Hays v. R., [1996] 2 CTC 2054 (Informal Procedure)

O’Connor J.T.C.C.: — This appeal was heard in Vancouver, British Columbia on November 30, 1995 pursuant to the Informal Procedure of this Court.

Testimony was given by the Appellant, by her former husband, Stuart Lee Taylor (“Mr. Taylor”) and by James D. Martin, the Appellant’s former solicitor (“Mr. Martin”).

Issue

The sole issue is whether in the 1990 taxation year the Appellant was obliged to include in her taxable income an amount of $6,850 as maintenance or alimony as required by paragraph 56(1 )(b) of the Income Tax Act (“Act”), without being able to deduct from that amount the sum of $3,150 which the Appellant submits represents alimony allegedly paid by her to Mr. Taylor.

Facts

The basic facts are as follows. The Appellant and Mr. Taylor separated in April, 1989. Effective July 12, 1989 they signed an interim separation agreement (“agreement”), the most relevant provisions of which are:

WHEREAS:

A. The Husband and the Wife were lawfully married, one to the other, at the City of Vancouver, Province of British Columbia, on the 1st day of April, 1978

B. There is one child of the marriage, namely, Andrew Scott Taylor, born the 1 st day of October, 1985.

C. The spouses separated on or about the month of April, 1989 and, since that date they have not cohabitated as a married couple and now propose to continue to live separate and apart from each other on the terms and conditions hereinafter expressed.

D. The Husband and the Wife are the registered owners of an undivided 2/3 interest of the property commonly known as 4214 West 10th Avenue, in the City of Vancouver, Province of British Columbia (hereinafter referred to as the “family residence”).

E. The Husband and the Wife wish to make an interim separation agreement, pending a final agreement or court order, to settle the issues in dispute between them.

3.1 The husband and the wife agree, warrant and represent that they both know the financial circumstances of the other, including all assets that are held by one or the other and all monies that are jointly held between them.

6.1 The Husband and Wife agree that they will henceforth live separate and apart from each other,

7.1 The Wife acknowledges that the Husband is currently occupying the family residence.

7.2 The Husband covenants and agrees that upon the Wife giving to him the 7 days notice that he will vacate the home and then 7 days following that notice the Wife and child may move back into the home and shall sole and exclusive use and occupancy of that home to the exclusion of the said Husband.

7.3 The terms with reference to the occupation of the said family residence are applicable up to and including the 1st day of November, 1989, at which time the parties will have either reconciled, or this agreement will continue in force and effect or, a new agreement will be negotiated between the said Husband the Wife with respect to occupation of the said home.

10.1 The Husband and the Wife covenant and agree that all bank accounts, R.R.S.P.’s, Canada Savings Bonds and other such assets shall remain as they are at the current time and, neither party shall draw on those said assets without the consent of the other.

14.1 The Husband covenants and agrees that he shall deposit into the joint bank account number 0551333 his full pay cheque each and every time the said pay cheque is received and, covenants and agrees that the Wife shall be able to draw from that account up to a maximum of Five Hundred and Fifty ($550.00) Dollars per month for the support and maintenance for herself and the child.

14.2 The Husband covenants and agrees that he shall draw while he is in the family residence, the sum of Four Hundred ($400.00) Dollars per month for his living expenses.

14.3 Should the Wife give 7 days notice to the Husband to reoccupy the family residence, then the Husband shall be able to draw the sum of Nine Hundred ($900.00) Dollars per month, from the said joint account during the time that he is in the said apartment.

14.4 The Husband covenants and agrees that should the Wife have any unforeseen major expense that would exceed the monthly maximum as set out in this paragraph, the Wife would advise the Husband of the same and the Husband would agree that the unforeseen expense and the amount for that unforeseen expense shall be paid out of the joint account.

14.5 The Husband acknowledges that should the Wife return to the family residence, then the Wife may require additional funds to provide daycare and/or preschool expenses for the said child.

15.1 The Husband and the Wife acknowledge that the terms of the financial arrangements between them have been ongoing for two(2)months and they acknowledge and agree that these sums will be paid pursuant to Sections 56.1 (2) and (3) and 60.1 (2) and (3) of the Income Tax Act of Canada.

The Minister of National Revenue (“Minister”) maintains that the Appellant is to be considered as having received in 1990, pursuant to section 14.1 of the agreement, seven payments of $550 each for a total of $3,850 plus $3,000 paid pursuant to an order of the Supreme Court of British Columbia mentioned below, for a total of $6,850.

The Appellant, Mr. Taylor and Mr. Martin all testified in essence that the maximum monthly withdrawal amounts of $550 were never intended as maintenance. It was explained that the Appellant and Mr. Taylor were considering a reconciliation after their separation in April and that the agreement simply set forth what amounts each could withdraw from the joint bank account which had been in effect between them since as early as January 1988.

No reconciliation occurred and the order of the Supreme Court of British Columbia dated September 20, 1990 provided as follows:

THIS COURT FURTHER ORDERS that the Respondent, Stuart Lee Taylor, shall pay to the Petitioner, Jacalyn Gail Hays, as interim support and maintenance for the child ... the sum of Five Hundred ($500.00) Dollars per month, commencing on the 3rd day of October, 1990 and continuing on the 3rd day of each and every month thereafter;

THIS COURT FURTHER ORDERS that the Respondent, Stuart Lee Taylor, shall pay to the Petitioner, Jacalyn Gail Hays, as interim spousal support, for the months of October, November and December, 1990 in the amount of Five Hundred ($500.00) Dollars per month, commencing on the 3rd day of October, 1990 and continuing on the 3rd day of each and every month thereafter; the said maintenance to be reduced to the sum of Three Hundred and Fifty($350.00)Dollars per month, commencing on the 3rd day of January, 1991 and continuing on the 3rd day of each and every month thereafter;

The Appellant testified that, notwithstanding the advice of her solicitor to the contrary, she thought she had to include in her 1990 return as alimony an amount of $6,850 and she thought further that she was entitled to deduct amounts taken from the joint bank account by Mr. Taylor. It is interesting to note that the Appellant in her 1989 return took the same position (declaring $4,400 as alimony received and $3,200 as alimony paid to Mr. Taylor) and this was not contested by the Minister. Apparently the Appellant’s position on this arose from her interpretation of section 15.1 of the agreement.

Mr. Taylor’s returns for 1989 and 1990 claimed deductions for the identical amounts of $4,400 and $6,850 with no inclusions for any alimony received. Mr. Taylor’s testimony was that his accountant advised him he could deduct the amounts of $4,400 and $6,850 in 1989 and 1990 so he did so.

In support of the Appellant’s contention that the payments contemplated in section 14.1 of the agreement were never to be considered as maintenance she filed letters from Mr. Martin to Mr. Taylor dated April 30, May 24 and June 8, 1990, letters dated sometime after the agreement, indicating that the issue of spousal support was still being negotiated between the Appellant and Mr. Taylor. The following are respectively quotes from the letters of May 24 and June 8:

May 24:

I believe that it may be expeditious at this time and appropriate to start dealing with some of the figures with respect to spousal maintenance and child maintenance. I presume that you are now aware of what your costs will be, commencing the 1st day of June, 1990 and can therefore turn your mind to the question of the amount of maintenance for both the child and Jacalyn.

June 8:

I still do not have any proposal from you with respect to my request to you in regards to spousal maintenance and to child maintenance both in the short term and in the long term.

Counsel for the Respondent suggested that the testimony of Mr. Martin should not be given too much credibility. She referred to a letter from Mr. Martin to Mr. Taylor dated June 19, 1989 which contains the following paragraph:

The sole remaining problem appears to be your unwillingness to have the agreement filed at a Provincial Court of British Columbia, pursuant to Section 74 of the Family Relations Act. If I might point out this is a direct benefit to both parties with respect to the income tax deductions available and protection as to the rights and obligations as set out in the agreement and, is a positive benefit to both of you in ensuring that those rights and responsibilities are protected. I would ask you to reconsider your opposition to the above and perhaps, you can take some time as to advise me to your objections and I will attempt to deal with them because I do not believe that the filing of such an agreement will prejudice either party but will in fact, protect both parties.

This letter may or may not have been simply in the nature of tentative legal advice and may well have been incorrect. In any event, I do not believe it is necessary for a separation agreement to be filed for the provisions of sections 56 and 60 of the Act to apply. Filing facilitates enforcement of an agreement but contrary to what the letter states it does not benefit anyone with respect to income tax deductions.

With respect to paragraph 15.1 of the agreement, Mr. Martin testified that this type of clause is relatively standard and added that the word “not” was omitted by error. In other words, the paragraph meant to state that the payments made prior to the agreement were not to be considered as paid pursuant to those provisions of the Act mentioned.

Analysis

I believe that in certain circumstances payments out of a joint bank account of separated spouses will be considered as maintenance payments. In the case of Coghlan v. R. (sub nom. Coghlan v. Canada), [1994] 1 C.T.C. 2446, 94 D.T.C. 1367 (T.C.C.), Archambault T.C.J. held that payments made through the use of withdrawals from a joint bank account did not, for that reason alone, disqualify them as being characterized as alimony and includible in taxable income. Also, in Shapka v. R. (sub nom. Shapka v. Canada), [1995] 2 C.T.C. 2447 (T.C.C.), Bowman T.C.J. stated as follows:

Some point was made of the fact that the payments in question came out of a bank account held jointly by the appellant and his wife. I attach no importance to this. Mr. Joines established in a meticulously careful reconstruction of the banking transactions that the payments all came from funds supplied from Mr. Shapka’s own resources.

However, in Teevens v. R., 3 R.F.L. (4th) 212, (sub nom. Teevens v. Canada [1994] 1 C.T.C. 2848 (T.C.C.), Brulé J.T.C.C. held that the use of a joint bank account does not meet the requirements of the Act. That was a case also dealing with alimony payments and the question was whether the husband was entitled to deduct them.

In my opinion the provisions of the agreement placing limits on the amounts which both consorts were entitled to withdraw from the joint bank account does not necessarily lead to the conclusion that the amounts of $550 per month are in the nature of maintenance. The agreement refers to the $550 maximum as “support and maintenance” but I do not believe that ends the matter. As can be seen from the portions of the agreement quoted above, it was not drafted with precision. One must look to the true nature of the arrangement between the Appellant and Mr. Taylor. I have accepted as credible the testimony of the Appellant, Mr. Taylor as well as that of Mr. Martin. The parties did not consider these limitations on withdrawals from the joint bank account as payments in the nature of maintenance. It is clear that from April to September 1990 the parties were still negotiating and attempting to arrive at a fixed number for what might be considered true maintenance.

Complete records of the joint bank account from June 11, 1988 to April 10, 1990 were presented. These records indicate numerous deposits in 1990 by both Mr. Taylor and the Appellant, who was employed in 1990. The accounts also indicate numerous withdrawals but they do not, with respect to the Appellant, tie in with the said monthly limitation of $550. Withdrawals were made as needs arose, whether for payment of the mortgage, clothing, food or other normal family needs. In my opinion, the true nature of the limitations on the withdrawals by the Appellant was as explained by her, Mr. Taylor and Mr. Martin. It is clear that the deductions claimed by Mr. Taylorshould not have been allowed. Mr. Taylor should have been reassessed. However, this does not change what I consider is the true nature of the arrangements made between the Appellant and her husband pursuant to the agreement. In 1990 it is clear that Mr. Taylor made deposits in the joint bank account in greater amounts than the Appellant. However, the Appellant’s deposits were certainly not negligible and in fact totalled in excess of $8,000 and related principally to deposits by the Appellant of her net salary. Is it not arguable that her withdrawals in 1990, at least up to $3,850 were withdrawals of her own money?

The returns filed by the Appellant in 1989 and 1990 are not helpful to her but I was convinced by her testimony that she simply was in error and was not trying to defraud Revenue Canada.

In conclusion, I believe that the joint bank account into and from which both consorts made deposits and withdrawals was in the nature of a facility for each of them to carry on, as they had in the past to meet expenses as they arose. In my opinion the amount of $3,850 did not constitute maintenance as contemplated by paragraph 56(1 )(b) of the Act.

Consequently, for all of the above reasons, the appeal is allowed, with costs, with the result that the only amount that must be included in the Appellant’s income as alimony or other allowance in 1990 is the $3,000 which she received pursuant to the order of the Supreme Court of British Columbia dated September 20, 1990 but the Appellant is not entitled to claim any deductions for alimony allegedly paid in 1990 to Mr. Taylor.

Appeal allowed.