Sharon Stewart and Ron Dilabio (Joined Party) v. Minister of National Revenue, [1990] 1 CTC 2231, 90 DTC 1110

Lamarre Proulx, T.C.J.: —The appellant appeals from a reassessment of tax in respect of the 1985 taxation year. The appeal concerns the requirements of subsection 56.1(3) of the Income Tax Act (the Act) for its application and the validity of a clause in a separation agreement.

Mr. Ron Dilabio, the appellant’s former spouse, was joined as a party to the appeal of the appellant by an order of this Court issued on April 6, 1989 by virtue of paragraph 174(3)(b) of the Act. That order was issued on the basis that it appeared that a determination of the question set forth in an application made by the respondent pursuant to section 174 of the Act and dated February 2, 1989 will affect the assessments in respect of the appellant and the party joined. The determination of the question follows the reasons for judgment.

Sharon Stewart and Ron Dilabio were married on October 12, 1968. They have two children, one born in 1972 and the other in 1975. Irreconcilable differences arose between the spouses and in August 1986 a first draft of a separation agreement was produced to the appellant. It contained the following clause:

6(b) (1) The husband shall pay the sum of $300.00 for each child for maintenance

of that child (making a total of $600.00 for two children) payable on the 1st day of September 1986, until one of the following occurs:

The appellant reviewed the draft agreement that had been sent to her by her lawyer. She was pleased with the text, except that she wanted $400 per child per month and a few other minor changes. In her lawyer's presence, she initialled the changes requested and signed a copy of the agreement. That was done on September 15, 1986. The signing in advance was made at her lawyer's request purportedly to facilitate the lawyer's task in obtaining an executed copy. The executed copy is dated December 15, 1986 and it contains the following clauses:

6(b) (I) The wife acknowledges receipt of support payments in the amount of

$1,035.00 for 1985 up to and including the month of June, 1986 and thereafter the sum of $600.00 per month until December, 1986.

(II) The husband shall pay the sum of $350.00 for each child for the maintenance of that child (making a total of $700.00 for two children) payable on the 1st day of January, 1987 until one of the following occurs:

Clause 6(b)(1) is the contentious clause. As previously mentioned, the changes on the August 1986 draft had been initialled by Ms. Stewart, so that ultimately on the December copy all the changes were properly initialled by the appellant, except that clause.

The lawyer of the appellant at the time of the separation testified to the effect that she never consented to this inclusion and the evidence showed that Ms. Stewart who knew the tax consequences of such an admission, never consented to it and had repeatedly not consented to it. Here are some excerpts of the lawyer's testimony:

Q. Specifically to clarify, did Sharon Dilabio ever agree to the acknowledgment clause?

A. No, because we had discussed several drafts where it had been, and she'd always said, No, that's not correct because I didn't get that money."

Q. Did you ever agree to the acknowledgment clause on her behalf?

A. No.

Q. Would you have gotten her approval if you had had discussions and made a tentative agreement, would you have gotten her approval?

A. Yes, if I'd realized that that clause had been added, I would have phoned her immediately before doing anything, and I'd have said, "Look, they've got this clause on the new page; what about it?

Q. Would you have advised your client for or against incorporating an acknowledgment clause in the separation agreement, and why?

A. Well if she had received the money, it would have been fine. But she informed me she never received the money; it had been paid to some third party, some of it.

A. He told me he was going to have the page re-typed. I don't recall that he ever said he was going to add the acknowledgment clause.

When the appellant received the December copy, she did not review it as she had done for the August copy. She had been informed by her lawyer that only the changes that she had consented to had been included. As an indication that the appellant never wanted to make the contentious admission is that she insisted on updating the starting date of the maintenance payments.

The lawyer for the husband in the preparation of the agreement, also testified. He said that he recalled having mentioned to the appellant's lawyer that his client wanted this acknowledgment clause to be inserted in and that she had agreed to it. This was done over the phone. Nothing else about that acknowledgement clause has ever been mentioned in the husband's lawyer's memoranda to the appellant's lawyer.

A letter from the appellant's lawyer to the appellant dated January 17, 1987 and filed into Court as Exhibit A-5 mentions the impugned clause though it is not clear whether this had been discussed over the phone and had been agreed to by the appellant's lawyer.

At your request I am enclosing a copy of the Separation Agreement which you signed on 12th September, 1986, but which was not signed in that form by Mr. Dilabio. As you know, it shows the sum of $350.00 to be paid by your husband in monthly support for each of the two children, as inserted and initialled by you.

I also enclose copies of the two pages prepared by your husband's lawyer and included in the Agreement at his insistence before he signed it on 15th December, 1986. They show that you acknowledge the sum of $1,035.00 paid to you in monthly support in 1985 and until June, 1986. Neither your husband nor his lawyer ever discussed this paragraph with you or me, and it seems possible that it may invalidate the whole agreement, since you did not assent to it when you signed.

In her testimony, the appellant's lawyer had said repeatedly that she does not recall the husband's lawyer ever discussing this insertion of the acknowledgment clause in the agreement. However, because of the fact that she did not react in an outraged manner to what would be an outrageous act (she tried to negotiate a settlement with the husband's lawyer, she did not advise her client to immediately repudiate the agreement), I am not convinced that the husband's lawyer had not mentioned the insertion to the appellant's lawyer. I find this confusing and I believe that I should disregard the appellant's lawyer's testimony on that aspect.

At the outset of the hearing, counsel for the joined party stated that I did not have jurisdiction to declare upon the validity of a clause in a separation agreement. That was one part of his statement. The other part was that the burden of proof was on the appellant and that his client was in the position of a defendant and that he did not intend to adduce any evidence. I informed him of my view that the joined party was not in the same position as a defendant but rather in the position of a quasi appellant and that he had to make his case.

With respect to the jurisdiction of this Court, he argued that this Court had jurisdiction to interpret an agreement but no jurisdiction to invalidate a clause in an agreement. Counsel for the respondent stated forcefully that this Court had jurisdiction to determine the validity of the contentious clause as it was

pursuant to that clause that the appellant had been assessed: the appellant is appealing her assessment on the ground that this clause is not valid and therefore I have jurisdiction to determine whether or not this clause is valid. He referred me to sections 169 and 171 of the Act and to sections 12 and 13 of the Tax Court Act and to the following cases:

McMillen Holdings Ltd. v. M.N.R., [1987] 2 C.T.C. 2327; 87 D.T.C. 585 (T.C.C.);

McCambridge v. The Queen, [1979] C.T.C. 473; 79 D.T.C. 5412 (F.C.A.);

Séminaire de Chicoutimi v. The City of Chicoutimi, [1973] S.C.R. 681;

Clarence Zwarich and Attorney General of Canada (unreported), June 17, 1987, F.C.A.;

Re Schewchuk and Ricard (1986), 28 D.L.R. (4th) 429 (B.C.C.A.).

Counsel for the respondent submitted that in dealing with an appeal which flows directly from an assessment, the doctrine of collateral attack would hold that the Tax Court of Canada has the jurisdiction to decide all issues which are necessary and ancillary for reaching its decisions. He stated also that for example, the Tax Court of Canada deals in issues on a daily basis which touch on matters which are of provincial jurisdiction. This is seen through cases such as, for instance, those dealing with partnerships, commercial transactions, sales, leasehold interest and other transactions of the like. The Court has on numerous occasions decided whether there are partnerships which exist, whether a building was sold at fair market value, whether there exists a valid contract of sale and whether there exists a contract of employment. These are all collateral issues which arise out of its jurisdiction to dismiss or allow an appeal, or vacate or vary an assessment.

I agree with these statements. The appeal cannot be kept in abeyance until the matter of the validity of the clause is resolved by the relevant Provincial Court. I have to determine whether the contentious clause is valid or not because it is a ground of appeal of the appellant. I say a ground of appeal because counsel for the appellant submitted in her argument as a first ground of appeal that the clause in question as drafted did not meet the requirements of subsection 56.1(3) and it is as a supplementary argument that she submitted the argument on the validity of the clause. That latter ground was the only ground that had been raised by the appellant in her notice of appeal. She was not then represented by a lawyer.

Subsection 56.1(3) of the Act reads as follows:

For the purposes of this section and section 56, 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 received 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 received 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.

When I read clause 6(b)(1) of the agreement in relation to the requirements of subsection 56.1(3) of the Act, I find that counsel's point is well taken. The provision says clearly that it is when a written agreement provides that an amount, received before the agreement was made, is to be considered as having been paid and received pursuant to that agreement, that the rules described in that section will apply. There are, in my view, two essential elements required by subsection 56.1(3) in drafting a clause: there should be mutual agreement as to the amounts received, and that these amounts should be considered as having been paid pursuant to the agreement.

I find that the clause under study lacks the second essential element: mutual agreement that the amounts received (in the year or the immediately preceding year) are to be considered as having been paid and received pursuant to the agreement.

This argument on the formal requirements of subsection 56.1(3) appears to me to be reinforced by the wording of the last lines of subsection 56.1(2) which says the following:

. . . shall, where the decree, order, judgment or written agreement, as the case may be provides that this subsection and subsection 60.1(2) shall apply to any payment made pursuant thereto, be deemed to be an amount paid by that person and received by the taxpayer as an allowance payable on a periodic basis.

I agree with the argument of the appellant's lawyer. Not only shall the clause stipulate that amounts have been received in the year or the previous year but it should also be clear that the parties want these amounts to be considered as having been paid and received pursuant to the agreement.

On this ground, the appeal shall succeed. Could it have succeeded on the ground of the validity of the clause? I have come to the conclusion that it could not have succeeded on that ground and hereafter are my views of the matter.

I am of the opinion that there are two legal questions to be considered in order to resolve the matter of the validity of the clause. One is the mandate given to a lawyer and the other is the unilateral mistake. In Bowstead on Agency, 15th ed. Sweet & Maxwell, 1985, we read at page 95:

The extent of the implied authority of a solicitor to compromise is however not clear. It would seem that the apparent authority of a solicitor in this respect can only be supported if there is in general implied authority to compromise in a fair and reasonable manner: only this could support general apparent authority to the outside world.

See also Revelstoke Companies Ltd. v. Moose Jaw et al., [1983] 1 W.W.R. 52. (Sask. Q.B.) where the defendants were to be held bound by the agreement even though the terms of the agreement were not their understanding of the terms. The Court found that there had been no suggestion that the defendant's lawyer had limited authority and that no such limitation had been communicated to the other party prior to the signing of the agreement.

There is also the matter of the unilateral mistake. In Stepps Investments Ltd. et al. v. Security Capital Corporation Ltd. (1976), 14 O.R. (2d) 259, Mr. Justice Grange states the following at pages 272-73:

it is not unreasonable, in my view, in modern commercial relations, to require the parties, where an important amendment is being made, to ensure that knowledge of such amendment comes to the other side. I do not mean that a party must overcome obtuseness in his opposite number but he must at least give him a real opportunity to appreciate the change. And if the circumstances are such that the amendment might readily be missed he should be particularly reluctant to assume such knowledge. Here the plaintiffs cc 'lld have resolved the whole problem by a clear reference to the amendment in the correspondence or in the recitals or the operative parts of the agreement itself. It could even have been resolved in a clear, unambiguous, oral conversation with the defendant's solicitors and I cannot find that such a clear and unambiguous conversation ever took place.

The headnote explaining that case says "the significance of this alteration was not brought to the attention of the defendant or his solicitor."

And in The Law of Contract, 2nd ed., Carswell, 1986, G.H.L. Fridman, Q.C., the learned author notes at 242-43:

It is not necessary for the party seeking to avoid the contract on the ground of mistake to prove that the other party caused or induced the mistake (although if such causation is established it might lead to rescission for fraud, or for innocent misrepresentation). As long as the unmistaken party knows of the mistake, without having caused it, that party cannot resist a suit for rectification on the grounds of mistake. The converse of the proposition as to knowledge of the other party's mistake is that if the unmistaken party is ignorant of the other's mistake the contract will be valid and neither rescission nor rectification will be possible.

In the present case, I would have been inclined to find under both arguments: the limited lawyer's mandate and the unilateral mistake, that the contentious clause was not valid and even more so because the joined party did not testify. I could have drawn a negative inference that he knew of the lawyer's limited mandate and of the appellant's unilateral mistake.

However, in both of the above described situations, if the party, who wishes to raise as grounds of rescission of the contract, the knowledge of the limitation of the agent's authority or the unilateral mistake, has otherwise ratified the agreement after the discovery of the unauthorized part of the agreement or affirmed the agreement by not repudiating or denouncing it, or by adopting other parts of the agreement, that party is bound by his ratification or by his affirmation. See Chitty on Contracts, General Principles, 25th ed. paragraph 453 at page 252.

If the appellant had repudiated the agreement outright when she discovered the mistake or the inclusion of the contentious clause, it would have put me in a position where I could have decided upon the validity of the contentious clause, but by not having done so, I am of the view that in the circumstances the appellant is to be considered as having agreed to the clause in question.

The appellant's lawyer raised also an argument respecting the wording of the contentious clause and submitted that the only amount acknowledged is an amount of $1,035 up to June 1986 and that the words per month should not be implicitly added after the figure of $1,035 in clause 6(b)(1) of the agreement. She submits that a clause of an agreement when ambiguous should be interpreted contra proferentem. This may be so when the evidence does not bring certainty to the Court as to the exact meaning of the words. In the present case the evidence showed that the appellant received $300 per month and that the husband was paying the property charges in a monthly sum of $735 until the house was sold in June 1986 and that after that he paid the sums of $600 per month. I find that the only sense that can be made out of clause 6(b)(1) is to determine that the words "per month" are implied. (On this matter, see McClelland & Stewart Ltd. v. Mutual Life, [1981] 2 S.C.R. 6 at 15.)

However, on the basis of the drafting requirements of subsection 56.1(3) of the Act, the appeal is allowed with costs and the matter referred back to the respondent for reconsideration and reassessment.

Determination

The question set forth in the respondent's application pursuant to section 174 of the Act and dated February 2, 1989 is the following:

The question in respect of which the Minister of National Revenue requests a determination is whether the whole or any part of said payments were made by Ron Dilabio and received by Sharon Stewart and, if so, whether they were amounts paid by him pursuant to a written agreement as alimony or other allowance payable on a periodic basis for her benefit and maintenance and that of the children of the marriage and whether Ron Dilabio was living apart and separated from Sharon Stewart, to whom he was required to make the payments, pursuant to a written separation agreement at the time the payments were made and throughout the remainder of they year, such that they are deductible by Ron Dilabio in the computation of his income for the 1985 taxation year pursuant to paragraph 60(b) and subsections 60.1(1) and 60.1(3) of the Income Tax Act, R.S.C. 1952, c. 148, as amended for the 1985 taxation year, and are to be included in the computation of Sharon Stewart's income for 1985 pursuant to paragraph 56(1)(b) and subsections 56.1(1) and 56.1(3) of the Income Tax Act, R.S.C. 1952, c. 148, as amended for the 1985 taxation year.

On the basis of my findings in the above reasons for judgment, I determine the question as follows: the said payments were made by Mr. Dilabio to Mrs. Stewart but they were not made pursuant to a written agreement: the written agreement did not provide that the said amounts were to be considered as having been paid and received pursuant thereto and therefore they are not deductible by Mr. Dilabio in the computation of his income for the 1985 taxation year.

Appeal allowed.