Tax Court of Canada Judgments

Date: 20020718

Docket: 2001-2445-IT-I

BETWEEN:

SAMUEL ALLEN MOSSMAN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Hershfield, J.T.C.C.

[1]            This appeal is in respect of the Appellant's 1999 taxation year for which he claimed $24,000 as a child support deduction. The support requirement arises from agreements entered into with Mrs. Mossman in 1994 and 1998. The deduction was denied on the basis that the support amount was paid to Mrs. Mossman under the later agreement that had a "commencement day" under subsection 56.1(4)[1] of the Income Tax Act (the "Act"). In general terms, child support payments made under an agreement entered into after May 1997 are not deductible. Agreements that are subject to this restriction have, under the Act, a "commencement day" as defined in subsection 56.1(4).

[2]            If the Minister is correct in his assumption that the payment was pursuant to an agreement having a commencement day in 1998, the deduction claimed will have been properly disallowed pursuant to paragraph 60(b) of the Act which, by formula, denies a "child support amount that became payable ...under an agreement ... on or after its commencement day,...".

[3]                In determining whether the subject payments were payable under an agreement on or after its "commencement day", it will be necessary to decide whether the second agreement is a variation of the first agreement. If it is only a variation and the support payments were made pursuant to it, there will not be a commencement day until a varied support amount is payable. If there are no varied support amounts payable in or before 1999, there will be no commencement day in or before 1999. On the other hand, if the second agreement causes the first agreement to be rescinded, the second agreement will be the only one under which the payments could have been made and that agreement clearly has a commencement day in 1998.

[4]            A secondary or alternative issue was also raised by the Respondent; namely, whether the payment by the Appellant was payable as "an allowance" to Mrs. Mossman. To be deductible, the payment to Mrs. Mossman must be paid as an "allowance".

FACTS

[5]            The following are the facts of the case as relied on by the Respondent and as I have found them. Mr. Mossman, the Appellant, was the only witness at the hearing.

A.               The Appellant and Helen Mossman married in 1970 and separated in 1988.

B.               Jeremy Mossman born in 1979 was a child of the marriage and was, after the separation, in the custody of his mother.

C.           In about June 1997, Jeremy completed grade 13 and at about this time and all relevant times thereafter Mrs. Mossman and Jeremy lived together in Miami, Florida where Jeremy was a full-time university student.

D.           In December 1994, the Appellant and Mrs. Mossman entered into a written agreement (the 1994 Agreement) that obligated the Appellant to pay support for Jeremy. The summary of the arrangement set out in the Notice of Appeal and admitted to in the Reply, is as follows:

(1) until Jeremy completed Grade 13, $2,000 per month; and thereafter

(2) until Jeremy ceased to reside with Mrs. Mossman or ceased to attend a full-time educational institution or reached 21 years of age or married or died, or until the appellant or Mrs. Mossman died, the sum of:

      (a) $1,700 per month, and

      (b) such amount per month as might be determined under an agreed formula for computing the appellant's share of Jeremy's post-secondary education expenses, provided that the appellant's share thereof would always be at least $300 per month.

I have relied on this summary as being sufficient for the purposes of addressing the issues raised by the Respondent in respect of this appeal. However, the summary is arguably deficient in some respects. For example, it does not suggest that there is a difference as to whom payments are required to be made. While this remains unresolved in the express language of the agreement, it is at least partly addressed in the agreement itself and this has relevance, as I will elaborate on in my analysis.

5.              At all material times the Appellant paid $2,000 per month to Mrs. Mossman for the support of Jeremy. The Appellant deposited this amount monthly to Mrs. Mossman's bank account.

6.              On January 19, 1998 the Appellant and Mrs. Mossman entered into a written agreement (the 1998 Agreement) which provided that the Appellant:

"shall continue to pay $2,000 per month as child support for as long as Jeremy remains a "child of the marriage". The said payment is premised upon the said $2,000 payment being tax deductible to Mr. Mossman, although not includable in Mrs Mossman's income due to her residency in Florida." (emphasis added)

[6]            I will comment later in these Reasons on my reasons for putting emphasis on the word "continue", but first it is necessary to comment on the words put in quotations. The 1998 Agreement is a hand-written agreement entered into between the Appellant and Mrs. Mossman to settle arbitration proceedings between them. The phrase "child of the marriage" is in quotation marks and Mr. Mossman testified that it was intended to be highlighted as a phrase of special meaning under the Divorce Act [2] and includes a child having reached the age of majority but who is unable to withdraw from the charge of a parent for certain reasons. Respondent's counsel acknowledged that "child of the marriage" included an adult child in full-time attendance at a post-secondary school or institution and she did not take issue with construing the 1998 Agreement as including a reference to Jeremy continuing his post-secondary education, as a condition of the Appellant continuing to pay support. [3]

[7]            In computing taxable income for 1999 the Appellant deducted $24,000 of child support paid to Mrs. Mossman in 1999. A similar amount had been deducted and allowed in each of the previous years since the 1994 Agreement.

THE ALLOWANCE ISSUE

[8]            Before looking at the principle issue noted above, as to whether the support payments were made under the 1994 Agreement and whether there is a "commencement day" in respect of that agreement, I will dispose of the secondary or alternative issue raised by the Respondent; namely, was the payment by the Appellant payable as "an allowance" to Mrs. Mossman? The formulistic quantification of the deduction allowed in paragraph 60(b) of the Act includes, as a deductible amount, a "support amount" defined in subsection 56.1(4) to mean an amount payable or receivable as "an allowance". The amount paid will be an allowance if Mrs. Mossman had discretion as to the use of the funds received from the Appellant. I accept that Mrs. Mossman was not accountable to Mr. Mossman as to the use of the $2,000 deposited monthly in her account. That was the Appellant's uncontradicted testimony. Further, neither the 1994 nor 1998 Agreements, by their express terms, contemplate Mrs. Mossman having to account for how she used the funds payable for Jeremy's support while he was in school. Jeremy was attending university. That condition was satisfied so the amount ($2,000) was payable and receivable as an allowance.[4]

[9]            This finding requires comment on another aspect of the $2,000 monthly payment obligation imposed under the 1994 Agreement. Although the 2(a) amount referred to in paragraph [5] D. of these Reasons above was (under the express terms of that agreement) payable to Mrs. Mossman, the part of the 2(b) amount that exceeded $300 was expressly payable to Jeremy. It is open to question whether the $300 forming part of the 2(b) amount was payable to Jeremy or his mother. The agreement was not express on that point. If payable to Jeremy, the support amount under the 1994 Agreement might only be $1,700. However, the Respondent did not advance this position and the Appellant advanced a construction of the agreement, matching his conduct, that the $300 was payable to Mrs. Mossman. I accept the Appellant's evidence and assertions on this point. Accepting this, while accepting that further formulated expense payments were payable only to Jeremy, means the support amount payable to Mrs. Mossman was fixed at $2,000 a month under the 1994 Agreement.

THE DEFINITION OF COMMENCEMENT DAY

[10]          The definition of "commencement day" is found in subsection 56.1(4):

"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

(vi)           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.

THE POSITION OF THE PARTIES

[11]          The Respondent's position is that the 1994 Agreement provided a formula for child support that was varied by the 1998 Agreement and that the payments in 1999 were made under the 1998 Agreement. The Respondent argues that when a formula for child support is varied by agreement, subparagraph (b)(ii) of the definition of "commencement day" dictates that the date the variation is agreed to is the "commencement day" and that, in any event, under paragraph (a) of that definition, the commencement day is the date the agreement effecting the variation was made. The Appellant argues that the 1998 Agreement continues the obligation under the 1994 Agreement to pay a fixed minimum support amount of $2,000 per month while Jeremy is in full-time attendance in school and that under the 1998 Agreement there has been no variation of that amount payable. The Appellant argues that where there is an agreement to vary child support, the agreement date is not the relevant date. The commencement day in respect of an agreement that varies child support is the day the first varied payment is required to be made. Certainly subparagraph (b)(ii) of the definition of "commencement day" favours the Appellant position. However the heart of the issue, after determining at a particular point in time whether a required payment has been varied, is the determination of "under which agreement was the payment required to be made?" This is a question of contract law.

ANALYSIS

[12]          The 1994 Agreement provides, in effect, its own formula for determining child support amounts payable by the Appellant to Mrs. Mossman. Provided certain conditions are met, the Appellant has agreed, under that agreement, to pay Mrs. Mossman's child support of $2,000 per month. This follows my findings as set out in paragraph [9] of these Reasons.

[13]          I acknowledge that this finding of the Appellant's obligation under the 1994 Agreement is somewhat simplistic and deserves further comment. Firstly, both the 2(a) and 2(b) amounts referred to in paragraph [5] D. of these Reasons are only payable if the following conditions are met:

                1.              Jeremy resides with Mrs. Mossman;

                2.              Jeremy is in full-time attendance at an educational institution;

                3.              Jeremy is under 21 years of age; and

                4.              Jeremy is single.[5]

Secondly, my finding that there is a fixed payment requirement of $2,000 a month under the 1994 Agreement is only accurate, if I accept that the Appellant was required to pay $300 each and every month regardless of actual expenses, scholarships, bursaries or even whether it was summer break. Otherwise, the monthly support amount under that agreement might be less than $2,000. I am satisfied on the evidence that the $2,000 paid to Mrs. Mossman monthly was required under the 1994 Agreement. The 1998 Agreement confirmed this obligation. Agreements unlike some statutes must be construed with some latitude to give effect to intentions. Accordingly, as a matter of construing the obligations of the Appellant under the 1994 Agreement, I am satisfied that the amount the Appellant had agreed to pay as child support for Jeremy was $2,000 per month provided the four conditions set out above were met.

[14]          It is important to note that the conditions for payment under the 1998 Agreement are different than the conditions for payment under the 1994 Agreement. The reference to "child of the marriage" in the 1998 Agreement changes the circumstances under which child support will be payable. The Divorce Act[6] sets out the definition of "child of the marriage" as follows:

"child of the marriage" means a child of two spouses or former spouses who, at the material time,

(a)              is under the age of majority and who has not withdrawn from their charge, or

(b)              is the age of majority or over and under their charge but unable, by reason of illness, disability or other cause, to withdraw from their charge or to obtain the necessaries of life;

[15]          As noted above, the Respondent accepted that Jeremy, although having turned 20 years of age in 1999, was a "child of the marriage" by virtue of living with his mother and being in full-time attendance at a post-secondary education institution. Still, this only recognizes two of the conditions set out in the 1994 Agreement. I need only give one example of the difference between the conditions under each of the two agreements to highlight the importance of the difference. When Jeremy reaches the age of 21 years, if he is still in school and still lives with his mother, the amount the Appellant would be required to pay Mrs. Mossman for Jeremy's support under the 1994 Agreement would be nil whereas under the 1998 Agreement, as it was put to me, the Appellant would still be required to pay Mrs. Mossman $2,000 per month for Jeremy's support.

[16]          In 1999, all the conditions under the 1994 Agreement had been met. The amount payable under that agreement is $2,000 per month. The Reply makes no assumption that the payable to Mrs. Mossman in 1999 under the 1994 Agreement would have been higher or lower under its formula for sharing post-secondary school expenses than the payable under the 1998 Agreement. There is only the argument that it might have been higher or lower and that the potential for a different payment obligation after the 1998 Agreement is a variation of the support amount required to be paid. Further, as stated above, even if I were to find that the 1994 Agreement required a greater support obligation, the additional support would not qualify as child support, as it was payable directly to Jeremy. As such there would be no decrease in the child support payable under the 1998 Agreement. I also note that additional support payable in respect of Jeremy's maintenance was never treated as deductible even when paid in 1998 and 1999. Only the $2,000 monthly payments were deducted before and after entering into the 1998 Agreement. This supports a finding that the amount payable under the 1998 Agreement as child support was intended as a continuation of the child support obligation created under the 1994 Agreement. In any event I am satisfied that there was no variance in the child support payable in or before 1999 under the 1998 Agreement relative to the amount payable under the 1994 Agreement.

[17]          Further, as emphasized above, the express language of the 1998 Agreement provides that the monthly payments of $2,000 are to "continue".[7] This is consistent at least with my finding that there was no variation in the amount of child support payable under the 1998 Agreement on its own terms compared to the amount payable under the 1994 Agreement on its terms.

[18]          The importance of finding that there has been no variance in the amount payable under the 1998 Agreement is found in the definition of "commencement day". Subparagraph (b)(ii) of the definition of "commencement day" creates a commencement day on the day on which the first varied amount is required to be made. It is not enough that under a modifying agreement a support payment might be varied. The commencement day is the day the first variation in amount payable actually occurs. It is not sufficient that the formula in the 1994 Agreement has been abandoned and it is not sufficient that the conditions or pre-conditions for the payment obligation have changed. What is relevant in the determination of a commencement day where a support amount is varied is the day that an amount payable is actually varied. The potential for variation is not relevant.

[19]          Of critical importance is whether we are considering a varied agreement in this case or whether there is at law only the later agreement. At law an agreement that varies an earlier agreement does not rescind the agreement being varied. Whether a subsequent agreement is a rescission or a variation depends on the extent to which it departs from the original contract. It is a rescission if it alters the original contract in some essential way but if it does not go to the vary root of the original contract it is only a variation.[8] From an income tax perspective tampering with support payments can dramatically alter the effect of an agreement in respect of an essential aspect of it. One has to be careful however in using the tax consequences of a change or alteration of the terms of a contract in determining whether there has been a rescission or variation according to principles of contract law. On the other hand, there is little question that the transitional rules ensuring that child support payments be non-deductible to the payer and non-taxable to the recipient should not be circumvented by too readily regarding amending agreements as not rescinding the earlier agreement. In this regard the intentions of the parties should not be relevant since parties cannot by mutual intent agree to maintain or restore the pre May 1997 tax regime for child support. On the other hand in deciding the issue of rescission versus variation, intentions cannot be totally ignored.

[20]          Aside from intentions, I place importance in this case on the Respondent not seeking to characterize the changes embodied in the 1998 Agreement as anything but a variation of the 1998 Agreement. The Reply states that the 1994 Agreement was varied by the 1998 Agreement. Comparisons of the agreements on points other than those referred to in these Reasons were not made. I was not asked to look at each as a whole. Rescission was not argued.

[21]          Accordingly, I conclude as a matter of contract, 1998 Agreement must be treated as an agreement varying the 1994 Agreement. The 1994 Agreement has not been rescinded and payments can be and were made pursuant to it. While clearly not determinative, the 1998 Agreement does speak of "continuing" the support obligation. This denotes that the very thing the Respondent states to have been varied was not intended to be varied let alone be taken as an essential alteration of the support obligation contained under the 1994 Agreement. The child support obligation has been clarified. Potential ambiguities in the 1994 Agreement have been clarified. The 1998 Agreement acknowledges the obligations imposed under the 1994 Agreement.[9]

[22]          While counsel for the parties did not refer to the recent case of Samycia v. Canada[10], it is necessary that I refer to it. That case involved a consent order (made after April 1997) that replaced a prior order (made in 1994). Both orders required child support payments of $400 per child. Fewer children were covered under the latter order and a variety of conditions effecting the duration of payments were added. The conditions effecting the duration of the payments in the latter order were wholly absent in the earlier one. The duration of the payments under the earlier order were to continue until further order. Associate Chief Judge Bowman found that the last order altered the total support payments and gave rise to a commencement day (the date of the last order) pursuant to subparagraph (b)(iii) of the definition of "commencement day". He also found that the last order entirely superseded the earlier order and was the order under which the support payments in question in that case were made. Accordingly, he found that paragraph (a) of the definition applied.

[23]          Clearly, Samycia was not a case dealing with a varied agreement or order. There was an implicit finding in that case that the orders were fundamentally different, as well, as an express finding that the last order superseded the earlier order. The latter finding is to say, using the jargon of my analysis, that the earlier order was rescinded. No payments can be made under a superseded or rescinded order or agreement. The only order in Samycia that was existent, under which payments could be made, was the last order that had a commencement day under the Act as defined in paragraph (a) of the definition.

[24]          As to the application of paragraph (a) of the definition of "commencement day" to the Appellant's case, the distinction between a varied agreement and superseding agreement is pivotal. Subparagraph (b)(ii) would be ineffective in making the "commencement day" the date payments commence if an agreement to vary child support was "an agreement" for the purpose of paragraph (a) of the definition of "commencement day". Every agreement made, after April 1997, that varies an earlier agreement would create a commencement day that differs from that dictated by subparagraph (a)(ii) (unless the made date of the latter agreement happens to correspond with the date that a varied payment is actually made). Where a varied agreement alters (actually or potentially) a child support amount payable, the more specific terms of subparagraph (b)(ii) must prevail over the general terms of paragraph (a) in prescribing a commencement day.

[25]          As I have said, the 1998 Agreement only varies the 1994 Agreement. The child support regime provided to Mrs. Mossman in the 1994 Agreement is in its essence continued under the 1998 Agreement regardless that certain pre-conditions for support have been varied and regardless that the quantification of "non" child support amounts (university expenses) have gone from formula to varied fixed amounts. Subparagraph (b)(ii) of the definition of commencement day must be governed by the date a varied child support amount is payable. As such, there will only be a commencement day when the first varied child support payment occurs.

[26]          Lastly, I note that in anticipation of subparagraph (b)(iii) of the definition of commencement day being raised by the Respondent, the Appellant urged that that paragraph not be applied where there was only a chance that the total support payments would vary as between the two agreements. In fact, the Respondent never argued that a commencement day was triggered by virtue of this subparagraph. While I have not had the benefit of the views of the Respondent on the question, I feel it necessary to add that I agree with the Appellant on this point. The potential of a varied agreement entered into after April 1997 to vary total child support amounts payable under an earlier agreement made before May 1997, is not an agreement "the effect of which is to change the total child support amounts payable". The 1994 Agreement might see child support end at any time that any one of the pre-conditions is not met. That might be Jeremy not residing with his mother or is quitting school. Neither of these events will result in a difference in total support payments as between the two agreements (the amount payable under each would be "nil"). Either of these events could occur before Jeremy's 21^st birthday. Therefore the effect of the second agreement on total payments is uncertain. Given that the total support amount in question here is dependant on a change in support payments governable by subparagraph (b)(ii) of the definition of commencement day, that subparagraph operates most clearly in this case in terms of dictating the commencement day of the varied agreement; i.e. the 1998 Agreement.

[27]          While I do not see a commencement day arising in or before 1999, I note that a payment made on or after Jeremy's 21st birthday is only payable under the 1998 Agreement. That payment and subsequent payments will have been varied relative to the payment requirements under the 1994 Agreement and the first variance in the amount required to be paid creates a commencement day. That is, while the 2000 year is not before me and I cannot deal with it, it strikes me that Jeremy's birthday in 2000 will trigger a commencement day under subparagraph (b)(ii) of the definition of "commencement day".

[28]          In any event, I find that the 1998 Agreement has not caused a variation in child support payments payable in or before 1999 relative to the amounts payable under the 1994 Agreement and as such no commencement day was triggered in or before 1999.

[29]          Accordingly, the appeal is allowed, with costs.

Signed at Winnipeg, Manitoba, this 18th day of July 2002

"J.E. Hershfield"

J.T.C.C.

COURT FILE NO.:                                                 2001-2445(IT)I

STYLE OF CAUSE:                                               Samuel Allen Mossman and

                                                                                                Her Majesty the Queen

PLACE OF HEARING:                                         Toronto, Ontario

DATE OF HEARING:                                           May 31, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge J.E. Hershfield

DATE OF JUDGMENT:                                       July 18, 2002

APPEARANCES:

Counsel for the Appellant: Richard Fitzsimmons

Counsel for the Respondent:              Andrea Jackett

                                                                                Audrea Hammell (Student-at-law)

COUNSEL OF RECORD:

For the Appellant:                

Name:                                Richard Fitzsimmons

Firm:                  Fitzsimmons & Company

                                                                                                Toronto, Ontario

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2001-2445(IT)I

BETWEEN:

SAMUEL ALLEN MOSSMAN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on May 31, 2002 at Toronto, Ontario, by

the Honourable Judge J.E. Hershfield

Appearances

Counsel for the Appellant:                    Richard G. Fitzsimmons

Counsel for the Respondent:                Andrea Jackett and

Audrea Hammell (Student-at law)

JUDGMENT

The appeal from the assessment made under the Income Tax Act for the 1999 taxation year is allowed, with costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.

Signed at Winnipeg, Manitoba, this 18th day of July 2002.

"J.E. Hershfield"

J.T.C.C.