Tossell v. Canada

Tossell v. Canada Court (s) Database Federal Court of Appeal Decisions Date 2005-06-17 Neutral citation 2005 FCA 223 File numbers A-527-03 Decision Content Date: 20050617 Docket: A-527-03 Citation: 2005 FCA 223 CORAM: DESJARDINS J.A. ROTHSTEIN J.A. SHARLOW J.A. BETWEEN: PATRICIA TOSSELL Appellant and HER MAJESTY THE QUEEN Respondent and LARRY PETERSON Respondent Heard at Toronto, Ontario, on May 10, 2005. Judgment delivered at Ottawa, Ontario, on June 17, 2005. REASONS FOR JUDGMENT BY: SHARLOW J.A. CONCURRED IN BY: DESJARDINS J.A. ROTHSTEIN J.A. Date: 20050617 Docket: A-527-03 Citation: 2005 FCA 223 CORAM: DESJARDINS J.A. ROTHSTEIN J.A. SHARLOW J.A. BETWEEN: PATRICIA TOSSELL Appellant and HER MAJESTY THE QUEEN Respondent and LARRY PETERSON Respondent REASONS FOR JUDGMENT SHARLOW J.A. [1] Ms. Patricia Tossell appeals a judgment of the Tax Court of Canada dated October 3, 2003, that dismissed her appeals (Tax Court Files 98-2469(I) and 2000-3286 (IT)I) from reassessments made for 1995 and 1996 under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.). In accordance with the same reasons for judgment and on the same date, the Judge issued a separate judgment allowing the appeal of Larry Peterson (Tax Court File 2000-2170(IT)G) for those same years. The reasons for judgment are reported as Peterson v. Canada, 2003 D.T.C. 1347, [2004] 1 C.T.C. 2858, 48 R.F.L. (5th) 333 (T.C.C.). [2] The issue in the Tax Court, and in this appeal, is the tax treatment of certain amounts that Mr. Peterson paid to Ms. Tossell in 1995 and 1996 as child support. Ms. Tossell claims that she is not required to include the payments in her income under paragraph 56(1)(b) of the Income Tax Act. Mr. Peterson claims that he is entitled a deduction for the payments under paragraph 60(b) of the Income Tax Act. Paragraphs 56(1)(b) and 60(b) mirror each other, so that if Ms. Tossell is correct, Mr. Peterson cannot be correct, and vice versa. [3] For 1995 and 1996 (after the coming into force of amendments made by S.C. 1994, c. 7, Sched. VIII, but before the coming into force of S.C. 1997, c. 25), paragraphs 56(1)(b) and 60(b) of the Income Tax Act read as follows: 56. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year, [...] 56. (1) Sans préjudice de la portée gènerale de l'article 3, sont à inclure dans le calcul du revenu d'un contribuable pour une année d'imposition: [...] (b) any 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 of 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; (b) un montant reçu par le contribuable au cours de l'année, en vertu d'une ordonnance ou d'un jugement rendus par un tribunal compétent ou en vertu d'un accord écrit, à titre de pension alimentaire ou autre allocation payable périodiquement pour subvenir aux besoins du contribuable ou d'enfants de celui-ci ou aux besoins à la fois du contribuable et de ces enfants, si le contribuable, pour cause d'échee de son mariage, vivait séparé de son conjoint ou ancien conjoint tenu d'effectuer le paiement, au moment de la réception du paiement et durant le reste de l'année; [...] [...] 60. There may be deducted in computing a taxpayer's income for a taxation year such of the following amounts as are applicable: [...] 60. Peuvent être déduites dans le calcul du revenu d'un contribuable pour une année d'imposition les sommes suivantes qui sont appropriées: [...] (b) 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; (b) un montant payé par le contribuable au cours de l'année, en vertu d'une ordonnance ou d'un jugement rendus par un tribunal compétent ou en vertu d'un accord écrit, à titre de pension alimentaire ou autre allocation payable périodiquement pour subvenir aux besoins du bénéficiaire, d'enfants de celui-ci ou à la fois du bénéficiaire et de ces enfants, si le contribuable, pour cause d'échec de son mariage, vivait séparé de son conjoint au ancien conjoint à qui il était tenu d'effectuer le paiement, au moment où le paiement a été effectué et durant le reste de l'année; Facts [4] The facts are stated at length in the Judge's reasons. For the purposes of this appeal, only a summary is required. [5] Ms. Tossell and Mr. Peterson were married in 1970 and separated in 1991. They have three children. At the time of the separation, their children were approximately 16, 14 and 10 years of age. In September of 1991, Ms. Tossell and Mr. Peterson entered into a written separation agreement they prepared themselves. They are both lawyers. [6] The 1991 separation agreement covered a number of issues, including living and support arrangements for the children, and the disposition of the family home and other property. Ms. Tossell and Mr. Peterson had practised law together. They agreed that Mr. Peterson should retain the law practice, with Ms. Tossell carrying on as an employee with a fixed salary, which was stipulated to be not less than $50,000. [7] The terms of the 1991 separation agreement required Mr. Peterson to pay child support to Ms. Tossell in the amount of $2,000 per month starting on September 1, 1991, as long as Ms. Tossell was employed by the law firm. There was provision for an annual increase based on the cost of living index. Child support was to be increased to $36,000 per year if Ms. Tossell ceased to be employed by the law firm and earned less than $50,000 per year. [8] In March of 1993, Mr. Peterson unilaterally reduced Ms. Tossell's remuneration from the law firm, apparently because he was experiencing a serious cash flow problem. At that point, Ms. Tossell ceased to work for the law firm as a regular employee. She did legal work from her home, earning a modest income. [9] Ms. Tossell applied to an Ontario government agency called the "Family Support Plan" to enforce Mr. Peterson's child support payment obligations. She represented to the Family Support Plan that Mr. Peterson was in arrears of child support in the amount of $8,182 and that he was obliged to pay child support of $3,000 per month. Mr. Peterson was of the view that was not in arrears as of March, 1993, and that his child support obligation was $2,000 per month. Mr. Peterson actually made child support payments, at the rate of $2,000 per month ($24,000 per year), in each of the 1994, 1995 and 1996 taxation years. [10] The account maintained by the Family Support Plan for Ms. Tossell is apparently intended to show amounts owed to her by Mr. Peterson for child support. However, Mr. Peterson disputes the correctness of the account. It shows an opening balance, as of May 25, 1983, in the amount of $8,182, and monthly increases in the amount of $3,000 plus cost of living adjustments. The account also reflects payments made by Mr. Peterson of $2,000, to the extent they were paid through the Family Support Plan (one or more child support payments apparently were made directly to Ms. Tossell). There has been no judicial determination as to whether the Family Support Plan account is correct. [11] As of December 31, 1996, the outstanding balance of the account maintained by the Family Support Plan was $55,760.28. That is apparently the source of the parties' agreement, as stated in a document filed by them jointly in the Tax Court, that immediately before Mr. Peterson made the $36,000 payment to Ms. Tossell in December of 1996 (discussed below), the amount owing under the terms of the 1991 separation agreement was approximately $56,000. The $36,000 was actually paid in December of 1996 but was not reflected in the Family Support Plan account until January of 1997. [12] In March of 1994, Ms. Tossell commenced an action in the Ontario Court General Division seeking enforcement of the 1991 separation agreement, including child support in the amount of $3,000 per month. Mr. Peterson defended the action on a number of grounds. He claimed, among other things, that under the 1991 separation agreement his child support obligation was only $2,000 per month. [13] On December 16, 1996, there was a pre-trial conference before Pardu J. of the Ontario Court (General Division) relating to the March 1994 action commenced by Ms. Tossell. It lasted for more than eight hours. Early that evening, counsel for Mr. Peterson and counsel for Ms. Tossell prepared "Minutes of Settlement". The Minutes of Settlement were signed by both Ms. Tossell and Mr. Peterson on December 16, 1996, thus settling the March 1994 action. [14] The only provision of the Minutes of Settlement that bears on this case is section 6, which reads as follows: 6. Defendant [Mr. Peterson] will pay retroactive additional periodic child support to the Plaintiff [Ms. Tossell] for each of the aforementioned children in the amount of $36,000 for the twelve months from January 1st, 1996 to and including December 1st, 1996. Payments [sic] are taxable in hands of Plaintiff and deductible by Defendant. [15] Counsel for Mr. Peterson gave evidence in the Tax Court. His recollection was that the $36,000 figure came from his estimate of the arrears of child support for 1994, 1995 and 1996, assuming the monthly obligation was $3,000 as contended by Ms. Tossell, rather than $2,000 as contended by Mr. Peterson. It is not clear why his estimate did not include part of 1993. He did not recall why the word "arrears" was not used in section 6 of the Minutes of Settlement. Nor did he recall why section 6 refers only to the twelve month period in 1996. [16] Ms. Tossell testified that she did not recall the basis of the determination of the $36,000 amount. She thought it was an amount put forward by Pardu J. Her understanding was that this was not intended to represent arrears of child support, because of the doubt about whether there were any such arrears, but an entirely new obligation. She also testified that the clause referred only to one year, 1996, because Pardu J. had said "something about there is case law saying you don't go back more than one year with retroactive support." Assuming Ms. Tossell's recollection is accurate, it is not clear this comment of Pardu J. related to a point of family law, or whether it was a reference to subsections 56.1(3) and 60.1(3) of the Income Tax Act (see the discussion below at paragraph 43). [17] The Minutes of Settlement were substantially reproduced in an endorsement prepared by Pardu J. on or shortly after December 16, 1996, to give effect to the Minutes of Settlement. However, before any Court Order was entered, an issue arose on a matter that is not relevant to this case. The final form of the Court Order, which was made in March of 1997, reflects the resolution of that issue. The final form of the Court Order contains this provision, which reflects section 6 of the Minutes of Settlement: 6. THIS COURT ORDERS that the Defendant [Mr. Peterson] shall pay retroactive additional periodic child support to the Plaintiff [Ms. Tossell] for each of the aforementioned children of the marriage in the amount of $36,000 for the twelve months from January 1st, 1996 to and including December 1st, 1996. The payments [sic] are taxable in the hands of the Plaintiff and deductible by the Defendant. Assessments and appeals [18] When Ms. Tossell filed her income tax returns for 1995 and 1996, she did not include in her income the $24,000 she had received from Mr. Peterson as child support in each of those years. Nor did she include in her income the $36,000 payment she received from Mr. Peterson in December of 1996 pursuant to section 6 of the Minutes of Settlement. Mr. Peterson claimed deductions for all of those amounts on the basis that they were child support payments and were within the scope of paragraph 60(b) of the Income Tax Act. [19] Ms. Tossell was reassessed for 1995 and 1996 to add all of those amounts to her income (that is, $24,000 in each of 1995 and 1996, and an additional $36,000 in 1996). Mr. Peterson was reassessed for 1995 and 1996 to disallow his deduction of the same amounts. Ms. Tossell and Mr. Peterson both appealed to the Tax Court. [20] On September 14, 2001, the Minister of National Revenue made an application under section 174 of the Income Tax Act for the determination of a question. Pursuant to that application, the income tax appeals of Mr. Peterson and Ms. Tossell were joined. The questions put to the Tax Court required a determination as to whether paragraph 56(1)(b) and paragraph 60(b) of the Income Tax Act applied to the amounts referred to in paragraph 19 above. The Judge concluded that paragraphs 56(1)(b) and 60(b) of the Income Tax Act applied to all of those amounts. [21] As that conclusion disposed of the only outstanding issues in the appeals of Mr. Peterson and Ms. Tossell, the Judge allowed the appeal of Mr. Peterson and dismissed the appeal of Ms. Tossell. Ms. Tossell now appeals to this Court. New evidence on appeal [22] At the hearing of this appeal, Ms. Tossell sought to rely on an affidavit of Mr. Peterson sworn September 3, 2003, and apparently filed in the Ontario Court of Justice in connection with another dispute between Mr. Peterson and Ms. Tossell. It was not presented as evidence in the Tax Court. Mr. Peterson objected to its introduction in this appeal. Generally, in an income tax appeal, this Court must depend solely on documents filed and other evidence adduced in the Tax Court. Evidence cannot be admitted on appeal unless it is credible, it is practically conclusive of an issue under appeal, and it could not have been presented at trial with the exercise of due diligence: Frank Brunckhorst Co. v. Gainers Inc., [1993] F.C.J. No. 874 (F.C.A.). The affidavit that Ms. Tossell seeks to introduce at this stage was in existence before the Tax Court trial. No reason was offered as to why it could not have been introduced as evidence in the Tax Court. It was not permitted to be introduced in this appeal. The payments of $2,000 per month for 1995 and 1996 [23] There can be no doubt that Mr. Peterson paid $24,000 to Ms. Tossell as child support in each of 1995 and 1996 pursuant to the 1991 separation agreement. Ms. Tossell argues, however, that those amounts do not meet the requirements of paragraph 56(1)(b) of the Income Tax Act because the 1991 separation agreement was not enforceable. [24] In the Tax Court, Ms. Tossell argued that Mr. Peterson had repudiated the 1991 separation agreement in March of 1993 when he changed her conditions of employment at the law firm. That argument was rejected by the Judge, primarily because Mr. Peterson continued after March of 1993 to make child support payments of $2,000 per month, which on Mr. Peterson's interpretation was what the 1991 separation agreement required. His conduct was not consistent with that of a party repudiating an agreement. In my view, the Judge was correct on that point. [25] Ms. Tossell also argued, based on her own testimony in the Tax Court, that in the course of a pre-trial conference on December 16, 1996, in relation to her 1994 action to enforce the 1991 separation agreement, Pardu J. made a comment to the effect that no judge would find the 1991 separation agreement to be enforceable. Ms. Tossell argues that it was because of that comment that the parties made a new agreement, set out in the Minutes of Settlement, to replace the 1991 separation agreement. [26] The evidence in the Tax Court was that Mr. Peterson considered the child support provisions in the 1991 separation agreement to be enforceable, and that during 1994 and 1995 he honoured what he believed to be his child support obligations under that agreement by paying $2,000 per month. There is nothing in the 1991 separation agreement itself that would suggest that the child support obligations were not binding on Ms. Tossell and Mr. Peterson. Nor did Ms. Tossell refer to any authority that would suggest that the 1991 separation agreement was so flawed that it was necessarily invalid from the outset. [27] I do not completely discount the possibility that, if Ms. Tossell's 1994 action had gone to trial, Pardu J. might have found the 1991 separation agreement to be unenforceable in its entirety, or in part. However, even if Pardu J. had found the child support obligations to be unenforceable, it seems to me to be an open question whether a necessary consequence of such a finding would be a recharacterization of the child support payments Mr. Peterson had actually made. [28] The Judge concluded that the $24,000 paid by Mr. Peterson to Ms. Tossell in 1995 and 1996, at the rate of approximately $2,000 per month, is taxable in the hands of Ms. Tossell pursuant to paragraph 56(1)(b) of the Income Tax Act. In my view, he was correct to reach that conclusion. The $36,000 payment made in December, 1996 [29] The dispute about the tax treatment of the $36,000 paid in December, 1996, arises from the difficulty of interpreting the first sentence of section 6 of the Minutes of Settlement (which is substantially the same as section 6 of the Court Order). That sentence is reproduced for ease of reference: 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 twelve months from January 1st, 1996 to and including December 1st, 1996. [30] The issue, as I understand it, is whether the description of the $36,000 payment as "retroactive additional periodic child support" establishes that the payment meets the requirements of paragraph 56(1)(b) and 60(b) of the Income Tax Act. Stated as simply as possible, the issue is whether the $36,000 is an amount paid by Mr. Peterson to Ms. Tossell as child support payable on a periodic basis pursuant to a written agreement or court order. [31] There is no doubt that the $36,000 payment was intended as child support, and that it was made pursuant to a written agreement, the Minutes of Settlement. However, an amount does not come within the scope of paragraph 56(1)(b) and paragraph 60(b) of the Income Tax Act unless it is payable on a periodic basis. An amount is payable on a periodic basis if the payment obligation recurs at intervals. Although section 6 of the Minutes of Settlement describes the $36,000 payment as "periodic", it refers to a single payment in the amount of $36,000. It does not describe an obligation to make payments on a periodic basis. [32] Mr. Peterson argued in the Tax Court, and in this Court, that the $36,000 was actually a payment of arrears of child support payable on a periodic basis pursuant to the 1991 separation agreement. That argument invokes the authority of The Queen v. Sills, [1985] 2 F.C. 200 (F.C.A.), which stands for the proposition that an obligation to pay an amount on a periodic basis maintains that character even if several such amounts are paid late in a single lump sum. [33] The Judge concluded that in December of 1996, Mr. Peterson was in default with respect to his child support obligations. The Judge's conclusion is summarized at paragraph 53 of his reasons: [53] Prior to December 1996, child support had been paid at the rate of $2,000 per month continuously from June 1993 and also from September 1991 to March 1993. In paragraph 12 above, I made a finding with respect to the basic agreement for child support within the Separation Agreement. Specifically, the two most important terms are: (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; and (b) If Patricia ceased to be employed by Larry's law firm for any reason, Larry was required to pay $36,000 per year. Patricia ceased to be employed by Larry's law firm sometime from March 22 to May 31, 1993. In my view, Larry was obliged to pay child support at the rate of $3,000 per month from and after June 1, 1993; and perhaps for one or two months before that date. Larry paid only $2,000 child support per month from June 1, 1993 to December 1996. Therefore, in that 43-month period, he was in arrears of child support to the limit of $43,000. [34] This conclusion is relevant only if the $36,000 payment required by section 6 of the Minutes of Settlement was intended to refer to arrears of child support accrued under the 1991 separation agreement, in which case the Sills principle would apply. The Judge found that the $36,000 payment was so intended. He explains that conclusion at paragraph 55 of his reasons: [55] I have concluded that the $36,000 single payment was an amount negotiated in the Minutes of Settlement signed on December 16, 1996 with respect to Larry's arrears of child support as at that date. My reasons for this conclusion are as follows. First, the payment is described as "retroactive additional periodic child support". Second, if the payment is allocated over the three years 1994, 1995 and 1996, it discharges Larry's arrears for the 36 months from January 1994 to December 1996. Third, an allocation over that 36-month period is consistent with Patricia's Statement of Claim issued in March 1994 and quoted in paragraph 54 above. Fourth, the $36,000 was paid through the Family Support Plan and caused a significant reduction in the "balance" which had been accruing at $3,000 per month since June 1993 (less the $2,000 per month which was actually paid through the Plan). And fifth, allocating the $36,000 over the 36 months from January 1994 to December 1996 is the most reasonable and common sense interpretation to place on paragraph 6 of the Court Order and paragraph 6 of the Minutes of Settlement. [35] I must respectfully disagree with the Judge that the reasons stated in paragraph 55 support the conclusion that the $36,000 payment referred to in section 6 of the Minutes of Settlement was intended to be for arrears of child support. [36] In my view, a written agreement or court order cannot be interpreted as obliging a person to pay arrears of child support unless, at the time the written agreement or court order is made, there is (1) an express or implied recognition of a pre-existing obligation to pay child support for a prior period, (2) an express or implied recognition of a complete or partial breach of that obligation, resulting in arrears of child support, and (3) an obligation set out in the written agreement or court order to pay the arrears in whole or in part. [37] There is no express recognition in the Minutes of Settlement, or the subsequent Court Order, of a pre-existing child support obligation, or the existence of arrears of child support. On December 16, 1996, when the Minutes of Settlement were signed, Ms. Tossell and Mr. Peterson had not agreed as to what Mr. Peterson's child support obligations were under the 1991 separation agreement, after March of 1993. If Pardu J. had a view on that point, there is no evidence as to what it was, except the recollections of Ms. Tossell and Mr. Peterson's lawyer, which are far from conclusive. [38] The other evidence in the record does not establish an implicit recognition that Mr. Peterson had an obligation to pay arrears of child support; on the contrary, the parties maintained their disagreement on this point until at least December 16, 1996. However, if I were to assume that the Judge was correct to find that Mr. Peterson was in default of his child support obligations, the arrears would have accrued at the rate of $1,000 per month for approximately 43 months. This suggests at least two important questions that are not answered. If section 6 of the Minutes of Settlement was intended to refer to arrears of child support, why are the arrears quantified at $36,000, which would be the equivalent of arrears for only 36 months? Why does section 6 of the Minutes of Settlement state that the $36,000 payment relates to 1996 only, a period for which the arrears of child support could not have been more than $12,000? [39] In my view, there is no basis for concluding that there is any implicit recognition, as of December 16, 1996, that Mr. Peterson was in arrears of child support. That is sufficient, in my view, to establish that section 6 of the Minutes of Settlement cannot be interpreted as requiring a payment of arrears of child support. [40] However, I would reach the same conclusion even if there had been an implicit recognition that Mr. Peterson was in arrears of child support because, in my view, section 6 of the Minutes of Settlement cannot reasonably be interpreted as an obligation to pay $36,000 as arrears of child support. I base that conclusion on the fact that section 6 describes the payment as "retroactive". The word "retroactive" does not simply mean "based on the past", as the Judge stated in paragraph 52 of his reasons. On the contrary, to describe the payment of a past due obligation as a "retroactive payment" is a misuse of the language. [41] The Minutes of Settlement were drafted by an experienced family lawyer, following a lengthy pre-trial conference with a judge with jurisdiction in matters of family law. It is reasonable to conclude that the word "retroactive" was used in the sense in which family lawyers would understand it. Paragraph 34(1)(f) of the Family Law Act, R.S.O. 1990, c. F.3, contemplates orders for retroactive support payments. It reads: 34. (1) In an application under section 33, the court may make an interim or final order ... (f) requiring that support be paid in respect of any period before the date of the order.... [42] It is clear from this statutory description of retroactive support payments that a legal obligation to pay retroactive child support is a new obligation. It could be, for example, a new obligation to pay child support for a specified prior period for which there was no pre-existing obligation. Or, it could be a new obligation to pay child support for a specified prior period in addition to child support payable under a previous agreement that has been found inadequate. Either way, a legal obligation to pay retroactive child support is the converse of a legal obligation to pay arrears of child support. [43] I digress at this point to mention subsections 56.1(3) and 60.1(3) of the Income Tax Act. Those provisions deal with a situation in which a court order or written agreement stipulates that a certain payment made prior to the date of the court order or written agreement is to be considered as having been made under that court order or written agreement. Where there is such a stipulation, the payment in question is treated for income tax purposes as having been made under the court order or written agreement, as long as the payment was made within the same year as the court order or written agreement, or within the prior year. The kind of clause described by these provisions may have a retroactive effect, in the sense that it retroactively characterizes a past payment as having been made "under" a court order or written agreement that did not exist when the payment was made. These provisions were not cited by any party to this appeal, and there is no reason to conclude that they have any application in this case. [44] The Judge seems to have been influenced in his conclusion by the fact that Mr. Peterson's family lawyer, in preparing for the pre-trial conference on December 16, 1996, had formed the view that $36,000 was the amount he could negotiate with respect to Mr. Peterson's arrears of child support as of December 1996. In my view, that evidence establishes only that Mr. Peterson's lawyer had a negotiating position. It is not capable of proving the nature of the $36,000 payment referred to in section 6 of the Minutes of Settlement. [45] The Judge also gave some weight to the fact that Mr. Peterson paid the $36,000 to Ms. Tossell through the Family Support Plan, and that it was credited to Ms. Tossell's account, causing a significant reduction in the outstanding balance. There is no evidence that anyone representing the Family Support Plan made any determination that the $36,000 payment represented child support arrears. There is no evidence that the Family Support Plan could have done anything with the $36,000 receipt except credit it to Ms. Tossell's account. Nor is there any evidence as to whether Mr. Peterson was required to make the payment through the Family Support Plan, rather than directly to Ms. Tossell. The fact that he did so, and that it was credited to Ms. Tossell's account, is not capable of establishing that the payment was intended to represent arrears of child support. [46] The Judge considered that allocating the $36,000 over the 36 months from January 1994 to December 1996 is the "most reasonable and common sense" interpretation of section 6 of the Minutes of Settlement. I must respectfully disagree. On December 16, 1996, each of the parties faced the prospect of litigating the 1991 separation agreement, which presented significant challenges for both of them. The litigation would have involved numerous issues, some involving issues with potential long term effects that would have been more significant than arrears of child support. They might have settled the unpaid child support issues in a way that would formally recognize the arrears, and provide for their payment or partial payment. Or, they might have put aside the issue of arrears of child support and created an entirely new obligation. It is impossible to determine from the record that either one of those solutions would have been more reasonable than the other. [47] From the discussion in paragraph 58 of the Judge's reasons, I infer that the Judge's view of the situation may have been influenced by the second sentence in section 6 of the Minutes of Settlement, which reads as follows: 6. [...] The payments are taxable in the hands of the Plaintiff and deductible by the Defendant. [48] It is not clear why this statement appears in the Minutes of Settlement. Ms. Tossell may have believed, on December 16, 1996, that the $36,000 would be taxable as a matter of law. Perhaps she was prepared at that time to agree that this treatment would be fair and equitable in the circumstances. Perhaps she was influenced by the consideration that, if Mr. Peterson was in a higher income tax bracket than Ms. Tossell, their combined assets would be enhanced if the payment was deductible by Mr. Peterson, even if it was taxable to Ms. Tossell. What Ms. Tossell might have thought or hoped is irrelevant. The tax treatment of the $36,000 payment depends on whether it is within the scope of paragraph 56(1)(b) and 60(b) of the Income Tax Act, which in turn depends upon the legal rights and obligations described in the first sentence of section 6 of the Minutes of Settlement. In my view, the Judge should have disregarded the second sentence. Conclusion [49] For these reasons, I would dismiss Ms. Tossell's appeal for 1995 (Tax Court File 98-2469(IT)I), and I would allow in part her appeal for 1996 (Tax Court File 2000-3286(IT)I) and refer this matter to the Minister for reassessment on the basis that the $36,000 payment received in 1996 by Ms. Tossell is not taxable in her hands. As her appeal was only partly successful, I would make no order as to costs. [50] There is no appeal by the Crown of the Tax Court judgment relating to Mr. Peterson (Tax Court File 2000-2170(IT)G). However, in an order of this Court dated January 23, 2004 (2004 FCA 30), Mr. Peterson was added as a respondent. It is not clear whether, as a result of this appeal, an order should be made affecting Mr. Peterson. [51] Counsel for the Crown is asked to provide written submissions on that point (not more than 5 pages, double spaced) by June 27, 2005. Counsel for Mr. Peterson may file a response (not more than 5 pages, double spaced), by July 4, 2005. Issuance of the formal judgment in this appeal will be deferred pending the receipt of those submissions. (s) "K. Sharlow" J.A. "I agree. Alice Desjardins J.A." "I agree. Marshall Rothstein J.A." FEDERAL COURT OF APPEAL NAMES OF COUNSEL AND SOLICITORS OF RECORD DOCKET: A-527-03 STYLE OF CAUSE: PATRICIA TOSSELL and HER MAJESTY THE QUEEN and LARRY PETERSON PLACE OF HEARING: Toronto, Ontario DATE OF HEARING: MAY 10, 2005 REASONS FOR JUDGMENT BY : SHARLOW J.A. CONCURRED IN BY: DESJARDINS JA ROTHSTEIN JA DATED: June 17, 2005 APPEARANCES: Patricia Tossell On her own behalf Peter M. Kremer, Q.C. Justine Malone For the Respondent, Her Majesty the Queen Larry Peterson Wallace DuCharme For the Respondent, Larry Peterson SOLICITORS OF RECORD: Patricia Tossell Sault Ste. Marie, ON On her own behalf John H. Sims, Q.C. For the Respondent, Her Majesty the Queen Deputy Attorney General of Canada Ottawa, ON Wallace Klein Partners in Law For the Respondent, Larry Peterson Barristers & Solicitors North Bay, ON