Bates v. The Queen, docket 97-120-IT-G

Date: 19980806

Docket: 97-120-IT-G

BETWEEN:

ELIZABETH E. BATES,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Mogan, J.T.C.C.

[1] The Appellant and Paul Bates were married in 1982. Two children were born of the marriage: Sarah in 1984 and Elizabeth in 1989. The Appellant (“Wife”) and Paul Bates (“Husband”) separated in 1990. By an Order of the Ontario Court (General Division) dated June 10, 1992, the Husband was ordered to pay to the Wife interim support for the children of the marriage in the amount of $1,900 per month per child (a total of $3,800 per month). The amount of $3,800 was paid each month until the end of September 1993 when a subsequent Order of the same Court changed the monthly payment amount. The issue in this appeal is whether the Wife is required to include in the computation of her income for 1993 the aggregate of $34,200 representing nine equal monthly payments (January to September) of $3,800.

[2] This appeal was argued on an Agreed Statement of Facts (“ASF”) which was entered as Exhibit A-1. There was no viva voce evidence. Incorporated into Exhibit A-1 were four documents identified as follows:

Tab A - The Order of Senior Master Sedgwick of the Ontario Court (General Division) dated June 10, 1992.

Tab B - The Reasons for Decision of Madame Justice E. MacDonald of the Ontario Court (General Division) in Empke v. Empke, dated November 17, 1992.

Tab C - The Judgment of Mr. Justice O’Connell of the Ontario Court (General Division) in Paul Joseph Bates v. Elizabeth Eileen Bates (the Husband and Wife herein), dated September 7, 1993.

Note: This Judgment was issued on the basis of the pleadings, minutes of settlement, and submissions of counsel.

Tab D - Minutes of Settlement of the Husband and Wife dated September 7, 1993.

[3] It is not necessary to set out all of the terms of the ASF but it may be necessary to quote portions of the documents attached as Tabs A, B, C and D. The first operative clause of the Senior Master’s Order dated June 10, 1992 states:

1. THIS COURT ORDERS that the Plaintiff, Paul Joseph Bates, pay to the Defendant, Elizabeth Eileen Bates, interim support for the children of the marriage in the amount of $1,900 per month per child (for a total of $3,800 per month).

The endorsement of Senior Master Sedgwick dated June 10, 1992 is attached to his Order and reads in its entirety:

The Wife is the moving party on this motion; the relief requested for the purpose of today’s hearing is interim support for two children of the marriage, Sarah and Elizabeth Bates, born July 7, 1984 and March 18, 1989 respectively, residing with the Wife. The parties married in 1982; they separated in December of 1990. Both of the parties are lawyers practising their profession. The Husband for the fiscal period ended first of March 1992 earned $273,000.00; according to him for the fiscal period ending 1st of March, 1993 he expects to earn $213,000 although I’m not certain how he arrives at this amount. The Wife earns $100,000.00 per annum and she has an expense allowance from her firm of $5,000.00 per annum. I have considered the children’s proposed budget prepared by the Wife; certain expenses i.e. housing appear somewhat high and one of them, life insurance is erroneous. However there is no doubt that the children are in need of interim support and clearly the Husband has the ability as indeed does the Wife to provide support. In my view a reasonable amount for the Husband to pay is $1,900.00 per month per child for a total of $3,800.00 and I so order. As it would seem to be no tax payable by the Wife until April of 1993 and there may well be a trial before then I do not make provision in the order for the impact of income tax.

[4] Relying on the last sentence in the Senior Master’s endorsement, the Wife’s divorce counsel, Greg Cooper, advised her that the child support payments in the amount of $3,800 per month were being received net of tax and that she should not include these payments in her income; and that her Husband should not be deducting these payments in computing his income (paragraph 5 - ASF). In or about November 1992, the Wife received from a lawyer friend a copy of the decision in Empke v. Empke (Tab B) in which Madame Justice MacDonald examined a Master’s Order which contained language similar to that found in Senior Master Sedgwick’s Order. The Wife believed that the Empke case confirmed the accuracy of Mr. Cooper’s advice that the child support payments were being received on a basis net of tax (paragraph 6 - ASF). From January 1, 1993 to September 30, 1993, the Wife received the sum of $34,200 as child support pursuant to the 1992 Court Order. As a result of the advice she received from her lawyer and her own reading of the Empke decision, she did not include this amount in her 1993 income (paragraph 7 - ASF).

[5] The Judgment of Mr. Justice O’Connell on September 7, 1993 (Tab C) changed the monthly payments for the maintenance of the children to $2,650 per month per child or a total of $5,300 per month (paragraph 8 - ASF). Paragraph 6 of the Judgment states:

6. THIS COURT ORDERS AND ADJUDGES pursuant to the Divorce Act R.S.C. (2nd Supp.) c.3 that the Plaintiff will pay to the Defendant $2650 per child per month commencing October 1, 1993 as long as each child is a child of the marriage within the meaning of the Divorce Act and living with the Defendant. These payments will be adjusted annually in accordance with the lesser of the percentage increase in the Consumer Price Index (all items not seasonally adjusted) for the City of Toronto and the Plaintiff’s percentage increase in income from all sources over the same period. This adjustment will begin on the first anniversary date of payment. These payments may be varied in the event of a material change in circumstances of either of the parties, the children, or either of them.

[6] On or about September 7, 1993, the Wife was advised by her divorce counsel, Greg Cooper, that this increased amount was being provided to her because, in part, it was calculated on a gross basis and, accordingly, she was obliged to include any amounts received pursuant to the 1993 Judgment in her income (paragraph 9 - ASF). From October 1, 1993 to December 31, 1993, the wife received the sum of $15,900 as child support pursuant to the 1993 Judgment; and she included this amount in the computation of her 1993 income (paragraph 10 - ASF).

[7] According to the pleadings in this appeal, the Minister of National Revenue (“MNR”) relies on paragraphs 56(1)(b) and 56(1)(c) of the Income Tax Act. Paragraph 56(1)(b) states:

56(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

...

(b) any amount received by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if the recipient was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, the spouse or former spouse required to make the payment at the time the payment was received and throughout the remainder of the year;

In paragraph 13 of the ASF, the Wife recognizes that:

(a) the child support payments were received pursuant to an interim order of a tribunal with the jurisdiction to order such payments;

(b) the child support payments were received as an allowance payable on a periodic basis for the maintenance of the children of the marriage;

(c) throughout the 1993 taxation year, the Wife was living apart from the husband who was required to make the payments at the time the payments were made;

(d) throughout the 1993 taxation year, the Wife was separated pursuant to a divorce, judicial separation or written separation agreement from the Husband who was required to make the payments at the time the payments were made.

In my opinion, paragraph 13 of the ASF is an acknowledgement by the Wife that she comes very close to meeting the conditions of paragraph 56(1)(b). There is a footnote to paragraph 13 of the ASF which states:

There will be argument that if Master Sedgwick did not have the authority to order that the support payments be received net of tax, then his 1992 order was not the valid order of a “competent” tribunal.

This footnote is more explicitly stated in paragraph 4 of the Appellant’s factum:

4. The Appellant’s position is that she is not required to include the child support payments in her income because either:

i) the Master had jurisdiction to order that the child support payments be received net of tax, and thus not be included in her income; or, in the alternative

(ii) if the Master acted outside his jurisdiction, then the appellant did not, pursuant to section 56(1)(b) or 56(1)(c) of the Act, receive the child support payments pursuant to a valid order of a “Competent Tribunal”.

[8] In paragraph 7 of the Appellant’s factum, the issue was stated with respect to whether the Wife was required to include the child support payments in the computation of her 1993 income pursuant to paragraphs 56(1)(b) or 56(1)(c) and, more specifically, that issue is expressed as follows:

7. ...

i) Did Master Sedgwick effectively order that the child support payments were being received by the Appellant “net of tax”?

ii) If the answer to (i) is yes:

(a) Does Master Sedgwick’s order bind Revenue Canada?

(b) If not, is Master Sedgwick’s order a valid order of a competent tribunal?

I will respond to the issues as they are raised in paragraph 7 of the Appellant’s factum.

[9] First, did the Senior Master effectively order that the child support payments were to be received by the Appellant net of tax? The only relevant statement by the Senior Master is the last sentence of his endorsement in Tab A of the ASF:

... As it would seem to be no tax payable by the Wife until April of 1993 and there may well be a trial before then I do not make provision in the order for the impact of income tax.

It is not clear to me what the Senior Master means by that sentence. If he intended to provide that the child support payments were not to be taxed in the hands of the Wife and were not to be deducted in computing the Husband’s income, why did he not say so? If the provision was important in his mind, why did he not make it an operative term of his order instead of leaving it to the last sentence in his endorsement? If he intended to benefit the Wife with child support payments free of tax, why could he not be more explicit? Was he ambivalent about making “provision in the order for the impact of income tax” because of his prior statement in the endorsement: “ ... clearly the Husband has the ability as indeed does the Wife to provide support”?

[10] The Appellant’s counsel wants me to infer that the Senior Master was awarding $1,900 per month per child on the basis that such amount would not be taxed in the Wife’s hands. In support of that inference, counsel referred me to Judge O’Connell’s judgment (ASF - Tab C) where the child support payment is increased to $2,650 per month per child. The Appellant regarded the $3,800 per month as not taxable but she voluntarily included the three payments of $5,300 per month (total $15,900) in her 1993 income. I am satisfied that the Appellant acted in good faith throughout. The issue is really a question of law.

[11] Appellant’s counsel places much reliance on the decision of Madame Justice MacDonald in Empke v. Empke (ASF - Tab B) in which the following passage appears:

This is an appeal from an order of Master Donkin made on April 27, 1992 wherein monthly interim support in the amount of $2,450.00 a month was ordered to be paid by the husband William Albert Empke to the wife Anne-Elizabeth Empke

Master Donkin’s order followed an interim-interim order of Master McBride made November 7, 1990 for $2,200.00 a month. This was to be effective from October 1, 1990. The order of Master McBride also contained the following wording in Paragraph 2:

“This court orders that the motion is otherwise adjourned sine die to be returnable on 10 days notice and that the impact of income tax is at large and shall be disposed of on the return of this motion.”

It is argued on behalf of the wife that Paragraph 2 of Master McBride’s order is to be construed so as to create the result that Mrs. Empke, the recipient of the $2,200.00 a month, could treat these monies as monies received net of any income tax liability that would otherwise be attracted to the payments by virtue of them being made pursuant to a court order. In my view, this is a logical interpretation of the questioned provision of Master McBride’s order; otherwise, it would not have been necessary for him to make specific mention of the matter of income tax.

I find the quoted statement of Master McBride in Empke just as imprecise as the statement of Senior Master Sedgwick which I am asked to construe herein. It was argued on behalf of Mrs. Empke that Master McBride’s order was to be construed so as to create the result that the recipient of the $2,200 per month could treat the money received net of any income tax. Madame Justice MacDonald held that that was a logical interpretation. I am not sure that it was a logical interpretation but, even if it was, it did not bind the MNR because the MNR was not a party to the Empke litigation. In this appeal, the MNR is a party. I place very little weight on the Empke decision.

[12] I would answer the first question by concluding that the Senior Master did not effectively order that the child support payments were to be received by the Appellant free of tax. His words are too imprecise. If I am wrong and if he did intend to order that such payments were to be free of tax to the Appellant, then I will consider the two alternative questions.

[13] Can the order of the Senior Master bind the MNR? In my opinion, it cannot. In Sigglekow v. The Queen, 85 DTC 5471, a Decree Nisi required a husband to pay to his wife the sum of $20.00 every week “tax-free”. In computing her income, the wife did not include such $20.00 payments. When deciding the income tax appeal against the taxpayer wife, Jerome A.C.J. stated at page 5473:

It is consistent throughout both the Trial Judgment and the Judgment of the Court of Appeal in Sills that the liability for tax does not spring from a separation agreement or a Court Order. Section 56 provides that moneys received must be included as income.

...

In the present case, the matter is even clearer because Mr. Sigglekow made the payments in precise compliance with a Court Order, except of course for any sums referable to the words "tax free" which he understandably chose to ignore. On the reasoning of the Federal Court of Appeal in the Sills case, there could be no question that such sums actually received by the Defendant fall precisely within the terms of section 56 and should, therefore, have been included in her income for the 1975, 1976 and 1977 taxation years. That was the basis of the Minister's reassessment which, in my view, was entirely correct.

In my view, Jerome A.C.J. has correctly summarized the law when he states that the liability for tax does not spring from a separation agreement or a Court Order. The liability for tax is determined by the provisions of the Income Tax Act and, more particularly, by section 56.

[14] There are other cases to support the proposition that the order of the Senior Master cannot bind the MNR. In Arshinoff v. The Queen, [1994] 1 C.T.C. 2850, a wife appealed claiming that certain payments received from her separated husband should not be included in the computation of her income. In Arshinoff, the Master of the Supreme Court of Ontario had issued an order which contained the following term:

THIS COURT ORDERS that the petitioner shall pay to the respondent, pending a further return of this motion following cross-examination of the parties, interim support in the sum of $5,000 per month, excluding tax, commencing September 1, 1989.

Relying on the above term, the wife claimed that any amount received from her husband should be free of tax. Arshinoff was heard by my colleague, Brulé J. who reviewed the facts and made the following statement after referring to the terms of certain orders issued by judges and other officers of the Ontario Courts:

... If their intention was that the appellant receive $5,000 net of tax, then the order for support should have been grossed up to ensure that she would in fact receive $5,000 net per month. The fact that the order was made “excluding tax” cannot bind the Minister who is entitled to reassess the appellant for any amount received as support pursuant to an order of a competent tribunal. Once the conditions enumerated in paragraph 56(1)(c) have been met, the appellant must include the amounts in question in the computation of her income.

[15] Another similar case is Halligan v. The Queen, [1996] 2 C.T.C. 2555 in which my colleague, Sarchuk J. was required to consider whether certain payments received pursuant to a divorce decree issued by a court in the State of Georgia (USA) were to be included in computing the income of the recipient who later resided in Canada. In deciding the case against the taxpayer, Sarchuk J. stated at page 2560:

In the course of her argument, the Appellant also questioned whether the Decree was issued by a competent tribunal within the meaning of paragraph 56(1)(b) of the Income Tax Act. ... The Appellant now says that she was not referring to the competency of the Georgia Court to grant the divorce, but rather the competency of that Court to consider the effect of the provisions of the Income Tax Act regarding child support. She is no doubt correct that it was not a matter that the Georgia Court would have concerned itself with since it was not relevant to that proceeding. But that is of little assistance to her cause since what facts the Georgia Court may have considered or was entitled to consider in granting the Decree is not germane to my determination of whether the maintenance payments received by the Appellant in 1990 and 1991 were properly included in her income by the Minister.

[16] The superior court of any province has jurisdiction to order payments for the maintenance of a spouse or children upon the break-up of a marriage. That jurisdiction does not include the authority to determine the character of those payments as being taxable or tax-free for purposes of the Income Tax Act. Once the superior court of a province has ordered maintenance payments on a marriage break-up, the character of those payments as taxable or not taxable will be determined by the conditions in paragraphs 56(1)(b) and 56(1)(c) of the Income Tax Act. If I had any doubt concerning separate jurisdictions with respect to ordering maintenance payments and determining the tax character of such payments, I would rely on the following statements of Cory J. and Iacobucci J. in The Queen v. Thibaudeau, 95 DTC 5273 at 5275:

In the present appeal, ss. 56(1)(b) and 60(b) of the Income Tax Act are triggered by the issuance of a support order pursuant to the Divorce Act, R.S.C. 1970, c. D-8. Accordingly, the taxation provisions operate in close conjunction with family law. The amount of income taxable under ss. 56(1)(b) and 60(b) is determined by the divorce or separation decree and, unless the family law system operates in a defective manner, the amount of child support will include grossing-up calculations to account for the tax liability that the recipient ex-spouse shall incur on the income. If there is any disproportionate displacement of the tax liability between the former spouses (as appears to be the situation befalling Ms. Thibaudeau), the responsibility for this lies not in the Income Tax Act, but in the family law system and the procedures from which the support orders originally flow. This system provides avenues to revisit support orders that may erroneously have failed to take into account the tax consequences of the payments. Therefore, in light of the interaction between the Income Tax Act and the family law statutes, it cannot be said that s. 56(1)(b) of the Income Tax Act imposes a burden upon the respondent within the meaning of s. 15 jurisprudence.

[17] On this question of whether the Senior Master’s Order can bind the MNR, Appellant’s counsel makes a further argument which is expressed as follows in paragraphs 28 and 29 of Appellant counsel’s factum:

28. Further, to the extent a Master has the jurisdiction to order child support payments on a net of tax basis, then the Appellant submits her reliance upon the Master’s endorsement and the Empke decision excuses her failure to comply with the Act in a manner akin to the “Regulated Industries Doctrine”. This defence was considered by the Ontario Court of Appeal in R. v. Independent Order of Foresters (1989), 26 C.P.R. (3d) 229 at p. 233:

The doctrine simply means that a person “obeying” a valid provincial statute may, in certain circumstances, be exempt from provisions of a valid federal statute. But there can be no exemption unless there is a direction or at least an authorization to perform the prohibited act ... .

29. The Appellant submits that Master Sedgwick effectively authorized her not to include the child support payments in her income and, thus, she should be exempted from liability for not including the child support payments in her 1993 income.

The argument concerning the Regulated Industries Doctrine is totally without merit. The Appellant was not obeying either a provincial statute or the order of a provincial Court. The only person who was obeying the Senior Master’s Order was the Appellant’s husband in making the monthly payments of $3,800. The Appellant was merely hoping that those payments would not be regarded as income by Revenue Canada.

[18] The Senior Master did not authorize the Appellant, effectively or otherwise, not to include the child support payments in her income. The Appellant seems to be confused with respect to the jurisdiction of the Ontario court to order child support payments and the jurisdiction of the Minister of National Revenue to determine the character of such payments for income tax purposes. In my view, family law is just a particular area of civil litigation. If Party A sues Party B for damages in a provincial superior court, there is no doubt that the court has jurisdiction to hear and decide the action but, if Party A recovers an amount of damages, the provincial superior court does not have jurisdiction to determine the character of such amount (income or otherwise) for purposes of the Income Tax Act.

[19] The third argument concerns the question of whether the Senior Master’s Order was a valid order of a competent tribunal within the meaning of paragraph 56(1)(b) of the Income Tax Act. The Appellant argues that if the Senior Master does not have jurisdiction to decide that the child support payments are free of tax in her hands, then the Senior Master’s Order is not an order of a “competent tribunal” within the meaning of paragraph 56(1)(b). This argument is also without merit. The words “competent tribunal” in paragraph 56(1)(b) refer to any particular tribunal which has the jurisdiction to order one spouse to pay to the other spouse certain amounts as alimony or other allowance payable on a periodic basis for the maintenance of the recipient or children of the marriage. That tribunal does not become any less competent for the purposes of paragraph 56(1)(b) if it does not have jurisdiction to determine the character of such amounts (as income or otherwise) for purposes of the Income Tax Act. When payments are made in the circumstances contemplated by paragraphs 56(1)(b) and 56(1)(c) of the Income Tax Act, the character of those payments to the recipient as income or otherwise will be determined by the conditions in paragraphs (b) and (c) as to whether those conditions are satisfied. Any dispute concerning the character of those payments will be decided at first blush by the MNR or, on appeal, by this Court or some higher Court in the manner in which appeals are resolved under the Income Tax Act.

[20] And lastly, Appellant’s counsel made an alternative submission that, if I should reject the Appellant’s position with respect to the application of section 56, I may at least recommend to the MNR that the Appellant be granted a remission of tax and interest under the provisions of the Financial Administration Act, R.S.C., c. F-11, as amended by Statutes of Canada 1991, c. 24. In all the circumstances of this appeal, I do not find any facts which would make it just and equitable for me to make such a recommendation to the MNR. Indeed, if the Appellant is looking for just and equitable relief, she might look to her divorce counsel who, according to paragraph 5 of the ASF, advised her that the child support payments in the amount of $3,800 per month would be free of tax. If that divorce counsel had experience in family law when he offered that advice in 1992, I would have expected him to know that the Senior Master did not have jurisdiction to determine the character of the monthly child support payments for income tax purposes.

[21] In paragraph 39 of the Appellant’s factum, there is a reference to the “real gap in knowledge” between family law lawyers and judicial officers with respect to the impact of specific provisions of the Income Tax Act. If there is such a gap, I think it is not excusable because the provisions of paragraphs 56(1)(b) and 56(1)(c) of the Income Tax Act are not constitutionally mind-bending. They are relatively straightforward. Any family law lawyer should be able to determine by reading those provisions whether the specific conditions have been met which would cause payments by one spouse to another spouse to be taxable in the hands of the recipient.

[22] I am not inclined to make any recommendation with respect to the Financial Administration Act. The appeal is dismissed, with costs.

Signed at Ottawa, Canada, this 6th day of August, 1998.

"M.A. Mogan"

J.T.C.C.