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Citation: 2005TCC656
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Date: 20051011
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Docket: 2004-4557(IT)I
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BETWEEN:
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ELISA WHITE,
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Appellant,
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And
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Little J.
A. FACTS:
[1] The Appellant and John James ("James") were married on July 29, 1989.
[2] The Appellant and James have two children:
Date of Birth
Robyn Jasper James November 22, 1990
Brockton Zachary James December 30, 1992
[3] The Appellant and James were divorced on February 3, 1997.
[4] The Divorce Order issued by the Court of Queen's Bench of Alberta provided as follows:
(a) the Appellant shall have sole custody of the children;
(b) the spouse shall have the right of access to the children;
(c) the spouse shall pay to the Appellant child support in the net of tax amount of $600.00 per month per child, commencing on March 15, 1997 and continuing on the 15th day of each month thereafter so long as the children are "children of the marriage" as defined in the Divorce Act;
(d) the Appellant's claim for retroactive support is dismissed; and
(e) the amounts owing under the Order are to be paid to the Director of Maintenance Enforcement and shall be enforced by the Director unless the Appellant files with the Court of Queen's Bench of Alberta and the Director, a notice in writing that she does not wish the Order to be enforced by the Director;
[5] The Appellant received support payments in the amount of $14,400.00 in each of the 1999, 2000, 2001, 2002 and 2003 taxation years.
[6] The support payments were received pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowable payment payable on a periodic basis for the maintenance of the Appellant, children of the marriage, or both the Appellant and children of the marriage.
[7] The Appellant was living apart from James who was required to make the payments at the time the payments were made and throughout the remainder of the year.
[8] The Minister of National Revenue (the "Minister") issued assessments for the 1999, 2001, 2002 and 2003 taxation years to include the support payments of $14,400.00 in the Appellant's income for those years.
B. ISSUES:
[9] The issues to be decided are whether:
(a) the support amounts received by the Appellant in the 1999, 2001, 2002 and 2003 taxation years are to be included in computing income; and
(b) the Tax Court of Canada has the jurisdiction to grant any relief to the Appellant under subsection 220(3.1) of the Income Tax Act (the "Act") in respect of the interest and penalties assessed.
C. ANALYSIS:
[10] Under what has been sometimes described as the old tax régime (pre-May 1997) spouses making payments to separated or ex-spouses for the support of the children were allowed to deduct those payments and the recipient was required to include the amount of the payments in their income.
Following the decision of the Supreme Court of Canada in Thibaudeau v. Canada, [1995] 2. S.C.R. 627, the Income Tax Act (the "Act") was amended and new provisions were introduced to deal with child support payments.
[11] The amended Act provided that if a pre-May 1997 agreement remained unchanged the deduction/inclusion system as provided by the old tax régime prevailed. However, if a new agreement were entered into by the parties or if a new Court Order was issued, or if an old agreement was changed in a particular way the deduction/inclusion tax régime did not apply and only payments made up to the "commencement day", as defined, were deductible from income by the payor and included in income by the payee.
[12] Subsection 56.1(4) of the Act defines "child support amount", "commencement day" and "support amount". Subsection 56.1(4) reads as follows:
"child support amount" means any support amount that is not identified in the agreement or order under which it is receivable as being solely for the support of a recipient who is a spouse or former spouse of the payer or who is a parent of a child of whom the payer is a natural parent.
"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.
"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 or former 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) the payer is a natural parent of a child of the recipient and the amount is receivable under an order made by a competent tribunal in accordance with the laws of a province.
[13] Paragraph 60(b) of the Act reads as follows:
(b) 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 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;
[14] During the hearing the Appellant testified that James has been making additional monthly support payments to her since May 1999 pursuant to an oral agreement that she made with him.
[15] I must decide whether this oral agreement that the Appellant entered into with James to change the monthly support payments is sufficient to constitute a "variance" of the April 1997 agreement.
[16] In the Divorce Judgment and Corollary Relief Order issued by Mr. Justice Hart of the Court of Queen's Bench of Alberta issued on the 4th day of March 1997 the following comments are found:
4. IT IS ORDERED THAT the Respondent shall pay to the Petitioner child support in the net of tax amount of $600 per month per child, commencing on the 15th day of March, 1997 and continuing on the 15th day of each and every month thereafter for so long as the children are "children of the marriage as defined by the Divorce Act. [Emphasis added ]
...
10. IT IS ORDERED THAT the amounts owing under this Order be paid to the Director of Maintenance Enforcement, and shall be enforced by the Director unless the creditor files with the Court and the Director, a notice in writing that she does not wish the Order to be enforced by the Director, pursuant to Section 7 of the Maintenance Enforcement Act. (Exhibit A-1)
[17] In the Reasons for Judgment issued by the Honourable Mr. Justice D.G. Hart on the 4th day of March 1997 the following comment is found:
[5] The Respondent shall pay to the Petitioner maintenance for the children in the sum of $600 per month per child, net of tax commencing on the 15th day of March 1997 and continuing on the 15th day of each successive month thereafter until further order. (Exhibit A-2) [Emphasis added ]
[18] A portion of a letter from Ruellen Forsyth-Nicholson (the Appellant's solicitor) was filed as Exhibit A-5. In this letter the following comment is found:
Her proposal, on the other hand, was that he should pay $1,200.00 net of taxes per month... (underlining added)
[19] In Dangerfield v. The Queen, 2004 DTC 6025, the issue before the Federal Court of Appeal was whether a "commencement day" of May 1, 1997 was specified in a Judgment of the Manitoba Court of Queen's Bench in a family case that included a requirement for the payment of periodic child support to the applicant. At pages 6027-6028 Linden J.A. stated:
[6] In the 1999 taxation year, the applicant received $3,182 in child support. She did not include this amount in her income, but Mr. Mountney did deduct this amount from his income on his tax return. The respondent reassessed the applicant. She appealed to the Tax Court, which ruled against her.
ANALYSIS
[7] Following the decision of the Supreme Court of Canada in Thibodeau v. The Queen, [1995] 1 C.T.C. 382, even though the government's right to tax support payments to the recipient was affirmed, it amended the legislation generally to eliminate, inter alia, the need to pay tax on these child support payments pursuant to orders or written agreements after a particular "commencement day". Subparagraph 56.1(4)(b)(iv) of the Income Tax Act, R.S.C. 1985, c. 1 (5th supp.) (the Act) contains the relevant commencement day definition:
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56.1(4)(b) "commencement day" at any time of an agreement or order means:
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_56.1(4)(b) date d'exécution: quant à un accord ou une ordonnance:...
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(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....
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(iv) le jour précisé dans l'accord ou l'ordonnance, ou dans toute modification s'y rapportant, pour l'application de la présente loi.
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[8] The problem in this case is that the Court judgment was pronounced on the 21st day of April 1997, it was formally signed on May 5, 1997, and the operation of clause (c) contained in it, dealing with child support, was expressly said to commence on May 1, 1997. There is no doubt that both judgments and orders are treated the same by the Court of Queen's Bench Rules, Man. Reg. 553/88.
[9] It is not contested that the judgment or order, as a whole, was effective on the day it was pronounced, according to Queen's Bench Rule 1.04.1, that is, on April 21, 1997. Nor is it contended that the May 5, 1997 date on which the judgment or order was signed had any significance for this appeal. What is at issue here is whether the part of the judgment or order dealing with child support could have a commencement day different than the April 21 effective date of the entire judgment or order, that is, May 1, 1997, the date specified in the clause dealing with the child support payments.
[10] The Tax Court Judge, who was apparently of the view that the entire order had to have a common commencement day, held that "the date support payments commence cannot be taken to be a 'commencement day' in respect of the order itself under subparagraph (b)(iv) of the definition of commencement day". He further concluded that "there is still no commencement day of the order itself." With all due respect, I disagree. The Tax Court Judge erred in law in coming to this conclusion. While it is necessary that an order for support have a commencement day (see: Pach v. The Queen and Rosenberg, [2003 DTC 5634] [2003] F.C.A. 363, per Malone, J.A.), the language in this order does specify a "commencement day" for the order to pay child support which complies with subparagraph 56.1(4)(b)(iv).
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[13] In my view a commencement day for the support payments was specified in this case. This was the clear intention of the Judge who made the order in question. The transcript demonstrates conclusively that the Judge, inter alia, made a separate oral order, as part of the overall judgment rendered on April 21, 1997, that the support payments of $250 per month were to commence on May 1, 1997. There was some doubt expressed about the commencement date issue in the transcript, but it was resolved to the satisfaction of the Judge, who clearly wished to comply with the new legislation by specifying a commencement day that would allow the tax free treatment of the payments to the applicant. This view is reflected in the Family Disposition Sheet signed by the Judge on April 21, 1997, which has a separate entry under "support", which indicates that $250 per month is to be paid "commencing May 1, 1997". The other orders made in this document have no commencement day specified, for it was not necessary to do so for tax or any other purposes.
[14] That there was a commencement day specified is also clear from the documentation demonstrating that the parties intended to specify a commencement day for the child support payments in order to be able to avoid tax on the payments in accordance with the new legislation. The Tax Court Judge obviously understood that the applicant and her counsel intended to do this. In the letter dated December 10, 1996, which was included in the evidence, counsel for the applicant wrote to the father of the child informing him that, under the new law, the applicant "will not have to pay tax on this amount and you will not be permitted to deduct it." The father did not respond to this letter. The father not only did not respond to the letter, but he did not even appear at the hearing, indicating that he was willing to run the risk of the orders that were made against him. If he had any objection to the orders being sought against him he should have taken the necessary steps to defend himself. Paradoxically, however, he later proceeded to deduct the amount of the support payments from his declared income, contrary to the understanding of the applicant, counsel, and presumably the Judge who made the order.
[15] The argument that the provision requires express reference in the agreement or order to the effect that the commencement day is being specified "for the purposes of this Act" is without merit. The jurisprudence is clear that such a technical requirement is unnecessary. The requirement is only that the commencement day be included in the order for the purposes of the Act; the order need not expressly state that it is for the purposes of the Act. It is often perfectly obvious, as it was here, that the date is specified for purposes of the Act, and if it is not, evidence may be led to that effect, as was done in this case.
[16] The application will be allowed, the Tax Court Judge's decision will be set aside and the appeal of the applicant from the reassessment of her 1999 taxation year will be allowed, with costs both here and below.
[20] This case is authority for the proposition that evidence may be led to indicate the intention of the parties when they appeared before Justice Hart. In this situation I have concluded that the Court Order and the documents between the parties indicate that the parties intended that the Appellant receive the support payment "net of tax" i.e. that the Appellant was not to pay tax on the amount that she received from Mr. James.
[21] In Kennedy v. R., [2004] F.C.J. No. 2122, the Federal Court of Appeal considered the tax treatment of child support payments.
[22] At paragraph 13, Sexton J.A. said:
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.
[23] In a memo dated February 20, 2004 from Ross Forbes of Collins Barrow, Chartered Accountants, the following comment is found:
John (i.e. James) has been paying $1,200 per month to Elisa to date. It is our understanding that John has been making an "uplift" in payments since 1999. $227 per month presently, on a voluntary basis per an oral agreement with Elisa. (Exhibit A-13)
[24] I also refer to an e-mail dated Monday, June 20, 2005 from James to the Appellant. The e-mail reads:
I have paid child support faithfully on the 15th day of every month. I have paid an uplift on my child support ...
[25] There were also several other e-mails included in Exhibit A-14 from James to the Appellant and the Appellant to James that refer to the "uplift" in support payments that James commenced to make to the Appellant in May 1999.
[26] Based on the evidence referred to above, I have concluded that the Court Order was "varied" by the parties when James began to make "uplift payments" to the Appellant in May 1999.
[27] It therefore follows that there was a new commencement date in May 1999 and that the new tax régime applies for part of the 1999 and for subsequent taxation years. The Appellant is not required to include the child support payments in her income from May - December 1999. The Appellant is not required to include the child support payments in her income for the 2001, 2002 and 2003 taxation years.
[28] The appeals are allowed, without costs.
Signed at Vancouver, British Columbia, this 11th day of October 2005.
Little J.
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