Ferdinand Thiessen v. Minister of National Revenue, [1977] CTC 2079, 77 DTC 59

The Assistant Chairman:— Mr Thiessen has appealed to this Board from a reassessment for tax for each of the years 1972, 1973 and 1974. In each of the said years, Mr Thiessen (the appellant) claimed as a deduction, in computing his net income, the sum of $1,350 under the heading “child support” based on the circumstances which will be recounted hereinafter. The Minister of National Revenue disallowed the appellant’s claim; hence the appeal.

The appellant married on February 14, 1962 and to the marriage were born three children: Carolyn on August 16, 1963; Randal on April 29, 1965; and Diane on May 3, 1968. Differences arose between the appellant and his wife and they separated in November of 1971, the children remaining with Mrs Thiessen (even though Mrs Thiessen later remarried, she will be referred to herein as Mrs Thiessen). A written separation agreement was entered into (the relevant portions of which will be reproduced hereinafter) on January 19, 1972. A divorce action had been instituted by this time, with the decree nisi being granted on February 29, 1972 and the decree absolute in June of 1972. The decrees nisi and absolute were silent as to maintenance. Both parties to the appeal agreed that the terms of the separation agreement still prevail even though not referred to in the decrees, and the hearing proceeded on that basis.

The relevant portions of the separation agreement read as follows:

D. The parties are the registered owners in fee simple as joint tenants of the lands and premises located at 8092-196th Street, Surrey, British Columbia, bearing the legal description:

Lot Three (3) of the West Half (W. /2) of the South West Quarter (S.W.%) of Section Twenty-seven (27), Township Eight (8), Plan 1083, New Westminster District

(hereinafter referred to as the “farm”)

E. Each party is fully advised and informed of the property estate and prospects of the other party and they severally have been fully advised and informed by their solicitors of their respective rights and liabilities against and to the other, and to and on the property and estate of the other.

F. It is the intention and desire of the parties hereto that there shall be complete, final and effective settlement of their respective rights in and to the property of each other and the property held by them jointly and the full relinquishment of all the rights, interest and claims which either party may otherwise have on the property of the other and with respect to the custody, maintenance, care and up-bringing of the aforementioned children.

NOW THIS INDENTURE WITNESSETH that in pursuance of the premises and in consideration of the covenants, conditions and provisions hereinafter contained the parties hereto covenant and agree, each with the other, as follows:

1. That the husband and wife shall henceforth live separate and apart from each other and neither of them will take proceedings against the other for restitution of conjugal rights, or molest or annoy, distrub [s/c] or interfere with the other in any manner whatsoever.

2. The wife shall have the care, custody and control of the children of the marriage, namely:

Carolyn Sandra Thiessen,

Randal David Thiessen, and

Diane Katherine Thiessen,

but the husband shall have reasonable access and rights of visitation to the said children at such time or times as are agreed upon between the parties hereto or by their respective Solicitors, and in the case of a dispute, at such time as may be fixed by a Court of competent jurisdiction.

3. Neither party will contract a debt, liability or obligation in the name of the other party or chargeable to the other party and each party will at all times hereinafter indemnify and save harmless the other party from and against all such debts and liabilities which either party may hereinafter contract.

4. It is understood and agreed that the gross value of the farm plus broiler quota is Seventy thousand ($70,000.00) Dollars and the husband shall forthwith after the execution of this Agreement convey to the wife his interest in the farm and in the broiler quota for the sum of Thirty-two thousand two hundred and eighty-seven and 50/100ths ($32,287.50) Dollars payable as follows:

The sum of Fifteen thousand ($15,000.00) Dollars upon execution of the Deed and transfer of the Quota and Seventeen thousand two hundred and Eighty-seven and 50/100ths ($17,287.50) Dollars secured by a Promissory Note bearing no interest in favour of the husband.

PROVIDED HOWEVER that so long as the wife maintains and accepts responsibility for the maintenance and education of the infant children and each of them the husband shall forgive payment of the Note in the following manner:

From January 1st, 1972 to August 1st, 1982, inclusive the Husband shall forgive One hundred and twelve and 50/100ths ($112.50) Dollars per

month on the first day of each and every month and from September 1st, 1982 up to and including April 1st, 1984 the husband shall forgive Seventy-five ($75.00) Dollars per month on the first day of each and every month and from May 1st, 1984 up to and including May 1st, 1987 the husband shall forgive the wife Thirty-seven and 50/100ths ($37.50) Dollars per month on the first day of each and every month.

5. The wife covenants and agrees to contribute to the support and provide for the maintenance of the said children of the marriage from the revenue of the farm, PROVIDED HOWEVER that in the event she sells the farm she shall deposit sufficient funds in a trust account of a Canadian Chartered Bank to assure a monthly payment of Thirty-seven and 50/100ths ($37.50) Dollars per month per child until the respective children attain the age of Nineteen (19) years. This latter sum representing the husband’s contributions towards the support of the children pursuant to Paragraph 6. herein. Should the wife fail to comply with this covenant the unforgiven portion of the said promissory note shall immediately become due and payable.

6. So long as the wife maintains and accepts responsibility for the maintenance and education of the infant children, the husband shall pay to the wife towards the maintenance and education of each child the sum of Thirtyseven and 50/100ths ($37.50) Dollars per month payable on the 1st day of each and every month, commencing on the 1st day of January, 1972, until such child attains the full age of Nineteen (19) years or becomes self supporting or married, which ever event shall occur first.

7. Subject to the provisions of Paragraph 6. herein the wife covenants and agrees that she will support and maintain herself and the infant children of the marriage and that neither she nor any person on her behalf will at any time commence or take proceedings against the husband for support, maintenance or alimony, save and except for the purpose of enforcing the provisions herein and hereby releases and forever discharges the husband, his heirs, executors and administrators, from all actions, causes of action, proceedings, suits, claims and demands whatsoever which she may now or at any time hereafter may have against the husband for support or maintenance Save as provided herein. In the event the wife does commence proceedings against the husband as aforesaid the unforgiven portion of the promissory note referred to in paragraph 4. herein shall immediately become due and payable.

8. Nothing in this Agreement shall prevent either of the parties from taking or instituting proceedings for divorce as they may be advised according to the law on the grounds of conduct which may have occurred previously or which occur subsequently to the date of this Agreement.

9. The parties hereto shall execute and deliver all documents and do all acts necessary to ensure due performance of this Agreement.

10. In the event that a Court dissolves the marriage of the husband and wife, the parties hereto agree that the maintenance amounts referred to in Paragraph 6. of this Agreement shall be submitted to the Court with the request that they be incorporated in the Divorce Decree as maintenance.

With respect to paragraph E, the evidence was clear that each party to the agreement had their own solicitor, and the solicitor witnessed his client’s signature to the agreement. As to paragraph 4, the parties were the owners of a parcel of land of about 5 acres under an agreement for sale, on which there was a 3-bedroom bungalow together with two buildings used in connection with the raising of broilers. At the time of signing the separation agreement, a small amount was owing on the agreement for sale and, in addition, there was owing to a bank a small amount on a mortgage on the property. Mrs Thiessen’s solicitor had the property and the broiler business, including quota, valued by a qualified appraiser who put the total value at $70,000. Reducing that value by the amount owing on the property, the appellant’s net equity was $32,287.50. Concurrent with the signing of the separation agreement, Mrs Thiessen signed a note in favour of Mr Thiessen in the amount of $32,287.50. The note reads as follows:

IN CONSIDERATION of my husband, Ferdinand Henry Thiessen, conveying all of his interest in that parcel of land situate within the Municipality of Surrey in the Province of British Columbia and more particularly known and described as:

Lot Three (3) of the West Half (W.V2) of the South West Quarter (S.W.%) of Section Twenty-seven (27), Township Eight (8), Plan 1083, New Westminster District,

and conveying all of his interest in the broiler quota attached to the farm on those premises to myself.

I, WILMA HELEN THIESSEN, do HEREBY PROMISE TO PAY to FERDINAND HENRY THIESSEN the sum of Thirty-two thousand two hundred and eighty-seven and 50/100ths ($32,287.50) Dollars as follows:

The sum of Fifteen thousand ($15,000.00) Dollars upon the execution of the Deed of Land and a further sum of Seventeen thousand two hundred and eighty-seven and 50/100ths ($17,287.50) Dollars without interest as follows:

On the 1st day of January, 1972 the sum of One hundred and twelve ($112.50) and 50/100ths Dollars and a similar payment of One hundred and twelve and 50/100ths ($112.50) Dollars on the 1st day of each and every month thereafter up to and including the 1st day of August, 1982; and then a monthly payment of Seventy-five ($75.00) Dollars per month commencing on the 1st day of September, 1982 and a similar sum of Seventy-five ($75.00) Dollars on the 1st day of each and every month thereafter up to and including the 1st day of April, 1984; and then a monthly payment of Thirty-seven and 50/100ths ($37.50) Dollars per month on the 1st day of May, 1984, and a similar payment of Thirty-seven and 50/100ths ($37.50) Dollars on the 1st day of each and every month thereafter up to and including the 1st day of May, 1987.

Just after the divorce, Mrs Thiessen, with cash she had received from her father’s estate, paid the appellant $15,000 and they both assigned their interest in the property to Mrs Thiessen alone. Mr Thiessen stated he sold the land to Mrs Thiessen as he wished his children to be raised on a farm and, in addition, she would have a source of income

—the broiler business on the farm. He would have taken cash had Mrs Thiessen had that amount available. The appellant explained that the schedule of forgiveness of Mrs Thiessen’s indebtedness to him ensured that she would not have to put out cash for the home except of course for taxes, insurance, etc. Subsequent to the payment of cash with respect to the property and the signing of the assignment, no receipt passed between the appellant and Mrs Thiessen, nor was there any written evidence of a discharge of a liability by either party to the other. It should be noted that, in so far as title to the real property was concerned, at no time did the appellant have a mortgage, lien, or Caveat against the title. In so far as a claim by the appellant was concerned, the title to the real property owned by Mrs Thiessen was unencumbered. It is to be clearly noted that as far as paying anything or transferring any physical property to Mrs Thiessen is concerned, the appellant did not, in the three years in question, pay or transfer anything. His counsel contended that, by forgiving Mrs Thiessen’s indebtedness to him in the years 1972, 1973 and 1974 as provided in the sépara- tion agreement, he had paid her maintenance and, consequently, he was entitled to the deduction claimed.

Paragraph 60(b) of the Income Tax Act for the 1972, 1973 and 1974 taxation years read as follows:

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 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 payment at the time the payment was made and throughout the remainder of the year;

The Federal Court of Appeal in the appeal of The Queen v Morton Pascoe, [1976] 1 FC 372; [1975] CTC 656; 75 DTC 5427, had occasion to consider paragraph 11 (1)(l) of the Income Tax Act as it read before tax reform, which is the same as paragraph 60(b) after tax reform, and Stated as follows:

First, we are of opinion that the payment of those sums did not constitute the payment of an allowance within the meaning of paragraph 11(1)(l) An allowance is, in our view, a limited predetermined sum of money paid to enable the recipient to provide for certain kinds of expense; its amount is determined in advance and, once paid, it is at the complete disposition of the recipient who is not required to account for it. A payment in satisfaction of an obligation to indemnify or reimburse someone or to defray his or her actual expenses is not an allowance; it is not a sum allowed to the recipient to be applied in his or her discretion to certain kinds of expense.

Another Division of the same Court in the case of The Attorney General of Canada v James C Weaver and Freda J Weaver, [1976] 1 FC 423; [1975] CTC 646; 75 DTC 5462, referred to the quotation made above and stated at pages 426-7 [649, 5464] as follows:

While this interpretation of “other allowance” in its context may at first sight seem narrow and restrictive it appears to me to leave scope for the application of that expression since “alimony”, as I understand the term, refers only to an allowance paid under a decree for the maintenance of a wife whereas the statutory provisions are plainly intended to apply as well to allowances of the same nature for the maintenance of children and, conceivably, of a husband, and whether under a decree or pursuant to the terms of an agreement for separation or even after the parties have ceased to be husband and wife.

Moreover, the Court’s interpretation appears to me to make clear what is to be regarded as embraced by the wording of the statute—something that cannot be said for the wording itself—and, as parties to whom it may have application have it within their power to make or change their arrangements having regard to the consequences that will flow from the statutory provisions, certainty as to their application is of prime importance.

It seems to me that in December 1971 and January 1972, when the parties were considering the terms of the separation agreement, demands were made, negotiations entered into, and terms finally agreed upon. The amount to be paid to Mrs Thiessen was at “her complete disposal” in that she could agree or disagree with the proposal. The decision was hers. If she refused his request, it could be that no agreement would have been reached, or other terms would have been agreed upon. In any event the decision was hers. It would appear that, had the appellant each month written a cheque to Mrs Thiessen for the requisite amount of maintenance and delivered it to her, and had she on her part endorsed that cheque to the appellant to pay the debt due on the house, would he not have paid maintenance? It would seem clear he had. Is he to lose the benefit of that payment merely because the agreement obviated the need for the writing of a monthly cheque and an endorsement thereon? In addition, as counsel for the appellant pointed out, Mrs Thiessen and her children are well protected inasmuch as she owns the home clear of any claim by the appellant and, as long as she maintains the children, will owe nothing on the note. If the amount were paid to Mrs Thiessen by cheque or cash as maintenance, so that it was at her complete disposition as to what she does with it; regardless of how or on what she spends the money, she was paid maintenance. Should the same not apply when, by offset, the maintenance is used to provide a home for herself and her children through an agreement made even before one payment was made?

One might say that, considering the whole financial aspect of the agreement, the real effect is that it is a lump sum payment of maintenance and so non-deductible (MNR v John James Armstrong, [1956] SCR 446; [1956] CTC 93; 56 DTC 1044). The forgiveness by the appellant is not absolute. According to paragraph 4 of the agreement, the schedule of forgiveness will only be maintained if . . the wife maintains and accepts responsibility for the maintenance and education of the infant children and each of them the husband shall forgive payment of the Note in the following manner . . .”.

In the result I find that the appellant was, per the separation agreement, obligated to pay maintenance to Mrs Thiessen and by mutual agreement she, with that sum at her disposal, in effect directed the appellant to keep that sum and apply it on her indebtedness to him. Consequently I find the amounts claimed and disallowed in each of the years 1972, 1973 and 1974 were within the ambit of paragraph 60(b) and so the appeal is allowed and the assessments are referred back to the respondent for reassessment in accordance with these reasons.

Appeal allowed.