did not attend. On
Monday, March 22, Larry sent a two-page letter to Patricia
(Exhibit T-1, Tab 3) expressing his disappointment at her failure
to attend the meeting. I will set out what I regard as the three
most important statements in that letter:
1. From August
'92 to February '93 your average monthly billing is
$3,472
2. You are
being paid a gross monthly salary of $5,667.
3. Your salary
is being cut by 50% to $34,000.
The second and third statements show the danger of
intermingling child support with Patricia's annual
compensation as a lawyer. In the second statement, the amount
$5,667 is one-twelfth of $68,000 which, as shown in paragraph 13
above, is a combined amount of child support plus annual salary
less a car allowance. In the third statement, the amount $34,000
is 50% of the same $68,000 combined amount.
[15] If the third statement is read
literally, it does not make any sense because Patricia never had
a salary of $68,000. When writing that third statement, Larry was
thinking only of the net cash ($68,000) which his firm was paying
to Patricia on an annual basis as child support and salary. In
paragraph 12 above, I summarized the basic agreement for child
support as, in part, requiring Larry to pay $24,000 per year so
long as Patricia was employed by his law firm. The amount of
child support payable by Larry was determined in the Separation
Agreement independent of Patricia's annual compensation as a
lawyer. Therefore, I construe the third statement as meaning that
the child support was to continue at $24,000 per year after
March 1993; and that Patricia's salary was reduced to
$10,000 ($24,000 plus $10,000 equals $34,000).
[16] Upon receiving the letter from Larry
dated March 22 (Exhibit T-1, Tab 3), Patricia obtained legal
advice from Lorna E. Rudolph, a lawyer in Sault Ste. Marie. Ms.
Rudolph's letter to Larry dated April 14, 1993 (Exhibit T-3)
states in part:
The result is, that you are required to pay Patricia the
$50,000 a year salary under the employment contract and you are
required to pay her the $24,000 per year child support.
... the fact that you decided to lump together the child
support as part of her salary ...
Those statements in Ms. Rudolph's letter are a clear
indication that Patricia saw her salary as totally separate from
the child support.
[17] After receiving Larry's letter of
March 22, Patricia never did return as a regular employee of
Larry's law firm. She worked on some files which were billed
through Larry's office. She took home other files (many legal
aid) which she billed on her own. And by the end of May 1993,
Patricia had decided to practise law alone out of her home.
Exhibit T-1, Tab 2 contains five cheque stubs for cheques issued
by Larry's firm to Patricia with the following
particulars:
|
1993 Date
|
Gross
|
Net
|
|
March 20
|
$2,606.60
|
$1,803.86
|
|
April 3
|
1,303.30
|
1,092.42
|
|
April 16
|
1,303.30
|
1,092.42
|
|
May 1
|
1,303.30
|
1,092.42
|
|
May 15
|
846.76
|
709.86
|
The first cheque represents pay for two weeks based on gross
annual compensation of $68,000. The next three cheques represent
pay for two weeks based on gross annual compensation of $34,000.
Larry wrote on the stub of the first cheque "child support
allocation $2,000"; and on the stub of the fourth cheque
"child support allocation $1,000". Those notations
indicate to me that Larry saw child support as a first charge on
any amounts paid to Patricia through his law firm payroll.
Patricia's evidence is that she did not cash any of the five
cheques until she had received independent legal advice that the
cashing of the cheques would not be construed as an admission
against her interest.
[18] Patricia did not regard any of the five
cheques as payment of child support. In May 1993, she applied to
the Ontario Family Support Plan (FSP) to enforce the child
support payments required under the Separation Agreement. Her
affidavit in support of her application to the FSP is Exhibit
T-1, Tab 4. Commencing in June 1993, Larry paid $1,000 twice a
month to Patricia's account in the FSP and the FSP remitted
the amounts to her. Exhibit 2, Tab B is a summary prepared by the
FSP showing amounts accrued and collected for Patricia during the
period May 25, 1993 to June 3, 1998. On the first day of each
month starting June 1, 1993, the FSP accrued $3,000 as the
"amount due". I assume that the FSP accrued the
$3,000 amount because either Patricia told them that that was the
support amount; or they read the Separation Agreement and
concluded that child support was $3,000 per month after Patricia
stopped being employed by Larry's law firm.
[19] The FSP accrued $3,000 each month as an
"amount due" but received only $2,000 each month as
paid by Larry. Over a period of time, following this pattern, the
FSP showed a growing balance of arrears owing by Larry. The
opening arrears ($8,182) in the FSP summary was never explained
in detail but part of it must represent the period March to May
1993 when Larry reduced the payments flowing from his law firm to
Patricia. In the 43-month period from June 1, 1993 to December
31, 1996, the FSP summary shows that Larry made 85 payments of
$1,000 each at the rate of two payments per month. Also, Patricia
acknowledged that Larry had paid $2,000 in that period for which
he did not receive credit in the FSP summary. Therefore, over the
43 months from June 1993 to December 1996 inclusive, Larry
paid either through the Plan ($85,000) or directly to Patricia
($2,000) an aggregate amount of $87,000.
[20] There is no doubt that in the period
June 1993 to December 1996, Larry was paying child support at the
rate of $2,000 per month when he should have been paying at the
rate of $3,000 per month because Patricia had ceased to be
employed by his law firm. In March 1994, Patricia filed a
Statement of Claim in the Ontario Court (General Division)
(Exhibit 2, Tab C) and sued Larry for specific performance of the
Separation Agreement, damages for breach of contract, damages for
wrongful dismissal, and other items. In April 1994, Larry filed a
Statement of Defence and Counterclaim (Exhibit 2, Tab D).
[21] On June 1, 1995, Larry filed in the
Ontario Court (General Division) a Petition for Divorce from
Patricia (Exhibit 2, Tab E). The Petition appears to be a
standard form of approximately 12 pages because many
"boilerplate" provisions are stroked out as not
applicable. In oral testimony, both Patricia and Larry testified
at length concerning items 27 to 30 in the Petition for Divorce.
Because these items are important, I will set them out as they
appear in Exhibit 2, Tab E except that I will omit words not
used:
27.(a) The existing arrangements between the
spouses for support for the children are as follows:
|
Amount Paid
|
Time period
(weekly, monthly, etc.)
|
Paid by
(husband or wife)
|
Paid for
(name of child)
|
|
$666.67
|
monthly
|
husband
|
Dana
|
|
$666.67
|
monthly
|
husband
|
Lisa
|
|
$666.67
|
monthly
|
husband
|
Caroline
|
(b) The existing support
arrangements are being honoured
28. The educational needs
of the children are being met
29. The following are all
other court proceedings with reference to the marriage or any
child of the marriage:
There is an Action presently before the Ontario Court (General
Division) in the District of Algoma, bearing Court File No.
13224/94.
DOMESTIC CONTRACTS AND FINANCIAL ARRANGEMENTS
30. The spouses have
entered into the following domestic contracts and other written
or oral financial arrangements:
Date
Nature of contract or
arrangement
Status
There have been no oral or written agreements.
[22] Item 30 of the Divorce Petition is
simply not true because Larry and Patricia had signed the
Separation Agreement on September 5, 1991 and, in June 1995 when
Larry filed the Divorce Petition, he was then paying child
support of $2,000 per month. When Patricia read item 30, she
concluded (i) that Larry had repudiated the Separation Agreement;
(ii) that the child support of $2,000 per month which she
received in 1995 was not paid under a written agreement; and
(iii) that she was not required to include in her income the
$24,000 which she was receiving from Larry in 1995.
Patricia's Notice of Appeal to this Court for 1995 stated in
part:
Larry Peterson was not paying the child support pursuant to
the 1991 Separation Agreement because, in his Petition for
Divorce dated June 1, 1995 he declared, in writing, to the
divorce court who granted his divorce that "there was no
oral or written agreement" in effect between the parties. He
was unilaterally paying $2,000.00 per month ...
Similarly, in her Notice of Appeal to this Court for 1996,
Patricia stated in part:
... Larry Peterson also claimed in his 1995 Petition for
Divorce that there was no written or oral agreement between the
parties and stated he was voluntarily paying $2,000.00 per month
in child support to me. Although I sought to have the Agreement
enforced by the Family Responsibility Office and then the Ontario
Court General Division from March 1993 to December 1996, I was
unsuccessful.
In the passage just quoted, Patricia made a statement which is
clearly inaccurate: "Larry Peterson ... in his 1995
Petition for Divorce ... stated he was voluntarily paying
$2,000 per month in child support to me". Larry made no such
statement in the Petition for Divorce.
[23] Larry attempted to explain item 30 by
saying that he thought it referred to any "new" written
or oral agreements. I do not know what he means by
"new" and this was not pursued in evidence. Matti E.
Mottonen was Larry's counsel for both the 1994 legal action
commenced by Patricia and the 1995 Divorce Petition filed by
Larry. Mr. Mottonen testified in this matter and he explained
item 30 as a mistake or oversight because it was obviously
inaccurate. In his mind, there was no question that the
Separation Agreement was in full force and effect.
Mr. Mottonen also pointed out that item 29 of the Divorce
Petition referred to the 1994 legal action commenced by Patricia
in which both she and Larry relied on the Separation Agreement.
Patricia's Statement of Claim had 37 paragraphs and
Larry's Statement of Defence and Counterclaim had 91
paragraphs. Although item 30 is inaccurate with respect to a
material fact, when I consider the specific reference to the
legal action in item 29, it is not possible for me to conclude
that Larry or Mr. Mottonen had any intent to mislead the Ontario
Court in the divorce proceeding.
[24] As stated in paragraph 9 of Exhibit 1
(Statement of Admitted Facts), the legal action commenced by
Patricia against Larry in the Ontario Court (General Division)
was settled in December 1996. There was a pre-trial conference on
December 16, 1996 with Madam Justice Pardu. It appears that the
conference lasted more than eight hours from mid-morning until
early evening. At the end of the conference, Minutes of
Settlement were signed by both Patricia and Larry and their
respective counsel. The Minutes of Settlement (Exhibit 2, Tab F)
were hand-written by Larry's counsel, Matti E. Mottonen, a
Sudbury lawyer. Paragraph 6 of the hand-written Minutes of
Settlement states:
(6) Defendant will
pay retroactive additional periodic child support to the
plaintiff for each of the aforementioned children in the amount
of $36,000 for the 12 months from January 1st, 1996 to and
including December 1st, 1996. Payments are taxable in hands of
plaintiff and tax deductible by defendant.
[25] On December 31, 1996, there was a
conversation between Larry and his oldest daughter Dana (then in
second year university) in which he stated what support he would
be paying her in future. When Dana reported the conversation to
her mother, Patricia concluded that Larry was or would be in
breach of the Minutes of Settlement. Madam Justice Pardu had not
yet issued an order to implement the Minutes of Settlement.
Patricia therefore brought a fresh motion before Madame Justice
Pardu to interpret the Minutes of Settlement and enforce them
with a court order. The motion came before Judge Pardu on March
27, 1997. The Judge dictated a three-page memorandum to file
(Exhibit T-1, Tab 10) and then issued an Order (Exhibit 2, Tab G)
dated December 16, 1996 and March 27, 1997 which was, in
substance, on the same terms as the Minutes of Settlement.
Paragraph 6 of the Order (Exhibit 2, Tab G) states:
6. THIS COURT
ORDERS that the Defendant shall pay retroactive additional
periodic child support to the Plaintiff for each of the
aforementioned children of the marriage in the amount of
$36,000.00 for the twelve months from January 1st, 1996 to and
including December 1st, 1996. The payments are taxable in the
hands of the Plaintiff and tax deductible by the Defendant.
Analysis - Did Larry Repudiate the Separation
Agreement?
[26] The main argument of Patricia's
counsel is that Larry breached the Separation Agreement on or
about March 22, 1993 and that he repudiated the agreement before
1995 and again in 1996. See paragraph 20 of Exhibit 1 set out in
paragraph 6 above. Patricia relies on repudiation because, if
Larry did repudiate the Separation Agreement, then the monthly
payments of $2,000 which he made after such repudiation would not
be "received under ... a written agreement" within
the meaning of paragraph 56(1)(b) of the Income Tax
Act as it applied to 1995 and 1996.
56(1) Without restricting the generality of
section 3, there shall be included in computing the income of a
taxpayer for a taxation year,
(a)
...
(b) an amount
received by the taxpayer in the year as alimony or other
allowance payable on a periodic basis for the maintenance of the
taxpayer, children of the taxpayer or both the taxpayer and the
children if the taxpayer, because of the breakdown of the
taxpayer's marriage, was living separate and apart from the
spouse or former spouse who was required to make the payment at
the time the payment was received and throughout the remainder of
the year and the amount was received under a decree, order or
judgment of a competent tribunal or under a written
agreement;
[27] Patricia relies on the following
evidence in support of her argument that Larry repudiated the
Separation Agreement. First, in the financial statement which he
filed in connection with her legal action (Exhibit T-1, Tab 6),
he assigned values to certain properties which were allocated
between him and Patricia in the Separation Agreement different
from the values used in that agreement. Second, he retained all
the rents from the building in which he carried on his law
practice when, under paragraph 3 of the Separation Agreement, he
and Patricia owned that building as tenants-in-common. Third, he
reduced her salary to less than $50,000 in conflict with
paragraph 5 of the Separation Agreement. And fourth, his big
reduction of her salary on March 22, 1993 was constructive
dismissal, and was breach of a fundamental term of the Separation
Agreement. I will consider these arguments in order.
[28] First, considering the property values
in Larry's financial statement (Exhibit T-1, Tab
6) being different from the values in the Separation Agreement, I
do not regard his different values as being even a breach of the
Separation Agreement, let alone a repudiation. The financial
statement was prepared in May 1994, almost three years after the
Separation Agreement of September 1991. In paragraphs 1, 2 and 3
of the Separation Agreement, Larry and Patricia were
over-reaching in a co-operative spirit to find balancing values
for the properties which they were dividing and allocating.
According to their common testimony, they were trying in the
summer of 1991 to have an amicable separation. In May 1994,
Patricia had sued Larry claiming significant amounts and, in his
financial statement, he was entitled to use hindsight to
reconsider property values which had never been tested on the
open market.
[29] Second, considering their common
ownership of the building in which Larry carried on his law
practice, if Larry and Patricia as owners/landlords were earning
a profit from the property, Larry was obliged to share that
profit 50/50 with Patricia. There is no evidence as to whether
ownership of that building was producing a profit. Were there
other tenants beside Larry's law firm? Was there a mortgage
on the building? What were the annual expenses? Was the rent
adequate to cover expenses and depreciation? Even if there were
an "owner's profit" which Larry had not shared with
Patricia, he would be in breach of only paragraph 3 of the
Separation Agreement. Such a breach could be rectified by a court
order requiring Larry as co-owner to account to Patricia as the
other co-owner. Such a breach would not be repudiation.
[30] I will review together the third and
fourth arguments for repudiation considering Larry's letter
of March 22, 1993 (Exhibit T-1, Tab 3) cutting Patricia's
salary and causing her to leave his law firm. This conduct by
Larry may have been a significant breach of contract. I say
"may have been" because there was a conflict in
evidence between Larry and Patricia as to what her obligations
were as an employed lawyer. In her Statement of Claim (Exhibit 2,
Tab C), Patricia alleged:
24. The parties by their
agreement intended to provide:
(1) for a level of
remuneration and financial support for the Wife sufficient to
enable her to continue the children's standard of living at
the level which existed before the separation, and
(2) for periods of
time which would allow the Wife to attend to her responsibility
for the continuing care of the children.
(3) for a period of
time to allow the Wife to expand her legal experience which due
to the time she spent caring for the children was restricted to
solicitor's work, and particularly estate work.
25. The consideration for
payments to the Wife under the agreement consisted of:
(1) the transfer in
trust to the Husband of her interest in Peterson & Peterson
including accounts receivable, work in progress, and a deferral
of the Wife's compensation for her share in the practice;
(2) provision of
services as an employee of Peterson & Peterson; and,
(3) payments in lieu
of spousal support which were a deductible business expense;
(4) fixed child
support.
In his Statement of Defence (Exhibit 2, Tab D), Larry denied
paragraphs 24 and 25 of the Statement of Claim; and he alleged in
paragraph 35:
35. ... the Plaintiff
had committed herself to be employed on a permanent and full-time
basis as an employee of the Law Firm of Peterson & Peterson.
The Plaintiff neglected to carry out her duties and in fact did
not carry out her employment on a full-time and permanent basis
with the firm. ... after the execution of the Separation
Agreement the Plaintiff chose not to work diligently at the
Defendant's Law Firm and earn a meaningful and proper salary.
...
and in paragraph 36:
36. ... the Plaintiff
voluntarily terminated her employment with the Defendant's
Law Firm. ... the Plaintiff's work was below acceptable
standards and the Plaintiff's billings were extremely low and
not up to the same standard that the Plaintiff exhibited prior to
the execution of the Separation Agreement on September 2, 1991.
...
[31] The issue of Patricia's claimed
wrongful dismissal in March 1993 was an important part of the
litigation commenced by her against Larry in March 1994. That
litigation was resolved by Minutes of Settlement (Exhibit 2, Tab
F) signed on December 16, 1996 and by the Court Order issued on
March 27, 1997 (Exhibit 2, Tab G). At the hearing in this Court,
Patricia testified first and Larry second. After Larry's
testimony, Patricia's counsel stated that he would recall
Patricia for reply testimony, and he proposed to call two new
witnesses who would support her claim for wrongful dismissal in
March 1993. Larry's counsel and counsel for the Minister
objected to testimony from the two new witnesses on the basis of
relevance. Also, Larry's counsel stated that, if two new
witnesses for Patricia were permitted to testify, he would call
two other new witnesses to support Larry's claim that his
letter of March 22, 1993 was justified.
[32] I ruled against hearing any new
witnesses give evidence on the issue of whether Patricia was
wrongfully dismissed in March 1993 because that issue is not
relevant to the four questions which I am required to answer in
the section 174 proceeding. See paragraphs 4 and 5 above.
That issue could have been litigated in the action which Patricia
commenced in March 1994 but that action was settled. Also, it
would be more difficult to obtain reliable oral testimony in
September 2003 (ten years after the events of March 1993) than in
1994 and 1995 when the events of March 22, 1993 were fresh in the
memory of all concerned.
[33] Patricia's real reason for wanting
to prove that she was wrongfully dismissed in March 1993 is her
desire to prove that Larry had repudiated the Separation
Agreement. My ruling against hearing new witnesses on the issue
of wrongful dismissal was founded on relevance but, since the end
of the hearing, I have other reasons to support that ruling.
After hearing arguments by all three counsel, I have concluded
that Larry did not repudiate the Separation Agreement at any time
even if it could be proven that he wrongfully dismissed Patricia
in March 1993. I will consider the absence of repudiation from
two points of view: (i) the performance of the Separation
Agreement as contrasted with its breach; and (ii) if there were
any act of repudiation by Larry (and I conclude there was not),
such act of repudiation was never accepted by Patricia.
[34] Since Patricia and Larry signed the
Separation Agreement on September 5, 1991, there has been
substantially more performance and compliance than there has been
any breach or breaches. The operative paragraphs begin on page 2
of the Agreement. Patricia and Larry complied with paragraph 1
when they divided and allocated Bruce-Algo Enterprises Limited
and the family home at 25 Alworth Place. They complied with
paragraph 2 when they divided and allocated Coppertown
Investments Limited and the cottage at Beech Beach. They complied
with paragraph 3 when they changed the ownership of 626
Wellington Street from life tenancy to tenants-in-common. They
complied with paragraph 4 when Patricia withdrew from the
partnership and Larry obtained her release from any liability at
the bank with respect to the law practice. They complied with
paragraph 5 when Patricia was employed by Larry for 18 months
(September 1991 to March 1993) at an annual salary of $50,000.
Whether Larry or Patricia was in breach of the employment
provisions in March 1993, I will not attempt to decide more
than ten years after the relevant period.
[35] Having regard to child support, there
was total compliance when the three daughters had their principal
residence with Patricia from September 1991 until after 1996, and
when Larry paid $2,000 per month to Patricia from
September 1991 to March 1993. In April and May 1993, Larry
was in breach of the child support provisions when he paid to
Patricia lesser amounts which cannot be identified with certainty
as being reduced salary or primarily child support. Larry was in
substantial performance and compliance with his child support
obligations in the 43-month period from June 1993 to December
1996 when he paid $2,000 per month to the Family Support Plan;
but he was also in breach of his child support obligations in
that same 43-month period by paying only $2,000 per month when he
should have been paying $3,000 per month. See paragraph 12 above
in which I make a finding with respect to the basic agreement for
child support.
[36] There was a disagreement between Larry
and Patricia concerning the cost of post secondary education for
Dana, the oldest daughter, who started university in the fall of
1994. That disagreement was resolved in the first paragraph of
the Minutes of Settlement (Exhibit 2, Tab F) and the Court Order
(Exhibit 2, Tab G) under which Larry was required to make certain
monthly payments directly to Dana. The two younger daughters had
not yet started post secondary education in the fall of 1996.
Having regard to all the provisions in the Separation Agreement,
I am satisfied that Patricia and Larry performed their
obligations and complied with the terms of the Agreement to a
much greater extent than any breaches which occurred.
[37] Patricia's counsel argued that
Larry's termination of Patricia (as employee) in March 1993
was breach of a fundamental term and therefore repudiation in
itself. Mr. Fitzgerald relied on paragraph 14 of the Separation
Agreement which stated:
WAIVER OF SUPPORT OF BOTH SPOUSES
14. In consideration of
the above agreed upon property settlement and other terms herein
contained, neither Patricia nor Larry are in need of alimony,
support, maintenance, or maintenance and support and hereby
releases and discharges the other from any and all support
obligations which may arise as a result of the marital
relationship.
Counsel argued that the words "... and other terms
herein contained ..." were a direct reference to
Patricia's ability to support herself as an employed lawyer.
If I am to accept that argument, there must have been some
minimum level of legal services which Patricia would provide in
order to earn a salary which Larry would "top up" to
$50,000 per year. The difficult question is whether Patricia was
performing that minimum level of legal services in the winter of
1992-1993.
[38] Patricia and Larry appear to have
assumed in the Separation Agreement that, if she ever left
Larry's law firm, she would be employed as a lawyer by some
third party. Paragraphs 6 and 8 of the Separation Agreement refer
to Patricia finding "other suitable employment" and
becoming "employed by another lawyer". The Separation
Agreement does not contemplate her starting her own law practice
from scratch as she did in June 1993. If she had become employed
as a lawyer by some third party, Larry had an obligation
(paragraph 8) to supplement or "top up" her income to
$50,000. If Patricia had a good claim for wrongful dismissal in
March 1993 when she left Larry's law firm and started her own
practice, it would be more difficult to measure Larry's
"top up" obligation.
[39] I will assume (and I regard it as a
generous assumption) that Larry's termination of Patricia as
an employee in March 1993 was a breach of a fundamental term of
their Separation Agreement and a potential repudiation of the
Agreement. There is a well established principle of contract law
that repudiation by one party must be accepted by the other
party. Chitty on Contracts (27th Edition) 1994, contains
the following passage at page 1158:
Acceptance of repudiation. Where there is an anticipatory
breach, or the breach of an executory contract, and the innocent
party wishes to treat himself as discharged, he must "accept
the repudiation," This is usually done by communicating the
decision to terminate to the party to default, although it may be
sufficient to lead evidence of an "unequivocal overt act
which is inconsistent with the subsistence of the contract
... without any concurrent manifestation of intent directed
to the other party." Unless and until the repudiation is
accepted the contract continues in existence for "an
unaccepted repudiation is a thing writ in water." Acceptance
of a repudiation must be clear and unequivocal and mere
inactivity or acquiescence will generally not be regarded as
acceptance for this purpose. ...
[40] The Law of Contract in Canada by
G.H.L. Fridman (1976) contains the following passages:
At page 519:
The problem of what sort of conduct constitutes a repudiation
of a contract is one that has exercised the courts for a long
time. To some extent it is not unlike (indeed it may even be a
variation of) the question, already canvassed in another chapter,
of the distinction between terms in a contact which are of a
basic, even a fundamental nature, and terms of lesser importance.
Breach of the former, as seen earlier, gives rise to rights of
repudiation and rescission on the part of the innocent party;
breach of the latter entitled the innocent party only to claim
damages. ...
At page 524:
"An unaccepted repudiation", said Asquit L.J. in one
English case, "is a thing writ in water and of no value to
anybody; it confers no legal rights of any sort or kind".
Although this graphic expression has been said to be limited by
the facts of the case in which it occurred, and not to be
applicable where the repudiation takes place "when
performance is tendered or due to be given by the other
party", the phrase does have some merit, and does put
succinctly an important aspect of the law relating to discharge
by repudiation or anticipatory breach. Such repudiation will not
effectively terminate the contract unless the innocent party does
accept the repudiation, and is prepared to treat the contract as
ended. The innocent party, in effect, has an election whether or
not to treat the contract as continuing or as ended, once the
party has committed an act which, in accordance with what has
been said above, can be regarded as repudiating the contract.
...
At page 526:
Thus there is a distinction between repudiation that is
accepted and repudiation which is not regarded and treated by the
innocent party as the renunciation and discharge of the contract.
An accepted repudiation is of legal effect: a repudiation that is
not accepted is not effective in law (as contrasted with its
effect in fact) to determine the contract. The crucial question
is whether the innocent party has exercised his option or
election in favour of treating the contract as at an end. This
choice, which will be binding once it is made, must me made
within a reasonable time, i.e., after the innocent party has
discovered the situation giving rise to the choice of action
which is open to him. If he delays at sufficient length to
prejudice the other party or third parties by his eventual course
of action or so long that his conduct can be regarded as
acceptance of the repudiation, the innocent party, in effect will
lose his right of election. ...
[41] Having assumed that Larry repudiated
the Separation Agreement in March 1993, I cannot find any
evidence that Patricia accepted that repudiation at any time.
Quite the contrary, there is strong evidence that she continued
to rely on the Separation Agreement. In March 1994, one year
after the assumed repudiation, Patricia sued Larry. The first
claim in her Statement of Claim (Exhibit 2, Tab C) speaks for
itself:
1. The
plaintiff claims AS AGAINST THE DEFENDANT HUSBAND:
(1) Specific
performance of the agreement dated September 2, 1991 made between
the Wife and the Husband, and particularly the obligations of the
Husband to pay to the Wife:
(a) up to $50,000.00
each year for her interest in Peterson & Peterson until she
reaches the age of sixty-five (65) years;
(b) $1,000.00 each
month per child for the support of the children (making a total
of $3,000.00 each month for three children);
In Larry's Statement of Defence and Counterclaim (Exhibit
2, Tab D), he made the following statement in paragraph 53:
53. The Defendant pleads
and relies upon the provisions of the Separation Agreement
entered into between the Parties and dated September 2, 1991.
[42] There is no merit in the argument that
Larry repudiated the Separation Agreement in March 1993. First,
he never stated or implied that he was repudiating the Agreement.
Second, he continued to honour a substantial part of the child
support provisions by paying $2,000 per month from June 1, 1993
to December 31, 1996. Third, he clearly alleged in his Statement
of Defence and Counterclaim that he relied on the Separation
Agreement. See paragraph 53 quoted above. And fourth, from March
1994 (the filing of her Statement of Claim) to December 1996 (the
pre-trial before Judge Pardu), Patricia did not amend her
Statement of Claim to withdraw her claim for specific performance
or to accept any purported repudiation.
[43] I find that Larry did not at any time
repudiate the Separation Agreement. I have no hesitation in
making that finding. Paragraph 4 above contains the four
questions I am required to answer under the Court Order issued
pursuant to section 174 of the Income Tax Act. Having
found that there was no repudiation of the Separation Agreement,
the first two questions must be answered in the affirmative. In
other words, Patricia is required to include in computing her
income for 1995 and 1996 the $24,000 which she received in each
year from Larry as child support because those amounts were
received "under a written agreement". Larry is
permitted to deduct in computing his income for 1995 and 1996 the
$24,000 which he paid in each year to Patricia as child support
because those amounts were paid "under a written
agreement".
Analysis - What is the character of the $36,000
payment?
[44] I now turn to the single payment of
$36,000 which Larry made to Patricia in December 1996. That
payment was made as a consequence of the pre-trial conference
held on December 16, 1996 before Madam Justice Pardu. The payment
appears on page 4 of Exhibit 2, Tab B which is a schedule of
amounts received by the Family Support Plan from Larry. The
schedule shows the $36,000 as "paid" on January 6, 1997
but the parties are in agreement that Larry paid the amount and
the Plan received the amount (as agent for Patricia) in the last
few days of December 1996. See paragraph 10 of Exhibit 1, the
Statement of Admitted Facts.
[45] The $36,000 amount was paid pursuant to
the Minutes of Settlement actually signed on December 16, 1996
and pursuant to the Court Order dated December 16, 1996 and March
27, 1997. Although the relevant provisions of the Minutes of
Settlement and Court Order are set out in paragraphs 24 and 25
above, they are worth repeating here because of their
importance:
Minutes of Settlement (Exhibit 2, Tab F):
(6) Defendant will
pay retroactive additional periodic child support to the
plaintiff for each of the aforementioned children in the amount
of $36,000 for the 12 months from January 1st, 1996 to and
including December 1st, 1996. Payments are taxable in hands of
plaintiff and tax deductible by defendant.
Court Order (Exhibit 2, Tab G):
6. THIS COURT
ORDERS that the Defendant shall pay retroactive additional
periodic child support to the Plaintiff for each of the
aforementioned children of the marriage in the amount of
$36,000.00 for the twelve months from January 1st 1996 to and
including December 1st, 1996. The payments are taxable in the
hands of the Plaintiff and tax deductible by the Defendant.
[46] There is a well-established principle
that a provincial court with jurisdiction in family law matters
may not, for income tax purposes, determine the character
(taxable or not; deductible or not) of a payment flowing from one
spouse to another. I considered this question in the appeal of
Elizabeth Bates, 98 DTC 1919. After reviewing other
decisions in Sigglekow, 85 DTC 5471, Arshinoff,
[1994] 1 C.T.C. 2850 and Halligan, [1996] 2 C.T.C. 2555, I
stated at page 1924:
[16] The superior court of any
province has jurisdiction to order payments for the maintenance
of a spouse or children upon the break-up of a marriage. That
jurisdiction does not include the authority to determine the
character of those payments as being taxable or tax-free for
purposes of the Income Tax Act. Once the superior court of
a province has ordered maintenance payments on a marriage
break-up, the character of those payments as taxable or not
taxable will be determined by the conditions in paragraphs
56(1)(b) and 56(1)(c) of the Income Tax Act.
If I had any doubt concerning separate jurisdictions with respect
to ordering maintenance payments and determining the tax
character of such payments, I would rely on the following
statements of Cory, J. and Iacobucci, J. in The Queen v.
Thibaudeau, 95 DTC 5273 at 5275: ...
Significant amendments to the Income Tax Act taking
effect May 1, 1997 bring into play other sections of the
Act but the above principle remains. Whether the $36,000
amount is income to Patricia or deductible by Larry will be
determined by the relevant provisions of the Act, by the
case law, and by the particular circumstances in which the
$36,000 amount was paid and received.
[47] There are two general principles which
apply to the $36,000 amount. First, a single payment (often
referred to as a "lump sum") will not be income to the
recipient or deductible to the payor if it is made to obtain a
release from a liability to make future payments under a
separation agreement or court order. And second, a single payment
will be (in most circumstances) income to the recipient and
deductible to the payor if it is made with respect to arrears of
periodic payments which should have been made under a separation
agreement or a court order. I will review the case law which
established these two principles.
[48] In M.N.R. v. John Armstrong, 56
DTC 1044, the taxpayer and his wife divorced in 1948. He was
required to pay $100 per month to his wife for the maintenance of
their daughter until she reached the age of 16. In 1950, when the
daughter was 11 years of age, the taxpayer paid a lump sum of
$4,000 to his former wife in full settlement of all amounts
payable in future. The taxpayer deducted the $4,000 in computing
his income for 1950 but the deduction was disallowed by the
Minister. The taxpayer's successful appeals in lower courts
were taken to the Supreme Court of Canada. The Supreme Court was
unanimous in allowing the Minister's appeal. Kellock J.
stated at page 1045:
In my opinion, the payment here in question is not within the
statute. It was not an amount payable "pursuant to" or
"conformément à" (to refer to the French
text) the decree but rather an amount paid to obtain a release
from the liability thereby imposed.
Locke J. stated at page 1046:
It was for the purpose of obtaining what purported to be a
release of the appellant's liability to maintain his infant
child to the extent that it was imposed by the decree nisi that
the $4,000 was paid. It cannot, in my opinion, be properly said
that this lump sum was paid, in the words of the section,
pursuant to the divorce decree. It was, it is true, paid in
consequence of the liability imposed by the decree for the
maintenance of the infant, but that does not fall within the
terms of the section.
[49] In The Queen v. Barbara Sills,
85 DTC 5096, the taxpayer and her husband entered into a
separation agreement in 1974 requiring the husband to pay $100
per month for her maintenance, and $100 per month for each of
their two children. She was to receive $300 per month in total.
By the end of 1975, arrears of $2,000 had accumulated with
respect to the monthly amounts which the taxpayer was entitled to
receive. In 1976, she received the following
three payments:
February
$1,000
April
1,000
December
1,000
$3,000
The Minister included the $3,000 in the taxpayer's income
for 1976 but she successfully appealed to the Tax Review Board
and the Federal Court Trial Division. The Minister's appeal
to the Federal Court of Appeal was allowed. Urie J.A. writing for
a unanimous Court stated at page 5098:
... On these facts, the $3,000 received by the Respondent
from LaBrash was clearly paid by him and received by her to carry
out the terms of the separation agreement. Some of the money was
payable to the Respondent as alimony, the remainder was payable
to her as maintenance for the dependant children. All of it was
payable on a monthly basis as stipulated in the separation
agreement. Where the Trial judge erred, in my view, was in not
having due regard to the use of the word "payable" in
the subsection. So long as the agreement provides that the monies
are payable on a periodic basis, the requirement of the
subsection is met. The payments do not change in character merely
because they are not made on time. ...
[50] In this Court, Garon J. (as he then
was) followed Sills in Soldera v. M.N.R., 91 DTC
987. The taxpayer had paid $7,500 in 1986 with respect to arrears
of maintenance which was payable to his wife under a court order.
When allowing the taxpayer's appeal, Garon J. stated at page
990:
... Furthermore, the matter of the Appellant's
existing liability prior to the issue of the 1986 Order in
respect of the maintenance payment that had fallen in arrears,
was expressly dealt with in paragraph 3 of the 1986 Order which
provides that, leaving out certain expletive words:
... the arrears of maintenance as of May 31, 1986
... are hereby fixed at $7,500.00.
In my view, the effect of paragraph 3 of the 1986 Order was
simply to reduce to $7,500 the Appellant's liability as of
May 31st, 1986, in respect of the maintenance payments that were
then in arrears. In this connection it must be recalled that the
total amount owing by the Appellant as of May 31st, 1986, under
paragraph 3 of the 1983 Order was approximately $14,000. It then
becomes apparent that paragraph 3 of the 1986 Order in fixing the
arrears of maintenance payments at $7,500 as of May 31st, 1986,
in effect reduced the Appellant's liability roughly by half.
Paragraph 3 of the 1986 Order does not alter or change the nature
of the Appellant's liability but simply reduces it. This is
made clear by an express reference in that paragraph to the
"arrears of maintenance as of May 31, 1986". If need
be, the point that the nature of the Appellant's liability
fixed by paragraph 3 of the 1986 Order is not affected is
reinforced by the fact that the payment of $7,500 is roughly in
line with what the Appellant indicated he was willing to pay in
terms of maintenance payments for his children in his
solicitor's letter of July 26th, 1983, to Mrs. Leggett's
solicitors. ...
[51] Counsel cited my decision in Susan
Widmer v. M.N.R. (August 23, 1995) in which I appear to have
been misled by an error in the headnote of Soldera. In any
event, the amount of the lump sum payment in Widmer
($15,000) was so different from, and smaller than, the amount of
arrears ($50,590) that the Widmer decision is easily
distinguished from this appeal.
[52] The terms of paragraph 6 of the Minutes
of Settlement and paragraph 6 of the Court Order are set out in
paragraph 45 above. The two paragraphs are substantially the
same. There is some confusion in the words because a single
payment of $36,000 is described as "periodic". There
are, however, other signs in paragraph 6 which help to ascertain
its meaning. First, the payment is based on the past and not the
present or the future because (i) it is called
"retroactive"; and (ii) it looks back over the 12
months of 1996. Second, it is clearly designated as "child
support". And third, it is "additional" to
something. In my opinion, that "something" is the
periodic child support which had been paid in the recent past
(i.e. prior to December 16, 1996).
[53] Prior to December 1996, child support
had been paid at the rate of $2,000 per month continuously from
June 1993 and also from September 1991 to March 1993. In
paragraph 12 above, I made a finding with respect to the basic
agreement for child support within the Separation Agreement.
Specifically, the two most important terms are:
(a) Larry was required to pay
$24,000 per year commencing September 1, 1991 so long as
Patricia was employed by Larry's law firm; and
(b) If Patricia ceased to be employed
by Larry's law firm for any reason, Larry was required to pay
$36,000 per year.
Patricia ceased to be employed by Larry's law firm
sometime from March 22 to May 31, 1993. In my view, Larry was
obliged to pay child support at the rate of $3,000 per month from
and after June 1, 1993; and perhaps for one or two months before
that date. Larry paid only $2,000 child support per month from
June 1, 1993 to December 1996. Therefore, in that 43-month
period, he was in arrears of child support to the limit of
$43,000.
[54] According to the testimony of Mr.
Mottonen (Larry's lawyer in his litigation with Patricia and
in the Divorce Petition), he had a $36,000 amount in the
memorandum which he had prepared for the pre-trial with Judge
Pardu on December 16, 1993. Mr. Mottonen seemed to think
that $36,000 was an amount which he could negotiate with respect
to Larry's arrears of child support as at December 1996. It
is clear from Patricia's Statement of Claim that she was
seeking $3,000 each month because her claim for specific
performance of the Separation Agreement (quoted in paragraph 41
above) refers to:
(b) $1,000.00 each
month per child for the support of the children (making a total
of $3,000.00 each month for three children);
[55] I have concluded that the $36,000
single payment was an amount negotiated in the Minutes of
Settlement signed on December 16, 1996 with respect to
Larry's arrears of child support as at that date. My reasons
for this conclusion are as follows. First, the payment is
described as "retroactive additional periodic child
support". Second, if the payment is allocated over the three
years 1994, 1995 and 1996, it discharges Larry's arrears for
the 36 months from January 1994 to December 1996. Third, an
allocation over that 36-month period is consistent with
Patricia's Statement of Claim issued in March 1994 and quoted
in paragraph 54 above. Fourth, the $36,000 was paid through the
Family Support Plan and caused a significant reduction in the
"balance" which had been accruing at $3,000 per month
since June 1993 (less the $2,000 per month which was actually
paid through the Plan). And fifth, allocating the $36,000 over
the 36 months from January 1994 to December 1996 is the most
reasonable and common sense interpretation to place on paragraph
6 of the Court Order and paragraph 6 of the Minutes of
Settlement.
[56] Even if I were to accept and apply the
words of paragraph 6 "for the twelve months from January 1,
1996 to and including December 1, 1996", I would still
conclude that the $36,000 amount was paid to substantially reduce
the arrears of child support which had accumulated to December
1996. I prefer not to accept and apply those words because,
having clearly called the amount "retroactive", Larry
would be paying child support at the rate of $5,000 per month
($2,000 plus $3,000) for only 1996. Child support at that rate
would be inconsistent with the Separation Agreement; inconsistent
with Patricia's Statement of Claim; and inconsistent with the
new regime of child support for 1997 and subsequent years
established in paragraphs 1 and 2 of the Minutes of Settlement
and Court Order.
[57] Patricia's counsel argued that the
new regime (1997 and subsequent years) was close to $5,000 per
month because, if the after-tax amount of $800 per month payable
to Dana were converted to a pre-tax amount of $1,600 per month
and added to the $3,500 per month for the two younger daughters,
child support under the new regime would be close to $5,000 per
month. I would not make that leap of rationalization in all the
circumstances of this case because the new regime was clearly
intended to take effect on January 1, 1997; and I would have to
ignore the significance of the word "retroactive" in
paragraph 6.
[58] When I construe paragraph 6 of the
Court Order and Minutes of Settlement against the background of
all documentary exhibits and oral testimony, I have no doubt in
concluding that the $36,000 single payment was a negotiated
amount referable only to arrears of child support from some month
in 1993 up to and including December 1996. If I had had any doubt
in construing paragraph 6 of the Court Order and Minutes of
Settlement (and I had none), I might have given some weight to
the intention of Patricia and Larry (they both signed the Minutes
of Settlement) as expressed in the last sentence of paragraph 6
stating that the "payments" are taxable in the hands of
Patricia (as plaintiff) and deductible by Larry (as defendant).
The ink was hardly dry on the Minutes of Settlement and Court
Order when Patricia filed her income tax return for 1996
neglecting, or perhaps refusing, to include the $36,000 in her
income. See Exhibit 2, Tab I.
[59] Patricia's counsel argued that the
$36,000 amount should be joined with the $39,000 (see paragraph 8
of the Court Order) and construed as an amount paid to obtain a
release from other liabilities along the lines of the
Armstrong case cited above. The two amounts are joined in
paragraphs 10 and 16 of the Court Order and paragraphs 10 and 15
of the Minutes of Settlement but that is only to ensure that all
terms of the Order and Minutes are carried out. Paragraph 6
of the Court Order and Minutes of Settlement must be construed on
a stand alone basis.
[60] I place particular emphasis on the
following sentence from the decision of the Federal Court of
Appeal in Sills quoted in paragraph 49 above: "The
payments do not change in character merely because they are not
made on time". The decisions in Sills and
Soldera apply to the $36,000 amount so as to make it
income to the recipient and deductible to the payor. Having
regard to the third and fourth question which I am required to
answer in the section 174 proceeding, the answer to the third
question is "yes"; and the answer to the fourth
question is "yes". The $36,000 must be included in
computing Patricia's income for 1996. The $36,000 may be
deducted in computing Larry's income for 1996.
[61] I will dispose of Larry's appeal
for 1997 in accordance with the terms of settlement dictated in
Court. Patricia's informal appeals for 1995 and 1996 are
dismissed, without costs. Larry's general appeals for 1995,
1996 and 1997 are allowed, with costs.
Signed at Ottawa, Canada, this 8th day of October, 2003.
Email this Content