Harris v. R., [1998] 1 CTC 2605, 98 DTC 1238

McArthur T.C.J.:

Judge Mogan of this Court heard the evidence of the case under appeal and put the following on record:

[...] over the lunch hour break I met with Counsel in Chambers because I realized that I had heard in this Court and in this city an appeal by the Appellant’s wife. And her appeal, as I recall, related to the years 1989 and 1990. And at that time she represented herself and I believe was the only witness to testify. And I allowed her appeal and held that the amounts were capital. And I think I recognized her in Court this morning.

And so I put to Counsel I thought I had a conflict because of the earlier decision I had given in Mrs. Harris’s favour on her uncontradicted evidence. And now I am faced with basically construing the same document on the basis of conflicting evidence.

And so I asked Counsel to consider the matter and I am now reconvening the Court to hear what Counsel have decided.

Mr. Tausendfreund?

MR. TAUSENDREUND: [...] I reviewed the matter with my client and my instructions are that my client, with the expedition in mind, the cost of the process in mind, would prefer to have the matter dealt with by way of a transcription of the evidence to be reviewed by another judge, who would then hear oral argument by both Counsel based on the transcribed evidence.

THE CROWN: Your Honour, the Respondents will agree to that. It is in the best interests of justice.

After reading the transcript of the evidence, I heard the arguments in Belleville, Ontario, on October 10, 1997.

The issue is whether payments of $24,000 made by the Appellant to his former spouse in 1991 were made pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written Agreement. The question narrows down to whether the payments were on account of capital or were they on account of maintenance and support.

The facts include the following:

The Appellant and his former spouse were married on June 13, 1970. They have three children. They entered into a written Separation Agreement, dated October 1, 1989. This Agreement provided in part:

Periodic Financial Provision

Commencing on the date of this Agreement, the husband will pay to the wife:

(a) for the support and maintenance of the wife the sum of $2,500 each month in advance on the first day of each month commencing October 1, 1989 and continuing until September 1, 1991 and thereafter the sum of $2,000 per month commencing October 1, 1991 and continuing until March 1, 1992 provided that if,

(1) the wife remarries or cohabits;

(ii) the wife dies; or

(iii) the husband dies; -

the support payable for the wife shall be reduced by the sum of $500 per month during the term for which it is payable herein.

Variation

The spouses intend the provisions contained in this Agreement to be final in all respects with respect to inter-spousal support which shall not be subject to variation.

Agreement to Survive Divorce

If at any future time the parties are divorced, the terms of this Agreement will survive and continue in force. The terms of this Agreement shall not be incorporated into a Divorce Judgment.

The parties were divorced by Divorce Judgment dated December 17, 1989. This Divorce Judgment did not include any reference to spousal support.

The Respondent disallowed the Appellant’s deduction of support payments made pursuant to the Separation Agreement for the years 1989 and 1990. The Appellant appealed this decision, which was settled in his favour by Consent Judgement dated December 9, 1992.

Judge Mogan found on appeal by the Appellant’s wife that the amounts were capital payments.

Now this appeal deals with contradictory evidence from both parties.

Appellant’s Position

The language in Section 9 of the Separation Agreement is clear and unambiguous. As such, it alone can be looked at to ascertain the intent of the parties.’ [1]

In the absence of ambiguity in the document, it is an error for the trial Judge to resort to parol evidence to interpret the document. [2]

Even where parol evidence would otherwise be admissible, it is not admissible to vary or modify the terms of the contract. [3]

Res judicata operates by the application of two doctrines of estoppel developed in the case law. [4]

Respondent’s Position

Dealing firstly with the argument of res judicata, Counsel referred the Court three cases: Minister of National Revenue v. Stickel (1972), 72 D.T.C. 6178 (Fed. T.D.); Taylor v. R. (1995), 95 D.T.C. 591 (T.C.C.); Harvey v. R. (1994), 94 D.T.C. 1910 (T.C.C.)

Secondly, Counsel submitted that the Court must look at the circumstances leading up to the making of an Agreement in order to interpret it. The Minister was not a party to the Agreement between the Harris’ and is therefore entitled to look at the evidence leading up to the Agreement to determine what this $2,500 and later $2,000 is for.

Counsel for the Appellant objected to the admissibility of a letter of June 14, 1989. I admitted it with the comment that the weight given to this evidence would be decided upon the writing of the judgment.

Analysis

I accept the Respondent’s position with respect to the question of res judicata. I agree with the reasoning of Judge Bowman in Harvey v. R. (1994), 94 D.T.C. 1910, at page 1913 where he stated:

It would throw the administration of taxation into chaos if the Minister were bound by every private deal he made, whether in accordance with the law or not.

The second issue is more difficult. The Appellant submits that there is no ambiguity in paragraph 9 of the Separation Agreement and because the wording is clear, that is the end of the matter with respect to extrinsic evidence or parol evidence. I agree the Respondent’s submissions that in income tax cases the parol evidence rule does not apply because the Respondent was not a party to the Separation Agreement. [5]

To challenge the clear and unambiguous language in paragraph 9 of the Separation Agreement, it is incumbent on the Respondent to provide the Court with a sound evidentiary basis. The Court must not be in a position to speculate, for instance, whether the evidence of Mrs. Harris is more credible that the evidence of the Appellant. [6]

The paragraph I am asked to construe clearly states that “the husband will pay to the wife for the support and maintenance of the wife...”. Mrs. Harris was represented by Counsel before signing this Agreement. Her Counsel did not testify. The letter of June 14, 1989 was entered into evidence without the evidence from the author or the Appellant’s Solicitor to whom it was directed. The Court was not made privy to the bargaining between the parties prior to the signing of the Agreement. The Appellant explained that the payments continued even upon the death of his former wife because he had no contact with his children and they would need further financial support in the event of their mother’s death. The Appellant’s evidence was as credible as that of Mrs. Harris.

I quote Judge Sarchuck with approval in Privitera supra, at pages 1126 and 1127 where he stated:

[...] attempts to impugn or repudiate the terms of an agreement prepared by professional advisers and signed by the taxpayer must be supported by evidence which very strongly supports the assertions being made. In Pallan, Christie, A.C.J.T.C. made the following comments at page 1107:

It must be understood that if taxpayers create a documented record of things said and done by them, or by them in concert with others, to achieve a commercial purpose and then seek to repudiate those things with evidence of allegations of conduct that is morally blameworthy in order to avoid an unanticipated assessment to tax, they face a formidable task. And that task will not be accomplished, in the absence of some special circumstance, an example of which does not occur to me, by their oral testimony alone. That evidence must be bolstered by some other evidence that has significant persuasive force of its own.

In McKimmon supra, the Federal Court of Appeal set out at page 6090 some considerations to be taken into account in determining if the payments are periodic support payments or capital payments. I apply those to the present case:

1. The length of the periods at which the payments are made. Amounts which are paid weekly or monthly are fairly easily characterized as allowances for maintenance. (The Appellant made monthly payments)

2. The amount of the payments in relation to the income and living standards of both payer and recipient. Where a payment represents a very substantial portion of a taxpayer’s income or even exceeds it, it is difficult to view it as being an allowance for maintenance.

The Appellant is a successful dentist. He indicated that the amount of the division of the assets between the parties and they were substantial. Mrs. Harris was to receive and did receive the matrimonial home at $220,000, its contents appraised at $15,000 to $16,000, a vehicle which was debt free and a brokerage account of about $88,000. She kept her own RRSP account of $100,000 and received a rollover from Dr. Harris of $100,000. She also kept all of her Canada Savings Bonds. The Appellant’s income in 1989 was $484,000 and $359,000 in 1990.

3. Whether the payments are to bear interest prior to their due date. (There was no reference to interest.)

4. Whether the amounts envisaged can be paid by anticipation at the option of the payer or can be accelerated as a penalty at the option of the recipient in the event of default. (This does not apply.)

5. Whether the payments allow a significant degree of capital accumulation by the recipient.

There is no evidence to indicate that Mrs. Harris was able to accumulate capital.

6. Whether the payments are stipulated to continue for an indefinite period or whether they are for a fixed term.

The Appellant stated the reason for the fixed term was that his wife was a qualified registered nurse but had not worked for a substantial portion of their marriage, and that this amount was meant to address her ability to rehabilitate herself professionally.

7. Whether the agreed payments can be assigned and whether the obligation to pay survives the lifetime of either the payer or the recipient.

The payments could not be assigned. The Appellant indicated that he and the children had become estranged and that in the event of his wife’s death, the payments were meant to address that contingent financial need. 8. Whether the payments purport to release the payer from any future obligations to pay maintenance. (This does not apply to the present case.)

I am satisfied that the payments are consistent with the characterization of support payments.

I have great difficulty in accepting an interpretation of the wording which is contrary to its plain meaning. There appears to have been hard bargaining between Counsel for the parties prior to the execution of the agreement. Mrs. Harris agreed to the wording of paragraph 9 and now repudiates the terms to avoid a tax assessment. To accomplish this task, something more than her oral testimony and a letter that is hearsay is required. More significant evidence is required.

The appeals are allowed, with costs, and returned to the Minister of National Revenue for reconsideration and reassessment.

Appeal dismissed.