Holbrook v. The Queen

Holbrook v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2005-10-25 Neutral citation 2005 TCC 671 File numbers 2003-254(IT)G Judges and Taxing Officers Eric A. Bowie Subjects Income Tax Act Decision Content 2003-254(IT)G BETWEEN: NICOLETTE HOLBROOK, Appellant, And HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeals heard on March 10, 2005, at Toronto, Ontario, By: The Honourable Justice E.A. Bowie Appearances: Counsel for the Appellant: Ron C. Peterson Counsel for the Respondent: John Grant ____________________________________________________________________ JUDGMENT The appeals from reassessments of tax made under the Income Tax Act for 1998, 1999 and 2000 taxation years are dismissed, with costs. Signed at Ottawa, Canada, this 25th day of October, 2005. "E.A. Bowie" Bowie J. Citation: 2005TCC671 Date: 20051025 Docket: 2003-254(IT)G BETWEEN: NICOLETTE HOLBROOK, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT BowieJ. [1] These appeals are brought from reassessments of income tax for the taxation years 1998, 1999 and 2000. The issue is whether child support amounts received by the Appellant in those taxation years are to be included in income. The resolution of this issue turns on whether there is a "commencement day" according to the definition of that term found in subsection 56.1(4) of the Income Tax Act ("Act").[1] [2] The facts are not in dispute. The Appellant and Mr. Ricky Gorgan (the "former spouse") were married in 1973, they had two children together, and in January 1993 they separated. They have lived separate and apart since that time. [3] On June 2, 1994, McIsaac J. of the Ontario Court (General Division) made an interim/interim Order for child support and spousal support. That Order required the former spouse to pay the Appellant monthly child support in the aggregate amount of $1,000, consisting of monthly payments of $500 per child, beginning June 1, 1994. [4] On April 28, 1998, the Appellant and her former spouse entered into a separation agreement. It required the former spouse to pay the Appellant monthly child support in the amount of $1,000, $836 being specified as the base amount under the Federal Child Support Guidelines (the Guidelines),[2] and $164 being specified as special and extraordinary expenses, with the first payment to be made on May 1, 1998. Paragraphs 16 and 18 of that agreement provide: 16. EFFECT OF THIS DOMESTIC CONTRACT a) The husband and wife accept the terms of this agreement in full satisfaction of all claims against the other except for claims: i) arising under this agreement; or ii) for a divorce judgment. b) The parties agree that the wife's support release as set out in this agreement constitutes a full and final financial settlement. c) This section may be pleaded and is a complete defence to any other claim which arises from their cohabitation and marriage. 18. SEPARATION AGREEMENT TO SURVIVE DIVORCE If a divorce judgment is obtained, all the terms of this agreement will survive and continue in force. [5] On May 28, 1999, Klowak J. of the Ontario Court (General Division) issued a Judgment for divorce. The divorce Judgment required the former spouse to pay the Appellant monthly child support in the amount of $1,000, $873 being the base amount and $127 the special and extraordinary expenses, the first payment to be made on May 1, 1998. [6] In the Appellant's 1998, 1999 and 2000 taxation years, she received child support of $1,000 each month, payable on the first day of each month. In filing her income tax returns for those years she did not include in income any of the child support amounts received after April 1998, because she took the view that those amounts were not taxable in her hands as a result of the combined effect of certain amendments to the Act made in 1997, and the separation agreement. [7] The Minister initially assessed her on that basis, but later reassessed her for all three years to add to her income child support amounts of $8,000, $12,000, and $12,000, respectively. [8] The issue in this case arises due to those amendments made to the Act in 1997, following the decision of the Supreme Court of Canada in Thibaudeau v. the Queen.[3] Under the prior law, child support payments that met the requirements of the Act were deductible by the payor, and taxable in the hands of the recipient. Although the Supreme Court upheld the constitutional validity of this legislative scheme in Thibaudeau, Parliament nevertheless amended the Act to provide that, as a general rule, child support payments would no longer be deductible by the payor, or taxed in the hands of the payee. The amendments came into force in 1997, and were made applicable to child support payments fixed by a Court Order or a separation agreement having a "commencement day" after April 1997. The expression "commencement day" is a term introduced to the Act by the amendment, and defined in subsection 56.1(4). [9] The formula for calculating the support amounts that are to be included in income under the new regime is set out in paragraph 56(1)(b) of the Act, which reads 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, (a) ... (b) the total of all amounts each of which is an amount determined by the formula A - (B + C) where A is the total of all amounts each of which is a support amount received after 1996 and before the end of the year by the taxpayer from a particular person where the taxpayer and the particular person were living separate and apart at the time the amount was received, B is the total of all amounts each of which is a child support amount that became receivable by the taxpayer from the particular person under an agreement or order on or after its commencement day and before the end of the year in respect of a period that began on or after its commencement day, and C is the total of all amounts each of which is a support amount received after 1996 by the taxpayer from the particular person and included in the taxpayer's income for a preceding taxation year; 56.(1) Sans préjudice de la portée générale de l'article 3, sont à inclure dans le calcul du revenu d'un contribuable pour une année d'imposition : a) ... b) le total des montants représentant chacun le résultat du calcul suivant : A - (B + C) où : A représente le total des montants représentant chacun une pension alimentaire que le a reçue après 1996 et avant la fin de l'année d'une personne donnée dont il vivait séparé au moment de la réception de la pension, B le total des montants représentant chacun une pension alimentaire pour enfants que la personne donnée était tenue de verser au aux termes d'un accord ou d'une ordonnance à la ou postérieurement et avant la fin de l'année relativement à une période ayant commencé à cette date ou postérieurement, C le total des montants représentant chacun une pension alimentaire que le contribuable a reçue de la personne donnée après 1996 et qu'il a incluse dans son revenu pour une antérieure; [10] Subparagraph B of this formula excludes from the income of the recipient those child support amounts that are receivable "under an agreement or order on or after its commencement day" and "in respect of a period that began on or after its commencement day". Whether an agreement or order has a "commencement day" is determined in accordance with the definition in subsection 56.1(4) of the Act: "commencement day" at any time of an agreement or order means (a) where the agreement or order is made after April 1997, the day it is made; and (b) where the agreement or order is made before May 1997, the day, if any, that is after April 1997 and is the earliest of (i) the day specified as the commencement day of the agreement or order by the payer and recipient under the agreement or order in a joint election filed with the Minister in prescribed form and manner, (ii) where the agreement or order is varied after April 1997 to change the child support amounts payable to the recipient, the day on which the first payment of the varied amount is required to be made, (iii) where a subsequent agreement or order is made after April 1997, the effect of which is to change the total child support amounts payable to the recipient by the payer, the commencement day of the first such subsequent agreement or order, and (iv) the day specified in the agreement or order, or any variation thereof, as the commencement day of the agreement or order for the purposes of this Act. « date d'exécution » Quant à un accord ou une ordonnance : a) si l'accord ou l'ordonnance est établi après avril 1997, la date de son établissement; b) si l'accord ou l'ordonnance est établi avant mai 1997, le premier en date des jours suivants, postérieur à avril 1997 : (i) le jour précisé par le payeur et le bénéficiaire aux termes de l'accord ou de l'ordonnance dans un choix présenté au ministre sur le formulaire et selon les modalités prescrits, (ii) si l'accord ou l'ordonnance fait l'objet d'une modification après avril 1997 touchant le montant de la qui est payable au bénéficiaire, le jour où le montant modifié est à verser pour la première fois, (iii) si un accord ou une ordonnance subséquent est établi après avril 1997 et a pour effet de changer le total des montants de qui sont payables au bénéficiaire par le payeur, la du premier semblable accord ou de la première semblable ordonnance, (iv) le jour précisé dans l'accord ou l'ordonnance, ou dans toute modification s'y rapportant, pour l'application de la présente loi. [11] The Appellant's counsel argued that the child support payments made after April 28, 1998 were receivable under the April 28, 1998 separation agreement, which provided for child support payments beginning May 1, 1998. This agreement, he says, is "the agreement" referred to in paragraph 56.1(4)(a) of the above definition. Accordingly, the Appellant argues, the commencement day is April 28, 1998, the day the separation agreement was made, and all the child support payments made thereafter are excluded from the Appellant's income. [12] The Appellant's counsel characterizes the separation agreement as a "stand alone" "comprehensive" agreement that was intended to, and did, supersede any previous agreements or orders, including the 1994 interim/interim Order. He argues that the 1994 Order was merely temporary, and that any rights or obligations that existed under it ceased to exist when the separation agreement was executed on April 28, 1998. In support of this argument, he relies on paragraphs 16 and 18 of the separation agreement (at paragraph 4, supra.). Any payments made after April 28, 1998 were, therefore, receivable solely under the separation agreement, and unrelated to any prior orders or agreements. The 1998 separation agreement is therefore "the agreement" for the purposes of paragraph 56.1(4)(a) of the definition of "commencement day". [13] In the alternative, the Appellant submitted that there is a commencement day under subparagraph 56.1(4)(b)(iv) of the definition, namely May 1, 1998, "the day specified in the agreement or order", and that this is so whether the payments were made under the separation agreement or the divorce Judgment. In either case, the Appellant's counsel says that there is a commencement day such that the child support amounts, beginning with the May 1, 1998 payment, are subject to the new legislative regime, and so are not to be included in the income of the recipient. [14] At paragraph 6 of his written argument, Mr. Peterson invokes the decision of the Federal Court of Appeal in Dangerfield v. The Queen:[4] 6. The second branch of the Appellant's Argument is that if support was receivable under an order made prior to May, 1997 then a commencement day is specified for the purposes of 56.1. (b) (iv). The case of Dangerfield in the Federal Court of Appeal makes it clear that once you have the type of language we have (Tab 2 p. 8 paragraph 6 and Tab 3 paragraph 3) and it is clear that the parties meant the new regime to apply as Ms. Holbrook has told us then there is a commencement day. (Dangerfield page 3) In Dangerfield there was no separation agreement, and the only judgment or order dealing with child support was signed on April 21, 1997, making provision for payments ... payable on the first day of each and every month, commencing May 1, 1997. Other provisions of the Judgment became effective immediately. In that context, the Federal Court of Appeal held that the intent of the Judge to create a commencement day of May 1, 1997 was clear, and that words such as "for the purposes of the Income Tax Act" were not necessary to bring the Judgment within subparagraph 56.1(4)(b)(iv). [15] Counsel's references to Tab 2, page 8, paragraph 6 and Tab 3, paragraph 3 are to these provisions in the separation agreement and the divorce Judgment, respectively: Separation Agreement 6. FINANCIAL PROVISIONS: CHILD SUPPORT a) The husband shall pay to the wife, on the first day of each month, $1,000 per month for the support of the children, commencing May 1, 1998. The child support figure is made up of a base amount of $836.00 and a payment in respect of special or extraordinary expenses of $164.00. The parties agree that the annual income of the wife is $47,559.60 and the annual income of the husband is $61,166.14 for the purposes of the Federal Child Support Guidelines. It is agreed that there are child care expenses paid by the wife which are assessed pursuant to s.7(1) of the Guidelines at $230.00 monthly. b) The Husband's child support obligation shall continue so long as the children are children of the marriage as defined under the Divorce Act, it being understood that as a result of his disability, it is unlikely that the child, Benjamin Jakob Gorgan will cease to be a child of the marriage. c) The husband and wife each agree that as part of their joint obligations to their children's well-being, that they will each continue to ensure that the children are covered under any extended plans coverage available to him or her through their employment. Divorce Judgment 3. THIS COURT ORDERS AND ADJUDGES, (upon finding the Petitioner's annual income to be $47,559.60 and the Respondent's annual income to be $64,166.14 for the purposes of the Federal Child Support Guidelines, and that there are child care expenses assessed pursuant to s. 7(1) of the Guidelines at $230.00 monthly) the following under the Divorce Act: (i) The Respondent shall pay to the Petitioner, commencing the May 1, 1998, by way of child support the sum of $1,000.00 per month so long as the children are children of the marriage as defined in the Divorce Act. (ii) the said amount to consist of a base amount of 873.00 monthly pursuant to s. 3(1)a of the Guidelines and $127.00 pursuant to s. 7 of the Guidelines. (iii) the parties shall ensure that the children are covered by any extended coverage available to them through their employment. (iv) the costs of tuition and book fees for post-secondary education for the children shall be split equally between the parties. Both of these documents were made after May 1997, however, and so cannot satisfy the opening words of paragraph (b) of the definition. Dangerfield therefore can have no application here. [16] Counsel for the Appellant argues that Parliament intended to reform the child support legislation by, among other things, ensuring that all child support awards made after April 1997 would be based on the Guidelines and that the Guideline amounts were fixed on the basis that they would not be taxable. The child support amount provided for in paragraph 6 of the 1998 separation agreement and the amount provided for in the divorce judgment were both based on the Federal Guidelines. He argues that it would be both unfair and inconsistent with the intention of Parliament to then subject these payments to tax under the old regime. I do not consider this argument to have any force, however, as it is obvious that the specified amount of $1,000 per month, both in the separation agreement and in the divorce Judgment, was not so much the product of the Guidelines as it was the amount that the parties agreed on. In each instance, the specified Guideline amount was less than $1,000, and the parties simply added an amount for special and extraordinary expenses that was exactly the amount required to bring the aggregate payment to the $1,000 per month amount that was first established by the interim/interim Order. If fairness and common sense were to dictate the result, surely they would militate against shifting the incidence of tax from the Appellant to the former spouse without decreasing the amount of the monthly payment. [17] It is not simply fairness and common sense that dictate the result, however, but the provisions of the Act, and those provisions are ambiguous, even within the strictures of the Supreme Court of Canada's recent definition of that word in Bell ExpressVu Limited Partnership v. Rex.[5] I appreciate that it appears from the words of paragraph (a) of the definition that where the last order, or "stand alone" separation agreement, that deals with the issue of the amount of child support to be paid is one that was made after April 1997 then the payments come within the new regime and are neither included in the payee's income nor deductible from that of the payer. However, if that were what Parliament intended when it enacted the amendments then it would not have included subparagraph (b)(iii) of the definition, because it would be redundant. Clearly, then paragraph (a) applies only where the initial agreement or order making provision for child support payments of the specific amounts in issue is made after April 1997. [18] The ambiguity has been resolved in that way by the decision of the Federal Court of Appeal in Kennedy v. Canada,[6] a decision that I am bound to follow. The facts in Kennedy were summarized by Sexton, J.A. in this way: [2] In 1991, Ms. Kennedy and her husband were separated and there was litigation pending in the Ontario Court (General Division) relating to the separation. In March of 1991, an interim child custody and support order was made, with Mr. Kennedy's consent. The order provided, among other things, for weekly child support payments for each of their children. The amount was fixed, with no provision for cost-of-living increases. [3] In December of 1991, the litigation was settled on terms set out in a written agreement, entitled "Minutes of Settlement". That agreement required, among other things, that Mr. Kennedy pay the same amount specified in the earlier order to Ms. Kennedy each week for each child. However, the Minutes additionally provided that the amount would be adjusted annually on the basis of a stipulated cost-of-living formula. [4] On September 24, 1997, on Ms. Kennedy's motion, the Ontario Court (General Division) issued a judgment providing for the payment of child support in the same amounts and on the same terms and conditions, including the cost-of-living adjustment, as set out in the Minutes of Settlement. [19] The issue before the Court was whether the child support payments received by Ms. Kennedy in 1997 and 1998 were subject to the old regime or the new regime. The issue turned on whether the September 1997 judgment created a commencement day under the Act; the Federal Court of Appeal found that it did not. Sexton J.A., writing for a unanimous Court, said: [10] The issue in the present case is whether the 1997 Judgment created a commencement day within the meaning of the statutory definition in s. 56.1(4) of the Income Tax Act, so as to make the child support payments made to Ms. Kennedy non-taxable in her hands. [11] It was argued by the appellant that because it was necessary for her to obtain a judgment in order to obtain an enforcement procedure to compel payment of the cost of living increases, the 1997 Order which was made after April 1997 created a commencement day within the meaning of paragraph (a) of the definition of s. 56.1(4). [12] I cannot accept this interpretation of the legislation. The obligation to pay the support payments was created by the Order of the Court in 1991. The obligation to pay the cost of living increases was created by the Minutes of Settlement which were signed in 1991. The 1997 Judgment did not alter either of those obligations. It may have made collection procedures simpler for Ms. Kennedy but the obligations themselves existed well prior to April 1997. Ms. Kennedy did not need to obtain the 1997 Judgment to enforce payment. She could have obtained relief in the Ontario Court by bringing an action to enforce the terms of the Minutes of Settlement. [13] It seems to me that, although the statutory definition of "commencement day" in subsection 56.1(4) might be more clearly drafted, the intention of the legislation is that orders or agreements made after April 1997 which actually create new obligations will be subject to the new regime. Obligations created under the old regime will remain subject to the old provisions. This intention is borne out by subparagraph (b)(ii) which specifies that agreements or orders which are varied after April 1997 so as to change child support amounts payable, will qualify as creating a commencement day. In such a case, a new obligation will have been created by the variance after April 1997. The same can be said of subparagraph (b)(iii) which provides that a subsequent agreement or order made after April 1997 which changes the total amount of child support payments creates a commencement day. [14] The Tax Court on earlier occasions has interpreted the legislation in a similar manner. See Katsoras v. Canada, [2002] T.C.J. No. 254 (T.C.C.), at paras. 8-10; Pieper v. Canada, [2004] T.C.J. No. 256 (T.C.C.), at para. 6; Bolt v. Canada, [2002] T.C.J. No. 401 (T.C.C.), at para 9; Price v. Canada, [2001] T.C.J. No. 355 (T.C.C.), at para 9. [20] I note that in the above passage the Court found that the obligation to pay child support was created by the interim Order, and the obligation to pay the cost of living increases was created by the Minutes of Settlement, even though the Minutes would have been the first comprehensive agreement between the parties. That this is so is made abundantly clear in the Reasons for Judgment given by Mogan J. in this Court:[7] [11] The Minutes of Settlement (Exhibit A-2) were signed by the Appellant and CMK in December 1991. I am satisfied that the Appellant obtained the judgment from the Ontario Court (General Division) in September 1997 (Exhibit A-3) in the expectation that, because the judgment was after May 1, 1997, subsequent child support payments would be free from tax in her hands. The Appellant's lawyer (Ms. MacPherson) obviously thought that such payments would be free from tax having regard to the fourth paragraph of her letter quoted in paragraph 10 above. [12] The child support payments received by the Appellant from CMK in 1998 and 1999 are the subject of this appeal. Can the judgment of the Ontario Court dated September 24, 1997 (Exhibit A-3) qualify as a "commencement date" with respect to those payments? The answer is found in the definition of "commencement date" set out in paragraph 9 above. The basic payments of $80 per child per week plus a cost-of-living adjustment on March 26, 1992 (and each year thereafter) were determined in the Minutes of Settlement (Exhibit A-2) signed in December 1991. Because those Minutes of Settlement were signed long before May 1997, and the payments in question were made pursuant to those Minutes of Settlement, the judgment of September 1997 (Exhibit A-3), standing alone, does not qualify under clause (a) of the definition of "commencement day". [13] Under clause (b) of the definition of "commencement day", there are four conditions which could possibly establish a commencement day for the Appellant after April 1997. The Appellant and CMK have never filed a joint election with the Minister, and so the condition in subparagraph (i) cannot be satisfied. Exhibit A-3 did not change the child support amounts payable to the Appellant, and so subparagraph (ii) cannot be satisfied. There is no subsequent agreement or order made after April 1997 which changed the total child support amounts payable, and so subparagraph (iii) cannot be satisfied. There is no agreement or order which specifies a day as the "commencement day" for the purposes of the Income Tax Act, and so subparagraph (iv) cannot be satisfied. [21] Whether child support payments payable under a pre-April 1997 order or agreement remain subject to the old regime, or become subject to the new regime, depends on whether the parties file with the Minister a joint election in prescribed form (subparagraph (b)(i) of the definition), or the amount of the payments is changed after April 1997, either by a variation of the existing agreement or order (subparagraph (b) (ii)), or by making a subsequent agreement or order (subparagraph (b)(iii)). In this case, there is a subsequent agreement and there is a subsequent order, but neither of them has the effect of changing the total child support obligation that was created in June 1994 by the interim/interim order, nor do they create a new obligation. There is therefore no commencement day, and the old regime continues to apply. I understand that to be the ratio decidendi of Kennedy. [22] The Appellant's counsel put a great deal of emphasis on the provisions of the separation agreement that I have reproduced at paragraph [4] above. He says that the payments were made pursuant to that agreement after May 1998 because it superseded the interim/interim order, and it survived the making of the divorce Judgment. However, the parties cannot contract out of the Court's jurisdiction, either after or before it is exercised, in matters of child support. This is explained by Beaubier J. in Morin v. The Queen[8] at paragraph 9: [9] Mr. Morin and Ms. Foster cannot agree to waive or otherwise abrogate the rights of a third party, namely, a child, for support determined by a court order. Any change must be made by another court order. This is quite different from an agreement to a reduction of spousal support. The different legal character of spousal support and child support was articulated by Madam Justice Wilson in Richardson v. Richardson, in the following passage, quoted with approval by Justice Sopinka writing for the majority of the Supreme Court of Canada in Willick v. Willick, 1994 CanLII 28 (S.C.C.), [1994] 3 S.C.R. 670: This inter-relationship [between spousal maintenance and child support] should not, however, lead us to exaggerate its extent or forget the different legal bases of the support rights. The legal basis of child maintenance is the parents' mutual obligation to support their children according to their need. That obligation should be borne by the parents in proportion to their respective incomes and ability to pay: Paras v. Paras, supra.... Child maintenance, like access, is the right of the child: Re Cartlidge and Cartlidge, [1973] 3 O.R. 801 (Fam. Ct.). For this reason, a spouse cannot barter away his or her child's right to support in a settlement agreement. The court is always free to intervene and determine the appropriate level of support for the child.... Further, because it is the child's right, the fact that child support will indirectly benefit the spouse cannot decrease the quantum awarded to the child. [Emphasis added.] In Pelech v. Pelech, 1987 CanLII 57 (S.C.C.), [1987] 1 S.C.R. 801, released concurrently with Richardson, the following often-quoted principle was stated: [T]he Hyman principle that parties cannot by contract oust the jurisdiction of the court in matters of spousal maintenance is an established tenet of Canadian law. Although that case pertained to spousal support rather than child support, if it is true that parties cannot oust the court's jurisdiction by way of spousal support agreements, it follows that the court's jurisdiction with respect to child support cannot be avoided by agreement. [23] It was manifestly not the intention of Parliament to shift the burden of taxation in respect of child support payment arrangements that were in place prior to the coming into force of the new regime, but to put that new regime in place only in respect of child support obligations that arise for the first time, or are adjusted as to quantum, after April 1997, unless the parties agree not just in writing, but by filing the prescribed form. Counsel for the Appellant sought to lead evidence from her as to an oral agreement between her and her former spouse concerning their intention as to the incidence of tax on the child support payments to be made after execution of the 1998 separation agreement. I excluded that evidence, as any such agreement can only be effective if it is made in conformity with paragraph (b)(i) of the definition, which is to say by filing the prescribed form of joint election. It is quite clear that no such joint election was filed in this case. [24] The appeals are dismissed, with costs. Signed at Ottawa, Canada, this 25th day of October, 2005. E.A. Bowie Bowie J. CITATION: 2005TCC671 COURT FILE NO.: 2003-254(IT)G STYLE OF CAUSE: Nicolette Holbrook and Her Majesty the Queen PLACE OF HEARING: Toronto, Ontario DATE OF HEARING: March 10, 2005 REASONS FOR JUDGMENT BY: The Honourable Justice E.A. Bowie DATE OF JUDGMENT: October 25, 2005. APPEARANCES: Counsel for the Appellant: Ron C. Peterson Counsel for the Respondent: John Grant COUNSEL OF RECORD: For the Appellant: Name: Ron C. Peterson Firm: Ron C. Peterson For the Respondent: John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada [1] R.S.C. 1985 (5th Supp.), c. 1, as amended. [2] SOR/97-175. [3] [1995] 2 S.C.R. 627. [4] [2004] 2 C.T.C. 24; 2003FCA480. [5] [2002] 2 S.C.R. 559. [6] [2004] F.C.J. No. 2122. [7] [2003] 4 C.T.C. 2263; 2003TCC338. [8] [2004] 5 C.T.C. 2452; 2004TCC584.