Von Neudegg v. R., [1999] 2 CTC 2525

Teskey T.C.J.:

The Appellant, in his Notice of Appeal wherein he appealed his 1995 reassessment of income tax, elected the Informal Procedure.

Issue

The sole issue before the Court is whether the $18,000 paid by the Appellant to his former spouse (the “spouse”) in 1995 qualifies as deductible from income pursuant to the provisions set out in section 60 of the Income Tax Act (the “Act’).

Subsection 60.1(3) provides as follows:

(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 preceding taxation year is to be considered to have been paid and received thereunder, the amount shall be deemed to have been paid thereunder.

Facts

On March 6, 1995, the Appellant and his former spouse separated.

The Appellant and his spouse both elected to attempt to resolve their difference through mediation.

On March 27, 1995, Nancy A. Flatters, a mediator wrote an Interim Mediator’s Report (Exhibit A-l) that is not signed by either the Appellant or his spouse. The words “without prejudice” appear on the first page. Paragraph two thereof reads:

The issues between the parties as defined in mediation were parenting, spousal support up to and including April 30, 1995. The draft proposed resolution in respect of these issues is as follows:

The last two paragraphs under the heading “Acknowledgement” read:

This Mediation Report is not to be considered a legal and binding document but only a working draft of the proposed resolution. It also reflects a “Standard of Fairness” that the parties have utilized to ensure that the Stephanie’s best interests are served in the interim.

The parties understand that they have the opportunity and have been encouraged by the Mediator to seek independent legal assistance and advice regarding the draft proposed resolution as set forth in this Mediation Report.

In February of 1996, the spouse commenced a petition for divorce in the Court of Queen’s Bench of Alberta and swore an Affidavit dated February 2, 1996 (Exhibit A-2). Paragraph number 16 thereof reads:

16. My husband has provided me with $1,500.00 per month on a voluntary basis since April 1995. He has continued to provide medical and dental coverage on his extended health care benefits at his employment so far as I know. He purchased glasses for me ($475.00), bought Stephanie and Alexander Christmas presents and provided me with approximately $3,000.00 shortly after our separation.

On April 3, 1996, the Appellant and his spouse entered into further mediation and signed a Mediation Agreement (Exhibit A-5). The following are the pertinent paragraphs contained therein:

5.1(a) all discussions and written communications within the mediation session

shall be on a “without prejudice” and “confidential” basis which the parties understand to mean that no statement or communication made during the mediation process may be admissible in any legal proceedings;

and

5.1(c) the parties agree that the Mediator shall not be compellable as a witness

in any legal proceeding nor shall the Mediator’s work product, including notes and reports drafted by the Mediator at the request of the parties be introduced in any legal proceeding.

6 1(c) The primary responsibility for resolution of the dispute lies on the Parties.

At no time shall the Mediator coerce the Parties into an agreement, nor ask for signatures to be affixed to any memorandum.

and

6.1(g) Upon successful completion of the mediation, the Mediator shall send

copies of a Memorandum of Agreement to the Parties’ respective legal counsel for independent legal advice.

7.3 If legal counsel are present for the Parties, any agreement reached between

counsel shall be binding on the Parties and the terms of such agreement shall be on a “with prejudice” basis.

On May 13, 1996, the spouse’s accountant sent a letter to Revenue Canada. The first paragraph thereof reads:

Immediately subsequent to the filing of the above return, it was noted that $18,000 of alimony and maintenance income in respect of Stephanie and Alexander was received by the taxpayer from her ex-husband Martin Von Neudegg. We understand that these payments were made in accordance with a separation agreement. Accordingly, please include $18,000 in income on line 128 of Ms. Von Neudegg’s 1995 personal income tax return.

On May 24, 1996, Revenue Canada reassessed the Appellant’s 1995 income by refusing the deduction of the $18,000 from income.

On July 19, 1996, the Mediator, Victor T. Tousignant (the “Mediator”) prepared a document entitled “Memorandum of Understanding” and forwarded it to both the Appellant and his spouse and their respective counsel. This was entered, as Exhibit A-4. The first six pages of Exhibit A-4 is a photocopy of the signed Memorandum. However, the last six pages of this Exhibit A-4 appear to be a draft of the first six pages. Unfortunately, this was not drawn to the Court’s attention when the document was entered into an exhibit and the Appellant was not cross-examined on it. This can lead to all sorts of speculation.

This exhibit does indicate that the Appellant and his spouse have arrived at an agreement. This Memorandum is not signed by either the Appellant or his spouse and was also sent to both parties’ legal counsel.

On December 5, 1996, the Appellant and is spouse signed a Matrimonial Settlement Agreement (Exhibit A-6) which deals with child support commencing on the I day of January 1996.

On April 9 and 10, the Appellant and his spouse signed a further document entitled “Child Support Agreement” (Exhibit A-7). Under the heading Child Support are the following paragraphs:

3.1 It is hereby agreed and acknowledged by the parties that pursuant to the

Mediation Agreement dated March 27, 1995, the Husband has been paying to the Wife for the support of the children the sum of $1,500.00 per month, such support having commenced on March 1, 1995, and continued on the I day of each and every month thereafter to and including December I, 1995, for a total payment by the Husband to the Wife for the support of the children the amount of $15,000.00.

3.2 The Wife shall claim the support received by her as income, and the

Husband shall have the corresponding tax deduction, from the period between March 1, 1995 and December 31, 1995.

3.3 The Husband agrees that he shall pay on behalf of the Wife, upon the

Wife calculating her taxes owing on the $1,500.00 per month in which she receives, the income tax payable by the Wife by claiming the support as income. The Husband shall pay this income tax cost owing by the Wife directly to Revenue Canada, and shall indemnify and save the Wife harmless from any further liability or interest owing to Revenue Canada for the non-payment of tax owing on this sum.

3.4 In the event that the Wife must refile her 1995 Income Tax Return to

include the income stated therein, the Husband shall pay to the Wife’s accountant the cost of the preparation of the refiled 1995 Income Tax Return.

Appellant’s Position

The Appellant argues that the words “written agreement” in subsection 60.1(3) of the Act are ambiguous. This position I reject outright, there is nothing ambiguous about the two words “written agreement”.

The Appellant relies upon a decision of my colleague, Rip J. in his reasons in the Simpson v. R. (1996), 25 R.F.L. (4th) 443 (T.C.C.), where he said at paragraph 53:

The test for whether an informal agreement in which the parties agree to draw up a formal contract is itself a contract is found in Bawitcko v. Kernels Popcorn (1991), 79 D.L.R. (4 ) 97 (Ont. C.A.). At page 104, Robins J.A. sets out three criteria:

(1) The parties must have intended to be bound. It is in answering this question that the label, “Without Prejudice”, may be important;

(2) The informal contract must not be uncertain or vague; and,

(3) The essential terms of the contract must be settled.

This argument is again rejected. The Interim Mediator’s Report is not signed by the Appellant or her spouse and is without prejudice and specially states, “it is not to be considered a legal and binding document”.

The spouse in her Affidavit of the 24 day of February 1996 (Exhibit A- 2), swore that the Appellant on a voluntary basis paid $1,500 per month since April of 1995. The Appellant did not call as a witness his spouse, although he could have. I therefore draw the inference that her testimony would not have been beneficial to the Appellant and that she would have maintained the wording in her sworn Affidavit (Exhibit A-2).

The second Mediation Agreement (Exhibit A-5) makes it clear that the mediation process is “without prejudice” and “confidential” and that communication made in mediation reports were “not” admissible in any legal proceeding.

The Memorandum of Understanding (Exhibit A-4) signed by the Mediator, Victor T. Tousignant dated July 19, 1996 is again unsigned by the parties. The best that can be said for this document is that it is some evidence of an “oral” agreement.

The “Matrimonial Settlement Agreement" (Exhibit A-6) is signed by the Appellant and his spouse. It is a written agreement within the meaning of the subsection. It does not deal with any payments made by the Appellant to his spouse in the year 1995. It provides for support for the two infant children in the amount of $750 each, starting on January 1, 1996. No mention is made therein concerning payments paid in 1995 for support.

The Appellant and his spouse entered into another agreement entitled “Child Support Agreement” (Exhibit A-7) which was signed in April of 1997. It purports to acknowledge the 1995 payments and that they shall be treated as income in the spouse’s hands and as a deduction by the husband.

The spouse’s accountant’s letter (Exhibit A-8) indicates the spouse’s willingness to have the proceeds taxed in her hands. This does not advance the Appellant’s case in any way.

I find that the first written agreement that would qualify under the provision of subsection 60.1(3) of the Act is the “Matrimonial Settlement Agreement” signed in December 1996 (Exhibit A-6) and it does not refer to payments made in 1995, therefore it does not assist the Appellant, notwithstanding his oral evidence that it could just as easily have said March 1 1995 as January 1 1996.

I find that the second written agreement entitled “Child Support Agreement” signed in April 1997 (Exhibit A-7), also qualifies as a written agreement, however the preceding taxation year at the time of its execution is 1996. Therefore, this agreement does not assist the Appellant.

Counsel for the Respondent referred the Court to numerous decisions under subsection 60.1(3) of the Act which all state that an agreement to fit within this provision must be in writing and fully signed and that not until it is signed is there a written agreement. The written agreement may be a combination of documents signed by the taxpayer and the spouse thereof.

The appeal is dismissed.

Appeal dismissed.