Date: 20011005
Docket: 2000-4269-IT-I
BETWEEN:
JACQUELINE WOOD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Mogan J.
[1] At the commencement of the hearing, the Appellant moved to amend the style of cause so that she would be identified as Jacqueline Wood because she no longer uses "Laporte" as her family name. The Respondent did not object and so I ordered that the Appellant herein be identified as Jacqueline Wood.
[2] The Appellant and Robert Laporte were married in August 1979 and they separated in 1993. They signed a separation agreement in 1996. When computing her income for the 1997 and 1998 taxation years, the Appellant reported maintenance payments in the amounts of $800 and $1,000, respectively. By notices of reassessment dated April 7, 2000, the Minister of National Revenue added to the Appellant's reported income for 1997 and 1998 the amounts of $4,420 and $3,915, respectively. The Appellant has appealed from those reassessments claiming that she did not receive the amount of $4,420 in 1997 or the amount of $3,915 in 1998. The only issue is whether those two amounts should be included in the Appellant's income for 1997 and 1998. The Appellant has elected the informal procedure.
[3] The Appellant and Robert Laporte had four children born on the following dates:
Nicole March 27, 1981
Michelle July 7, 1982
Mathieu June 10, 1984
Marc April 12, 1987
In 1991, the Appellant enrolled in nursing school. In 1993, the Appellant and Mr. Laporte separated when he left the family home. According to the Appellant's evidence, she had a difficult time because she had to provide for the four children; she had to keep up mortgage payments on the family home; she was in her last year of nursing school; and she had a student loan. In 1994, she graduated from nursing school at the top of her class. In 1996, she and Mr. Laporte finally signed a lengthy separation agreement (Exhibit A-1) comprising 10 pages and 32 paragraphs. Set out below are those portions of Exhibit A-1 which I regard as most relevant to these appeals.
7. The husband shall pay to the wife for the support and contribution toward the expenses of (names and birth dates of children), the sum of Two Hundred and Eighteen Dollars and Seventy-Five Cents ($218.75) per month per child, for a total of Eight Hundred and Seventy-Five ($875.00) Dollars per month. Out of the Eight Hundred and Seventy-Five ($875.00) Dollars per month paid by the husband to the wife, the sum of Four Hundred and Thirty-Five ($435.00) Dollars would be paid in cash on the first day of each month. This sum of Four Hundred and Thirty-Five ($435.00) Dollars shall be included in income by the wife and shall be deductible as support paid by the husband for income tax purposes. The remaining sum of four hundred and forty ($440.00) dollars per month shall be paid monthly by the husband toward monthly or annual expenses for activities of the children or expenses for their benefit ...
10. The parties acknowledge that they occupy 79 Norden Crescent, Sault Ste. Marie, Ontario as their matrimonial home. The husband agrees to transfer title to this property to the wife and further agrees to execute all documents necessary to transfer title to this property in the name of the wife. In consideration for receiving title to the said matrimonial home, the wife shall pay to the husband the sum of fourteen thousand six hundred ($14,600.00) dollars as an equalization payment, with payment of this amount to be deferred on the terms provided for in this agreement.
The said sum of fourteen thousand six hundred ($14,600.00) dollars owing by the wife to the husband shall be secured by way of a second mortgage from the wife to the husband to be registered on title against the matrimonial home. The said second mortgage shall not come due and payable by the wife until the matrimonial home is sold or if all of the children of the marriage no longer reside with the wife or if the youngest child of the marriage attains the age of eighteen (18) years.
The mortgage shall provide for interest at the rate of 5% per annum to commence at such time as a divorce judgment is granted dissolving the marriage of the parties. ...
11. The parties agree that any amount of the eight hundred and seventy-five ($875.00) dollars monthly, not paid by the husband for child support or for the expenses of the children as provided for in paragraph 7 of this agreement, shall be credited in favour of the wife to reduce the amount owing on the second mortgage in favour of the husband as outline in paragraph 10 hereof.
12. The parties acknowledge that there is presently a first mortgage registered against title to the matrimonial home in favour of the Bank of Montreal. The wife shall be solely responsible for the payment of this mortgage and shall indemnify and save harmless the husband in respect of payments on the said mortgage.
[4] As shown above, paragraph 7 of the separation agreement required Mr. Laporte to make monthly payments of $875. He stopped making those payments in March 1997 and did not pay for most of 1997 and 1998. On September 15, 1998, the Appellant filed with the Ontario Family Responsibility Office a "Statement of Arrears" claiming that Mr. Laporte was in arrears in the aggregate amount of $16,425 for the period March 1, 1997 to September 1, 1998. The Statement of Arrears is Exhibit A-3. In the computation part of Schedule "A" to the Statement of Arrears, the Appellant has shown all amounts resulting in the accumulated total of $16,425 and then in the next line:
"Total arrears owing: = $730
* See Note below Re: Amount Owing to Husband on Second Mortgage"
At the bottom of Schedule "A" (as indicated by the asterisk), the Appellant has written the following note:
*NOTE
As per separation agreement (#11, pg. 4) "any amount of the $875.00 not paid by the husband shall be credited in favour of the wife to reduce the amount owing on the second mortgage $14,600) in favour of the husband". (#10, pg. 4) - "the mortgage shall provide for interest at the rate of 5% per annum to commence at such time as a divorce judgment is granted" DIVORCE JUDGMENT - MARCH 3, 1997 (copy included). Therefore, according to my calculations I owe $14,600 plus interest of $1,095 or total $15,695 as of Sept. 1/98. Therefore second mortgage in favour of the husband is paid in full by his support in arrears and his total arrears as of Sept. 1/98 is $16,425 - $15,695 = $730.
[5] As I interpret Exhibit A-3 and, in particular, the last sentence in the "NOTE" quoted above, the Appellant regarded the second mortgage amount owing to her former husband as paid in full on September 15, 1998 (when she signed Exhibit A-3); and she agreed to reduce his maintenance arrears to $730 if the balance of $15,695 was applied to discharge the second mortgage.
[6] The Ontario Family Responsibility Office was able to recover certain payments from Mr. Laporte in the winter of 1998-1999 but he fell into arrears again and the Appellant took him to Court in May 1999. By Court Order dated May 13, 1999 (Exhibit A-2) Madam Justice Pardu issued the following order in which the Appellant was the "Applicant" and Mr. Laporte was the "Respondent":
1. THIS COURT ORDERED that the respondent shall pay to the applicant the sum of $926.00 per month for the support of the children of the marriage, Nicole Laporte born March 27, 1981, Michelle Laporte born July 7, 1982, Mathieu Laporte born June 10, 1984 and Marc Laporte born April 12, 1987, commencing June 1, 1999.
2. THIS COURT ORDERS AND ON CONSENT that the bank draft in the sum of $4,348.11 shall be endorsed by the applicant and deposited in a money market fund or T-Bill account for Nicole.
3. THIS COURT ORDERS that the second mortgage from the applicant to the Respondent on the property known as 79 Norden Crescent, Sault Ste. Marie, Ontario shall be discharged.
4. THIS COURT ORDERS that arrears are fixed at $3,000.00 effective February 28, 1999 and that in the event the Respondent paid in excess of $2,432.84 in support between October 20, 1998 and February 28, 1999, such excess is to be credited against the arrears herein.
5. THIS COURT ORDERS that there shall be no costs.
6. THIS COURT ORDERS that unless the support order is withdrawn from the office of the Director of Family Responsibility Office, it shall be enforced by the Director and amounts owing under the support order shall be paid to the Director, who shall pay them to the person to whom they are owed.
[7] Exhibit A-4 is an updated statement of arrears showing the net maintenance amounts not paid in the period October 1998 to September 2000. Having regard to paragraphs 3 and 4 in the above Court Order (Exhibit A-2), I assume that arrears were fixed at $3,000 effective February 28, 1999 on the following approximate computation:
Arrears on September 15, 1998
per Exhibit A-3 $16,425
Further arrears from October 1998
to February 28, 1999
per Exhibit A-4 2,672
Accumulated Arrears to February 28, 1999 19,097
Less: 2nd mortgage amount $14,600
Less: interest at 5% per annum
from March 3, 1997 to March 3, 1999 1,460
16,060
$3,037
[8] According to Exhibit A-1 (paragraph 7 of separation agreement), the Appellant agreed that, if Mr. Laporte paid $875 each month, she would include $435 in income but the remaining $440 would be regarded as maintenance for the children. When issuing the assessments under appeal, Revenue Canada must have had in hand Exhibit A-3 showing 10 months of unpaid maintenance in 1997 and nine unpaid months in 1998. The amounts added to the Appellant's reported income were determined as follows:
1997 - 10 times $435 equals $4,350
1998 9 times $435 equals $3,915
For 1997, there is a minor discrepancy because Revenue Canada intended to add only $4,350 but in fact the reassessment added $4,420. At the hearing, counsel for the Respondent was not able to offer any reason for the $70 discrepancy.
[9] According to the Reply to the Notice of Appeal (subparagraphs 8(k) and (l)), Revenue Canada assumed that the Appellant and Mr. Laporte set off the amounts $4,350 for 1997 and $3,915 for 1998 with respect to the unpaid maintenance and the second mortgage owing by the Appellant to Mr. Laporte on the family home. Accordingly, Revenue Canada regarded the Appellant as having received the amounts $4,350 and $3,915 as maintenance in 1997 and 1998, respectively.
[10] Paragraph 11 of the separation agreement (Exhibit A-2) speaks for itself and provides that amounts not paid by the husband to the wife as support are to be credited in favour of the wife to reduce the amount owing by her to him on the second mortgage. The Appellant relied on this provision when she filed her Statement of Arrears (Exhibit A-3) on September 15, 1998 and hand-wrote the note quoted in paragraph 4 above. In effect, she set off the amount owing on the second mortgage ($15,695) against his accumulated arrears ($16,425) and agreed that his net arrears owing were only $730. Madam Justice Pardu seems to have recognized that the setoff had already occurred when she issued her Order of May 13, 1999 (Exhibit A-2) that the second mortgage be discharged (paragraph 3); and that the arrears be fixed at $3,000 as at February 28, 1999 (paragraph 4). According to my calculations in paragraph 7 above, the second mortgage must have been regarded as paid off in September 1998 in order to determine that the arrears balance was only $3,000 on February 28, 1999. Justice Pardu would not have ordered that the second mortgage be discharged unless she was satisfied that it had been paid in full.
[11] In the assessments under appeal, Revenue Canada regards the setoff of support arrears against the second mortgage as equivalent to payment by the former husband and receipt by the Appellant. In law, there is a significant difference between setoff and payment. I was required to consider this difference in Sandra Fisher v. The Queen, 2000 DTC 3612. The following passage appears in a recent Canadian text, The Law of Set-Off in Canada by Kelly R. Palmer, Canada Law Book Inc., 1993 at pages 17 and 18:
While the availability of a cross-claim in set-off will relieve the defendant from paying the plaintiff's claim, this does not mean that a payment has been made. Payment and set-off are two distinct actions which a defendant may take. Halsbury states that:
Set-off is entirely distinct from payment. Payment is satisfaction of a claim made by or on behalf of a person against whom the claim is brought. The person paying performs the obligation in respect of which the claim arises, which thereby becomes extinguished. Set-off exempts a person entitled to it from making any satisfaction of claim brought against him, or of so much of the claim as equals the amount which he is entitled to set off, and thus to the extent of his set-off he is discharged from performance of the obligation in respect of which the claim arises.
Where there has been payment, the party against whom the claim is brought pleads payment or accord and satisfaction, which in effect alleges that the claim no longer exists. On the other hand, a plea of set-off in effect admits the existence of the claim, and sets up a cross-claim as being ground on which the person against whom the claim is brought is excused from payment and entitled to judgment on the plaintiff's claim. (Halsbury's Law of England, 4th ed., vol. 42, para. 410)
This is not to say, however, that set-off cannot be used for payment under any circumstances. Should the parties agree that a set-off of mutual debts will be a satisfactory payment, then the agreement will stand. This is more a matter of contract than set-off.
Should this agreement not be present then it is clear that payment of a debt cannot be made by way of set-off.
[12] In the appeal of Sandra Fisher, I was able to conclude that there was no amount "paid" or "received" because there was no agreement between Ms. Fisher and her former husband that the setoff which was imposed by the Ontario Court would be regarded as payment or receipt. The circumstances are different in this appeal. The Appellant and her former husband have a separation agreement (Exhibit A-1) in which they clearly anticipated the possibility of his falling into arrears in his support payments (paragraph 11); and they agreed that she could set off his arrears against the amount she owed on the second mortgage. The agreement between the Appellant and her former husband in this appeal is a matter of contract within the meaning of the passage quoted above from The Law of Set-Off in Canada. Because of the agreement (Exhibit A-1, paragraph 11), the Appellant may be regarded as having "received" the amount $4,350 in 1997 and the amount $3,915 in 1998.
[13] I am reinforced in my view by the decisions of this Court in Armstrong v. M.N.R., 88 DTC 1015 and Humphrey v. The Queen, [1994] T.C.J. No. 131. In Armstrong, Judge Bonner found in paragraph 4 that Ms. Armstrong agreed to permit her husband to discharge his obligation to pay maintenance by way of setoff against her obligation to pay him $5,700. And in Humphrey, Judge Beaubier quoted from an agreement between Ms. Humphrey and her husband in which they specifically agreed (paragraph 6(e)) that the arrears of $3,000 "shall be considered paid by the husband and received by the wife ... as a setoff". In both Armstrong and Humphrey, the appeals were dismissed and the two wives in those appeals were required to include in income certain amounts "received" by way of setoff because they had agreed to the setoff as a means of effecting a reduction in the amounts owing to their former husbands.
[14] The same principle applies here. In Exhibit A-1 (the separation agreement dated June 20, 1996), the Appellant and Mr. Laporte agreed in paragraph 11 that his arrears in support payments could be used by her to reduce the amount owing by her on the second mortgage. Exhibit A-3 (her statement of arrears) shows that she actually used the separation agreement to set off a portion of his arrears to pay off the second mortgage and thereby reduce his "arrears owing" to $730. The agreement between the Appellant and Mr. Laporte and its application by the Appellant show that his debt to her was "paid" by way of setoff.
[15] According to the Reply to the Notice of Appeal, the Minister of National Revenue increased the Appellant's income for 1997 by $4,420 when it should have been increased by only $4,350. See paragraph 8 above. The appeal for 1997 is therefore allowed only for the purpose of reducing the amount to be added to the Appellant's income from $4,420 to $4,350. The appeal for 1998 is dismissed.
Signed at Ottawa, Canada, this 5th day of October, 2001.
"M.A. Mogan"
J.T.C.C.
COURT FILE NO.: 2000-4269(IT)I
STYLE OF CAUSE: Jacqueline Wood and Her Majesty the Queen
PLACE OF HEARING: Sault Ste. Marie, Ontario
DATE OF HEARING: August 14, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge M.A. Mogan
DATE OF JUDGMENT: October 5, 2001
APPEARANCES:
For the Appellant: The Appellant herself
Counsel for the Respondent: Jade Boucher
COUNSEL OF RECORD:
For the Appellant:
Name: N/A
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-4269(IT)I
BETWEEN:
JACQUELINE WOOD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on August 14, 2001, at Sault St. Marie, Ontario, by
the Honourable Judge M.A. Mogan
Appearances
For the Appellant: The Appellant herself
Counsel for the Respondent: Jade Boucher
JUDGMENT
The appeal from the assessment of tax 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 only for the purpose of reducing the amount to be added to the Appellant's income from $4,420 to $4,350.
The appeal from the assessment of tax made under the Act for the 1998 taxation year is dismissed.
Signed at Ottawa, Canada, this 5th day of October, 2001.
|
"M.A. Mogan" |
J.T.C.C.