Date: 20010403
Docket: 2000-138-IT-I
BETWEEN:
DANIEL FERRON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Archambault, J.T.C.C.
[1] Daniel Ferron disputes a reassessment for the 1997 taxation year made by the Minister of National Revenue (Minister) who disallowed a portion, namely $41,856 (disallowed support), of the support amount of $65,856 that Mr. Ferron had deducted in computing his income. The Minister contends that the disallowed support represents the payment of support expenses to third parties (payments to third parties) and not a periodic allowance paid by Mr. Ferron to Hélène Bernard, his spouse, as it is required to be under paragraph 60(b) and subsection 56.1(4) of the Income Tax Act (Act). He further claims that the agreement between Mr. Ferron and Ms. Bernard did not provide for the application of subsection 60.1(2) of the Act, which read in part as follows:
(2) Agreement. For the purposes of section 60, this section and subsection 118(5), the amount determined by the formula
A - B
where
A is the total of all amounts each of which is an amount (other than an amount that is otherwise a support amount) that became payable by a taxpayer in a taxation year, under an order of a competent tribunal or under a written agreement, in respect of an expense (other than an expenditure in respect of a self-contained domestic establishment in which the taxpayer resides or an expenditure for the acquisition of tangible property that is not an expenditure on account of a medical or education expense or in respect of the acquisition, improvement or maintenance of a self-contained domestic establishment in which the person described in paragraph (a) or (b) resides) incurred in the year or the preceding taxation year for the maintenance of a person, children in the person's custody or both the person and those children, where the person is
(a) the taxpayer's spouse or former spouse [...]
is, where the order or written agreement, as the case may be, provides that this subsection and subsection 56.1(2) shall apply to any amount paid or payable thereunder, deemed to be an amount payable by the taxpayer to that person and receivable by that person as an allowance on a periodic basis, and that person is deemed to have discretion as to the use of that amount.
[My emphasis.]
The Facts
[2] Mr. Ferron was the only person to testify at the hearing. Hélène Bernard, who had been personally served with a subpoena at her home at the request of Mr. Ferron's counsel, was not present and the Court was given no reason for her absence.
[3] Mr. Ferron and Ms. Bernard were married on November 27, 1972. The couple had three children: Julie, Patrick and Luc. Mr. Ferron and Ms. Bernard have been living separate and apart since January 30, 1993. Ms. Bernard drafted an amicable separation agreement (agreement in principle) on February 21, 1993. That agreement, which was signed by Ms. Bernard and Mr. Ferron, stipulated that Mr. Ferron would pay Ms. Bernard monthly support of $2,000 for life. This support was to be paid on a tax-free basis. The agreement further provided that Mr. Ferron would have to make certain payments to third parties for the children, namely payments of medical and paramedical expenses, education expenses and recreational expenses. Lastly, it provided that a final agreement was to be drafted by a notary selected by Ms. Bernard and that Mr. Ferron was to pay that notary's fees.
[4] The notary, Mr. Leroux, drafted three notarial deeds which the parties signed on August 31, 1993, one granting Ms. Bernard a right of habitation in respect of the family residence, another providing for the appointment of Ms. Bernard as trustee of a trust established by Mr. Ferron's parents and the third (support agreement) having to do with the payment of support and custody of the children. In his bill dated August 27, 1993, Mr. Leroux stated that, in March 1993, he had met with Ms. Bernard and Claude Leblanc, a lawyer, to familiarize himself with the case. As Mr. Leblanc was not his lawyer, Mr. Ferron believes that he was Ms. Bernard's.
[5] Mr. Leroux first prepared draft agreements based on the information provided, in particular, in the agreement in principle. These drafts were sent to Mr. Leblanc and Ms. Bernard as well as to Mr. Ferron. It appears that Mr. Ferron did not meet with Ms. Bernard and Mr. Leblanc during the negotiations which took place in March, April, June and August 1993. Mr. Ferron wrote his changes on the drafts prepared by Mr. Leroux, who met Ms. Bernard and Mr. Leblanc on a number of occasions to discuss the changes suggested by Mr. Ferron.
[6] The support agreement provides as follows under the heading "Support":
[TRANSLATION]
2. SUPPORT
2.1 Mr. Ferron shall pay Ms. Bernard, for herself, throughout her lifetime, support of TWO THOUSAND DOLLARS ($2,000) per month, payable in advance on the first day of each month, at Ms. Bernard's home, commencing on the first day of February 1993;
2.2 The said support of TWO THOUSAND DOLLARS ($2,000) per month shall be indexed on the first day of January of each year based on the annual Pension Index established in accordance with section 119 of the Act respecting the Québec Pension Plan;
2.3 Subject to paragraph 2.4 below, Ms. Bernard shall support her children out of the support amount fixed above;
2.4 In addition, Mr. Ferron shall pay, to support the children, all medical, surgical and paramedical expenses, all tuition fees charged by private institutions, all reasonable recreational expenses and all expenses related to the children's monthly budget;
2.5 Mr. Ferron undertakes to pay all expenses for the maintenance of the property at 470 Antoine Forestier in Laval, in particular heating, electricity, gas, telephone, snow removal, lawn care, landscape maintenance, tenant's repairs, municipal, school, church and other taxes, insurance and all other charges and contributions;
2.6 Mr. Ferron shall reimburse Ms. Bernard for any income tax she may be required to pay under paragraphs 2.1 to 2.6, based on the lowest marginal rate;
2.7 The payments made under paragraphs 2.1 to 2.6 above shall be taxable as income in Ms. Bernard's hands and may be deducted as support by Mr. Ferron.
[My emphasis.]
[7] Mr. Ferron had asked that the numbers of subsections 56.1(2) and 60.1(2) of the Act be specifically mentioned in the agreement. He was informed that Ms. Bernard denied this request because, in her view, it might lead to confusion: what would happen if the section numbers were changed in the future? Mr. Ferron was not represented by a lawyer when the support agreement was negotiated.
[8] On May 31, 1995, Ms. Bernard filed a motion for corollary relief as part of an application for divorce. Madam Justice Sévigny of the Superior Court of Quebec confirmed and approved at the interim stage all Mr. Ferron's undertakings toward Ms. Bernard in the support agreement [TRANSLATION] "of May 31, 1993". It appears that the actual date was in fact August 31, 1993. On February 26, 1998, the Superior Court granted Mr. Ferron and Ms. Bernard a divorce.
[9] Mr. Ferron discharged all his support obligations toward Ms. Bernard and his children from 1993 to 1997. In March 1998, Ms. Bernard left the family residence and Mr. Ferron's children went to live with him.
[10] An auditor for the Minister asked Mr. Ferron to furnish supporting documents concerning the sum of $65,856 deducted as support. Mr. Ferron not only provided all the evidence and explanations supporting the deduction of this amount, but he discovered that he had in fact paid more than that amount. The auditor subsequently informed Mr. Ferron that he was not entitled to deduct an amount of $41,856 since it represented payments to third parties and [TRANSLATION] "the agreement made no express mention of the application of subsections 56.1(2) and 60.1(2) of the Act."
[11] Mr. Ferron believes that Ms. Bernard had contested with the Minister the fact that the payments to third parties were included in her income for 1995, 1996 and 1997. He feels that this explains why the Minister asked him to sign notices of waiver of the time limit for 1995 and 1996. However, as time had already expired for 1995, he provided a waiver for 1996 only.
Analysis
[12] On November 22, 1996, I rendered a decision in Pelchat v. The Queen, [1996] T.C.J. No. 1711 (97 DTC 945), in which the issue was similar to that in the instant case, although what was involved in Pelchat was a court order rather than an agreement between spouses. The court had ordered that "[t]he said support shall be taxable in the hands of the respondent and tax deductible for the petitioner." Counsel for the Minister had contended that this order did not meet the conditions set out in subsection 60.1(2) of the Act and, in support of his argument, cited a number of decisions, including that of the Federal Court of Appeal in The Queen v. Armstrong, 96 DTC 6315, [1996] 2 C.T.C. 266. After analyzing this decision, I observed in paragraphs 3-5 (DTC page 946):
In that case, however, there was no provision regarding the tax treatment of the amounts to be paid by the taxpayer in the court's order laying down the support obligation.
In its reasons the Court of Appeal cited the remarks of my brother Judge Beaubier in Mambo v. The Queen, [1995] T.C.J. No. 931, [1996] 1 C.T.C. 2388, explaining the reasons behind this condition stated in subsection 60.1(2) of the Act. The first reason given by him was as follows: "The first is to confirm that both parties know that there are tax consequences to such an order or agreement".
Counsel for the Minister also cited the decision of Judge Garon of this Court in Mailloux v. Her Majesty the Queen, [1991] T.C.J. No. 641, in which he said the following:
I think it is likely that the legislature intended to ensure that the parties in question were fully aware of the fiscal consequences resulting from the payments made in accordance with a written agreement, a judgment or an order of a court for the specific purposes mentioned in that agreement, judgment or order. [My emphasis.]
[13] I ultimately came to the following conclusion in paragraph 7 (DTC page 947):
The only statutory provision I know of which might make Ms. Patry liable for tax on the reimbursement is subsection 56.1(2) of the Act. Similarly, the only statutory provision I know of which might permit the deduction of this reimbursement by Mr. Pelchat is subsection 60.1(2) of the Act. I therefore have no doubt that when the decree speaks of the reimbursement as being taxable in the hands of Ms. Patry and as being deductible by Mr. Pelchat, it refers to these two relevant provisions of the Act. It follows that Mr. Pelchat met the above-stated condition of subsection 60.1(2) of the Act and that he is entitled to deduct the reimbursement in calculating his income.
It should be noted that Mr. Pelchat's appeal was instituted under the general procedure and that no appeal was brought before the Federal Court of Appeal against the decision rendered.
[14] In the instant case, counsel for the respondent contends that my decision in Pelchat was indirectly reversed by the Federal Court of Appeal's subsequent decision in The Queen v. Larsson,97 DTC 5425, rendered on August 5, 1997. First of all, I would note that the Federal Court of Appeal judges in that case did not refer to my decision and that no comment was made on the validity of the interpretation I had adopted in Pelchat. Second, the relevant facts in Larsson are different from those in Pelchat.
[15] In Larsson, a number of support orders had had to be made to clarify the court's intention. In the third of these orders, issued in November 1993, the court directed that the mortgage payments made in 1989 and 1990 were to be deemed to be "periodic maintenance payments" (an allowance payable on a periodic basis for the maintenance of the recipient) under the Act, although no express mention was made of subsection 60.1(2) of the Act. A fourth order was subsequently issued which referred expressly to this provision of the Act. However, the court did not state "expressly" that this order was to have retroactive effect. McDonald J.A. formulated the question at issue as follows at page 5428:
As can be seen, much turns on whether the fourth order of the British Columbia Supreme Court was intended to apply retroactively. The question for this Court, then, is whether the fourth order ought to be deemed to have been made nunc pro tunc.
[16] In analyzing the context in which the order in question was made, McDonald J.A. concluded that it implicitly had retroactive effect.
[17] Thus, the question the Court of Appeal had to decide in Larsson was not, unlike that which is before me here, whether an order under which payments to third parties were to be tax deductible for the payer and taxable in the hands of the recipient met the conditions for the application of subsections 56.1(2) and 60.1(2) of the Act. Rather, the issue was whether the fourth order, in which an express reference to these two provisions of the Act was added, could apply retroactively to previous years. Consequently, I find that the Court of Appeal has not yet ruled on the interpretation I adopted in Pelchat, supra. It may have occasion to do so following the decision rendered in the instant case if the respondent continues to believe that I have erred in law in applying the provisions in question.
[18] I still believe that my interpretation in Pelchat is the correct one. First of all, a careful reading of the wording of subsections 56.1(2) and 60.1(2) of the Act reveals that these subsections do not require that the agreement between the parties or the court order expressly mention the numbers of these subsections. All they require is that the agreement or order provide that these two subsections apply.[1]
[19] The question then is whether an agreement between the parties or a court order can implicitly provide that the two relevant subsections apply to payments to third parties. I answered in the affirmative in Pelchat because the wording of the order was more than clear enough to justify such a conclusion. Although the Superior Court of Quebec did not expressly mention the numbers of subsections 56.1(2) and 60.1(2) of the Act, it clearly indicated that those subsections applied to the payments to third parties made by Mr. Pelchat when it directed that "[t]he said support shall be taxable in the hands of the respondent and tax deductible for the petitioner." As I stated in Pelchat, the only provisions of the Act that require the inclusion or permit the deduction of payments made to third parties in computing income are subsections 56.1(2) and 60.1(2).
[20] I cannot help but observe that my approach in Pelchat is similar to that adopted by McDonald J.A. in deciding the issue in Larsson. He commented as follows at page 5428:
It is the usual rule that an order of a court is effective from the date on which it is made unless it provides otherwise. Thus, where a court does not explicitly state that it intends for its order to apply retroactively, it will be assumed that the order does not so apply. In this case, the British Columbia Supreme Court did not explicitly state that the fourth order was to apply retroactively.
This cannot, however, be the end of the analysis. While one must assume that a court order is effective from the date on which it is entered, it is equally reasonable to assume that when courts make orders, those orders are intended to be of some force or effect at the time they are made. In the case at bar, the fourth order specifically contemplates the nature of mortgage payments made since 1989 by the taxpayer. At the time the fourth order was made in 1993, though, the matrimonial home had been sold and no more mortgage payments would be made by the taxpayer. It is clear on these facts that if the fourth order were not intended to be of retroactive effect, it would be moot. This is at least an indicator of retroactivity, and may even defeat the presumption against retroactivity.
In my view, it would be perverse to interpret a court's ruling in such a way as to render it moot from its inception. In the case at bar, if the fourth order is not interpreted retroactively, it is of no force or effect from the day it was entered. In such a situation, I can see no other reasonable interpretation than to assume that the British Columbia Supreme Court intended the fourth order to have been made nunc pro tunc.
[My emphasis.]
[21] Here paragraph 2.7 of the support agreement clearly stipulates that the payments referred to in paragraph 2.4 (payments to third parties) are "taxable as income in Ms. Bernard's hands" and may be "deducted as support by Mr. Ferron". Furthermore, Ms. Bernard had demanded reimbursement for the tax she would have to pay not only on the lifetime support payment of $2,000, but also on the payments to third parties (paragraph 2.6 of the support agreement). These payments were thus intended to be subject to tax. Since these paragraphs are clear, Ms. Bernard could not fail to understand their meaning when she signed the support agreement.
[22] In all likelihood, Ms. Bernard had the benefit of advice not only from the notary who drafted the support agreement—a notary she herself had chosen and whose duty it was to ensure that each of the parties to the agreement clearly understood its implications—but also from a lawyer retained to defend her interests. There is no evidence that Ms. Bernard did not have the intellectual ability to understand that "[t]he payments made under paragraphs 2.1 to 2.6 above [would] be taxable as income in Ms. Bernard's hands".
[23] In addition, it is important to remember that Ms. Bernard, who had been personally served with a subpoena of this Court at Mr. Ferron's request, not only failed to appear but did not offer any explanation for her absence. I believe it is entirely appropriate to infer from her absence in the circumstances that she would not have been able to deny that she had clearly understood the extent of her obligation to include the amounts paid by Mr. Ferron in her income. The comments of Sopinka and Lederman cited by my colleague Judge Lamarre in Huneault v. The Queen, [1998] T.C.J. No. 103, paragraph 25 (98 DTC 1488, at page 1491) are pertinent:
I would recall here the comments contained in The Law of Evidence in Civil Cases, by Sopinka and Lederman, which were cited by Judge Sarchuk of this Court in Enns v. M.N.R., 87 DTC 208, at 210:
In The Law of Evidence in Civil Cases, by Sopinka and Lederman, the authors comment on the effect of failure to call a witness and I quote:
In Blatch v. Archer, (1774), 1 Cowp. 63, at p. 65, Lord Mansfield stated:
It is certainly a maxim that all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted.
The application of this maxim has led to a well-recognized rule that the failure of a party or a witness to give evidence, which it was in the power of the party or witness to give and by which the facts might have been elucidated, justifies the court in drawing the inference that the evidence of the party or witness would have been unfavourable to the party to whom the failure was attributed.
[My emphasis.]
[24] In my view, the wording of paragraph 2.7 of the support agreement is even clearer than if it had simply been stipulated that subsections 56.1(2) and 60.1(2) of the Act were to apply to the payments made in accordance with paragraphs 2.1 to 2.6. Ms. Bernard could then subsequently have claimed that she had not understood the implications of that stipulation. Here she cannot claim not to have understood the meaning of the words "shall be taxable as income in Ms. Bernard's hands".
[25] Furthermore, the wording adopted by the parties also has the advantage of avoiding any typographical errors in the number of the provision of the Act. What would have been Ms. Bernard's (and even the Minister's) position if the support agreement had referred instead to subsections 56.1(1) and 60.1(1) of the Act? Would they have claimed that Mr. Ferron could not deduct the payments to third parties because reference had not been made to the correct numbers of the provisions of the Act?
[26] Sections 313.0.1 and 336.1 of the Taxation Act, R.S.Q. c. I-3, are similar to subsections 56.1(2) and 60.1(2) of the Act. If Mr. Ferron and Ms. Bernard had lived in Ontario in 1993 when they entered into the support agreement and Mr. Ferron had lived in Quebec in 1997, would the Quebec Minister of Revenue have been right in claiming that the payments to third parties were not deductible because the agreement referred solely to subsections 56.1(2) and 60.1(2) of the Act, not sections 313.0.1 and 336.1 of the Taxation Act?
[27] I find it entirely reasonable to believe that the reassessment made by the Minister resulted from a request by Ms. Bernard for a refund of the tax on the payments to third parties. Nor do I believe I am mistaken in stating that, in 1984, when subsections 56.1(2) and 60.1(2) were added to the Act, the vast majority of persons receiving support were women and that the wording of those subsections was intended to ensure they would not be subject to tax on payments to third parties without their consent or without the judge who determines the amount of support so deciding.
[28] It is deplorable that Ms. Bernard availed herself in such an abusive manner of a provision of the Act that was enacted to provide better protection for women's interests. I conclude that Ms. Bernard abused the provision because she not only obtained reimbursement of the tax which she owed on the payments to third parties from Mr. Ferron, but also would appear to have requested a refund of for that same tax from the Minister. She thus apparently obtained more than she was entitled to.
[29] This entire affair is all the more disturbing since it was Ms. Bernard herself who, on the alleged ground that it could have caused confusion, rejected Mr. Ferron's suggestion that the numbers of the relevant subsections of the Act be expressly stated.
[30] It is also disturbing that the Minister, consciously or otherwise, should become an accessory to this kind of abuse. I find it hard to understand why in the circumstances he did not see fit to deny Ms. Bernard a refund of the tax which she sought in respect of the payments to third parties, given my decision in Pelchat, supra, in 1996. In deciding instead to disallow a portion of the deduction claimed by Mr. Ferron, the Minister forced him to appear before this Court and to incur legal costs by retaining a lawyer. If on the basis of the decision in Larsson, the Minister had doubts as to the validity of my decision, he could have informed Ms. Bernard of that, leaving her free to raise the question again before this Court if she so wished. In the circumstances, it is she who should have had to bear the costs of litigation.
[31] Subsection 60.1(2) must be interpreted in such a way as to give it its effect, which is to provide adequate protection from tax for the beneficiaries of payments to third parties where those beneficiaries did not assume the tax burden in full knowledge of the facts. It must not be interpreted so as to provide a tool to cheat support payers who, like Mr. Ferron, discharge all their support obligations in good faith.
[32] In conclusion, I find that all the conditions set out in paragraph 60(b) and subsection 60.1(2) have been met and that Mr. Ferron is entitled to the deduction of $41,856 which the Minister denied him.
[33] For all these reasons, Mr. Ferron's appeal is allowed and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that Mr. Ferron is entitled, in computing his income, to deduct the amount of $65,856 paid by him as support. Given the circumstances of this case, I award
the appellant, under subsection 10(2) of the Tax Court of Canada Rules (Informal Procedure), the fixed sum of $1,500 in lieu of taxed costs.
Signed at Ottawa, Canada, this 3rd day of April 2001.
"Pierre Archambault"
J.T.C.C.
Translation certified true on this 14th day of May 2001.
[OFFICIAL ENGLISH TRANSLATION]
Erich Klein, Revisor
2000-138(IT)I
BETWEEN:
DANIEL FERRON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on November 22, 2000, at Montreal, Quebec, by
the Honourable Judge Pierre Archambault
Appearances
Counsel for the appellant: Christopher R. Mostovac
Counsel for the Respondent: Dany Leduc
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1997 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant is entitled in computing his income to deduct the amount of $65,856 paid by him as support. Given the circumstances of this case, I award the appellant, under subsection 10(2) of the Tax Court of Canada Rules (Informal Procedure), the fixed sum of $1,500 in lieu of taxed costs.
Signed at Ottawa, Canada, this 3rd day of April 2001.
|
"Pierre Archambault" |
J.T.C.C.
Translation certified true
on this 14th day of May 2001.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
[1] If the support agreement or the order confirming it had provided that "subsections 56.1(2) and 60.1(2) of the Act apply", the Minister quite clearly would not have disallowed the deduction of the amount of $41,856. The respondent acknowledges that Mr. Ferron has provided ample proof that this sum was paid.