J. Ross Maclachlan v. Her Majesty the Queen, [1992] 1 CTC 2089

Brulé, T.C.C.J.:—This is an appeal from a reassessment of income tax for the 1987 taxation year which reassessment was made on the basis that the appellant was not entitled to deduct the sum of $24,750 under the provisions of either paragraph 60(b) or subsection 60.1(3) of the Income Tax Act, R.S.C. 1952,

c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") for payments made to his former spouse.

Facts

The appellant, a resident of British Columbia, was married to Lynda Louise MacLachlan (“the spouse") on April 17, 1979. One child of the appellant's spouse born on July 17, 1970 and adopted by the appellant was brought into the marriage. The appellant and his spouse commenced to live separate and apart on June 19, 1986, and a decree of divorce was pronounced on September 16, 1987.

On July 8, 1986, the appellant and his spouse entered into an agreement, the interim separation agreement, whereby the appellant agreed to pay to his spouse interim maintenance and support for herself and the child the sum of $3,500 per month for the months of July, August, and September 1986. The agreement further provided that after September 1986 the parties would agree to continue the agreement, enter into a new agreement, or seek relief from a court of competent jurisdiction.

The appellant continued to make payments after September 1986, and gave his spouse $3,500 per month for the remaining months in 1986. There is, however, no evidence as to whether the parties had agreed to continue the agreement or had entered into a new agreement, and no relief was sought from a court of competent jurisdiction.

In 1987, the appellant continued to make payments to his spouse. In letters dated January 6, February 10, and February 26, 1987, the appellant gave his spouse three payments of $2,500. Although not specified in the pleadings, the appellant apparently paid $1,250 to his spouse in April 1987.

By letter dated May 6, 1987, the appellant sent his spouse $2,000 and stated that he was confirming that the sums paid during the months of January through May 1987 would be considered by both parties as maintenance payments for tax purposes. In reply to this letter, the appellant's spouse stated that apart from the most recent payment of $2,000, the parties had not agreed that those sums would be treated as maintenance payments for tax purposes.

By letter dated June 1, 1987, the appellant sent his spouse $2,000. By letter dated June 30, 1987, the appellant sent his spouse three cheques of $2,000 for the months of July, August, and September 1987. And by letter dated October 6, 1987, the appellant sent his spouse another cheque for $2,000.

On November 13, 1987, the appellant's solicitors sent a letter to the spouse's solicitors. This letter was intended to confirm some sort of settlement between the parties. Among other things, it was stated that the appellant would pay $2,000 per month to his former spouse up to and including the month of March 1988 or until the settlement of a court action, whichever occurred first. Yet this letter was signed only by the solicitor for the appellant.

In an agreement dated December 31, 1987, the parties agreed that payments totalling $24,750 had been made during 1987 but that the characterization of such payments would be determined by the trial judge in the action or by further agreement between the parties. The relevant portions of this agreement are as follows:

D. The Husband has made payments to the Wife since October, 1986 for her support and for the support of the Child, which have yet to be characterized by the parties for tax purposes. The trial in the action commenced by the Wife against the Husband for maintenance and division of property, (the "the Action") is set to recommence on March 21, 1988.

2. THE PARTIES FURTHER AGREE that the following further payments were made by the Husband to the Wife during the 1987 calendar year:

(a) In the months of January, February and March, 1987, the sum of Two Thousand, Five Hundred ($2,500.00) Dollars per month;

(b) During the month of April, 1987, the sum of One Thousand, Two Hundred Fifty ($1,250.00) Dollars;

(c) During the months of May to December, 1987, inclusive, the sum of Two Thousand ($2,000.00) Dollars per month.

The parties agree that the characterization of such payments for tax purposes will be determined by the Trial Judge in the Action or by further agreement between the parties.

In his reasons for judgment dated March 9, 1989, Honourable Judge Skipp stated that: "The wife must pay income tax on maintenance paid to her by her husband pursuant to a court order and I am without jurisdiction to order that voluntary payments made by him, which are unarguably and indisputably maintenance payments, be deducted by him from his income."

Appellant's Position

The appellant claims that the payments made to the spouse pursuant to the interim separation agreement and/or the supplemental agreement come within the scope of paragraphs 60(b) or (c) or (c.1) or section 60.1 and should be allowed as a deduction for the 1987 taxation year. The appellant further contends that payments made pursuant to the December 31, 1987 agreement were maintenance payments within the meaning of subsection 60.1(3).

In the alternative, the appellant claims that:

(1) the payments made in January, February, March and May of 1987 were made pursuant to an agreement in writing dated May 6, 1987;

(2) the maintenance payments made from June to October 1987 were made pursuant to an implied extension of the May 6, 1987 agreement;

(3) the payments made in November and December 1987 were made pursuant to a written agreement dated November 13, 1987.

In the further alternative, the appellant claims that all of the 1987 payments were made pursuant to an implied extension and amendment of the separation agreement of July 8, 1986, which extensions and amendments were confirmed in writing by the solicitors of both parties.

Thus the appellant bases his appeal upon (1) the interim separation agreement, (2) the alleged May 6,1987 agreements, (3) the alleged November 13, 1987 agreement, and (4) the December 31,1987 agreement.

Respondent's Position

The respondent submits that the appellant has been properly assessed for his 1987 taxation year in that the payments made in 1987 were not made pursuant to a decree, order, judgment of a competent tribunal or pursuant to a written agreement, but were voluntary payments.

The respondent states that the payments referred to in the December 31, 1987 agreement were not maintenance payments within the meaning of the term in subsection 60.1(3).

The respondent maintains that the January, February, March, and May payments were not made pursuant to an agreement dated May 6, 1987, that the payments from June to October 1987 were not payments made pursuant to an implied extension of any agreement dated May 6, 1987, and that the November and December 1987 payments were not made pursuant to an agreement dated November 13, 1987.

In reply to the further alternative claim, the respondent submits that the 1987 payments were not made pursuant to an implied extension of the interim separation agreement of July 8, 1986. The extensions and amendments were not in existence, were never confirmed in writing by the solicitors for the parties and cannot constitute a written separation agreement.

Analysis

The applicable sections of the Act are the following:

60. 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 the 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.

60.1 (3) For the purposes of this section and section 60, where a decree, order or judgment of a competent tribunal or a written agreement made at any time in a taxation year provides that an amount paid before that time and in the year or the immediately preceding taxation year is to be considered as having been paid and received pursuant thereto, the following rules apply:

(a) the amount shall be deemed to have been paid pursuant thereto; and

(b) the person who made the payment shall be deemed to have been separated pursuant to a divorce, judicial separation or written separation agreement from his spouse or former spouse at the time the payment was made and throughout the remainder of the year.

In Bernard A. Hodson v. The Queen, [1988] 1 C.T.C. 2, 88 D.T.C. 6001, Heald, J. in the Federal Court of Appeal outlined the rationale behind paragraph 60(b) at page 5 (D.T.C. 6003) as follows:

As pointed out by the Trial Judge, spouses who live together are not allowed to split their income thereby reducing the total tax bill of the family. Paragraph 60(b) provides an exception to that general rule and confers upon separated spouses who come within its terms and conditions certain tax advantages. Parliament has spoken in clear and unmistakable terms. Had Parliament wished to extend the benefit conferred by paragraph 60(b) on separated spouses who, as in this case, do not have either a Court order or a written agreement, it would have said so. The rationale for not including separated spouses involved in payments made and received pursuant to a verbal understanding is readily apparent. Such a loose and indefinite structure might well open the door to colourable and fraudulent arrangements and schemes for tax avoidance.

In the present case we have both a written separation agreement and written agreements.

Subsection 248(1) of the Act defines "separation agreement" as follows:

“separation agreement" includes an agreement by which a person agrees to make payments on a periodic basis for the maintenance of a former spouse, children of the marriage, or both the former spouse and children of the marriage, after the marriage has been dissolved whether the agreement was made before or after the marriage was dissolved.

Black's Law Dictionary, Sixth Edition, 1991, defines "separation agreement" as: "Written arrangements concerning custody, child support, alimony and property division made by a married couple who are usually about to get a divorce or legal separation.”

Case law dictates that a written separation agreement is a formal document on which an action by a spouse for non-payment could be founded in an appropriate Court without the necessity of adducing extrinsic evidence (Keith Norman Fryer v. M.N.R., 31 Tax A.B.C. 143, 63 D.T.C. 176, at page 144 (D.T.C. 177)). Such a document must contain the essential terms of an agreement and be signed by both spouses (No. 345 v. M.N.R., 15 Tax A.B.C. 236, 56 D.T.C. 327, at page 239 (D.T.C.)).

Draft separation agreements (William Edward Horkins v. The Queen, [1976] C.T.C. 52, 76 D.T.C. 6043, at page 57 (D.T.C. 6046)), correspondence between the parties (John Michael Burgess v. Canada, [1991] 1 C.T.C. 163, 91 D.T.C. 5076, at page 169 (D.T.C. 5078)), oral agreements (Allen Crane Bentley v. M.N.R., 11 Tax A.B.C. 413, 54 D.T.C. 510, at page 414 (D.T.C. 511)) and unilateral decisions (J.V.R. Gagné v. M.N.R., [1976] C.T.C. 463, 76 D.T.C. 1125, at page 2166 (D.T.C. 1127)) will not satisfy the requirement.

On the other hand Reed, J. in the Burgess case, supra, stated that she accepted that a written agreement could be entered into as a result of an exchange of letters between counsel, in the same way that contracts are often formed through an exchange of letters. Yet correspondence between solicitors could not be equated to a written separation agreement.

In Edward Kostiner v. M.N.R., 32 Tax A.B.C. 124, 63 D.T.C. 478, the Tax Appeal Board based its decision upon Fryer, No. 345, and Bentley (all supra). Those decisions referred to a written separation agreement while the issue in Kostiner, supra dealt with a written agreement. It was stated that the Tax Appeal Board had always held that correspondence between the parties or their solicitors could not be acceptable as evidence of the right to deduct alimony or maintenance from the payer's taxable income.

Reed, J. in Burgess, supra, set out at pages 165-66 (D.T.C. 5078) the following:

I need not address the significance of the exchange of correspondence as an agreement, however, because it is clear from the text of paragraph 60(b), and the jurisprudence which has interpreted it, that more than a written agreement is required to satisfy paragraph 60(b). It is clear, from the emphasized portions of paragraph 60(b), that the taxpayer must have been living apart and separated from his spouse "pursuant to . . . a judicial separation or written separation agreement". To repeat, in order for the payments to be deductible, not only must they be made pursuant to a written agreement but there must be a written separation agreement in effect governing the relationship of the taxpayer to his spouse. An agreement by exchange of letters of the type which occurred in the present case does not satisfy that requirement of paragraph 60(b).

The case of Kenneth Lepack v. M.N.R., [1989] 1 C.T.C. 2119, 89 D.T.C. 69, the Court held that because there was no evidence that the maintenance paid by the taxpayer to his former spouse was paid pursuant to a written separation agreement, the payments were not deductible. This was a strict requirement under the Act.

As a result of this strict interpretation of paragraph 60(b), subsection 60.1(3) was enacted to provide for the deductibility of payments prior to the effective date of an order or agreement. The agreement should stipulate that prior payments (within the time limitations) are to be considered for the purposes of section 60 as having been paid and received pursuant to the agreement.

It is helpful to consider the various agreements in this case in relation to paragraph 60(b) and subsection 60.1(3).

Paragraph 60(b)

Written Separation Agreement

The interim separation agreement was entered into on July 8, 1986 and it provided that: "said agreement shall be for a three month period beginning the first day of July 1986 and concluding on the first day of September 1986”. The parties did not formally agree to extend this agreement. This separation agreement did not therefore cover any period of time in 1987. It matters not whether the appellant believed himself bound to pay maintenance to his wife.

As well, the letters accompanying each payment which stated that the amount enclosed represented maintenance cannot be construed as amounting to a written separation agreement. The courts have consistently refused to accept arguments to this effect because such letters represent only a unilateral decision (see Fryer and Gagné, both supra).

Written Agreement

The appellant was divorced on September 16, 1987. This meets the requirement of living apart from the spouse for payments made after September 16, 1987. The question now remaining is whether any payments made after this divorce were made pursuant to a written agreement.

The payments made in November and December of 1987 cannot be considered as deductible by the Appellant pursuant to paragraph 60(b). The letter dated November 13, 1987 confirms that there is an agreement to the effect that the appellant will make maintenance payments to his former spouse and that these will be considered maintenance for tax purposes. Yet this cannot satisfy the requirements of paragraph 60(b) because the letter is signed only by the appellants solicitor. There is no letter from the spouse's solicitor to indicate that the spouse had agreed to these terms. Without evidence to indicate otherwise, this letter represents only a unilateral decision. Acknowledgement from both parties is necessary.

Subsection 60.1(3)

With respect to the arguments advanced by the appellant concerning subsection 60.1(3), it is again necessary to find a written agreement pursuant to which payments were made to the spouse.

The May 6,1987 letter stated that there existed an agreement to the effect that payments made up to that point were maintenance payments for tax purposes, yet a reply to this letter from the solicitors representing the spouse denied that such an agreement existed with respect to all of the payments save the most recent. This cannot therefore be construed as a written agreement.

Similarly, the December 31, 1987 agreement does not have any effect on the payments made during 1987. Paragraph 60(b) and subsection 60.1(3) are to be interpreted restrictively. Subsection 60.1(3) permits a deduction under paragraph 60(b) that otherwise would not be open to the parties. Paragraph 60(b) refers to an agreement pursuant to which a taxpayer pays amounts "as alimony or other allowance” on a periodic basis for maintenance. In the case at bar, there was no agreement that the amounts were paid “as alimony”, just an agreement that amounts were paid. Perhaps the payments were for maintenance, but the parties did not agree on this. As there was no agreement, subsection 60.1(3) cannot apply.

The parties did agree to have the payments characterized by the trial judge. They wanted him to decide whether it should be deductible by the appellant and included as income by the appellant's wife. The trial judge did not believe that he had jurisdiction to do this. Yet the trial judge did say that the payments were indisputably maintenance. Such determination by the judge was, however, after the fact.

In addition, I do not believe that it would be possible to incorporate that judgment into the agreement to provide that the parties agreed that the payments were paid as alimony. Yet even if it were, subsection 60.1(3) would still not apply. The March 9, 1989 judgment would have the effect of completing the agreement. The agreement would be made" as of March 9, 1989. This would be too late for the application of subsection 60.1(3), as the provision allows only a deduction for amounts paid in the year that the agreement was made or in the immediately preceding taxation year. Thus only payments made in 1988 would be eligible, and these have already been allowed.

Counsel for the Appellant referred to two reported cases: Sharon Stewart and Ron Dilabio (Joined Party) v. M.N.R., [1990] 1 C.T.C. 2231, 90 D.T.C. 110, and The Queen v. Anne H. Sigglekow, [1985] 2 C.T.C. 251, 85 D.T.C. 5471. Having read these I do not see how they can assist in this appeal, the facts being somewhat different. At the same time counsel for the respondent referred to Peter Syrier v. M.N.R., [1989] 1 C.T.C. 2405, 89 D.T.C. 256, which, while pleaded in accordance with subsection 60.1(3) is of no assistance in this case. A further reported case of William Cottrell v. M.N.R., [1990] 2 C.T.C. 2031, 90 D.T.C. 1581, does approach the present problem, and there the appellant was successful in his appeal because the trial judge noted at page 2033 (D.T.C. 1582): "The inclusion in the "written agreement" of some reasonable reference to “support” while the parties were living apart should suffice to bring into play the provision of subsection 60.1(3) of the Act. That is precisely the situation in this matter before the Court.”

No such reference to "support" is found in the agreement of December 31, 1987.

Conclusion

In my opinion, none of the 1987 payments can be deducted by the appellant.

The payments made in the first ten months of 1987 are not deductible by the appellant. The interim separation agreement covered only a period of three months. As a result, there was never any divorce, judicial separation or written separation agreement pursuant to which the appellant was living apart from his spouse. And although all the letters to the spouse's solicitors stated that the payment enclosed represented a maintenance payment, this in itself cannot be conclusive because it is a unilateral decision and there is no evidence to indicate the wife's acceptance of it.

The appellant was divorced in September of 1987 and this satisfies the requirement for the written separation agreement or divorce. Yet the November 13,1987 letter cannot be construed as a written agreement because it was signed only by the appellant's solicitor, such not being acceptable for income tax purposes. There is no evidence to indicate whether the spouse had agreed to this. Thus the payments made in November and December of 1987 are not covered by a written agreement.

The payments are not deductible under subsection 60.1(3) by virtue of the December 31, 1987 agreement. This agreement acknowledged that payments had been made but did not state that they were to be considered as maintenance for tax purposes. They do not therefore qualify under subsection 60.1(3).

Nor can the 1987 payments come within the scope of subsection 60.1(3) by virtue of the May 6, 1987 letter from the appellant to his spouse. This letter is not a written agreement because the reply from the spouse's solicitors denies the existence of an agreement.

I would also point out that there could be an agreement pursuant to which the appellant paid maintenance to his wife in May of 1987. The May 6, 1987 letter from the solicitors of the spouse confirmed this agreement. It remains, however, that there was no separation agreement governing the relationship of the parties at the time. And even if there were, this $2,000 sum could not be deducted by the appellant under paragraph 60(b) because the agreement did not provide for payments on a periodic basis. While the November 13, 1987 agreement provided for monthly payments, the May 6, 1987 letter stated that only the most recent payment would be considered as maintenance for tax purposes. They were not periodic payments as required by paragraph 60(b) because one payment cannot be considered as periodic.

While intentions may have been present the necessary written documents fall short of the income tax requirements to obtain relief for the appellant. As counsel for the respondent aptly put the situation, "the appellant has fallen through the cracks in the legislation".

The appeal is dismissed herein with costs.

Appeal dismissed.