Court File No. 2006-934(IT) I
TAX COURT OF CANADA
IN RE: the Income Tax Act
BETWEEN:
ELIZABETH TUCK
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
HEARD BEFORE MR. JUSTICE ROSSITER
in the Courts Administration Service, Discovery Room
180 Queen Street West, 6th Floor,
Toronto, Ontario
on Wednesday, March 14, 2007 at 9:29 a.m.
ORAL REASONS
APPEARANCES:
Mrs. Elizabeth Tuck on her own behalf
(via telephone)
Mr. Laurent Bartleman for the Respondent
(via telephone)
Also Present:
Mr. William O'Brien Court Registrar
Ms Linda O'Brien Court Reporter
A.S.A.P. Reporting Services Inc. 8 2007
200 Elgin Street, Suite 1004 130 King Street West, Suite 1800
Ottawa, Ontario K2P 1L5 Toronto, Ontario M5X 1E3
(613) 564-2727 (416) 861-8720
(ii)
INDEX
PAGE
Decision of Mr. Justice Rossiter 1
Toronto, Ontario
‑‑‑ Upon commencing on Wednesday, March 14, 2007
at 9:29 a.m.
JUSTICE ROSSITER: Thank you very much for attending this morning. We have with us the court reporter and the registrar.
When we were here last, I took this matter under advisement, and I said I would render my decision today if matters were not resolved between the parties. I understand they weren't resolved between the parties, so I will give you my oral judgment now.
I may have reviewed some the facts when we were here last, I think I did, but I am going to review them one more time so everything is clearly on the record.
This matter comes before this court on February 5th of 2007 by way of an appeal by the appellant, Elizabeth Tuck, from a determination by the Minister of National Revenue, the Minister, that the amount paid by the appellant to her husband, David Tuck, in 2001 is spousal support in the amount of $50,400 was not deductible pursuant to section 60.1(3) of the Income Tax Act notwithstanding the fact that the recipient of the moneys, David Tuck, claimed $18,000 as spousal support income on line 156 of his T1 return for the income tax year of 2002.
The facts in this matter are straightforward and not in dispute.
On November the 11th, 2000, the appellant and David Tuck became separated. In 2002, the appellant brought all the financial obligations of her and David Tuck up to date and gave David Tuck a cheque in the amount of $10,000.
From January 1st, 2001 to December 31st, 2004, the appellant paid David Tuck the sum of $4,200, approximately, each month as spousal support. The amount might be adjusted monthly on an occasional basis when the appellant paid Mr. Tuck's bills directly.
In 2001, the appellant made payments to David Tuck totalling $48,260 specifically in the following amounts. Each payment was made by cheque under the signature of the appellant and was drawn on her CIBC account. Six of the cheques were dated the first day of the month; December 1st, 2001, $4,200; November the 1st, 2001, $4,200; October the 1st, 2001, $4,200; August the 1st, 2001, $4,140; July 1st, 2001, $4,120; April 1st, 2001, $,4,000.
The other six cheques were dated randomly but all towards the end of the month; December 26, 2001, $4,200; August 31st, 2001, $4,100; May 31st, 2001, $4,200; August 30th, 2001, $4,200; February 25th, 2001, $4,200; and finally, January 21st, 2001, $2,500.
All the cheques were made payable to David R. Tuck or David Tuck. All cheques, except three, in the memo portion of the cheque referred to payments, i.e. April payment. Two of the remaining three cheques made no reference to payment in the memo portion of the cheque. The cheque dated December 26, 2001 in the memo portion stated "January payment for spousal support".
David Tuck filed a 2001 T1, Exhibit A‑1, tab 4, with a cover letter claiming income of $18,000 in line 156 as "support payments received". This appeared initially to be Mr. Tuck's total income for 2001, but his T1 also showed a statement of business activities with total taxes payable of $374.38.
On January 31st, 2002 the appellant completed a financial statement, Exhibit A‑1, tab 5, in the course of dealing with the matrimonial issues. The document was sworn by the appellant and shows actual monthly support payments of $4,200. This document speaks as of the date of July 31st, 2002.
On July 31st, 2002, the appellant and David Tuck entered into an interim agreement, Exhibit A‑1, tab 1, schedule A. Clause number one of this agreement states as follows:
"Beth shall pay to David for his interim maintenance and support the sum of $4,200 per month commencing on June 1st, 2002 and the first day of each subsequent month thereafter."
Clause number two of interim agreement states as follows:
"The parties acknowledge and agree that all support payments made by Beth pursuant to the terms of this agreement shall be deductible by Beth as periodic payments includable by David in calculation of their respective incomes for tax purposes and considered as having been paid and received pursuant to the provisions of subsection 56.1(2), 56.1(3), 60.1(2) and 60.1(3) of the Income Tax Act."
On July 31st, 2002 a letter was forwarded from the appellant's counsel to the counsel for her husband, David Tuck, Exhibit A‑1, tab 6, referring to an agreement between the parties and to an offer of settlement. Enclosed were executed copies of the interim agreement, Exhibit A‑1, tab 1, schedule A, dated July 31st, 2002, and the financial statement of the appellant dated July 31st, 2002, Exhibit A‑1, tab 5, plus some cheques on a periodic basis for Mr. Tuck. There was no reference in this agreement to payment being made by the appellant to Mr. Tuck in 2001 but there was reference to section 60.1(3) of the Act.
By October 1st, 2002, a formal offer of settlement was sent by the appellant's counsel to counsel for her husband, David Tuck, Exhibit A‑1, tab 8, and this offer had been reviewed and approved by the appellant prior to it being forwarded to Mr. Tuck's counsel, Exhibit A‑1, tab 7. This offer makes no reference to payments in 2001 by the appellant to David Tuck.
Paragraph 2 of the offer states as follows:
"The husband acknowledges that he has received from the wife the sum of $10,000 in December of 2000 and $4,200 per month on the first day of each month commencing the first day of January 2001, and continuing up to and including the date of the acceptance of this offer. The husband and the wife agree the support payments to the husband shall be included by the husband and deducted by the wife in the calculation of their respective income tax returns pursuant to the Income Tax Act, sections 56.1(3) and section 60.1(3), and both shall cooperate in refiling the tax returns for the years 2000 and 2001."
It should be noted that this clause specifically referred to section 60.1(3) of the Income Tax Act in terms of 2000, 2001. There was in this particular offer of settlement what I would term to be a sunset clause, that is the maintenance stops on December 31st, 2004. Reference should be made to paragraph 1 of the agreement.
Also, this agreement provides for a lump sum payment to David Tuck by the appellant of $50,000, plus Mr. Tuck was to receive the funds held in trust for the sale of the matrimonial home at 214 Cranbrooke Avenue, Toronto, Ontario.
On December 18th, 2002, a letter was forwarded by Mr. Tuck's counsel to counsel for the appellant, Exhibit A‑1, tab 9, and this letter stated as follows:
"Re Tuck v. Tuck.
"Thank you for your letter of October 1st, 2002. My client is prepared to accept the terms set out in the offer attached to the letter save and except for the time limit on the spousal support payments. There are numerous factors that make time‑limited support unacceptable, including the length of the marriage, the length of time my client was out of the workforce, the wide disparity in the parties' incomes, my client's age and his limited retirement savings. I do not believe a court would impose a time limit on his spousal support and my client will not accept one. Mr. Tuck is prepared to agree to a review of spousal support at the end of 2004. I understand that he has discussed this with your client and that is agreeable to her. Please advise if this is correct.
"I look forward to hearing from you."
On December 19th, 2002, a letter was forwarded by the appellant's counsel to Mr. Tuck's counsel in which he stated as follows, Exhibit A‑1, tab 10:
"I am unable to meet with my client until the second week of January. However, I will review your letter and will get back to you shortly thereafter."
On October 17, 2003 an interim separation agreement, which I call interim separation agreement number 2, was completed by the parties, Exhibit A‑1, tab 2. In this interim agreement there is no mention nor reference to 2001. There is no reference to section 60.1(3) but there is reference to section 56.1(2) and 60.1(2) of the Act. There were provisions for payment of the $4,200 per month for the months January to May 2002 by the appellant to Tuck.
On February 10th, 2005, there was a separation agreement executed between the appellant and Mr. Tuck, Exhibit A‑1, tab 1. Specific reference should be made to paragraph 4.1 which states as follows:
"The parties acknowledge that the wife has paid to the husband as periodic spousal support the sum of $4,200 per month commencing January 1st, 2002 to and including December 1st, 2004."
Paragraph 4.2 states as follows:
"The parties agree that the payment of spousal support are taxable to the husband and tax deductible for the wife."
Paragraph 4.6 states as follows:
" -- all of these payments from January 1st, 2001 to and including December 31st, 2004 have been paid and received pursuant to two interim agreements, that within the agreement, in subsections 56.1(2), 56.1(3), 60.1(2) and 60.1(3) of the Income Tax Act."
The appellant testified at the hearing that in the interim agreement of July 31st, 2002 previous payments had not been acknowledged because Mr. Tuck was not very agreeable. She testified that Mr. Tuck would agree verbally and then say later he did not want to sign an agreement to acknowledge something that he actually agreed to initially verbally.
The appellant also acknowledged there was no specific acknowledgement by David Tuck of payments for 2001 in the interim agreement of October 17, 2003, but he did so in the February 10th, 2005 separation agreement.
The issue in this particular matter is whether the appellant is entitled to claim spousal support payments of $50,400 as a deduction in computing her income for the 2001 taxation year.
The position of the appellant on the issue is as follows:
(1) the appellant is not asking for deductions on moneys paid to third parties, only for the moneys paid to David Tuck for the year 2001.
(2) based upon the letter of December the 18th, 2002 from Mr. Tuck's counsel to the appellant's counsel, Exhibit A‑1, tab 9, either on its own or coupled with the T1 of David Tuck, Exhibit A‑1, tab 4, and the financial statement of the appellant of July 31st, 2002, Exhibit A‑1, tab 5, and the cheques signed by the appellant drawn on her account, and presumably endorsed by Mr. Tuck and deposited in his account as shown in Exhibit A‑1, tabs 2 and 3, and the clause in the written agreement referring to section 60.1(3) of the Act, meets the requirements of the Act in terms of deductibility.
And finally:
(3) the 2002 interim agreement can be read as such that the payment of the 2001 are deemed to be included in the 2002 agreement even though there was no specific reference to them in the 2002 agreement, Exhibit A‑1, tab 1, schedule A, based upon the Pienaar case, P‑I‑E‑N‑A‑A‑R, [2003] 1 C.T.C. 2296.
The position of the respondent may be stated as follows:
(1) the appellant is out of time under section 60.1(3) of the Act, if the appellant is relying upon the separation agreement of February 10th, 2005 as the written agreement to bring the appellant within the terms of the Act.
(2) the appellant cannot rely upon the July 31st, 2002 interim agreement or the October 31st, 2003 interim agreement because there is no reference in either agreement to the 2001 payments or the deductibility for income tax purposes.
(3) the inclusion of the $18,000 of spousal support income by David Tuck in 2001 does not bind the Crown on the deduction claimed by the appellant.
(4) the cheques paid by the appellant to David Tuck and endorsed by David Tuck, cashed and deposited by David Tuck in his own account do not constitute a written agreement under 60.1(3) of the Act.
(5) the offer of settlement presented by the appellant's counsel to Mr. Tuck's counsel was never accepted by Mr. Tuck and the appellant until the separation agreement of February 10th, 2005.
Finally:
(6) there was no consent in writing between the Appellant and Tuck on the issue of the duration of the support from the appellant to the respondent until the separation agreement of February 10th, 2005.
In terms of the law, I have reviewed in detail all the authorities submitted and referred to by both parties, including the relevant provisions of the Act.
On the question of whether the February 10th, 2005 separation agreement can be interpreted as a written agreement within the meaning section 60.1(3) of the Act so as to allow a deduction for the support payment paid by the appellant to Mr. Tuck in 2001, the answer to this question is no. Section 60.1(3) of the Act makes certain specific statements and I won't review it in particular.
The Federal Court of Appeal in Anstead v. R, 2005 D.T.C. 5616 stated at paragraph 11 as follows:
"As to the third argument, the appellant admits it was not raised before the Tax Court Judge. In any event, we do not agree that section 60.1(3) can be construed as argued by the appellant. That subsection clearly means that with reference to the 2002 order, deductions can only be claimed in the year of the preceding taxation year from the date of the 2002 order."
Applying Anstead in the case at bar, section 60.1(3) and relying upon the February 10th, 2005 separation agreement means deductions can only be claimed in the year of the preceding taxation year from the date of the 2005 agreement, that is 2005 or 2004.
This situation falls outside the time line deductibility for the 2001 payments by the appellant to Mr. Tuck, given the date of the written separation agreement of February 10th, 2005.
As for the question of whether or not there is a written agreement covering the deductions of 2001, this certainly causes me some difficulty.
The October 17th, 2003 interim agreement, Exhibit A‑1, tab 1, schedule B, is not applicable due to the ruling in Anstead referred to earlier, that is in order to be deductible under the October 17, 2003 interim agreement, the deduction can only relate to the year 2002 and 2003.
The July 31st, 2002 interim agreement, Exhibit A‑1, tab 1, schedule A, makes no reference to payments in 2001 by the appellant to David Tuck.
The matter, however, does not end there. Section 60.1(3) was referred to, and it should be noted that for the purpose of section 60, there must be a written agreement or order of a competent tribunal. In the case at bar, there is no order of a competent tribunal so the only remaining issue is whether or not there is a written agreement.
In Foley v. R, [2004] C.T.C. 2016, a decision of Associate Chief Justice Bowman, as he then was, Mr. Justice Bowman dealt in detail with what was meant by the phrase "written agreement". The issue was whether or not section 60.1(3)(b) of the Act could be interpreted to mean an agreement signed by both parties or could it be an exchange of correspondence between the parties?
Mr. Justice Bowman referred to Hodson v. MNR (1987) 88 D.T.C 6001 which held that there has to be a written agreement or a Court order in support of the deductions under paragraph 60(b).
He also referred to Kapel, K‑A‑P‑E‑L, v. MNR [1979] C.T.C. 2187, again dealing with section 60(b). Unfortunately, neither of these cases are applicable because they are dealing with section 60(b) of the Act which references a written separation agreement.
Mr. Justice Bowman also made reference to Kapel in Knapp, K‑N‑A‑P‑P, v. MNR [1985] 2 C.T.C. 2046, and made these following comments:
"In that case there was nothing that could be called a written agreement signed by either party. The appellant argued that the cheques signed by the husband and the receipts signed by the wife were a written agreement. Such an argument was obviously doomed. The word "agreement" denotes at least a binding obligation."
Mr. Justice Bowman after referring to a variety of other cases pointed out that counsel concluded a written agreement must be signed by both parties and must be in one document. Mr. Justice Bowman then went on to point out a number of situations which came to mind and concluded that he did not think that a contract in writing or a written agreement requires the physical affixing of the signature of the parties. Again, he was referring to section 60(b) of the Act. He goes on to quote the definition of writing in subsection 35(1) of the Interpretation Act as follows.
Excuse me, for a moment.
MR. BARTLEMAN: Sorry, Your Honour, I was wondering if I could ask you just to maybe slow down a little bit.
JUSTICE ROSSITER: Okay, we will slow down.
MR. BARTLEMAN: Thank you.
JUSTICE ROSSITER: I figured I was going too fast. You have to tell me that, Mr. Bartleman. I get wrapped here and we're on our way. Okay.
MR. BARTLEMAN: Thank you, Your Honour.
JUSTICE ROSSITER: It is fairly simple. This is not complicated. He was describing the word "writing" in the Interpretation Act.
"Writing, or any term of like import, includes words printed, typewritten, painted, engraved, lithographed, photographed or represented or reproduced by any mode of representing or reproducing words in visible forms."
Mr. Justice Bowman suggested that suppose one spouse prepares an agreement and sends it to the other saying, "I offer to settle our matrimonial differences on the basis of this agreement," then the other spouse writes back: "I accept," that in his case view is a binding agreement and it is in writing. He found that an exchange of correspondence was a written agreement within the meaning of section 60(b).
Here, in the case at bar, there was an acknowledgment of the payment of the sum of $4,200 per month. There is an acceptance of these funds. The funds were paid by the appellant to Mr. Tuck on a monthly basis by cheques, signed by the appellant, drawn upon her personal bank account. The cheques were made out to Mr. Tuck. He obviously endorsed these cheques and deposited them in his account.
He acknowledges the payments for 2002 and onward by interim agreement of July 31st, 2002 and October 17th, 2003 and separation agreement of February 10th, 2005. He acknowledged the 2001 payments by separation agreement of February 10th, 2005 and even included $18,000 from the moneys he received from the appellant in his 2001 tax return.
Here we have no specific exchange of correspondence between counsel for the parties. What we have is an offer of settlement from the appellant's counsel to Mr. Tuck's counsel, a response from Mr. Tuck's counsel saying basically, yes, the amount of maintenance is satisfactory, but we do not want to terminate on December 31st, 2004 for a variety of reasons. However, we understand that your client is agreeable with renegotiating the quantum at the end of December 2004 and please let me know if this is the case.
Unfortunately, the appellant's counsel did not confirm this agreement, notwithstanding that the appellant testified that she was in agreement with it for December 31st, 2002. It was eventually agreed to by a separation agreement of February the 10th, 2005, indeed there was another interim agreement executed on October 17, 2003 after the presentation of the offer of settlement.
I have also reviewed Kerry Donald Grant v. Her Majesty the Queen, 2000‑2702 (IT)I, which is a case similar to the case at bar. This was a decision of Mr. Justice Mogan of the Tax Court of Canada. In it, the facts are very similar but there are a couple of quotes which I think are very relevant to the case at hand. Paragraph No. 9 of the decision, fourth line, he states in part as follows:
"Therefore, if the appellant is to succeed, a written agreement must be inferred from other documents. I would not infer a written agreement from the monthly cheques (each in the amount of $1,000) which the appellant issued to Kathleen in 1997 and which she cashed. Her acceptance and cashing of these cheques does not by itself mean that the appellant and Kathleen had agreed that $1,000 per month was an appropriate maintenance amount. She may have cashed the cheques as a convenient method of receiving maintenance for herself and the two younger children without agreeing that the amount was adequate and consistently claiming that amount should be higher. She did not testify however and there is no evidence that she disputed the quantum of the monthly amount."
"In fact the evidence runs in the other direction. Exhibit A‑1, a letter dated April 1996 from Kathleen's lawyer to the appellant's lawyer, refers to the appellant's undertaking to maintain the support obligations at the level of $1,000 per month, and Exhibit A‑2, a letter of May 21st, 1997 from Kathleen's lawyer to the appellant's lawyer, ends with the following paragraph:
"'My client is also, of course, looking for an increase in the child support especially given that the agreement to receive $1,000 per month was made at a time when only two of the three children were residing at home, the third having come to reside there shortly thereafter."
And finally in paragraph 13, fifth line down:
"In the circumstances of this case I hold that the payments of $1,000 per month made by the appellant through 1997 were paid 'under a written agreement' comprising the cheques (each in the amount of $1,000) delivered to Kathleen each month from September 1995 through to the end of 1997, plus the letter (Exhibit A‑2) from Kathleen's lawyer dated May 21st, 1996 confirming the 'agreement' and the appeal was allowed."
Now, I also want to refer to David O'Connor v. Her Majesty the Queen, 2002‑4586 (IT)I, a decision of Mr. Justice E.A. Bowie of the Tax Court, and the comments that he made in the Grant case as follows. Mr. Justice Bowie in the O'Connor case stated in paragraph 9 as follows:
"The identical question arose in Grant v. Canada. Cheques for $1,000 were given by Mr. Grant to his estranged wife for support of their children each month following their separation and before any written agreement or court order was made. Mogan J. rejected the proposition that by cashing these cheques Ms. Grant entered into a written agreement fixing $1,000 per month as the child support amount to be paid by him. I agree with his view that cashing the cheques does not imply agreement. A mother supporting children in these circumstances would be likely to need the funds and could be expected to negotiate the cheques even if she felt they were inadequate. In Grant, there was a subsequent letter from Ms. Grant's lawyer to Mr. Grant's lawyer that referred to 'the agreement to receive $1,000 per month', from which Mogan J. inferred a written agreement when it was read with the cheques. Here we have no such letter or anything like it and no written agreement can be inferred."
The issue in this case in my mind is whether or not the cheques themselves coupled with the other documentation and facts of this case constitute a written agreement for periodic payments on a monthly basis. Each individual cheque is in writing. Each individual cheque is signed by the appellant and duly endorsed by David Tuck. Each cheque is in a particular amount paid on a monthly basis. Each cheque was accepted by Mr. Tuck and used by him for his own personal reasons over a term of years.
It appears clear that certainly the amount of the payment was intended by the parties, that is the appellant and Mr. Tuck, to be maintenance. The only outstanding item in late December of 2002 was the duration of the payments.
In the case at bar there was, as I said, the regular monthly cheques individually drawn by the appellant on her account payable to Mr. Tuck, endorsed by him and used by him for his personal reasons, both of which obviously intended these amounts to be regular periodic monthly maintenance payments.
In this particular case, there was a letter from Mr. Tuck's lawyer to the appellant's lawyer after the appellant's lawyers presented an offer basically confirming the monthly periodic amounts and basically confirmed Mr. Tuck was in agreement with the periodic amounts, the only issue being whether or not there was a sunset clause.
In Mr. Tuck's counsel's letter to the appellant's counsel, the amount of $4,200 was specifically referred to, and the only question was the duration, and then there was a suggestion that the appellant had agreed to the request of Mr. Tuck that the duration of the payments be left open.
Is it fair for the respondent to receive tax from Mr. Tuck in the nature of tax on the $18,000 Mr. Tuck declared as income in his 2001 T1 tax return when it was declared as spousal support and yet not allow the appellant at least an equivalent deduction for the 2001 period?
Initially, I could understand why the respondent would disallow the amount of the deduction, but after investigation and after production of the variety of documents referred to in evidence herein, and after an explanation provided by the appellant, in my view it is grossly unfair for the respondent not to allow the appellant an $18,000 deduction.
The respondent should have done one of two things. The respondent should have either allowed the deduction of $18,000 for the appellant or, number two, allowed the appellant a complete deduction for the full maintenance paid by her in 2001 and reassessed Mr. Tuck for 2001. To do otherwise would mean the respondent has not treated the taxpayer fairly.
Here, the respondent did neither, but instead collected tax from Mr. Tuck on the amount he declared as maintenance and completely disallowed Mrs. Tuck, the appellant, any deduction for any payment by her to Mr. Tuck at all for 2001.
Surely, the Income Tax Act is not such that it was intended that the respondent is to benefit from the mistakes of the taxpayer, which is exactly what happened here.
Surely, Parliament did not intend the Income Tax Act to be interpreted in such a way as to benefit the respondent unfairly at the expense of the taxpayer.
Unfortunately, and I do say unfortunately, the interpretation that has been given to the relevant provisions of the Income Tax Act in the past by the courts is such that it allows the Minister to take what I call unfair advantage of the taxpayers when the settled intention of the taxpayer is otherwise.
Regretfully in the facts of this case, I cannot find a written agreement to be in existence so as to allow the deductions sought by the appellant. I find the Minister on some occasions to be narrow of view and unbending at times and this is one of those times.
Unfortunately, I have no choice in this particular case based upon the facts and the evidence presented and the interpretation given and the case law that I have considered that the appeal has to be dismissed without costs.
That is my decision, Mr. Bartleman and Ms. Tuck.
MS. TUCK: Thank you.
JUSTICE ROSSITER: Thank you for your presentations, very much appreciated. I will ask the registrar to adjourn the court.
THE REGISTRAR: This court is now adjourned.
‑‑‑ Whereupon the proceedings adjourned
at 10:00 a.m.
STYLE OF CAUSE: ELIZABETH TUCK AND HER MAJESTY THE QUEEN
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: March 14, 2007
REASONS FOR JUDGMENT: The Honourable
Justice E. P. Rossiter
DATE OF JUDGMENT: March 14, 2007
APPEARANCES:
|
For the Appellant: |
The Appellant herself |
|
|
|
|
Counsel for the Respondent: |
Laurent Bartleman |
COUNSEL OF RECORD:
Firm:
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada