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[OFFICIAL ENGLISH TRANSLATION]
2001-762(IT)I
BETWEEN:
LINDA BEAULIEU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 25, 2001, at Matane, Quebec, by
the Honourable Judge Alain Tardif
Appearances
For the Appellant: The Appellant herself
Counsel for the Respondent: Dany Leduc
JUDGMENT
The appeal from the determination of the child tax benefit made under the Income Tax Act for the base years of 1997 and 1998 is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 26th day of October 2001.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 4th day of February 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20011026
Dockets: 2001-762(IT)I
BETWEEN:
LINDA BEAULIEU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] This is an appeal concerning the 1997 and 1998 taxation years. The appeal pertains to whether support should be taxed and the consequences resulting therefrom both in terms of the Goods and Services Tax (G.S.T.) and the child tax benefit for those years.
[2] The facts assumed by the respondent in establishing and maintaining the notices of reassessment, the child tax benefit notices and the notices of redetermination are not contested. The facts admitted are as follows:
[TRANSLATION]
(a) the appellant and Serge Perreault were married on October 4, 1980;
(b) the appellant and Serge Perreault had two children from this marriage:
(i) Rémy, born on November 18, 1981, and
(ii) Stéphanie, born on April 4, 1986;
(c) the appellant and Serge Perreault have lived separate and apart since December 2, 1993;
(d) the appellant and Serge Perreault were divorced on May 29, 1995, and the judgment became effective on the thirty-first day after that date;
(e) as a result of the divorce judgment from the Superior Court, rendered by the Honourable Judge Gaétan Pelletier, J.S.C., and dated May 29, 1995, he confirmed and gave effect to the agreement signed by the appellant and Serge Perreault on May 3, 1995:
(i) the appellant is awarded custody of the two children,
(ii) Serge Perreault is ordered to pay the appellant a weekly amount of $197.89, as child support,
(iii) the financial contributions shall be neither taxable nor deductible in the hands of the parties;
[3] The appellant's evidence consisted of her testimony, the testimony of her former spouse and the filing of Exhibits A-1 and I-1.
[4] Exhibit A-1 summarizes the main part of the appellant's testimony very well, and its contents are reproduced below.
[TRANSLATION]
. . .
Your Honour,
Before we proceed with this hearing, with your permission, I would like to recall certain facts that could assist you, and me as well, in your judgment in this case, which is mine.
Although it is said that everyone is expected to know the law, you know full well, Your Honour, that each person cannot be aware of all the details pertaining to all the legal aspects of the laws that govern us. That is why, in preparing the agreement for my divorce, Serge Perreault availed himself of the services of the notary, Nadine Rioux.
Since at that time I was, and still am, not very well off, being unemployed, Mr. Perreault suggested that she settle the legal details. I had confidence in his choice of Ms. Rioux, especially since he offered to pay the fees.
My sole objective, your Honour, when we worked out the various provisions included in this agreement, was the present and future welfare of our children: Rémy, who was 13 at the time, and Stéphanie, who was then 8 years old.
It must be understood, Your Honour, that Mr. Perreault works for CN and this company is known for always paying salaries higher than the average. He therefore has an excellent pension fund and an excellent Quebec Pension Plan. In addition, Your Honour, he always kept secret an unspecified amount in an RRSP fund, and it would be good if I could know what it is.
Accordingly, Your Honour, I waived my share of these amounts at the time, without understanding my legal rights and the implication, and Ms. Rioux never explained that I had lost my right to recover these amounts. Moreover, Your Honour, he offered a generous amount in child support, which he quickly had reduced by means of another judgment. It was also agreed, Your Honour, that he would take the children for about one month a year, combining the summer period and the Christmas season.
For nearly 5 years, Mr. Perreault complied with the non-deduction clause in accordance with the agreement. Naturally, my understanding was that we were in compliance with the Income Tax Act and, furthermore, since 1995, I had had my tax returns prepared by H & R Block to ensure that I was in compliance with the law.
Furthermore, Your Honour, I would like to bring to your attention the fact that this agreement was signed in good faith and was confirmed by the Honourable Gaétan Pelletier, J.S.C.
If there were points in this agreement that were contrary to the Income Tax Act, how could they have been overlooked by the Honourable Judge who rendered the divorce judgment?
Also, in his judgment, the Honourable Superior Court Judge, Gaétan Pelletier, ordered, approved and gave effect to the agreement signed by the two parties.
Accordingly:
(1) This agreement would seem to contain clauses that are contrary to the Income Tax Act.
(2) In the last four years, Mr. Perreault did not comply with his responsibility to take the children every other weekend and during vacations, as mentioned above.
(3) Mr. Perreault had his salary changed in order to reduce his pension and later had the salary raised.
(4) The fact that he did not take the children caused me substantial monetary loss and significant emotional and physical harm, because I had full-time custody of the children and no possibility of any rest whatsoever.
(5) My renunciation of my share in the patrimony (four years' cohabitation and fifteen years' cohabitation after we were married), his CN pension, Q.P.P. and R.R.S.P. fund was conditional on the full and complete application of the agreement clauses.
In conclusion, Your Honour, I believe that I was deceived, manipulated and, moreover, kept in ignorance of my rights by Mr. Perreault and Ms. Rioux.
. . .
[5] Exhibit I-1 is the divorce judgment issued by the Honourable Judge Gaétan Pelletier on May 29, 1995. The judgment confirmed the agreement entered into by the parties, which, under the heading "financial contributions", specifically provided as follows:
[TRANSLATION]
1. - The male defendant shall pay support to the female defendant for the children, Rémy and Stéphanie PERREAULT, of ONE HUNDRED NINETY-SEVEN DOLLARS and EIGHTY-NINE CENTS ($197.89) every week on every Friday and, in addition, additional costs (equipment, sports, bicycle and so forth) shall be apportioned as follows: 70% payable by the father and 30% payable by the mother.
2. - Support shall be indexed annually on the anniversary of the signing of this agreement, in the manner provided for in article 590 of the Civil Code of Quebec, beginning as of next year on the date of the signing of this agreement.
3. - The support shall be adjusted when one of the children attains the full age of twenty-five (25) or that child has completed his or her education and no longer resides with the mother and can support him or herself.
4. - In the event that one of the children dies before the age of twenty-five (25), the support amount shall be adjusted. However, in the event that one of the children becomes disabled and cannot support him or herself before the age of twenty-five (25), the support paid on behalf of the child shall continue to be paid to the child for as long as the child's disability lasts.
5. - These financial contributions shall be neither taxable nor deductible in the hands of the parties.
[6] In the divorce, the appellant's former spouse respected the spirit and letter of the agreement that was confirmed by not deducting from his annual income the amount paid to the appellant as support.
[7] As a result of material changes in his ability to pay, he brought proceedings to have the support reduced. At the time of those proceedings, his new lawyers informed him that the amount he had been paying to his former spouse as support since the divorce judgment was fully deductible from his income, notwithstanding the clarity of the agreement dated May 3, 1995, and the undertaking provided therein.
[8] The appellant's former husband accordingly claimed and received from the respondent the refunds to which he was entitled, all of which had the obvious result that the appellant was then assessed for additional unreported income and, by the same token, penalized in respect of the G.S.T. credit and the child tax benefit to which she was entitled.
[9] Although I have neither the authority nor the jurisdiction to rule on the quality and the effects of the civil agreement between the parties, in my opinion, the agreement was binding on the parties. The appellant explained that it was an agreement the purpose and effect of which was to resolve all of the financial and material consequences of their divorce. She also emphasized the fact that this was a fundamental consideration without which she would not have agreed to.
[10] For the appellant, this is a very important and indeed even fundamental issue; however, this Court has no jurisdiction to interfere in this essentially civil matter. In fact, I must decide this appeal mainly on the basis of the provisions of the Income Tax Act (the "Act"), applicable to the years at issue. There is no doubt that the amounts received by the appellant were definitely taxable amounts, within the meaning of the Act, the whole pursuant to paragraphs 56(1)(b) and 56(1)(c) of the Act.
[11] According to the act and the case law concerning the relevant sections, even if an agreement is very clear and unambiguous, the payments received by the appellant had to be added to her income, with the resulting effects on the G.S.T. credit and the child tax benefit.
[12] The duty to pay tax on support is established by the Income Tax Act; it cannot be circumvented, even if a Superior Court judge has decided otherwise in confirming a duly signed agreement by the parties.
[13] Thus, as in the case at bar, although the agreement provided that the amount payable as support would not be deductible in the hands of the debtor nor taxable in the hands of the creditor, the case law has stated that such judgment is of no effect with regard to the provisions of the Act since the criteria for deductibility and taxation are established by tax legislation and not by the courts or by an agreement. Accordingly, an agreement may be fully effective as it applies to the parties to the agreement, but of no effect in terms of the tax provisions, which must be complied with at all times.
[14] In this respect, I believe paragraph [13] of a judgment rendered by the Honourable Judge Mogan in Bates v. Canada, [1998] T.C.J. No. 660 (Q.L.) should be reproduced:
Can the order of the Senior Master bind the M.N.R.? In my opinion, it cannot. In Sigglekow v. The Queen, 85 D.T.C. 5471, a Decree Nisi required a husband to pay to his wife the sum of $20.00 every week "tax-free". In computing her income, the wife did not include such $20.00 payments. When deciding the income tax appeal against the taxpayer wife, Jerome A.C.J. stated at page 5473:
It is consistent throughout both the Trial Judgment and the Judgment of the Court of Appeal in Sills that the liability for tax does not spring from a separation agreement or a Court Order. Section 56 provides that moneys received must be included as income.
. . .
In the present case, the matter is even clearer because Mr. Sigglekow made the payments in precise compliance with a Court Order, except of course for any sums referable to the words "tax free" which he understandably chose to ignore. On the reasoning of the Federal Court of Appeal in the Sills case, there could be no question that such sums actually received by the Defendant fall precisely within the terms of section 56 and should, therefore, have been included in her income for the 1975, 1976 and 1977 taxation years. That was the basis of the Minister's reassessment which, in my view, was entirely correct.
In my view, Jerome A.C.J. has correctly summarized the law when he states that the liability for tax does not spring from a separation agreement or a Court Order. The liability for tax is determined by the provisions of the Income Tax Act and, more particularly, by section 56.
The Honourable Judge Mogan goes on to say in paragraph 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. . . .
[15] Since May 1, 1997, all agreements relating to support matters are governed by the new tax rules and the new support guidelines, which in turn are determined by the Act to amend the Divorce Act,the Family Orders and Agreements Enforcement Assistance Act, the Garnishment, Attachment and Pension Diversion Act and the Canada Shipping Act.
[16] For all of these reasons, the appeal must be dismissed.
Signed at Ottawa, Canada, this 26th day of October 2001.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 4th day of February 2003.
Sophie Debbané, Revisor