Date: 20010627
Docket: 2000-4736-IT-I
BETWEEN:
MICHAEL J. O'NEILL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rip, J.
[1]
In this appeal the appellant Michael J. O'Neill appeals from
his 1998 income tax assessment that disallowed a deduction for
child support.
[2]
During 1998 Mr. O'Neill made monthly payments of $1,500 to
his former spouse Adele Mandryk. The payments were made pursuant
to a written Separation Agreement dated September 1, 1995, that
was amended on three occasions: May 6, 1996, July 1, 1997 and
January 1, 1998. The agreements were prepared by the appellant
and Ms. Mandryk without benefit of legal advice.
[3]
The original agreement set out the terms of the separation of the
appellant and his wife at the time, the distribution of assets
and custody of the three children from the marriage, among other
things. Among the assets distributed was ". . . split of
available cash", essentially the division of monthly net
income less fixed expenses for the month.[1] The cash available each month,
$2,395, was allocated as to Ms. Mandryk " & kids" as
to $1,395 and the appellant as to $1,000. The agreement
explained:
a)
This Cash Split is to continue until June 30, 1996. The goal is
that Adele will have a sufficient monthly income by that time and
continued monthly maintenance payments would be for the children
only, and would be negotiated at that time. Should for some
unforeseen reason Adele not have a regular monthly income of her
own by June 30, 1996 negotiation would take place for continued
support payments. Extended to June 30, 1997 by mutual agreement
on May 1, 1996.
[4]
The May 6, 1996 agreement, signed by both spouses, reads as
follows:
By telephone conversation on the above noted dated
(sic) Michael O'Neill indicated to Adele Mandryk that
he would like to extend the terms of their separation agreement,
including financial support, to June 30, 1997. Adele Mandryk
agreed to his offer.
[5]
Apparently Ms. Mandryk continued her education and, as a result,
her income was substantially reduced and she did not have "a
sufficient monthly income" as contemplated in the original
agreement. On July 1, 1997 Ms. Mandryk and the appellant
signed the following agreement:
Michael O'Neill agreed to extend the terms of the
Separation Agreement to June 30, 2000, in order that Adele
Mandryk may continue with her education under conditions of
financial stability for their children.
[6]
Mr. O'Neill testified that in effect his support payments
were supporting not only the children but also Ms. Mandryk.
Because Ms. Mandryk did not have sufficient income, he stated, he
and Ms. Mandryk agreed to the following on January 1, 1998:
The amount of maintenance paid by Michael J. O'Neill to
Adele M. Mandryk as his share toward the well-being of their
children is increased to $1500.00/month, beginning January 1,
1998.
This amount will continue until June 30, 2000 and will be
examined again, at that date.
[7]
When they prepared the amending agreement of January 1, 1998
neither he nor Ms. Mandryk, Mr. O'Neill testified, was aware
of the amendments to the Income Tax Act
("Act"), in particular subsection 56.1(4) and
paragraph 60(b), that disallowed the deduction of child
support payments made pursuant to agreements made or amended
after April 1997.
[8]
Child support amounts, as defined in subsection 56.1(4) of the
Act,[2] that
became payable by the taxpayer under an agreement on or after its
commencement day, as defined[3] in subsection 56.1(4), are now not deductible
from his income: paragraph 60(b). This was explained by
Bowman A.C.J. in Kovarik v. Canada, [2001] T.C.J. No. 181
(Q.L.) as follows, at paragraphs 8 and 9:
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.
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.
[9]
What must be determined is whether the amounts paid by Mr.
O'Neill during the 1998 taxation year were child support
amounts within the meaning of the Act and if so, whether
they were payable on or after the agreement's commencement
day within the meaning of the Act.
[10] The
definition of "child support amount" in subsection
56.1(4), provides that each amount of support payable under an
agreement or order that is not identified in the agreement as
being solely for spousal support is an amount payable for child
support. It would follow that the amounts paid by the appellant
are child support amounts within the meaning of the
Act.
[11] The
definition of "commencement day" in subsection 56.1(4)
applies to the facts at bar: when after April 1997, a written
agreement made before May 1997 is varied 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 becomes
the commencement day. The original written agreement was made on
September 1, 1995, that is, before May 1997. However, it was
finally varied on January 1, 1998 to change the child support
amounts payable to the recipient, beginning on January 1, 1998.
Whether the appellant and his former spouse intended to modify
the tax treatment of the support amounts when they varied their
agreement is not relevant. As stated by Bowman A.C.J. in
Kovarik, supra, at paragraph 15, "[the] definition of
commencement day in subsection 56.1(4) is not difficult to
understand. . . . 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". The
child support amounts paid in 1998 were therefore paid on or
after the agreement's commencement day in respect of a period
that began on or after its commencement day. It would follow that
these amounts are not deductible from the appellant's
income.
[12] The
Minister of National Revenue ("Minister") reassessed
the appellant for 1998 to disallow the deduction of $18,000 on
January 24, 2000. The appellant sought immediate legal advice and
on February 28, 2000 he and Ms. Mandryk executed an agreement
that purports to be a "Clarification to that Separation
Agreement dated September 1, 1995"
("Clarification"). The Clarification included the
following recitals:
AND WHEREAS the Parties entered into a Separation Agreement on
September 1, 1995 to deal with matters relating to the Parties
living separate and apart and to the continuing support required
for the Wife and for the children of the marriage payable by the
Husband thereafter;
AND WHEREAS the Wife required an increase in her assistance as
the result of her circumstances and student loan debt she has
incurred, which increase was to be effective January 1, 1998;
AND WHEREAS the document prepared to acknowledge that increase
in spousal support did not properly reflect the intentions of or
the agreement between the Parties and was signed by the Parties
as the result of their mutual mistake and was therefore void ab
initio and the Parties wish to hereby properly document their
agreement with respect to spousal support as contained in the
Separation Agreement dated September 1, 1995 and to amend same
effective January 1, 1998 with respect to spousal support
only.
[13] And Mr.
O'Neill and Ms. Mandryk agreed that:
1.
The provision for payment of support for the Wife and the
children of the marriage as set forth in the Separation Agreement
was, has been and continues to be as follows:
(a)
Spousal support payable by the Husband to the Wife as may be
amended from time to time in the sum of $350.46 commencing
September 1, 1995; and
(b)
Child support payable by the Husband to the Wife for the children
of the marriage in the sum of $1,044.54 commencing September 1,
1995; totalling
(c)
Spousal support and child support in the sum of $1,395.00
commencing September 1, 1995.
2.
The Husband and Wife have agreed that spousal support may be
amended from time to time as a result of the Wife's needs
arising from her commencement of her post-secondary education
until the termination thereof and the needs as may be incurred
thereby.
3.
After September 1, 1995 the Wife undertook a course of training
in which she is still enrolled to improve her career skills and
promote her economic self-sufficiency in the future. As the
result of those efforts, any income earned by the Wife has been
limited and she has incurred costs of tuition, books and other
educational expenses, and transportation expenses, all of which
have increased her debt obligations beyond her financial ability
to service the debt. Effective January 1, 1998 the Husband agreed
to increase the spousal support payable by the Husband to the
Wife from $350.46 to $455.46 per month commencing and payable on
the 1st of January, 1998 and the first of each month thereafter
until further agreement or Order of the Court. The Husband has
paid that increased sum and the Wife acknowledges having received
such payments as spousal support and that such have been paid and
received pursuant to the agreement of the Parties, documented
herein, effective January 1, 1998. The effect of the above will
insure the continued wellbeing of the children of the marriage by
enabling the child support of $1,044.54 to be utilized for the
children only and not for the Wife's increasing expenses.
4.
The Parties had no intention to make nor effect an amendment
child support payment provisions of the Separation Agreement
which has provided for child support payments in the amount of
$1,044.54 continuously from September 1, 1995 to date and the
continued payments of spousal support in the amount firstly of
$350.46 from September 1, 1995 to January 1, 1998 and $455.46
thereafter to date.
5.
The Parties acknowledge and agree that any subsequent agreement
entered into between the Parties and specifically that Agreement
dated January 1, 1998 was to give effect to the payment of child
support and spousal support as herein stated.
6.
In all other respects the terms and conditions of the Separation
Agreement of September 1, 1995 are to continue as stated
therein.
[14] In
producing the "Clarification" the appellant submitted
that it confirms that the agreement of January 1, 1998 varied the
spousal support only, leaving the amount payable for child
support at $1,044.54, as intended in the original agreement of
1995.
[15]
Notwithstanding that the appeal at bar is an Informal Procedure
appeal, it is questionable whether the Clarification is
admissible to contradict what are apparently unambiguous
agreements. In Salter v. Minister of National Revenue,[4] the issue was
whether a taxpayer assessed on an amount he had received from his
employer with respect to his retirement was entitled to introduce
extrinsic evidence to indicate the true nature of the
transaction. The agreement between the taxpayer and the employer
stated that the amount was "paid in full settlement of all
claims that he has or might have in respect of wages or
salary". The agreement however also provided for the release
from the existing contract between the parties. The taxpayer
argued that the amount was paid in order to secure a release from
the unexpired portion of the contract. The issue was whether he
was entitled to introduce evidence "which would in any way
add to, vary, modify or contradict the terms of the written
agreement" to support his position. After an analysis of the
doctrine of evidence, Cameron J. decided that such evidence was
admissible since the Minister was not a party to the written
agreement that the taxpayer wanted to contradict. Cameron J.
stated the following at page 920:
In the instant case it is necessary, in order to reach a proper
conclusion as to appellant's assessability to tax, to know
the nature of the transaction and what was the true
consideration. Was the sum of $15,000 paid in settlement of wages
or salary and therefore subject to tax? Or was it a capital sum
paid to secure the release of a valuable contract and therefore
free of tax? Or was it partly one and partly the other?
[Decision re Admissibility of Evidence]
Basing my finding on the above, I have reached the conclusion
that the evidence introduced by the appellant to indicate the
true nature of the transaction and to show the real consideration
was admissible. I also find that the appellant is not estopped by
reason of the terms of the written agreement from proving the
real consideration as the agreement was res inter alios,
and there is therefore no mutuality.
[16]
Alternatively, he stated the following at the same page:
If I am in error in the above conclusion and extrinsic evidence
could not be read to contradict, or vary the written agreement, I
am of the opinion that the court is entitled to consider evidence
of the surrounding circumstances so that it may know what the
agreement is dealing with and understand it. . . . This clause,
[pursuant to which the amount was paid "in full settlement
of all claims that he has or might have in respect of wages or
salary"] in my view, is capable of several
interpretations.
[17] While
this case is authority to permit Mr. O'Neill to introduce the
Clarification to explain the agreement of January 1, 1998, I find
neither vagueness nor doubt in interpreting the 1998 agreement.
In Salter, the document in question was ambiguous, being
capable of several interpretations.
[18] In
Bell v. M.N.R.,[5] Thorson J. discussed the application of the
Salter case where an agreement is clear and without
ambiguity. At page 1161, he stated:
Moreover, the terms of the agreement are clear and it is free
from ambiguity. Consequently, it is not permissible to adduce
evidence with a view to varying or contradicting its terms or
showing that it was different from what it purported to be. The
decision of Cameron, J., in Salter v. Minister of National
Revenue, (1945) Ex. C.R. 634 [2 DTC 918], on which counsel
for the appellant so strongly relied, cannot, therefore, be of
assistance to him, for it has no bearing on the facts of the
present case.
[19] I would
find it most difficult to extrapolate from the original agreement
of September 1, 1995 that out of the $1,395 to be paid monthly to
Ms. Mandryk and the children, $350.46 was for Ms. Mandryk as
spousal support. Similarly, I cannot satisfy myself that on
January 1, 1998, Ms. Mandryk and the appellant contemplated that
spousal support was being increased to $455.46 a month and child
support was to remain at the amount determined in 1995.
[20] As I have
previously stated, the agreement of January 1, 1998 is clear and
free from ambiguity. The payments provided for are child support.
Unfortunately, the appeal will have to be dismissed.
Signed at Ottawa, Canada, this 27th day of June 2001.
"Gerald J. Rip"
J.T.C.C.
COURT FILE
NO.:
2000-4736(IT)I
STYLE OF
CAUSE:
Michael J. O'Neill v. The Queen
PLACE OF
HEARING:
Edmonton, Alberta
DATE OF
HEARING:
May 10, 2001
REASONS FOR JUDGMENT BY: The
Honourable Judge Gerald J. Rip
DATE OF
JUDGMENT:
June 27, 2001
APPEARANCES:
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
R. Scott McDougall
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-4736(IT)I
BETWEEN:
MICHAEL J. O'NEILL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 10, 2001, at Edmonton,
Alberta, by
the Honourable Judge Gerald J. Rip
Appearances
For the
Appellant:
The Appellant himself
Counsel for the Respondent: R. Scott
McDougall
JUDGMENT
The
appeal from the assessment made under the Income Tax Act
for the 1998 taxation year is dismissed.
Signed at Ottawa, Canada, this 27th day of June 2001.
J.T.C.C.
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