Rosalie Shapiro v. Minister of National Revenue and Edward Shapiro (Third Party), [1991] 1 CTC 2112, 91 DTC 227

Goetz, T.C.J.:—The Minister of National Revenue reassessed the appellant's 1984 and 1985 taxation years and included the amounts of $27,574 in 1984 and $32,160 in 1985 in computing the appellant's total income for those years. It is from this reassessment that the appellant is now appealing claiming that an agreement entered into between herself and her husband Edward Shapiro on February 22, 1984 was not in fact a separation agreement as contemplated by section 56(1)(b) and section 60(b) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The Minister then made an application for and obtained an order pursuant to paragraph 174(3)(b) of the Income Tax Act joining Edward Shapiro as a party to the appeal of Rosalie Shapiro. The questions to be determined by the Court pursuant to that order are set out in paragraph 10 of the section 174 application:

(a) whether the said amounts were paid by Edward Shapiro, pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of Rosalie Shapiro,

(b) whether Edward Shapiro and Rosalie Shapiro were living apart and were separated, pursuant to a written separation agreement, at the time the amounts were paid and received and throughout the remainder of the year,

(c) whether the amounts are deductible by Edward Shapiro pursuant to paragraph 60(b) and subsection 60.1(1) and 60.1(3) of the Income Tax Act, R.S.C. 1952, c.148, as it read and applied in 1984 and 1985,

(d) whether the amounts are to be included in computing Rosalie Shapiro's income pursuant to paragraph 56(1)(b) and subsections 56.1(1) and 56.1(3) of the Act.

Facts

At the outset of the hearing, counsel for the Minister stated:

In paragraph 9 are outlined the assumptions of fact on which the Minister of National Revenue proceeded in assessing those amounts; and the Ministry included the amounts in Mrs. Shapiro's income, and allowed to Dr. Shapiro a deduction for the amounts.

It is the Minister's position at this point, Your Honour, that is not a correct position in law; and that while his amounts could be said to have been paid pursuant to a written agreement or even a written separation agreement, they could be (sic) not be said to have been living apart and separated pursuant to such an agreement. And that is the reason for the Minister's change in position.

The position is that these amounts do not fall within the provisions of the Income Tax Act, thereby not allowing Dr. Shapiro the deduction, and the amounts are likewise not included in Mrs. Shapiro's income. -

At this point counsel for the appellant moved to allow the appeal. Counsel for Dr. Shapiro (the added party) urged the Court to sever Dr. Shapiro from any effects of a possible order of the Court allowing the appellants appeal. He wished to maintain his position that the agreement of February 22, 1984 was in fact a separation agreement enabling Dr. Shapiro to make deductions of the payments made to the appellant pursuant to that agreement. The matter came before the Court again on November 23, 1990 at which time the Minister filed as Exhibit R-I the agreement dated February 22, 1984. Mrs. Shapiro left their home in 1976, came back in 1978, moved out again in 1979 and moved in again in 1980 and in September of that year Dr. Shapiro moved out. In 1981, he returned to the marital home but at that time Mrs. Shapiro then moved out. They lived together for fifteen months till September 1982 when Dr. Shapiro left and never returned. Jewish divorce proceedings occurred but they were subsequently remarried in the Jewish faith. A separation agreement was entered into between the parties on November 25, 1976 whereby in fact they did agree to live separate and apart but of course this has no force and effect having regard to their conduct from that date forward. The second Jewish marriage was in 1981 and there were no further Jewish proceedings for divorce.

The 1984 agreement was handwritten by Leonard Levencrown, solicitor for the appellant, at that time he was dealing with a Mr. Allard, solicitor for Dr. Shapiro. Mr. Levencrown is a lawyer and a specialist in dealing with family law and it is his view that the agreement was not a separation agreement but rather attempted to ensure that the marriage home would be maintained for her estate and security and for her support. The use of the words "alimentary pension” in the 1984 agreement was because Mrs. Shapiro was adamant that there was no divorce or separation and that the word “alimony” might suggest that there was. He stated that it was not unusual to have many interim agreements entered into between spouses pending final settlement of their differences. He made an interesting statement with respect to the Shapiro's namely: ”I am not so sure these parties are separated".

Exhibit R-1, the agreement of February 22, 1984 reads as follows:

The parties hereto agree to settle the issues between them on the following basis:

1. The husband quit claims his interest in the matrimonial home to the wife absolutely.

2. The wife to simultaneously place a new 1st mortgage upon the matrimonial home in the amount of $65,000.00 upon normal amortization to be paid monthly by wife and guaranteed by husband. The proceeds of $65,000.00 to be paid as follows:

(1) in satisfaction of the existing real estate taxes to a maximum of $5,000.

(2) The balance to the account of husband at CIBC Billings Bridge. Balance to be $60,000.

3. The wife shall be paid by husband an alimentary pension of $2,500 per month until a material change in circumstances occurs to either party. The payments are to be secured by a charge on the husband's RRSP's.

4. All present proceedings to be dismissed on consent without costs save for an order incorporating these presents, (gifts)

5. The husband to absolutely assign to the wife all property not disclosed in the course of these proceedings. All other property remains property of husband.

6. The husband to make wife beneficiary of existing policy of insurance in the amount of $25,000.

7. The husband to provide for use of wife a motor vehicle at an expense of $180 per month.

8. Husband to get the chattels set out in Schedule A attached.

Dated at Ottawa this 22nd day of February 1984.

[signed by]

Edward Shapiro

Robert Allard (solicitor)

Rosalie Shapiro

Leonard Levencrown (solicitor)

Schedule A to agreement dated February 22, 1984:

One half of art collection.

Books

Slides—husband to pay for copies

Chesterfield

Plants

[initialled by the four signors]

The appellant's counsel submits that paragraph 56(1)(b) ofthe Act requires that payments must have been received pursuant to an agreement which requires that the parties live separate and apart in order to be included in income pursuant to that provision and that the agreement did not contain this vital provision namely that they were living separate and apart pursuant to a written agreement. The Minister, in assessing Dr. Shapiro permitted him to deduct the payments made to Rosalie Shapiro in the years 1984 and 1985 pursuant to paragraph 60(b).

Paragraph 56(1)(b) and 60(b) are mere images of each other. Their operation is interrelated and the interpretation of one of these paragraphs will apply equally to the other.

See The Queen v. Sills, [1985] 1 C.T.C. 49; 85 D.T.C. 5096 (F.C.A.) for the judicial acceptance of these four conditions.

Under paragraph 56(1)(b) certain amounts in the nature of alimony or maintenance are included in the income of the recipient in the year in which they are received. For an amount to be included in the income of a recipient as a payment of alimony or other allowance under paragraph 56(1)(b), the following conditions must be fulfilled:

(1) The payments must be made either (a) pursuant to a decree, order or judgment of a competent tribunal, or (b) pursuant to a written agreement.

(2) The payments must be made " as alimony or other allowance . . . for the maintenance of the recipient, the children of the marriage, or both”.

(3) The amounts must be payable on a periodic basis.

(4) At the time the payment is received and throughout the remainder of the year the recipient must be living apart from the spouse or former spouse required to make the payments, and must be separated from the spouse or former spouse as a result of a divorce, a judicial separation or a written separation agreement.

An amount included in the income of a taxpayer under paragraph 56(1)(b), (c) or (c.1) is deductible by the person making the payment under paragraph 60(b), (c), or (c.1). An amount in the nature of alimony or maintenance which is not included in the income of the recipient under paragraph 56(1)(b), (c) or (c.1) will not be deductible by the person making the payment under paragraphs 60(b), (c) or (c.1).

I have examined the agreement of February 1984 and I have concluded that it is not a written separation agreement which as one of its terms requires the parties to live separate and apart.

For our purposes, the operative words of paragraph 56(1)(b) read (1985 Act):

. . ., if the recipient was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, the spouse . . .

The operative words of paragraph 60(b) read (1985 Act):

. . ., if he was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, his spouse . . .

In the case of Perley C. Smith v. M.N.R., [1979] C.T.C. 3055; 79 D.T.C. 827:

The facts in Smith indicate that the taxpayer made monthly alimony payments to his wife pursuant to an agreement in writing. In issue was whether the agreement constituted a written separation as specified under the Act. The agreement contained no mention of any agreement to live separate and apart. The Minister disallowed a paragraph 60(b) deduction of alimony payments based on the alleged deficiency in the agreement. The taxpayer appealed to the Tax Review Board. The written agreement read as follows (page 3055 (D.T.C. 828)):

March 17, 1974.

Dear Reen,

I hereby agree to pay you $475 on the first of every month beginning April 1, 1974.

I further agree to increase this amount annually if I receive salary increases.

Yours truly

(Signed) P C Smith

Accepted:

(Signed) Anne M J Smith

Witness: (Signature)

(Signature)

And at page 3057 (D.T.C. 829):

Although the letter of March 17, 1974, was relied upon by the appellant as a basis upon which he could deduct such maintenance payments from his annual income for the years 1974, 1975 and 1976, and although it was also signed by his wife and witnessed, I regret that I must come to the conclusion that it does not fit into the strict wording of the Act, namely that it is "a written separation agreement". Nowhere in the letter is there any mention of agreement to live separate and apart which I consider to be an essential ingredient in a separation agreement, this ingredient was commented upon by my colleague, M J Bonner, Esq, in the case of Kapel v MNR, (supra).

Mr. Bonner's complete comment in Kapel v. M.N.R., [1979] C.T.C. 2187; 79 D.T.C. 199 with respect to this "essential ingredient" reads at page 2188 (D.T.C. 200): "However, I will observe that one of the further difficulties which lay in the appellant's way was the failure of Mrs. Kapel to agree in writing to live separate and apart from her husband."

Counsel for Dr. Shapiro gave a carefully constructed argument on behalf of his client and as persuasive as it was—to accept his position would be to open a Pandora’s box. It is a requirement of paragraph 56(1)(b) that payments must have been received pursuant to a written agreement which contains a provision requiring that the parties live separate and apart in order for such payments to be included in income pursuant to that paragraph. The agreement pursuant to which payments were made in the case at Bar did not contain this requirement. As a result, the Minister should not be allowed to include the sums in issue in the appellant's income for 1984 and 1985. For the same reason, Edward Shapiro should not have been allowed to deduct from his taxable income the amounts he paid to his estranged wife in 1984 and 1985. Dr. Shapiro should not receive the benefits of paragraph 60(b) because the written separation agreement "does not fit into the strict wording of the Act. . .” to quote in Smith. Nowhere in the agreement is there a provision to live separate and apart which is an essential ingredient in a separation agreement, when dealing in terms of the Income Tax Act.

I think that answers all the questions set out in the section 174 Order. The appellant's appeal is allowed with party-party costs to be taxed.

Appeal allowed.