Date: 20000211
Docket: 98-2328-IT-I
BETWEEN:
MICHAEL MCINTOSH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre, J.T.C.C.
[1] These are appeals, filed under the informal procedure, from assessments made by the Minister of National Revenue ("Minister") under the Income Tax Act ("Act") for the appellant's 1994 and 1995 taxation years.
[2] In computing his income for the 1994 and 1995 taxation years, the appellant deducted amounts of $7,165 and $20,761 respectively as alimony or maintenance payments. In assessing the appellant, the Minister disallowed the deduction of those amounts on the following basis:
(a) the Appellant and his former spouse, namely Lori Ann McIntosh (the "Former Spouse"), separated during the 1994 taxation year;
(b) at all relevant time[s], the Appellant and the Former Spouse had three children, namely, Kevin born September 29, 1986, Nicholas born July 26, 1988 and Brandon born May 30, 1992;
(c) pursuant to an interim separation agreement (the "Agreement") dated November 17, 1994, the Appellant was required to pay a total of $1,350.00 per month commencing September 1, 1994 to the Former Spouse as child support;
(d) the Agreement was not duly signed by the Appellant and his former spouse and therefore did not constitute a written agreement within the meaning of paragraph 60(b) of the Act;
(e) during the 1994 and 1995 taxation years, the Appellant was not required, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, to pay to his Former Spouse any amount for alimony or maintenance payments;
(f) with respect to the 1994 and 1995 taxation years, the payments made by the Appellant to his Former Spouse during the said taxation years in the amounts of $7,165.00 and $20,761.00 respectively were not paid pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement; and
(g) alimony or maintenance payments are not allowable as a deduction to the Appellant in computing his income for the 1994 and 1995 taxation years.
[3] The issue is whether the appellant was entitled, in computing his income for the 1994 and 1995 taxation years, to deduct an amount for alimony or maintenance payments pursuant to paragraph 60(b) of the Act. Paragraph 60(b) reads as follows:
SECTION 60: Other deductions.
There may be deducted in computing a taxpayer's income for a taxation year such of the following amounts as are applicable:
460(b)3
(b) Alimony payments – an amount paid by the taxpayer in the year as alimony or other allowance payable on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient 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 to whom the taxpayer was required to make the payment at the time the payment was made and throughout the remainder of the year and the amount was paid under a decree, order or judgment of a competent tribunal or under a written agreement.
[4] The appellant was the only one to testify at the hearing. According to his testimony, his wife left the matrimonial home on September 2, 1994. A work order to that effect issued by a moving company and signed by Mrs. McIntosh was filed in evidence (Exhibit A-2). The appellant said that prior to his wife's departure, her counsel drafted a letter stating that she had agreed to leave the house and that the appellant could start making support payments. Accordingly, she received from the appellant a first payment in the amount of $1,500 on September 1, 1994, which she acknowledged having received in a document signed by her on the same date (Exhibit A-1).
[5] The letter from Mrs. McIntosh's counsel referred to by the appellant in his testimony is dated August 16, 1994 and is addressed to the appellant's counsel (Exhibit A-6). In that letter, the wife's counsel states that he is responding to the appellant's offer made by letter dated July 12, 1994. This letter was not filed in evidence.
[6] In his letter (Exhibit A-6), Mrs. McIntosh's counsel discusses the question of custody of the children and rights of access. He also clearly disagrees with the child and spousal support payments offered by the appellant and makes other proposals in that regard. The relevant parts of Exhibit A-6 are as follows:
. . .
(2) With respect to the issue of child support, our client never agreed to $400.00 per month for an aggregated monthly amount of $1,200.00.
(3) In reviewing your client's financial statement as well as our client's financial statement, it appears that our client cannot survive on $1,500.00 per month for herself and the children. We are proposing $1,350.00 per month, being $450.00 per child commencing September 1st, 1994. These amounts would be deductible by your client and includable in our client's income tax return.
. . .
(6) On the issue of spousal support, we suggest $500.00 per month for a period of seven years. . . .
(7) With respect to the matrimonial home, your client will become the sole owner and be responsible for the mortgage and he will indemnify and hold harmless our client. Our client will move from the matrimonial home on or before September 1st, 1994. Your client will pay all necessary legal fees required to effect said transfer. Your client will assume all debts and indemnify my client. My client has registered a Legal Aid Lien on the property. This agreement is conditional upon receiving a release from Legal Aid on her debt for legal fees.
. . .
Therefore, the disagreement between your proposal and our proposal is on the issue of custody, access, the quantum of child support and the quantum and duration of spousal support. We require that you provide us with your client's response no later than August 19, 1994.
My client intends to leave the matrimonial home by September 1st, 1994 with the children even if there is no agreement. . . .
If we are required to litigate this matter, we are considering this letter to be an offer for settlement served pursuant to the Rules of Civil Procedure.
[7] On August 29, 1994, Mrs. McIntosh's counsel sent another letter to the appellant's counsel (Exhibit A-7). It reads as follows:
Please find enclosed a draft Separation Agreement that we have been prepared with our client's instructions to bring this matter to a conclusion.
Would you please review this matter with your client. As your client is aware, our client is moving September 1, 1994. Our proposal is contingent upon us receiving your release of our client's legal aid lien against the matrimonial home which your client will be assuming. If your client consents to the terms enclosed herein, we will then approach the Ontario Legal Aid Plan with a recommendation that our client will not seek costs against your client. However, this offer is not open for acceptance until we have received the legal aid waiver. However, we require your client's response before we approach the Ontario Legal Aid Plan.
[8] The draft Separation Agreement which was sent with this letter was filed as Exhibit A-8. It proposes child support payments in the amount of $1,350 per month. The draft indicates that "it is the intention of the husband and wife that the payments under 5(a) [child support payments] are to be deductible by the husband pursuant to Paragraph 56(1)(b) of the Act and included in the income of the wife pursuant to Paragraph 60(1)(b)". The draft Separation Agreement also proposes spousal support for Mrs. McIntosh in the amount of $500 per month, commencing September 1, 1994 until August 1, 1999.
[9] This draft Separation Agreement contains many handwritten comments, I assume by the appellant, disagreeing with the spousal support provisions, among other things.
[10] On September 7, 1994, the appellant wrote a letter to Revenue Canada (Exhibit A-4) requesting a tax reduction at source as a result of marital separation. In that letter, the appellant states that "the separation agreement provides that Mrs. McIntosh will be responsible for the tax on the support payments and will be deductible by Mr. McIntosh". On September 13, 1994, Revenue Canada answered the appellant in writing authorizing his employer to reduce the appellant's tax deduction at source for 1994 and 1995 (Exhibit A-5).
[11] In his testimony, the appellant said that he claimed this waiver of tax right away because he was under the impression that his wife was bound by the offer made on her behalf by her lawyer, as per Exhibit A-6. He explained that they did not sign the Separation Agreement because they did not agree on all of its terms. Furthermore, the appellant was advised by his lawyer not to issue a cheque to Mrs. McIntosh until there was agreement by her counsel that the payment would be tax deductible.
[12] The appellant filed in evidence another letter (Exhibit A-10) sent by Mrs. McIntosh's counsel to his counsel on October 5, 1994. According to its preamble, that letter was in response to two letters from the appellant's counsel that were sent in September 1994. Those two letters were not filed in evidence and it is therefore impossible to determine what proposals were put forward therein.
[13] Exhibit A-10 states, among other things, the following:
Further to your letters of September 7 and September 23, 1994, I have reviewed this matter with my client.
Firstly, we can advise that your client has already agreed to pay our client $796.00 every two weeks. Consequently, the amount of support that you wish to reduce on the issue of spousal support is not acceptable. We are also standing fast with the amount to be paid until 1999.
. . .
With respect to making the agreement retroactive to include the $1,500.00 payment to Mrs. McIntosh on August 31, 1994, my client agrees.
With respect to the provisions in the second paragraph on page 3 of your letter dealing with the Thibodeau decision, we agree.
With respect to section 8, we do not agree that it should be deleted. This agreement should be an agreement that will last the period contemplated.
. . .
What is more a concern is with respect to the fact that your client cannot remove our client from any liability on the matrimonial home. My client may be prepared to agree that your client have exclusive possession of the property for the term of the mortgage. There would have to be an agreement where he would have to indemnify her and hold her harmless on the mortgage. In addition, we would require a condition that if he defaults in the mortgage, that he will therefore allow our client the first option to retain exclusive possession of the home and your client would consent to leave the home within thirty days of his default. However, we will advise as to our client's position after reviewing your client's response to this correspondence.
[14] The appellant also filed in evidence another draft Separation Agreement dated November 17, 1994 which was not signed (Exhibit A-9). This agreement repeats that the appellant is to pay to his wife the sum of $1,350 per month for child support and that it is the intention of both parties that the payments should be included in the wife's income and deductible by the husband pursuant to the Act. It also states that the appellant is to pay to his wife the sum of $500 per month for her support until August 1, 1999. On this draft there are also some handwritten comments, which again I assume are by the appellant. For example, the amount of $500 for spousal support is crossed out by hand and replaced by the figure of $375.
[15] The appellant testified that this document was drafted because there was still an issue as to custody and access with respect to the children. He said that the issue of the deductibility of support payments remained a constant concern. According to the appellant, all the agreements prepared by Mrs. McIntosh's counsel had a clause stating that the payments were to be deductible by the appellant.
[16] Another draft Separation Agreement dated July 2, 1995 and not signed was filed in evidence (Exhibit A-11). There was no accompanying letter from Mrs. McIntosh's counsel filed with it. In that agreement, the child support payments remain at $1,350 per month. The inclusion-deduction clause pursuant to the Act is still there. The difference is the addition of a clause with respect to child support. It reads as follows:
(c) The husband made periodic payments of support to the wife in respect of the children and the wife, in the last calendar year totalling $6,900.00. These payments will be considered as having been made pursuant to this Agreement. They will be deducted by the husband and included by the wife in the calculation of their respective income taxes pursuant to ss. 56.1(3) and 60.1(3) of the Income Tax Act. The wife shall remain solely responsible for any amounts by which her income taxes increased in 1994 or any subsequent calendar year through the application of this section, plus any additional income tax payable by her in relation to that payment. The same rules will apply to the spousal support paid in 1994 by the husband to the wife.
As for spousal support, the amount had been changed to $375 per month until August 1, 1999.
[17] Finally, the appellant and Mrs. McIntosh duly signed a written Separation Agreement which is dated January 6, 1997. The child support clause remains the same and it is acknowledged that the appellant had made periodic payments totalling $17,787 to his wife in respect of the children and the wife in the previous calendar year (1996). It is also stated that these payments "will be considered as having been made pursuant to this Agreement", and that "they will be deducted by the husband and included by the wife in the calculation of their respective income taxes pursuant to ss. 56.1(3) and 60.1(3) of the Income Tax Act". As for spousal support, the payments were reduced to $150 per month, commencing January 1, 1997 until August 1, 1999.
[18] The appellant said that he had spoken to his wife in 1998 and that she advised him at that time that she had not been declaring the support payments as income for tax purposes for three years. She told him that her lawyer had told her that she did not have to pay income tax on the child and spousal support payments.
[19] The appellant relies on this Court's decision in Simpson v. The Queen, [1996] T.C.J. No. 391, in submitting that the correspondence between counsel indicates that there was a written agreement on the question of the deductibility of the child and spousal support payments. He points out that the Separation Agreement was not signed until January 6, 1997 because he and his wife did not agree on other terms of the agreement. In his view, this fact alone should not preclude his deducting the support payments that he made to his wife in 1994 and 1995 from his income for those years.
Analysis
[20] I cannot accept the appellant's argument. In Hodson v. The Queen, [1987] F.C.J. No. 130, Strayer J., then of the Federal Court, Trial Division, stated the following at page 2:
The intention of Parliament as expressed in paragraph 60(b) is quite clear: either there must be a court order requiring such payments or else there must be a "written agreement" requiring them. If Parliament had intended to permit such deductions to be made on the basis of oral agreements or implied agreements or in respect of purely voluntary payments it would have said so. Having used the words "written agreement" it has clearly excluded other less formal arrangements.
The Federal Court of Appeal, [1987] F.C.J. No. 1053, confirmed this decision. Heald J. speaking for the Court on the interpretation to be given to paragraph 60(b), said at page 2:
. . . Parliament has spoken in clear and unmistakeable terms. Had Parliament wished to extend the benefit conferred by paragraph 60(b) on separated spouses who, as in this case, do not have either a Court order or a written agreement, it would have said so. The rationale for not including separated spouses involved in payments made and received pursuant to a verbal understanding is readily apparent. Such a loose and indefinite structure might well open the door to colourable and fraudulent arrangements and schemes for tax avoidance. I hasten to add that there is no suggestion in the case at bar of any such fraudulent or colourable arrangement. The Minister agrees that, in the case at bar, the appellant has made the alimony payments to his spouse in good faith. Nevertheless, such a possible scenario in other cases commends itself to me as the rationale for the carefully worded restrictions set out in the paragraph. If the words used by Parliament create hardships, as suggested by the appellant, it is Parliament, and not the Court, that has the power to redress those hardships.
[21] In the Simpson case, referred to by the appellant, the issue was whether a document signed by Mr. and Mrs. Simpson on a certain date was a binding agreement or simply a letter of instructions to Mrs. Simpson's lawyer to prepare a binding agreement between the spouses. Having concluded that it was a binding agreement, Judge Rip of this Court also had to answer the question as to whether it constituted a written separation agreement for the purposes of paragraphs 56(1)(b) and 60 (b) of the Act. He said at p. 10:
[53] . . . The test for whether an informal agreement in which the parties agree to draw up a formal contract is itself a contract is found in Bawitko v. Kernels Popcorn (1991), 79 D.L.R. (4th) 97 (Ont. C.A.). At page 104, Robins J.A. sets out three criteria:
(1) The parties must have intended to be bound. . . .
(2) The informal contract must not be uncertain or vague; and,
(3) The essential terms of the contract must be settled.
[22] In the Simpson case, Judge Rip came to the conclusion that the document signed by both spouses was a written separation agreement. According to Judge Rip, it was not a simple letter to a solicitor to have drawn up a separation agreement. He so concluded because he was of the view that by signing the draft letter and by acting as if they were bound by the terms of the draft letter, the two spouses agreed to the terms of the agreement to be prepared by the lawyer. The agreement would merely confirm in a formal or legalistic way what the spouses had already agreed to. It is important to say here that the two spouses had testified and that the whole correspondence between counsel had been filed in evidence before Judge Rip.
[23] In Bawitko Investments Ltd. v. Kernels Popcorn Ltd., 79 D.L.R. (4th) 97, referred to by Judge Rip, the Ontario Court of Appeal said at pages 103-105:
As a matter of normal business practice, parties planning to make a formal written document the expression of their agreement, necessarily discuss and negotiate the proposed terms of the agreement before they enter into it. They frequently agree upon all of the terms to be incorporated into the intended written document before it is prepared. Their agreement may be expressed orally or by way of memorandum, by exchange of correspondence, or other informal writings. The parties may "contract to make a contract", that is to say, they may bind themselves to execute at a future date a formal written agreement containing specific terms and conditions. When they agree on all of the essential provisions to be incorporated in a formal document with the intention that their agreement shall thereupon become binding, they will have fulfilled all the requisites for the formation of a contract. The fact that a formal written document to the same effect is to be thereafter prepared and signed does not alter the binding validity of the original contract.
However, when the original contract is incomplete because essential provisions intended to govern the contractual relationship have not been settled or agreed upon; or the contract is too general or uncertain to be valid in itself and is dependent on the making of a formal contract; or the understanding or intention of the parties, even if there is no uncertainty as to the terms of their agreement, is that their legal obligations are to be deferred until a formal contract has been approved and executed, the original or preliminary agreement cannot constitute an enforceable contract. In other words, in such circumstances the "contract to make a contract" is not a contract at all. The execution of the contemplated formal document is not intended only as a solemn record or memorial of an already complete and binding contract but is essential to the formation of the contract itself: . . .
. . . If no agreement in respect to essential terms has been reached or the terms have not been agreed to with reasonable certainty, it can only be concluded that such terms were to be agreed upon at a later date and until that time there would be no completed agreement.
[24] In that case, the Ontario Court of Appeal had to decide if an oral agreement to acquire franchise rights for a retail store which was based on a standard form of franchise agreement, constituted a final agreement. It was established that the parties had agreed on certain terms at the time of the oral agreement but others, essential to the proposed contractual arrangement, remained open for negotiation.
[25] The Ontario Court of Appeal stated at pages 106-108:
. . . Viewing the matter in terms of mutuality of obligations, if the situation were reversed and the appellant sought specific performance of the oral contract, accepting Passander's evidence, I would not think it possible to conclude that he had at that time entered into a final and binding contract which the appellant was entitled to enforce.
. . . The parties were simply not ad idem on all of the terms necessary to form a completed and legally enforceable franchise contract.
. . .
. . . The agreement reached on April 18th [the oral agreement] did not encompass essential aspects of the intended formal agreement. Accordingly, it did not satisfy the standards of certainty which the law requires as a prerequisite to incurring binding and enforceable contractual relations.
[26] In the present case, I have not heard the testimony of Mrs. McIntosh or of her counsel, and the proposals sent by the appellant's counsel to Mrs. McIntosh's counsel were not filed in evidence. It is therefore difficult for me to say, based solely on the documentation from Mrs. McIntosh's counsel (without the benefit of having heard Mrs. McIntosh and her counsel testify to comment on that documentation), and without having seen what proposals counsel for the appellant made during the years at issue, that the spouses had reached an agreement before January 6, 1997 (when the last draft agreement was finally signed). It is even more difficult to say that the spouses were acting as if they were bound by the previous draft agreements.
[27] It is true that according to Exhibit A-1, Mrs. McIntosh has acknowledged having received a first payment of $1,500 on September 1, 1994. However, in his first letter (Exhibit A-6), dated August 16, 1994, Mrs. McIntosh's counsel made it clear that Mrs. McIntosh could not survive on $1,500 per month. In that letter and in the draft agreement prepared in August 1994, they were claiming from the appellant $1,350 per month in child support and $500 per month in spousal support, for a total of $1,850 per month.
[28] Moreover, it is true that in the draft agreement dated November 17, 1994, Mrs. McIntosh's counsel included a clause stating that the intention of the spouses was that the payments made by the appellant would be deductible by him and would be included in Mrs. McIntosh's income pursuant to the Act. However, when that clause was put in, Mrs. McIntosh was still claiming total child and spousal support of $1,850. Obviously, the appellant did not agree with that as he did not pay that amount of money to Mrs. McIntosh and he crossed out the $500 figure for spousal support and replaced it with $375 per month.
[29] The unsigned draft agreement dated July 2, 1995 states that the husband made periodic payments to his wife totalling $6,900 in 1994 and that these payments were to be considered as having been made pursuant to that agreement. The appellant started paying in September 1994. The total amount of $6,900 was paid over four months in 1994. This would indicate that the appellant paid $1,725 per month, that is $1,350 per month for the children and $375 per month for his wife. That is the amount that the appellant had intended to pay from the outset for his children and his wife. But that draft agreement is not signed and I cannot infer, especially from the previous correspondence filed, that Mrs. McIntosh did in fact agree to the terms thereof at that time.
[30] It was only on January 6, 1997, that both spouses finally agreed on all the terms of the Separation Agreement and signed it. From the evidence, I cannot say that the appellant and his wife were in agreement on the essential terms with respect to the periodic payments in 1994 and 1995. While, from the various draft agreements, there would seem to have been a consensus on the child support payments, the same cannot be said of the spousal support. As the inclusion in Mrs. McIntosh's income of the alimony and maintenance payments had an impact on her net income, I do not think that it can be said that she agreed with such an inclusion in her income before she had signed the final agreement. This is particularly so as it seems that she was claiming higher spousal support payments than the appellant was ready to pay. In my view, the unsigned draft agreements filed in evidence along with the correspondence of only Mrs. McIntosh's counsel did not, as was stated by the Ontario Court of Appeal in Bawitko Investments, satisfy the standards of certainty which the law requires as a prerequisite to incurring binding and enforceable contractual relations between the spouses.
[31] I therefore conclude that the unsigned draft agreements did not equate with a Separation Agreement within the meaning of the Act. The payments made by the appellant to Mrs. McIntosh in 1994 and 1995 were not paid pursuant to a written agreement. Consequently, those payments are not deductible under paragraph 60(b) of the Act.
[32] The appeals are dismissed.
Signed at Ottawa, Canada, this 11th day of February 2000.
"Lucie Lamarre"
J.T.C.C.