Gilbert Brodeur v. Minister of National Revenue, [1985] 2 CTC 2201, 85 DTC 514

Tremblay, TCJ:—This case was heard on May 31, 1985, in the City of Toronto, Ontario.

1. The Point at Issue

Pursuant to the pleadings, the first point is whether the appellant, separated from his wife following a separation agreement, is correct, in the computation of his 1978, 1979, 1980 and 1981 taxation years, to deduct as alimony payments $21,455.56, $11,410.34, $12,353.64 and $12,674.49 respectively. From these payments, the respondent disallowed $4,920.56 (1978), $4,350.34 (1979), $4,353.64 (1980) and $4,834.49 (1981) on the basis that they were part of payments of a debt of $20,000.

The second point at issue is whether the appellant, a shareholder of Fel- can Limited, who received shareholder loans of $4,072.36 in 1978 and $20,930.77 in 1980, has the right not to include the said amounts in the computation of the income of the said years. The respondent included them on the basis that the loans were not repaid within one year from the end of 1978 and 1980 of Felcan, pursuant to provision 15(2) of the Income Tax Act.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent's assessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessment or reassessment are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

5. In so reassessing the appellant, the respondent relied, inter alia, upon the following findings or assumptions of fact:

(a) the facts hereinbefore pleaded;

(b) the amounts disallowed in paragraph 3 herein were calculated as follows:

(c) the amounts referred to in subparagraph 5(b) herein were disallowed because they consisted of a debt repayment as referred to in subparagraph 5(f) herein, of direct payments to OHIP as referred to in subparagraph 5(g) herein, and of payments which were payments not made pursuant to the agreement referred to in subparagraph 5(e) herein, and that were not payments of alimo- ny or another allowance payable on a periodic basis for the maintenance of the appellant's spouse or children;

	7978	7979	1980	7987
Alimony claimed	$21,455.56 $11,410.34 $12,353.64 $12,674.49
Payments allowable	16,534.00	7,060.00	8,000.00	7,840.00
Reduction to claim	$ 4,920.56	$ 4,350.34	$ 4,353.64	$ 4,834.49

(d) the appellant is separated from his spouse;

(e) the appellant is a party to a separation agreement (the agreement) executed in 1977;

(f) in paragraph 10 of the agreement, the appellant acknowledged that he was indebted to his spouse in the amount of $20,000 (the “debt”) and he was to repay the debt at a rate of $300 per month;

(g) in paragraph 7 of the agreement, the appellant agreed to maintain the OHIP coverage of his children and spouse;

(h) the appellant is the chief shareholder of Felcan;

(i) in 1978 and 1980 the appellant received shareholder loans of $4,072.36 and $20,930.77 from Felcan;

(j) the shareholder loans received by the appellant, as referred to in subparagraph 5(i) herein, were not repaid within one year from the end of the 1978 and 1980 taxation years of Felcan;

(k) in any event, any repayment of these shareholder loans referred to in subparagraph 5(i) herein, were repayments made as a part of a series of loans and repayments.

3. Consent to Judgment

At the beginning of the trial, counsel for the respondent informed the Court that his client, after considering new facts given by the appellant, was ready to consent to judgment in favour of the appellant’s contention regarding the shareholder loans (ie in sum $4,072.36 in 1978 and $20,930.77 in 1980). The appellant admitted the payments concerning OHIP were not alimony payments. The only unsettled point concerns the monthly payments of $300 from 1978 to 1981 as alimony, according to the appellant, and as payment for a debt, according to the respondent.

4. The Facts

4.01 The appellant filed as Exhibit A-1 the separation agreement passed in January 1977.

The important paragraphs invoked by the parties are 10, 18 and 19. They read as follows:

10. DEBT OF HUSBAND TO WIFE:

The husband acknowledges that he is indebted to the wife in the amount of twenty thousand dollars ($20,000.00). The husband agrees to pay to the wife the said sum of twenty thousand dollars ($20,000.00) at the rate of three hundred dollars ($300.00) per month and said payments commencing on March 1, 1977.

18. EXECUTION OF OTHER DOCUMENTS:

The husband and wife shall at any time and from time to time execute and deliver to the other any document or documents that the other reasonably requires to give effect to terms of this agreement.

19. INDEPENDENT LEGAL ADVICE:

The husband and wife each acknowledge that each,

(a) has had independent legal advice;

(b) understands their respective rights and obligations under this agreement;

and

(c) is signing this separation agreement voluntarily.

4.02 The appellant filed also a letter dated May 27, 1976 issued by counsel for his wife addressed to himself. He contends that the monthly payment of $300 in the agreement was originally $415 from May 1976.

The main paragraphs referred to by the parties read as follows:

I understand that your wife and children presently reside at your former matrimonial home, at 18 Goodwood Park Crescent here in Toronto, and that you are paying for rent and parking in the amount of $415.00 per month. I have been further informed that you are paying a weekly allowance of approximately $130.00 to your wife: additionally you have assumed financial responsibility for continued OHIP coverage on behalf of your wife and children.

As the living accommodation you wife and children find themselves in presently has become too small, you are to purchase a four bedroom townhouse or condominium, to be registered in your wife's name; the down payment and mortgage and interest payments are to be borne by you. Pending such purchase you are to continue to pay rent and parking, etc.

4.03 The appellant testified that originally there was a verbal agreement that he would pay the said $415 up to a total of $20,000. In the separation agreement the monthly payment was diminished to $300 from January 1977. However he testified that the amount of $20,000 remained. He completed to pay [sic] the said $20,000 around 1982, including in the said amount the payment made from May 1976 to December 1976.

4.04 The appellant filed as Exhibit A-2, the reassessment in respect of the 1978 taxation year, dated May 13, 1980. It mainly concerned the general averaging tax calculation based on the appellant’s 1974 and subsequent years' returns. The second reassessment in respect of the 1978 taxation was issued on June 21, 1983.

4.05 The appellant also testified that in filing his notice of objection, he had asked the Minister to by-pass the appeals division and to go directly to the Federal Court, pursuant to 165(3)(b). This demand however was not followed.

5. Law — Cases at Law — Analysis

5.01 Law

The main provisions of the Income Tax Act involved in the Income Tax Act are: 60(b), 60.1, 152(4), (5), 165(3)(b).

They shall be quoted if necessary in the analysis.

5.02 Cases at Law

The parties referred the Court to the following cases at law:

1. The Queen v Louis Dorion, [1981] CTC 136; 81 DTC 5111;

2. G R Beardmore et al v MNR, [1975] CTC 2030; 75 DTC 31;

3. The Queen v Morton Pascoe, [1975] CTC 656; 75 DTC 5427;

4. A-G (Can) v J C Weaver et al, [1975] CTC 646; 75 DTC 5462;

5. The Queen v J-P Gagnon, [1981] CTC 463; 81 DTC 5377;

6. The Queen v GA A Bryce, [1982] CTC 133; 82 DTC 6126.

5.03. Analysis

5.03.1 The appellant contended that the respondent was supposed to fulfil his demand to by-pass the appeal division and to go directly to the Federal Court as provided in 165(3)(b). This provision reads as follows:

Sec 165(3)

(3) Duties of Minister. Upon receipt of a notice of objection under this section, the Minister shall,

(a) with all due dispatch reconsider the assessment and vacate, confirm or vary the assessment or reassess, or

(b) where the taxpayer indicates in the notice of objection that he wishes to appeal immediately either to the Tax Court of Canada or to the Federal Court and that he waives reconsideration of the assessment and the Minister consents, file a copy of the notice of objection with the Registrar of the Tax Court or in the Registry of the Federal Court, as the case may be,

and he shall thereupon notify the taxpayer of his action by registered mail. [Emphasis added.]

One of the requirements of this provision is the Minister's consent. It seems the Minister did not give his consent to the appellant’s wishes. Moreover it seems that in December 1983, before making his decision, the respondent had brought some points to the attention of the appellant who agreed not to go to the Federal Court. In the appellant’s notice of appeal indeed, one can read:

In December 1983, I was informed that my request of June 27th, 1983 to bypass the appeals division and go directly to the Federal Court would have resulted in more expenses and much longer delays than if I agreed to have the case reviewed by the appeals division.

I welcomed the suggestion, especially since I was also informed that a change in the appeals structure had resulted in the replacement of the Tax Review Board by the new Tax Court of Canada, a much more suitable forum than the Federal Court for a taxpayer representing himself.

5.03.2 The appellant, in his argumentation, contended that the respondent has no authority to issue the second reassessment because it was issued more than three years after the first reassessment. (par 4.04) He then referred to provisions 152(4), (5). They read as follows:

Sec 152(4)

(4) Idem.The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has made any misrepresentation that is attributable to neglect, care- lessnes or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or

(ii) has filed with the Minister a waiver in prescribed form within 3 years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year,

(b) within 6 years from the day referred to in subparagraph ((a)(ii), if

(i) an assessment or reassessment of the tax of the taxpayer was required pursuant to subsection (6) or would have been required if the taxpayer had claimed an amount by filing the prescribed form referred to in that subsection on or before the day referred to therein, or

(ii) there is reason, as a consequence of the assessment or reassessment of another taxpayer's tax pursuant to this paragraph or subsection(6), to assess or reassess the taxpayer’s tax for any relevant taxation year, and

(c) within 3 years from the day referred to in subparagraph (a)(ii), in any other case,

Sec 152(5)

(5) Idem. Notwithstanding subsection (4), there shall not be included in computing the income of a taxpayer, for the purposes of any reassessment, additional assessment or assessment of tax, interest or penalties under this Part that is made after the expiration of 3 years from the day referred to in subparagraph (4)(a)(ii), any amount

(a) that was not included in his income for the purposes of an assessment of

tax under this Part made before the expiration of 3 years from that day,

(b) in respect of which the taxpayer establishes that the failure so to include it did not result from any misrepresentation that is attributable to negligence, carelessness or wilful default or from any fraud in filing a return of his income or supplying any information under this Act, and

(c) where any waiver has been filed by the taxpayer with the Minister, in the form and within the time referred to in subsection (4), with respect to a taxation year to which the reassessment, additional assessment or assessment of tax, interest or penalties, as the case may be, relates, that the taxpayer establishes cannot reasonably be regarded as relating to a matter specified in the waiver.

Pursuant to those provisions, it is true that the second reassessment issued on June 21, 1983, followed by three years the date of the first reassessment May 13, 1980.

However, the said provision referred to by the appellant was amended in 1984 by 1984 c 45, s 59(3) to substitute “3 years” for “4 years”.

At the time of the new reassessment in June 1983, the then provision provided “4 years” and not “3 years”. Therefore the said new reassessment was issued in conformity with the Act.

5.03.3 Concerning the monthly payments of $300 up to a total of $20,000, the appellant referred to the Dorion case (par 4.02(1) ). Mr Justice Décary in fact, concerning a payment of $20,000 said:

It is my considered opinion that the decision of the Court of Appeal as to the nature of the $20,000 for purposes of civil relations between the parties cannot be ignored in establishing the tax nature of this amount.

According to him (see paragraphs 4.01, 4.02, 4.03 above) the original payments of $415 and the subsequent payments of $300 were actual alimony payments meeting the conditions provided in 60(b) of the Act. It reads as follows:

Sec 60(b)

(b) Alimony payments. — 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;

5.03.4 The problem is whether the appellant has reversed the burden of proof on this point. The respondent's assumption is that the monthly payments are payment of a debt, (para 2.02.5(f) ) owed by the appellant to his wife. The said assumption is based in paragraph 10 of the separation agreement quoted above. (para 4.01) Very strong evidence must be adduced to contradict a clause of an official agreement voluntarily signed by parties, and each party receiving independent legal advice. (see para 4.01)

The Court does not think that the appellant gave sufficient evidence to reverse the assumption that the payments are debt payments and not alimony payments.

5.03.5 Despite the former point, there is another point which is also a difficult one in the instant case. This is the question of payments totalling $20,000.

In the Dorion case, Mr Justice Décary on this point summarized the Pascoe decision by the Federal Court of Appeal:

A payment as alimony or an allowance for maintenance is linked to the duration of the life of the creditor or debtor or to the period of time during which the alimony or allowance is necessary for the recipient and can be paid by the debtor. In such a case the alimony or allowance cannot be a total fixed amount payable by instalments up to the amount of $20,000 over a period of five years as in the case at bar, as the consideration for alimony or an allowance is the need of the creditor, whereas here the consideration is the waiver of benefits resulting from the marriage contract.

5.03.6 The Court must dismiss the appeal concerning the monthly payments of $300. However, as agreed above (see para 3), the appeal is allowed on the point of shareholder loans in respect of the 1978 and 1980 taxation years.

6. Conclusion

The appeal is dismissed in respect of the 1979 and 1981 taxation years and is allowed in part in respect of the 1978 and 1980 taxation years. The matter is referred back to the respondent for reassessments in accordance with the above reasons for judgment.

Appeal allowed in part.