Peterson v. The Queen

Peterson v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2003-10-08
Neutral citation
2003 TCC 712
File numbers
2000-2170(IT)G
Judges and Taxing Officers
Murray A. Mogan
Subjects
Income Tax Act
Decision Content
Docket: 2000-2170(IT)G
BETWEEN:
LARRY PETERSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on September 15, 16 and 17, 2003, at Sault St. Marie, Ontario
By the Honourable Justice M.A. Mogan
Appearances:
Counsel for the Appellant:
Gregory J. DuCharme
Counsel for the Respondent:
Peter M. Kremer, Q.C. and Justine Malone
____________________________________________________________________
JUDGMENT
The appeals from assessments of tax made under the Income Tax Act for the 1995, 1996 and 1997 taxation years are allowed, with costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the following basis:
(a) For 1995, the Appellant may deduct in computing income the $24,000 amount which he paid as child support in equal monthly amounts over the year;
(b) For 1996, the Appellant may deduct in computing income the $24,000 amount which he paid as child support in equal monthly amounts over the year;
(c) For 1996, the Appellant may deduct in computing income the $36,000 amount which he paid in December 1996 with respect to arrears of child support; and
(d) For 1997, pursuant to the agreement of the parties, the Appellant may deduct in computing income the following three amounts:
(i) professional fees in the amount of $4,513;
(ii) employment expenses in the amount of $19,500 with respect to a claim for wrongful dismissal; and
(iii) child support payments in the amount of $42,000.
Signed at Ottawa, Canada, this 8th day of October, 2003.
"M.A. Mogan"
Docket: 98-2469(IT)I
2000-3286(IT)I
BETWEEN:
PATRICIA TOSSELL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on September 15, 16 and 17, 2003, at Sault St. Marie, Ontario
By the Honourable Justice M.A. Mogan
Appearances:
Counsel for the Appellant:
Christopher P. FitzGerald
Counsel for the Respondent:
Peter M. Kremer, Q.C. and Justine Malone
____________________________________________________________________
JUDGMENT
The appeals from assessments of tax made under the Income Tax Act for the 1995 and 1996 taxation years are dismissed, without costs.
Signed at Ottawa, Canada, this 8th day of October, 2003.
"M.A. Mogan"
Citation: 2003TCC712
Date: 20031008
Docket: 2000-2170(IT)G
BETWEEN:
LARRY PETERSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
98-2469(IT)I
2000-3286(IT)I
AND BETWEEN:
PATRICIA TOSSELL,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Mogan J.
[1] Larry Peterson married Patricia Boyd in Ontario in 1970. There were three daughters born of the marriage: Dana (1975), Lisa (1977) and Caroline (1981). Larry and Patricia separated in 1991 and were divorced in 1995 or 1996. As a result of the separation, Larry made monthly payments of $2,000 to Patricia from late 1991 to 1996; and he made a single payment of $36,000 to Patricia in December 1996.
[2] When filing his income tax returns for 1995 and 1996, Larry deducted $24,000 as maintenance paid in each year and, for 1996, he also deducted $36,000 as maintenance paid. By Notices of Reassessment the Minister of National Revenue ("the Minister") disallowed as deductions in computing Larry's income the following amounts paid to Patricia: $24,000 paid in 1995; $24,000 paid in 1996; and $36,000 paid in December 1996. Larry has appealed to this Court from those assessments (Court file 2000-2170).
[3] When filing her income tax returns for 1995 and 1996, Patricia did not include in computing income the $24,000 received on a monthly basis in each year; and she did not include the single payment of $36,000 received in December 1996. By Notices of Reassessment the Minister included in the computation of income the following amounts which Patricia received from Larry: $24,000 received in 1995; $24,000 received in 1996; and $36,000 received in December 1996. Patricia has appealed to this Court from those assessments (Court files 98-2469 and 2000-3286).
[4] On March 13, 2002 the Minister made an application to this Court under subsection 174(3) of the Income Tax Act to join Patricia Tossell to the appeal of Larry Peterson. By an Order issued on March 26, 2002, this Court joined Patricia Tossell to the appeal of Larry Peterson with respect to assessments of tax made for the 1995 and 1996 taxation years for the purpose of the following four questions:
1. Are the aggregate payments of $24,000 received by Patricia Peterson (Tossell) from Larry Peterson in each of the 1995 and 1996 taxation years to be included in computing Patricia Peterson (Tossell)'s income on the basis that they were payments within the meaning of paragraph 56(1)(b) of the Act?
2. Are the aggregate payments of $24,000 paid by Larry Peterson to Patricia Peterson (Tossell) in each of the 1995 and 1996 taxation years deductible in computing Larry Peterson's income as payments within the meaning of paragraph 60(b) of the Act?
3. Is the payment of $36,000 received by Patricia Peterson (Tossell) from Larry Peterson in the 1996 taxation year to be included in computing Patricia Peterson (Tossell)'s income on the basis that it was a payment within the meaning of paragraph 56(1)(b) and subsection 56.1(3) of the Act?
4. Is the payment of $36,000 paid by Larry Peterson to Patricia Peterson (Tossell) in the 1996 taxation year deductible in computing Larry Peterson's income on the basis that it was a payment within the meaning of paragraphs 60(b) and 60(c) of the Act?
[5] The appeals of Larry Peterson and Patricia Tossell were set down for hearing at Sault Ste. Marie commencing on September 15, 2003, with the understanding that evidence would be presented with respect to the four questions asked in the Minister's application under subsection 174(3). At the commencement of the hearing, counsel for the Minister and Larry Peterson stated that all issues raised in his appeal with respect to the 1997 taxation year had been settled on terms which were recited in Court. Therefore, the only issues remaining to be decided were the four questions set out in the Minister's application under subsection 174(3).
The Facts
[6] The parties filed as Exhibit 1 a document entitled "Statement of Admitted Facts" signed by the three counsel for Larry Peterson, Patricia Tossell and the Minister, respectively, on September 15, 2003, the first day of the hearing. The first 18 paragraphs of Exhibit 1 contain only facts. Paragraphs 19 to 30 of Exhibit 1 contain a summary of the positions of the three parties with respect to the four questions to be answered. Exhibit 2 is a binder with 11 tabs A to K inclusive containing the documents referred to in Exhibit 1. Although the basic facts are already recited above, I will set out in full the content of Exhibit 1:
STATEMENT OF ADMITTED FACTS
1. Patricia Jean Peterson, now Tossell ("Patricia"), and Larry Douglas Peterson ("Larry") were married on August 29, 1970 and separated on January 1, 1991.
2. Patricia and Larry had three children of the marriage a) Dana Patricia Peterson born July 5, 1975; b) Lisa Maureen Peterson born November 1, 1977; c) Caroline Jane Peterson born April 30, 1981.
3. On September 5, 1991, Patricia and Larry entered into a written separation agreement (the "Separation Agreement") in which Larry was required to pay and Patricia entitled to receive child support in the amount of $24,000 for the period from September 1, 1991 to August 31, 1992. Pursuant to the Separation Agreement, the amount of child support payable by Larry to Patricia, would increase to $36,000 in the event that Patricia is employed by someone other than the Peterson & Peterson law firm. The Separation Agreement provided for an annual increase in child support based on the increase in the cost of living index. Tab A.
4. On or about March 22, 1993, Larry began making payments that were less than the amounts provided for in the Separation Agreement.
5. In May 1993, Patricia applied to the Family Support Plan Northern Region to enforce the payment required under the Separation Agreement.
6. Commencing June 1993, Larry made payments of $1,000 twice a month to Patricia's account in the Plan. The Plan paid to Patricia the amounts collected on her behalf. Tab B.
7. On March 9, 1994, Patricia commenced an action by Statement of Claim in the Ontario Court General Division against Larry to have the terms of the Separation Agreement enforced. Larry filed a Defence and Counterclaim on April 21, 1994. Tabs C and D.
8. By Petition for Divorce dated June 1, 1995, Larry commenced divorce proceedings against Patricia. Tab E.
9. The action referred to in paragraph 7 was settled by Minutes of Settlement dated and filed December 16, 1996 and resulted in an order dated December 16, 1996 and March 27, 1997 (the "Order") issued by Madam Justice Pardu. Tabs F and G.
10. Pursuant to paragraph 6 of the Order, Larry made a $36,000 payment to the Plan in December 1996 in respect of retroactive additional periodic child support for the twelve months from January 1, 1996 to and including December 1, 1996;
11. At the time of this $36,000 payment, the amount of arrears owing under the terms of the Separation Agreement was of approximately $56,000;
12. Larry paid and Patricia received monthly payments of $2,000 for a total of $24,000 in each of the 1994, 1995 and 1996 taxation years;
13. In filing her 1994 income tax return, Patricia reported as income $24,000 child support payments received from Larry;
14. In filing his 1994 income tax return, Larry deducted from income $24,000 child support payments paid to Patricia;
15. In filing her 1995 and 1996 income tax returns, Patricia did not report as income the $24,000 payments received from Larry in those years. Tabs H and I.
16. In filing his 1995 and 1996 income tax returns, Larry deducted the $24,000 he paid to Patricia as child support amount. Tabs J and K.
17. In filing her 1996 income tax return, Patricia did not report as income the $36,000 payment she had received from Larry in December 1996. Tab I.
18. In filing his 1996 income tax return, Larry deducted the $36,000 payment he made to Patricia in December 1996. Tab K.
POSITION OF THE PARTIES
Patricia
19. Patricia takes the position that the separation agreement was an interlinked contractual arrangement for transfer of partnership and business assets and liabilities, future employment of Patricia by Larry, termination of the parties' law partnership, payments in lieu of employment as well as child support dependant in level on other terms of the contract, as set out at paragraphs 2 to 10 of the agreement at Tab A.
20. Patricia alleges that Larry breached the 1991 agreement on or about March 22, 1993 and repudiated the agreement on or before 1995, and again in 1996, and therefore it was not valid in respect of the 1995, 1996 and 1997 taxation years.
21. Patricia takes the position that the aggregate payments of $24,000 she received in each of the 1995 and 1996 taxation years and the $36,000 payment she received in December 1996 were not received under a valid order or agreement and are not to be included in income pursuant to paragraph 56(1)(b) of the Act.
22. Patricia also alleges that the $36,000 payment received in December 1996 was a single payment.
23. Patricia takes the position that as the $36,000 payment was not paid on a periodic basis and therefore is not to be included in her income for 1996 pursuant to paragraph 56(1)(b) of the Act.
Ŀarry
24. Larry alleges that the aggregate payments of $24,000 made in each of the 1995 and 1996 taxation years were paid under a valid order or agreement and are deductible pursuant to paragraph 60(b) of the Act.
25. Larry also takes the position that the $36,000 payment is deductible pursuant to paragraph 60(b) of the Act.
The Minister
26. The Minister takes the position that the $24,000 payments made by Larry to Patricia in each of the 1995 and 1996 taxation years were paid under a valid order or agreement and are deductible pursuant to paragraph 60(b) of the Act.
27. The Minister takes the position that Patricia is required to include the $24,000 payments she received in each of the 1995 and 1996 taxation years on the basis that the amounts are within the meaning of paragraph 56(1)(b) of the Act.
28. The Minister also takes the position that Larry is entitled to deduct $24,000 from his income for each of the 1995 and 1996 taxation years on the basis that the payments are within the meaning of paragraph 60(b) of the Act.
29. The Minister takes the position that the $36,000 payment was not paid on a period basis and therefore is not to be included in Patricia's income for the 1996 taxation year on the basis that the amount is not within the meaning of paragraph 56(1)(b) of the Act.
30. The Minister also takes the position that Larry is not entitled to deduct the $36,000 payment from his income in the 1996 taxation year on the basis that the payment is not within the meaning of paragraph 60(b) of the Act.
[7] The most important issue in this proceeding is raised in paragraph 20 of Exhibit 1 set out above: whether Larry Peterson repudiated the separation agreement of September 5, 1991 (Exhibit 2, Tab A) before 1995. Most of the evidence was directed to that issue. For convenience, I shall refer to the male Appellant as "Larry"; the female Appellant as "Patricia"; and the agreement (Exhibit 2, Tab A) of September 5, 1991 as the "Separation Agreement". There is no other separation agreement.
[8] In these appeals, it is an important fact that both Larry and Patricia are lawyers. They were married in 1970 before they started law school. They attended law school together and were both called to the bar of Ontario in 1976. They were practising law in partnership in 1990-1991 when their marriage came apart. Their main office was in Sault Ste. Marie but there were branch offices in Bruce Mines and Blind River serviced only by Larry. He said that he would be in the Sault Ste. Marie office on Monday, in Bruce Mines on Tuesday, in Blind River on Wednesday, in Sault Ste. Marie on Thursday and in Bruce Mines on Friday. Larry's father had practised law in Bruce Mines. Patricia practised only in the Sault Ste. Marie office on somewhat reduced hours because she was the main provider of child care for their three daughters.
[9] On January 2, 1991, Patricia informed Larry that she wanted to separate from him; that she wanted the separation to be discreet and confidential in the sense that they would continue to share the same dwelling but not the same bedroom for the next few months; and that she wanted the separation to be amicable in the sense that they would both give priority to the interests of their three daughters. Larry agreed to Patricia's proposal. They continued to reside in the family home at 25 Alworth Place, Sault Ste. Marie until September 1, 1991 when Larry moved out but their marriage, as such, effectively ended on January 2, 1991 when Patricia disclosed for the first time her wish to separate.
[10] In April 1991 and again in August 1991, Patricia attended two continuing education courses at York University on the subject "Family Mediation". Although she was not specialized in family law, she knew more about it than Larry. In the summer of 1991, Patricia wrote out in hand what was to become the Separation Agreement. Because their separation was not yet public knowledge, the Separation Agreement was not drafted or typed at the office. Near the end of August, Larry brought home to 25 Alworth Place his computer and typed the Separation Agreement from Patricia's handwritten notes. Larry is an experienced typist. He testified that there was some discussion/negotiation between him and Patricia as he typed but he claimed that the only material change which he made to her handwritten draft was to add the last sentence to paragraph 8.
[11] The Separation Agreement contains much detail but it is not well drafted because it is too imprecise. The quality of drafting is understandable when one considers the anxiety and tensions which must have been present in the Peterson home in July and August when Larry and Patricia were still under the same roof but their de facto separation was in its seventh and eighth month. Larry moved out on September 1, 1991. The provisions for child support are intermingled with the provisions for Patricia's continuation as a lawyer employed in her husband's law firm. The most relevant provisions of the Separation Agreement concerning child support are set out below:
Joint Parenting to Continue:
Patricia and Larry have decided to separate from their marriage to each other and are committed to continue in parenting the children of the marriage.
Principal Residence
The children will have their principal residence with Patricia and will spend time with Larry at their mutual convenience. Patricia and Larry both love the children of the marriage and are committed to minimizing the effect of the divorce on the children and to ensuring that the children grow up in a secure and loving environment.
...
1. Larry will be the sole owner of his interest in Bruce-Algo Enterprises Limited - Patricia releases her interest in this property - 1/5th current FMV of $300,000.00.
Patricia will be the sole owner of the home and contents at 25 Alworth Place, Sault Ste. Marie - FMV $300,000.00.
...
PETERSON & PETERSON LAW PRACTICE
4. Patricia will withdraw from the partnership known as Peterson & Peterson. All professional fees and liability coverages shall be paid by the firm.
5. As of September 01, 1991 Patricia will become an employee of the law firm Peterson & Peterson with a starting salary of $50,000 plus $24,000 (allowed for child support) per year and will be guaranteed a position with the firm so long as Larry is a partner in the firm and until Patricia reaches the age of 65 years in lieu of a complete buy-out. Patricia's interest in the law practice shall be transferred to Larry in trust and a pro-rata portion of the capital will become Larry's absolutely for each year Patricia remains an employee of the firm.
6. In the event Patricia finds other suitable employment in Sault Ste. Marie, at a minimum salary of $50,000 she will then receive $36,000 from Larry as child support and other compensation from Larry when funds are available for her equity in the law practice.
6.1 The income tax liability incurred during the fiscal year of September 1, 1990 to August 31, 1991 by Patricia shall be paid by the firm. All income tax and other employee deductions on Patricia's salary commencing September 1, 1991 shall be deducted from her salary and remitted to Revenue Canada.
CHILD SUPPORT
7. For the first year (September 1, 1991 to August 31, 1992) Larry, either through the firm or personally, will pay Patricia, provided she is an employee of the Peterson & Peterson law firm, $24,000 per year ($2,000 per month or $461.53 per week) child support.
8. If Patricia becomes employed by another employer, Larry will pay Patricia $36,000 per year in child support and supplement Patricia's income to $50,000 in the event her annual salary is less than $50,000. It is agreed that should Patricia assume an employment position which pays less than $50,000 per year that such position will be mutually agreed upon by both Patricia and Larry.
8.1 Support for each child shall continue until one of the following events occur:
- child completes her first undergraduate degree or diploma
- child attains the age of 22 years
- child marries
- child becomes self-supporting
- child dies
8.2 The child support will be increased annually based on the cost of living index. Patricia's salary with the firm will be reviewed and increased when agreed upon by Patricia and Larry but shall not be less than $50,000 per year.
POST SECONDARY EDUCATION
9. It is agreed that Larry will continue to pay the educational trust funds established for each of the children including the lump sum for Lisa and Caroline.
10. Patricia and Larry will divide the additional costs of post secondary education for the children.
[12] Patricia and Larry each testified at length concerning the above provisions and the parol evidence rule was, wisely in my view, never invoked. They were more in agreement than disagreement on the meaning of the above provisions. Relying on the above provisions and the oral testimony of both Patricia and Larry, I find that the basic agreement for child support in September 1991 was as follows:
(a) Larry was required to pay $24,000 per year commencing September 1, 1991 so long as Patricia was employed by Larry's law firm.
(b) If Patricia ceased to be employed by Larry's law firm for any reason, Larry was required to pay $36,000 per year.
(c) The references to Patricia having a minimum lawyer salary of $50,000 per year whether working for Larry or otherwise were not, directly or indirectly, any form of child support because those references had three other objectives: (i) Patricia's earnings as a lawyer; (ii) Larry acquiring Patricia's interest in the law practice (see paragraphs 5 and 6); and (iii) Patricia having a minimum level of spousal support like alimony or maintenance (see paragraphs 8 and 8.2 plus oral testimony of Patricia).
[13] Starting in September 1991, the minimum salary of $50,000 and the child support of $24,000 were both paid out of the Peterson law firm as if Patricia's gross annual compensation were $74,000. The actual monthly payments were complicated by the fact that Patricia had the use of a firm car for which she was charged $6,000 per year. Therefore, the cash payments to her on a monthly basis were determined by the following computation:
Annual Salary
$50,000
Less car allowance
6,000
Subtotal
44,000
Plus child support
24,000
Net paid over 12 months
$68,000
Larry explained that the law firm held back source deductions (income tax, EI and CPP) on only $50,000 and that only the $50,000 was charged as an expense in computing the profit of the law firm even though the firm had been the source of the child support payments. I assume that each monthly payment of $2,000 by the law firm for child support was charged to Larry as a draw but there was no specific evidence on this point.
[14] The Separation Agreement appears to have worked smoothly from September 1991 until March 1993. Larry paid the child support of $2,000 per month; he deducted those amounts in computing his income; and Patricia reported those amounts as part of her income. In March 1993, Larry concluded that he had a cash crisis in his law practice. He called a meeting for Saturday, March 20 but Patricia did not attend. On Monday, March 22, Larry sent a two-page letter to Patricia (Exhibit T-1, Tab 3) expressing his disappointment at her failure to attend the meeting. I will set out what I regard as the three most important statements in that letter:
1. From August '92 to February '93 your average monthly billing is $3,472
2. You are being paid a gross monthly salary of $5,667.
3. Your salary is being cut by 50% to $34,000.
The second and third statements show the danger of intermingling child support with Patricia's annual compensation as a lawyer. In the second statement, the amount $5,667 is one-twelfth of $68,000 which, as shown in paragraph 13 above, is a combined amount of child support plus annual salary less a car allowance. In the third statement, the amount $34,000 is 50% of the same $68,000 combined amount.
[15] If the third statement is read literally, it does not make any sense because Patricia never had a salary of $68,000. When writing that third statement, Larry was thinking only of the net cash ($68,000) which his firm was paying to Patricia on an annual basis as child support and salary. In paragraph 12 above, I summarized the basic agreement for child support as, in part, requiring Larry to pay $24,000 per year so long as Patricia was employed by his law firm. The amount of child support payable by Larry was determined in the Separation Agreement independent of Patricia's annual compensation as a lawyer. Therefore, I construe the third statement as meaning that the child support was to continue at $24,000 per year after March 1993; and that Patricia's salary was reduced to $10,000 ($24,000 plus $10,000 equals $34,000).
[16] Upon receiving the letter from Larry dated March 22 (Exhibit T-1, Tab 3), Patricia obtained legal advice from Lorna E. Rudolph, a lawyer in Sault Ste. Marie. Ms. Rudolph's letter to Larry dated April 14, 1993 (Exhibit T-3) states in part:
The result is, that you are required to pay Patricia the $50,000 a year salary under the employment contract and you are required to pay her the $24,000 per year child support.
... the fact that you decided to lump together the child support as part of her salary ...
Those statements in Ms. Rudolph's letter are a clear indication that Patricia saw her salary as totally separate from the child support.
[17] After receiving Larry's letter of March 22, Patricia never did return as a regular employee of Larry's law firm. She worked on some files which were billed through Larry's office. She took home other files (many legal aid) which she billed on her own. And by the end of May 1993, Patricia had decided to practise law alone out of her home. Exhibit T-1, Tab 2 contains five cheque stubs for cheques issued by Larry's firm to Patricia with the following particulars:
1993 Date
Gross
Net
March 20
$2,606.60
$1,803.86
April 3
1,303.30
1,092.42
April 16
1,303.30
1,092.42
May 1
1,303.30
1,092.42
May 15
846.76
709.86
The first cheque represents pay for two weeks based on gross annual compensation of $68,000. The next three cheques represent pay for two weeks based on gross annual compensation of $34,000. Larry wrote on the stub of the first cheque "child support allocation $2,000"; and on the stub of the fourth cheque "child support allocation $1,000". Those notations indicate to me that Larry saw child support as a first charge on any amounts paid to Patricia through his law firm payroll. Patricia's evidence is that she did not cash any of the five cheques until she had received independent legal advice that the cashing of the cheques would not be construed as an admission against her interest.
[18] Patricia did not regard any of the five cheques as payment of child support. In May 1993, she applied to the Ontario Family Support Plan (FSP) to enforce the child support payments required under the Separation Agreement. Her affidavit in support of her application to the FSP is Exhibit T-1, Tab 4. Commencing in June 1993, Larry paid $1,000 twice a month to Patricia's account in the FSP and the FSP remitted the amounts to her. Exhibit 2, Tab B is a summary prepared by the FSP showing amounts accrued and collected for Patricia during the period May 25, 1993 to June 3, 1998. On the first day of each month starting June 1, 1993, the FSP accrued $3,000 as the "amount due". I assume that the FSP accrued the $3,000 amount because either Patricia told them that that was the support amount; or they read the Separation Agreement and concluded that child support was $3,000 per month after Patricia stopped being employed by Larry's law firm.
[19] The FSP accrued $3,000 each month as an "amount due" but received only $2,000 each month as paid by Larry. Over a period of time, following this pattern, the FSP showed a growing balance of arrears owing by Larry. The opening arrears ($8,182) in the FSP summary was never explained in detail but part of it must represent the period March to May 1993 when Larry reduced the payments flowing from his law firm to Patricia. In the 43-month period from June 1, 1993 to December 31, 1996, the FSP summary shows that Larry made 85 payments of $1,000 each at the rate of two payments per month. Also, Patricia acknowledged that Larry had paid $2,000 in that period for which he did not receive credit in the FSP summary. Therefore, over the 43 months from June 1993 to December 1996 inclusive, Larry paid either through the Plan ($85,000) or directly to Patricia ($2,000) an aggregate amount of $87,000.
[20] There is no doubt that in the period June 1993 to December 1996, Larry was paying child support at the rate of $2,000 per month when he should have been paying at the rate of $3,000 per month because Patricia had ceased to be employed by his law firm. In March 1994, Patricia filed a Statement of Claim in the Ontario Court (General Division) (Exhibit 2, Tab C) and sued Larry for specific performance of the Separation Agreement, damages for breach of contract, damages for wrongful dismissal, and other items. In April 1994, Larry filed a Statement of Defence and Counterclaim (Exhibit 2, Tab D).
[21] On June 1, 1995, Larry filed in the Ontario Court (General Division) a Petition for Divorce from Patricia (Exhibit 2, Tab E). The Petition appears to be a standard form of approximately 12 pages because many "boilerplate" provisions are stroked out as not applicable. In oral testimony, both Patricia and Larry testified at length concerning items 27 to 30 in the Petition for Divorce. Because these items are important, I will set them out as they appear in Exhibit 2, Tab E except that I will omit words not used:
27.(a) The existing arrangements between the spouses for support for the children are as follows:
Amount Paid
Time period
(weekly, monthly, etc.)
Paid by
(husband or wife)
Paid for
(name of child)
$666.67
monthly
husband
Dana
$666.67
monthly
husband
Lisa
$666.67
monthly
husband
Caroline
(b) The existing support arrangements are being honoured
28. The educational needs of the children are being met
29. The following are all other court proceedings with reference to the marriage or any child of the marriage:
There is an Action presently before the Ontario Court (General Division) in the District of Algoma, bearing Court File No. 13224/94.
DOMESTIC CONTRACTS AND FINANCIAL ARRANGEMENTS
30. The spouses have entered into the following domestic contracts and other written or oral financial arrangements:
Date Nature of contract or arrangement Status
There have been no oral or written agreements.
[22] Item 30 of the Divorce Petition is simply not true because Larry and Patricia had signed the Separation Agreement on September 5, 1991 and, in June 1995 when Larry filed the Divorce Petition, he was then paying child support of $2,000 per month. When Patricia read item 30, she concluded (i) that Larry had repudiated the Separation Agreement; (ii) that the child support of $2,000 per month which she received in 1995 was not paid under a written agreement; and (iii) that she was not required to include in her income the $24,000 which she was receiving from Larry in 1995. Patricia's Notice of Appeal to this Court for 1995 stated in part:
Larry Peterson was not paying the child support pursuant to the 1991 Separation Agreement because, in his Petition for Divorce dated June 1, 1995 he declared, in writing, to the divorce court who granted his divorce that "there was no oral or written agreement" in effect between the parties. He was unilaterally paying $2,000.00 per month ...
Similarly, in her Notice of Appeal to this Court for 1996, Patricia stated in part:
... Larry Peterson also claimed in his 1995 Petition for Divorce that there was no written or oral agreement between the parties and stated he was voluntarily paying $2,000.00 per month in child support to me. Although I sought to have the Agreement enforced by the Family Responsibility Office and then the Ontario Court General Division from March 1993 to December 1996, I was unsuccessful.
In the passage just quoted, Patricia made a statement which is clearly inaccurate: "Larry Peterson ... in his 1995 Petition for Divorce ... stated he was voluntarily paying $2,000 per month in child support to me". Larry made no such statement in the Petition for Divorce.
[23] Larry attempted to explain item 30 by saying that he thought it referred to any "new" written or oral agreements. I do not know what he means by "new" and this was not pursued in evidence. Matti E. Mottonen was Larry's counsel for both the 1994 legal action commenced by Patricia and the 1995 Divorce Petition filed by Larry. Mr. Mottonen testified in this matter and he explained item 30 as a mistake or oversight because it was obviously inaccurate. In his mind, there was no question that the Separation Agreement was in full force and effect. Mr. Mottonen also pointed out that item 29 of the Divorce Petition referred to the 1994 legal action commenced by Patricia in which both she and Larry relied on the Separation Agreement. Patricia's Statement of Claim had 37 paragraphs and Larry's Statement of Defence and Counterclaim had 91 paragraphs. Although item 30 is inaccurate with respect to a material fact, when I consider the specific reference to the legal action in item 29, it is not possible for me to conclude that Larry or Mr. Mottonen had any intent to mislead the Ontario Court in the divorce proceeding.
[24] As stated in paragraph 9 of Exhibit 1 (Statement of Admitted Facts), the legal action commenced by Patricia against Larry in the Ontario Court (General Division) was settled in December 1996. There was a pre-trial conference on December 16, 1996 with Madam Justice Pardu. It appears that the conference lasted more than eight hours from mid-morning until early evening. At the end of the conference, Minutes of Settlement were signed by both Patricia and Larry and their respective counsel. The Minutes of Settlement (Exhibit 2, Tab F) were hand-written by Larry's counsel, Matti E. Mottonen, a Sudbury lawyer. Paragraph 6 of the hand-written Minutes of Settlement states:
(6) Defendant will pay retroactive additional periodic child support to the plaintiff for each of the aforementioned children in the amount of $36,000 for the 12 months from January 1st, 1996 to and including December 1st, 1996. Payments are taxable in hands of plaintiff and tax deductible by defendant.
[25] On December 31, 1996, there was a conversation between Larry and his oldest daughter Dana (then in second year university) in which he stated what support he would be paying her in future. When Dana reported the conversation to her mother, Patricia concluded that Larry was or would be in breach of the Minutes of Settlement. Madam Justice Pardu had not yet issued an order to implement the Minutes of Settlement. Patricia therefore brought a fresh motion before Madame Justice Pardu to interpret the Minutes of Settlement and enforce them with a court order. The motion came before Judge Pardu on March 27, 1997. The Judge dictated a three-page memorandum to file (Exhibit T-1, Tab 10) and then issued an Order (Exhibit 2, Tab G) dated December 16, 1996 and March 27, 1997 which was, in substance, on the same terms as the Minutes of Settlement. Paragraph 6 of the Order (Exhibit 2, Tab G) states:
6. THIS COURT ORDERS that the Defendant shall pay retroactive additional periodic child support to the Plaintiff for each of the aforementioned children of the marriage in the amount of $36,000.00 for the twelve months from January 1st, 1996 to and including December 1st, 1996. The payments are taxable in the hands of the Plaintiff and tax deductible by the Defendant.
Analysis - Did Larry Repudiate the Separation Agreement?
[26] The main argument of Patricia's counsel is that Larry breached the Separation Agreement on or about March 22, 1993 and that he repudiated the agreement before 1995 and again in 1996. See paragraph 20 of Exhibit 1 set out in paragraph 6 above. Patricia relies on repudiation because, if Larry did repudiate the Separation Agreement, then the monthly payments of $2,000 which he made after such repudiation would not be "received under ... a written agreement" within the meaning of paragraph 56(1)(b) of the Income Tax Act as it applied to 1995 and 1996.
56(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,
(a) ...
(b) an amount received by the taxpayer in the year as alimony or other allowance payable on a periodic basis for the maintenance of the taxpayer, children of the taxpayer or both the taxpayer 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 who was required to make the payment at the time the payment was received and throughout the remainder of the year and the amount was received under a decree, order or judgment of a competent tribunal or under a written agreement;
[27] Patricia relies on the following evidence in support of her argument that Larry repudiated the Separation Agreement. First, in the financial statement which he filed in connection with her legal action (Exhibit T-1, Tab 6), he assigned values to certain properties which were allocated between him and Patricia in the Separation Agreement different from the values used in that agreement. Second, he retained all the rents from the building in which he carried on his law practice when, under paragraph 3 of the Separation Agreement, he and Patricia owned that building as tenants-in-common. Third, he reduced her salary to less than $50,000 in conflict with paragraph 5 of the Separation Agreement. And fourth, his big reduction of her salary on March 22, 1993 was constructive dismissal, and was breach of a fundamental term of the Separation Agreement. I will consider these arguments in order.
[28] First, considering the property values in Larry's financial statement (Exhibit T-1, Tab 6) being different from the values in the Separation Agreement, I do not regard his different values as being even a breach of the Separation Agreement, let alone a repudiation. The financial statement was prepared in May 1994, almost three years after the Separation Agreement of September 1991. In paragraphs 1, 2 and 3 of the Separation Agreement, Larry and Patricia were over-reaching in a co-operative spirit to find balancing values for the properties which they were dividing and allocating. According to their common testimony, they were trying in the summer of 1991 to have an amicable separation. In May 1994, Patricia had sued Larry claiming significant amounts and, in his financial statement, he was entitled to use hindsight to reconsider property values which had never been tested on the open market.
[29] Second, considering their common ownership of the building in which Larry carried on his law practice, if Larry and Patricia as owners/landlords were earning a profit from the property, Larry was obliged to share that profit 50/50 with Patricia. There is no evidence as to whether ownership of that building was producing a profit. Were there other tenants beside Larry's law firm? Was there a mortgage on the building? What were the annual expenses? Was the rent adequate to cover expenses and depreciation? Even if there were an "owner's profit" which Larry had not shared with Patricia, he would be in breach of only paragraph 3 of the Separation Agreement. Such a breach could be rectified by a court order requiring Larry as co-owner to account to Patricia as the other co-owner. Such a breach would not be repudiation.
[30] I will review together the third and fourth arguments for repudiation considering Larry's letter of March 22, 1993 (Exhibit T-1, Tab 3) cutting Patricia's salary and causing her to leave his law firm. This conduct by Larry may have been a significant breach of contract. I say "may have been" because there was a conflict in evidence between Larry and Patricia as to what her obligations were as an employed lawyer. In her Statement of Claim (Exhibit 2, Tab C), Patricia alleged:
2