Kovarik v. The Queen, docket 2000-4906-IT-I (Informal Procedure)

Date: 20010327

Docket: 2000-4906-IT-I

BETWEEN:

ZDISLAV KOVARIK,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Bowman, A.C.J.

[1]            In this appeal the appellant claims a deduction in computing income for 1998 of the sum of $5,850 as alimony or maintenance under paragraph 60(b) of the Income Tax Act. The Minister has allowed only $1,350.

[2]            The facts are relatively straightforward. The so-called assumptions pleaded by the Minister of National Revenue are the following.

(a)            the Appellant and Jana Velensky (the "Former Spouse") were divorced on or about December 20, 1979;

(b)            the Appellant and the Former Souse have two children, Ray Paul, who was born in 1973 and Garrett George, who was born in 1971 (the "Children");

(c)            at all material times, the Appellant's Former Spouse had custody of the Children;

(d)            pursuant to the terms of a Decree Nisi of Divorce of the United Family Court of the Judicial District of Hamilton-Wentworth dated December 20, 1979 (the "December 20, 1979 Decree") between the Appellant and his former spouse, the Appellant was required to pay an amount of $250.00 per month per child for a total of $500.00 per month to his former spouse as child support;

(e)            pursuant to the terms of an Agreement dated January 15, 1990 (the "January 15, 1990 Agreement") between the Appellant and his former spouse, the child support the Appellant was required to pay his former spouse was increased from $250.00 per month, per child, to $450.00 per month, per child, effective January 1, 1990, and that the support for Ray Paul, would be discontinued effective February 1, 1998;

(f)             pursuant to the terms of an Agreement dated February 12, 1998 (the "February 12, 1998 Agreement") between the Appellant and his former spouse the support for Ray Paul, would be discontinued effective February 1, 1998, and the child support for Garrett George would be continued until such time as he was no longer a child as defined under the Divorce Act;

(g)            in the 1998 taxation year, the Appellant made payments in accordance with the January 1, 1990 Decree in the amount of $1,350.00.

[3]            Paragraphs (a) to (e) are admitted by the appellant. Nonetheless I cannot accept (e) in its entirety. Specifically the final words

and that support for Ray Paul, would be discontinued effective February 1, 1998

are plainly wrong. There is nothing to that effect in the January 15, 1990 agreement. That provision did not appear until the agreement of February 12, 1998. Indeed if it had appeared in the January 15, 1990 agreement there would have been no need for the February 12, 1998 agreement and the matter would not have come to court.

[4]            Paragraph (g) is not admitted.

[5]            I set out the agreements of January 15, 1990 and February 12, 1998 in their entirety.

                THIS AGREEMENT made the 15th day of January, 1990.

BETWEEN:

                ZDISLAV VACLAV KOVARIK

                Hereinafter called Kovarik

                                                                                OF THE FIRST PART

                                and

                JANA VELENSKY

                Hereinafter called VELENSKY

                                                                                OF THE SECOND PART

WHEREAS by Decree Nisi of Divorce dated December 20, 1979, in action 3226/79 in the Unified Family Court of the Judicial District of Hamilton-Wentworth, Kovarik was ordered to pay to Velensky for the maintenance of the infant children of their marriage GARRETT GEORGE KOVARIK and RAY PAUL KOVARIK the sum of $250.00 per month for each child, a total of $500.00 per month payable on the 1st day of each month, commencing on the 1st day of January, 1980.

AND WHEREAS the parties hereto have agreed that the payments will be increased to $900.00 per month, a total of $450.00 per month for each child, effective January 1, 1990.

NOW THIS INDENTURE WITNESSETH and the parties hereto covenant and agree as follows:

1.              Effective January 1, 1990, Kovarik will pay to Velensky for the maintenance of Garrett George Kovarik who was born on the 6th day of September, 1971 and Ray Paul Kovarik who was born on the 26th day of March, 1973, the sum of $450.00 per month for each child, a total of $900.00 per month.

2.              The parties acknowledge that on January 1, 1990, Kovarik paid to Velensky the sum of $900.00, being the payment due January 1, 1990 in accordance with this agreement.

                IN WITNESS WHEREOF the parties hereto have hereunto set their hands and seals.

SIGNED, SEALED AND DELIVERED

                (signed)                  ) (signed by Zdislav V. Kovarik)       

                Ivan Broha                             )

                                                                )

                (signed)                  ) (signed by Jana Velensky)               

                Pavel Velensky

                THIS AGREEMENT made the 12th day of February, 1998.

BETWEEN:

                                                ZDISLAV VACLAV KOVARIK,

                                                Hereinafter called Kovarik

                                                                                OF THE FIRST PART

                                                                - and –

                                                JANA VELENSKY,

                                                Hereinafter called Velensky

                                                                                OF THE SECOND PART

WHEREAS by Decree Nisi of Divorce dated December 20, 1979, in action 3226/79 in the Unified Family Court of the Judicial District of Hamilton-Wentworth, Kovarik was ordered to pay to Velensky for the maintenance of the infant children of their marriage GARRETT GEORGE KOVARIK and RAY PAUL KOVARIK the sum of $250.00 per month for each child, a total of $500.00 per month, payable on the 1st day of each month, commencing on the 1st day of January, 1980.

AND WHEREAS the parties hereto agreed that the payments be increased to $900.00 per month, a total of $450.00 per month for each child, effective January 1, 1990.

AND WHEREAS RAY PAUL KOVARIK born on the 26th of March, 1973 has graduated from university and is now self supporting and has withdrawn from parental control.

AND WHEREAS the parties have agreed that child support for the said RAY PAUL KOVARIK may be discontinued effective the 1st of February, 1998.

AND WHEREAS the parties have mutually agreed that the existing child support agreement for the support of GARRETT GEORGE KOVARIK born on the 6th of September, 1971, be continued in the sum of $450.00 per month.

NOW THIS INDENTURE WITNESSETH and the parties hereby covenant and agree as follows:

1.              The parties further mutually agree that child support for RAY PAUL KOVARIK born on the 26th of March, 1973 be cancelled and rescinded effective the 1st of February, 1998.

2.              The parties further agree that the existing child support order continue insofar as GARRETT GEORGE KOVARIK is concerned until such time as he is no longer a child as defined under the Divorce Act.

                IN WITNESS WHEREOF the parties hereto have hereunder set their hands and seals.

SIGNED, SEALED AND DELIVERED

                (signed) ) (signed by Zdislav Vaclav Kovarik)              

                                                )               Zdislav Vaclav Kovarik

                                                )

                (signed) )                 (signed by Jana Velensky)               

                                                )               Jana Velensky

[6]            Professor Kovarik testified. He is a professor of mathematics at McMaster University. I mention this otherwise irrelevant fact simply to support the conclusion that I formed of him in the witness stand that he is a man of superior intelligence who is aware of the legal and practical consequences of the documents he signed.

[7]            So much then for the factual background of the case. The problem is simply this: what is the effect of the February 12, 1998 agreement?

[8]            Under what I may describe as the old régime (pre May 1997) spouses making payments to separated or ex spouses for the support of children could deduct those payments and the recipient had to include them in income. Following the decision of the Supreme Court of Canada in Thibaudeau v. Canada, [1995] 2 S.C.R. 627, the legislation changed. So long as a pre May 1997 agreement remained unchanged the deduction/inclusion system under the old régime prevailed.

[9]            If a new agreement were entered into, or an old agreement was changed in a particular way, the deduction/inclusion régime ceased and only payments made up to the "commencement day", as defined, were deductible by the payor and includible by the payee.

[10]          Subsection 56.1(4) defines "child support amount", "commencement day" and "support amount". Subsection 56.1(4) reads as follows.

                The definitions in this subsection apply in this section and section 56.

"child support amount" means any support amount that is not identified in the agreement or order under which it is receivable as being solely for the support of a recipient who is a spouse or former spouse of the payer or who is a parent of a child of whom the payer is a natural parent.

"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

(iv)           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.

"support amount" means an amount payable or receivable as an allowance on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient and children of the recipient, if the recipient has discretion as to the use of the amount, and

(a)            the recipient is the spouse or former spouse of the payer, the recipient and payer are living separate and apart because of the breakdown of their marriage and the amount is receivable under an order of a competent tribunal or under a written agreement; or

(b)            the payer is a natural parent of a child of the recipient and the amount is receivable under an order made by a competent tribunal in accordance with the laws of a province.

[11]          Paragraph 60(b) reads

                There may be deducted in computing a taxpayer's income for a taxation year such of the following amounts as are applicable:

                ...

(b)            the total of all amounts each of which is an amount determined by the formula

A – (B + C)

where

A              is the total of all amounts each of which is a support amount paid after 1996 and before the end of the year by the taxpayer to a particular person, where the taxpayer and the particular person were living separate and apart at the time the amount was paid,

B              is the total of all amounts each of which is a child support amount that became payable by the taxpayer to the particular person under an agreement or order on or after its commencement day and before the end of the year in respect of a period that began on or after its commencement day, and

C              is the total of all amounts each of which is a support amount paid by the taxpayer to the particular person after 1996 and deductible in computing the taxpayer's income for a preceding taxation year.

[12]          Paragraph 56(1)(b) requires the inclusion in income of the following

(b)            the total of all amounts each of which is an amount determined by the formula

A – (B + C)

where

A              is the total of all amounts each of which is a support amount received after 1996 and before the end of the year by the taxpayer from a particular person where the taxpayer and the particular person were living separate and apart at the time the amount was received,

B              is the total of all amounts each of which is a child support amount that became receivable by the taxpayer from the particular person under an agreement or order on or after its commencement day and before the end of the year in respect of a period that began on or after its commencement day, and

C              is the total of all amounts each of which is a support amount received after 1996 by the taxpayer from the particular person and included in the taxpayer's income for a preceding taxation year.

[13]          Paragraph 56(1)(b) is the mirror image of paragraph 60(b).

[14]          Counsel for the appellant contends that the definition of commencement day in subsection 56.1(4) does not apply and that therefore the limitation in paragraph 60(b) does not apply either. He argues that if the appellant and his former spouse had entered into two agreements with respect to their two children the cancellation of one would not have affected the other. I agree but that is not what happened. We have one agreement covering support payments for two children. In 1998 the younger son received an MBA and moved out, becoming self-sufficient. The older, a medical student, continued to need his parents' support. The 1990 agreement was changed and the support payments were reduced to $450 per month.

[15]          The cardinal rule in interpreting statutes is the plain words rule. Numerous aids to construction have been developed: see Glaxo Wellcome Inc. v. The Queen, 96 DTC 1159 (aff'd 98 DTC 6638 (F.C.A.), leave to appeal to S.C.C. denied). But these aids to interpretation are not necessary if the words are clear. The definition of "commencement day" in subsection 56.1(4) is not difficult to understand. Whether the February 12, 1998 agreement is a new agreement or simply a variation of the 1990 agreement it clearly changes the child support payments from $900 per month to $450 per month. I do not see how the plain words of the definition can be avoided, however sophisticated the rules of statutory interpretation one may choose to use may be.

[16]          The liability for one child — the older one — remains admittedly the same but the total changes.

[17]          Counsel contends that the 1998 agreement was unnecessary because the obligation to pay support for Ray Paul Kovarik would have expired upon his moving out. I do not think that the Divorce Act supports such an automatic cessation. Without the agreement of the appellant's ex spouse he would have needed a court order or some similar sanction for a variation of the 1990 agreement and this would have brought him into the definition of "commencement day" one way or another.

[18]          I do not accept that the agreement of 1998 was simply a confirmation of what the law was all along. It varied the support payments and put a limit on the period when they were to continue — a limitation that was not in the 1990 agreement.

[19]          Counsel's alternative position is that I should reserve judgment to permit the appellant to apply to the Ontario Court for rectification of the agreements of 1998 and 1990. The rectification that he seeks would be essentially an expungement of the 1998 agreement and a division of the 1990 agreement into two, one for each son.

[20]          It is of course beyond my sphere to decide whether the Ontario Court would grant such relief. There is certainly precedent from such retroactive rectification to be granted to achieve a reversal of unintended tax consequences. The best example is A.G. Canada v. Juliar et al., 2000 DTC 6589 (Ont. C.A.).

[21]          Courts with jurisdiction in federal tax matters have given effect to such rectification orders made by provincial courts: Dale et al. v. The Queen, 94 DTC 1100, reversed in part 97 D.T.C. 5252 (F.C.A.); Sussex Square Apartments Limited v. The Queen, 99 DTC 443, aff'd 2000 DTC 6548 (F.C.A.).

[22]          No doubt it would be open to me to reserve until the appellant sought and possibly obtained a rectification order, but I do not however think it is appropriate that I do so. This court's function is to decide whether an assessment is right on the facts before it, not whether it might be changed as the result of a subsequent event such as a rectification order. If, every time a particular transaction had unexpected or unwanted tax consequences and the Minister assessed accordingly, this court on an appeal were to defer making a decision and grant a sort of stay of execution while the taxpayer sought a rectification order to reverse the adverse effects of the earlier transaction a goodly number of our cases would be hoist into judicial never-never land pending the disposition of the application by the provincial court. Acting as a form of judicial limbo is not part of this court's mandate.

[23]          The appeal is dismissed.

Signed at Ottawa, Canada, this 27th day of March 2001.

"D.G.H. Bowman"

A.C.J.