[OFFICIAL ENGLISH TRANSLATION]
Date: 20011026
Dockets: 2001-762(IT)I
BETWEEN:
LINDA BEAULIEU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] This is an appeal concerning the
1997 and 1998 taxation years. The appeal pertains to whether
support should be taxed and the consequences resulting therefrom
both in terms of the Goods and Services Tax (G.S.T.) and the
child tax benefit for those years.
[2] The facts assumed by the
respondent in establishing and maintaining the notices of
reassessment, the child tax benefit notices and the notices of
redetermination are not contested. The facts admitted are as
follows:
[TRANSLATION]
(a) the appellant
and Serge Perreault were married on October 4, 1980;
(b) the appellant
and Serge Perreault had two children from this marriage:
(i) Rémy,
born on November 18, 1981, and
(ii) Stéphanie,
born on April 4, 1986;
(c) the appellant
and Serge Perreault have lived separate and apart since December
2, 1993;
(d) the appellant
and Serge Perreault were divorced on May 29, 1995, and the
judgment became effective on the thirty-first day after that
date;
(e) as a result of
the divorce judgment from the Superior Court, rendered by the
Honourable Judge Gaétan Pelletier, J.S.C., and dated
May 29, 1995, he confirmed and gave effect to the agreement
signed by the appellant and Serge Perreault on May 3, 1995:
(i) the
appellant is awarded custody of the two children,
(ii) Serge Perreault
is ordered to pay the appellant a weekly amount of $197.89, as
child support,
(iii) the financial
contributions shall be neither taxable nor deductible in the
hands of the parties;
[3] The appellant's evidence consisted
of her testimony, the testimony of her former spouse and the
filing of Exhibits A-1 and I-1.
[4] Exhibit A-1 summarizes the main
part of the appellant's testimony very well, and its contents are
reproduced below.
[TRANSLATION]
. . .
Your Honour,
Before we proceed with this hearing, with your permission, I
would like to recall certain facts that could assist you, and me
as well, in your judgment in this case, which is mine.
Although it is said that everyone is expected to know the law,
you know full well, Your Honour, that each person cannot be aware
of all the details pertaining to all the legal aspects of the
laws that govern us. That is why, in preparing the agreement for
my divorce, Serge Perreault availed himself of the services
of the notary, Nadine Rioux.
Since at that time I was, and still am, not very well off,
being unemployed, Mr. Perreault suggested that she settle
the legal details. I had confidence in his choice of
Ms. Rioux, especially since he offered to pay the fees.
My sole objective, your Honour, when we worked out the various
provisions included in this agreement, was the present and future
welfare of our children: Rémy, who was 13 at the time, and
Stéphanie, who was then 8 years old.
It must be understood, Your Honour, that Mr. Perreault works
for CN and this company is known for always paying salaries
higher than the average. He therefore has an excellent pension
fund and an excellent Quebec Pension Plan. In addition, Your
Honour, he always kept secret an unspecified amount in an RRSP
fund, and it would be good if I could know what it is.
Accordingly, Your Honour, I waived my share of these amounts
at the time, without understanding my legal rights and the
implication, and Ms. Rioux never explained that I had lost
my right to recover these amounts. Moreover, Your Honour, he
offered a generous amount in child support, which he quickly had
reduced by means of another judgment. It was also agreed, Your
Honour, that he would take the children for about one month a
year, combining the summer period and the Christmas season.
For nearly 5 years, Mr. Perreault complied with the
non-deduction clause in accordance with the agreement. Naturally,
my understanding was that we were in compliance with the
Income Tax Act and, furthermore, since 1995, I had had my
tax returns prepared by H & R Block to ensure
that I was in compliance with the law.
Furthermore, Your Honour, I would like to bring to your
attention the fact that this agreement was signed in good faith
and was confirmed by the Honourable Gaétan Pelletier,
J.S.C.
If there were points in this agreement that were contrary to
the Income Tax Act, how could they have been overlooked by
the Honourable Judge who rendered the divorce judgment?
Also, in his judgment, the Honourable Superior Court Judge,
Gaétan Pelletier, ordered, approved and gave
effect to the agreement signed by the two parties.
Accordingly:
(1) This agreement
would seem to contain clauses that are contrary to the Income
Tax Act.
(2) In the last four
years, Mr. Perreault did not comply with his responsibility to
take the children every other weekend and during vacations, as
mentioned above.
(3) Mr. Perreault
had his salary changed in order to reduce his pension and later
had the salary raised.
(4) The fact that he
did not take the children caused me substantial monetary loss and
significant emotional and physical harm, because I had full-time
custody of the children and no possibility of any rest
whatsoever.
(5) My renunciation
of my share in the patrimony (four years' cohabitation and
fifteen years' cohabitation after we were married), his CN
pension, Q.P.P. and R.R.S.P. fund was conditional on the
full and complete application of the agreement clauses.
In conclusion, Your Honour, I believe that I was deceived,
manipulated and, moreover, kept in ignorance of my rights by Mr.
Perreault and Ms. Rioux.
. . .
[5] Exhibit I-1 is the divorce
judgment issued by the Honourable Judge Gaétan Pelletier
on May 29, 1995. The judgment confirmed the agreement entered
into by the parties, which, under the heading "financial
contributions", specifically provided as follows:
[TRANSLATION]
1. - The male defendant shall pay support to the female
defendant for the children, Rémy and Stéphanie
PERREAULT, of ONE HUNDRED NINETY-SEVEN DOLLARS and EIGHTY-NINE
CENTS ($197.89) every week on every Friday and, in
addition, additional costs (equipment, sports, bicycle and
so forth) shall be apportioned as follows: 70% payable by the
father and 30% payable by the mother.
2. - Support shall be indexed annually on the anniversary of
the signing of this agreement, in the manner provided for in
article 590 of the Civil Code of Quebec, beginning as of next
year on the date of the signing of this agreement.
3. - The support shall be adjusted when one of the children
attains the full age of twenty-five (25) or that child has
completed his or her education and no longer resides with the
mother and can support him or herself.
4. - In the event that one of the children dies before the age
of twenty-five (25), the support amount shall be adjusted.
However, in the event that one of the children becomes disabled
and cannot support him or herself before the age of twenty-five
(25), the support paid on behalf of the child shall continue to
be paid to the child for as long as the child's disability
lasts.
5. - These financial contributions shall be neither taxable
nor deductible in the hands of the parties.
[6] In the divorce, the appellant's
former spouse respected the spirit and letter of the agreement
that was confirmed by not deducting from his annual income the
amount paid to the appellant as support.
[7] As a result of material changes in
his ability to pay, he brought proceedings to have the support
reduced. At the time of those proceedings, his new lawyers
informed him that the amount he had been paying to his former
spouse as support since the divorce judgment was fully deductible
from his income, notwithstanding the clarity of the agreement
dated May 3, 1995, and the undertaking provided therein.
[8] The appellant's former husband
accordingly claimed and received from the respondent the refunds
to which he was entitled, all of which had the obvious result
that the appellant was then assessed for additional unreported
income and, by the same token, penalized in respect of the G.S.T.
credit and the child tax benefit to which she was entitled.
[9] Although I have neither the
authority nor the jurisdiction to rule on the quality and the
effects of the civil agreement between the parties, in my
opinion, the agreement was binding on the parties. The appellant
explained that it was an agreement the purpose and effect of
which was to resolve all of the financial and material
consequences of their divorce. She also emphasized the fact that
this was a fundamental consideration without which she would not
have agreed to.
[10] For the appellant, this is a very
important and indeed even fundamental issue; however, this Court
has no jurisdiction to interfere in this essentially civil
matter. In fact, I must decide this appeal mainly on the basis of
the provisions of the Income Tax Act
(the "Act"), applicable to the years at issue. There
is no doubt that the amounts received by the appellant were
definitely taxable amounts, within the meaning of the Act,
the whole pursuant to paragraphs 56(1)(b) and
56(1)(c) of the Act.
[11] According to the act and the
case law concerning the relevant sections, even if an agreement
is very clear and unambiguous, the payments received by the
appellant had to be added to her income, with the resulting
effects on the G.S.T. credit and the child tax benefit.
[12] The duty to pay tax on support is
established by the Income Tax Act; it cannot be
circumvented, even if a Superior Court judge has decided
otherwise in confirming a duly signed agreement by the
parties.
[13] Thus, as in the case at bar, although
the agreement provided that the amount payable as support would
not be deductible in the hands of the debtor nor taxable in the
hands of the creditor, the case law has stated that such judgment
is of no effect with regard to the provisions of the Act
since the criteria for deductibility and taxation are established
by tax legislation and not by the courts or by an agreement.
Accordingly, an agreement may be fully effective as it applies to
the parties to the agreement, but of no effect in terms of the
tax provisions, which must be complied with at all times.
[14] In this respect, I believe paragraph
[13] of a judgment rendered by the Honourable Judge Mogan in
Bates v. Canada, [1998] T.C.J. No. 660 (Q.L.) should be
reproduced:
Can the order of the Senior Master bind the M.N.R.? In my
opinion, it cannot. In Sigglekow v. The Queen, 85
D.T.C. 5471, a Decree Nisi required a husband to pay to his
wife the sum of $20.00 every week "tax-free". In
computing her income, the wife did not include such $20.00
payments. When deciding the income tax appeal against the
taxpayer wife, Jerome A.C.J. stated at page 5473:
It is consistent throughout both the Trial Judgment and the
Judgment of the Court of Appeal in Sills that the liability for
tax does not spring from a separation agreement or a Court Order.
Section 56 provides that moneys received must be included as
income.
. . .
In the present case, the matter is even clearer because Mr.
Sigglekow made the payments in precise compliance with a Court
Order, except of course for any sums referable to the words
"tax free" which he understandably chose to ignore. On
the reasoning of the Federal Court of Appeal in the Sills case,
there could be no question that such sums actually received by
the Defendant fall precisely within the terms of section 56 and
should, therefore, have been included in her income for the 1975,
1976 and 1977 taxation years. That was the basis of the
Minister's reassessment which, in my view, was entirely
correct.
In my view, Jerome A.C.J. has correctly summarized the law
when he states that the liability for tax does not spring from a
separation agreement or a Court Order. The liability for tax is
determined by the provisions of the Income Tax Act and, more
particularly, by section 56.
The Honourable Judge Mogan goes on to say in paragraph 16:
The superior court of any province has jurisdiction to order
payments for the maintenance of a spouse or children upon the
break-up of a marriage. That jurisdiction does not include the
authority to determine the character of those payments as being
taxable or tax free for purposes of the Income Tax Act. Once the
superior court of a province has ordered maintenance payments on
a marriage break-up, the character of those payments as taxable
or not taxable will be determined by the conditions in paragraphs
56(1)(b) and 56(1)(c) of the Income Tax Act. . . .
[15] Since May 1, 1997, all agreements
relating to support matters are governed by the new tax rules and
the new support guidelines, which in turn are determined by the
Act to amend the Divorce Act,the Family Orders and
Agreements Enforcement Assistance Act, the Garnishment,
Attachment and Pension Diversion Act and the Canada Shipping
Act.
[16] For all of these reasons, the appeal
must be dismissed.
Signed at Ottawa, Canada, this 26th day of October
2001.
J.T.C.C.
Translation certified true
on this 4th day of February 2003.
Sophie Debbané, Revisor
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