Kenneth J. Lepack v. Minister of National Revenue, [1989] 1 CTC 2119, 89 DTC 69

Bonner, T.C.J.: —The appellant appeals from assessments of income tax for the 1985 and 1986 taxation years. In his return of income for each of those years the appellant claimed a deduction of $7,800 as "separation allowance". On assessment the deductions were disallowed. The issue is whether the appellant is entitled to the deductions by virtue of paragraph 60(b) of the Income Tax Act ("Act"). It provides:

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

(b) an amount paid by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if he was living apart from, and was separated pursuant to divorce, judicial separation or written separation agreement from, his spouse or former spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year.

At the hearing of the appeal evidence was given by the appellant and by his spouse, Patsy Stewart Lepack. The two were married in 1965. There were three children of the marriage. In 1971 the family moved to the Sudbury area. In 1976 they bought a house at Wahnapitae, Ontario. That house consisted of one storey and a basement. Subsequently difficulties developed in the relationship between the spouses. The two agreed to separate. For financial reasons and reasons relating to the relationship between the parents and the children, it was agreed that the appellant would live in the basement of the house and that his spouse and children would continue to live on the main floor. Thereafter the appellant and his wife ceased to live together as man and wife. The appellant testified that after the separation he entered the main floor of the house for three purposes only:

(a) to use the door leading outside;

(b) to use the bathroom which was on the main floor; and

(c) to make support payments to his wife by leaving either cash or cheque on the kitchen table.

At or about the time of the separation the appellant and his spouse agreed orally that the appellant should pay to his spouse the sum of $150 a week for her support and that of the children. The appellant testified that he also paid the utilities, mortgage instalments and taxes on the house. His spouse paid him $100 a month as rent for the accommodations occupied by her and the children. Each year after the separation, shortly before the time for filing income tax returns, the appellant and his spouse prepared a form of handwritten recital or acknowledgement intended for inclusion in their returns of income. From the outset the wording of the documents was quite consistent. The document prepared for the 1986 tax return reads as follows:

I Ken J. Lepack

Became separated from my wife on the first of March 1976 by mutual agreement.

She looks after our children, for which I pay her the sum of $150.00 per week.

We are still separated in 1987.

Ken J. Lepack

I paid my estranged wife $7800.00 for child support & living expenses for herself in 1986.

(signed) Patsy Stewart

At the hearing counsel for the respondent indicated that in light of the evidence she did not intend to pursue the argument that the spouses were not separated and did not live apart as required by paragraph 60(b).

Counsel for the appellant in argument dealt first with the question whether the annual memoranda satisfied the paragraph 60(b) requirement that the amount in question be paid ”. . pursuant to a written agreement . . He asserted that by the memoranda the parties had confirmed in writing an oral agreement and that the arrangement was valid and enforceable in law. He referred to the Statute of Frauds, R.S.O. 1980, c. 481, and to several decisions [1] which touch on the question of enforceability of an arrangement of the type now in question.

The difficulty with all this is that the question is not whether the parties have entered into a enforceable arrangement. It is whether the requirements of paragraph 60(b) have been satisfied. Nothing in the cases referred to by the appellant's counsel touches on the essential point, namely, whether the amounts paid were paid pursuant to a written agreement.

In my view, a memorandum which states that the parties to an oral agreement have made payments in compliance with it cannot be equated with the making of payments pursuant to a written agreement. In Fitch v. Ft. Francis Pulp & Paper Co., [1927] 4 D.L.R. 811, the Ontario Supreme Court, Appellate Division, dealt with the question whether a requirement in the Solicitor's Act that an agreement between solicitor and client with regard to remuneration be in writing is satisfied by a memorandum which would be sufficient under the Statute of Frauds. Middleton, J.A. speaking for the Court, said:

What the Solicitors Act, R.S.O. 1914, c. 159, s. 49(1), requires is "an agreement in writing," and not merely that there should be a written note or memorandum evidencing the existence of the agreement, and we think that under the statute the writing must be some document made with the intention of contracting. The contract itself must be shown by the written instrument relied upon, and cannot rest upon a mere written proposition coupled with that which took place afterwards. Under a somewhat similar statute this was the conclusion arrived at in Taylor v. Holt (1864), 3 H. & C. 452,159 E.R. 607, and there are numerous cases pointing in the same direction.

While it is expedient for a solicitor always to prepare a formal agreement so as to comply unquestionably with the statute, it may well be that an agreement can be found in correspondence, when the correspondence was intended to make the contract; but letters or memoranda written during the course of the employment indicating that payment for services already rendered are upon a salary basis, or a notice purporting to terminate a contract, even though it should recite all its terms and so amount to a written note or memorandum within the Statute of Frauds, would not be "an agreement in writing" within the meaning of this statute."

[Emphasis added.]

The memoranda prepared by the appellant were obviously not made with the intention of contracting. They therefore cannot serve as a written agreement for purposes of paragraph 60(b). The payments can hardly be said to have been made pursuant to the memoranda prepared after they were made. "Pursuant to" in the context of paragraph 60(b) means “in accordance with” or "by reason of". [2] Equally they cannot be said to have been made pursuant to the memoranda which predate them because those memoranda did not call for subsequent payments. The failure to meet the paragraph 60(b) requirement that the payments be made pursuant to a written agreement is by itself sufficient to disentitle the appellant to deductions under that section. The appeals will therefore be dismissed.

Appeals dismissed.