Heather Marie Horner v. Her Majesty the Queen, [1993] 2 CTC 2022

Margeson, T.C.C.J. (orally):—In the 1990 taxation year the Minister reassessed the appellant by including in income for that year the amount of $33,200 on the basis that it was received by the appellant in that 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 appellant, children of the marriage, or both the appellant and children of the marriage.

The respondent relied upon the provisions of paragraphs 56(1)(b) and 56(1)(c) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") and argued that the amounts were properly included in computing the appellant's income pursuant to those provisions. The appellant filed her appeal through a solicitor but acted for herself on the hearing.

Facts

The evidence before this Court disclosed that the appellant’s spouse was encountering financial difficulties in the years 1980 and 1981, was losing money on the stock market in Vancouver and in order to assist him in paying his bills she mortgaged her house in the amount of $91,000 and this was applied to his outstanding indebtedness. In December of 1989 the husband again sought further loans from the appellant and then she decided to seek legal advice with the intention of protecting her property but at the same time allowing her spouse to live in the home and she was advised by a Mr. Ken Stevenson in February of 1990.

Later on, a document that she referred to as an Interspousal Agreement was executed on April 23, 1990. However, before that occurred the appellant had her solicitor send a letter to her spouse dated March 29, 1990, indicating that she was desirous of a reconciliation but wanted an Interspousal Agreement providing for ownership and possession of the matrimonial home in the appellant. According to this agreement each would be responsible for their own debts, each person would renounce any rights in the other's property, and there was to be a provision for payment of maintenance for the appellant and their three children in the amount of $3,800 per month.

A letter was introduced into evidence as Exhibit A-3 and the agreement was introduced as Exhibit A-4. All these exhibits and others referred to were admitted by agreement.

In her evidence in court the appellant maintained that it was not her intention to seek a separation but a reconciliation and the agreement was never referred to as a separation agreement. She also noted that the agreement did not refer to continuing to live separate and apart and the letter itself did not refer to living separate and apart at that time or in the future.

The evidence of the appellant was that the husband initially moved out so that the parties could try and work things out. They initially set three weeks as the period of time required for this, during which period of time she would go on vacation and he would live with his mother. Upon her return the appellant continued hearing rumors about her husband's infidelity, which he continued to deny even though he was seen by his spouse in the company of other women.

In December of 1990, the appellant engaged the services of an investigator which confirmed not only her suspicions but what must have been obvious to her for some time and she decided to put the marriage to rest and started divorce proceedings. There is no evidence before me indicating that the parties ever lived together again since sometime before the execution of Exhibit A-3, that is, the sending of the letter Exhibit A-3 on March 29, 1990, or after the appellant's return from her vacation.

The appellant said she did not look upon the payments under Exhibit A-4 as maintenance payments but as a repayment of money loaned to her spouse by herself. She contended that the payments were a form of property settlement. The appellant sought her accountant's advice on the matter of the agreement and he told her she would have to pay taxes on it. She decided to pay the taxes and to argue about it later. She sought legal advice about it and concluded that the receipts were not taxable in her hands. On May 17, 1991, an order was issued by the Court of Queen’s Bench of Saskatchewan requiring the husband to pay the appellant $2,500 per month for maintenance of the children of the marriage and the same day a further order was issued by the same Court purporting to exempt the payments made under the agreement of April 23, 1990, from inclusion in the appellant's income and making them taxable in the husband's hands.

In cross-examination the appellant admitted that her spouse had gone into bankruptcy on April 30, 1991, and candidly admitted that no taxes could be collected from him on those amounts. Further, the appellant admitted that she knew Exhibit A-4, that is the agreement, was a serious agreement, that it dealt with the provision of maintenance, that it was meant to survive the divorce, that she knew what it meant, including the payment of maintenance during separation, that it referred to the parties having lived separate and apart, that he moved out in March and never returned and that the agreement was signed after the holidays were over.

Respondent's position

The respondent argues that Exhibit A-4 is a written agreement under paragraph 56(1)(b) and is also a separation agreement under the definition of subsection 248(1) of the Income Tax Act. He argues that the agreement fulfilled all the requirements of paragraph 56(1)(b). It is the respondent's position that it was binding at all times. He argues that it is immaterial that it was made before the divorce. It provides for periodic payments of maintenance for the children, that the payments are made pursuant to the agreement and that the recipient was living separate and apart from her spouse pursuant to the agreement.

The position of the respondent is that the whole rationale of the agreement was to live separate and apart. Otherwise, why would you have an agreement? Further, he says, the evidence of the appellant herself makes it clear that they were living separate and apart pursuant to the agreement and that payments were made pursuant to it. The respondent says it is clear that the husband went into bankruptcy shortly before the agreement was signed, that no funds could be recovered from him, and that the orders A-7 and A-8 could have no effect on the taxability of the appellant and were made without jurisdiction because the jurisdiction for such matters rests with the Tax Court of Canada.

Appellant’s position

According to the pleadings, which position was echoed by the appellant in her testimony and argument before me, it is contended that Exhibit A-4, the agreement, is an interspousal agreement entered into for the purposes of reconciliation, not for the purpose of separation, and as a property settlement. The appellant argues that this is confirmed by the letter of March 29, 1990, Exhibit A-3.

Further, the agreement does not contain a clause requiring the appellant and her spouse to live separate and apart and that is fatal under paragraph 56(1)(b) of the Income Tax Act and subsection 248(1).

The appellant takes the position that a formal separation did not take place until the spring of 1991 when the application was made to the Court of Queen's Bench requiring the spouse to pay maintenance.

Finally, the appellant argues that the agreement does not contain a provision requiring the spouses to live separate and apart and that indeed the spouses were not living separate and apart as a result of the agreement. The appellant says one of the requirements of the agreement is missing; therefore, the payments were not taxable in the hands of the appellant.

Analysis and decision

The term "alimony" as defined in paragraph 56(1)(b) of the Income Tax Act requires the following: (1) an agreement; (2) that an amount be received; (3) that the amount be received pursuant to the agreement; (4) that the amount be received for the maintenance of the recipient and/or children of the marriage; (5) that the recipient be living separate and apart from the payor at the time that the moneys were received and throughout the remainder of the year;

(6) the recipient was living separate and apart from the payor pursuant to the agreement.

Subsection 248(1) broadens the term “separation agreement" by including under it agreements made before or after the marriage was dissolved. This subsection in no way limits the provisions of paragraph 56(1)(b).

There is no real argument here whether Exhibit A-4 is an agreement. That is certain. It is also certain that an amount was received, that the amount was received for the maintenance of the recipient appellant and/or the children of the marriage, that the recipient was living separate and apart from the payor at the time of the payment and throughout the remainder of the year. The only remaining issues, therefore, are whether or not the amount was received pursuant to the agreement and if it was, whether or not the recipient was living apart from the payor and was separated pursuant to the agreement.

The appellant’s solicitor, in her pleading used the term "as a result of a written separation agreement" but the paragraph clearly refers to the word "pursuant". The shorter Oxford Dictionary defines "pursuant" inter alia as "in accordance with”, and the fifth edition of Black’s Law Dictionary defines "pursuant" inter alia as "to execute or carry out in accordance with or by reason of something.” “Also, in the course of carrying out, in conformance to, or agreement with, according to.”

I am satisfied on all the evidence before me that the amount was received pursuant to the written agreement. Exhibit A-4 clearly spells out the amount of the payment, what the payment is for, when it is to be paid, for how long it is to continue and even refers to it as maintenance for the children. I could not reasonably come to any other conclusion.

The most favourable interpretation that could be given to the provisions of paragraph 56(1)(b) insofar as the appellant is concerned would be that it requires that the recipient must have been living separate and apart from the payor at a time of the receipt pursuant to the written agreement and further that the parties must have separated pursuant to the written agreement. A further interpretation could be that the section only requires that the spouses had been separated and that the payments were made pursuant to the written agreement but that the separation need not be as a result of the written agreement.

If one adopted the more restrictive approach offered by the appellant it would be almost impossible to satisfy both requirements in the absence of such a specific clause in the agreement or the admission of the recipient that the payments were made pursuant thereto.

I am inclined to accept the less restrictive view, but even if I am wrong in that, after a proper review of the evidence, including the viva voce evidence of the appellant herself and the exhibits, I can come to no other conclusion than that at the time Exhibit A-4 was executed on April 23, 1990, that both the husband and wife had agreed to enter into this agreement as the basis for governing their relationship thereafter until something changed, which was unlikely.

It may have been that there was some glimmer of hope that reconciliation might take place between the parties, but it was ever so slight. That in itself does not mean that they were not separating in accordance with the agreement from that point on, they intended to live separate and apart from that time and the written agreement was to govern the relationship between the parties thereafter.

I am satisfied that the spouses had concluded that, that the appellant's accountant had concluded that, and if the husband had not been in the financial position that he was in and indeed had not gone into bankruptcy when he did the spouses would not have considered the facts to be otherwise.

I am satisfied in the end that the spouses were separated pursuant to the written agreement and indeed were living separate and apart pursuant to the written agreement at the time of the receipt of the funds by the appellant.

The only remaining question is whether or not the agreement must include a clause requiring the parties to live separate and apart. I can see nothing in the relevant provisions that would lead me to that conclusion. However, the agreement in issue here clearly states that the parties have been living separate and apart and everything that follows thereafter clearly indicates that the parties will continue to live separate and apart and that the executed agreement will regulate their relationship.

It seems absurd to me that the failure to include such a statement in the agreement would prevent the agreement from being considered to have satisfied all of the requirements of paragraph 56(1)(b) and to be anything other than that which it purported to be.

I have considered all the cases referred to by both parties but the one that gives me most difficulty is Shapiro v. M.N.R., [1991] 1 C.T.C. 2112, 91 D.T.C. 227 (T.C.C.), which purports to require that the agreement itself spell out that the parties agree to live separate and apart. That case can be distinguished from the case at bar in that Exhibit A-4 in this case does refer to the fact that the parties were living separate and apart since March 21, 1990, and everything that follows thereafter proclaims loudly that the parties intend to continue to live separate and apart, and under the terms of the agreement.

The learned trial judge in that case referred to the case of Kapel v. M.N.R.,

[1979] C.T.C. 2187, 79 D.T.C. 199 (T.R.B.), in indicating the same requirements. However, in that case there was no written agreement signed by Mrs. Kapel and there was nothing from which the Court could conclude that she had agreed in writing to live separate and apart. I do not conclude that the case of Kapel, supra, stands for the proposition that the agreement must specifically state that the parties will live separate and apart when the only reasonable interpretation of the agreement was that that was their intention.

The appellant put into evidence Exhibit A-10 which was Interpretation Bulletin IT-118R3 dated December 21, 1990, which puts forth the position that the agreement must specifically state that the parties have agreed to live separate and apart from one another. I am not bound to accept such an interpretation and I do not for the reasons given above. Further, I do not consider myself bound by the terms of Exhibit A-7 or Exhibit A-8 which are the orders of the Court of Queen's Bench wherein the Court purported to characterize the payments herein as non-deductible by the husband for income tax purposes and non-taxable in the hands of the wife as income.

For the above reasons the appeal is dismissed.

Appeal dismissed.