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Docket: 2000-2170(IT)G |
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BETWEEN: |
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LARRY PETERSON, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeals heard on September 15, 16 and 17, 2003, at Sault St. Marie, Ontario
By the Honourable Justice M.A. Mogan |
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Appearances: |
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Counsel for the Appellant: |
Gregory J. DuCharme |
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Counsel for the Respondent: |
Peter M. Kremer, Q.C. and Justine Malone |
____________________________________________________________________
JUDGMENT
The appeals from assessments of tax made under the Income Tax Act for the 1995, 1996 and 1997 taxation years are allowed, with costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the following basis:
(a) For 1995, the Appellant may deduct in computing income the $24,000 amount which he paid as child support in equal monthly amounts over the year;
(b) For 1996, the Appellant may deduct in computing income the $24,000 amount which he paid as child support in equal monthly amounts over the year;
(c) For 1996, the Appellant may deduct in computing income the $36,000 amount which he paid in December 1996 with respect to arrears of child support; and
(d) For 1997, pursuant to the agreement of the parties, the Appellant may deduct in computing income the following three amounts:
(i) professional fees in the amount of $4,513;
(ii) employment expenses in the amount of $19,500 with respect to a claim for wrongful dismissal; and
(iii) child support payments in the amount of $42,000.
Signed at Ottawa, Canada, this 8th day of October, 2003.
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"M.A. Mogan" |
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Docket: 98-2469(IT)I 2000-3286(IT)I |
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BETWEEN: |
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PATRICIA TOSSELL, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeals heard on September 15, 16 and 17, 2003, at Sault St. Marie, Ontario
By the Honourable Justice M.A. Mogan |
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Appearances: |
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Counsel for the Appellant: |
Christopher P. FitzGerald |
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Counsel for the Respondent: |
Peter M. Kremer, Q.C. and Justine Malone |
____________________________________________________________________
JUDGMENT
The appeals from assessments of tax made under the Income Tax Act for the 1995 and 1996 taxation years are dismissed, without costs.
Signed at Ottawa, Canada, this 8th day of October, 2003.
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"M.A. Mogan" |
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Citation: 2003TCC712 |
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Date: 20031008 |
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Docket: 2000-2170(IT)G |
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BETWEEN: |
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LARRY PETERSON, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent,
98-2469(IT)I 2000-3286(IT)I AND BETWEEN: PATRICIA TOSSELL,
and
HER MAJESTY THE QUEEN, Respondent.
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REASONS FOR JUDGMENT
Mogan J.
[1] Larry Peterson married Patricia Boyd in Ontario in 1970. There were three daughters born of the marriage: Dana (1975), Lisa (1977) and Caroline (1981). Larry and Patricia separated in 1991 and were divorced in 1995 or 1996. As a result of the separation, Larry made monthly payments of $2,000 to Patricia from late 1991 to 1996; and he made a single payment of $36,000 to Patricia in December 1996.
[2] When filing his income tax returns for 1995 and 1996, Larry deducted $24,000 as maintenance paid in each year and, for 1996, he also deducted $36,000 as maintenance paid. By Notices of Reassessment the Minister of National Revenue ("the Minister") disallowed as deductions in computing Larry's income the following amounts paid to Patricia: $24,000 paid in 1995; $24,000 paid in 1996; and $36,000 paid in December 1996. Larry has appealed to this Court from those assessments (Court file 2000-2170).
[3] When filing her income tax returns for 1995 and 1996, Patricia did not include in computing income the $24,000 received on a monthly basis in each year; and she did not include the single payment of $36,000 received in December 1996. By Notices of Reassessment the Minister included in the computation of income the following amounts which Patricia received from Larry: $24,000 received in 1995; $24,000 received in 1996; and $36,000 received in December 1996. Patricia has appealed to this Court from those assessments (Court files 98-2469 and 2000-3286).
[4] On March 13, 2002 the Minister made an application to this Court under subsection 174(3) of the Income Tax Act to join Patricia Tossell to the appeal of Larry Peterson. By an Order issued on March 26, 2002, this Court joined Patricia Tossell to the appeal of Larry Peterson with respect to assessments of tax made for the 1995 and 1996 taxation years for the purpose of the following four questions:
1. Are the aggregate payments of $24,000 received by Patricia Peterson (Tossell) from Larry Peterson in each of the 1995 and 1996 taxation years to be included in computing Patricia Peterson (Tossell)'s income on the basis that they were payments within the meaning of paragraph 56(1)(b) of the Act?
2. Are the aggregate payments of $24,000 paid by Larry Peterson to Patricia Peterson (Tossell) in each of the 1995 and 1996 taxation years deductible in computing Larry Peterson's income as payments within the meaning of paragraph 60(b) of the Act?
3. Is the payment of $36,000 received by Patricia Peterson (Tossell) from Larry Peterson in the 1996 taxation year to be included in computing Patricia Peterson (Tossell)'s income on the basis that it was a payment within the meaning of paragraph 56(1)(b) and subsection 56.1(3) of the Act?
4. Is the payment of $36,000 paid by Larry Peterson to Patricia Peterson (Tossell) in the 1996 taxation year deductible in computing Larry Peterson's income on the basis that it was a payment within the meaning of paragraphs 60(b) and 60(c) of the Act?
[5] The appeals of Larry Peterson and Patricia Tossell were set down for hearing at Sault Ste. Marie commencing on September 15, 2003, with the understanding that evidence would be presented with respect to the four questions asked in the Minister's application under subsection 174(3). At the commencement of the hearing, counsel for the Minister and Larry Peterson stated that all issues raised in his appeal with respect to the 1997 taxation year had been settled on terms which were recited in Court. Therefore, the only issues remaining to be decided were the four questions set out in the Minister's application under subsection 174(3).
The Facts
[6] The parties filed as Exhibit 1 a document entitled "Statement of Admitted Facts" signed by the three counsel for Larry Peterson, Patricia Tossell and the Minister, respectively, on September 15, 2003, the first day of the hearing. The first 18 paragraphs of Exhibit 1 contain only facts. Paragraphs 19 to 30 of Exhibit 1 contain a summary of the positions of the three parties with respect to the four questions to be answered. Exhibit 2 is a binder with 11 tabs A to K inclusive containing the documents referred to in Exhibit 1. Although the basic facts are already recited above, I will set out in full the content of Exhibit 1:
STATEMENT OF ADMITTED FACTS
1. Patricia Jean Peterson, now Tossell ("Patricia"), and Larry Douglas Peterson ("Larry") were married on August 29, 1970 and separated on January 1, 1991.
2. Patricia and Larry had three children of the marriage a) Dana Patricia Peterson born July 5, 1975; b) Lisa Maureen Peterson born November 1, 1977; c) Caroline Jane Peterson born April 30, 1981.
3. On September 5, 1991, Patricia and Larry entered into a written separation agreement (the "Separation Agreement") in which Larry was required to pay and Patricia entitled to receive child support in the amount of $24,000 for the period from September 1, 1991 to August 31, 1992. Pursuant to the Separation Agreement, the amount of child support payable by Larry to Patricia, would increase to $36,000 in the event that Patricia is employed by someone other than the Peterson & Peterson law firm. The Separation Agreement provided for an annual increase in child support based on the increase in the cost of living index. Tab A.
4. On or about March 22, 1993, Larry began making payments that were less than the amounts provided for in the Separation Agreement.
5. In May 1993, Patricia applied to the Family Support Plan Northern Region to enforce the payment required under the Separation Agreement.
6. Commencing June 1993, Larry made payments of $1,000 twice a month to Patricia's account in the Plan. The Plan paid to Patricia the amounts collected on her behalf. Tab B.
7. On March 9, 1994, Patricia commenced an action by Statement of Claim in the Ontario Court General Division against Larry to have the terms of the Separation Agreement enforced. Larry filed a Defence and Counterclaim on April 21, 1994. Tabs C and D.
8. By Petition for Divorce dated June 1, 1995, Larry commenced divorce proceedings against Patricia. Tab E.
9. The action referred to in paragraph 7 was settled by Minutes of Settlement dated and filed December 16, 1996 and resulted in an order dated December 16, 1996 and March 27, 1997 (the "Order") issued by Madam Justice Pardu. Tabs F and G.
10. Pursuant to paragraph 6 of the Order, Larry made a $36,000 payment to the Plan in December 1996 in respect of retroactive additional periodic child support for the twelve months from January 1, 1996 to and including December 1, 1996;
11. At the time of this $36,000 payment, the amount of arrears owing under the terms of the Separation Agreement was of approximately $56,000;
12. Larry paid and Patricia received monthly payments of $2,000 for a total of $24,000 in each of the 1994, 1995 and 1996 taxation years;
13. In filing her 1994 income tax return, Patricia reported as income $24,000 child support payments received from Larry;
14. In filing his 1994 income tax return, Larry deducted from income $24,000 child support payments paid to Patricia;
15. In filing her 1995 and 1996 income tax returns, Patricia did not report as income the $24,000 payments received from Larry in those years. Tabs H and I.
16. In filing his 1995 and 1996 income tax returns, Larry deducted the $24,000 he paid to Patricia as child support amount. Tabs J and K.
17. In filing her 1996 income tax return, Patricia did not report as income the $36,000 payment she had received from Larry in December 1996. Tab I.
18. In filing his 1996 income tax return, Larry deducted the $36,000 payment he made to Patricia in December 1996. Tab K.
POSITION OF THE PARTIES
Patricia
19. Patricia takes the position that the separation agreement was an interlinked contractual arrangement for transfer of partnership and business assets and liabilities, future employment of Patricia by Larry, termination of the parties' law partnership, payments in lieu of employment as well as child support dependant in level on other terms of the contract, as set out at paragraphs 2 to 10 of the agreement at Tab A.
20. Patricia alleges that Larry breached the 1991 agreement on or about March 22, 1993 and repudiated the agreement on or before 1995, and again in 1996, and therefore it was not valid in respect of the 1995, 1996 and 1997 taxation years.
21. Patricia takes the position that the aggregate payments of $24,000 she received in each of the 1995 and 1996 taxation years and the $36,000 payment she received in December 1996 were not received under a valid order or agreement and are not to be included in income pursuant to paragraph 56(1)(b) of the Act.
22. Patricia also alleges that the $36,000 payment received in December 1996 was a single payment.
23. Patricia takes the position that as the $36,000 payment was not paid on a periodic basis and therefore is not to be included in her income for 1996 pursuant to paragraph 56(1)(b) of the Act.
Ŀarry
24. Larry alleges that the aggregate payments of $24,000 made in each of the 1995 and 1996 taxation years were paid under a valid order or agreement and are deductible pursuant to paragraph 60(b) of the Act.
25. Larry also takes the position that the $36,000 payment is deductible pursuant to paragraph 60(b) of the Act.
The Minister
26. The Minister takes the position that the $24,000 payments made by Larry to Patricia in each of the 1995 and 1996 taxation years were paid under a valid order or agreement and are deductible pursuant to paragraph 60(b) of the Act.
27. The Minister takes the position that Patricia is required to include the $24,000 payments she received in each of the 1995 and 1996 taxation years on the basis that the amounts are within the meaning of paragraph 56(1)(b) of the Act.
28. The Minister also takes the position that Larry is entitled to deduct $24,000 from his income for each of the 1995 and 1996 taxation years on the basis that the payments are within the meaning of paragraph 60(b) of the Act.
29. The Minister takes the position that the $36,000 payment was not paid on a period basis and therefore is not to be included in Patricia's income for the 1996 taxation year on the basis that the amount is not within the meaning of paragraph 56(1)(b) of the Act.
30. The Minister also takes the position that Larry is not entitled to deduct the $36,000 payment from his income in the 1996 taxation year on the basis that the payment is not within the meaning of paragraph 60(b) of the Act.
[7] The most important issue in this proceeding is raised in paragraph 20 of Exhibit 1 set out above: whether Larry Peterson repudiated the separation agreement of September 5, 1991 (Exhibit 2, Tab A) before 1995. Most of the evidence was directed to that issue. For convenience, I shall refer to the male Appellant as "Larry"; the female Appellant as "Patricia"; and the agreement (Exhibit 2, Tab A) of September 5, 1991 as the "Separation Agreement". There is no other separation agreement.
[8] In these appeals, it is an important fact that both Larry and Patricia are lawyers. They were married in 1970 before they started law school. They attended law school together and were both called to the bar of Ontario in 1976. They were practising law in partnership in 1990-1991 when their marriage came apart. Their main office was in Sault Ste. Marie but there were branch offices in Bruce Mines and Blind River serviced only by Larry. He said that he would be in the Sault Ste. Marie office on Monday, in Bruce Mines on Tuesday, in Blind River on Wednesday, in Sault Ste. Marie on Thursday and in Bruce Mines on Friday. Larry's father had practised law in Bruce Mines. Patricia practised only in the Sault Ste. Marie office on somewhat reduced hours because she was the main provider of child care for their three daughters.
[9] On January 2, 1991, Patricia informed Larry that she wanted to separate from him; that she wanted the separation to be discreet and confidential in the sense that they would continue to share the same dwelling but not the same bedroom for the next few months; and that she wanted the separation to be amicable in the sense that they would both give priority to the interests of their three daughters. Larry agreed to Patricia's proposal. They continued to reside in the family home at 25 Alworth Place, Sault Ste. Marie until September 1, 1991 when Larry moved out but their marriage, as such, effectively ended on January 2, 1991 when Patricia disclosed for the first time her wish to separate.
[10] In April 1991 and again in August 1991, Patricia attended two continuing education courses at York University on the subject "Family Mediation". Although she was not specialized in family law, she knew more about it than Larry. In the summer of 1991, Patricia wrote out in hand what was to become the Separation Agreement. Because their separation was not yet public knowledge, the Separation Agreement was not drafted or typed at the office. Near the end of August, Larry brought home to 25 Alworth Place his computer and typed the Separation Agreement from Patricia's handwritten notes. Larry is an experienced typist. He testified that there was some discussion/negotiation between him and Patricia as he typed but he claimed that the only material change which he made to her handwritten draft was to add the last sentence to paragraph 8.
[11] The Separation Agreement contains much detail but it is not well drafted because it is too imprecise. The quality of drafting is understandable when one considers the anxiety and tensions which must have been present in the Peterson home in July and August when Larry and Patricia were still under the same roof but their de facto separation was in its seventh and eighth month. Larry moved out on September 1, 1991. The provisions for child support are intermingled with the provisions for Patricia's continuation as a lawyer employed in her husband's law firm. The most relevant provisions of the Separation Agreement concerning child support are set out below:
Joint Parenting to Continue:
Patricia and Larry have decided to separate from their marriage to each other and are committed to continue in parenting the children of the marriage.
Principal Residence
The children will have their principal residence with Patricia and will spend time with Larry at their mutual convenience. Patricia and Larry both love the children of the marriage and are committed to minimizing the effect of the divorce on the children and to ensuring that the children grow up in a secure and loving environment.
...
1. Larry will be the sole owner of his interest in Bruce-Algo Enterprises Limited - Patricia releases her interest in this property - 1/5th current FMV of $300,000.00.
Patricia will be the sole owner of the home and contents at 25 Alworth Place, Sault Ste. Marie - FMV $300,000.00.
...
PETERSON & PETERSON LAW PRACTICE
4. Patricia will withdraw from the partnership known as Peterson & Peterson. All professional fees and liability coverages shall be paid by the firm.
5. As of September 01, 1991 Patricia will become an employee of the law firm Peterson & Peterson with a starting salary of $50,000 plus $24,000 (allowed for child support) per year and will be guaranteed a position with the firm so long as Larry is a partner in the firm and until Patricia reaches the age of 65 years in lieu of a complete buy-out. Patricia's interest in the law practice shall be transferred to Larry in trust and a pro-rata portion of the capital will become Larry's absolutely for each year Patricia remains an employee of the firm.
6. In the event Patricia finds other suitable employment in Sault Ste. Marie, at a minimum salary of $50,000 she will then receive $36,000 from Larry as child support and other compensation from Larry when funds are available for her equity in the law practice.
6.1 The income tax liability incurred during the fiscal year of September 1, 1990 to August 31, 1991 by Patricia shall be paid by the firm. All income tax and other employee deductions on Patricia's salary commencing September 1, 1991 shall be deducted from her salary and remitted to Revenue Canada.
CHILD SUPPORT
7. For the first year (September 1, 1991 to August 31, 1992) Larry, either through the firm or personally, will pay Patricia, provided she is an employee of the Peterson & Peterson law firm, $24,000 per year ($2,000 per month or $461.53 per week) child support.
8. If Patricia becomes employed by another employer, Larry will pay Patricia $36,000 per year in child support and supplement Patricia's income to $50,000 in the event her annual salary is less than $50,000. It is agreed that should Patricia assume an employment position which pays less than $50,000 per year that such position will be mutually agreed upon by both Patricia and Larry.
8.1 Support for each child shall continue until one of the following events occur:
- child completes her first undergraduate degree or diploma
- child attains the age of 22 years
- child marries
- child becomes self-supporting
- child dies
8.2 The child support will be increased annually based on the cost of living index. Patricia's salary with the firm will be reviewed and increased when agreed upon by Patricia and Larry but shall not be less than $50,000 per year.
POST SECONDARY EDUCATION
9. It is agreed that Larry will continue to pay the educational trust funds established for each of the children including the lump sum for Lisa and Caroline.
10. Patricia and Larry will divide the additional costs of post secondary education for the children.
[12] Patricia and Larry each testified at length concerning the above provisions and the parol evidence rule was, wisely in my view, never invoked. They were more in agreement than disagreement on the meaning of the above provisions. Relying on the above provisions and the oral testimony of both Patricia and Larry, I find that the basic agreement for child support in September 1991 was as follows:
(a) Larry was required to pay $24,000 per year commencing September 1, 1991 so long as Patricia was employed by Larry's law firm.
(b) If Patricia ceased to be employed by Larry's law firm for any reason, Larry was required to pay $36,000 per year.
(c) The references to Patricia having a minimum lawyer salary of $50,000 per year whether working for Larry or otherwise were not, directly or indirectly, any form of child support because those references had three other objectives: (i) Patricia's earnings as a lawyer; (ii) Larry acquiring Patricia's interest in the law practice (see paragraphs 5 and 6); and (iii) Patricia having a minimum level of spousal support like alimony or maintenance (see paragraphs 8 and 8.2 plus oral testimony of Patricia).
[13] Starting in September 1991, the minimum salary of $50,000 and the child support of $24,000 were both paid out of the Peterson law firm as if Patricia's gross annual compensation were $74,000. The actual monthly payments were complicated by the fact that Patricia had the use of a firm car for which she was charged $6,000 per year. Therefore, the cash payments to her on a monthly basis were determined by the following computation:
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Annual Salary |
$50,000 |
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Less car allowance |
6,000
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Subtotal |
44,000 |
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Plus child support |
24,000
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Net paid over 12 months |
$68,000 |
Larry explained that the law firm held back source deductions (income tax, EI and CPP) on only $50,000 and that only the $50,000 was charged as an expense in computing the profit of the law firm even though the firm had been the source of the child support payments. I assume that each monthly payment of $2,000 by the law firm for child support was charged to Larry as a draw but there was no specific evidence on this point.
[14] The Separation Agreement appears to have worked smoothly from September 1991 until March 1993. Larry paid the child support of $2,000 per month; he deducted those amounts in computing his income; and Patricia reported those amounts as part of her income. In March 1993, Larry concluded that he had a cash crisis in his law practice. He called a meeting for Saturday, March 20 but Patricia did not attend. On Monday, March 22, Larry sent a two-page letter to Patricia (Exhibit T-1, Tab 3) expressing his disappointment at her failure to attend the meeting. I will set out what I regard as the three most important statements in that letter:
1. From August '92 to February '93 your average monthly billing is $3,472
2. You are being paid a gross monthly salary of $5,667.
3. Your salary is being cut by 50% to $34,000.
The second and third statements show the danger of intermingling child support with Patricia's annual compensation as a lawyer. In the second statement, the amount $5,667 is one-twelfth of $68,000 which, as shown in paragraph 13 above, is a combined amount of child support plus annual salary less a car allowance. In the third statement, the amount $34,000 is 50% of the same $68,000 combined amount.
[15] If the third statement is read literally, it does not make any sense because Patricia never had a salary of $68,000. When writing that third statement, Larry was thinking only of the net cash ($68,000) which his firm was paying to Patricia on an annual basis as child support and salary. In paragraph 12 above, I summarized the basic agreement for child support as, in part, requiring Larry to pay $24,000 per year so long as Patricia was employed by his law firm. The amount of child support payable by Larry was determined in the Separation Agreement independent of Patricia's annual compensation as a lawyer. Therefore, I construe the third statement as meaning that the child support was to continue at $24,000 per year after March 1993; and that Patricia's salary was reduced to $10,000 ($24,000 plus $10,000 equals $34,000).
[16] Upon receiving the letter from Larry dated March 22 (Exhibit T-1, Tab 3), Patricia obtained legal advice from Lorna E. Rudolph, a lawyer in Sault Ste. Marie. Ms. Rudolph's letter to Larry dated April 14, 1993 (Exhibit T-3) states in part:
The result is, that you are required to pay Patricia the $50,000 a year salary under the employment contract and you are required to pay her the $24,000 per year child support.
... the fact that you decided to lump together the child support as part of her salary ...
Those statements in Ms. Rudolph's letter are a clear indication that Patricia saw her salary as totally separate from the child support.
[17] After receiving Larry's letter of March 22, Patricia never did return as a regular employee of Larry's law firm. She worked on some files which were billed through Larry's office. She took home other files (many legal aid) which she billed on her own. And by the end of May 1993, Patricia had decided to practise law alone out of her home. Exhibit T-1, Tab 2 contains five cheque stubs for cheques issued by Larry's firm to Patricia with the following particulars:
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1993 Date |
Gross |
Net
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March 20 |
$2,606.60 |
$1,803.86 |
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April 3 |
1,303.30 |
1,092.42 |
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April 16 |
1,303.30 |
1,092.42 |
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May 1 |
1,303.30 |
1,092.42 |
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May 15 |
846.76 |
709.86 |
The first cheque represents pay for two weeks based on gross annual compensation of $68,000. The next three cheques represent pay for two weeks based on gross annual compensation of $34,000. Larry wrote on the stub of the first cheque "child support allocation $2,000"; and on the stub of the fourth cheque "child support allocation $1,000". Those notations indicate to me that Larry saw child support as a first charge on any amounts paid to Patricia through his law firm payroll. Patricia's evidence is that she did not cash any of the five cheques until she had received independent legal advice that the cashing of the cheques would not be construed as an admission against her interest.
[18] Patricia did not regard any of the five cheques as payment of child support. In May 1993, she applied to the Ontario Family Support Plan (FSP) to enforce the child support payments required under the Separation Agreement. Her affidavit in support of her application to the FSP is Exhibit T-1, Tab 4. Commencing in June 1993, Larry paid $1,000 twice a month to Patricia's account in the FSP and the FSP remitted the amounts to her. Exhibit 2, Tab B is a summary prepared by the FSP showing amounts accrued and collected for Patricia during the period May 25, 1993 to June 3, 1998. On the first day of each month starting June 1, 1993, the FSP accrued $3,000 as the "amount due". I assume that the FSP accrued the $3,000 amount because either Patricia told them that that was the support amount; or they read the Separation Agreement and concluded that child support was $3,000 per month after Patricia stopped being employed by Larry's law firm.
[19] The FSP accrued $3,000 each month as an "amount due" but received only $2,000 each month as paid by Larry. Over a period of time, following this pattern, the FSP showed a growing balance of arrears owing by Larry. The opening arrears ($8,182) in the FSP summary was never explained in detail but part of it must represent the period March to May 1993 when Larry reduced the payments flowing from his law firm to Patricia. In the 43-month period from June 1, 1993 to December 31, 1996, the FSP summary shows that Larry made 85 payments of $1,000 each at the rate of two payments per month. Also, Patricia acknowledged that Larry had paid $2,000 in that period for which he did not receive credit in the FSP summary. Therefore, over the 43 months from June 1993 to December 1996 inclusive, Larry paid either through the Plan ($85,000) or directly to Patricia ($2,000) an aggregate amount of $87,000.
[20] There is no doubt that in the period June 1993 to December 1996, Larry was paying child support at the rate of $2,000 per month when he should have been paying at the rate of $3,000 per month because Patricia had ceased to be employed by his law firm. In March 1994, Patricia filed a Statement of Claim in the Ontario Court (General Division) (Exhibit 2, Tab C) and sued Larry for specific performance of the Separation Agreement, damages for breach of contract, damages for wrongful dismissal, and other items. In April 1994, Larry filed a Statement of Defence and Counterclaim (Exhibit 2, Tab D).
[21] On June 1, 1995, Larry filed in the Ontario Court (General Division) a Petition for Divorce from Patricia (Exhibit 2, Tab E). The Petition appears to be a standard form of approximately 12 pages because many "boilerplate" provisions are stroked out as not applicable. In oral testimony, both Patricia and Larry testified at length concerning items 27 to 30 in the Petition for Divorce. Because these items are important, I will set them out as they appear in Exhibit 2, Tab E except that I will omit words not used:
27.(a) The existing arrangements between the spouses for support for the children are as follows:
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Amount Paid |
Time period (weekly, monthly, etc.) |
Paid by (husband or wife) |
Paid for (name of child) |
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$666.67 |
monthly |
husband |
Dana |
|
$666.67 |
monthly |
husband |
Lisa |
|
$666.67 |
monthly |
husband |
Caroline |
(b) The existing support arrangements are being honoured
28. The educational needs of the children are being met
29. The following are all other court proceedings with reference to the marriage or any child of the marriage:
There is an Action presently before the Ontario Court (General Division) in the District of Algoma, bearing Court File No. 13224/94.
DOMESTIC CONTRACTS AND FINANCIAL ARRANGEMENTS
30. The spouses have entered into the following domestic contracts and other written or oral financial arrangements:
Date Nature of contract or arrangement Status
There have been no oral or written agreements.
[22] Item 30 of the Divorce Petition is simply not true because Larry and Patricia had signed the Separation Agreement on September 5, 1991 and, in June 1995 when Larry filed the Divorce Petition, he was then paying child support of $2,000 per month. When Patricia read item 30, she concluded (i) that Larry had repudiated the Separation Agreement; (ii) that the child support of $2,000 per month which she received in 1995 was not paid under a written agreement; and (iii) that she was not required to include in her income the $24,000 which she was receiving from Larry in 1995. Patricia's Notice of Appeal to this Court for 1995 stated in part:
Larry Peterson was not paying the child support pursuant to the 1991 Separation Agreement because, in his Petition for Divorce dated June 1, 1995 he declared, in writing, to the divorce court who granted his divorce that "there was no oral or written agreement" in effect between the parties. He was unilaterally paying $2,000.00 per month ...
Similarly, in her Notice of Appeal to this Court for 1996, Patricia stated in part:
... Larry Peterson also claimed in his 1995 Petition for Divorce that there was no written or oral agreement between the parties and stated he was voluntarily paying $2,000.00 per month in child support to me. Although I sought to have the Agreement enforced by the Family Responsibility Office and then the Ontario Court General Division from March 1993 to December 1996, I was unsuccessful.
In the passage just quoted, Patricia made a statement which is clearly inaccurate: "Larry Peterson ... in his 1995 Petition for Divorce ... stated he was voluntarily paying $2,000 per month in child support to me". Larry made no such statement in the Petition for Divorce.
[23] Larry attempted to explain item 30 by saying that he thought it referred to any "new" written or oral agreements. I do not know what he means by "new" and this was not pursued in evidence. Matti E. Mottonen was Larry's counsel for both the 1994 legal action commenced by Patricia and the 1995 Divorce Petition filed by Larry. Mr. Mottonen testified in this matter and he explained item 30 as a mistake or oversight because it was obviously inaccurate. In his mind, there was no question that the Separation Agreement was in full force and effect. Mr. Mottonen also pointed out that item 29 of the Divorce Petition referred to the 1994 legal action commenced by Patricia in which both she and Larry relied on the Separation Agreement. Patricia's Statement of Claim had 37 paragraphs and Larry's Statement of Defence and Counterclaim had 91 paragraphs. Although item 30 is inaccurate with respect to a material fact, when I consider the specific reference to the legal action in item 29, it is not possible for me to conclude that Larry or Mr. Mottonen had any intent to mislead the Ontario Court in the divorce proceeding.
[24] As stated in paragraph 9 of Exhibit 1 (Statement of Admitted Facts), the legal action commenced by Patricia against Larry in the Ontario Court (General Division) was settled in December 1996. There was a pre-trial conference on December 16, 1996 with Madam Justice Pardu. It appears that the conference lasted more than eight hours from mid-morning until early evening. At the end of the conference, Minutes of Settlement were signed by both Patricia and Larry and their respective counsel. The Minutes of Settlement (Exhibit 2, Tab F) were hand-written by Larry's counsel, Matti E. Mottonen, a Sudbury lawyer. Paragraph 6 of the hand-written Minutes of Settlement states:
(6) Defendant will pay retroactive additional periodic child support to the plaintiff for each of the aforementioned children in the amount of $36,000 for the 12 months from January 1st, 1996 to and including December 1st, 1996. Payments are taxable in hands of plaintiff and tax deductible by defendant.
[25] On December 31, 1996, there was a conversation between Larry and his oldest daughter Dana (then in second year university) in which he stated what support he would be paying her in future. When Dana reported the conversation to her mother, Patricia concluded that Larry was or would be in breach of the Minutes of Settlement. Madam Justice Pardu had not yet issued an order to implement the Minutes of Settlement. Patricia therefore brought a fresh motion before Madame Justice Pardu to interpret the Minutes of Settlement and enforce them with a court order. The motion came before Judge Pardu on March 27, 1997. The Judge dictated a three-page memorandum to file (Exhibit T-1, Tab 10) and then issued an Order (Exhibit 2, Tab G) dated December 16, 1996 and March 27, 1997 which was, in substance, on the same terms as the Minutes of Settlement. Paragraph 6 of the Order (Exhibit 2, Tab G) states:
6. THIS COURT ORDERS that the Defendant shall pay retroactive additional periodic child support to the Plaintiff for each of the aforementioned children of the marriage in the amount of $36,000.00 for the twelve months from January 1st, 1996 to and including December 1st, 1996. The payments are taxable in the hands of the Plaintiff and tax deductible by the Defendant.
Analysis - Did Larry Repudiate the Separation Agreement?
[26] The main argument of Patricia's counsel is that Larry breached the Separation Agreement on or about March 22, 1993 and that he repudiated the agreement before 1995 and again in 1996. See paragraph 20 of Exhibit 1 set out in paragraph 6 above. Patricia relies on repudiation because, if Larry did repudiate the Separation Agreement, then the monthly payments of $2,000 which he made after such repudiation would not be "received under ... a written agreement" within the meaning of paragraph 56(1)(b) of the Income Tax Act as it applied to 1995 and 1996.
56(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,
(a) ...
(b) an amount received by the taxpayer in the year as alimony or other allowance payable on a periodic basis for the maintenance of the taxpayer, children of the taxpayer or both the taxpayer and the children if the taxpayer, because of the breakdown of the taxpayer's marriage, was living separate and apart from the spouse or former spouse who was required to make the payment at the time the payment was received and throughout the remainder of the year and the amount was received under a decree, order or judgment of a competent tribunal or under a written agreement;
[27] Patricia relies on the following evidence in support of her argument that Larry repudiated the Separation Agreement. First, in the financial statement which he filed in connection with her legal action (Exhibit T-1, Tab 6), he assigned values to certain properties which were allocated between him and Patricia in the Separation Agreement different from the values used in that agreement. Second, he retained all the rents from the building in which he carried on his law practice when, under paragraph 3 of the Separation Agreement, he and Patricia owned that building as tenants-in-common. Third, he reduced her salary to less than $50,000 in conflict with paragraph 5 of the Separation Agreement. And fourth, his big reduction of her salary on March 22, 1993 was constructive dismissal, and was breach of a fundamental term of the Separation Agreement. I will consider these arguments in order.
[28] First, considering the property values in Larry's financial statement (Exhibit T-1, Tab 6) being different from the values in the Separation Agreement, I do not regard his different values as being even a breach of the Separation Agreement, let alone a repudiation. The financial statement was prepared in May 1994, almost three years after the Separation Agreement of September 1991. In paragraphs 1, 2 and 3 of the Separation Agreement, Larry and Patricia were over-reaching in a co-operative spirit to find balancing values for the properties which they were dividing and allocating. According to their common testimony, they were trying in the summer of 1991 to have an amicable separation. In May 1994, Patricia had sued Larry claiming significant amounts and, in his financial statement, he was entitled to use hindsight to reconsider property values which had never been tested on the open market.
[29] Second, considering their common ownership of the building in which Larry carried on his law practice, if Larry and Patricia as owners/landlords were earning a profit from the property, Larry was obliged to share that profit 50/50 with Patricia. There is no evidence as to whether ownership of that building was producing a profit. Were there other tenants beside Larry's law firm? Was there a mortgage on the building? What were the annual expenses? Was the rent adequate to cover expenses and depreciation? Even if there were an "owner's profit" which Larry had not shared with Patricia, he would be in breach of only paragraph 3 of the Separation Agreement. Such a breach could be rectified by a court order requiring Larry as co-owner to account to Patricia as the other co-owner. Such a breach would not be repudiation.
[30] I will review together the third and fourth arguments for repudiation considering Larry's letter of March 22, 1993 (Exhibit T-1, Tab 3) cutting Patricia's salary and causing her to leave his law firm. This conduct by Larry may have been a significant breach of contract. I say "may have been" because there was a conflict in evidence between Larry and Patricia as to what her obligations were as an employed lawyer. In her Statement of Claim (Exhibit 2, Tab C), Patricia alleged:
24. The parties by their agreement intended to provide:
(1) for a level of remuneration and financial support for the Wife sufficient to enable her to continue the children's standard of living at the level which existed before the separation, and
(2) for periods of time which would allow the Wife to attend to her responsibility for the continuing care of the children.
(3) for a period of time to allow the Wife to expand her legal experience which due to the time she spent caring for the children was restricted to solicitor's work, and particularly estate work.
25. The consideration for payments to the Wife under the agreement consisted of:
(1) the transfer in trust to the Husband of her interest in Peterson & Peterson including accounts receivable, work in progress, and a deferral of the Wife's compensation for her share in the practice;
(2) provision of services as an employee of Peterson & Peterson; and,
(3) payments in lieu of spousal support which were a deductible business expense;
(4) fixed child support.
In his Statement of Defence (Exhibit 2, Tab D), Larry denied paragraphs 24 and 25 of the Statement of Claim; and he alleged in paragraph 35:
35. ... the Plaintiff had committed herself to be employed on a permanent and full-time basis as an employee of the Law Firm of Peterson & Peterson. The Plaintiff neglected to carry out her duties and in fact did not carry out her employment on a full-time and permanent basis with the firm. ... after the execution of the Separation Agreement the Plaintiff chose not to work diligently at the Defendant's Law Firm and earn a meaningful and proper salary. ...
and in paragraph 36:
36. ... the Plaintiff voluntarily terminated her employment with the Defendant's Law Firm. ... the Plaintiff's work was below acceptable standards and the Plaintiff's billings were extremely low and not up to the same standard that the Plaintiff exhibited prior to the execution of the Separation Agreement on September 2, 1991. ...
[31] The issue of Patricia's claimed wrongful dismissal in March 1993 was an important part of the litigation commenced by her against Larry in March 1994. That litigation was resolved by Minutes of Settlement (Exhibit 2, Tab F) signed on December 16, 1996 and by the Court Order issued on March 27, 1997 (Exhibit 2, Tab G). At the hearing in this Court, Patricia testified first and Larry second. After Larry's testimony, Patricia's counsel stated that he would recall Patricia for reply testimony, and he proposed to call two new witnesses who would support her claim for wrongful dismissal in March 1993. Larry's counsel and counsel for the Minister objected to testimony from the two new witnesses on the basis of relevance. Also, Larry's counsel stated that, if two new witnesses for Patricia were permitted to testify, he would call two other new witnesses to support Larry's claim that his letter of March 22, 1993 was justified.
[32] I ruled against hearing any new witnesses give evidence on the issue of whether Patricia was wrongfully dismissed in March 1993 because that issue is not relevant to the four questions which I am required to answer in the section 174 proceeding. See paragraphs 4 and 5 above. That issue could have been litigated in the action which Patricia commenced in March 1994 but that action was settled. Also, it would be more difficult to obtain reliable oral testimony in September 2003 (ten years after the events of March 1993) than in 1994 and 1995 when the events of March 22, 1993 were fresh in the memory of all concerned.
[33] Patricia's real reason for wanting to prove that she was wrongfully dismissed in March 1993 is her desire to prove that Larry had repudiated the Separation Agreement. My ruling against hearing new witnesses on the issue of wrongful dismissal was founded on relevance but, since the end of the hearing, I have other reasons to support that ruling. After hearing arguments by all three counsel, I have concluded that Larry did not repudiate the Separation Agreement at any time even if it could be proven that he wrongfully dismissed Patricia in March 1993. I will consider the absence of repudiation from two points of view: (i) the performance of the Separation Agreement as contrasted with its breach; and (ii) if there were any act of repudiation by Larry (and I conclude there was not), such act of repudiation was never accepted by Patricia.
[34] Since Patricia and Larry signed the Separation Agreement on September 5, 1991, there has been substantially more performance and compliance than there has been any breach or breaches. The operative paragraphs begin on page 2 of the Agreement. Patricia and Larry complied with paragraph 1 when they divided and allocated Bruce-Algo Enterprises Limited and the family home at 25 Alworth Place. They complied with paragraph 2 when they divided and allocated Coppertown Investments Limited and the cottage at Beech Beach. They complied with paragraph 3 when they changed the ownership of 626 Wellington Street from life tenancy to tenants-in-common. They complied with paragraph 4 when Patricia withdrew from the partnership and Larry obtained her release from any liability at the bank with respect to the law practice. They complied with paragraph 5 when Patricia was employed by Larry for 18 months (September 1991 to March 1993) at an annual salary of $50,000. Whether Larry or Patricia was in breach of the employment provisions in March 1993, I will not attempt to decide more than ten years after the relevant period.
[35] Having regard to child support, there was total compliance when the three daughters had their principal residence with Patricia from September 1991 until after 1996, and when Larry paid $2,000 per month to Patricia from September 1991 to March 1993. In April and May 1993, Larry was in breach of the child support provisions when he paid to Patricia lesser amounts which cannot be identified with certainty as being reduced salary or primarily child support. Larry was in substantial performance and compliance with his child support obligations in the 43-month period from June 1993 to December 1996 when he paid $2,000 per month to the Family Support Plan; but he was also in breach of his child support obligations in that same 43-month period by paying only $2,000 per month when he should have been paying $3,000 per month. See paragraph 12 above in which I make a finding with respect to the basic agreement for child support.
[36] There was a disagreement between Larry and Patricia concerning the cost of post secondary education for Dana, the oldest daughter, who started university in the fall of 1994. That disagreement was resolved in the first paragraph of the Minutes of Settlement (Exhibit 2, Tab F) and the Court Order (Exhibit 2, Tab G) under which Larry was required to make certain monthly payments directly to Dana. The two younger daughters had not yet started post secondary education in the fall of 1996. Having regard to all the provisions in the Separation Agreement, I am satisfied that Patricia and Larry performed their obligations and complied with the terms of the Agreement to a much greater extent than any breaches which occurred.
[37] Patricia's counsel argued that Larry's termination of Patricia (as employee) in March 1993 was breach of a fundamental term and therefore repudiation in itself. Mr. Fitzgerald relied on paragraph 14 of the Separation Agreement which stated:
WAIVER OF SUPPORT OF BOTH SPOUSES
14. In consideration of the above agreed upon property settlement and other terms herein contained, neither Patricia nor Larry are in need of alimony, support, maintenance, or maintenance and support and hereby releases and discharges the other from any and all support obligations which may arise as a result of the marital relationship.
Counsel argued that the words "... and other terms herein contained ..." were a direct reference to Patricia's ability to support herself as an employed lawyer. If I am to accept that argument, there must have been some minimum level of legal services which Patricia would provide in order to earn a salary which Larry would "top up" to $50,000 per year. The difficult question is whether Patricia was performing that minimum level of legal services in the winter of 1992-1993.
[38] Patricia and Larry appear to have assumed in the Separation Agreement that, if she ever left Larry's law firm, she would be employed as a lawyer by some third party. Paragraphs 6 and 8 of the Separation Agreement refer to Patricia finding "other suitable employment" and becoming "employed by another lawyer". The Separation Agreement does not contemplate her starting her own law practice from scratch as she did in June 1993. If she had become employed as a lawyer by some third party, Larry had an obligation (paragraph 8) to supplement or "top up" her income to $50,000. If Patricia had a good claim for wrongful dismissal in March 1993 when she left Larry's law firm and started her own practice, it would be more difficult to measure Larry's "top up" obligation.
[39] I will assume (and I regard it as a generous assumption) that Larry's termination of Patricia as an employee in March 1993 was a breach of a fundamental term of their Separation Agreement and a potential repudiation of the Agreement. There is a well established principle of contract law that repudiation by one party must be accepted by the other party. Chitty on Contracts (27th Edition) 1994, contains the following passage at page 1158:
Acceptance of repudiation. Where there is an anticipatory breach, or the breach of an executory contract, and the innocent party wishes to treat himself as discharged, he must "accept the repudiation," This is usually done by communicating the decision to terminate to the party to default, although it may be sufficient to lead evidence of an "unequivocal overt act which is inconsistent with the subsistence of the contract ... without any concurrent manifestation of intent directed to the other party." Unless and until the repudiation is accepted the contract continues in existence for "an unaccepted repudiation is a thing writ in water." Acceptance of a repudiation must be clear and unequivocal and mere inactivity or acquiescence will generally not be regarded as acceptance for this purpose. ...
[40] The Law of Contract in Canada by G.H.L. Fridman (1976) contains the following passages:
At page 519:
The problem of what sort of conduct constitutes a repudiation of a contract is one that has exercised the courts for a long time. To some extent it is not unlike (indeed it may even be a variation of) the question, already canvassed in another chapter, of the distinction between terms in a contact which are of a basic, even a fundamental nature, and terms of lesser importance. Breach of the former, as seen earlier, gives rise to rights of repudiation and rescission on the part of the innocent party; breach of the latter entitled the innocent party only to claim damages. ...
At page 524:
"An unaccepted repudiation", said Asquit L.J. in one English case, "is a thing writ in water and of no value to anybody; it confers no legal rights of any sort or kind". Although this graphic expression has been said to be limited by the facts of the case in which it occurred, and not to be applicable where the repudiation takes place "when performance is tendered or due to be given by the other party", the phrase does have some merit, and does put succinctly an important aspect of the law relating to discharge by repudiation or anticipatory breach. Such repudiation will not effectively terminate the contract unless the innocent party does accept the repudiation, and is prepared to treat the contract as ended. The innocent party, in effect, has an election whether or not to treat the contract as continuing or as ended, once the party has committed an act which, in accordance with what has been said above, can be regarded as repudiating the contract. ...
At page 526:
Thus there is a distinction between repudiation that is accepted and repudiation which is not regarded and treated by the innocent party as the renunciation and discharge of the contract. An accepted repudiation is of legal effect: a repudiation that is not accepted is not effective in law (as contrasted with its effect in fact) to determine the contract. The crucial question is whether the innocent party has exercised his option or election in favour of treating the contract as at an end. This choice, which will be binding once it is made, must me made within a reasonable time, i.e., after the innocent party has discovered the situation giving rise to the choice of action which is open to him. If he delays at sufficient length to prejudice the other party or third parties by his eventual course of action or so long that his conduct can be regarded as acceptance of the repudiation, the innocent party, in effect will lose his right of election. ...
[41] Having assumed that Larry repudiated the Separation Agreement in March 1993, I cannot find any evidence that Patricia accepted that repudiation at any time. Quite the contrary, there is strong evidence that she continued to rely on the Separation Agreement. In March 1994, one year after the assumed repudiation, Patricia sued Larry. The first claim in her Statement of Claim (Exhibit 2, Tab C) speaks for itself:
1. The plaintiff claims AS AGAINST THE DEFENDANT HUSBAND:
(1) Specific performance of the agreement dated September 2, 1991 made between the Wife and the Husband, and particularly the obligations of the Husband to pay to the Wife:
(a) up to $50,000.00 each year for her interest in Peterson & Peterson until she reaches the age of sixty-five (65) years;
(b) $1,000.00 each month per child for the support of the children (making a total of $3,000.00 each month for three children);
In Larry's Statement of Defence and Counterclaim (Exhibit 2, Tab D), he made the following statement in paragraph 53:
53. The Defendant pleads and relies upon the provisions of the Separation Agreement entered into between the Parties and dated September 2, 1991.
[42] There is no merit in the argument that Larry repudiated the Separation Agreement in March 1993. First, he never stated or implied that he was repudiating the Agreement. Second, he continued to honour a substantial part of the child support provisions by paying $2,000 per month from June 1, 1993 to December 31, 1996. Third, he clearly alleged in his Statement of Defence and Counterclaim that he relied on the Separation Agreement. See paragraph 53 quoted above. And fourth, from March 1994 (the filing of her Statement of Claim) to December 1996 (the pre-trial before Judge Pardu), Patricia did not amend her Statement of Claim to withdraw her claim for specific performance or to accept any purported repudiation.
[43] I find that Larry did not at any time repudiate the Separation Agreement. I have no hesitation in making that finding. Paragraph 4 above contains the four questions I am required to answer under the Court Order issued pursuant to section 174 of the Income Tax Act. Having found that there was no repudiation of the Separation Agreement, the first two questions must be answered in the affirmative. In other words, Patricia is required to include in computing her income for 1995 and 1996 the $24,000 which she received in each year from Larry as child support because those amounts were received "under a written agreement". Larry is permitted to deduct in computing his income for 1995 and 1996 the $24,000 which he paid in each year to Patricia as child support because those amounts were paid "under a written agreement".
Analysis - What is the character of the $36,000 payment?
[44] I now turn to the single payment of $36,000 which Larry made to Patricia in December 1996. That payment was made as a consequence of the pre-trial conference held on December 16, 1996 before Madam Justice Pardu. The payment appears on page 4 of Exhibit 2, Tab B which is a schedule of amounts received by the Family Support Plan from Larry. The schedule shows the $36,000 as "paid" on January 6, 1997 but the parties are in agreement that Larry paid the amount and the Plan received the amount (as agent for Patricia) in the last few days of December 1996. See paragraph 10 of Exhibit 1, the Statement of Admitted Facts.
[45] The $36,000 amount was paid pursuant to the Minutes of Settlement actually signed on December 16, 1996 and pursuant to the Court Order dated December 16, 1996 and March 27, 1997. Although the relevant provisions of the Minutes of Settlement and Court Order are set out in paragraphs 24 and 25 above, they are worth repeating here because of their importance:
Minutes of Settlement (Exhibit 2, Tab F):
(6) Defendant will pay retroactive additional periodic child support to the plaintiff for each of the aforementioned children in the amount of $36,000 for the 12 months from January 1st, 1996 to and including December 1st, 1996. Payments are taxable in hands of plaintiff and tax deductible by defendant.
Court Order (Exhibit 2, Tab G):
6. THIS COURT ORDERS that the Defendant shall pay retroactive additional periodic child support to the Plaintiff for each of the aforementioned children of the marriage in the amount of $36,000.00 for the twelve months from January 1st 1996 to and including December 1st, 1996. The payments are taxable in the hands of the Plaintiff and tax deductible by the Defendant.
[46] There is a well-established principle that a provincial court with jurisdiction in family law matters may not, for income tax purposes, determine the character (taxable or not; deductible or not) of a payment flowing from one spouse to another. I considered this question in the appeal of Elizabeth Bates, 98 DTC 1919. After reviewing other decisions in Sigglekow, 85 DTC 5471, Arshinoff, [1994] 1 C.T.C. 2850 and Halligan, [1996] 2 C.T.C. 2555, I stated at page 1924:
[16] The superior court of any province has jurisdiction to order payments for the maintenance of a spouse or children upon the break-up of a marriage. That jurisdiction does not include the authority to determine the character of those payments as being taxable or tax-free for purposes of the Income Tax Act. Once the superior court of a province has ordered maintenance payments on a marriage break-up, the character of those payments as taxable or not taxable will be determined by the conditions in paragraphs 56(1)(b) and 56(1)(c) of the Income Tax Act. If I had any doubt concerning separate jurisdictions with respect to ordering maintenance payments and determining the tax character of such payments, I would rely on the following statements of Cory, J. and Iacobucci, J. in The Queen v. Thibaudeau, 95 DTC 5273 at 5275: ...
Significant amendments to the Income Tax Act taking effect May 1, 1997 bring into play other sections of the Act but the above principle remains. Whether the $36,000 amount is income to Patricia or deductible by Larry will be determined by the relevant provisions of the Act, by the case law, and by the particular circumstances in which the $36,000 amount was paid and received.
[47] There are two general principles which apply to the $36,000 amount. First, a single payment (often referred to as a "lump sum") will not be income to the recipient or deductible to the payor if it is made to obtain a release from a liability to make future payments under a separation agreement or court order. And second, a single payment will be (in most circumstances) income to the recipient and deductible to the payor if it is made with respect to arrears of periodic payments which should have been made under a separation agreement or a court order. I will review the case law which established these two principles.
[48] In M.N.R. v. John Armstrong, 56 DTC 1044, the taxpayer and his wife divorced in 1948. He was required to pay $100 per month to his wife for the maintenance of their daughter until she reached the age of 16. In 1950, when the daughter was 11 years of age, the taxpayer paid a lump sum of $4,000 to his former wife in full settlement of all amounts payable in future. The taxpayer deducted the $4,000 in computing his income for 1950 but the deduction was disallowed by the Minister. The taxpayer's successful appeals in lower courts were taken to the Supreme Court of Canada. The Supreme Court was unanimous in allowing the Minister's appeal. Kellock J. stated at page 1045:
In my opinion, the payment here in question is not within the statute. It was not an amount payable "pursuant to" or "conformément à" (to refer to the French text) the decree but rather an amount paid to obtain a release from the liability thereby imposed.
Locke J. stated at page 1046:
It was for the purpose of obtaining what purported to be a release of the appellant's liability to maintain his infant child to the extent that it was imposed by the decree nisi that the $4,000 was paid. It cannot, in my opinion, be properly said that this lump sum was paid, in the words of the section, pursuant to the divorce decree. It was, it is true, paid in consequence of the liability imposed by the decree for the maintenance of the infant, but that does not fall within the terms of the section.
[49] In The Queen v. Barbara Sills, 85 DTC 5096, the taxpayer and her husband entered into a separation agreement in 1974 requiring the husband to pay $100 per month for her maintenance, and $100 per month for each of their two children. She was to receive $300 per month in total. By the end of 1975, arrears of $2,000 had accumulated with respect to the monthly amounts which the taxpayer was entitled to receive. In 1976, she received the following three payments:
February $1,000
April 1,000
December 1,000
$3,000
The Minister included the $3,000 in the taxpayer's income for 1976 but she successfully appealed to the Tax Review Board and the Federal Court Trial Division. The Minister's appeal to the Federal Court of Appeal was allowed. Urie J.A. writing for a unanimous Court stated at page 5098:
... On these facts, the $3,000 received by the Respondent from LaBrash was clearly paid by him and received by her to carry out the terms of the separation agreement. Some of the money was payable to the Respondent as alimony, the remainder was payable to her as maintenance for the dependant children. All of it was payable on a monthly basis as stipulated in the separation agreement. Where the Trial judge erred, in my view, was in not having due regard to the use of the word "payable" in the subsection. So long as the agreement provides that the monies are payable on a periodic basis, the requirement of the subsection is met. The payments do not change in character merely because they are not made on time. ...
[50] In this Court, Garon J. (as he then was) followed Sills in Soldera v. M.N.R., 91 DTC 987. The taxpayer had paid $7,500 in 1986 with respect to arrears of maintenance which was payable to his wife under a court order. When allowing the taxpayer's appeal, Garon J. stated at page 990:
... Furthermore, the matter of the Appellant's existing liability prior to the issue of the 1986 Order in respect of the maintenance payment that had fallen in arrears, was expressly dealt with in paragraph 3 of the 1986 Order which provides that, leaving out certain expletive words:
... the arrears of maintenance as of May 31, 1986 ... are hereby fixed at $7,500.00.
In my view, the effect of paragraph 3 of the 1986 Order was simply to reduce to $7,500 the Appellant's liability as of May 31st, 1986, in respect of the maintenance payments that were then in arrears. In this connection it must be recalled that the total amount owing by the Appellant as of May 31st, 1986, under paragraph 3 of the 1983 Order was approximately $14,000. It then becomes apparent that paragraph 3 of the 1986 Order in fixing the arrears of maintenance payments at $7,500 as of May 31st, 1986, in effect reduced the Appellant's liability roughly by half. Paragraph 3 of the 1986 Order does not alter or change the nature of the Appellant's liability but simply reduces it. This is made clear by an express reference in that paragraph to the "arrears of maintenance as of May 31, 1986". If need be, the point that the nature of the Appellant's liability fixed by paragraph 3 of the 1986 Order is not affected is reinforced by the fact that the payment of $7,500 is roughly in line with what the Appellant indicated he was willing to pay in terms of maintenance payments for his children in his solicitor's letter of July 26th, 1983, to Mrs. Leggett's solicitors. ...
[51] Counsel cited my decision in Susan Widmer v. M.N.R. (August 23, 1995) in which I appear to have been misled by an error in the headnote of Soldera. In any event, the amount of the lump sum payment in Widmer ($15,000) was so different from, and smaller than, the amount of arrears ($50,590) that the Widmer decision is easily distinguished from this appeal.
[52] The terms of paragraph 6 of the Minutes of Settlement and paragraph 6 of the Court Order are set out in paragraph 45 above. The two paragraphs are substantially the same. There is some confusion in the words because a single payment of $36,000 is described as "periodic". There are, however, other signs in paragraph 6 which help to ascertain its meaning. First, the payment is based on the past and not the present or the future because (i) it is called "retroactive"; and (ii) it looks back over the 12 months of 1996. Second, it is clearly designated as "child support". And third, it is "additional" to something. In my opinion, that "something" is the periodic child support which had been paid in the recent past (i.e. prior to December 16, 1996).
[53] Prior to December 1996, child support had been paid at the rate of $2,000 per month continuously from June 1993 and also from September 1991 to March 1993. In paragraph 12 above, I made a finding with respect to the basic agreement for child support within the Separation Agreement. Specifically, the two most important terms are:
(a) Larry was required to pay $24,000 per year commencing September 1, 1991 so long as Patricia was employed by Larry's law firm; and
(b) If Patricia ceased to be employed by Larry's law firm for any reason, Larry was required to pay $36,000 per year.
Patricia ceased to be employed by Larry's law firm sometime from March 22 to May 31, 1993. In my view, Larry was obliged to pay child support at the rate of $3,000 per month from and after June 1, 1993; and perhaps for one or two months before that date. Larry paid only $2,000 child support per month from June 1, 1993 to December 1996. Therefore, in that 43-month period, he was in arrears of child support to the limit of $43,000.
[54] According to the testimony of Mr. Mottonen (Larry's lawyer in his litigation with Patricia and in the Divorce Petition), he had a $36,000 amount in the memorandum which he had prepared for the pre-trial with Judge Pardu on December 16, 1993. Mr. Mottonen seemed to think that $36,000 was an amount which he could negotiate with respect to Larry's arrears of child support as at December 1996. It is clear from Patricia's Statement of Claim that she was seeking $3,000 each month because her claim for specific performance of the Separation Agreement (quoted in paragraph 41 above) refers to:
(b) $1,000.00 each month per child for the support of the children (making a total of $3,000.00 each month for three children);
[55] I have concluded that the $36,000 single payment was an amount negotiated in the Minutes of Settlement signed on December 16, 1996 with respect to Larry's arrears of child support as at that date. My reasons for this conclusion are as follows. First, the payment is described as "retroactive additional periodic child support". Second, if the payment is allocated over the three years 1994, 1995 and 1996, it discharges Larry's arrears for the 36 months from January 1994 to December 1996. Third, an allocation over that 36-month period is consistent with Patricia's Statement of Claim issued in March 1994 and quoted in paragraph 54 above. Fourth, the $36,000 was paid through the Family Support Plan and caused a significant reduction in the "balance" which had been accruing at $3,000 per month since June 1993 (less the $2,000 per month which was actually paid through the Plan). And fifth, allocating the $36,000 over the 36 months from January 1994 to December 1996 is the most reasonable and common sense interpretation to place on paragraph 6 of the Court Order and paragraph 6 of the Minutes of Settlement.
[56] Even if I were to accept and apply the words of paragraph 6 "for the twelve months from January 1, 1996 to and including December 1, 1996", I would still conclude that the $36,000 amount was paid to substantially reduce the arrears of child support which had accumulated to December 1996. I prefer not to accept and apply those words because, having clearly called the amount "retroactive", Larry would be paying child support at the rate of $5,000 per month ($2,000 plus $3,000) for only 1996. Child support at that rate would be inconsistent with the Separation Agreement; inconsistent with Patricia's Statement of Claim; and inconsistent with the new regime of child support for 1997 and subsequent years established in paragraphs 1 and 2 of the Minutes of Settlement and Court Order.
[57] Patricia's counsel argued that the new regime (1997 and subsequent years) was close to $5,000 per month because, if the after-tax amount of $800 per month payable to Dana were converted to a pre-tax amount of $1,600 per month and added to the $3,500 per month for the two younger daughters, child support under the new regime would be close to $5,000 per month. I would not make that leap of rationalization in all the circumstances of this case because the new regime was clearly intended to take effect on January 1, 1997; and I would have to ignore the significance of the word "retroactive" in paragraph 6.
[58] When I construe paragraph 6 of the Court Order and Minutes of Settlement against the background of all documentary exhibits and oral testimony, I have no doubt in concluding that the $36,000 single payment was a negotiated amount referable only to arrears of child support from some month in 1993 up to and including December 1996. If I had had any doubt in construing paragraph 6 of the Court Order and Minutes of Settlement (and I had none), I might have given some weight to the intention of Patricia and Larry (they both signed the Minutes of Settlement) as expressed in the last sentence of paragraph 6 stating that the "payments" are taxable in the hands of Patricia (as plaintiff) and deductible by Larry (as defendant). The ink was hardly dry on the Minutes of Settlement and Court Order when Patricia filed her income tax return for 1996 neglecting, or perhaps refusing, to include the $36,000 in her income. See Exhibit 2, Tab I.
[59] Patricia's counsel argued that the $36,000 amount should be joined with the $39,000 (see paragraph 8 of the Court Order) and construed as an amount paid to obtain a release from other liabilities along the lines of the Armstrong case cited above. The two amounts are joined in paragraphs 10 and 16 of the Court Order and paragraphs 10 and 15 of the Minutes of Settlement but that is only to ensure that all terms of the Order and Minutes are carried out. Paragraph 6 of the Court Order and Minutes of Settlement must be construed on a stand alone basis.
[60] I place particular emphasis on the following sentence from the decision of the Federal Court of Appeal in Sills quoted in paragraph 49 above: "The payments do not change in character merely because they are not made on time". The decisions in Sills and Soldera apply to the $36,000 amount so as to make it income to the recipient and deductible to the payor. Having regard to the third and fourth question which I am required to answer in the section 174 proceeding, the answer to the third question is "yes"; and the answer to the fourth question is "yes". The $36,000 must be included in computing Patricia's income for 1996. The $36,000 may be deducted in computing Larry's income for 1996.
[61] I will dispose of Larry's appeal for 1997 in accordance with the terms of settlement dictated in Court. Patricia's informal appeals for 1995 and 1996 are dismissed, without costs. Larry's general appeals for 1995, 1996 and 1997 are allowed, with costs.
Signed at Ottawa, Canada, this 8th day of October, 2003.
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"M.A. Mogan" |
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CITATION: |
2003TCC712 |
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COURT FILE NOS.: |
2000-2170(IT)G and 98-2469(IT)I and 2000-3286(IT)I |
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STYLE OF CAUSE: |
Larry Peterson and Patricia Tossell and Her Majesty the Queen |
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PLACE OF HEARING: |
Sault Ste. Marie, Ontario |
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DATE OF HEARING: |
September 15, 16 and 17, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice M.A. Mogan |
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DATE OF JUDGMENTS: |
October 8, 2003 |
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APPEARANCES: |
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Counsel for Larry Peterson:
Counsel for Patricia Tossell: |
Gregory J. DuCharme
Christopher P. FitzGerald |
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Counsel for the Respondent: |
Peter M. Kremer, Q.C. and Justine Malone |
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COUNSEL OF RECORD: |
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For the Appellant Larry Peterson: |
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Name: |
Gregory J. DuCharme |
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Firm: |
Wallace Klein Partners in Law |
For the Appellant Patricia Tossell:
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Name: |
Christopher P. FitzGerald |
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Firm: |
Allemano and FitzGerald |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |