Date: 20070511
Docket: A-565-05
Citation: 2007 FCA 145
CORAM: NADON
J.A.
SHARLOW
J.A.
MALONE
J.A.
BETWEEN:
NICOLETTE HOLBROOK
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
SHARLOW J.A.
[1]
The
appellant Nicolette Holbrook is appealing the judgment of the Tax Court of
Canada (2005 TCC 671) dismissing her income tax appeal for 1998, 1999 and 2000.
The issue in the Tax Court and in this appeal is whether Ms. Holbrook is
required to pay income tax on child support amounts she received in those years
from her former spouse, Mr. Gorgan.
[2]
The child
support amounts in issue are not taxable to Ms. Holbrook if, in the words of
paragraph 56(1)(b) of the Income Tax Act, R.S.C. 1985 (5th
Supp.), c. 1, they are amounts that:
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… became
receivable by [Ms. Holbrook] from [Mr. Gorgan] 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.
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. . . [M.
Gorgan] était tenue de verser [à Mme Holbrook] aux termes d’un
accord ou d’une ordonnance à la date d’exécution ou postérieurement et avant
la fin de l’année relativement à une période ayant commencé à cette date ou
postérieurement.
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[3]
This provision asks
the following questions:
(1)
Under what agreement
or order was the amount payable?
(2)
Does that agreement
or order have a “commencement day”?
[4]
Both questions are
critical to the determination of the correct tax treatment of child support
amounts once they are paid. The answers distinguish child support amounts that
are governed by the current provisions of the Income Tax Act (the “new
regime”) from those that are governed by the former inclusion/deduction regime
(the “old regime”). The difference is significant. Under the old regime, child
support amounts were taxable to the recipient and deductible by the payer.
Under the new regime, child support amounts are not taxable to the recipient or
deductible by the payer.
[5]
In my view, the Judge
in the court below erred in failing to consider the first question.
[6]
The term
“commencement day” is defined in subsection 56.1(4) of the Income Tax Act.
The definition reads as follows:
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"commencement
day" at any time of an agreement or order means
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« date
d'exécution » Quant à un accord ou une ordonnance:
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(a) where the agreement or order is
made after April 1997, the day it is made; and
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a) si l'accord ou
l'ordonnance est établi après avril 1997, la date de son établissement;
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(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
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b) si l'accord ou
l'ordonnance est établi avant mai 1997, le premier en date des jours
suivants, postérieur à avril 1997:
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(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,
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(i) le jour précisé par le payeur et le
bénéficiaire aux termes de l'accord ou de l'ordonnance dans un choix conjoint
présenté au ministre sur le formulaire et selon les modalités prescrits,
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(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,
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(ii) si l'accord ou l'ordonnance fait l'objet
d'une modification après avril 1997 touchant le montant de la pension
alimentaire pour enfants qui est payable au bénéficiaire, le jour où le
montant modifié est à verser pour la première fois,
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(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
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(iii) si un accord ou une ordonnance
subséquent est établi après avril 1997 et a pour effet de changer le total
des montants de pension alimentaire pour enfants qui sont payables au
bénéficiaire par le payeur, la date d'exécution du premier semblable accord
ou de la première semblable ordonnance,
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(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.
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(iv) le jour précisé dans l'accord ou
l'ordonnance, ou dans toute modification s'y rapportant, pour l'application
de la présente loi.
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[7]
Child support amounts
are subject to the new regime only if they are payable under an agreement or
order with a commencement day of May 1, 1997 or later. The commencement day of
an agreement or order made after April 1997 is determined by paragraph (a)
of the definition of “commencement day”. Paragraph (a) says that the
commencement day of an agreement or order made after April 1997 is the day it
is made. It follows that a child support amount payable under an agreement or
order made after April 1997 is subject to the new regime.
[8]
Generally, a child
support amount payable under an agreement or order made before May 1997 is
subject to the old regime. However, there are four exceptions to that general
rule. The four exceptions operate by attributing a post-April 1997 commencement
day to a pre-May 1997 agreement or order.
1)
The first exception
applies if the parties to an agreement or order file a joint election
specifying a post-April 1997 commencement day for a pre-May 1997 agreement or
order (subparagraph (b)(i) of the definition of “commencement
day”). Because of this provision, it is always open to parties to agree to be
subject to the new regime.
2)
The second exception
applies if a pre-May 1997 agreement or order is varied after April 1997 to
change the child support amounts payable. In that case, the commencement day of
the pre-May 1997 agreement as varied is the day on which the first varied
amount is payable (subparagraph (b)(ii) of the definition of
“commencement day”).
3)
The third exception
applies if there is a pre-May 1997 agreement or order under which child support
amounts are payable, and another agreement or order is made after April 1997,
the effect of which is to change the total child support amounts payable
(subparagraph (b)(iii) of the definition of “commencement day”). This
provision may cover a number of different situations. Generally, it is intended
to ensure that where there is an increase in the total child support amounts
payable, the new regime cannot be avoided by having the original amount
governed by pre-May 1997 agreement or order and the increase governed by a
post-April 1997 agreement or order.
4)
The fourth exception
applies if a pre-May 1997 agreement or order (or a variation of a pre-May 1997
agreement or order), specifies a particular day after April 1997 as the
commencement day of the agreement or order (subparagraph (b)(iv)
of the definition of “commencement day”). In that case, the commencement day is
the specified day. Whether that condition is met in a particular case turns on
the interpretation of the agreement or order, which may in certain cases
require consideration of extraneous evidence. This condition may be met by any
variation of an old agreement or order, whether or not there is a change to
total child support amounts payable, as long as a commencement day is specified
in the agreement or order in which the variation is made.
[9]
The four exceptions
in paragraph (b) do not expressly deal with the situation where there is
a pre-May 1997 agreement or order and a post-April 1997 agreement or order,
both requiring the payment of the same amount of child support, where the later
agreement or order does not expressly stipulate a commencement day and the
parties do not make a joint election. In that situation, the later agreement or
order may be construed as merely recognizing the continuation of the obligation
set out in the earlier agreement or order, in which case the child support
amounts would be payable under the earlier agreement or order and the old
regime would apply even after the later agreement or order is made because the
later agreement or order would not be relevant. Alternatively, the later
agreement or order may be construed as terminating the child support obligation
in the previous agreement or order, and replacing it with a new child support
obligation, in which case the child support amounts paid after the later
agreement or order is made would be payable under that later agreement or
order, which would have a post-April 1997 commencement day pursuant to
paragraph (a) of the definition of “commencement day”. Therefore, the
new regime would apply after the later agreement or order is made. I will
illustrate with two examples.
[10]
In the first example,
parties enter into an agreement in 1996 that stipulates an obligation to pay
child support, and in 1999 the entire agreement is embodied in a court order.
The court order does not stipulate a commencement day and the parties do not
make a joint election. If as a matter of law the child support obligation
stipulated in the 1996 agreement is capable of being enforced, the 1999 order
may be construed as merely recognizing the continuation of the existing
obligation, unless there is some provision in the 1999 order that precludes
that interpretation. If that is the correct interpretation of the order, it
would be consistent with the statutory scheme to conclude that child support
amounts paid after 1999 are payable under the 1996 agreement rather than the
1999 order, so that there would be no commencement day and the old regime would
apply.
[11]
In the second
example, an interim child support order is made in 1996, and a final child
support order is made in 1999 stipulating the same amounts. It is generally the
case that an interim order ceases to have effect when it is replaced by a final
order. In that event, child support payments after the final order is in place
normally should be presumed to have been made under the final order, not the
interim order, and the new regime would apply to those payments. That
presumption may be rebutted by appropriate language in the final order.
[12]
The facts of this
case are not in dispute. In 1994, an interim child support order was made by
the General Division of the Ontario Court requiring Mr. Gorgan to pay Ms.
Holbrook child support payments of $500 per month for each of their two
children, starting on June 1, 1994. It is undisputed that the interim order
established a binding obligation to pay child support. That obligation would
subsist as long as the interim order remained in force.
[13]
In April of 1998, the
parties entered into a separation agreement that apparently was intended to
resolve all outstanding issues, and to survive any divorce judgment. It states
that Mr. Gorgan is obliged to pay child support of $1,000 per month ($500 per
child) starting May 1, 1998. Of that amount, $836 was specified as the base
amount under the Federal Child Support Guidelines, SOR/97-175 and $164
was specified as special and extraordinary expenses. On May 28, 1999, the
Ontario Court issued a judgment for divorce requiring Mr. Gorgan to pay monthly
child support of $1,000 commencing May 1, 1998, of which $873 was said to be
the base amount under the Guidelines and $127 was special and
extraordinary expenses.
[14]
As I understand the
separation agreement, it stipulates a $1,000 per month child support obligation
in place of the obligation established under the interim order, which ceased to
have effect once the separation agreement came into force. If the agreement had
been intended merely to recognize and continue the obligations created by the
interim order, there would be no reason to stipulate that monthly payments
under the agreement would commence on May 1, 1998. I conclude that all child
support payments that were payable to Ms. Holbrook on May 1, 1998 or later are
payable under the separation agreement and not the interim order. Because that
separation agreement was entered into after April 1997, its commencement day is
the day it was made in April of 1998. Therefore, all child support amounts
payable on or after May 1, 1998 are subject to the new regime and are not
taxable to Ms. Holbrook.
[15]
In the circumstances,
it is not necessary to consider whether the 1999 divorce judgment has a
commencement day because the child support amounts payable to Ms. Holbrook were
already subject to the new regime by virtue of the separation agreement.
However, if there had been no separation agreement, I would have concluded that
the divorce judgment is a final order that terminated the interim order
effective May 28, 1999, so that child support amounts payable on or after June
1, 1999 would have been subject to the new regime.
[16]
The Judge
determined that all child support amounts payable to Ms. Holbrook were subject
to the old regime. He reached that conclusion because he considered himself
bound to follow the decision of this Court in Kennedy v. Canada, 2004
FCA 437. He interpreted that case as establishing a principle to the effect
that where the amount of a child support obligation is established in a pre-May
1997 agreement or order, the new regime can never apply unless there is an
agreement or order that changes the total child support amounts payable.
[17]
In my
view, Kennedy establishes no such principle. The existence of that
supposed principle is based on subparagraph (iii) of the definition of
“commencement day’ in subsection 56.1(4) (quoted above), which establishes a
commencement day for a “subsequent agreement or order” made after April 1997
that changes total child support amounts payable. In Kennedy, there was
an interim order for child support in 1991, followed by minutes of settlement
entered into in 1991 stipulating the same payments plus a cost of living
adjustment. In September of 1997, a final order was made incorporating the
terms set out in the minutes of settlement. Not only were the amounts
unchanged, the obligation itself continued to be grounded in the 1991 minutes
of settlement. That obligation was confirmed by the court order, not replaced.
[18]
Kennedy did not consider the
situation where a post-April 1997 agreement or order terminates the child
support obligation in a pre-May 1997 agreement or order, and replaces it with a
new child support obligation. In that situation, it is not relevant to ask
whether there has been a change to the child support amount payable because the
pre-May 1997 agreement or order has ceased to have effect.
[19]
It was
suggested in argument that subparagraph (iii) of the definition of
“commencement day” in subsection 56.1(4) is rendered pointless if a post-April
1997 agreement or order that does not change the total child support amounts
payable under a pre-May 1997 agreement or order is found to have a
“commencement day”. I do not accept that argument. In my view, the intention
of Parliament would be respected, as well as the intention of the parties in
making the later agreement or the court in making the later order, by asking
whether the later agreement or order terminates and replaces the child support
obligation established in the previous agreement or order, or continues it. If
the later agreement or order terminates and replaces the prior obligation, then
no injustice results from finding the post-April 1997 agreement to have a
“commencement day” pursuant to paragraph (a) of the definition in
subsection 56.1(4).
[20]
For these
reasons, I would allow this appeal with costs in this Court and in the Tax
Court, set aside the judgment of the Tax Court, allow Ms. Holbrook’s income tax
appeal for 1998, 1999 and 2000, and refer this matter back to the Minister for
reassessment in accordance with these reasons.
"K. Sharlow"
"I
agree
B. Malone J.A."
NADON J.A. (Dissenting)
[21]
I cannot agree with my colleague Sharlow J.A. In
my view, this appeal should be dismissed.
[22]
The issue in this appeal stems from legislative
amendments which were brought to the Income Tax Act in 1996 (Income
Tax Budget Amendments Act 1996, S.C. 1997 c.25, s.9). Prior to these
amendments, child support payments made under a written agreement or court
order were taxable in the hands of the recipient and deductible by the payer
(the “old regime”). However, following the amendments, such payments were no longer
either taxable or deductible (the “new regime”).
[23]
The amendments provide for a number of ways by
which parties who entered into a child support agreement or court order under
the old regime can render the payment thereof subject to the new regime. Although
the definition of “commencement day” in paragraph 56.1(4)(b) of the Income
Tax Act sets out four scenarios pursuant to which the payment of child
support under an agreement or a court order made before May 1997 falls under
the new regime, I need only address the scenario set out at subparagraph (iii)
thereof which, in my view, is the only relevant one in this appeal.
[24]
The sole issue on this appeal is whether there
is a “commencement day” within the meaning of the statutory definition found in
subsection 56.1(4) of the Income Tax Act (quoted above in paragraph 6 of
Sharlow J.A.’s Reasons).
[25]
Sharlow J.A. concludes that because as of May 1,
1998, the child support payments were payable under a separation agreement
dated April 1998, i.e. an agreement made after April 1997, that
terminated and replaced a previous child support order, there is a
“commencement day” as defined in paragraph (a) of the statutory
definition. This leads Sharlow J.A. to conclude that April 28, 1998 is the
“commencement day” and that, as result, all child support payments commencing
May 1, 1998 fall into the new regime and hence are not taxable to the
appellant. Put another way, my understanding of my colleague’s approach is that
since the separation agreement of April 28, 1998 is, pursuant to paragraph (a),
an “… agreement made after April 1997,” the commencement day for the purpose of
the paragraph is April 28, 1998, i.e. the date the agreement was made.
[26]
In my respectful view, on the facts before us,
that conclusion cannot be correct.
[27]
I start with the proposition that there cannot
be any doubt that an interim order is an order which can create an obligation
to pay child support payments. That point was made abundantly clear by this
Court in Kennedy v. Canada, 2004 FCA 437, where Sexton J.A., writing for
a unanimous Court, held that the obligation to pay for child support had been
created by an interim child custody and support order made in 1991 (see
paragraph 12 of the reasons in Kennedy, supra).
[28]
In the present matter, I have no hesitation in
finding, as the Judge below did, that the interim order of June 22, 1994
created the former spouse’s obligation to pay child support. Thus, contrary to
my colleague, it is my view that the relevant provision for the determination
of this appeal is paragraph (b) of the definition of “commencement day”
in subsection 56.1(4) of the Income Tax Act and not paragraph (a).
[29]
Consequently, the real issue before us is
whether the separation agreement of April 1998 or, for that matter, the divorce
judgment of May 1999, had the effect of changing, in the words of subparagraph
(b)(iii) of the definition of “commencement day”, “the total child
support amounts payable” to the appellant by her former spouse. In my view,
there can be only one answer to that question and that answer is no.
[30]
It is clear that neither the separation
agreement nor the judgment for divorce made any change to the child support
payments payable to the appellant by her former spouse. They remained at $1000
per month for the two children of the marriage. In view of the wording of subparagraph
(iii) of the statutory definition, no other conclusion is possible.
[31]
I would add that it is immaterial whether the
child support payments, which commenced May 1, 1998, became payable under the
separation agreement in lieu of the interim order of June 1994. What is
relevant, however, is whether the agreement concluded after April 1997 had the
effect of changing the child support payments which had been created by the
interim order of 1994. As I have already indicated, the answer to the question
is no.
[32]
Consequently, there is no “commencement day”
under paragraph (b) of the statutory definition and, as a result, the
child support payments fall under the old regime and are thus taxable to the
appellant.
[33]
Before concluding, I must point out that if my
colleague is right in her view that there was no order made prior to May 1997
within the meaning of paragraph (b) of the statutory definition, then
subparagraph (b)(iii) is meaningless. In other words, whenever an
agreement or order made prior to May 1997 is superseded or replaced by an
agreement or order made after April 1997, there will be a “commencement day”
for the purposes of the section whether or not the subsequent agreement has the
effect of changing or modifying the child support amounts.
[34]
I am thus satisfied that in concluding that the
Minister’s reassessments of tax for taxation years 1998, 1999, and 2000 was correct
and hence in dismissing the appellant’s appeal therefrom, the Tax Court judge
made no error.
[35]
I would therefore dismiss the appeal with costs.
"M. Nadon"
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