Date: 20020718
Docket:
2001-2445-IT-I
BETWEEN:
SAMUEL ALLEN
MOSSMAN,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
Reasonsfor
Judgment
Hershfield,
J.T.C.C.
[1]
This appeal is in respect of the Appellant's 1999 taxation
year for which he claimed $24,000 as a child support deduction.
The support requirement arises from agreements entered into with
Mrs. Mossman in 1994 and 1998. The deduction was denied on the
basis that the support amount was paid to Mrs. Mossman under
the later agreement that had a "commencement day" under
subsection 56.1(4)
of the Income Tax Act (the "Act"). In
general terms, child support payments made under an agreement
entered into after May 1997 are not deductible. Agreements that
are subject to this restriction have, under the Act, a
"commencement day" as defined in subsection
56.1(4).
[2]
If the Minister is correct in his assumption that the payment was
pursuant to an agreement having a commencement day in 1998, the
deduction claimed will have been properly disallowed pursuant to
paragraph 60(b) of the Act which, by formula,
denies a "child support amount that became payable ...under
an agreement ... on or after its commencement
day,...".
[3]
In determining whether the subject payments were payable under an
agreement on or after its "commencement day", it will
be necessary to decide whether the second agreement is a
variation of the first agreement. If it is only a variation and
the support payments were made pursuant to it, there will not be
a commencement day until a varied support amount is payable. If
there are no varied support amounts payable in or before 1999,
there will be no commencement day in or before 1999. On the other
hand, if the second agreement causes the first agreement to be
rescinded, the second agreement will be the only one under which
the payments could have been made and that agreement clearly has
a commencement day in 1998.
[4]
A secondary or alternative issue was also raised by the
Respondent; namely, whether the payment by the Appellant was
payable as "an allowance" to Mrs. Mossman. To be
deductible, the payment to Mrs. Mossman must be paid as an
"allowance".
FACTS
[5]
The following are the facts of the case as relied on by the
Respondent and as I have found them. Mr. Mossman, the Appellant,
was the only witness at the hearing.
A.
The Appellant and Helen Mossman married in 1970 and separated in
1988.
B.
Jeremy Mossman born in 1979 was a child of the marriage and was,
after the separation, in the custody of his mother.
C.
In about June 1997, Jeremy completed grade 13 and at about this
time and all relevant times thereafter Mrs. Mossman and Jeremy
lived together in Miami, Florida where Jeremy was a full-time
university student.
D.
In December 1994, the Appellant and Mrs. Mossman entered into a
written agreement (the 1994 Agreement) that obligated the
Appellant to pay support for Jeremy. The summary of the
arrangement set out in the Notice of Appeal and admitted to in
the Reply, is as follows:
(1) until Jeremy completed
Grade 13, $2,000 per month; and thereafter
(2) until Jeremy ceased to
reside with Mrs. Mossman or ceased to attend a full-time
educational institution or reached 21 years of age or married or
died, or until the appellant or Mrs. Mossman died, the sum
of:
(a) $1,700 per month, and
(b) such amount per month as might be determined under an agreed
formula for computing the appellant's share of Jeremy's
post-secondary education expenses, provided that the
appellant's share thereof would always be at least $300 per
month.
I have relied on this
summary as being sufficient for the purposes of addressing the
issues raised by the Respondent in respect of this appeal.
However, the summary is arguably deficient in some respects. For
example, it does not suggest that there is a difference as to
whom payments are required to be made. While this remains
unresolved in the express language of the agreement, it is at
least partly addressed in the agreement itself and this has
relevance, as I will elaborate on in my analysis.
5.
At all material times the Appellant paid $2,000 per month to
Mrs. Mossman for the support of Jeremy. The Appellant
deposited this amount monthly to Mrs. Mossman's bank
account.
6.
On January 19, 1998 the Appellant and Mrs. Mossman entered into a
written agreement (the 1998 Agreement) which provided that the
Appellant:
"shall continue
to pay $2,000 per month as child support for as long as Jeremy
remains a "child of the marriage". The said
payment is premised upon the said $2,000 payment being tax
deductible to Mr. Mossman, although not includable in Mrs
Mossman's income due to her residency in Florida."
(emphasis added)
[6]
I will comment later in these Reasons on my reasons for putting
emphasis on the word "continue", but first it is
necessary to comment on the words put in quotations. The 1998 Agreement is a
hand-written agreement entered into between the Appellant and
Mrs. Mossman to settle arbitration proceedings between them.
The phrase "child of the marriage" is in quotation
marks and Mr. Mossman testified that it was intended to be
highlighted as a phrase of special meaning under the Divorce
Act and includes a child having
reached the age of majority but who is unable to withdraw from
the charge of a parent for certain reasons. Respondent's
counsel acknowledged that "child of the marriage"
included an adult child in full-time attendance at a
post-secondary school or institution and she did not take issue
with construing the 1998 Agreement as including a reference
to Jeremy continuing his post-secondary education, as a condition
of the Appellant continuing to pay support.
[7]
In computing taxable income for 1999 the Appellant deducted
$24,000 of child support paid to Mrs. Mossman in 1999. A similar
amount had been deducted and allowed in each of the previous
years since the 1994 Agreement.
THE ALLOWANCE
ISSUE
[8]
Before looking at the principle issue noted above, as to whether
the support payments were made under the 1994 Agreement and
whether there is a "commencement day" in respect of
that agreement, I will dispose of the secondary or alternative
issue raised by the Respondent; namely, was the payment by the
Appellant payable as "an allowance" to Mrs. Mossman?
The formulistic quantification of the deduction allowed in
paragraph 60(b) of the Act includes, as a
deductible amount, a "support amount" defined in
subsection 56.1(4) to mean an amount payable or receivable
as "an allowance". The amount paid will be an allowance
if Mrs. Mossman had discretion as to the use of the funds
received from the Appellant. I accept that Mrs. Mossman was not
accountable to Mr. Mossman as to the use of the $2,000
deposited monthly in her account. That was the Appellant's
uncontradicted testimony. Further, neither the 1994 nor 1998
Agreements, by their express terms, contemplate Mrs. Mossman
having to account for how she used the funds payable for
Jeremy's support while he was in school. Jeremy was attending
university. That condition was satisfied so the amount ($2,000)
was payable and receivable as an allowance.
[9]
This finding requires comment on another aspect of the $2,000
monthly payment obligation imposed under the 1994 Agreement.
Although the 2(a) amount referred to in paragraph [5] D. of these
Reasons above was (under the express terms of that agreement)
payable to Mrs. Mossman, the part of the 2(b) amount that
exceeded $300 was expressly payable to Jeremy. It is open to
question whether the $300 forming part of the 2(b) amount was
payable to Jeremy or his mother. The agreement was not express on
that point. If payable to Jeremy, the support amount under the
1994 Agreement might only be $1,700. However, the Respondent did
not advance this position and the Appellant advanced a
construction of the agreement, matching his conduct, that the
$300 was payable to Mrs. Mossman. I accept the Appellant's
evidence and assertions on this point. Accepting this, while
accepting that further formulated expense payments were payable
only to Jeremy, means the support amount payable to Mrs. Mossman
was fixed at $2,000 a month under the 1994 Agreement.
THE
DEFINITION OF COMMENCEMENT DAY
[10]
The definition of "commencement day" is found in
subsection 56.1(4):
"commencement
day" at any time of an agreement or order means
(a)
where the agreement or order is made after April 1997, the day it
is made; and
(b)
where the agreement or order is made before May 1997, the day, if
any, that is after April 1997 and is the earliest of
(i)
the day specified as the commencement day of the agreement or
order by the payer and recipient under the agreement or order in
a joint election filed with the Minister in prescribed form and
manner,
(ii)
where the agreement or order is varied after April 1997 to change
the child support amounts payable to the recipient, the day on
which the first payment of the varied amount is required to be
made,
(iii) where
a subsequent agreement or order is made after April 1997, the
effect of which is to change the total child support amounts
payable to the recipient by the payer, the commencement day of
the first such subsequent agreement or order, and
(vi)
the day specified in the agreement or order, or any variation
thereof, as the commencement day of the agreement or order for
the purposes of this Act.
THE POSITION
OF THE PARTIES
[11]
The Respondent's position is that the 1994 Agreement provided
a formula for child support that was varied by the 1998 Agreement
and that the payments in 1999 were made under the 1998 Agreement.
The Respondent argues that when a formula for child support is
varied by agreement, subparagraph (b)(ii) of the
definition of "commencement day" dictates that the date
the variation is agreed to is the "commencement day"
and that, in any event, under paragraph (a) of that
definition, the commencement day is the date the agreement
effecting the variation was made. The Appellant argues that the
1998 Agreement continues the obligation under the 1994 Agreement
to pay a fixed minimum support amount of $2,000 per month while
Jeremy is in full-time attendance in school and that under the
1998 Agreement there has been no variation of that amount
payable. The Appellant argues that where there is an agreement to
vary child support, the agreement date is not the relevant date.
The commencement day in respect of an agreement that varies child
support is the day the first varied payment is required to be
made. Certainly subparagraph (b)(ii) of the definition of
"commencement day" favours the Appellant position.
However the heart of the issue, after determining at a particular
point in time whether a required payment has been varied, is the
determination of "under which agreement was the payment
required to be made?" This is a question of contract
law.
ANALYSIS
[12]
The 1994 Agreement provides, in effect, its own formula for
determining child support amounts payable by the Appellant to
Mrs. Mossman. Provided certain conditions are met, the Appellant
has agreed, under that agreement, to pay Mrs. Mossman's child
support of $2,000 per month. This follows my findings as set out
in paragraph [9] of these Reasons.
[13]
I acknowledge that this finding of the Appellant's obligation
under the 1994 Agreement is somewhat simplistic and deserves
further comment. Firstly, both the 2(a) and 2(b) amounts referred
to in paragraph [5] D. of these Reasons are only payable if the
following conditions are met:
1.
Jeremy resides with Mrs. Mossman;
2.
Jeremy is in full-time attendance at an educational
institution;
3.
Jeremy is under 21 years of age; and
4.
Jeremy is single.
Secondly, my finding
that there is a fixed payment requirement of $2,000 a month under
the 1994 Agreement is only accurate, if I accept that the
Appellant was required to pay $300 each and every month
regardless of actual expenses, scholarships, bursaries or even
whether it was summer break. Otherwise, the monthly support
amount under that agreement might be less than $2,000. I am
satisfied on the evidence that the $2,000 paid to Mrs. Mossman
monthly was required under the 1994 Agreement. The 1998 Agreement
confirmed this obligation. Agreements unlike some statutes must
be construed with some latitude to give effect to intentions.
Accordingly, as a matter of construing the obligations of the
Appellant under the 1994 Agreement, I am satisfied that the
amount the Appellant had agreed to pay as child support for
Jeremy was $2,000 per month provided the four conditions set out
above were met.
[14]
It is important to note that the conditions for payment under the
1998 Agreement are different than the conditions for payment
under the 1994 Agreement. The reference to "child of
the marriage" in the 1998 Agreement changes the
circumstances under which child support will be payable. The
Divorce Act
sets out the definition of "child of the marriage" as
follows:
"child of the
marriage" means a child of two spouses or former spouses
who, at the material time,
(a)
is under the age of majority and who has not withdrawn from their
charge, or
(b)
is the age of majority or over and under their charge but unable,
by reason of illness, disability or other cause, to withdraw from
their charge or to obtain the necessaries of life;
[15]
As noted above, the Respondent accepted that Jeremy, although
having turned 20 years of age in 1999, was a "child of the
marriage" by virtue of living with his mother and being in
full-time attendance at a post-secondary education institution.
Still, this only recognizes two of the conditions set out in the
1994 Agreement. I need only give one example of the
difference between the conditions under each of the two
agreements to highlight the importance of the difference. When
Jeremy reaches the age of 21 years, if he is still in school and
still lives with his mother, the amount the Appellant would be
required to pay Mrs. Mossman for Jeremy's support under the
1994 Agreement would be nil whereas under the 1998 Agreement, as
it was put to me, the Appellant would still be required to pay
Mrs. Mossman $2,000 per month for Jeremy's
support.
[16]
In 1999, all the conditions under the 1994 Agreement had been
met. The amount payable under that agreement is $2,000 per month.
The Reply makes no assumption that the payable to Mrs. Mossman in
1999 under the 1994 Agreement would have been higher or lower
under its formula for sharing post-secondary school expenses than
the payable under the 1998 Agreement. There is only the argument
that it might have been higher or lower and that the potential
for a different payment obligation after the 1998 Agreement
is a variation of the support amount required to be paid.
Further, as stated above, even if I were to find that the 1994
Agreement required a greater support obligation, the additional
support would not qualify as child support, as it was payable
directly to Jeremy. As such there would be no decrease in the
child support payable under the 1998 Agreement. I also note
that additional support payable in respect of Jeremy's
maintenance was never treated as deductible even when paid in
1998 and 1999. Only the $2,000 monthly payments were deducted
before and after entering into the 1998 Agreement. This
supports a finding that the amount payable under the
1998 Agreement as child support was intended as a
continuation of the child support obligation created under the
1994 Agreement. In any event I am satisfied that there was no
variance in the child support payable in or before 1999 under the
1998 Agreement relative to the amount payable under the 1994
Agreement.
[17]
Further, as emphasized above, the express language of the
1998 Agreement provides that the monthly payments of $2,000
are to "continue".
This is consistent at least with my finding that there was no
variation in the amount of child support payable under the 1998
Agreement on its own terms compared to the amount payable under
the 1994 Agreement on its terms.
[18]
The importance of finding that there has been no variance in the
amount payable under the 1998 Agreement is found in the
definition of "commencement day". Subparagraph
(b)(ii) of the definition of "commencement day"
creates a commencement day on the day on which the first varied
amount is required to be made. It is not enough that under a
modifying agreement a support payment might be varied. The
commencement day is the day the first variation in amount payable
actually occurs. It is not sufficient that the formula in the
1994 Agreement has been abandoned and it is not sufficient
that the conditions or pre-conditions for the payment obligation
have changed. What is relevant in the determination of a
commencement day where a support amount is varied is the day that
an amount payable is actually varied. The potential for variation
is not relevant.
[19]
Of critical importance is whether we are considering a varied
agreement in this case or whether there is at law only the later
agreement. At law an agreement that varies an earlier agreement
does not rescind the agreement being varied. Whether a subsequent
agreement is a rescission or a variation depends on the extent to
which it departs from the original contract. It is a rescission
if it alters the original contract in some essential way but if
it does not go to the vary root of the original contract it is
only a variation.
From an income tax perspective tampering with support payments
can dramatically alter the effect of an agreement in respect of
an essential aspect of it. One has to be careful however in using
the tax consequences of a change or alteration of the terms of a
contract in determining whether there has been a rescission or
variation according to principles of contract law. On the other
hand, there is little question that the transitional rules
ensuring that child support payments be non-deductible to the
payer and non-taxable to the recipient should not be circumvented
by too readily regarding amending agreements as not rescinding
the earlier agreement. In this regard the intentions of the
parties should not be relevant since parties cannot by mutual
intent agree to maintain or restore the pre May 1997 tax regime
for child support. On the other hand in deciding the issue of
rescission versus variation, intentions cannot be totally
ignored.
[20]
Aside from intentions, I place importance in this case on the
Respondent not seeking to characterize the changes embodied in
the 1998 Agreement as anything but a variation of the 1998
Agreement. The Reply states that the 1994 Agreement was
varied by the 1998 Agreement. Comparisons of the agreements on
points other than those referred to in these Reasons were not
made. I was not asked to look at each as a whole. Rescission was
not argued.
[21]
Accordingly, I conclude as a matter of contract, 1998 Agreement
must be treated as an agreement varying the 1994 Agreement. The
1994 Agreement has not been rescinded and payments can be and
were made pursuant to it. While clearly not determinative, the
1998 Agreement does speak of "continuing" the support
obligation. This denotes that the very thing the Respondent
states to have been varied was not intended to be varied let
alone be taken as an essential alteration of the support
obligation contained under the 1994 Agreement. The child support
obligation has been clarified. Potential ambiguities in the
1994 Agreement have been clarified. The 1998 Agreement
acknowledges the obligations imposed under the 1994 Agreement.
[22]
While counsel for the parties did not refer to the recent case of
Samycia v. Canada,
it is necessary that I refer to it. That case involved a consent
order (made after April 1997) that replaced a prior order (made
in 1994). Both orders required child support payments of $400 per
child. Fewer children were covered under the latter order and a
variety of conditions effecting the duration of payments were
added. The conditions effecting the duration of the payments in
the latter order were wholly absent in the earlier one. The
duration of the payments under the earlier order were to continue
until further order. Associate Chief Judge Bowman found that the
last order altered the total support payments and gave rise to a
commencement day (the date of the last order) pursuant to
subparagraph (b)(iii) of the definition of
"commencement day". He also found that the last order
entirely superseded the earlier order and was the order under
which the support payments in question in that case were made.
Accordingly, he found that paragraph (a) of the definition
applied.
[23]
Clearly, Samycia was not a case dealing with a varied
agreement or order. There was an implicit finding in that case
that the orders were fundamentally different, as well, as an
express finding that the last order superseded the earlier order.
The latter finding is to say, using the jargon of my analysis,
that the earlier order was rescinded. No payments can be made
under a superseded or rescinded order or agreement. The only
order in Samycia that was existent, under which payments
could be made, was the last order that had a commencement day
under the Act as defined in paragraph (a) of the
definition.
[24]
As to the application of paragraph (a) of the definition
of "commencement day" to the Appellant's case,
the distinction between a varied agreement and superseding
agreement is pivotal. Subparagraph (b)(ii) would be
ineffective in making the "commencement day" the date
payments commence if an agreement to vary child support was
"an agreement" for the purpose of paragraph (a)
of the definition of "commencement day". Every
agreement made, after April 1997, that varies an earlier
agreement would create a commencement day that differs from that
dictated by subparagraph (a)(ii) (unless the made date of
the latter agreement happens to correspond with the date that a
varied payment is actually made). Where a varied agreement alters
(actually or potentially) a child support amount payable, the
more specific terms of subparagraph (b)(ii) must prevail
over the general terms of paragraph (a) in prescribing a
commencement day.
[25]
As I have said, the 1998 Agreement only varies the 1994
Agreement. The child support regime provided to Mrs. Mossman in
the 1994 Agreement is in its essence continued under the 1998
Agreement regardless that certain pre-conditions for
support have been varied and regardless that the quantification
of "non" child support amounts (university expenses)
have gone from formula to varied fixed amounts. Subparagraph
(b)(ii) of the definition of commencement day must be
governed by the date a varied child support amount is payable. As
such, there will only be a commencement day when the first varied
child support payment occurs.
[26]
Lastly, I note that in anticipation of subparagraph
(b)(iii) of the definition of commencement day being
raised by the Respondent, the Appellant urged that that paragraph
not be applied where there was only a chance that the total
support payments would vary as between the two agreements. In
fact, the Respondent never argued that a commencement day was
triggered by virtue of this subparagraph. While I have not had
the benefit of the views of the Respondent on the question, I
feel it necessary to add that I agree with the Appellant on this
point. The potential of a varied agreement entered into after
April 1997 to vary total child support amounts payable under an
earlier agreement made before May 1997, is not an agreement
"the effect of which is to change the total child support
amounts payable". The 1994 Agreement might see child support
end at any time that any one of the pre-conditions is not met.
That might be Jeremy not residing with his mother or is quitting
school. Neither of these events will result in a difference in
total support payments as between the two agreements (the amount
payable under each would be "nil"). Either of these
events could occur before Jeremy's 21st
birthday. Therefore the effect of the second agreement on total
payments is uncertain. Given that the total support amount in
question here is dependant on a change in support payments
governable by subparagraph (b)(ii) of the definition of
commencement day, that subparagraph operates most clearly in this
case in terms of dictating the commencement day of the varied
agreement; i.e. the 1998 Agreement.
[27]
While I do not see a commencement day arising in or before 1999,
I note that a payment made on or after Jeremy's 21st birthday
is only payable under the 1998 Agreement. That payment and
subsequent payments will have been varied relative to the payment
requirements under the 1994 Agreement and the first variance in
the amount required to be paid creates a commencement day. That
is, while the 2000 year is not before me and I cannot deal with
it, it strikes me that Jeremy's birthday in 2000 will
trigger a commencement day under subparagraph (b)(ii)
of the definition of "commencement day".
[28]
In any event, I find that the 1998 Agreement has not caused a
variation in child support payments payable in or before 1999
relative to the amounts payable under the 1994 Agreement and as
such no commencement day was triggered in or before
1999.
[29]
Accordingly, the appeal is allowed, with costs.
Signed at Winnipeg, Manitoba, this 18th day of
July 2002
"J.E. Hershfield"
J.T.C.C.
COURT FILE
NO.:
2001-2445(IT)I
STYLE OF
CAUSE:
Samuel Allen Mossman and
Her Majesty the Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
May 31, 2002
REASONS FOR JUDGMENT
BY: The Honourable Judge J.E.
Hershfield
DATE OF
JUDGMENT:
July 18, 2002
APPEARANCES:
Counsel for the Appellant: Richard
Fitzsimmons
Counsel for the
Respondent:
Andrea Jackett
Audrea Hammell (Student-at-law)
COUNSEL OF RECORD:
For the
Appellant:
Name:
Richard Fitzsimmons
Firm:
Fitzsimmons & Company
Toronto, Ontario
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-2445(IT)I
BETWEEN:
SAMUEL ALLEN MOSSMAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 31, 2002 at Toronto,
Ontario, by
the Honourable Judge J.E.
Hershfield
Appearances
Counsel for the
Appellant:
Richard G. Fitzsimmons
Counsel for the
Respondent:
Andrea Jackett and
Audrea Hammell (Student-at law)
JUDGMENT
The
appeal from the assessment made under the Income Tax Act
for the 1999 taxation year is allowed, with costs, and the
assessment is referred back to the Minister of National Revenue
for reconsideration and reassessment in accordance with the
attached Reasons for Judgment.
Signed at Winnipeg,
Manitoba, this 18th day of July 2002.
J.T.C.C.
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