Date: 20010403
Docket: 2000-138-IT-I
BETWEEN:
DANIEL FERRON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Archambault, J.T.C.C.
[1]
Daniel Ferron disputes a reassessment for the 1997 taxation
year made by the Minister of National Revenue (Minister)
who disallowed a portion, namely $41,856 (disallowed
support), of the support amount of $65,856 that
Mr. Ferron had deducted in computing his income. The
Minister contends that the disallowed support represents the
payment of support expenses to third parties (payments to
third parties) and not a periodic allowance paid by
Mr. Ferron to Hélène Bernard, his spouse,
as it is required to be under paragraph 60(b) and
subsection 56.1(4) of the Income Tax Act
(Act). He further claims that the agreement between
Mr. Ferron and Ms. Bernard did not provide for the
application of subsection 60.1(2) of the Act, which read in
part as follows:
(2)
Agreement. For the purposes of section 60, this section
and subsection 118(5), the amount determined by the formula
A - B
where
A
is the total of all amounts each of which is an amount
(other than an amount that is otherwise a support amount)
that became payable by a taxpayer in a taxation year,
under an order of a competent tribunal or under a written
agreement, in respect of an expense (other than an
expenditure in respect of a self-contained domestic establishment
in which the taxpayer resides or an expenditure for the
acquisition of tangible property that is not an expenditure on
account of a medical or education expense or in respect of the
acquisition, improvement or maintenance of a self-contained
domestic establishment in which the person described in paragraph
(a) or (b) resides) incurred in the year or
the preceding taxation year for the maintenance of a person,
children in the person's custody or both the person and
those children, where the person is
(a) the taxpayer's spouse or former spouse
[...]
is, where the order or written agreement, as the case may
be, provides that this subsection and subsection 56.1(2) shall
apply to any amount paid or payable thereunder, deemed to be
an amount payable by the taxpayer to that person and receivable
by that person as an allowance on a periodic basis, and that
person is deemed to have discretion as to the use of that
amount.
[My emphasis.]
The Facts
[2]
Mr. Ferron was the only person to testify at the hearing.
Hélène Bernard, who had been personally served
with a subpoena at her home at the request of
Mr. Ferron's counsel, was not present and the Court was
given no reason for her absence.
[3]
Mr. Ferron and Ms. Bernard were married on
November 27, 1972. The couple had three children: Julie,
Patrick and Luc. Mr. Ferron and Ms. Bernard have been
living separate and apart since January 30, 1993.
Ms. Bernard drafted an amicable separation agreement
(agreement in principle) on February 21, 1993. That
agreement, which was signed by Ms. Bernard and
Mr. Ferron, stipulated that Mr. Ferron would pay
Ms. Bernard monthly support of $2,000 for life. This support
was to be paid on a tax-free basis. The agreement further
provided that Mr. Ferron would have to make certain payments
to third parties for the children, namely payments of medical and
paramedical expenses, education expenses and recreational
expenses. Lastly, it provided that a final agreement was to be
drafted by a notary selected by Ms. Bernard and that
Mr. Ferron was to pay that notary's fees.
[4]
The notary, Mr. Leroux, drafted three notarial deeds which
the parties signed on August 31, 1993, one granting
Ms. Bernard a right of habitation in respect of the family
residence, another providing for the appointment of
Ms. Bernard as trustee of a trust established by
Mr. Ferron's parents and the third (support
agreement) having to do with the payment of support and
custody of the children. In his bill dated August 27, 1993,
Mr. Leroux stated that, in March 1993, he had met with
Ms. Bernard and Claude Leblanc, a lawyer, to
familiarize himself with the case. As Mr. Leblanc was not his
lawyer, Mr. Ferron believes that he was
Ms. Bernard's.
[5]
Mr. Leroux first prepared draft agreements based on the
information provided, in particular, in the agreement in
principle. These drafts were sent to Mr. Leblanc and
Ms. Bernard as well as to Mr. Ferron. It appears that
Mr. Ferron did not meet with Ms. Bernard and
Mr. Leblanc during the negotiations which took place in
March, April, June and August 1993. Mr. Ferron wrote his
changes on the drafts prepared by Mr. Leroux, who met
Ms. Bernard and Mr. Leblanc on a number of occasions to
discuss the changes suggested by Mr. Ferron.
[6]
The support agreement provides as follows under the heading
"Support":
[TRANSLATION]
2.
SUPPORT
2.1
Mr. Ferron shall pay Ms. Bernard, for herself,
throughout her lifetime, support of TWO THOUSAND DOLLARS
($2,000) per month, payable in advance on the first day of
each month, at Ms. Bernard's home, commencing on the
first day of February 1993;
2.2
The said support of TWO THOUSAND DOLLARS ($2,000) per month shall
be indexed on the first day of January of each year based on the
annual Pension Index established in accordance with
section 119 of the Act respecting the Québec Pension
Plan;
2.3
Subject to paragraph 2.4 below, Ms. Bernard shall
support her children out of the support amount fixed above;
2.4
In addition, Mr. Ferron shall pay, to support the
children, all medical, surgical and paramedical expenses, all
tuition fees charged by private institutions, all
reasonable recreational expenses and all expenses related to the
children's monthly budget;
2.5
Mr. Ferron undertakes to pay all expenses for the
maintenance of the property at 470 Antoine Forestier in Laval, in
particular heating, electricity, gas, telephone, snow removal,
lawn care, landscape maintenance, tenant's repairs,
municipal, school, church and other taxes, insurance and all
other charges and contributions;
2.6
Mr. Ferron shall reimburse Ms. Bernard for any
income tax she may be required to pay under paragraphs 2.1
to 2.6, based on the lowest marginal rate;
2.7
The payments made under paragraphs 2.1 to 2.6 above shall
be taxable as income in Ms. Bernard's hands and may be
deducted as support by Mr. Ferron.
[My emphasis.]
[7]
Mr. Ferron had asked that the numbers of
subsections 56.1(2) and 60.1(2) of the Act be specifically
mentioned in the agreement. He was informed that Ms. Bernard
denied this request because, in her view, it might lead to
confusion: what would happen if the section numbers were changed
in the future? Mr. Ferron was not represented by a lawyer
when the support agreement was negotiated.
[8]
On May 31, 1995, Ms. Bernard filed a motion for
corollary relief as part of an application for divorce. Madam
Justice Sévigny of the Superior Court of Quebec
confirmed and approved at the interim stage all
Mr. Ferron's undertakings toward Ms. Bernard in the
support agreement [TRANSLATION] "of May 31, 1993".
It appears that the actual date was in fact August 31, 1993.
On February 26, 1998, the Superior Court granted
Mr. Ferron and Ms. Bernard a divorce.
[9]
Mr. Ferron discharged all his support obligations toward
Ms. Bernard and his children from 1993 to 1997. In March
1998, Ms. Bernard left the family residence and
Mr. Ferron's children went to live with him.
[10] An
auditor for the Minister asked Mr. Ferron to furnish
supporting documents concerning the sum of $65,856 deducted as
support. Mr. Ferron not only provided all the evidence and
explanations supporting the deduction of this amount, but he
discovered that he had in fact paid more than that amount. The
auditor subsequently informed Mr. Ferron that he was not
entitled to deduct an amount of $41,856 since it represented
payments to third parties and [TRANSLATION] "the agreement
made no express mention of the application of
subsections 56.1(2) and 60.1(2) of the Act."
[11]
Mr. Ferron believes that Ms. Bernard had contested with
the Minister the fact that the payments to third parties were
included in her income for 1995, 1996 and 1997. He feels that
this explains why the Minister asked him to sign notices of
waiver of the time limit for 1995 and 1996. However, as time had
already expired for 1995, he provided a waiver for 1996 only.
Analysis
[12] On
November 22, 1996, I rendered a decision in Pelchat v.
The Queen, [1996] T.C.J. No. 1711 (97 DTC 945), in which
the issue was similar to that in the instant case, although what
was involved in Pelchat was a court order rather than an
agreement between spouses. The court had ordered that "[t]he
said support shall be taxable in the hands of the respondent and
tax deductible for the petitioner." Counsel for the Minister
had contended that this order did not meet the conditions set out
in subsection 60.1(2) of the Act and, in support of his
argument, cited a number of decisions, including that of the
Federal Court of Appeal in The Queen v. Armstrong,
96 DTC 6315, [1996] 2 C.T.C. 266. After
analyzing this decision, I observed in paragraphs 3-5 (DTC
page 946):
In that case, however, there was no provision regarding the
tax treatment of the amounts to be paid by the taxpayer in the
court's order laying down the support obligation.
In its reasons the Court of Appeal cited the remarks of my
brother Judge Beaubier in Mambo v. The Queen, [1995]
T.C.J. No. 931, [1996] 1 C.T.C. 2388, explaining the reasons
behind this condition stated in subsection 60.1(2) of the
Act. The first reason given by him was as follows: "The
first is to confirm that both parties know that there are tax
consequences to such an order or agreement".
Counsel for the Minister also cited the decision of Judge
Garon of this Court in Mailloux v. Her Majesty the
Queen, [1991] T.C.J. No. 641, in which he said the
following:
I think it is likely that the legislature intended to
ensure that the parties in question were fully aware of the
fiscal consequences resulting from the payments made in
accordance with a written agreement, a judgment or an order of a
court for the specific purposes mentioned in that agreement,
judgment or order. [My emphasis.]
[13] I
ultimately came to the following conclusion in paragraph 7
(DTC page 947):
The only statutory provision I know of which might make
Ms. Patry liable for tax on the reimbursement is
subsection 56.1(2) of the Act. Similarly, the only statutory
provision I know of which might permit the deduction of this
reimbursement by Mr. Pelchat is subsection 60.1(2) of
the Act. I therefore have no doubt that when the decree speaks of
the reimbursement as being taxable in the hands of Ms. Patry
and as being deductible by Mr. Pelchat, it refers to these
two relevant provisions of the Act. It follows that
Mr. Pelchat met the above-stated condition of
subsection 60.1(2) of the Act and that he is entitled to
deduct the reimbursement in calculating his income.
It should be noted that Mr. Pelchat's appeal was
instituted under the general procedure and that no appeal was
brought before the Federal Court of Appeal against the decision
rendered.
[14] In the
instant case, counsel for the respondent contends that my
decision in Pelchat was indirectly reversed by the Federal
Court of Appeal's subsequent decision in The Queen v.
Larsson,97 DTC 5425, rendered on August 5, 1997.
First of all, I would note that the Federal Court of Appeal
judges in that case did not refer to my decision and that no
comment was made on the validity of the interpretation I had
adopted in Pelchat. Second, the relevant facts in
Larsson are different from those in Pelchat.
[15] In
Larsson, a number of support orders had had to be made to
clarify the court's intention. In the third of these orders,
issued in November 1993, the court directed that the mortgage
payments made in 1989 and 1990 were to be deemed to be
"periodic maintenance payments" (an allowance payable
on a periodic basis for the maintenance of the recipient) under
the Act, although no express mention was made of
subsection 60.1(2) of the Act. A fourth order was
subsequently issued which referred expressly to this provision of
the Act. However, the court did not state "expressly"
that this order was to have retroactive effect.
McDonald J.A. formulated the question at issue as follows at
page 5428:
As can be seen, much turns on whether the fourth order of the
British Columbia Supreme Court was intended to apply
retroactively. The question for this Court, then, is whether the
fourth order ought to be deemed to have been made nunc pro
tunc.
[16] In
analyzing the context in which the order in question was made,
McDonald J.A. concluded that it implicitly had retroactive
effect.
[17] Thus, the
question the Court of Appeal had to decide in Larsson was
not, unlike that which is before me here, whether an order under
which payments to third parties were to be tax deductible for the
payer and taxable in the hands of the recipient met the
conditions for the application of subsections 56.1(2) and
60.1(2) of the Act. Rather, the issue was whether the fourth
order, in which an express reference to these two provisions of
the Act was added, could apply retroactively to previous years.
Consequently, I find that the Court of Appeal has not yet ruled
on the interpretation I adopted in Pelchat, supra.
It may have occasion to do so following the decision rendered in
the instant case if the respondent continues to believe that I
have erred in law in applying the provisions in question.
[18] I still
believe that my interpretation in Pelchat is the correct
one. First of all, a careful reading of the wording of
subsections 56.1(2) and 60.1(2) of the Act reveals that
these subsections do not require that the agreement between the
parties or the court order expressly mention the numbers of these
subsections. All they require is that the agreement or order
provide that these two subsections apply.[1]
[19] The
question then is whether an agreement between the parties or a
court order can implicitly provide that the two relevant
subsections apply to payments to third parties. I answered in the
affirmative in Pelchat because the wording of the order
was more than clear enough to justify such a conclusion. Although
the Superior Court of Quebec did not expressly mention the
numbers of subsections 56.1(2) and 60.1(2) of the Act, it
clearly indicated that those subsections applied to the payments
to third parties made by Mr. Pelchat when it directed that
"[t]he said support shall be taxable in the hands of the
respondent and tax deductible for the petitioner." As I
stated in Pelchat, the only provisions of the Act that
require the inclusion or permit the deduction of payments made to
third parties in computing income are subsections 56.1(2)
and 60.1(2).
[20] I cannot
help but observe that my approach in Pelchat is similar to
that adopted by McDonald J.A. in deciding the issue in
Larsson. He commented as follows at page 5428:
It is the usual rule that an order of a court is effective
from the date on which it is made unless it provides otherwise.
Thus, where a court does not explicitly state that it intends
for its order to apply retroactively, it will be assumed that the
order does not so apply. In this case, the British Columbia
Supreme Court did not explicitly state that the fourth order was
to apply retroactively.
This cannot, however, be the end of the analysis. While
one must assume that a court order is effective from the date on
which it is entered, it is equally reasonable to assume that
when courts make orders, those orders are intended to be of some
force or effect at the time they are made. In the case at
bar, the fourth order specifically contemplates the nature of
mortgage payments made since 1989 by the taxpayer. At the time
the fourth order was made in 1993, though, the matrimonial home
had been sold and no more mortgage payments would be made by the
taxpayer. It is clear on these facts that if the fourth order
were not intended to be of retroactive effect, it would be
moot. This is at least an indicator of retroactivity, and may
even defeat the presumption against retroactivity.
In my view, it would be perverse to interpret a court's
ruling in such a way as to render it moot from its inception.
In the case at bar, if the fourth order is not interpreted
retroactively, it is of no force or effect from the day it was
entered. In such a situation, I can see no other reasonable
interpretation than to assume that the British Columbia Supreme
Court intended the fourth order to have been made nunc pro
tunc.
[My emphasis.]
[21] Here
paragraph 2.7 of the support agreement clearly stipulates
that the payments referred to in paragraph 2.4 (payments to
third parties) are "taxable as income in
Ms. Bernard's hands" and may be "deducted as
support by Mr. Ferron". Furthermore, Ms. Bernard
had demanded reimbursement for the tax she would have to pay not
only on the lifetime support payment of $2,000, but also on the
payments to third parties (paragraph 2.6 of the support
agreement). These payments were thus intended to be subject to
tax. Since these paragraphs are clear, Ms. Bernard could not
fail to understand their meaning when she signed the support
agreement.
[22] In all
likelihood, Ms. Bernard had the benefit of advice not only
from the notary who drafted the support agreement—a notary
she herself had chosen and whose duty it was to ensure that each
of the parties to the agreement clearly understood its
implications—but also from a lawyer retained to defend her
interests. There is no evidence that Ms. Bernard did not
have the intellectual ability to understand that "[t]he
payments made under paragraphs 2.1 to 2.6 above [would] be
taxable as income in Ms. Bernard's hands".
[23] In
addition, it is important to remember that Ms. Bernard, who
had been personally served with a subpoena of this Court at
Mr. Ferron's request, not only failed to appear but did
not offer any explanation for her absence. I believe it is
entirely appropriate to infer from her absence in the
circumstances that she would not have been able to deny that she
had clearly understood the extent of her obligation to include
the amounts paid by Mr. Ferron in her income. The comments
of Sopinka and Lederman cited by my colleague Judge Lamarre
in Huneault v. The Queen, [1998] T.C.J. No. 103, paragraph
25 (98 DTC 1488, at page 1491) are pertinent:
I would recall here the comments contained in The Law of
Evidence in Civil Cases, by Sopinka and Lederman, which were
cited by Judge Sarchuk of this Court in Enns v.
M.N.R., 87 DTC 208, at 210:
In The Law of Evidence in Civil Cases, by
Sopinka and Lederman, the authors comment on the effect of
failure to call a witness and I quote:
In Blatch v. Archer, (1774), 1 Cowp. 63, at p. 65, Lord
Mansfield stated:
It is certainly a maxim that all evidence is to be weighed
according to the proof which it was in the power of one side to
have produced, and in the power of the other to have
contradicted.
The application of this maxim has led to a well-recognized
rule that the failure of a party or a witness to give
evidence, which it was in the power of the party or
witness to give and by which the facts might have been
elucidated, justifies the court in drawing the inference that
the evidence of the party or witness would have been
unfavourable to the party to whom the failure was
attributed.
[My emphasis.]
[24] In my
view, the wording of paragraph 2.7 of the support agreement
is even clearer than if it had simply been stipulated that
subsections 56.1(2) and 60.1(2) of the Act were to apply to
the payments made in accordance with paragraphs 2.1 to 2.6.
Ms. Bernard could then subsequently have claimed that she
had not understood the implications of that stipulation. Here she
cannot claim not to have understood the meaning of the words
"shall be taxable as income in Ms. Bernard's
hands".
[25]
Furthermore, the wording adopted by the parties also has the
advantage of avoiding any typographical errors in the number of
the provision of the Act. What would have been
Ms. Bernard's (and even the Minister's) position if
the support agreement had referred instead to
subsections 56.1(1) and 60.1(1) of the Act? Would they have
claimed that Mr. Ferron could not deduct the payments to
third parties because reference had not been made to the correct
numbers of the provisions of the Act?
[26]
Sections 313.0.1 and 336.1 of the Taxation Act,
R.S.Q. c. I-3, are similar to subsections 56.1(2)
and 60.1(2) of the Act. If Mr. Ferron and Ms. Bernard
had lived in Ontario in 1993 when they entered into the support
agreement and Mr. Ferron had lived in Quebec in 1997, would
the Quebec Minister of Revenue have been right in claiming that
the payments to third parties were not deductible because the
agreement referred solely to subsections 56.1(2) and 60.1(2)
of the Act, not sections 313.0.1 and 336.1 of the
Taxation Act?
[27] I find it
entirely reasonable to believe that the reassessment made by the
Minister resulted from a request by Ms. Bernard for a refund
of the tax on the payments to third parties. Nor do I believe I
am mistaken in stating that, in 1984, when
subsections 56.1(2) and 60.1(2) were added to the Act, the
vast majority of persons receiving support were women and that
the wording of those subsections was intended to ensure they
would not be subject to tax on payments to third parties without
their consent or without the judge who determines the amount of
support so deciding.
[28] It is
deplorable that Ms. Bernard availed herself in such an
abusive manner of a provision of the Act that was enacted to
provide better protection for women's interests. I conclude
that Ms. Bernard abused the provision because she not only
obtained reimbursement of the tax which she owed on the payments
to third parties from Mr. Ferron, but also would appear to
have requested a refund of for that same tax from the Minister.
She thus apparently obtained more than she was entitled to.
[29] This
entire affair is all the more disturbing since it was
Ms. Bernard herself who, on the alleged ground that it could
have caused confusion, rejected Mr. Ferron's suggestion
that the numbers of the relevant subsections of the Act be
expressly stated.
[30] It is
also disturbing that the Minister, consciously or otherwise,
should become an accessory to this kind of abuse. I find it hard
to understand why in the circumstances he did not see fit to deny
Ms. Bernard a refund of the tax which she sought in respect
of the payments to third parties, given my decision in
Pelchat, supra, in 1996. In deciding instead to
disallow a portion of the deduction claimed by Mr. Ferron,
the Minister forced him to appear before this Court and to incur
legal costs by retaining a lawyer. If on the basis of the
decision in Larsson, the Minister had doubts as to the
validity of my decision, he could have informed Ms. Bernard
of that, leaving her free to raise the question again before this
Court if she so wished. In the circumstances, it is she who
should have had to bear the costs of litigation.
[31]
Subsection 60.1(2) must be interpreted in such a way as to
give it its effect, which is to provide adequate protection from
tax for the beneficiaries of payments to third parties where
those beneficiaries did not assume the tax burden in full
knowledge of the facts. It must not be interpreted so as to
provide a tool to cheat support payers who, like Mr. Ferron,
discharge all their support obligations in good faith.
[32] In
conclusion, I find that all the conditions set out in
paragraph 60(b) and subsection 60.1(2) have been
met and that Mr. Ferron is entitled to the deduction of
$41,856 which the Minister denied him.
[33] For all
these reasons, Mr. Ferron's appeal is allowed and the
assessment is referred back to the Minister for reconsideration
and reassessment on the basis that Mr. Ferron is entitled,
in computing his income, to deduct the amount of $65,856 paid by
him as support. Given the circumstances of this case, I award
the appellant, under subsection 10(2) of the Tax Court
of Canada Rules (Informal Procedure), the fixed sum of $1,500
in lieu of taxed costs.
Signed at Ottawa, Canada, this 3rd day of April 2001.
"Pierre Archambault"
J.T.C.C.
Translation certified true on this 14th day of May
2001.
[OFFICIAL ENGLISH TRANSLATION]
Erich Klein, Revisor
2000-138(IT)I
BETWEEN:
DANIEL FERRON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on November 22, 2000, at Montreal,
Quebec, by
the Honourable Judge Pierre Archambault
Appearances
Counsel for the appellant:
Christopher R. Mostovac
Counsel for the
Respondent:
Dany
Leduc
JUDGMENT
The
appeal from the assessment made under the Income Tax Act
for the 1997 taxation year is allowed and the assessment is
referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that the appellant
is entitled in computing his income to deduct the amount of
$65,856 paid by him as support. Given the circumstances of this
case, I award the appellant, under subsection 10(2) of the
Tax Court of Canada Rules (Informal Procedure), the fixed
sum of $1,500 in lieu of taxed costs.
Signed at Ottawa, Canada, this 3rd day of April 2001.
J.T.C.C.
Translation certified true
on this 14th day of May 2001.
Erich Klein, Revisor
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