Citation: 2012TCC311
Date: 20120831
Docket: 2011-465(IT)I
BETWEEN:
HARVEY CHADWICK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Paris J.
[1]
These are appeals from
reassessments of the Appellant’s 2008 and 2009 taxation year by which the
Minister of National Revenue (the “Minister”) disallowed the deduction of child
support payments of $5,400 per year.
[2]
A succinct overview of
the treatment of child support payments under the Income Tax Act (“ITA”)
is found in the decision of the Federal Court of Appeal in Warbinek v.
Canada, 2008 FCA 276:
2 Prior to the enactment of
certain amendments to the ITA in 1997, child support payments were generally
deductible in computing the income of the payor for the year of payment and
includable in computing the income of the payee for the year of receipt. As a
consequence of those amendments, such payments are generally no longer
deductible expenses to the payor or income inclusions to the payee.
3 These profound changes are
subject to transitional rules that, in certain circumstances, preserve the
prior regime with respect to child support payments made after the time that
the changes became effective where those payments are made pursuant to child
support arrangements that were put in place before that time. . .
[3]
The issue in the case
before me is which of the two regimes is applicable to the child support
payments made by the Appellant to his ex-spouse in 2008 and 2009.
Facts
[4]
The Appellant and his
ex-spouse separated in June 1996. They entered into a separation agreement (the
“Agreement”) on August 27, 1996. That Agreement required the Appellant to pay
his ex-spouse child support of $450 per month for their two children commencing
September 1, 1996. The relevant portions of the Agreement read as follows:
CHILD
MAINTENANCE
1. The
Husband shall pay to the Wife for the support, maintenance and education of the
children, the sum of $450.00 dollars per month subject to the following:
a. The payments shall commence on the 1st day of
the month following the date of the signing of this Contract and shall continue
until the child reaches the age of sixteen (16) years or over, and under the
Wife’s care but unable by reason of illness, disability, full-time attendance
at an educational institution or other cause to withdraw herself from her
charge or provide herself with necessaries of life or sooner dies or marries.
b. The payments shall be made in advance on the 1st
day of each and every month hereafter.
c. The Parties acknowledge that the aforesaid payment of
maintenance is contingent on the Wife retaining full time employment, as she
currently has. In the event of the loss of employment by the Wife, through
illness or disability, the Parties agree to review the amount of maintenance
required to meet the children’s month to month needs.
d. The Parties agree that the Husband shall provide to the
Wife 12 post dated cheques on or before September 1, 1996, and on or before
September 1st of each and every year thereafter.
[5]
The Agreement also
provided that:
. .
. all the terms, conditions and provisos of this Contract shall survive and
continue in full force and effect and this Contract shall be presented to the
Queen’s Bench Court of Moose Jaw as a full and final settlement satisfaction and
discharge of all claims to maintenance, alimony or financial support and the
division of the matrimonial property present and future of the Parties hereto.
[6]
Subsequent to the Agreement,
the Appellant and his ex-spouse filed for divorce and a Divorce Judgment was
issued by the Saskatchewan Court of Queen’s Bench on June 16, 1998. The
portions of the Divorce Judgment dealing with child support read as follows:
. .
.
(c) HARVEY DAVID CHADWICK shall pay to DIANE LOUISE CHADWICK,
for the support of the said children the sum of $450.00 per month, the first of
such payments to be paid on the first day of July, A.D. 1998, and a like amount
to continue to be paid on the first day of each and every month thereafter, for
so long as the children remain children within the meaning of The Divorce
Act:
(d) The above Child Maintenance is based on the Respondent
having gross annual income of $31,403.00 in 1994, $33,062.00 in
1995, $26,715.61 in 1996, and $26,070.69 in 1997. The basic Child
Maintenance payable pursuant to the Federal Child Support Guidelines for
Saskatchewan is $374.00, and the Parties are consenting to a monthly Child
Maintenance payment in the amount of $450.00 as this figure represents
reasonable support for the Children as contemplated by Section 15.1(7) of
The Divorce Act, and this was the figure agreed to in an Interspousal Contract
dated August 27, 1996.
[7]
The Appellant made
child support payments of $450 per month from September 1, 1996 on and deducted
them each year. These deductions were allowed by the Minister until the 2008
and 2009 taxation years.
Legislative
Provisions
[8]
Paragraph 60(b)
of the ITA permits the deduction of child support payments. It reads:
60. There may be deducted in computing a taxpayer's
income for a taxation year such of the following amounts as
are applicable:
. . .
(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 paid after 1996 and before the end of the year by the
taxpayer to a particular person, where the taxpayer and the particular person
were living separate and apart at the time the amount was paid.
B is the total of all amounts each of which is a child support amount that
became payable by the taxpayer to 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 paid by the
taxpayer to the particular person after 1996 and deductible in computing the
taxpayer’s income for a preceding taxation year.
[9]
The definition of
“commencement day” is set out in subsection 56.1(4) as follows:
“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.
Position of the
Parties
[10]
The Respondent argued
that the Divorce Judgment issued on June 16, 1998 varied the amount of child
support payable by the Appellant under the Agreement, and therefore according
to subparagraph (b)(ii) of the definition of “commencement day” the
agreement had a commencement day of June 15, 1998. Since the payments in issue
were made under an agreement with a commencement day after April 1997, those
payments were excluded from the amount that could be deducted by the Appellant
under paragraph 60(b) of the ITA.
[11]
At the hearing, the
Respondent also argued, in the alternative, that the obligation in the Divorce
Judgment to pay child support was a new obligation on the Appellant and was not
a continuation of the existing obligation under the Agreement. The Respondent
argued that the Divorce Judgement terminated that obligation and from July 1,
1998 on the child support payments were made pursuant to the Divorce Judgment.
According to paragraph (b)(i) or the definition of “commencement
day” the commencement day of the Divorce Judgment would be the day it was made
and the payments made by the Appellant under the Judgment were paid after the
commencement day of the Divorce Judgment. Therefore those payments are excluded
from the calculation of the support amount deductible under paragraph 60(b).
[12]
The Appellant takes the
position that since the child support payments he made under the Agreement were
deductible, and since the Divorce Judgment did not change the amount of child
support that he was required to pay, the tax treatment of the support payments
should not change subsequent to the Divorce Judgment. The Appellant relied on
the decision of the Federal Court of Appeal in Kennedy v. The Queen,
2004 FCA 437.
[13]
In that case the
taxpayer and her ex-spouse separated in 1991. An interim child custody and
support order was made in March 1991, and Minutes of Settlement were entered
into by the taxpayer and her ex-spouse in December 1991. The Minutes of
Settlement required the taxpayer’s ex-spouse to pay her the same amount of
child support as set out in the interim order, but also provided for cost of
living adjustments to the support amounts. In September 1997 the taxpayer
obtained a Court order providing for the payment of child support in the same
amounts and on the same terms as in the Minutes of Settlement. The taxpayer
stated that the 1997 Order was necessary to enable her to have the child
support obligation enforced through the Family Responsibility Office at no cost
to her.
[14]
The taxpayer took the
position that she was not required to include the child support payments she
received after September 1997 in her income because they were paid under an
order made after April 1997.
[15]
The Federal Court of
Appeal held that the 1997 Order did not create a commencement day, and that the
taxpayer was still required to include the payments in her income because the
support payments continued to be made under the 1991 Order and the Minutes of
Settlement. The Court stated at paragraphs 12 and 13:
12 . . .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.
[16]
In the case before me,
the Appellant submitted that the June 1998 Divorce Judgment did not change the
child support amount the Appellant was required to pay to his ex-spouse, and
argued that the obligation to pay that amount was created by the Agreement and
the Divorce Judgement simply recognized the continuation of that obligation. Therefore,
as in Kennedy, the post-April 1997 Court Order did not create any new obligation
to pay child support, and the payments remain subject to the old regime and
deductible by the Appellant.
Analysis
[17]
In Holbrook v. The
Queen, 2007 FCA 145, the Federal Court of Appeal set out when child support
payments are subject to the new regime under the ITA and when they are
subject to the old regime:
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.
. . .
[18]
Those four exceptions
are the ones found in paragraph (b) of the definition of “commencement
day”. The Court went on to consider the situation where, as in this case, a
pre-May 1997 agreement or order and a post-April 1997 agreement or order both
require the payment of the same amount of child support. The Court stated:
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 . . .
[19]
The Court in Holbrook
found that Kennedy did not stand for the principle 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. The Court was of the view
that in Kennedy the post-April 1997 order confirmed rather than replaced
the obligation created by the pre-May 1997 minutes of settlement, and therefore
that the child support payments in issue in that case continued to be made
under the pre-May 1997 minutes of settlement. The Court said at paragraph 17:
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.
(Emphasis added.)
[20]
The Court concluded
that 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, the pre-May 1997 order or agreement ceases to have
effect. In such a case, it is not relevant to ask whether there has been a
change to the child support amount payable. The Court found that the issue to
be determined was whether the later order or agreement terminates and replaces
the child support obligation established in the previous order or agreement, or
continues it.
[21]
The issue in this case,
then, is one of construction of the Agreement and Divorce Order.
[22]
I am unable to agree
with the Appellant’s contention that the Divorce Judgment should be construed
as continuing the support obligation contained in the Agreement on the basis
that it did not vary the amount of support payable.
[23]
The Divorce Judgment
does not order or state that the support obligation created by the Agreement
was continued or was incorporated into it. In fact the language of the Divorce
Judgment supports the opposite view that the support obligation was a new one.
Paragraph 2(c) of the Divorce Judgment stated that “the first of such
payments [is] to be paid on the first day of July, A.D. 1998”. The Federal
Court of Appeal in Holbrook noted at paragraph 14 of that decision that
if an agreement or order was intended to recognize and continue the obligations
created by a previous order that there would be no need to stipulate that
monthly payments under the agreement or order would commence on a
certain date.
[24]
The provision for child
support in the Divorce Judgment differs in at least one significant respect, as
well, from the support obligation under the Agreement. The Agreement provided
that the support payments would continue until the children reached the age of sixteen
(16) years, or over if they were unable to withdraw from the ex-spouse’s care
due to education, illness or disability. The Divorce Judgment ordered that the
support payments continue “for so long as the children remain children within
the meaning of the Divorce Act.” Under section 2 of the Divorce
Act a child remains a “child of the marriage” until he or she reaches the
age of majority as determined by the laws of the province where the child
ordinarily resides and has not withdrawn from the parent’s charge, or is over
the age of majority but is unable to withdraw from their charge.
[25]
Under section 2 of
the Saskatchewan Age of Majority Act, R.S.S. 1978 c. A‑6 the
age of majority in that province is 18 years.
[26]
Therefore, support was
payable under the Divorce Judgment for two years longer than under the
Agreement.
[27]
In addition, the
Divorce Judgment contained no limitation similar to the one found in
paragraph 1(c) of the Agreement that the amount of support was contingent
on the Appellant’s ex-spouse maintaining full-time employment.
[28]
The Appellant maintains
that the Agreement provided that the support obligation would be incorporated
in the Divorce Judgment upon presentation of the Agreement to the Court as a
full and final settlement of all claims. However, by consenting to the Divorce
Judgment terms, it appears to me that the parties consented to the replacement
of support obligation contained in the Agreement with that found in the Divorce
Judgment. As I have noted above, the Divorce Judgment differed in material
respects from the obligation contained in the Agreement. While the Court in the
Divorce Judgment states that the Appellant and his ex-spouse agreed to the $450
amount in the Agreement, it does not purport to incorporate the remaining
terms of the Agreement relating to support.
[29]
For these reasons, I
find that the order for child support in the Divorce Judgment superseded the
obligation found in the Agreement despite the fact that the amount of support
payable did not change. Therefore it is the commencement day of the Divorce
Judgment that is relevant and it is determined by paragraph (a) of
the definition of “commencement day” in the ITA. Since the support
payments in issue were made after the commencement day of the Divorce Judgment,
they are excluded from the amount deductible under paragraph 60(b)
of the ITA.
[30]
Having reached this
conclusion, it is not necessary for me to address the Respondent’s argument
that the June 15, 1998 Order varied the total amount of child support payable
by the Appellant, thus triggering a commencement day under paragraph (b)(ii)
of the definition of “commencement day”.
[31]
The appeals are
dismissed.
Signed at Vancouver, British Columbia, this 31st day
of August 2012.
“B.Paris”
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