The Queen v. McLaren, 90 DTC 6566, [1990] 2 CTC 429 (FCTD)

MacKay, J.: —This is an appeal by the plaintiff Her Majesty The Queen from a decision of the Tax Court of Canada, dated February 22, 1988, which allowed the defendant taxpayer's appeal from a notice of reassessment of income tax made by the Minister of National Revenue in 1985 for the taxation year 1983.

Counsel for the parties submitted an agreed statement of facts which provides as follows:

1. The defendant resides in the Municipality of North Vancouver in the Province of Vancouver.

2. The defendant's income for 1983 was $43,851.

3. The defendant's husband in 1983 was Martin McLaren.

4. The defendant's husband had no income in 1983.

5. The defendant's children were under fourteen years of age in 1983.

6. In 1983 the children were ordinarily in the custody of the defendant.

7. The defendant's husband was a supporting person of the children within the meaning of subsection 63(3) of the Income Tax Act.

8. The defendant's husband was not a person within the meaning of subparagraph 63(2)(b)(iii), (iv), (v) or (vi) of the Income Tax Act.

9. The defendant paid the amount of $535 on account of child care expenses incurred with respect to the children.

10. The defendant deducted the child care expenses incurred by her in computing her income for her 1983 taxation year.

11. By Notice of Reassessment dated March 18, 1985, the Minister of National Revenue reassessed the defendant to disallow the deduction for child care expenses claimed by her in respect of her 1983 taxation year in the amount of $535.

12. In so reassessing the defendant, the Minister of National Revenue proceeded on the basis that the defendant's income for 1983 of $43,851 exceeded the income for 1983 of a supporting person of the eligible children for whom the child care expenses were claimed.

The authority for deducting child care expenses is found in section 63 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). I set forth the relevant portions of the section:

63. (1) Subject to subsection (2), there may be deducted in computing the income of a taxpayer for a taxation year the aggregate of all amounts each of which is an amount paid in the year as or on account of child care expenses in respect of an eligible child of the taxpayer for the year

(a) by the taxpayer, where he is a taxpayer described in subsection (2) and the supporting person of the child for the year is a person described in subparagraph (2)(b)(vi), or

(b) by the taxpayer or a supporting person of the child for the year, in any other case,

to the extent that

(c) the amount is not included in computing the amount deductible under this subsection by an individual (other than the taxpayer), and

(d) the amount is not an amount (other than an amount that is included in computing a taxpayer's income and that is not deductible in computing his taxable income) in respect of which any taxpayer is or was entitled to a reimbursement or any other form of assistance,

and the payment of which is proven by filing with the Minister one or more receipts each of which was issued by the payee and contains, where the payee is an individual, that individual’s Social Insurance Number, but not exceeding the amount, if any, by which

(e) the least of

(i) $8,000,

(ii) the product obtained when $2,000 is multiplied by the number of eligible children of the taxpayer for the year in respect of whom the child care expenses were incurred, and

(iii) 2/3 of the taxpayer's earned income for the year

exceeds

(f) the aggregate of all amounts each of which is an amount deducted, in respect of the eligible children of the taxpayer that are referred to in subparagraph (e)(ii), under this subsection for the year by an individual (other than the taxpayer) to whom subsection (2) is applicable for the year.

(2) Where the income for a taxation year of a taxpayer who has an eligible child for the year exceeds the income for that year of a supporting person of that child (on the assumption that both incomes are computed without reference to this section and paragraphs 56(1)(s) and (u)), the amount that may be deducted by the taxpayer under subsection (1) for the year as or on account of child care expenses shall not exceed the lesser of

(a) the amount that would, but for this subsection, be deductible by him for the year under subsection (1); and

(b) the product obtained when the lesser of

(i) $240, and

(ii) $60 multiplied by the number of eligible children of the taxpayer for the

year in respect of whom the child care expenses were incurred

is multiplied by the number of weeks in the year during which the child care expenses were incurred and throughout which the supporting person was a person described in one or more of the following subparagraphs:

(iii) a person in full-time attendance at a designated educational institution (within the meaning assigned by paragraph 110(9)(a)),

(iv) a person certified by a qualified medical practitioner to be a person who

(A) by reason of mental or physical infirmity and confinement throughout a period of not less than 2 weeks in the year to bed, to a wheelchair or as a patient in a hospital, an asylum or other similar institution, was incapable of caring for children, or

(B) by reason of mental or physical infirmity, was in the year, and is likely to be for a long-continued period of indefinite duration, incapable of caring for children,

(v) a person confined to a prison or similar institution throughout a period of not less than 2 weeks in the year, or

(vi) a person living separate and apart from the taxpayer, throughout a period of not less than 90 days commencing in the year, by reason of a breakdown of their marriage or similar domestic relationship.

(2.1) For the purposes of this section, where, in any taxation year, the income of a taxpayer who has an eligible child for the year and the income of a supporting person of the child are equal (on the assumption that both incomes are computed without reference to this section and paragraphs 56(1)(s) and (u)), no deduction shall be allowed under this section to the taxpayer and the supporting person in respect of the child unless they jointly elect to treat the income of one of them as exceeding the income of the other for the year.

“Child care expense", “eligible child" and “supporting person" are all defined in subsection 63(3) of the Act. There is no dispute that the claimed $535 is within the definition of child care expense and that in 1983, the children for whom the expenses were incurred were eligible children and that Martin McLaren, the defendant's husband, was a supporting person, in accord with the Act.

The issue before this Court raises a question of statutory interpretation: does subsection 63(2) disentitle a taxpayer from claiming the child care deduction when his or her supporting person had nil income for the relevant taxation year? When the question was considered by the Tax Court, His Honour Judge Taylor answered it in the negative. He gave the following explanation for his decision to allow the taxpayer's appeal from the reassessment [1988] 1 C.T.C. 2371; 88 D.T.C. 1259 at 2372 (D.T.C. 1260):

As I see it, the point at issue has been determined by this Court in a recent judgment of Chief Judge Couture—Normand Fiset v. M.N.R., [1988] 1 C.T.C. 2335; 88 D.T.C. 1223, in which the Chief Judge reached the conclusion that under circumstances where the "supporting person" had no income, that subsection 63(2) of the Act did not apply.

It has been the position of the plaintiff since the issuance of the reassessment that the essential nature of subsection 63(2) is comparative. Simply put, this means that where the income of the taxpayer exceeds that of the supporting person, and where none of the limiting circumstances set out in paragraphs (iii)-(vi) apply, no deduction may be claimed by the taxpayer. The plaintiff submits that to enter into a debate as to whether "income", for the purposes of section 63, constitutes a positive amount merely confuses the issue. It is the plaintiff's contention that in this instance the defendant's income is greater than zero and therefore the deduction must be disallowed. This logically follows, states the plaintiff, because where the supporting person does not fall within any of the situations outlined in paragraphs 63(2)(iii) to (vi), the product obtained in paragraph 63(2)(b) is zero, and the subsection as a whole excludes any deduction which exceeds the lesser of the amounts calculated in paragraphs 63(2)(a) and (b).

In support of its contention, the plaintiff refers to section 3 of the Act, which stipulates the method for determining a taxpayer's income:

3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:

(a) determine the aggregate of amounts each of which is the taxpayer's income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, his income for the year from each office, employment, business and property;

(b) determine the amount, if any, by which

(i) the aggregate of

(A) the aggregate of his taxable capital gains for the year from dispositions of property other than listed personal property,

(B) his taxable net gain for the year from dispositions of listed personal property, and

(C) the amount, if any, by which

(1) the aggregate of his taxable capital gains for the year from indexed security investment plans

exceeds

(Il) the aggregate of his allowable capital losses for the year from indexed security investment plans,

exceeds

(ii) the amount, if any, by which his allowable capital losses for the year from dispositions of property other than listed personal property exceed his allowable business investment losses for the year;

(c) determine the amount, if any, by which the aggregate determined under paragraph (a) plus the amount determined under paragraph (b) exceeds the aggregate of the deductions permitted by subdivision e in computing the taxpayer's income for the year (except such of or such part of those deductions, if any, as have been taken into account in determining the aggregate referred to in paragraph (a));

(d) determine the amount, if any, by which the remainder determined under paragraph (c) exceeds the aggregate of

(i) the aggregate of amounts each of which is his loss for the year from an office, employment, business or property or his allowable business investment loss for the year, and

(ii) the amount, if any, by which the amount determined under subclause (b)(i)(C)(lI) exceeds the amount determined under subclause (b)(i)(C)(l);

and

(e) determine the amount, if any, by which the remainder determined under paragraph (d) exceeds the lesser of

(i) the amount, if any, by which the amount determined under subparagraph (b)(ii) exceeds the aggregate determined under subparagraph (b)(i),

and

(ii) $2,000, or if the taxpayer is a corporation nil;

and the remainder, if any, obtained under paragraph (e) is the taxpayer's income for the year for the purposes of this Part.

The plaintiff points out that what one is left with at the end of the process described in section 3 is the taxpayer's income. It is this amount which must be determined for the purposes of section 63 and this can incorporate the figure zero. It is the plaintiff's submission that the Tax Court, both in this case and Fiset v. M.N.R., [1988] 1 C.T.C. 2335; 88 D.T.C. 1226, erred by focusing instead on whether there was income from a source, such as employment, and it is this misconception which leads the Court to the conclusion that "income" must be a positive amount. The plaintiff also argues that the Tax Court erred in finding that the word “remainder” at the end of the section 3 formula implies a positive amount. According to the plaintiff, if one accepts the dictionary definition put forward by the defendant that "remainder" is the number left after subtraction or division, then when one divides 63 by nine, the result is seven and the remainder zero. Thus, zero is a number like any other, except that it holds a very important place in the numerical system.

Moreover, when one turns to the definition of taxable income in subsection 2(2) of the Act, which states that "taxable income of a taxpayer for a taxation year is his income for the year plus the addition and minus the deductions permitted by Division C", it is the plaintiff's contention that a taxpayer with zero income can and should fit into this equation. It only makes sense, according to the plaintiff, that a taxpayer can start with zero income and then only where he or she has zero taxable income in the result, does he or she not pay any tax. In order to be logically consistent with the overall object and purpose of the Act as a whole, income must include the number zero. For it would be absurd, to the plaintiff's way of thinking, if one were to follow the reasoning of the Tax Court and hold that pursuant to section 63, the taxpayer with the higher income can claim the child care deduction where the supporting person has no income and yet when the supporting person has income in the positive amount of $1, the deduction is then claimed only by the supporting person. That result counsel for the plaintiff characterizes as not logically consistent or rational.

The plaintiff also refers to other provisions of the Act. Paragraphs 56(1)(s) and (u) rely on a comparison of incomes for the purpose of allocating, between a taxpayer and his or her spouse, certain amounts paid as social assistance payments and home insulation or energy conversion grants, as income. In these instances, where the taxpayer is married or residing with his or her spouse at the time the payment is received, the amount can only be attributed as income of the taxpayer, if his or her income for the year is less than the spouse's income for the year, otherwise it is attributed to the spouse where he or she has income for the year which is less than that of the taxpayer. The obvious intent of these provisions is said to be that if you are a married couple, the person with the lower income includes the designated amounts as income. The plaintiff asserts that it would fly in the face of parliamentary intent if the interpretation of income as found by the Tax Court in this case was applied to these provisions. I am not persuaded that the allocation, as income, of payments in accord with paragraphs 56(1)(s) and 56(1)(u) is comparable to the entitlement to claim deductions under subsections 63(1) and (2), nor that the interpretation of "income" as found by the Tax Court in this case would be contrary to the intent of Parliament in the two other paragraphs mentioned. As I see it the result would then be that payments there referred to would be allocated to the taxpayer as income where the spouse has no income and the payments would be taxable, which seems consistent with the general intent of Parliament.

The plaintiff refers as well to section 122.2, dealing with a child tax credit calculated as that provision specifies by a formula including "the aggregate of all amounts each of which is the income for the year of the individual or a supporting person of an eligible child. . .”. Again, I am not persuaded that the definition of income found by the Tax Court in reference to subsection 63(2) would be adverse to the intent of Parliament apparent in section 122.2.

Finally, the plaintiff also canvasses the legislative history of the provision. Initially, the benefit provided by section 63 was directed principally toward women. A man could only claim the deduction if he was not married, or was separated from his wife, or his wife was mentally or physically incapable of caring for children, or his wife was in prison. Thus, Parliament was basically granting a form of assistance to women in order that they could work outside the home. The current wording of the legislation apparently resulted from concern that it was discriminatory in its original form, and now the focus is simply on the lower income person. Thus, the plaintiff points out that the object and purpose of section 63 is, and always has been, comparative only. It was never Parliament's intention to grant the normal breadwinner, the one parent earning income in a family, a deduction for child care expense. For this intention the plaintiff relies on the fact that the various subsections and subparagraphs of the provision severely limit not only the situations within which the deduction may be claimed, but also the actual amount of the deduction itself.

The defendant, on the other hand, submits that the object of the provision in question is to generally enable the earning of income by either the taxpayer or the supporting person. Counsel for the defendant finds support for his position by turning to subsection 63(1), which he submits cannot be completely ignored in the analysis of the meaning of subsection 63(2). For although it is subject to subsection 63(2), subsection (1) is still the first step to entitlement to the child care deduction and thus serves as an important indication of Parliament's intent in this regard. Paragraphs 63(1)(a) and (b), according to the defendant, clearly evidence the fact that someone, either the taxpayer or the supporting person, at least initially, is entitled to claim the deduction. The defendant submits that subsection 63(2) merely shifts this entitlement to the supporting person with income that is lower than that of the taxpayer, and one must return to paragraph 63(1)(b) in order to calculate the actual amount of the claim. Thus, subsection 63(2) is at best a limitation provision and not a means for disentitlement altogether.

Counsel for the defendant also urges support for his contention that the child care deduction was not intended to be lost by noting subsection 63(2.1) which provides for the situation where both the taxpayer and the supporting person have incomes which are equal. In that case the taxpayer and the supporting person must jointly elect the income of one to exceed that of the other in order to claim the deduction. Accordingly, the defendant maintains that Parliament's intention here is clear. Child care expenses, by definition, are expenses incurred to earn income and the aim of section 63 is to grant a credit for this type of expenditure to the taxpayer or to the supporting person.

Counsel for the defendant also refers to section 3 of the Act, but does so in support of his position that income cannot include zero. The defendant notes that, contrary to the view expressed by the plaintiff, the section 3 process only commences where there is an amount in the form of income for the year from an office, employment, a business or property. The existence of income from a source is a basic consideration. In this case, the defendant points out that the supporting person had no such income, but this contention is disputed and indeed there is no evidence other than the agreed fact that the supporting person here had no income; the result of the full application of section 3, not a result with reference to any specific source. The defendant further urges that after one has proceeded through the steps of section 3, the use of the phrase “remainder, if any" at the end of the section presupposes that if there is no amount in remainder, there is no income for the purposes of the Act. The defendant refers to the Oxford Dictionary of Current English which defines the word "remainder" as "a residue, remaining persons or things; number left after subtraction or division. . .". "Remainder, if any", submits the defendant, means there must be something positive left.

The defendant relies on the decision of this Court in Tahsis Ltd. v. The Queen, [1979] C.T.C. 410; 79 D.T.C. 5328 at 413 (D.T.C. 5330) for the proposition that if the legislators had intended the interpretation proposed by the plaintiff, it would have been easy enough for Parliament to have made this intention clear. The Federal Court in that case was asked to interpret a provision of the Income Tax Act dealing with currency rate fluctuations. The Court found that as the provision clearly indicated fluctuations after 1971 should be taken into account, an intention to consider earlier fluctuations could not be inferred from the subsection because such an objective could easily have been clearly stipulated. According to the defendant, this premise applies equally to this case, especially when Parliament has elsewhere in the Act evidenced an intention that where there is no income that be taken into account. Subsection 4(1) of the Act provides for income or loss from a source or from sources in a place and it includes specific reference to "the taxpayer's income or loss, as the case may be, computed in accordance with this Act on the assumption that he had during the taxation year no income or loss except from the part of the business that was carried on in that particular place or no income or loss except from the part of those duties that were performed in that particular place, as the case may be, . . ." Thus, the defendant argues that there are in fact two concepts referred to in the Act. One involves income and where, as in subsection 63(2), a comparison of two incomes is drawn, this presupposes the existence of two amounts. The second involves no income, which Parliament has indicated in section 4 is another concept altogether.

Finally, counsel for the defendant puts forth an alternative argument. He submits that if the wording employed in the section is ambiguous, it is clear from the case law that the issue must be resolved in favour of the taxpayer. In this regard, he relies on the statement made by the Supreme Court of Canada in Johns-Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46; [1985] 2 C.T.C. 111; 85 D.T.C. 5373 at 126 (D.T.C. 5384; S.C.R. 72):

Such a determination is, furthermore, consistent with another basic concept in tax law that where the taxing statute is not explicit, reasonable uncertainty or factual ambiguity resulting from lack of explicitness in the statute should be resolved in favour of the taxpayer.

Both parties are in agreement that the applicable principle for guidance in the interpretation of the Income Tax Act is that stated by E. A. Driedger in Construction of Statutes, 2nd ed., (1983), at page 87:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

It is my opinion that the word “income”, both in its ordinary usage and that employed in the context of the Act imputes the existence of a positive amount. Dictionary definitions refer to "income" as an annual and recurring gain derived from labour or capital. Webster's Third New International Dictionary of the English Language, Unabridged, (1986), for example, defines "income" as "a gain or recurrent benefit that is usu. measured in money and for a given period of time, derives from capital, labour, or a combination of both, includes gains from transactions in capital assets, but excludes unrealized advances in value. . .". The Shorter Oxford English Dictionary (3rd ed., 1986) defines "income" in the sense of that word we are concerned with here, as "that which comes in as the periodical produce of one's work, business, lands, or investments (commonly expressed in terms of money); annual or periodical receipts accruing to a person or corporation; revenue".

These definitions of "income" are generally consistent with the legal concept employed by the Income Tax Act as canvassed by Chief Judge Couture of the Tax Court in his decision in Fiset, supra. At the risk of repeating his review of the Act's provisions, I would simply note that subsection 5(1), which defines income from an office or employment, subsection 9(1), which determines income from business or property, and subsection 39(1) which defines a capital gain, all involve the receipt of a positive or net amount which is derived from a source within the taxation year. I agree with the Chief Judge that subsection 63(2) itself in using the words "income for a taxation year" and “income for that year" together with the phrase "(on the assumption that both incomes are computed. . .)" clearly presumes that each of the parties received income within the meaning of the Act in the taxation year. Moreover, the entirety of section 3, which is the closest thing to a definition of "income" under the Act, consists of a process of reduction from one amount to another until one reaches a final amount which is said to represent the taxpayer's income for the year. The very explicit use of the words “remainder, if any" in the final phrase of the section clearly mandates the existence of something positive before the taxpayer can be said to have income for the purposes of the Act. It seems clear to me that a fundamental premise underlying the Income Tax Act is that "income" means the "net accretion of economic power", a definition suggested in Canada Report of the Royal Commission on Taxation, (Carter Commission) (1966), vol. 1, at 9-10. That concept does not apply where there is no income or income Is zero.

Turning then to the section in question, there is no clear indication that the use of the term “income” in subsection 63(2) was intended to be anything different than that used throughout the rest of the Act. To my mind, this in itself is significant. As the defendant pointed out, had Parliament intended that in section 63 "income" includes zero, it would have been an easy matter to have made this intention evident. The section does provide for numerous other possible contingencies and considerable thought went into the wording of this provision. Inherent in the section are a variety of situations, for example, where supporting persons of the child are not the child's parents in a strictly legal sense or where families are separated. Often the proper application to a particular fact situation will involve an analysis of the interaction of more than one paragraph of the section. Even with respect to who may in fact claim the child care expense, care must be taken to read the wording employed in paragraphs 63(1)(a) and (b) in conjunction with that of subsection 63(2). Subsection 63(1) indicates that the deduction may be claimed by either the taxpayer or another supporting person of the child. In general, while only one person can deduct child care expense, either a taxpayer or a supporting person may claim the expense. However, subsection 63(2) limits a claim by the taxpayer to a portion of the expenses incurred for the year based on the number of weeks the supporting person with income has lower income than the taxpayer and satisfies the conditions outlined in paragraphs 63(2) 3( (iii) through (vi). To the extent the latter conditions are not met for a full year, a claim to deduct the expense is shifted to the supporting person with income which is less than that of the taxpayer.

Therefore, one cannot help but wonder how the legislators could have failed to have considered the scenario presently before this Court. Even if there was a failure to adequately express an intention that income, as it pertains to child care expenses, includes zero, I must agree with the Court of Appeal in its reasoning in Canterra Energy Ltd. v. The Queen, [1987] 1 C.T.C. 89; 87 D.T.C. 5019 at 95 (D.T.C. 5023) that if a provision is not aptly worded to carry out the intent of its drafter, the courts should not be precluded from allowing the taxpayer to take advantage of the benefits of the provision as worded.

With respect to the overall object and purpose of section 63, the parties have each asserted differing views in this regard in support of their respective arguments. The background to section 63 in its prior form was considered at length by the Canadian Human Rights Tribunal in Bailey et al. v. M.N.R. (1980), 1 C.H.R.R. 193. The Tribunal found that the section was discriminatory because it excluded men from the benefit of the deduction, unless they were unmarried, separated or had a wife who was incapable of caring for the children because of physical or mental infirmity or confinement to prison. It was as a result of this decision that section 63 was amended to apply equally to both male and female taxpayers. The distinction drawn between higher and lower income earners in the current provision, in my view, is clearly predicated on the taxpayer and the supporting person each having income for the taxation year as provided in accordance with section 3. In each case that income, the “remainder, if any" after following the steps of section 3 must be "a net accretion of economic power", not merely zero or no income.

I conclude that the word "income" found in subsection 63(2) of the Income Tax Act, when read both in its grammatical and ordinary sense, and in its context in the Act, means the existence of a positive sum. Where the supporting person has no income, subsection 63(2) does not apply and one reverts to subsection 63(1)(b) and the taxpayer may claim the deduction. In my view, this finding does not result in any repugnancy or inconsistency with the object and spirit of the Act as a whole, nor with the intention of Parliament.

For the foregoing reasons, this action is dismissed and the matter is referred back to the Minister of National Revenue for reassessment in a manner not inconsistent with these reasons. This is an appeal to which subsection 178(2) of the Income Tax Act applies and the defendant is entitled to recover costs of this action.

Crown's appeal dismissed.