Simpson v. R., [1996] 2 CTC 2687

Rip J.T.C.C.: — Sharlene M.A. Simpson appealed her income tax assessments for 1992 and 1993 on the basis that she received no amount under a written agreement from Rae R. Simpson, her husband, in either year as alimony or maintenance and therefore the Minister of National Revenue (“Minister”) erred in adding the amount of $17,400 to her income for 1992 pursuant to paragraph 56(1)(b) or (c) of the Income Tax Act (“Act”).

The respondent pleaded that Mrs. Simpson had not objected to her assessment for 1993 and asserted the appeal from that assessment was not properly before the Court.

The respondent applied to this Court under section 174 of the Act for a determination and for an order to join Rae R. Simpson as a party to the appeal. The application referred only to the assessment for 1992. [1] The determination sought was:

(a) whether the amount of $17,400.00 received by Sharlene M.A. Simpson from Rae R. Simpson during the 1992 taxation year should be included in the computation of her income; and

(b) whether Rae R. Simpson is entitled to deduct alimony payments made within the 1992 taxation year in the amount of $17,400.00.

The Minister’s application was granted.

The respondent’s position at the hearing of the determination was that a document, dated May 22, 1992, is not a written separation agreement for purposes of subsection 60(b) of the Act and, I assume, paragraph 56(1 )(b). The Minister had assessed Mrs. Simpson on the basis the document was not such an agreement. However, the Minister in her application for determination proposed issuing new reassessments for 1992 to both wife and husband. Mrs. Simpson’s income would be reduced by the amount of $17,400 previously added to her income; Mr. Simpson’s income would be increased by the amount of $17,400 previously allowed as a deduction in computing his income.

Other facts the Minister relied on for the making of the proposed reassessments are:

(i) on August 13, 1993, the Ontario Court (General Division) issued an order (the “Order”) with respect to Sharlene M.A. Simpson and Rae R. Simpson;

(ii) paragraph 2 of the Order provides that interim support in the amount of $800 per month, commencing July 1, 1993, be paid by Rae R. Simpson for the benefit of the infant child Jennifer Simpson;

(iii) paragraph 3 of the Order provides that interim support in the amount of $2,100 per month, commencing July 1, 1993, be paid by Rae R. Simpson for the benefit of Sharlene M.A. Simpson; and

(iv) the Order does not provide that an amount paid prior to the Order and in the 1993 taxation year or the 1992 taxation year is to be considered to have been paid and received thereunder.

Issue

The dispute between the spouses that gives rise to this appeal is whether a document signed by Mr. and Mrs. Simpson on May 24, 1992, but dated May 22, 1992, was a binding agreement or a letter of instructions to Mrs. Simpson’s lawyer in Ottawa to prepare a binding agreement between the spouses. If it was a binding agreement, was it also a written separation agreement for the purposes of paragraphs 56(1 )(b) and 60(b)?

Facts

At all relevant times in 1992 Mr. Simpson was a Lieutenant- Colonel in the Canadian Armed Forces stationed in Belgium at Supreme Headquarters Allied Powers, Europe (“Shape”). Mr. and Mrs. Simpson lived on the base with their children. On or about March 24, 1992, after 22 years of marriage, Mr. Simpson informed his wife he was leaving the household. After March 24, Mr. Simpson occasionally visited the family home to take food from the refrigerator and do his laundry. Mrs. Simpson went to Ottawa on April 13 to “house hunt”. She returned to Belgium about May 6 and remained there until June 10 when she and the children moved to Ottawa.

While in Ottawa, Mrs. Simpson retained a lawyer, Rodney Cross, “to sort out what was necessary and protect [my interests] on separation”. Mr. Simpson also retained an Ottawa lawyer, Ms. Nancy Johnson. Apparently sometime in April Mr. Simpson was informed by the military that he was eligible for a post in Egypt. Mr. Simpson was eligible to receive a monthly allowance of $800 while in Egypt. The post was dependent on a written agreement between the Simpsons that would provide for maintenance of Mrs. Simpson and the children while Mr. Simpson was in Egypt. When Mrs. Simpson returned to Belgium, Mr. Simpson asked Mrs. Simpson to approve the instructions to their respective lawyers for preparation of a separation agreement.

On or about May 17, their eldest daughter wrote Mr. Simpson setting out what Mrs. Simpson wanted as a property settlement and support and asked for his “feedback”. Mr. Simpson was anxious for the transfer to Egypt. On May 18, he wrote his wife recommending the family leave Belgium “under the normal posting rules (1.e., ... as if there were no marital problems)”. He suggested his posting to Egypt would leave “open the possibility of time and distance healing”. Mrs. Simpson testified she was against the separation and continued to hope they would reconcile. She also declared she was “afraid of what he might do” because he wanted to go to Egypt. She recalled he earlier had threatened her life; he denied the accusation. In any event, Mrs. Simpson said she wanted him to go to Egypt.

Mr. Simpson proposed in the letter that it would “be wise to put together a separation agreement ... [to] be filed when we’re in Ottawa”. This agreement “would provide you your share of family assets ... and ... for support for the duration of me being in Egypt”. He agreed to an amount of support Mrs. Simpson had requested in a “letter on Sunday morning ...”. The latter letter contained Mrs. Simpson’s calculations of the division of the family assets. This letter and others were delivered by the Simpsons’ elder daughter who acted as courier between her parents. The daughter indicated in a note to her father, accompanying the calculations, that it was her understanding the military did not require an agreement in detail between the spouses. Mr. Simpson recommended that they inform Colonel Bishop, the military officer responsible for such matters, that they wanted the year apart in order to “give us time and distance to sort ourselves out,” that they had agreed on “support terms and that the legalities will be sorted out in Ottawa” and that “we require the family move to Ottawa together and we’ll handle the rest there as far as me going to Egypt is concerned”. Mrs. Simpson stated that she inferred from the letter that lawyers would sort out any problems; meanwhile, there was no agreement between her and her husband.

Later on May 18, Mr. Simpson wrote another letter to Mrs. Simpson suggesting an interim agreement until “after we’ve both cooled down”. He stated they would only have to agree on interim equalization of their property, interim support for the wife and the minor child and “pension per new legislation”. Legislation affecting pensions was tabled, or was proposed to be tabled, in the House of Commons. The interim agreement would be in effect until Mr. Simpson’s return from Egypt “or agreement” or “on agreement”, on final terms. The word in Mr. Simpson’s handwriting before “agreement” is either “or” or “on”. Counsel argued that the significance between the words “on” or “or” is whether the agreement would be in force only until Mr. Simpson returned to Canada or until a new agreement was concluded. Mr. Simpson wanted the agreement to be in force only while he was in Egypt and returned to Canada.

In the letter, Mr. Simpson informed his wife that Colonel Bishop had to know by the following Wednesday at the latest whether they had an agreement or he would not be posted to Egypt. He advised his wife of the advantages of an agreement: “it gets us apart and away from the close contact that right now is a destructive process” and “[s]econd, it lets things advance without burning bridges ... but also gives us both the chance to rethink things in the future”.

Mr. Simpson had earlier informed his lawyer that he and Mrs. Simpson “would work things out in Europe” and therefore initiated communication with his wife “to get things moving”. He acknowledged his wife did not want a separation and it was his view that his wife thought any separation agreement would end any thought of reconciliation. In his view reconciliation was not possible. He also realized that if no agreement was signed, he would lose his post to Egypt.

Mr. Simpson agreed that he and his wife thought the “legalities [would be] worked out in Ottawa”. He and Mrs. Simpson would “agree to what had to be agreed to and the lawyers in Ottawa could dress [it] up”. He stated he thought “we’d agree to everything in Belgium and the written agreement would be produced in Ottawa”.

Later, however, Mr. Simpson thought an interim agreement was “achievable” in Belgium and he suggested an interim agreement in his second letter of May 18.

Mrs. Simpson replied to her husband’s letters of May 18 the next day. She proposed an amount for support of her and their younger daughter and agreed to her husband’s proposal for an immediate cash capital payment.

This letter and all subsequent letters she sent to her husband, including the document in issue, were headed “Without Prejudice”. She testified the words “Without Prejudice” on the head of a letter meant one is not necessarily “bound to the words written on the paper”. She said she did not want to be bound by any agreement set forth in a letter before Mr. Cross had reviewed the letter and advised her. In cross- examination, Mrs. Simpson stated the reason for the words “Without Prejudice” was that she did not want to agree on anything; the letters “were thoughts on paper”. She never thought she and her husband would themselves make an agreement “after paying big dollars to lawyers”.

Mr. Simpson replied to his wife by letter dated May 19, commenting on her request for support and the equalization payment. He also expressed concern about pending pension legislation and her claim on his pension. He added “the agreement runs until I return to Canada or until we reach a subsequent agreement ...” and recommended they draft a letter “that we can both agree on to instruct the lawyers what is to be put in the agreement”. Mr. Simpson suggested either his or her lawyer draft the agreement to be signed in Canada. He said they agreed to as much as possible so that the lawyers would have little as possible to argue over. He headed his letter of May 19 and all subsequent letters to Mrs. Simpson with the notation “Without Prejudice” because his wife did so on hers.

Mr. Cross sent a fax to Mrs. Simpson on May 19, warning her that she was “being rushed into things” and that he was not comfortable with what Mr. Simpson had proposed. He requested written instructions to prepare a separation agreement. Mr. Cross testified he thought Mrs. Simpson was “giving into something without proper reflection”.

Mrs. Simpson sent a note to Mr. Simpson on May 20 praying for reconciliation; this, too, was headed “Without Prejudice”. The next day she wrote two letters to Mr. Simpson. In the first letter Mrs. Simpson informed her husband she preferred a final separation agreement but was “willing to agree so that you can get to Egypt”. She suggested that they “split our differences [in support payments] in half”, explaining that he would have more to claim for taxes. She was also prepared to accept an equalization payment of $30,000 but was still concerned about her rights to Mr. Simpson’s pension and severance payment: she wished to discuss these issues with her lawyer. She did give her husband permission to inform Colonel Bishop of their agreement. She concluded that they had agreed on some items and, as result, saved lawyers’ fees. In cross- examination Mrs. Simpson declared that the first letter of May 21 was simply a letter and not an agreement. The military, she said, wanted a letter signed by both spouses, but the lawyers would sort everything out.

Mr. Simpson wrote to Colonel Bishop in the morning of May 20. He stated “Colonel Bishop was holding the reins on progress of the posting” and he did not want Colonel Bishop to advise Ottawa to give up the post. He wanted to make sure Colonel Bishop knew “things were progressing” and informed Colonel Bishop “we will jointly advise lawyers to draw up agreement ...”. On one copy of that letter (Exhibit A-1, tab 11) there is a note that Mr. and Mrs. Simpson had agreed to a “letter of instructions to send to lawyer” [emphasis added] to draw up an interim agreement. On another copy of the letter (Exhibit J-1), produced by Mr. Simpson, the notation refers to a “letter of intention to send to lawyer to draw up” [emphasis added] an interim agreement.

Both Exhibits appear to be copies of a copy of the same letter. The two versions of the note were obviously written by different people. Most words in both versions of the note are printed; the writing in the main body of the letter is cursive. Added in both versions are asterisks followed by the words “letter follows on next page”. This addition seems to be in the same writing as the version in Exhibit A-1. The letters “f”, “n”, “s”, “t”, “o” and “u” in each version of the note appear to be written by different people. I also note, for example, the word “lawyer” is printed in Exhibit A-l but is in cursive writing in Exhibit J-1; the words “draw up” are in cursive writing in both exhibits, although in different hand; all other words are printed. There also may be an erasure behind the words in Exhibit J-1, Mr. Simpson’s evidence. I mention these discrepancies because they exemplify the tenor of much of the evidence of Mr. Simpson and Mrs. Simpson.

In her second letter of May 21, Mrs. Simpson referred to a conversation she had with Colonel Bishop regarding support and equalization, advising him that she and her husband had agreed on “a figure for support”. However Colonel Bishop stated he required “something more substantial”. She conceded they would have to agree “with an interim number for equalization”. Mrs. Simpson informed Mr. Simpson that if the military required an “interim agreement faxed today, I will drop off the points that I think need to go into the agreement. I will give them to Pam [their elder child] before noon, with my lawyers [sic] fax number. Please review the points and let me know if you agree — if something needs to be added etc.”.

Mrs. Simpson was in continuous contact with her lawyer. Mr. Cross estimated they spoke by telephone before May 22 “about 15 to 20 times”. Mr. Cross recalled Mrs. Simpson wanted the support provision settled and “didn’t want to go through this again” when Mr. Simpson returned from Egypt.

On May 22 Mrs. Simpson prepared a first draft of a letter dated May 22, 1992 (“draft letter”) to Mr. Cross thanking him for “the fax and advice” and requesting him to “draw up an interim separation agreement” to facilitate Mr. Simpson’s post to Egypt “to stay in effect while he is there and until he returns to Canada”. [2] “Here”, she wrote, “is the list of facts”. She then set out in point form to what she and her husband agreed. She sent a copy of a draft letter to Mr. Simpson requesting his comments. If he had no comments, she proposed faxing the draft letter to Mr. Cross. This draft letter served as the basis for all subsequent drafts, including the draft letter signed by Mr. Simpson and Mrs. Simpson. The main body of all drafts was the same. Mr. Simpson replied to each draft by letter, by notes to the draft or a combination of both.

Other draft letters, all dated May 22, were exchanged for comments. On one draft Mr. Simpson suggested a clause that Mrs. Simpson “retrain to achieve economic self-sufficiency”. Mrs. Simpson requested $26,000 that, she said, Mr. Simpson had promised her.

Mr. Simpson’s comments to the draft letters were written on his copy of the latest draft letter from his wife. He noted on one draft that: “I don’t have much option - do I?” and suggested that he and his wife type the letter in final form the next day. Mrs. Simpson replied by letter dated May 24.

Attached to a draft letter sent by Mrs. Simpson was a note in her hand writing which provided among other things, Mr. Simpson pay her $26,000 as equalization “before I leave to go to Canada and by May 29/92”. The note was dated May 24. He agreed but stated such payment would be: “subject to the agreement being signed by then and my posting to Egypt proceeding”. Mrs. Simpson wanted the $26,000 before returning to Ottawa with her daughters and he agreed to pay only if he were posted to Egypt. She wrote the note was “to be added to letter for lawyer to drawing up interim agreement”, that is, the draft letter. Mrs. Simpson testified she found out Mr. Simpson had transferred funds from Canada to Europe and knew he had the money to pay her. In another note dated May 24 (Exhibit A-l, tab 16), Mrs. Simpson also reminded her husband “we are not lawyers - Rod Cross will draw up a satisfactory legal agreement for both parties”. She intended to telephone Mr. Cross the next day. Mr. Simpson had claimed he could not pay support unless he received the additional monthly posting allowance.

Eventually Mr. Simpson signed his name where indicated on a draft letter, made additional comments in the body of the draft letter and under his signature; he initialed the comments under his signature.

Mr. Simpson testified in cross-examination that Mrs. Simpson had earlier “rejected” his lawyer being involved in negotiations and “I was over a barrel”. According to Mr. Simpson, his wife wanted Mr. Cross to prepare the final agreement. He also conceded it was “possible” Mrs. Simpson required further advice from Mr. Cross after May 24.

The draft letter of May 22, previously signed by Mr. Simpson, was signed by Mr. Simpson again and by Mrs. Simpson on May 24, purportedly before a witness. Mrs. Simpson testified the witness was in a nearby room at the Canadian School in Brussels when the document was executed. Mr. Simpson stated that there was no witness when he first signed the draft letter and therefore he signed the draft letter a second time over his original signature and before the witness. Then his wife made him sign a third time, also before the witness; the third signature was affixed under his two previous signatures.

The note to the draft letter Mrs. Simpson had prepared earlier in her hand, was signed by Mr. Simpson and the witness; Mrs. Simpson did not sign the note. Reference to the note occurs in three places in the signed draft letter all in Mrs. Simpson’s hand. Above Mr. Simpson’s signature on the draft letter, in his hand, is the notation “with additions for 24 May note to me”. Reference in the note to the equalization payment being subject to the post was struck out. Mr. Simpson was to pay his wife the $26,000 before she left for Canada. Mrs. Simpson also undertook in the note that she would not “summons” her husband to “discoveries motions” if he would voluntarily submit to discoveries when in Canada. The note also referred to Bill C-55, the pension legislation, and medical insurance.

There were also additional comments by Mr. Simpson on the signed draft letter, after his signature. He wanted Mrs. Simpson to agree that they had “been living separate [sic] since 24 Mar. 1992”. She did not initial this comment nor his other comments regarding the end of child support for the younger child on her death, marriage or completion of high school, for example, and termination of support for Mrs. Simpson in case of her death, remarriage or cohabitation.

The first paragraph of the draft letter signed by Mr. Simpson and Mrs. Simpson requests Mr. Cross: “Would you please draw up an interim separation agreement. Here is the list of facts. Rae has agreed that you draw up this agreement ...”.

Mr. Simpson received a copy of the draft the day following its execution. He denied the words “draw up” in the draft mean “instruct”. Mr. Simpson said he viewed the draft as “instructions to Cross to take the agreement and make it into a fancy one”. He signed the draft letter, he said, because, if he wished to go to Egypt, he “had no alternative”.

Mrs. Simpson testified that although her husband’s letter of May 18 suggested agreement on pension, equalization payment and interim support, the executed draft letter of May 22 contained much more. This, she said, was due to “my husband telling me what should go into the agreement”.

On May 25 Mrs. Simpson faxed Mr. Cross advising that she would fax him “a letter for drawing up of an interim separation agreement, not a final settlement”. She advised the interim agreement would be signed by both her and her husband in Ottawa. She stated “the final settlement will happen a year from now or so”. Mrs. Simpson instructed Mr. Cross not to put “any of the wording as in” Ms. Johnson’s letter of May 4 (not in evidence), since the “Military colonels here ... chuckled at that section of her [the] letter”. Mrs. Simpson’s fax of May 25 to Mr. Cross included instructions that had not been agreed to by her husband. For example she wanted “the interim agreement to be quite clear that Rae be open to discoveries” and the support payments “continue and he guaranteed upon Rae’s death or remarriage”. Mrs. Simpson testified her eldest daughter faxed the signed draft letter of May 22 to Mr. Cross on May 25. Mr. Simpson said he was “amazed at the letter ... it was 1800 to what I thought was happening”.

Mr. Cross testified he considered the signed draft letter of May 22 not binding on the parties but instructions to him to prepare an agreement. He noted the draft letter was signed by Mrs. Simpson but additions to the agreement had not been initialed by her. In any event he wanted to speak to her and give her advice concerning the pension and life insurance on Mr. Simpson’s life. He did not think Mrs. Simpson was adequately protected, in particular if Mr. Simpson died. In cross-examination he described Mrs. Simpson as “scared, nervous and apprehensive” at the time and the draft letter was “a signal ... to get in touch with the client ... that she had all the information”.

Once Mr. and Mrs. Simpson signed the draft letter of May 22, Mr. Simpson was posted to Egypt. Before going to Egypt he visited Canada for three weeks and met Mr. Cross in Ottawa. On or about June 20 Mr. Cross gave Mr. Simpson a copy of a draft interim separation agreement he had prepared. Mr. Simpson wrote Mr. Cross on June 24 agreeing “with the Draft insofar as it reflects the agreement dated 22 May 92 (plus addendum) and signed by Sharlene and on 25 May 92 - this is the agreement which was faxed to you to be formalized in the subject Draft Interim Agreement”. In his letter Mr. Simpson stated Mr. Cross had informed him that the May 22 agreement was “non-prejudicial” to either party. Mr. Cross testified he could not remember “ever saying such a thing” and said he did not know what the words “non prejudicial” meant. Mr. Cross stated he had “a flash of anger” on receiving the letter from Mr. Simpson “when he alluded to an agreement that did not exist”. In cross-examination, Mr. Simpson indicated that he thought Mr. Cross was acting for both him and his wife. Mr. Cross denied this. Mr. Simpson requested numerous changes to the draft prepared by Mr. Cross to make “it consistent with the existing agreement”. Mr. Simpson thought the agreement was “open ended” and did not agree with the arrangements for life insurance, among other things. Many clauses in Mr. Cross’ draft were “window dressing” and “legalities” as far as Mr. Simpson was concerned. Mr. Simpson said he did not want anything not agreed to by him and Mrs. Simpson in the draft. He wanted the agreement to cover support only while he was in Egypt. He noted that until the changes were made “I consider the 22 May agreement to continue to be in force and binding on both of us”. Mr. Simpson advised Mr. Cross he would honour his obligations set out in the signed draft letter. Mr. Cross did not inform Mr. Simpson he was wrong to assume the signed draft letter was a binding agreement, Mr. Simpson declared.

Mr. Simpson said he was not aware his wife had been in further contact with Mr. Cross “with instructions” and that he “would not have signed [the] agreement if [it were] not satisfactory”. He testified that he “had more or less given up on Egypt” and as far as he was concerned he had signed an interim agreement to cover the period he was in Egypt.

Mr. Cross, on June 25, wrote to Mrs. Simpson attaching Mr. Simpson’s comments and expressed his doubt “an agreement will be reached ...”.

On February 2, 1993 Mr. Simpson wrote Mr. Cross mentioning his requests for changes to Mr. Cross’ draft agreement. Mr. Simpson referred to three telephone conversations he had with Mr. Cross in June 1992 and the latter’s advice to him that the signed draft of May 22, 1992 “would suffice as a written agreement for the duration of my tour of duty ...”. Mr. Cross did not recall the telephone calls. His reaction to this letter was that Mr. Simpson was “dead wrong”, that he does “not give advice to the opposing side”. Meanwhile Mrs. Simpson had discharged Mr. Cross and had no contact with him after July 1, 1992. Mrs. Simpson had decided to secure the services of another lawyer.

Mrs. Simpson agreed she had received the $26,000 from her husband and monthly payments of $2,900 from his pay allotment starting on July 1, 1992. Mrs. Simpson declared she had accepted the payments “because I needed the support” for herself and the children and not because Mr. Simpson had been obliged to make the payments pursuant to a written agreement.

Litigation between the spouses followed upon Mr. Simpson’s return to Canada. Mrs. Simpson made several applications to the Ontario Courts for maintenance. In one application Mrs. Simpson failed to serve notice of her application to Mr. Simpson. In an endorsement to an Order of February 27, 1995 Sedgwick J. of the Ontario Court wrote:

I have serious doubts whether the plaintiff (Mrs. Simpson) complied with her obligation ... to make full and fair disclosure of all material facts. In the circumstances ... the motion made by the plaintiff without notice ... [in] my view approaches an abuse of process.

Analysis of Evidence

Counsel for Mrs. Simpson and Mr. Simpson presented more than adequate submissions of fact and law on behalf of their clients. However their submissions were premised on the basis I accept the evidence of one or the other of their clients. This was not an impossible task, but it was difficult. Neither Mr. Simpson nor Mrs. Simpson was willing to give evidence with any candor. During the testimony of Mr. Simpson, who testified after his wife, I concluded that neither he nor Mrs. Simpson was on the side of the angels. Their evidence was wholly self-serving: each tried to show how good and fair he or she was and how terrible the other was. It may be that over the past four years their views of what happened in 1992 and subsequently have been coloured by the emotion of marital breakdown; the scars are still open and festering.

Mr. Simpson was very defensive at the beginning of his cross- examination. He treated the first half hour of questions with suspicion, frequently asking his wife’s counsel to clarify obvious questions. At times his answers were evasive, trying to avoid a simple “yes” or “no” reply. Later he stated he did not know “Major” Bishop; when counsel corrected Bishop’s rank to “Colonel”, Mr. Simpson quite freely admitted he knew “Colonel” Bishop. Bishop’s rank was unimportant to the question but Mr. Simpson’s distrust of opposing counsel led to him being very guarded when answering questions. Mr. Simpson did not appreciate being in a position where he had to explain his actions or motives. He has a view of events that, in his mind, one ought not to question.

Mrs. Simpson’s evidence also was unsatisfactory. At times she appeared to misunderstand questions put to her by her own counsel; it was as if she feared her answers. She testified she did not sign the draft letter of May 22 in the presence of a witness. This is contrary to Mr. Simpson’s testimony on this particular issue which, on the balance of probability, I accept as fact. There is no reason for Mr. Simpson to have signed his name a second and third time on the draft letter except that Mrs. Simpson insisted he do so in the presence of a witness. Also, her reason for adding the words “Without Prejudice” to the various draft letters suggests that she wanted Mr. Simpson bound to the agreement but she wanted to retain the freedom to change her mind.

Of course not all the testimony of the Simpsons was exaggerated or downright mean. From time to time I recognized some truth in their evidence.

For whatever reason, Mr. Simpson personally negotiated with his wife without the benefit of the solicitor he had earlier hired. I do not accept Mr. Simpson’s reason for acting on his own was that Mrs. Simpson told him she objected to him having a lawyer. The reasons are that he wished to save money, that he thought he could manipulate Mr. Cross to defend his interests with his wife and that he was confident he could outsmart his wife during negotiations in Belgium. In correspondence with Mrs. Simpson, Mr. Simpson frequently held out the carrot of reconciliation.

Mr. Simpson wanted an interim agreement for the time of his post in Egypt. A final agreement would be negotiated on his return to Canada. Mrs. Simpson agreed to an interim agreement although she had earlier preferred a final agreement. However, she wished the interim agreement to continue until a permanent agreement was reached.

Subsection 60(b) read, in 1992, as follows: [3]

There may be deducted in computing a taxpayer’s income for a taxation year such of the following amounts as are applicable:

(b) an amount paid by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if he was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, his spouse or former spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year;

Now, was the signed draft letter of May 22 a written agreement, more precisely a written separation agreement? The test for whether an informal agreement in which the parties agree to draw up a formal contract is itself a contract is found in Bawitko Investment Ltd. v. Kernels Popcorn Ltd (1991), 79 D.L.R. (4th) 97, 53 O.A.C. 314 (Ont. C.A.). At page 104, Robins J.A. sets out three criteria:

(1) The parties must have intended to be bound. It is in answering this question that the label, “Without Prejudice”, may be important;

(2) The informal contract must not be uncertain or vague; and,

(3) The essential terms of the contract must be settled.

In Bawitko, the plaintiff wished to enter into a franchise agreement with the defendant. Representatives of the plaintiff and the defendant orally agreed to four points of variation from the detailed standard form franchise contract used by the defendant. The parties also agreed that a formal written contract would embody their agreement. Subsequently, the defendant sent a standard form contract to the plaintiff for execution but it did not comply with the terms of the oral agreement.

The Court of Appeal held the parties had not agreed to the essential terms of the agreement. The four points on which the parties agreed were the only terms on which the parties agreed. They had not addressed other terms contained in the standard form agreement. The complex terms of the standard form agreement could not be regarded as mere formalities.

In concluding there was no agreement, the Court considered the subsequent conduct of the parties; the respondent wanted the appellants to negotiate further (page 106) and the appellants sought terms different than those found in the purported agreement. Neither party acted as if it was bound by the contract (page 107).

The reasons in Bawitko, supra, have been applied to determine if a separation agreement had been reached. In Lee-Chin v. Lee-Chin (1993), [1994] 1 R.F.L. (4th) 351 (Ont. U.F.C.), the parties and their lawyers met and discussed support and other issues. They also divided the parties’ jade collection. The husband believed an oral agreement existed and sought to enforce it. Beckett J. dismissed his motion. He states, at pages 361-62:

The cases make clear that whether or not parties are bound immediately by an informal oral agreement is a question of fact to be determined in each case. If the evidence indicates that the execution of a formal contract is a condition of the bargain, then the informal agreement is merely a “contract to make a contract,” and is not binding on the parties until a formal execution of an agreement. On the other hand, if the evidence indicates that the execution of a formal contract is merely the expression of the already complete and binding contract, then the informal agreement is binding and the formal documentation need not be completed. The Cal van [Consolidated Oil & Gas Co. v. Manning, [1959] S.C.R. 253] case indicates that when words such as “subject to contract” are used, it is a qualified or conditional acceptance.

The parties in Lee-Chin did not intend to enter a binding contract. It was true that some issues had been settled. However, the agreement was made without prejudice and was subject to the making up of a formal contract and to the resolution of tax issues. There was no confirmation in the surrounding circumstances of a final and binding agreement (page 362).

On the authority of these cases the executed draft letter of May 22, 1992 was a binding written agreement.

Appellant’s counsel, Mr. Miller, submitted that his client did not intend that the signed draft letter to be an agreement, but only a letter of instructions to Mr. Cross. This according to Mr. Miller is what Mr. Simpson said he wanted in his letter of May 19, 1992. Mr. Miller noted that Mrs. Simpson did not initial, and therefore did not agree, with Mr. Simpson’s comments and additions at the bottom of the draft letter, below the signatures. He stated the reason the words “Without Prejudice” were written on the draft letters written by Mrs. Simpson was that she wanted her lawyer to verify what should go into the agreement. While Mrs. Simpson may not have understood what the words “Without Prejudice” meant, she knew these words “would give her time to have her lawyer check it out”. At all times Mr. Simpson and Mrs. Simpson agreed “the legalities would be worked out in Ottawa”. Mr. Cross also viewed the signed draft letter as his instructions.

Counsel for Mrs. Simpson observed that the note to the signed draft letter mentioned Mr. Simpson’s pension and severance but had no detail other than a reference to Bill C-55. The reference to pension and severance, counsel declared, was vague and uncertain. This was because Mrs. Simpson wished to consult with her lawyer in Ottawa. He also suggested the draft letter did not contemplate any reduction in support payments if the minor child died, for example. Terms in the draft letter were not settled by the parties; hence, there was no agreement, counsel declared.

Still, there was a binding agreement, albeit an interim one.

I agree with counsel for Mrs. Simpson who suggested that his client did not want the agreement to terminate on Mr. Simpson’s return from Egypt. However, she knew the agreement was to be an interim; her letter of May 25 to Mr. Cross acknowledges the agreement is “not a final settlement”. She wanted the interim agreement to continue in force until a final agreement was made.

There is no doubt that Mr. Simpson and Mrs. Simpson instructed Mr. Cross in the signed draft letter to prepare a formal agreement. The signed draft letter set out the various items agreed by Mrs. Simpson and Mr. Simpson. Mr. Simpson’s comments and additions below their signatures were not initialed by Mrs. Simpson and are not part of the agreement; Mrs. Simpson did not agree to them. However, the note of May 24, 1992, referred to in the draft letter, is incorporated into the signed draft letter by reference. At the time the draft letter was signed Mrs. Simpson took pain to ensure that Mr. Simpson’s signature was witnessed. This was important to her since subsection 55(1) of the Ontario Family Law Act, states that a domestic contract, which includes a separation agreement, is unenforceable unless it is made in writing, signed by the parties and witnessed. There is no other reason for Mrs. Simpson to have insisted Mr. Simpson sign his name a third time to the draft letter - and for him to do so before a witness - unless she intended the draft to be a binding agreement between her and Mr. Simpson until Mr. Cross prepared a formal agreement in Ottawa.

The document before me is signed by both spouses. This was not a simple letter to a solicitor to draw up a separation agreement. Mrs. Simpson wanted the $26,000 equalization payment before leaving Belgium for Canada; she specifies this demand in the note of May 24, 1992. It is obvious that Mr. Simpson would make this payment only if he were obliged by an agreement with his wife to do so. The $26,000 was paid by Mr. Simpson on June 2, 1992 and was received by Mrs. Simpson pursuant to the agreement contained in the signed draft letter.

The parties acted as if they were bound by the terms of the draft letter. On June 26, Mr. Simpson transferred from his account to Mrs. Simpson’s account amounts of $2,900 as support for each of July and August 1992. He also authorized the military authorities to pay to Mrs. Simpson monthly out of his salary the amount of $2,900 as support. These payments commenced on August 1, 1992 and ended on May 31, 1993. Mrs. Simpson accepted these payments without any hesitation. She testified she accepted the money not because Mr. Simpson made the payments pursuant to the signed draft letter of May 22 but because she needed the money. I do not accept her reason. In my view the payments were made by Mr. Simpson and received by Mrs. Simpson pursuant to the terms in the draft letter they signed.

On the facts of this case the signed draft letter was a binding agreement and reference to any document to be prepared by Mr. Cross may be ignored. The signed draft letter sets out the desire and agreement of the parties for the support payments, among other things. The agreement to be prepared by Mr. Cross would merely confirm in a “formal” or “legalistic” way what the spouses had already agreed.

Furthermore, the words “Without Prejudice” in the letters did not prevent the draft letter from being a binding agreement. When Mrs. Simpson sent the various draft letters to her husband, she wanted to be in a position where she, but not he, could alter its terms. The words “Without Prejudice” were directed not to Mr. Cross, to whom the letters were addressed, but to Mr. Simpson. These words at the head of each draft letter were an attempt by Mrs. Simpson, as it is said, to have her cake and eat it too.

Where a document is marked “Without Prejudice”, the admissions of the person who made the document may not be used against him or her. This rule applies only where the document is made and sent in the course of negotiating an agreement and these negotiations fail. If negotiations result in an agreement, the document is admissible in evidence against its maker. See, for example, Maracle v. Travellers Indemnity Co. of Canada (sub nom. Travellers Indemnity Co. of Canada v. Maracle), [1994] 2 S.C.R. 50, 80 D.L.R. (4th) 652 at page 59 per Sopinka J. and Thibodeau v. Thibodeau (1984), 47, C.P.C. 224, 65 N.S.R. (2d) 442 at pages 443-44 (S.C.T.D.).

Once Mr. Simpson and Mrs. Simpson both signed the draft letter, any privilege the words “Without Prejudice” might have conferred had ended. By signing the draft letter, Mrs. Simpson consented to its terms. The words “Without Prejudice” are not open ended. I do not believe Mrs. Simpson really thought that she could sign an agreement and not be bound by its terms. Mrs. Simpson could have altered or rejected the terms of the draft letter after Mr. Simpson signed the draft letter. She had not yet signed the letter. Any variation of the terms by her would require her husband’s consent. However, once she and Mr. Simpson both affixed their signatures to the draft letter, she lost any privilege the words may have given her. In an old Ontario case of Vardon v. Vardon (1885), 6 O.R. 719 (Ch. D.), the plaintiffs wife had separated from her husband. She sued him for alimony. In correspondence she and her husband attempted to reach a settlement. The settlement alleged by the wife involved the payment of money and the conveyance of land to her. Wilson C.J., of the Chancery Division, ordered specific performance of the conveyance. His decision was upheld by the Divisional Court: at page 738.

In reaching this conclusion, Wilson C.J., at page 728, examined the correspondence, some of which was marked “Without Prejudice”:

It was contended, however, by the defendant’s counsel, that the correspondence cannot be referred to, even to enforce the contract, so long as the negotiations by which it was effected were carried on “without prejudice”.

But that would lead to this result.. If A. made a proposal “without prejudice” and B. wrote an answer accepting and closing with the proposal, and, I will assume, he too added “without prejudice”, so that that was a perfect contract, yet it could not be enforced. I received the correspondence to enable me to say whether there had or had not been constituted a binding contract.

[Emphasis added]

I have applied the laws of Ontario in this appeal. Questions were put to Mr. Simpson and Mrs. Simpson whether they intended the laws of Canada, in particular Ontario, or Belgium to apply to their separation agreement. It is clear that while neither Mr. Simpson nor Mrs. Simpson appears to have directed his or her mind specifically to this question, each intended the laws of Ontario to apply. Each originally obtained the services of lawyers in Ontario. Mrs. Simpson and Mr. Simpson intended to execute the formal agreement in Ottawa. During negotiations and in the signed draft letters both spouses refer to the application of Canadian law, or proposed law, in particular Bill C-55. The signed draft agreement was executed according to formalities required under an Ontario statute. Both persons were domiciled and resident in Canada and intended to return shortly to Canada, Mrs. Simpson almost immediately and Mr. Simpson when his post was over. Their minds were always directed to Canadian laws and it is obvious they intended that Canadian laws apply. I therefore find that the agreement be interpreted under the laws of Ontario and Canada.

Counsel for Mrs. Simpson also submitted that if the signed draft letter is a written agreement, then it is not an agreement contemplated by paragraph 56(1 )(b) and subsection 60(b) of the Act. The spouses were not living separate and apart pursuant to a written separation agreement. That is, the signed draft letter does not provide for Mr. Simpson and Mrs. Simpson to live separate and apart. He cited Burgess v. R. (sub nom. Burgess v. Minister of National Revenue), [1991] 1 C.T.C. 163, 91 D.T.C. 5076 (F.C.T.D.), at pages 165-66 (D.T.C. 5078), and Shapiro v. Minister of National Revenue, [1991] 1 C.T.C. 2112, 91 D.T.C. 227 (T.C.C.) at pages 2114-15 (D.T.C. 230) as authority.

The definition of “separation agreement” in the Act is not helpful since it applies to an agreement for payment for the maintenance of a former spouse, which is not the situation here.

Moreover, the facts in Burgess and Shapiro are quite different from those in the appeal at bar and these cases do not assist Mrs. Simpson. Read J. held in Burgess that an exchange of correspondence between lawyers did not constitute a “written separation agreement” within the meaning of subsection 60(b) of the Act. A written separation agreement must govern “the relationship of the taxpayer to his spouse”. I do not agree with my former colleague Goetz T.C.J. that for maintenance payments to be included in income, it is a requirement of paragraph 56(1 )(b) that payments must be received pursuant to a written agreement that contains a provision requiring that the parties live separate and apart. I prefer the view of Mogan T.C.J. in Lay v. R. (sub nom. Lay v. Canada), [1993] 2 C.T.C. 2916, 95 D.T.C. 272 (T.C.C.), at page 2921 (D.T.C. 275) that since:

there is no provision in paragraph 60(b) that the written agreement must contain a covenant to live separate and apart, although I would clearly agree with Judge Goetz that it is an essential ingredient that the parties have agreed to live separate and apart. Paragraph 60(b) simply states “.. if he was living apart from, and was separated pursuant to a ... written separation agreement from, his spouse ...”. In this appeal, it is implicit from the terms of the two written agreements that the Appellant and his wife have agreed to live apart.

Judge Mogan found, at page 2921 (D.T.C. 275) that:

In this appeal, it is implicit from the terms of the two written agreements that the appellant and his wife have agreed to live apart.

See also Nelson v. R. (sub nom. Nelson v. Canada), [1994] 1 C.T.C. 2031, 94 D.T.C. 1003 at pages C.T.C. 2038-39 (D.T.C. 1009) and Horner v. R. (sub nom. Horner v. Canada), [1993] 2 C.T.C. 2022, 93 D.T.C. 707 at pages C.T.C. 2025-26 (D.T.C. 709-10).

In Lay and in other private law cases, Courts have examined circumstances surrounding the making of a separation agreement to determine whether the parties were living separate and apart at the time. In Doroshenko v. Doroshenko (1979), 9 R.F.L. (2d) 61, 4 Fam. L. Rev. 309, (Ont. Co. Ct), the husband conveyed his interest in the matrimonial home to his wife. She later sold the house. He asked for a division of the family assets, claiming a portion of the proceeds of the sale. The court decided that the husband was entitled to $10,000 out of the $53,000 sale price. McCart J. noted that the separation agreement was void because it was contrary to public policy; it was made while the parties were living together. The Court looked at external circumstances to come to this conclusion. See also Thierry v. Thierry (1956), 18 W.W.R. 127, 2 D.L.R. (2d) 419 (Sask. C.A.) and Woods v. Woods, [1927] 60 O.L.R. 438, [1927] 3 D.L.R. 321 (H.C.).

In Cushman v. Cushman (1979), 10 R.F.L. (2d) 305 (Ont. H.C.), the Court granted the parties a divorce and divided the family assets unequally. It considered the effect of the transitional rule in subsection 59(3) of the Family Law Reform Act of Ontario at the time. That subsection permitted transfers of property pursuant to an agreement made before the statute came into force to be treated as if they had been made pursuant to a domestic contract under the Act. The rule applied only to parties who were living separate and apart when they made the contract. Therefore, McDermid J. had to determine whether the parties before him had been living separate and apart at the time the husband had quit claimed his interest in the matrimonial home to his wife (see page 310). He found that at that time the spouses had been living together. McDermid J. relied on extrinsic evidence, the testimony of the wife, in making his finding.

Furthermore, it appears that while the parties must separate prior to entering into a separation agreement, they need not stipulate in this agreement that they have separated. In Rutherford v. Rutherford (1981), [1981] 6 W.W.R. 485, 30 B.C.L.R. 145 (C.A.), Seaton J.A. examined the provisions of British Columbia’s Family Relations Act, S.B.C. 1978, c. 20. The Court held that a husband’s pension plan was a family asset. The date this asset had to be valued depended in part on deciding when a separation agreement had been made. Although subsection 43(1) of the Act uses the term “separation agreement”, the term is not defined. At page 153, Seaton J.A. cites The Canadian Law Dictionary, 1980 for the definition of “separation agreement”:

An arrangement evidenced in writing between a husband and wife to live apart and which usually sets out the terms of the financial support that one is to provide the other, the custody of children, the rights of the non-custodial parent to access to the children, the provision of financial support of the children, the division of matrimonial properties, etc....

He then concludes, at pages 153-54:

The term “separation agreement” is found associated with marriage agreements that must be in writing and witnessed, and court orders. It would be unlikely that a casual agreement — “Shall we separate?” “Yes — let’s” - would belong in that company. It follows that to be a separation agreement the arrangement must be a formal one. I do not go so far as to say that it must be in writing.

The Act seems to use the term separation agreement to describe contracts that divide property, arrange custody, provide maintenance and that sort of thing. It has in mind agreements entered into upon separation rather than agreements to separate.

[Emphasis added. ]

This also reflects the wording of subsection 55(1) of the Ontario Family Law Act, R.S.O., 1990 c.F-3. Under subsection 55(1) of the Ontario Family Law Act, spouses may not enter into separation agreements until they are living separate and apart.

Seaton J.A. held, at page 153, that the spouses had not entered into a separation agreement:

In my view this Act, when it refers to a separation agreement contemplates something more than an oral agreement to live apart.

As in Lay, it is implicit in the draft letter that the parties have separated. Mr. Miller insisted Mrs. Simpson never agreed to live separate and apart from Mr. Simpson and even on May 24, 1992 was hoping for a reconciliation. This submission is contrary to the facts: in her letter of May 25, 1992 to Mr. Cross she refers to an “interim separation agreement”; all draft letters of May 22, also refer to “an interim separation agreement”. Mrs. Simpson insisted on an equalization payment, support payments, and custody of the children because she realized she and her husband were separated.

The draft letter was a written separation agreement fo the purposes of the Act.

Conclusion

Finally, to recapitulate: the signed draft letter is an interim agreement between Mr. Simpson and Mrs. Simpson for Mr. Simpson to pay monthly support to his wife for her maintenance and that of their minor child. In 1992 Mr. Simpson made the monthly payments and Mrs. Simpson received these payments pursuant to the signed draft letter of May 22. This signed draft letter was a written separation agreement; it governed certain relations between the spouses. At the times the monthly payments were made Mr. Simpson and Mrs. Simpson were separated pursuant to the signed draft agreement. Therefore my determination is as follows:

(a) The amount of $17,400 received by Sharlene M.A. Simpson during the 1992 taxation year should be included in the computation of her income; and

(b) Rae R. Simpson is entitled to deduct alimony payments made within the 1992 taxation year in the amount of $17,400.

Mrs. Simpson’s appeal from her assessment for 1992 is therefore dismissed.

Mrs. Simpson appealed from assessments for 1992 and 1993 but, ac- cording to Revenue Canada, she had failed to file a Notice of Objection from the assessment for 1993. No evidence was led whether a Notice of Objection was filed. Unfortunately, this was not part of the determination. However, respondent’s counsel failed to raise the matter during evidence at trial and only replied to it when I queried him during argument. Of course, if Mrs. Simpson had filed a Notice of Objection I would have dismissed her appeal for 1993 for the same reasons as her appeal from the assessment for 1992. If she did not file a Notice of Objection I would quash her appeal. To the extent that this issue was not presented at trial, it remains unresolved. If the interested parties agree whether or not a Notice of Objection was filed for 1993 I am prepared to issue a formal Judgment for that year’s appeal.

There shall be no order as to costs.

Appeal dismissed.