Makowetski v. R., [1998] 3 CTC 2271

Bell T.C.J.:

The issue is whether the Appellant is entitled to a deduction for income tax purposes in respect of alimony or maintenance payments in his 1992, 1993 and 1994 taxation years.

Facts:

In computing income for the 1992, 1993 and 1994 taxation years, the Appellant deducted the amounts of $6,000, $6,985 and $7,371 respectively as alimony or maintenance payments. Upon reassessment the Minister of National Revenue (“Minister”) disallowed those deductions.

The Appellant and his former spouse have two children, Janelle, born in July, 1976 and Stacey, born in November, 1978. The Appellant and his former spouse separated in June, 1986. They entered into a written separation agreement dated November 28, 1986 dealing with matrimonial property and other matters and then provided lump sum payments to the wife out of one- half of the net sale proceeds of the house and

ONE HUNDRED FIFTY ($150.00) DOLLARS per month per child for the maintenance and support of the children of the marriage payable on the 1st day of each and every month commencing December 1, 1986, and terminating when the said fund is depleted.

Another paragraph in this agreement reads as follows:

It is further agreed that when the said fund for payment of child maintenance is depleted, the Husband and the Wife shall agree on the amount of maintenance payable by the Husband to the Wife for the maintenance and support of the children. If no such agreement is obtained, then the parties shall have the amount of maintenance payable by the Husband to the Wife for the maintenance and support of the children of the marriage reviewed by a court of competent jurisdiction.

The Appellant testified that it was clear to him that after that fund was depleted he was to pay $150 per month for support. He also said that he and his ex-wife always agreed on the amount to be paid each month, that amount escalating over a period of time. He said that because of this agree- ment there was no need to go to court for a review. He stated that he deducted payments in computing his income tax. Respondent’s counsel advised the Court that his ex-wife included no such amounts in her income.

The Appellant then testified that he received notice from the Department of National Revenue that he owed between $8,000 and $9,000 because the claimed deductions were not allowed. He, after a telephone conversation with his ex-wife, stopped making payments. He was summoned to court, paid two months of arrears to signify good faith and again appeared in court in July, 1996. The initial court order in respect of a custody and maintenance application made on November 18, 1986 incorporated a portion of the agreement and provided that a portion of the net sale proceeds would be paid as to

$150.00 per month per child for the maintenance and support of the children of the marriage payable on the first day of each month commencing December 1, 1986 and terminating when the said fund is depleted;

The next full provision in that order read as follows:

Maintenance for the support of the children of the marriage shall be agreed upon by the parties or reviewed by the Court when the aforesaid maintenance fund is depleted;

This order was dated November 18, 1986.

The order of July 10, 1996 provided that the Appellant pay maintenance for the support of Stacey in the amount of $500 per month commencing August I, 1996 and continuing so long as the child was eligible for maintenance under the Divorce Act or otherwise at law. It also provided that the Appellant pay to his ex-wife the sum of $1,000 at the rate of $50 per month commencing on August 1, 1996 and on the first day of each and every month thereafter until that sum had been paid in full. The Appellant testified that he had been $1,000 in arrears.

The Appellant also testified that he had not entered into another written agreement after the depletion of the fund mentioned in the original agreement.

For the years in question, paragraph 60(b) of the Income Tax Act (“Act”) read as follows:

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 as alimony or other allowance payable on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient and the chil- dren, if the taxpayer, because of the breakdown of the taxpayer’s marriage, was living separate and apart from the spouse or the former spouse to whom the taxpayer was required to make the payment at the time the payment was made and throughout the remainder of the year and the amount was paid under a decree, order or judgment of a competent tribunal or under a written agreement.

Appellant’s counsel submitted that the written separation agreement as incorporated into the court order of November 18, 1986 constituted an enforceable contract so long as the parties agreed on the amount of maintenance and because of such agreement there was no need for review by the court after the fund depletion. He stated that the Appellant had complied with paragraph 60(b) under both an order of a competent tribunal and a written agreement.

Appellant’s counsel referred to Courtney & Fairbairn Ltd. v. Tolaini Brothers (Hotels) Ltd., [1975] 1 All E.R. 716 (Eng. C.A.). In this case, with respect to whether a contract existed, a contractor wrote to a property developer with respect to a proposed development. The letter read in part:

Accordingly I would be very happy to know that, if my discussions and arrangements with interested parties lead to ... a financial arrangement acceptable to both parties you will be prepared to instruct your Quantity Surveyor to negotiate fair and reasonable contract sums in respect of each of the three projects as they arise.

The developer responded to that letter in writing saying:

In reply to your letter of the 10th April, I agree to the terms specified therein, and I look forward to meeting the interested party regarding finance.

The developer instructed his quantity surveyor to negotiate with the contractor as to the price for the building works, but agreement on price could not be reached and the negotiations broke down. The initial developer brought an action in which it claimed a declaration that there was an enforceable contract to employ them as builders for the development and that the developer’s company was in breach of contract in employing other building contractors. It was held that the letters did not give rise to any enforceable contract because there could be no binding contract unless the price had been agreed and further, that a contract to negotiate was not a contract known to the law since it was too uncertain to have any binding force and no court could estimate the damages for breach of such an agreement. Lord Denning said at page 719,

I am afraid that I have come to a different view from the judge. The reason is because I can find no agreement on the price or on any method by which the price was to be calculated... It was to be agreed between the parties themselves. If they had left the price to be agreed by a third person such as an arbitrator, it would have been different. But here it was to be agreed between the parties themselves.

Appellant’s counsel referred to the written agreement as incorporated into the court order and said that there was an enforceable contract in that in the absence of agreement between the parties a court would determine the amount of maintenance.

Appellant’s counsel then referred to Tadman’s Ltd. v. Avenue Hotel Prince Albert Ltd. (1956), 21 W.W.R. 381 (Sask. Q.B.). In this case the lease in question gave the lessee the option of renewal for another five years and provided that, with respect to the rent for the renewed term, the parties agreed to negotiate and to fix it at a “fair and reasonable amount”. Another clause of the agreement referred to as the arbitration clause provided for arbitration should it be required. It was held that that clause constituted an enforceable agreement to arbitrate the amount of the rent to be paid if the option to renew were exercised and the parties were unable to agree upon the amount and held that upon the determination of that amount by the arbitrators, the lessee would be entitled to be granted the renewal provided. In short, Graham, J. said at page 384, in determining that a contract existed,

I must further hold that upon the determination of the rental by the board of arbitration the plaintiff is entitled to be granted a renewal of the said lease for a period of five years commencing on January 1, 1957, on the same terms as provided for in the said agreement except that the rent fixed therein shall be the rent determined as fair and reasonable by the board of arbitration.

On that basis Appellant’s counsel also submitted that there was a binding written contract.

Appellant’s counsel then referred to Wright v. Minister of National Revenue (1964), 64 D.T.C. 758 (T.C.C.) in which reference was made to several authorities contained in the following quote:

Order: 1. ‘an order signifies a direction or command by a court of judicature’ (The Dictionary of English Law, Earl Jowitt 1959); 2. ‘the term order in its widest sense may be said to include any decision given by a court on a question Or questions at issue between the parties to a proceeding properly before the court’ (Halsbury’s Laws of England 3rd Ed. Vol. 22 page 740).

He submitted that the word “order” must be interpreted in its broad sense and reiterated that if the parties had not agreed they would have been in the courts.

Counsel then referred to the July 10, 1996 order with respect to the payment of the sum of $1,000 at the rate of $50 per month and said the evidence indicated that this was the arrears not paid by the Appellant. He then submitted that the court must have acknowledged that there was a contract or it could not have given the order to pay that sum. He further submitted that the court may have based this upon an extant contractual obligation or the prior court obligation and that in either case the Appellant should succeed.

Appellant’s counsel then referred to Lay v. R. (1993), 95 D.T.C. 272 (T.C.C.) in which pursuant to the terms of two simple handwritten agreements the Appellant permitted his wife to write cheques up to stipulated amounts on their joint account. He deducted the amounts so withdrawn. His appeal from the Minister’s disallowance of same was allowed.

Respondent’s counsel referred to MacLachlan v. R. (1991), 92 D.T.C. 1024 (T.C.C.) in respect of payments which the Court found were not covered by an interim separation agreement. The Court at page 1027 said,

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., 63 DTC 176 at page 177). Such a document must contain the essential terms of an agreement and be signed by both spouses (No. 34) v. M.N.R., 56 DTC 327 at page 329).

Counsel then referred to Jaskot v. Minister of National Revenue (1991), 92 D.T.C. 1102 (T.C.C.) with reference to the words of Strayer, J. in Hodson v. Minister of National Revenue (1987), 87 D.T.C. 5113 (Fed. T.D.) and (1987), 88 D.T.C. 6001 (Fed. C.A.), namely,

The intention of Parliament as expressed in paragraph 60(b) is quite clear: either there must be a court order requiring such payments or else there must be a “written agreement” requiring them. If Parliament had intended to permit such deductions to be made on the basis of oral agreements or implied agreements or in respect of purely voluntary payments it would have said so. Having used the words “written agreement” it has clearly excluded other less formal arrangements.

(emphasis added)

Submissions made by Respondent’s counsel reduced themselves to the simple proposition that there was no written agreement pursuant to which the Appellant’s payments were made.

Analysis and Conclusion:

The Appellant and his former spouse performed exactly as required by the November 28, 1986 agreement. The parties received precisely that for which they bargained. When the maintenance fund was depleted they, pursuant to the written agreement, agreed upon the amount of the maintenance for the support of the children. This included mutually agreed escalation payments. The Appellant’s evidence in this regard was unchallenged and is accepted by me. If this had not been the case the amount of maintenance would have been fixed, on application, by review of the Court. In the circumstances, applying the principles set out in the Appellant’s authorities, the conditions of paragraph 60(b) [1] were met.

Accordingly, the appeal is allowed.

Appeal allowed.