Robert P. Smith v. Minister of National Revenue, [1989] 1 CTC 2413, 89 DTC 299

Rip, T.C.J.:— Robert P. Smith appeals from notices of reassessment for his 1982, 1983 and 1984 taxation years in which the Minister of National Revenue, the respondent, did not permit him to deduct, pursuant to subsection 60(b) of the Income Tax Act ("Act"), the amounts of money paid by Mr. Smith to his former wife in 1982, 1983 and 1984 as an allowance payable on a a periodic basis for the maintenance of the children of the marriage. The respondent says the allowances were not paid pursuant to a written separation agreement in existence at the time of the payments.

On December 3,1976, Mr. and Mrs. Smith separated. After the separation their respective solicitors were engaged in negotiating a separation agreement. At the time the parties were residing in British Columbia; they had four children, born in 1964, 1965, 1971 and 1972 respectively. The children continued to live with their mother after the separation of their parents.

. . Y ® P 'on agreement ("Agreement") was executed by Mr. and proviJed'tha?- ° ° 14, 1977. g P 6 and 7 of that agreement

6. The shall pay to the Wife the sum of FOUR HUNDRED ($400.00) DOLLARS per month for the support of the said children, representing ONE HUNDRED ($100.00) DOLLARS per month for the support of each child.

7. The Wife and the said children shall be entitled to the aforesaid maintenance payments from the date of the execution of this Agreement until the happening of the following:

(a) Payments to the Wife may be continued until —

(i) she begins living in a common-law relationship,

(ii) until a divorce is obtained by either party,

(iii) or until the death of the Wife;

In 1979 Mrs. Smith requested, because of her religious beliefs, Mr. Smith to institute proceedings against her. On November 7, 1980 the Supreme Court of British Columbia issued judgment by way of decree nisi that Mr. Smith be divorced from Mrs. Smith. During the hearing Mr. Smith's counsel advised the Court:

We're asking for a decree nisi only . . .. There is a separation agreement in effect which I don’t propose to enter. Mr. Smith is paying maintenance in the amount of four hundred dollars per month for four girls, children of the marriage, and Mrs. Smith has been represented by Counsel throughout and that arrange- ment is satisfactory.

O J u , nisi was made absolute by judgment of the Supreme Court of British Columbia on February 26, 1981. Mr. Smith continued making the maintenance payments to his wife in the manner provided for in paragraph 6 of the Agreement. Upon a child attaining the age of 19 years, the age of k !2 7u in British Columbia, Mr. Smith ceased to make payments for that child. The 5'?l . P y aggregated $4,600, $3,600 and $2,400 in 1982, 1983 and 1984 respectively.

Mr. Smith testified that each year he would discuss with his former wife the payments he made and the amounts he would claim as a deduction in computing his income for tax purposes and what she would report as income in her income tax return. At one point, he said, Mrs. Smith questioned whether, as a result of the divorce, Mr. Smith was still liable to make maintenance payments in accordance with the Agreement; he advised her that as far as he was aware, he was liable and therefore continued to make the payments. An appeals officer of the respondent testified Mrs. Smith did not include in her income for 1982, 1983 and 1984 the maintenance payments received from Mr. Smith in those years.

The appellant insisted that he and Mrs. Smith contemplated the maintenance payments set forth in the Agreement of October 14, 1977 would continue until the last child reached the age of 19 years and, more specifically, would not terminate on the divorce. This understanding appears to have been incorporated in an earlier draft of the Agreement. The draft agreement, dated June 1977, provided, inter alia, that:

6. The Husband shall pay to the Wife the sum of FOUR HUNDRED ($400) DOLLARS per month for the support of the said Wife and the said children, representing EIGHTY ($80.00) DOLLARS per month for the support of the Wife and EIGHTY ($80.00) DOLLARS per month for the support of each child.

7. The Husband agrees that the question of maintenance of the said Wife and children shall be adjusted according to the cost-of-living index, and periodic adjustments in the future will be made.

8. The Wife and the said children shall be entitled to the aforesaid maintenance payments from the date of the execution of this Agreement until the happening of the first of the following events:

(a) Payments to the Wife may be continued until —

(i) she begins living in a common-law relationship,

(ii) until a divorce is obtained by either party,

(iii) or until the death of the Wife;

(b) Payments to the children will terminate for each child upon that child reaching the age of majority, being the age of 19 years." [1]

The changes in the executed Agreement, Mr. Smith testified, reflected that the maintenance payments were being made only for the support of the children to the age of majority, at $100 per month per child; Mrs. Smith was not to receive support of $80 per month for herself. He said there was no issue between his former wife and him with respect to payments for the support of the children ceasing in the event of a divorce: the payments would continue.

Mr. Smith revealed that before the divorce became absolute there were discussions of a new agreement. Mrs. Smith was seeking $500 per month for support of the children but eventually dropped the request. Mr. Smith had stopped making payments to Mrs. Smith in July 1979 when she moved to New Brunswick, but continued the payments in July 1980 when she returned to British Columbia. Discussions also revolved around access and visiting rights.

At the time the discussions were taking place for a new agreement, Mr. Smith learned that it was "open to interpretation" whether the payments under the Agreement would survive a divorce decree absolute. After the decree absolute was issued, further negotiations for a new agreement took place. Mrs. Smith's solicitor wrote the appellant's solicitor in British Columbia on June 28, 1981, advising that:

We feel that it would be to the advantage to your client to consent to the maintenance terms because under the terms of the paragraph 7 of the existing Separation Agreement the maintenance payment would discontinue as of the date of Divorce, and your client may not be entitled to deduct payments since they are no longer being made pursuant to an Agreement or Court Order.

Negotiations did not lead to a new separation agreement.

Mrs. Smith did not testify nor was she present in Court during the trial.

Argument

Appellant's counsel submits that the parties, Mr. Smith and Mrs. Smith, to the Agreement contemplated that the maintenance payments for the children would continue as long as the children were entitled to them and would not terminate on divorce. She says that paragraph 2 of the executed Agreement was improperly amended and does not reflect the true intentions of the parties. Mr. Smith believed the payments were to continue after his divorce; she adds that this was also the view of his erstwhile solicitor, if one reads the transcript of the divorce hearing.

Counsel for the appellant suggests that paragraph 7 of the Agreement is unconscionable and is unenforceable because it is contrary to public policy; she argues that this Court should sever paragraph 7 from the Agreement. Such a severance would permit the payments made by her client pursuant to paragraph 6 of the Agreement to be deductible in accordance with paragraph 60(b).

Mr. Smith's counsel referred the Court to the Divorce Act, R.S.C. 1970, c. D-8 which provides, at paragraph 9(1)(e), that where a divorce decree is sought on the grounds being the spouses have been living separate and apart for a period of not less than three years, it is the duty of the Court "to refuse the decree if there are children of the marriage and the granting of the decree would prejudicially affect the making of reasonable arrangements for their maintenance”. The appellant's counsel says the reason the question of maintenance for the children is found in paragraph 9(1)(e) is that it permits a court to override a separation agreement. The Courts have held that arrangements for support of the children must be in place at the time the divorce is granted and the reasonableness of those arrangements is the proper concern of the Court which has jurisdiction: Money v. Money (1987), 5 R.F.L. (3d) 375; 45 Man. R. (2d) 308; (Man. C.A.).

Counsel also referred to provincial law, citing specifically province of Ontario legislation, [2] protecting children’s rights to support and maintenance. Where a court of competent jurisdiction considers it is in the best interests of a child it may disregard provisions in an agreement in respect of the maintenance of the children: Head v. Head (1979), 1 F.L.R.A.C. 273 (Ont. Prov. Ct.). She also cited authority for the proposition that a court may enforce a legal and proper covenant in a separation agreement although other covenants in the same agreement may be illegal: Hamilton v. Hector (1872), 13 L.R. 511.

There are three reasons why I cannot accept the appellant's argument.

Firstly, a decree absolute has been granted by a British Columbia court of competent jurisdiction and no court of competent jurisdiction has found paragraph 7 of the Agreement to be unconscionable or unenforceable. This Court, a creation of a federal statute, is not a court of equity and cannot take it upon itself to interpret the Agreement on the basis paragraph 7 has been severed from the Agreement. [3] This Court's jurisdiction is found in its enabling statute: see Union Oil of Canada Ltd. v. The Queen, [1976] 1 F.C. 74; 72 D.L.R. (3d) 81. The Agreement must be interpreted as executed, without modification. It is not enough that Mrs. Smith or a guardian of the children could have applied to a court of competent jurisdiction for an order striking out paragraph 7 because it may be contrary to public policy on the face of the Agreement; that person must apply to such a court and receive an order before this Court can interpret the Agreement in the manner desired by the appellant.

Secondly, section 56 of the Family Relations Act of British Columbia states that:

(1) Each parent of a child is responsible and liable for the reasonable and necessary support and maintenance of the child, taking into account the

(a) cost of reasonable residential accommodation, housekeeping, food, clothing, education, recreation and supervision for the child;

(b) child's need for a stable and supportive environment; and

(c) financial circumstances and obligations of each person liable for the support and maintenance of the child.

(2) The making of an order against one parent for the maintenance and support of a child does not affect the liability of another parent for the maintenance and support of the child or bar the making of an order against the other parent.

Both parents are obliged to support a child; any agreement between parents for support and maintenance of their child is simply an agreement between themselves and does not affect the minor child's right to support against either parent. Arrangements between parents who are separated may or may not permit the parent making maintenance payments to deduct the payments in computing income for tax purposes; because the arrangements may not permit such a deduction does not mean the arrangement is improper.

Thirdly, the issue of children's rights and interests as a child per se is not an issue at bar. This Court has jurisdiction only to determine whether an income tax assessment is good or bad. Chief Judge Couture, in an appeal dealing with the deductibility of maintenance payments in Guilbault v. M.N.R., [1988] 2 C.T.C. 2323; 88 D.T.C. 1682, stated, at page 2324 (D.T.C. 1683):

. . . As counsel for the respondent pointed out, the child’s rights are absolutely irrelevant in the dispute before the Court.

This statement holds true in the case at bar.

It is trite law that any taxpayer must fulfill all the requirements of paragraph 60(b) of the Income Tax Act in order to be able to deduct alimony payments, notwithstanding any equitable considerations regarding children's rights to maintenance payments.

In the case of The Queen v. Sills, [1985] 1 C.T.C. 49; 85 D.T.C. 5096, Mr. Justice Heald of the Federal Court of Appeal discussed the meaning of the word "pursuant", as it related to paragraph 56(1)(b) of the Income Tax Act, in the following manner (at page 52 (D.T.C. 5098)):

The Shorter Oxford Dictionary defines "pursuant", inter alia, as “in accordance with”. The Fifth Edition of Black's Law Dictionary defines "pursuant", inter alia, as "to execute or carry out in accordance with or by reason of something”. It also defines “pursuant to" inter alia, as follows: “pursuant to" means “in the course of carrying out; in conformance to or agreement with; according to".

Respondent's counsel, in Sills, op cit, relied on the appeal of Armstrong v. M.N.R. (7 T.A.B. 264; 52 D.T.C. 415; [1954] C.T.C. 236; 54 D.T.C. 1105 and [1956] S.C.R. 446; [1956] C.T.C. 93; 56 D.T.C. 1044), a decision of the Supreme Court of Canada. She cited from the reasons of the Chief Justice at page 94 (D.T.C. 1045) where he stated the proper test for the application of the predecessor section to paragraph 56(1)(b) of the Act to be as follows:

The test is whether it was paid in pursuance of a decree, order or judgment and not whether it was paid by reason of a legal obligation imposed or undertaken. There was no obligation on the part of the respondent to pay, under the decree, a lump sum in lieu of the monthly sums directed thereby to be paid.

In the case at bar, the payments in question were, in fact, made; but they were not made “pursuant to a written agreement” since the Agreement provided that the payments were not required to be made in the event of a divorce.

The circumstances in the case at bar are, to a certain extent, similar to those in the case of Cook v. M.N.R., [1987] 1 C.T.C. 2092; 87 D.T.C. 45. The appellant therein made payments pursuant to a written separation agreement in which a clause provided for termination of the agreement on notice. The appellant subsequently sent a letter invoking the termination clause: however, he continued to make the payments. The deduction of these payments was disallowed on reassessment. The taxpayer claimed that he had orally rescinded his letter (which had invoked the termination clause); in other words, that the agreement was still valid. In dismissing the appeal, judge Brulé stated as follows (at page 2094 (D.T.C. 46)):

. . . l refer to the case of Keith Norman Fryer v. M.N.R., 31 Tax A.B.C. 143; 63 D.T.C. 176, wherein at page 144 (D.T.C. 177), Assistant Chairman R.S.W. Fordham, Q.C. of the Tax Appeal Board said in relation to an alleged written separation:

What is required is a formal document on which an action by a wife for nonpayment could be founded in the appropriate court, without the necessity of adducing extrinsic evidence.

Here there was such a document; it ceased to exist early in January 1975 and while the appellant felt bound to make payments according to the original Agreement, and did so, such were not in conformity with paragraph 60(b) of the Income Tax Act.

It seems to me that the above comments may be applied to the case at bar; even though the appellant may have felt bound to continue the payments, he did not make the payments according to an existing written separation agreement upon which "an action by a wife for non-payment could be founded".

The application of the parol evidence rule leads to the conclusion that both the appellant's oral testimony as to the intention behind the executed Agreement, and the earlier draft of the Agreement ought not to be allowed to be given as proof pointing to the “actual” Agreement being something other than the October 14, 1977 Agreement. Any agreement that may exist between the parties other than that of October 14, 1977 is not a "written agreement" and any payment pursuant to such an agreement would not be "pursuant to a written agreement" in accordance with paragraph 60(b) of the Act. See Sopinka and Lederman, The Law of Evidence in Civil Cases, pages 267 and 268.

Even if one accepts that an agreement existed between the parties prior to October 14, 1977, that agreement was superseded by the later one. As S.M. Waddams [4] points out:

Positions taken during negotiations may be varied on their conclusion. In such a case the later agreement prevails, not by virtue of the parol evidence rule, but because of the parties’ own subsequent agreement.

The draft agreement is of course of no force and effect. It is clear, however, that paragraph 7 of the executed Agreement, ending in a semicolon, is not complete. One could only assume what, if anything, was to follow subparagraph (a) of paragraph 7. It may well be that the words of subparagraph (b) of paragraph 8 of the draft agreement were to follow; however, on the other hand, the parties may have negotiated subparagraph

(b) out of the executed Agreement. This may well be the position of Mrs. Smith since she did not include the maintenance payments in her income.

In the circumstances, the appeals must be dismissed.

Appeals dismissed.