Tax Court of Canada Judgments

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.

"Gerald J. Rip"

J.T.C.C.

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