The appellant, Rajat Vohra, married in 2006 and became separated on December 8, 2010. On March 6, 2011, Mr Vohra and his ex-spouse entered into a “separation agreement”. Presumably to save legal costs, they chose to prepare the separation agreement on their own. The agreement provided in the clause dealing with spousal support as follows:

“Party 1 [the appellant] shall pay spousal support to party 2 in the amount of $3500 monthly commencing Dec 8/10 and ending Dec 8/14.”

The parties honoured the terms of the written agreement. The appellant paid $3,500 per month in spousal support throughout the term of the agreement and for several years thereafter. In the 2018 taxation year, the appellant’s ex-spouse declared the support payments of $42,000 she received as income in her tax filings. The appellant claimed a deduction of $42,000 for these payments.

The Minister denied the appellant’s deduction of $42,000 paid to his ex-spouse in the 2018 taxation year on the basis that these payments did not fall within the definition of “support amount” pursuant to subsection 56.1(4) of the Income Tax Act R.S.C. 1985 (5th Supp.), c.1 (the “Act”). In particular, the Minister took the position that the spousal support payments were not made by the appellant pursuant to a “written agreement”, as the agreement to pay support expired in 2014. Mr Vohra appealed the reassessment to the Tax Court of Canada.

“Support amount” is defined in subsection 56.1(4) as follows:

“support amount”

“support amount” means an amount payable or receivable as an allowance on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient and children of the recipient, if the recipient has discretion as to the use of the amount, and

(a) the recipient is the spouse or common-law partner or former spouse or common-law partner of the payer, the recipient and payer are living separate and apart because of the breakdown of their marriage or common-law partnership and the amount is receivable under an order of a competent tribunal or under a written agreement; or

(b) the payer is a legal parent of a child of the recipient and the amount is receivable under an order made by a competent tribunal in accordance with the laws of a province.

Interestingly, although it appears that this was not argued by the CRA, Mr Justice Ronald MacPhee noted in his judgment that the 2011 separation agreement was “flawed from the outset”. To start with, the signatures of the spouses were not witnessed. In addition, there was a handwritten clause at the bottom of the agreement which stated that the agreement was subject to approval by legal counsel, and there was no indication, either in the agreement, or in the evidence led at trial, that this was ever done.

The appellant argued that the parties’ continued compliance created an implied contract, and in the alternative, argued that the 2011 contract was still in force. The CRA argued that the 2011 contract had expired in 2014 and had not been renewed, so that there was no written agreement pursuant to which the payments were made.

In disposing of the first argument, Mr Justice MacPhee pointed out that an implied contract, as well as a verbal contract, did not meet the requirements of the Act for payment made pursuant to it to be deductible. He noted that there had been considerable jurisprudence on this matter, and in considering the rationale for there to be a “written agreement” required in the Act, quoted the Federal Court of Appeal as follows:

“The rationale for not including separated spouses involved in payments made and received pursuant to a verbal understanding is readily apparent. Such a loose and indefinite structure might well open the door to colourable and fraudulent arrangements and schemes for tax avoidance.” (Hodson v. Minister of National Revenue, (1987), 88 DTC 6001 (Fed C. A.) at page 6003.)

Mr Justice MacPhee pointed out that what had occurred in this case clearly was not a fraudulent scheme. Despite the fact that the agreement was technically flawed and expired, the parties continued through the 2018 taxation year to consider themselves bound by their 2011 separation agreement. Their conduct supported the conclusion that a meeting of the minds continued to exist concerning spousal support obligations and that what was set out in the 2011 separation agreement was treated by them as continuing to be in force up to and including 2018.

Adopting the plain meaning of the words of the Act over the “formal requirements of a properly drawn up contract” the Court allowed the appeal, holding that the support payments in question were made pursuant to a “written agreement”. There was no question that the agreement the parties relied upon was legally flawed. Yet it was held to be an agreement in writing within the meaning of the Act, sufficient to support the deductibility of the payments made under it.