Mogan J.T.C.C.:-This case was commenced when Carole Ann Walker (the appellant) filed a notice of appeal from certain income tax assessments. The Minister of National Revenue (the Minister) made an application to this Court under section 174 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the ’’Act") (i) for an order joining Roy S. Shattock (the former husband of Carole Ann Walker) as a third party to her appeal; and (ii) for the determination of certain questions set out in the Minister’s application. On May 8, 1992, an order was issued, inter alia, joining Roy S. Shattock as a third party to the appeals of Carole Ann Walker for the 1988 and 1989 taxation years. When the hearing commenced, counsel for all three parties agreed to the following facts which were contained in the Minister’s application under section 174:
1. Carole Ann Walker and Roy S. Shattock were married on May 9, 1964.
2. Carole Ann Walker and Roy S. Shattock have been living separate and apart since September 1, 1986.
3. Carole Ann Walker and Roy S. Shattock signed a separation agreement as of March 9, 1988 which was a domestic agreement within the meaning of the Family Law Act of Ontario. Each of the parties had received independent legal advice with respect to the agreement which is Exhibit "A" to this appeal.
4. Roy S. Shattock paid $5,021 (half his gross military service pension) to Carole Ann Walker in each of the 1988 and 1989 taxation years.
5. Carole Ann Walker received $5,021 in each of the taxation years 1988 and 1989 from Roy S. Shattock which is half of the gross sum of his military service pension.
6. Carole Ann Walker did not include the 1989 payment referred to in paragraph (5) in her income for the taxation year 1989.
7. Subsequent to the assessment of the 1988 TI tax return, Carole Ann Walker requested that the $5,021 be deleted from her 1988 income. This request was allowed (incorrectly in the Minister’s opinion) per the notice of reassessment dated July 24, 1990. The Minister then determined that the proper treatment of this amount of Carole Ann Walker’s share of Roy S. Shattock’s military pension was to include it in her income. This was done by the notice of reassessment dated March 11, 1991 which is the one currently under appeal.
8. By the notices of reassessment dated March 11, 1991, the Minister included $5,021 in the income of Carole Ann Walker for each of the 1988 and 1989 taxation years.
9. By notice of reassessment dated April 9, 1991, the Minister reduced by $5,021 in the income of Roy S. Shattock for the 1988 taxation year; and by notice of reassessment dated March 11, 1991, the Minister reduced by $5,021 the income of Roy S. Shattock for the 1989 taxation year.
10. Carole Ann Walker filed a notice of appeal on August 9, 1991 on the grounds that according to the terms of the agreement referred to in paragraph 3 it is Roy S. Shattock and not she who should be responsible for the payment of taxes on the gross proceeds of the military service pension received by him.
11. A reply to the notice of appeal referred to in paragraph 10 was filed by the Minister on November 22, 1991.
The parties agreed to the following additional facts which were not contained in the Minister’s application.
12. Roy S. Shattock’s gross military service pension is not indexed and is paid at the rate of $836.84 per month, making an annual amount of $10,042.08.
13. Commencing April 1988, Carole Ann Walker received $418.42 each month from Roy S. Shattock by cheque usually dated the first day of each month, making an annual amount of $5,021.04.
The relevant provisions of the separation agreement (Exhibit "A") are as follows:
9. SUPPORT OBLIGATIONS
Neither party, subject to the other provisions of the agreement, shall be obligated to make any payment or payments of any kind whatsoever, directly or indirectly, to or for the benefit of the other, and each party hereby expressly renounces any right or claim which she or he has had, now has or will in the future have or acquire, whether at law or in equity or under the provisions of any statute past, present or future, including the Family Law Act and amendments thereto, for alimony, support, maintenance or otherwise....
10. CHILD SUPPORT
The wife shall pay to the husband for the care, support and maintenance of the child, the monthly sum of $225 on the first day of each and every month, beginning on the first day of April, 1988....
14. EQUALIZING PAYMENT — NET FAMILY PROPERTY
The husband and the wife agree that during their marriage certain items of property were acquired by both of them and that those items of property were used by the family without regard to the identity of the person acquiring the property. It is agreed that all property has been divided between them to their mutual satisfaction and that subsequent to the equalizing payment set out below that each may keep the property in their possession free of any claim of the other.
From the net proceeds of the sale of the matrimonial home, the husband shall pay to the wife the sum of $7,038.75. The husband shall further pay to the wife the sum $580.26 representing the differential between the wife’s share of the husband’s pension benefits for the first three months of 1988 and the support moneys due by the wife to the husband for the support of the child of the marriage.
The husband shall assign one half of the gross proceeds of his pension income from his military service and until such time as the payments resulting from the assignment are processed and reach the wife, the husband shall pay to the wife the sum of $418.42 per month on the first day of every month commencing on the first day of April, 1988. The wife may elect to set off monies payable to the husband for child support against pension income until the assignment is perfected but must advise the husband of such election prior to the 25th of the previous month. The husband warrants that he will proceed
with due diligence to process such assignment.
Section 10 requires the monthly child support payments of $225 to begin on April 1, 1988. And section 14 requires the monthly payments of $418.42 to begin on April 1, 1988. Those dates were probably chosen because the separation agreement was made as of March 9, 1988.1 assume, however, from the second paragraph of section 14 that the monthly payments were to be regarded as having commenced in January 1988. This assumption is based on the husband’s single payment of $580.26 representing the differential "for the first three months of 1988" which appears to have been computed as follows:
One-half of military pension for January, February and March: $1,255.26 Less: child support for January, February and March: $675.00 Single payment husband to wife: $580.26
The single payment of $580.26 from the husband to the wife was an attempt to place them in the financial position they would have been in if the child support and the sharing of the military pension had commenced in January 1988. It is for this reason that the wife is regarded as having received one-half of the military pension (i.e. $5,021) throughout 1988.
The questions which the Court is asked to determine in the Minister’s application under section 174 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") are as follows:
I. Is the amount of $5,021 which Carole Ann Walker received in each of the taxation years 1988 and 1989 from Roy S. Shattock pursuant to their separation agreement (made as of March 9, 1988) to be included in the computation of her income under the provisions of the Income Tax Act?
II. If the amounts referred to in Question I are not to be included in computing the income of Carole Ann Walker for the 1988 and 1989 taxation years, are those amounts to be included in computing the income of Roy S. Shattock for the 1988 and 1989 taxation years?
Counsel for the appellant relied heavily on the provisions of the Family Law Act, 1986, S.O. 1986, c. 4 to support the argument that no part of the monthly payments of $418.42 should be included in computing the appellant’s income. In Marsham v. Marsham (1987), 7 R.F.L. (3d) 1, the wife had retained an actuary to give expert evidence as to the value of the husband’s pension. Walsh J. concluded that pension benefits and severance pay were "property" within the meaning of the Family Law Act, 1986 ("F.L.A.") and had to be valued to determine "net family property". He stated at page 11 :
The actuarial expert was vigorously cross-examined on his report, particularly as to the many assumptions he had used in determining the present value of the husband’s pension benefits. I am satisfied as to the reasonableness of his assumptions as to mortality and interest, but not on his failure to make any deduction for income tax. There is no dispute that the husband’s pension benefits are taxable on receipt. In calculating the present day value of the husband’s pension benefits, there should, therefore, be a deduction made for income tax liability....
The actuary was requested to, and did, calculate the value of the husband’s future pension benefits at age 60, 65 and 70, without accounting for any value relating to survivor benefits. He was also asked to discount the same for income tax at, firstly, the husband’s present marginal rate of 52 per cent, and then at his average tax rate of 36 per cent, with the following results: at age 60, $73,000 at the marginal rate, $97,000 at the average rate; at age 65, $49,000 at the marginal rate, and $65,000 at the average rate; at age 70, $31,000 at the marginal rate, and $41,000 at the average rate.
For the purpose of determining a value for the husband’s pension benefits under the Act, I value the husband’s pension benefits at $97,000. Considering all of the circumstances, it is reasonable to assume that the husband would retire at age 60. It was at that age that the husband would first qualify for an immediate unreduced pension.
The appellant argues that Marsham, supra, was decided ten months before the appellant and the third party signed their separation agreement and, as a leading case under the F.L.A., it was well known to any competent lawyer in Ontario advising clients in the field of family law. Both the appellant and the third party received independent legal advice with respect to their separation agreement. Accordingly, the appellant argues that if the third party (husband) wanted to avoid income tax on the full amount of the military pension, he should have insisted upon a tax indemnity provision like the one suggested by Walsh J. in clause 12 of the directions which he gave at the end of his judgment in Marsham.
In a more recent decision, Berdette v. Berdette (1991), 33 R.F.L. (3d) 113, the Ontario Court of Appeal made it clear that spouses who separate do not share the assets they accumulated during marriage but only the value of those assets. Galligan J.A. stated at page 130:
The intent of this legislation is to establish partnership and equal sharing of property accumulated during marriage. That intent is not effected, however, by the sharing of the assets themselves as was done under the Family Law Reform Act, R.S.O. 1980, c. 152, which preceded the F.L.A. It is done by the sharing of the value of the assets. The distinction is crucial and is one that is not infrequently overlooked.... In my view, the definition of "net family property” contained in subsection 4(1), the opening words of subsections 4(2), 5(1) and 5(6), all show that the F.L.A. does not provide for the distribution of property. Rather, it provides for the payment of money when the net family property of one spouse is less than that of the other.
Relying on Berdette, supra, it is argued that the appellant never shared or participated in the third party’s military pension as an asset in itself. Rather, she received payments from the military pension only as a means of achieving the equal sharing of value required by the F.L.A.
I am not satisfied that the decisions construing and applying the provisions of the F.L.A. are relevant in the questions which are required to be answered in this appeal. As I understand the submissions of counsel for the appellant and the third party, cases like Marsham and Berdette end up in court because the husband and wife are not able to agree on the allocation or value of net family property. In this appeal, the appellant and the third party entered into a separation agreement (Exhibit "A") of ten pages with 24 numbered paragraphs settling the value and allocation of all family property. It appears from section 54 of the F.L.A. that a man and a woman who cohabited may enter into an agreement which overrides the provisions of the F.L.A. subject to section 56. In my opinion, the first task in this appeal is to construe the separation agreement signed by the appellant and the third party.
Counsel for the third party relied on the decisions in The Queen v McKimmon, [1990] 1 C.T.C. 109, 90 D.T.C. 6088 (F.C.A.), and Gagnon v. The Queen, [1986] 1 S.C.R. 264, [1986] 1 C.T.C. 410, 86 D.T.C. 6179, to argue that all of the military pension would initially be included in the income of Roy S. Shattock but that he would be permitted a deduction under paragraph 60(b) of the Income Tax Act for the $418.42 paid to the appellant each month on the basis that it was like alimony or some other allowance for the maintenance of the appellant. Counsel suggested that sections 9 and 14 of the separation agreement should be read together and, in particular, the opening words of section 9 which state: "Neither party, subject to the other provisions of the agreement, shall be obligated...." I reject this argument because it is not supported by the terms of the separation agreement. In section 9, the husband and wife expressly renounce any claim for alimony, support or maintenance. The words "subject to" in the first line of section 9 refer to the child support provided in section 10; and those words do not refer to any payment in section 14 because the second sentence in the first paragraph of section 14 refers to "the equalizing payment set out below". The separation agreement contained the following provisions:
1. The parties agree that the headings in this agreement are included for the purpose of facilitating the reading of this agreement and are not to be considered part of the agreement.
2. In this agreement, the following words or groups of words have the meanings shown corresponding thereto as follows:
2.8 all other terms not specifically stated herein bear the meaning or meaning as determined by the Family Law Act and the jurisprudence thereto.
Notwithstanding section 1, I cannot ignore the fact that section 14 is preceded by the heading "Equalizing Payment — Net Family Property"; and the phrase "net family property" is defined in section 4 of the F.L.A. Also, subsections 5(1) and 5(6) of the F.L.A. state:
5(1) When a divorce is granted or a marriage is declared a nullity, or when the spouses are separated and there is no reasonable prospect that they will resume cohabitation, the spouse whose net family property is the lesser of the two net
family properties is entitled to one-half the difference between them.
5(6) The Court may award a spouse an amount that is more or less than half the difference between the net family properties if the court is of the opinion that equalizing the net family properties would be unconscionable, having regard to....
In attempting to construe the separation agreement, I conclude (i) that the purpose of section 14 was to settle for all time any payment or payments that may have been required under subsection 5(1) of the F.L.A.; and (ii) that the assignment of one-half of the gross proceeds of the husband’s military pension was the last act of the parties in "equalizing the net family properties" under the F.L.A.
Once it was decided that the appellant and Roy S. Shattock would share equally his military pension, there were at least two methods of dividing the pension. Firstly, an actuarial expert could have determined the present value of the military pension as a stream of future income by reference to Roy S. Shattock’s life expectancy in March 1988, the amount of the pension, interest rates and any other relevant information. The present value so determined would have to be discounted by some factor representing future income tax payable on the pension itself. This is what the parties did in Marsham as shown in the portion of the reasons for judgment of Walsh J. quoted above. And secondly, the parties could ignore the present value of the military pension and simply divide the gross amount of all future payments at the source. In my opinion, this is what the appellant and Roy S. Shattock attempted to do.
Recognizing that Roy S. Shattock’s military pension was $836.84 per month (not indexed), the following words from the third paragraph of section 14 of the separation agreement are of particular importance:
The husband shall assign one-half of the gross proceeds of his pension income from his military service and until such time as the payments resulting from the assignment are processed and reach the wife, the husband shall pay to the wife the sum of $418.42 per month on the first day of every month commencing on the first day of April, 1988.... The husband warrants that he will proceed with due diligence to process such assignment.
To me, the above words are a clear indication that the husband and wife (1.e. the third party and the appellant) intended that the military pension be allocated at the source so that the administrator of the pension would issue two cheques each month: one to the husband for $418.42 and one to the wife for $418.42. How else can I interpret words like: "and until such time as the payments resulting from the assignment are processed and reach the wife, the husband shall pay to the wife..."? Also, the last sentence of section 14 supports my interpretation: "The husband warrants that he will proceed with due diligence to process such assignment". If the assignment had been processed immediately causing the administrator to issue two cheques each month, the appellant and the third party would have each reported annual income of $5,021 with respect to the military pension.
I understand from comments by counsel that the husband (third party) did attempt to process the assignment but that certain federal legislation prevented the administrator of the military pension from giving effect to the assignment. Counsel also indicated that such legislation was being amended (or perhaps has now been amended) to permit such an assignment. In my view, the inability of the administrator of the military pension to give effect to the assignment in 1988 and 1989 cannot nullify what the parties achieved in their separation agreement. Under subsection 4(1) of the F.L.A., pension benefits are included in ’’property". And under the separation agreement, the appellant and the third party agreed to divide such property into two equal portions. They did not attempt to divide the present value of the pension (with or without a discount for income tax) as in Marsham, but they did in fact divide the stream of future payments so that each would be entitled to one-half of the gross proceeds of the pension month by month.
The appellant and the third party each received independent legal advice when negotiating and settling the terms of the separation agreement. If the Marsham decision was well known in March 1988 by lawyers practising in the field of family law (as suggested by counsel for the appellant), why is there no reference to income tax in section 14 of the separation agreement along the lines of item 12 in the directions given by Walsh J. at the end of his reasons in Marsham? If the third party were to pay all of the income tax on the full annual pension of $10,042 and then pay a tax-free annual amount of $5,021 to the appellant, the third party would be left with very little cash residue each year from the pension. If the parties intended such an unreasonable result in section 14, it ought to have been explicitly stated in single syllable words. Because the parties were dividing equally a stream of future payments (i.e. the gross proceeds of the pension) which clearly had the character of income for income tax purposes, I think it was their intention that each would include half of the gross proceeds of the pension in the computation of his/her income and each would pay the resulting income tax. This is the more reasonable interpretation of section 14.
As-a consequence of section 14 of the separation agreement, the wife (appellant) was entitled from and after April 1988 to receive one-half of the gross proceeds of the military pension each month. If the administrator of the military pension was unable (for whatever reason) to give effect to the husband’s assignment, and if the administrator continued to pay the gross proceed to the husband each month, then the husband received one-half of the gross proceed as agent for or in trust for his wife (the appellant). For income tax purposes, the husband (third party) was required to report on an annual basis only one-half ($5,021) of the gross proceeds as pension income under subparagraph 56(l)(a)(i) of the Income Tax Act; and the wife (appellant) was also required to report on an annual basis one-half ($5,021) of the gross proceeds as pension income under subparagraph 56(l)(a)(i) of the Income Tax Act. I can now respond to the two questions in the
Minister’s application under section 174 of the Income Tax Act.
I. Is the amount of $5,021 which Carole Ann Walker received in each of the taxation years 1988 and 1989 from Roy S. Shattock pursuant to their separation agreement (made as of the 9th day of March, 1988) to be included in the computation of her income under . the provisions of the Income Tax Act?
Answer: Yes
II. If the amounts referred to in Question I are not to be included in computing the income of Carole Ann Walker for the 1988 and 1989 taxation years, are those amounts to be included in computing the income of Roy S. Shattock for the 1988 and 1989 taxation years?
Answer: Not required because of the answer to Question I. The appeals of the appellant for 1988 and 1989 are dismissed. In all the circumstances of this case, no costs are awarded.
Appeal dismissed.
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