Citation: 2007TCC708
Date: 20071207
Docket: 2006-2334(IT)I
BETWEEN:
JEAN MCALLISTER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan, J.
[1] The Appellant, Jean McAllister, is
appealing the reassessments of the Minister of National Revenue of her 2001, 2002, 2003 and 2004 taxation years which
included in her income arrears of child support paid by her former spouse to
the Family Responsibility Office ("FRO")
and which were then paid by the FRO to the Ministry of Community and Social
Services ("MCSS").
[2] The Minister's
reassessment was based on the following assumptions:
(a) the Appellant and her former spouse, namely Thomas Harold
McAllister (the "Former Spouse") married on April 19, 1980 and divorced
on April 16, 1992;
(b) at all relevant times, the Appellant and the Former Spouse
were living separate and apart;
(c) at all relevant times, the Appellant and the Former Spouse
had two children, namely Darryl James McAllister born August 19, 1981 and Jason
Thomas McAllister born September 29, 1982 (the "Children");
(d) pursuant to an Order of the Ontario Court (General
Division) dated March 16, 1992 (the "Order"), the Former Spouse
was required to pay $200.00 per child per month for the support of the Children
on the 28th day of each month;
(e) the amounts referred to in subparagraph 11(d) herein was (sic)
required to be paid to the Director of the Family Responsibility Office ("FRO"),
Province of Ontario, who would enforce the Order and pay them to the
Appellant [Emphasis added];
(f) the Former Spouse fell in arrears and no amounts were paid
under the terms of the Order between March 19, 1993 and November 7, 2000;
(g) as of December 31, 2000, the amount of arrears stood at $37,657.24;
(h) on November 7, 2000, payments made pursuant to the Order
recommenced and between the said date and the end of 2004, the Former Spouse
paid $175.00 per week and said payments included both his current obligation
and paying off the arrears amount previously referred to;
(i) in March 2004, the requirement to pay support for the
second child ceased;
(j) there was no subsequent Order that altered or amended the
amount of child support to be paid; and
(k) during the 2000, 2001, 2002, 2003 and 2004 taxation
years, the Appellant was paid the amounts of $1,350.00, $9,100.00, $9,625.00, $9,100.00
and $9,100.00 respectively pursuant to the terms of the Order and in accordance
with the payment of arrears as stipulated by the FRO. [Emphasis added.]
[3] Except for
subparagraphs (e) and (k), the facts are essentially as set out above. The assumption
in paragraph 11(e) is inaccurate in that the Order
does not state that amounts payable under it shall be paid to “the Appellant";
rather, it reads that the Order "… shall be enforced by the Director [of
the FRO] and amounts owing under the support Order shall be paid to the
Director, who shall pay them to the person to whom they are owed". As
for paragraph 11(k), it is not a proper assumption; whether the Appellant "was
paid" the amounts listed "pursuant to the terms of the Order and in
accordance with the payment of arrears as stipulated by the FRO" is the
very issue to be decided.
[4] The Appellant
and her accountant, Roxana Johnston, testified at the hearing. Both were
entirely credible. Their evidence revealed additional facts not included in the
Minister's assumptions: that as a result of her former spouse's failure to pay
support under the Order, the Appellant was forced to apply for financial
assistance under the Family Benefits Act and was required to assign
her right to receive certain payments under the Order to MCSS.
The assignment was made by an agreement in writing dated March 5, 1992.
[5] The Appellant's former spouse made no payments under
the Order from 1993 to 2000. In 2002, 2003 and 2004, however, he resumed his
obligations, paying $9,625, $9,100 and
$9,100, respectively to the FRO. These amounts included both current support
payments and arrears amounts that had accumulated between 1993 and 2000. As the
Order required the FRO to pay amounts paid to it "to the person to whom
they are owed", the FRO allocated the amounts received between the
Appellant and the MCSS as follows: the current amounts (then payable under the
Order on the 28th of each month of 2002, 2003 and 2004) to the
Appellant and the arrears amounts (which had become payable between 1993 and
2000 when the Appellant was receiving Family Benefits Act benefits) to
the MCSS under
the Family Benefits Act assignment
agreement.
[6] The Appellant
does not dispute that the current amounts
paid to her through FRO were properly taxable as income in each of 2002, 2003
and 2004. She argues, however, that the arrears paid to MCSS in each of those
years ought not to be included in her income as she did not receive them.
[7] The Respondent's
submission is that the arrears amounts are properly included in income as "child
support" under paragraph 56(1)(b) of the Income Tax Act:
56.(1)
Amounts to be included in income for year -- Without restricting the generality of section 3,
there shall be included in computing the income of a taxpayer for a taxation year,
…
(b) [spousal
or child] support -- 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 received after 1996 and
before the end of the year by the taxpayer from a particular person where the taxpayer and the particular
person were living separate
and apart at the time the amount was received,
B is the total
of all amounts each of which is a child support amount that became
receivable by the taxpayer from 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 received after 1996 by the taxpayer from the
particular person and included in the taxpayer's income for a
preceding taxation year;
[8] Relying on the
decisions of this Court in Pepper v. Canada and Mymryk v. Canada,
counsel for the Respondent argued that regardless of who actually received the
payments made by the Appellant's former spouse, the Family Benefits Act assignment
agreement did not deprive them of their "support amount" status under
the Income Tax Act. Accordingly, both the current and arrears amounts ought
to be included in the Appellant’s income for the taxation years in question.
Analysis
[9] Paragraph 56(1)(b) of the Income Tax Act requires the
inclusion in income of a "support amount" defined in subsection
56.1(4) as an amount "payable … as an allowance on a periodic basis
for the maintenance of the … children of the recipient, if the recipient has
discretion as to the use of the amount". [Emphasis added.]
[10] The evidence in the present matter does not support the
conclusion that the Appellant had "discretion as to the use of" the
arrears when they became payable on the
28th day of the months between 1993 and 2000. By that time, the
Appellant's right to them had long since been assigned to the MCSS under the Family
Benefits Act.
[11] The Family
Benefits Act provides a scheme for the payment of benefits to certain Ontario
residents who qualify under the statutory criteria as persons "in need".
As a mother with dependent
children resident in Ontario who was divorced from their father and had
not remarried, the Appellant satisfied two of these
three criteria. To determine whether she was "in need", the next step
was to compute her "income" as defined under the Regulations.
[12] Paragraph 13(1)(c) of the Regulations provides that income "…
shall include all payments of any nature or kind whatsoever, received by or on
behalf of, … any dependant of the applicant or recipient…". Paragraph
13(2)(7) specifically requires the inclusion in income of "… any payments
for support … received under an order made by a court of competent jurisdiction
…". As the Appellant was not receiving any payments under the Order
(precisely the reason she found herself "in need"), she did not have
to include such amounts in her income for the purpose of establishing whether
she was "in need" or for computing the quantum of the benefits to
which she was entitled under the legislation. However, as will be seen, that she
was owed such "income" during her benefit entitlement period
triggered other obligations under the Family Benefits Act.
[13] Under section 10(1)
of the Regulations, "[w]here money is due and owing or may become
due and owing to an applicant" for benefits which, "if received,
would be included in income for the purposes of subsection 13(1)", the
Director has a discretion to require "as a condition of eligibility for a
benefit that the applicant … agree in writing to reimburse Ontario for all or
any part of the benefit paid or to be paid when the money becomes payable". Pursuant to paragraph 10(4)(b) of the Regulations, a "written
agreement" may include "an assignment to Ontario by the applicant …
of the right to be paid the money by the person or agency by whom the money is
payable". Within certain limits, the MCSS may recover from the applicant’s debtor amounts which, had
they been paid, would have been included in her income and which would have
reduced the quantum of her benefits accordingly. In other words, the debtor
becomes liable to Ontario for the overpayment of benefits resulting from his
default in paying "income" amounts to the applicant.
[14] In the present
case, the Director required the Appellant to make an agreement in writing assigning
to MCSS some of her rights under the Order; namely, her right to be paid support
amounts that became payable by her former spouse under the Order during the
time she was receiving benefits. Accordingly, when her former spouse finally started
complying with the Order, the current amounts were properly payable and paid to
the Appellant. The right to the arrears amounts (as it had done since March 5,
1992) lay exclusively with the MCSS pursuant to the Family Benefits Act assignment
agreement.
[15] The existence of
the assignment agreement and the terms of the Order directing the FRO to pay
the amounts received from her former spouse to “the person to whom they [were] owed” precluded the Appellant from interfering in
any way with the payment of the arrears to the MCSS. She could not, for
example, have required the FRO to withhold and remit a portion of the arrears to
the Minister of National Revenue. Furthermore, there was no direct correlation
between the Family Benefits Act benefits and the support payments. While the failure of the Appellant's former
spouse to pay support under the Order triggered her need for such benefits
and affected the computation of the quantum of benefits for which she was
eligible under the Family Benefits Act, the benefits were not, in any legal sense, in lieu of the support
payments. Her right to Family Benefits Act benefits arose from having satisfied
the legislative criteria for benefit eligibility. The arrears owed to her by her former spouse provided
a global fund from which the MCSS was entitled to recover overpayment of
benefits caused by his failure to pay amounts that would otherwise have been
included in the Appellant's income. In these circumstances, it cannot be said
that the Appellant had "discretion as to the use of" the arrears amounts
payable or paid under the Order and accordingly, the arrears amounts are not
caught by the definition of "support amount" under subsection 56.1(4)
of the Income Tax Act.
[16] A
similar conclusion was reached in another Ontario case, Bishop v. Minister of National Revenue. The facts of Bishop are essentially the same as those of the
case at bar. Like the Appellant, Mrs. Bishop had been forced to seek social
assistance as a result of her former spouse's default under a support order for
their children. She, too, had been required to make an assignment of her right
to such payments under the same provisions of the Ontario Family
Benefits Act and Regulations. On these facts, Kempo, J. held that
the effect of the assignment was to convey to the Ontario government Mrs.
Bishop's "… legal and equitable interests respecting the income stream
derived from the 1975 support order which, effectively, vested in the [MCSS]'s favour all her existing and
potential rights of action and recovery as between herself and [her former
spouse]; …" and that it "… effectively divested her of any discretion
with respect to any amounts paid or to be paid thereunder to the [MCSS]". In reaching this conclusion, the Court
noted that "[i]t is of particular significance that the
source of Mrs. Bishop's right to receipt of social assistance benefits and
amounts did not arise from the assignment. Rather, their source arose from the Ontario social assistance legislation itself. Her assignment
was merely one of the preconditions attached to her enjoyment of these rights."
[17] Whether the Appellant was actually receiving or owed
support payments was relevant under the Family Benefits Act to the determination
of her degree of "need", the computation of the quantum of benefits
for which she was eligible and the identification and accessing of a source of third-party
funds from which MCSS could recover any overpayment of benefits. Whether the
amounts ultimately recovered by MCSS from her former spouse ought to be
included in her income under the Income Tax Act depends on their being a
“support amount” as defined in subsection 56.1(4). Given
the Appellant's lack of discretion over the use of the arrears as a result of
the Family Benefits Act provisions, I am satisfied that they were not. The
conclusion of Kempo, J. in Bishop applies equally to the case at hand:
[49] As noted, Mrs. Bishop neither actually received, nor indirectly
benefitted from, Mr. Bishop's payment. Further mere physical possession of
these funds would not have rendered them her own property, legally or
beneficially. There would have been no benefit to her by virtue of its mere
possession, nor would it have been her income. As a matter of law, she was
without any standing with respect to the creditor/debtor relationship that
existed between the Ministry and Mr. Bishop at the time of the payment.
[18] As mentioned above, the Respondent relied
on Pepper and Mymryk, decisions in which former Chief Justice
Garon rejected the approach taken in Bishop:
[From Pepper v. Canada]:
[10] Although
I believe I could dispense with any further comments, I wish to stress the
point that the support payments were made to the Minister of Community and
Social Services as a result of the assignment made by Mrs. Pepper on November
1, 1991. The payments are therefore made to the Minister of Community and
Social Services pursuant to a decision made by Mrs. Pepper who was required to
make an assignment of the moneys pursuant to the Support Order in question,
because she wanted to benefit by and receive social assistance payments. Such
payments are caught by the "constructive receipt" provisions of
subsection 56(2) of the Act. In effect, it is clear that the payments in
question were "made pursuant to the direction of, or with the concurrence
of a taxpayer (Mrs. Pepper) to some other person (the Minister of
Community and Social Services) for the benefit of the taxpayer" (Mrs.
Pepper). In such a case, the income is imputed to the taxpayer to the extent
that it would be income for the taxpayer if the payments had been made to the
taxpayer. It is common ground that paragraphs 56(1)(b) and 60(b) of the Act
would be applicable here if such payments had been received directly by Mrs.
Pepper.
[11] Furthermore,
I am fortified in the validity of the conclusion that the Appellant is entitled
to the deduction of the payments made to the Minister of Community and Social
Services in considering the scheme of the Income Tax Act. In effect, it
would seem preposterous that the person entitled to receive support payments
contemplated by paragraphs 56(1)(b), 56(1)(c), 60(b) and 60(c) of the Income
Tax Act could by his own act deprive the payor of support payments of the
benefit of the deductions to which he would otherwise be entitled under the
provisions of paragraphs 60(b) and 60(c) of the Income Tax Act by simply
making an assignment to a third party of the right to receive such payments, or
otherwise by making a direction that the support payments should be paid to
somebody else.
[From Mymryk v. Canada]:
[27] I did not follow the Bishop
decision in the case Pepper v. R., [1997] 1 C.T.C. 2716 (T.C.C.). In the
Pepper
decision, I stated that I could not see how a person entitled to receive
maintenance payments could by her own act deprive the payor of such payments of
the benefit of the deduction to which he would otherwise be entitled under the
relevant paragraphs of section 60 of the Act, by simply making an
assignment to a third party. Likewise, in the present case, it would not be
logical and fair that his former spouse can prevent the Appellant from treating
as support amount any amount paid or payable to the Executive Director of
Social Services under the two assignments mentioned earlier. In this respect,
it is noteworthy that the Appellant in computing his income for the 2000
taxation year deducted, and the Minister of National Revenue allowed as a
deduction, the amount of $750, which represented support arrears paid by the
Appellant in the year 2000.
[28] I have not been referred to any restrictions in the two Court Orders mentioned in the Assignments
of support arrears pursuant to which the Appellant was required to pay a
support amount. In view of the conclusion at which I have arrived on this
question, I have not found it necessary to consider the impact on the
Assignments mentioned earlier, if any, of the Consent Default Order dated May
10, 1999.
[29] I
therefore conclude that the Appellant's second argument according to which the
Appellant's ex-spouse had no discretion as to the use of the support amount
cannot be accepted.
[19] I am not persuaded that these decisions are
applicable to the present facts. As Informal Procedure decisions, Pepper and
Mymryk are without precedential value. Further, the issue before the
Court in both cases was the payor spouse’s right to deduct a support amount
that had been paid to an assignee of the recipient spouse. Accordingly, comments
as to whether such amounts might have had to be included in the recipient
spouse's income are obiter dicta. While certainly the Income Tax
Act contemplates the reciprocal operation of the inclusion-deduction
provisions, the deductibility of such payments does not depend upon its being
included in income by the recipient. Such reciprocity is achieved through the use
of the definition of "support amount" in the respective formulas for
the calculation of included income
and deductible amounts.
Whether a payment is a “support amount” will depend on the facts of a
particular taxpayer's circumstances. In the present case, the Appellant has
shown that the arrears paid by her former spouse to MCSS were not a “support
amount” and accordingly, need not be included in income under paragraph 56(1)(b)
of the Income Tax Act.
[20] In Pepper and Mymryk, the
Court was troubled by the possibility of the recipient spouse "by his own
act" unilaterally depriving the payor spouse of
his deduction "by simply making an assignment to a third party". While a legitimate concern, this is not
what occurred in either Bishop or in the present case. The Appellant did
not take it upon herself to assign her rights to the MCSS to thwart her former
spouse’s entitlement to a deduction. Rather, it was her former spouse who "by
his own act" chose, for a seven-year period, not to comply with his Court-ordered
support obligations. It was he who put the Appellant in the position of having to
assign her rights to the payments he was supposed to have been making in order
to be eligible for Family Benefits Act benefits to support their two
children. It was the default of the Appellant's former spouse that deprived her
of the discretion she might otherwise have had with regard to the use of the arrears
payments; absent such discretion, the arrears amounts are not "support
amounts" as defined in the Income Tax Act.
[21] The Court also considered in Pepper and Mymryk the constructive receipt provisions
of subsection 56(2) of the Income Tax Act. That broadly drafted provision
includes in a taxpayer’s income "[a] payment … made pursuant to the
direction of, or with the concurrence of a taxpayer to some other person for
the benefit of the taxpayer” or “as a benefit that the taxpayer desired
to have conferred on the other person...". [Emphasis added.] In Pepper,
the Court described Mrs. Pepper's assignment of her rights to the MCSS as "a
decision made by Mrs. Pepper who was required to make an
assignment of the moneys [under] the Support Order …
because she wanted to benefit by and receive social assistance payments." [Emphasis added]. With the exception of the reference to being "required"
to make an assignment, the evidence in the present case does not justify a
similar finding. The use of the word "desired" in subsection 56(2)
suggests a degree of intention simply not present in the Appellant’s
circumstances: her “decision” to forgo her right to arrears that accumulated
during the period she was receiving benefits to the MCSS was in truth, an obligation
imposed on her by provincial statute as a "condition of eligibility" for benefits made necessary by her former spouse's default.
[22] The other cases relied upon by the
Respondent are distinguishable from the present appeal. In Giles v. Canada, the assignment by the recipient spouse
was to the Manitoba equivalent of the Ontario FRO. In these
circumstances, the Court concluded that there was "if not actual receipt,
constructive receipt" of arrears. The analogous aspect in the
present case is the payment of current amounts to the Appellant by the FRO,
amounts which the Appellant does not dispute were properly included in her
income in 2002, 2003 and 2004. As for Gervais v. Canada and Boucher v. Canada these cases turned on the particular
wording of the Quebec legislation which by operation of law, subrogated to the
provincial social assistance agency the recipient spouse's right to support
arrears. And as with Pepper and Mymryk, the issue before the Court
in those cases was not whether the amounts paid ought to be included in the
taxpayer's income.
[23] For these
reasons, the appeals of the 2001, 2002, 2003 and 2004 taxation years are
allowed. The reassessment of the Minister of National Revenue of the 2001 taxation
year is vacated. The reassessments of the 2002, 2003 and 2004 taxation years
are referred back to the Minister of National Revenue for reconsideration and
reassessment on the basis that the arrears portion of the amounts of $9,625, $9,100
and $9,100 paid by the Appellant's former spouse in each of those years was not
a "support amount" as defined in the Income Tax Act and
accordingly, only the current amounts of $5,725, $4,800 and $3,000 are properly
included in the Appellant’s income for 2002, 2003 and 2004, respectively.
Signed at Calgary,
Alberta, this 7th day of December, 2007.
“G.A. Sheridan”
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