Citation: 2005TCC817
Date: 20051229
Docket: 2004-3617(IT)I
BETWEEN:
JOHN NELLES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
O'Connor, J.
Issue
[1] The issue in this
appeal is whether in the 2002 taxation year the Appellant ("John") is
entitled to a deductible tax credit in the amount of $6,482 in respect of child
support.
Facts
[2] John married Sandra
Marie ("Sandra" or "Sandy") in Belleville, Ontario on July 11, 1993.
They had two daughters, namely Cindy born August 19, 1993 and Sarah born May 4,
1995. Sandra and John began living separate and apart in May 2001 and
remained as such during the year 2002. They entered into a Separation Agreement
dated and signed at Belleville, February 10, 2003 ("Agreement"). The Agreement,
prepared with the assistance of counsel, is sophisticated and lengthy, (19
pages). Its' most relevant provisions are as follows:
4. LIVING SEPARATE AND APART
The parties have been living separate and apart since on
or about May 18, 2001, ... . The parties shall continue to live separate and
apart from each other for the rest of their lives and there is no reasonable
prospect that the parties will resume cohabitation.
...
6. EFFECTIVE DATE
This agreement will take effect on the date it is signed
by the latter of the parties to sign.
7. JOINT CUSTODY
(a) The parties ... shall have joint custody
of the children ..., with a shared parenting agreement ... .
...
(c) John and Sandy have agreed to a week
about arrangement with the children, with a commitment to utilize each other
when child care is needed. Both parents are committed to the children spending
as much time with each of them as possible.
...
9. CHILD SUPPORT
(a) Based upon the father having an annual
income for (sic) $43,000.00 per annum and the wife having an annual
income of $30,000.00 per annum and the shared parenting of the children, the
father will pay the mother the difference in the Guideline amounts in the
amount of $163.00 per month commencing December 1, 2002.
(b) The parties will exchange tax returns and
notices of assessment on or before June 1st each year and commencing July 1st
each year the parent having the higher employment income will pay the parent
having the lower employment income for the prior taxation year the difference
in the respective Guideline amounts.
...
(e) The parties shall be equally responsible
for childcare costs and each of them shall be entitled to claim on their
respective income tax returns one child as a dependant and the amount of the
daycare costs paid (i.e. each paying (sic) claiming one-half of the
total daycare costs as each parent is paying one-half of the daycare costs).
(f) The parties shall agree upon any special
or extra-ordinary expenses for the children and upon agreement those special
and extra-ordinary expenses shall be shared in proportion to their respective
incomes (i.e. based upon the father having employment income of $43,000.00 and
the wife having employment income of $30,000.00, the father shall be
responsible for 59% of those costs and the mother shall be responsible for 41%
of those costs).
...
29. PROPER LAW
This agreement shall be governed by and construed
according to the laws of Ontario.
[3] Sandra and John
also entered into an Amending Separation Agreement ("Amendment") on
November 29, 2005 (two days prior to the hearing of this appeal). The relevant
provisions are as follows:
...
AND WHEREAS the parties
entered into a Separation Agreement made on the 10th day of
February, 2003.
AND WHEREAS upon
separation the parties obtained separate accommodations and implemented equal
shared parenting of the children.
AND WHEREAS the parties
did not abide by the Separation Agreement dated February 10, 2003 so far as
child support was concerned.
AND WHEREAS no child
support was paid by either party to the other in 2001 or 2002.
AND WHEREAS John ...
paid Sandra ... an amount of support in the amount of $163.00 per month for a
period of only four months in 2003 and wish by this agreement to identify the
basis upon which that support was paid.
AND WHEREAS the parties
wish to amend certain provisions of the Agreement dated February 10, 2003.
THEREFORE THE PARTIES
agree as follows:
1. Paragraph 9(a) of the Separation Agreement
dated February 10, 2003 is hereby deleted and declared null and void and
superseded by the following:
For fhe period of four months in 2003 when John ... paid Sandra ...
support in the amount of $163.00 such amount is a net amount recognizing that
Sandra ... acknowledges she would pay John ... support for one child (Cindy)
and he would pay Sandra ... support for the second child (Sarah) such that
there was a net amount payable of $163.00 and such that one parent paid support
for one child and the other parent paid support for the second child such that
the $163.00 is only a net amount and not an amount paid in respect of both
children.
The parties further acknowledge and agree that except for the
support indicated in the above paragraph John ... nor Sandra ... have paid
support to the other for either or both of the children and the parties further
agree that no child support is payable for either of the children.
2. Except as provided in this Amending Agreement
there are no other changes or amendments to the Separation Agreement dated
February 10, 2003.
[4] Both the Agreement
and the Amendment were signed by both Sandra and John. John's testimony is
consistent with the contents of the Amendment.
[5] In 2002 John and
Sandra had separate residences and as a general rule their two daughters would
live one week with John, then one week with Sandra in their separate
residences.
[6] Against this
background John in his 2002 taxation year claimed the dependant tax credit in
the amount of $6,482 and by reassessment the Minister disallowed it.
Law
[7] The provisions of
the Income Tax Act ("Act") applicable in 2002 were
paragraphs 118(1)(a), 118(1)(b) and subsections 118(5) and
56.1(4). As the taxpayer in this appeal is male the following summary will
consider the taxpayer as a male. Paragraph 118(1)(a) provides, inter
alia, for a deductible tax credit for a taxpayer who supports his consort
with whom he is living. Paragraph 118(1)(b) and subsections 118(5)
and 56.1(4), so far as relevant, provide as follows:
118(1)(b) wholly dependent person
["equivalent to spouse" credit] – in the case of an individual who
does not claim a deduction for the year because of paragraph (a) and who, at
any time in the year,
(i) is
(A) ...
(B) a person who is married ..., who
neither supported nor lived with their spouse or ... and who is not supported
by that spouse or ..., and
(ii) whether alone
or jointly with one or more other persons, maintains a self-contained domestic
establishment (in which the individual lives) and actually supports in that
establishment a person who, at that time, is
(A) ...
(B) wholly dependent for support on the
individual, or the individual and the other person or persons, as the case may
be,
(C) related to the individual, and
(D) except in the case of a parent or
grandparent of the individual, either under 18 years of age or so dependent by
reason of mental or physical infirmity,
an amount equal to the total of
(a formula follows)
118(5) No amount may be deducted under
subsection (1) in computing an individual's tax payable under this Part for a
taxation year in respect of a person where the individual is required to pay a
support amount (within the meaning assigned by subsection 56.1(4)) to the
individual's spouse ... in respect of the person and the individual
(a) lives separate
and apart from the spouse ... throughout the year because of the breakdown of
their marriage ...; or
(b) claims a
deduction for the year because of section 60 in respect of a support amount
paid to the spouse ... .
Aucun montant n'est déductible en application du
paragraphe (1) relativement à une personne dans le calcul de l'impôt payable
par un particulier en vertu de la présente partie pour une année d'imposition
si le particulier, d'une part, est tenu de payer une pension alimentaire au
sens du paragraphe 56.1(4) à son époux ... pour la personne et, d'autre part,
selon le cas :
a) vit séparé de son époux ... tout au
long de l'année pour cause d'échec de leur mariage ... ;
b) demande une déduction pour l'année
par l'effet de l'article 60 au titre de la pension alimentaire versée à son
époux ... .
56.1(4) "support amount" means an amount payable or receivable as an
allowance on a periodic basis for the maintenance of the recipient, children of
the recipient or both the recipient and children of the recipient, if the
recipient has discretion as to the use of the amount, and
(a) the recipient is the spouse ... of the payer,
the recipient and payer are living separate and apart because of the breakdown
of their marriage ... and the amount is receivable under an order of a
competent tribunal or under a written agreement; or
(b) ...
...
«pension alimentaire » Montant payable ou
à recevoir à titre d'allocation périodique pour subvenir aux besoins du
bénéficiaire, d'enfants de celui-ci ou à la fois du bénéficiaire et de ces
enfants, si le bénéficiaire peut utiliser le montant à sa discrétion et, selon
le cas :
a) le bénéficiaire est l'époux ...
du payeur et vit séparé de celui-ci pour cause d'échec de leur mariage ... et
le montant est à recevoir aux termes de l'ordonnance d'un tribunal compétent ou
d'un accord écrit;
b) ...
...
Analysis
[8] In his 2002 Return,
John claimed the tax credit of $6,482 (the maximum) because he believed he
qualified by providing support for his daughter, Sarah. The Reassessment in
question denies the claim, alleging as follows in the Reply to the Notice of
Appeal.
... the Appellant is not
entitled to claim an amount for an eligible dependant of $6,482.00 pursuant to
paragraph 118(1)(b) of the Act in computing tax payable for the 2002 taxation
year for his daughter, Sarah as the Appellant was required to pay a support
amount as defined in subsection 56.1(4) of the Act to the Former Spouse
with respect to the said daughter and the Appellant and Former Spouse were
living separate and apart throughout the said taxation year within the meaning
of subsection 118(5) of the Act.
[9] According to the
Reply there does not appear to be a dispute as to the application of "commencement
date", "support amount", "maintains a self‑contained domestic
establishment" or "wholly dependent for support", definitions,
the applications of which have been the subject of many tax appeals. The only
concern is whether subsection 118(5) applies and this will be determined on the
basis of whether or not John can be considered as being required to make
support payments.
[10] Counsel for the
Respondent referred to the decisions of this Court in Shewchuk v. Canada
[2000] T.C.J. No. 398 and Irwin v. Canada [2004] T.C.J. No. 510. Both these decisions dealt
with shared parenting arrangements and an obligation on the taxpayer to pay to
his/her spouse a support amount equal to the difference between the amounts
each would, on the basis of employment income, be obliged to pay in accordance
with the Federal/Ontario Child Support Guidelines established by SOR/97-175
(Guidelines). (In this appeal the monthly support set-off amount of $163.00 was
arrived at by an application of the amounts in the Guidelines).
[11] Counsel for John submitted
that in these two decisions there was clearly an obligation, a requirement to
pay support whereas in this appeal there was no obligation, no requirement as
contemplated in paragraph 118(5). In my opinion counsel for John is correct. Subsection
118(5) is not applicable because the Appellant, John, was not required to pay
support in the 2002 taxation year. The Agreement was only signed in 2003. It is
not retroactive. It's effective date is in 2003 when it was signed. Although it
indicated that payments were to commence in December 2002, this in fact did not
happen and the parties acknowledged that there was no obligation to make a
support payment and in fact no support payments were made. Both parties have
acknowledged all of that in the Amendment. The Amendment does not govern the
matter, but John's testimony confirms that the facts set forth in the Amendment
were true, including notably that the parties had verbally agreed that there
was no requirement to pay support in 2002. I do not see how the Agreement
signed in 2003 can be used to establish a requirement to pay support commencing
in the year 2002, more particularly since the parties verbally acknowledged
that that was not the case. Put briefly, there was no requirement to pay
("tenu de payer") existing in 2002. Therefore subsection 118(5) does
not apply. Moreover paragraph 118(5)(b) is not applicable and no other
provision of the Act operates to deny the credit permitted by paragraph
118(1)(b). Nor can the credit be denied simply because John's return indicated
that the support related to Sarah. It is not necessary to consider the effect
of paragraph 9(e) of the Agreement. Therefore the appeal is allowed with costs.
[12] Because the
judgments in the two decisions mentioned above and because several other
appeals discussing paragraph 118(5) have suggested an element of unfairness in
its application, the following comments may be helpful by way of clarification.
[13] At first glance it
is difficult to identify the policy behind the provision. The element of
unfairness appears to be that a taxpayer, who is required to make support
payments to his separated spouse for the benefit of a child cannot (after 1997
when the rules changed from one of deduction by the support payor and inclusion
by the recipient to the exact opposite of no deduction and no inclusion), deduct
that amount from his income and also cannot have the dependant tax credit if he
is "required" to pay child support. On the other hand in similar
circumstances if the taxpayer is not required to pay support he can have the
credit. This policy issue has been addressed by Justice Lamarre in Gautron
v. the Queen, 2003 TCC 127 (English translation at 2005 DTC 729 and Justice
Bédard in Frégeau v. the Queen, 2004 DTC 2726 (English translation at
2004 TCC 293).
[14] One explanation for
this is that the amounts provided for in the Guidelines contemplate that the
recipient of the support has custody of the child or children and is the one
who is entitled to the dependent credit. This of course ignores the fact that
the Guidelines do not apply to shared parenting arrangements, such as that in
this appeal where each parent has a separate residence and the children reside
in each residence from week to week and where each parent contributes to
support. The permutations and combinations resulting from different factual
situations are limitless and determining whether one, both or none of the
parents is entitled to the credit is mind boggling. The determination might be
further complicated by the application of paragraph 118(4), which contemplates
allocating or dividing the credit. Examples of some of the difficulties that
can arise are exhibited in the Technical Interpretations, paragraphs 5104,
5522, 6765 and 7654 of Window on Canadian Tax.
[15] In conclusion, as
stated above, the appeal is allowed with costs.
Signed at Ottawa, Canada, this 29th day of December, 2005.
"T. O'Connor"
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