BETWEEN:
and
and
BRIAN VICTOR DENNING,
Third Party.
____________________________________________________________________
Appeals heard on October 24 and 27, 2005, at London, Ontario
By: The Honourable Justice C.H. McArthur
Appearances:
|
For the Third Party |
The Third Party himself |
____________________________________________________________________
JUDGMENT ON A DETERMINATION OF QUESTIONS
UNDER SECTION 174 OF THE INCOME TAX ACT
By Order dated May 6, 2005, Brian Victor Denning was added as a Third Party to the appeal of Kathleen Lefebvre for the purpose of determining the following questions:
1. Are the support payments paid by Brian V. Denning to Kathleen Lefebvre in the 1999 and 2000 taxation years to be included in computing Kathleen Lefebvre's income on the basis that they were payments within the meaning of paragraph 56(1)(b) of the Income Tax Act?
2. Are the child support payments paid by Brian V. Denning to Kathleen Lefebvre in the 2000 taxation year deductible in computing Brian V. Denning's income as payments within the meaning of paragraph 60(b) of the Act?
Upon hearing the evidence of the Appellant and the Third Party; and upon hearing submissions from all three parties;
It is determined that:
(a) The answer to question 1 is the amounts of $11,550 and $9,759 paid by Brian V. Denning to Kathleen Lefebvre in the 1999 and 2000 taxation years, respectively, are includable in computing her income; and
(b) The answer to question 2 is that the amount of $9,759 is deductible by Brian V. Denning, in computing his income for the 2000 taxation year.
The appeals from reassessments of tax made under the Act for the 1999 and 2000 taxation years are dismissed.
Signed at Ottawa, Canada, this 5th day of June 2006.
BETWEEN:
KATHLEEN LEFEBVRE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
BRIAN VICTOR DENNING,
Third Party.
REASONS FOR JUDGMENT
[1] On April 19, 2004, the Minister of National Revenue made an application pursuant to section 174 of the Income Tax Act joining Brian Victor Denning as a party to the appeals of Kathleen Lefebvre for the determination of questions in respect of the:
(a) Notices of Reassessment of Kathleen Lefebvre, dated September 16, 2002, in respect of her 1999 and 2000 taxation years, respectively; and
(b) Notice of Reassessment of Brian V. Denning dated September 16, 2002, in respect of his 2000 taxation year.
On May 6, 2005, an Order was made by Justice Sheridan joining Bruce Victor Denning as a party to the appeals of Kathleen Lefebvre.
[2] The questions in respect of which a determination is sought are:
(i) Are the support payments paid by Brian V. Denning to Kathleen Lefebvre in the 1999 and 2000 taxation years to be included in computing Kathleen Lefebvre's income on the basis that they were payments within the meaning of paragraph 56(1)(b) of the Income Tax Act?
(ii) Are the child support payments paid by Brian V. Denning to Kathleen Lefebvre in the 2000 taxation year deductible in computing Brian V. Denning's income as payments within the meaning of paragraph 60(b) of the Act?
Facts
[3] These appeals involve the breakdown of the marriage between the Appellant and Brian Victor Denning. The Appellant and Mr. Denning who were married for 13 years have four children, and they have been separated since 1996. Upon their separation, the Appellant and Mr. Denning discussed financial arrangements including payments for child support and the division of marital property. These discussions resulted in a verbal agreement in which Mr. Denning agreed to pay the Appellant child support in the amount of $1,100, at least for the month of September 1996. There was insufficient evidence to establish a permanent obligation to pay $1,100 monthly. This conclusion is supported by the fact that only a single cheque was provided to the Appellant prior to the written agreement. A written agreement dated September 7, 1996 states, inter alia, that Mr. Denning is to pay the Appellant monthly child support amounts of $1,100 beginning on September 1, 1996.
[4] In the computation of her income, the Appellant did not include the child support payments she received in the 1999 and 2000 taxation years. In reassessing the Appellant for those taxation years, the Minister included in her income the child support amounts of $11,550 and $9,759, respectively. Subsequently, on application by the Minister, and as set out above, this Court ordered that Mr. Denning be joined as a party to this appeal from the reassessment for the 2000 taxation year pursuant to paragraph 174(3)(b) of the Act.
[5] Amendments were made to the Income Tax Act in 1997 which included changes to the tax treatment of child support payments. Justice Bowman described these changes in the decision of Kovarik v. Canada[1] as follows:
Under what I may describe as the old régime (pre May 1997) spouses making payments to separated or ex spouses for the support of children could deduct those payments and the recipient had to include them in income. Following the decision of the Supreme Court of Canada in Thibaudeau v. R., [1995] 2 S.C.R. 627 (S.C.C.), the legislation changed. So long as a pre May 1997 agreement remained unchanged the deduction/inclusion system under the old régime prevailed.
If a new agreement were entered into, or an old agreement was changed in a particular way, the deduction/inclusion régime ceased and only payments made up to the "commencement day", as defined, were deductible by the payor and includible by the payee.
[6] The formula for calculating the support amounts that are to be included in income under the new regime is set out in paragraph 56(1)(b) of the Act, which states:
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) the total of all amounts each of which is an amount determined by the formula ...
The formula includes that child support amounts that are receivable "under an agreement or order on or after its commencement day" and "in respect of a period that began on or after its commencement day" are excluded from the income of the recipient under the definition of B in the formula. In addition, subsection 56.1(4) provides the following definitions which apply to sections 56 and 56.1:
"child support amount" means any support amount that is not identified in the agreement or order under which it is receivable as being solely for the support of a recipient who is a spouse or common-law partner or former spouse or common-law partner of the payer or who is a parent of a child of whom the payer is a legal parent.
"commencement day" at any time of an agreement or order means
(a) where the agreement or order is made after April 1997, the day it is made; and
(b) where the agreement or order is made before May 1997, the day, if any, that is after April 1997 and is the earliest of
(i) the day specified as the commencement day of the agreement or order by the payer and recipient under the agreement or order in a joint election filed with the Minister in prescribed form and manner,
(ii) where the agreement or order is varied after April 1997 to change the child support amounts payable to the recipient, the day on which the first payment of the varied amount is required to be made,
(iii) where a subsequent agreement or order is made after April 1997, the effect of which is to change the total child support amounts payable to the recipient by the payer, the commencement day of the first such subsequent agreement or order, and
(iv) the day specified in the agreement or order, or any variation thereof, as the commencement day of the agreement or order for the purposes of this Act.
"support amount" means an amount payable or receivable as an allowance on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient and children of the recipient, if the recipient has discretion as to the use of the amount, and
(a) the recipient is the spouse or common-law partner or former spouse or common-law partner of the payer, the recipient and payer are living separate and apart because of the breakdown of their marriage or common-law partnership and the amount is receivable under an order of a competent tribunal or under a written agreement; or (Emphasis added)
(b) the payer is a legal parent of a child of the recipient and the amount is receivable under an order made by a competent tribunal in accordance with the laws of a province.
Appellant's Position
[7] The Appellant argues that the child support payments she received from Mr. Denning in the 1999 and 2000 taxation years should not be included in the computation of her income because paragraph 56(1)(b) requires that a taxpayer include support payments in his or her income when those payments are receivable under an order of a competent tribunal, or under a written agreement made before May 1997. She contends that the child support payments were paid pursuant to a verbal agreement, the details of which were subsequently reduced to writing in the agreement of September 7, 1996.
[8] The Appellant submits that the verbal agreement established that Mr. Denning was to pay $1,100 on the first of every month. She suggests that the fact that Mr. Denning promptly delivered cheques in that amount on the assigned dates and did not wait until the signing of a written agreement, demonstrates that he acknowledged and complied with the verbal agreement. Furthermore, as the amount of the child support payments was not varied by the written agreement, or by an order of a competent tribunal, until after the period in issue, it can only be that the amounts were paid pursuant to the obligation which arose from the verbal agreement.
Respondent's Position
[9] The Respondent argues that the child support payments received by the Appellant in the 1999 and 2000 taxation years should be included in the computation of her income because the payments were made pursuant to the written agreement of September 7, 1996. Since these payments were receivable under a written agreement made before May 1997, with no "commencement day", as defined by subsection 56.1(4) of the Act, the Appellant was required to include the amounts in her income. The Respondent notes that no exact date could be pinpointed as to when the obligation to make the child support payments began pursuant to any purported verbal agreement. The discussions that occurred prior to the written agreement were merely casual negotiations, and there is no certainty as to what obligations, if any, resulted from those discussions.
[10] The Respondent further indicates that in this case, there is a clear written agreement, and a purported verbal agreement whose terms and details are uncertain, and concludes that the child support payments were made pursuant to the written agreement and the Appellant is, therefore, required to include the payments in her income.
Analysis
[11] The Appellant requests the Court to conclude that the child support payments are not "support amounts" as defined in subsection 56.1(4) of the Act because they were receivable under a verbal agreement rather than under an order or written agreement. In support of her position, the Appellant relies on Poirier v. Canada[2] in which the Federal Court of Appeal affirmed the decision of Justice Archambault and quotes extensively from that decision, including the following:
... First, it must be decided whether the April 28, 1997, contract is really an "agreement" within the meaning of the relevant provisions of the Act. To fully understand the scope of the concept, its raison d'être must be examined, it's (sic) purpose in the Act. The relevance of the concept can be found in the definition of support amount, above. For such a support payment to be deductible under paragraph 60(b) of the Act, and for it to be included as income for the beneficiary under paragraph 56(1)(b), it must have been paid either under the terms of an order issued by a court of competent jurisdiction or under the terms of a written agreement. It seems that a simple verbal agreement would not be enough to allow for support payments to be deducted. There must be a written agreement or an order by a court of competent jurisdiction. The obvious goal of the Act is to ensure that taxpayers are required to pay or have the right to receive such support payments because of an obligation coming from either a court order or an agreement that creates the obligation, and that the obligation is part of a written document. Even if the definition of "commencement day" merely makes reference to an "agreement," this is a written agreement. A verbal agreement would have no relevance.
[12] The Appellant contends that while a simple verbal agreement is not enough to provide for the inclusion/deduction of the child support payments, a simple verbal agreement is enough to create an obligation to pay the support payments. As such, the written agreement of September 7, 1996 did not create the legal obligation to pay or receive the support payments; it merely confirmed the obligation created by the purported verbal agreement.
[13] I cannot agree with the Appellant's conclusion. Even agreeing that there was a verbal agreement regarding the child support payments, the Appellant nevertheless has the right to receive the payments under the written agreement, making the payments "support amounts" as defined. This case is distinguishable from Poirier where the contract in issue did not create the legal obligation to pay the support amounts since it explicitly stated that it would be dependent on a court order. The written agreement in this case contains terms that create, with certainty, a legal obligation to pay the support amounts and makes them receivable on its own. It is not just confirmation of a verbal agreement that lacked certainty and that may or may not have created a separate legal obligation to pay the support amounts. Furthermore, it should be noted that the Appellant did not seriously challenge the validity of the written agreement at the hearing of these appeals.
[14] As for the Appellant's suggestion that Mr. Denning acknowledged and complied with a verbal agreement because he delivered cheques for the child support payments, and did not wait until the signing of a written agreement, I accept Mr. Denning's testimony that he provided only one cheque to the Appellant on September 1, 1996, prior to the written agreement. In fact, the written agreement states that payments shall begin on September 1, 1996, and so the payments can be construed as being made pursuant to that agreement, rather than a purported verbal agreement. In any event, I am of the opinion that this type of verbal agreement is unenforceable in Ontario pursuant to section 55 of the Family Law Act,[3] which states:
55(1) A domestic contract and an agreement to amend or rescind a domestic contract are unenforceable unless made in writing, signed by the parties and witnessed.
[15] While the Notice of Appeal included that an Order of the Ontario Court (General Division) dated September 22, 1999 constituted a variation of the child support, which would bring the payments under the new regime as an order or agreement made after May 1, 1997, this was not argued at trial, most likely because the amount of the child support was not changed by that Order, which would have been necessary to constitute a variation.
[16] The position of counsel for the Appellant is straightforward. He does not dispute the existence of a written agreement dated September 7, 1996 which provided, inter alia, for monthly child support payments of $1,100. He stated that this payment obligation was created by an oral agreement, as evidenced by the $1,100 payment made on September 1, 1996. The September 7, 1996 written agreement was simply a recording of the oral agreement, which created the obligation sometime prior to September 7, 1996. In support of this position that the written document was simply confirmation of an obligation created earlier, the Appellant relies on Poirier.
[17] Mr. Denning testified that "the fact that I gave Kathy one cheque dated September 1, 1996 is because she needed the money. She did not get a bunch of cheques on that date, she got one". After the September 7, 1996 agreement, she received a series of cheques. Obviously, without the written agreement, there would have been no deductibility and no inclusion. Any oral arrangements are too vague to create a legal obligation to pay $1,100 monthly. Poirier does not assist the Appellant.
[18] Accordingly, the amounts of $11,550 and $9,759 paid by Brian to Kathleen in the 1999 and 2000 taxation years, respectively, are includable in computing her income in those years, pursuant to paragraph 56(1)(b) of the Act, and the amount of $9,759 is deductible by Brian in computing his income for the 2000 taxation year, pursuant to paragraph 60(b) of the Act.
[19] The appeals from the reassessments made under the Act for the 1999 and 2000 taxation years are dismissed.
Signed at Ottawa, Canada, this 5th day of June 2006.
"C.H. McArthur"
McArthur J.
COURT FILE NO.: 2003-3205(IT)I
STYLE OF CAUSE: KATHLEEN LEFEBVRE AND HER MAJESTY THE QUEEN AND BRIAN VICTOR DENNING
PLACE OF HEARING: London, Ontario
DATE OF HEARING: October 24 and 27, 2005
REASONS FOR JUDGMENT BY: The Honourable Justice C.H. McArthur
DATE OF JUDGMENT: June 5, 2006
APPEARANCES:
|
Counsel for the Appellant: |
Keith M. Trussler |
|
Counsel for the Respondent: |
Boyd Aitken |
|
For the Third Party: |
The Third Party himself |
COUNSEL OF RECORD:
Firm: Giffen & Partners
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada