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Citation: 2005TCC179
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Date: 20050817
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Docket: 2004-2013(IT)I
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BETWEEN:
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TRACEY CALLWOOD,
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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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and
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JOHN G. CRAWFORD,
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Joined Party.
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REASONS FOR DETERMINATION
Hershfield J.
[1] This
is a reference for a determination of a common question pursuant to
section 174 of the Income Tax Act (the "Act") and
the Order of this Court dated December 16, 2004 (the "Section 174 Order").
[2] The
Appellant filed an appeal in respect of her 2000 and 2001 taxation years seeking
to reduce the amount of support payments included in her taxable income in
those years pursuant to paragraph 56(1)(b) of the Act. The Joined
Party claimed a deduction of the subject payments in those years pursuant to
paragraph 60(b) of the Act. The Section 174 Order recognizes that
these are reciprocal provisions of the Act. That is, the Section 174
Order recognizes that a determination of the question of the Appellant's claim
to reduce the amount of support payments included in her taxable income would
also constitute a determination of the Joined Party's deductible amount as both
determinations are based on the resolution of a common question of law and on
common findings of fact arising from the same events. The Respondent has
proposed to reassess the Joined Party accordingly in the event that the Appellant
is correct in respect of her claim. Subject to subsection 174(4.1) of the Act,
the determination of the question before me will be final and binding on all
the parties pursuant to subsection 174(4).
[3] The
Appellant's current husband, a former paralegal in a U.S. law firm, gave
evidence on behalf of the Appellant who I will refer to simply as "Tracey".
He was a credible witness who was personally involved in the drafting of documents
and had personal knowledge of all of the court proceedings and goings on
between the parties and their lawyers at all relevant times. I accept his
evidence but that is not to say that I accept certain inferences or arguments
that he wished me to draw or accept. The Joined Party's current wife gave
evidence on behalf of the Joined Party who I will refer to simply as "John".
John's current wife was also a credible witness but had less personal knowledge
of matters relating to the agreements and the child support payments. Accordingly,
I do not give her evidence weight except in respect to exhibits she tendered,
the authenticity of which was not challenged.
[4] Tracey
and John were divorced in 1997. Prior to the divorce they entered into a
separation agreement in January 1997 which made provision for the support of
three children of the marriage (the "original agreement"). In October 2000,
the original agreement was amended (the "amending agreement") and the
support provision in respect of the children was varied. The question to be determined
pursuant to section 174 is whether the variance in the terms of the
original agreement, or any other event, created a "commencement day"
so as to bring the support payments made thereafter within the new child
support regime introduced effective in May 1997, whereby child support payments
are not taxable to the recipient (Tracey) and not deductible by the payor
(John).
[5] Tracey
was assessed in respect of her 2000 and 2001 taxation years as having received taxable
child support payments which reflects the position that there were no events
including the entering into of the amending agreement that would create a
commencement day so as to bring child support payments within the new regime. As
noted, Tracey has appealed that assessment although it seems that both parties,
at the time they filed their returns for the subject years, continued to
believe that the old regime governed (i.e. that payments were deductible and that
receipts were taxable) even after the original agreement was amended. This is evidenced not only by the
manner in which the parties filed their returns but by correspondence which I
will refer to later in these Reasons and by the fact that no attempt was made
to address the different economic affect on both parties that a change in tax
treatment would cause. This suggests that the intention of the parties was not
to regard the changes in the agreement as constituting a change in tax
treatment. While intentions are not generally relevant in determining whether
there is a commencement day that marks when child support payments are brought
into the new non‑taxable/non‑deductible regime, since the Act
itself seems to leave no room to consider intentions, in some cases, intentions
may be considered as appeared to be the case in Dangerfield v. Canada as
decided by the Federal Court of Appeal. In any event, the
changes to the original agreement need to be analyzed in light of the statutory
provisions.
[6] Paragraphs
56(1)(b) and 60(b) of the Act provide for the exclusion of
"child support amount" payments which are defined in subsection 56.1(4).
In brief, child support amount payments are not included in the taxable income
of the recipient and not deductible in the calculation of the payor's taxable
income if they are receivable and payable under an agreement or order made after
its "commencement day". The "commencement day" of an
agreement or order is defined in subsection 56.1(4) as follows:
56.1(4) The definitions in this
subsection apply in this section and section 56.
. . .
"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.
[7] Consider
now the agreements and orders present in this case.
[8] The
original agreement provided as follows:
VII. CHILD SUPPORT
Husband hereby agrees
to pay Wife as child support, and Wife agrees to accept as child support,
according to the following schedule:
1997: $400.00 within three
months of the signing of this Agreement by Wife
Alicia Aileen Crawford: 1997-2003
$1599.99 no later than March 31
$1599.99 no later than June 30
$1599.99 no later than September 30
$1599.99 no later than December 31
Bryce Gordon William
Crawford: 1997-2008
$1599.99 no later than March 31
$1599.99 no later than June 30
$1599.99 no later than September 30
$1599.99 no later than December 31
Alexandria Betty Crawford: 1997-2009
$1600.02 no later than March 31
$1600.02 no later than June 30
$1600.02 no later than September 30
$1600.02 no later than December 31
Husband
agrees to render payments on a weekly basis in the form of cashier's check or
money order until a wage attachment is granted.
It is
specifically understood and agreed by the parties that if said minor children attend
college, then the support payments will continue until graduation or enrollment
ceases. It is also understood that the Husband will share the burden of
expenses for clothing, medical insurance and any other necessary expenses of
said children. Husband and Wife agree that these support payments shall not be
modified by any Court during the lifetime of the parties hereto. (Emphasis added to
highlight paragraphs deleted by amending agreement.)
[9] It
was acknowledged at the hearing that the payment schedule was based on $400.00
per week for all three children or $133.00 per week per child (rounded
to the nearest dollar) but same was apparently mistakenly equated to $1,600.00
per month as an aggregate payment (whether there were four weeks in a month or
not). That is, the payment schedule of essentially $1,600.00 per quarter per
child mistakenly corresponds with a monthly obligation of $1,600.00 which is
less than $400.00 on a weekly basis. It seems that I might have been the first
person to draw the parties' attention to the difference. In any event, payments
were required under the agreement to be made on a weekly basis and I
gather that the parties had a common understanding, reflected in the actual
payments made, that the required child support was $133.00 per week per child
or $20,800.00 per year if paid in full.
[10] The amending agreement provides as follows:
3. Child Support
The former wife
acknowledges that there are no arrears outstanding of child support owed by the
former husband to the former wife.
Paragraph VII of the
Domestic Contract (i.e. the original agreement) is amended by deleting
therefrom the two ending paragraphs therein from "Husband agrees to ..."
to "... lifetime of the parties hereto".
[11] The deletion is of the highlighted portions of the original agreement
reproduced above. It is clear that the deletion of the understanding to share
expenses for clothes, medical insurance and other necessities is not a
variation referred to in subparagraph (b)(ii) of the definition of
"commencement day" as the "child support amounts" payable
are the fixed amounts referred to in the original agreement and these have not
been varied. This is the case as "child support amount" as defined in
subsection 56.1(4) of the Act must first be a "support amount"
which is defined in that subsection as an allowance payable or receivable on a periodic
basis. The necessary expenses referred to in the original agreement were not
payable on a periodic basis. Accordingly they were not part of the "child
support amounts" provided for in the original agreement. Their deletion
then cannot be a change to the "child support amounts" payable which
is to say that there is no commencement day under subparagraph (b)(ii)
of the definition by virtue of that deletion.
[12] The Appellant argued that the total child support has been varied so
as to meet the requirement for a commencement day in subparagraph (b)(iii)
of the definition since an extension of child support was deleted in the
amending agreement. This deletion does create the possibility that the total
child support paid will be less under the amending agreement. However
subparagraph (b)(iii) does not speak to possibilities. It speaks to
a variation the effect of which is to actually change the total child support. Where
the effect of changing the total is, under an amending agreement, contingent on
an unknown future event, it cannot be a variation that creates a commencement
day at the time of entering into the amending agreement.
[13] In addition to deleting the two highlighted paragraphs of the original
agreement, a provision respecting life insurance is added as
subclause 3(a) to the amending agreement. That subclause acknowledges that
John carried a policy of life insurance on his life and that he would designate
Tracey as the beneficiary of his life insurance benefits in trust for the
children. The designation was to remain for so long as John is obligated to
provide support for the children. John undertook, in the amending agreement, to
maintain the policy in force and to pay the premiums on the policy as they fall
due. It is also provided that if John dies without the insurance in effect, his
obligation to pay child support pursuant to the amending agreement will survive
his death and be a first charge on his estate.
[14] This amendment (adding an annual or other periodic life insurance
premium payable to benefit children) is argued to be a variation for the
purposes of creating a commencement day. The issue is whether such payments are
an "allowance" paid to Tracey as required under the definition of
"support amount". As the premium payments are for the benefit of the
children, subsections 56.1(1) and 60.1(1) of the Act apply to avoid any
issue as to whether Tracey was the recipient of the premium amounts. Such
subsections deem such third party payments to be payable to and receivable by Tracey
and, when paid, to have been paid to, and received by, her. However, that is
not sufficient to constitute the payment as an "allowance". To be an
allowance, Tracey must have discretion as to the use of the amounts. While
there is authority for the view that discretion can be exercised in advance of
the receipt of periodic payments so that pre‑arranged and agreed upon
third party payments have been found not to run afoul of the discretion as to
use requirement, there
should, in my view, be some basis for drawing the inference that that was what
the recipient parent intended. In
the case at bar I find that no such intention can be inferred. There is no exercise
of discretion by Tracey as to the use of dollars available for the maintenance
and support of the children. To the contrary, the dollars applied to insurance
served a different purpose. Tracey wanted financial protection for the children
after John's death if he died before his child support obligations ended. The
subject clause in the amending agreement does that at a cost to John of the insurance
premiums or failing that, effectively at his choice, at a cost to his
estate in terms of its continued liability. As such, this added provision cannot
be said to be an "allowance" and accordingly it cannot be said to be
a variation in child support amounts payable or receivable.
[15] In addition to the amending agreement there is another document pre‑dating
the amendment that relates to the question as to whether or not there has been
a commencement day in respect of the subject child support payments. This earlier
document is a divorce judgment dated May 12, 1997, signed by the local
registrar of the Ontario Court (General Division) on June 12, 1997 ordering and
adjudging that Tracey and John are divorced effective June 12, 1997. The Order
does not expressly acknowledge or refer to the original agreement but a
provision of the original agreement - that Tracey has not relinquished or
waived any rights she may have or acquire in and to any retirement plan that John
or his estate may receive - is set out in the order. The order makes no mention
of child support but I mention it as there was reference at the hearing to an
agreement made in contemplation of the divorce judgment.
[16] In April 1997, prior to the issuance of the divorce judgment, the
parties signed and filed affidavits in respect of the divorce petition. These
affidavits confirm or constitute an agreement to an equal division of John's
CPP and GM pension plan as well to John making an irrevocable designation
of Tracey as the sole beneficiary of his life insurance plans and his pension
plan. The affidavits go on to provide as follows:
3. The
Respondent agrees that the child support will be increased annually in each
year commencing in January 1998, for so long as child support is payable under the
Separation Agreement, by an amount equal to the lesser of the annual percentage
increase in the Cost of Living of the proceeding year and the annual percentage
increase in the Respondents salary.
[17] If these affidavits constitute an agreement to vary the original
agreement, they are pre-May, 1997 variations so no commencement day is created
by them. The June 1997 divorce judgment makes no reference to them or to their
subject matter, so it does not create a commencement day. Further, there is
virtually no evidence that the inflation provision seemingly agreed to by sworn
affidavit was ever given effect. Indeed the evidence is to the contrary. Based
on what I can gather from the evidence, which is lacking on this point, the
affidavits seem to reflect some without prejudice pre-divorce negotiations
which were never given effect and must therefore be ignored.
[18] The next series of events raised at the hearing relates to
correspondence exchanged in the course of negotiating or working out the terms
of the amending agreement. John's current wife tendered a letter dated
September 1, 1999 from John's lawyer to Tracey's lawyer indicating that
John would, under the amending agreement, "continue the existing $1,600.00
per month payments, tax deductible and includable, which includes any
extraordinary expenses".
This letter was intended to suggest that the intention of the parties was that
the amending agreement was not to amend the tax regime applicable under the
original agreement.
[19] Tracey's representative argued that this correspondence never
reflected an agreement by the parties as to the tax treatment. He asserted that
a letter of May 23, 2000 from Tracey's lawyer to John's lawyer supported his
position. However, such letter does not strike me as suggesting anything other
than Tracey's lawyer had thought that the child support payments would be
taxable under the original agreement. He warns or cautions however of a
different treatment than that expected. Such warning or caution cannot be taken
as a reflection of intent in regard to the amending agreement. His letter
provides as follows:
However, I must advise you at this
time that Revenue Canada has initially advised my client (Tracey) that the
payments currently being made by your client (John) are not taxable in her
hands and tax deductible in his hands given the writing of the existing
agreement prepared in January of 1997. Therefore, it is incumbent upon me to
advise you that we may wish to re-visit the issue of child support unless your
client continues to be willing to pay the said sum on a non tax deductible
basis.
[20] The possible tax position posed in this last letter does not appear
correct at law. Regardless, a letter of December 1, 2000 from Tracey's lawyer to Tracey confirms that
he left the tax situation in respect of ongoing child support payments to her
to deal with with Revenue Canada. There is no evidence that this was
dealt with but if Tracey thought the child support payments were tax free under
either the original agreement or the amending agreement it seems unlikely she
would have filed her returns on the basis that they were taxable. Further, it
does not appear that Tracey's lawyer's letter to John's lawyer in May 2000
dissuaded John from believing that the payments would continue to be deductible
even under the amended agreement since he continued to deduct support payments.
On balance then I find the evidence supports a finding that the parties never
intended the amending agreement to cause a change in the tax regime applicable to
the child support payments. While intention should not be determinative, if
relevant at all, it is somewhat comforting to point out, where it is possible
to do so, cases where the legal affect of actions coincide with intentions.
[21] The events potentially impacting the question before me do not stop
here. There was an additional Order in September 2002 of the Ontario Superior
Court of Justice that provided as follows:
1. The
obligation of the respondent John Crawford to pay support for the child Alicia
Alieen Crawford, born May 15, 1985 is suspended, effective December 14,
2001.
This Order makes no reference to the reason for suspending the obligation
to pay support but was apparently made as that child, Alicia, had commenced
living with her father on December 14, 2001. I accept this to be the case.
[22] Following the issuance of the September 2002 Order, John's lawyer
wrote Tracey to confirm that effective December 31, 2001 his client would
comply with the provisions of the agreement by continuing child support
payments for two children in the total sum of $266.00 per week. Notwithstanding that this letter
states a compliance date of December 31, 2001, the actual effective date set
out in the September 2002 Order would prevail in terms of establishing payables
and receivables at particular times. As well, I note that John's actual
payments in December 2001 were as required under the September 2002 Order which
was clearly intended to confirm his legal obligation at that earlier time.
[23] I note at this point that the scope of my determination, pursuant to
the reference under section 174, is to deal with the Appellant's 2000 and 2001
taxation years. Under subparagraph (a)(ii) of the definition of
commencement day, there is a commencement day when the first varied amount is
payable. This raises two issues. Firstly, is there a varied or changed child
support amount where the amount per child has not been varied and
secondly if there is a change in the child support amount in such case, was there
a varied amount payable in 2001 so as to impact the inclusions and deductions
in that year?
[24] A "support amount" is defined in subsection 56.1(4) of the Act
as the amount payable for the maintenance of the recipient or children of the
recipient or both. It is not defined on a per person basis where
different persons are intended to benefit by specific, stipulated amounts. A "child
support amount" is a "support amount" not identified as solely
for the benefit of the recipient who is a parent of a child. None of the
payments in the subject appeal are identified as solely for Tracey the
recipient parent. To the contrary they are identified for specific children in
specific amounts but that identification simply makes the total of all the
support payments "child support amounts". No distinctions are made in
the Act as to whether payments are for one or more children. Recipient
parents are not presumed to be bound to apply receipts in accordance with the
rationale that was the basis for formulating the amount of support. Under the Act
for taxation purposes support is for children as a group regardless of their
number and if the group support amount changes under written agreement or court
order after April 1997, for any reason, the new regime governing child support
payments applies.
Accordingly, notwithstanding that the support payments in the case at bar
remained unchanged on a per child basis, the child support amount as defined in
the Act did change from $400.00 per week to $266.00 per week and a
commencement day is thereby created.
[25] An alternative approach would be to read the subject provisions and
definitions as applying separately to each payment in respect of each child
where such separation is evident from the agreement and order providing for
them. In the case at bar then there would be three distinct support amounts
payable to Tracy. One such support amount was changed but
two were not. The two unchanged support amounts of $133.00 per week in respect
of each child still living with Tracey have not changed so that the new tax
regime governing child support payments would not apply to them.
[26] Support for this latter construction can be found in Miller v. R. In that case it
was held that an order reducing child support by the amount applicable for one
child who had attained the age of 21 years was not a change in the child
support amount payable. The attraction of this decision is that it reflects the
intentions of the parties who made no attempt to address taxation issues on the
basis of the new regime and thwarts the seemingly unintended result sought by one
of the parties who, unilaterally after continuing to file returns on the basis
of the former regime, now seeks an advantage. Further, deference and comity
among judges to add certainty and predictability in an area of such statutory
complexity as exists here seems appropriate where doing so gives effect to the
common understanding of the parties in a case where the Act provides for
reciprocity between them. Still, I cannot ignore what seems to me to be the clear
consequences of the subject provisions of the Act as written which is
that a change in support, in respect of even one child, triggers the new regime
both as a change in the child support amount under paragraph (b)(ii) and as a
change in the total child support payable under paragraph (b)(iii). Accordingly, I find that the
September 2002 Order caused a commencement day to come into existence.
[27] The next issue then is when the new, post-April 1997, child support
taxation regime applies in the case at bar. The commencement day under
subparagraph (a)(ii) of the definition is the day on which the
first payment of the varied amount is required to be made. That day under the September
2002 Order is December 14, 2001.
Accordingly, all payments payable and receivable after that date are not
deductible by John and not includable by Tracey in the calculation of their
respective taxable incomes. Such amounts are determinable. The 2001 child
support amount under appeal by the Appellant ($20,533.00) is two weekly
payments, of $133.00 each, short of a full year's child support calculated
under the original and amended agreements. Two weekly payments of $400.00 each
were payable in December before the 14th under the original and
amended agreements and two weekly payments of $266.00 each were payable in
December after the 14th as required under the September 2002 Order. It
is these latter payments totalling $533.00 that were required to be made after
a commencement day and, accordingly, they fall under the new child support
payment tax regime regardless of the intentions or understandings of the
parties. Accordingly, I find that the full amount under appeal in 2000, and,
the amount under appeal in 2001 less $533.00, were paid and received under the old
child support payment regime. The $533.00 paid in December 2002 was paid and
received under the new regime. John can therefore deduct the amounts ($20,800.00
in 2000 and $20,000.00 in 2001) paid prior to the December commencement day and
Tracey must therefore include them in the calculation of their respective taxable
incomes pursuant to subparagraphs 56(1)(b) and 60(b) of the Act.
[28] The foregoing dictates the following determinations:
1) The purported indexing
of child support payments evidenced by the affidavits made in 1997 did not vary
the child support payable and receivable under the original agreement or create
a commencement day;
2) The 1997 divorce
judgment did not vary the child support payable and receivable under the
original agreement or create a commencement day;
3) The changes to the
original agreement incorporated in the amending agreement did not vary the
child support payable and receivable under the original agreement or create a
commencement day;
4) The September 2002
Order effective December 14, 2001 constitutes a variation in the child support
amounts payable and receivable so as to create a commencement day at that
effective date in respect of all child support amounts payable and receivable
thereafter under the original agreement as amended and as varied by the September
2002 Order; and, accordingly
5)
The child support
payments in 2000 ($20,800.00) and the child support payments less $533.00 in
2001 ($20,000.00) are properly includable in the taxable income of the
Appellant and are properly deductible from the taxable income of the Joined
Party.
[29] Before signing theses Reasons I refer to the recent Federal Court of
Appeal decision in Tossell and The Queen and Peterson. While section 174 of the Act
allows for determinations distinct from judgments, the practice of this Court
is often to render judgments where binding determinations dispose of all issues
under appeal by the party or parties who have in fact filed appeals the outcome
of which hinges on the determination. The Federal Court of Appeal in Tossell
has accepted this practice. Since there has been a consent made in a
written submission of Respondent’s counsel to the only other issue raised in
the Appellant’s Notice of Appeal, the foregoing determinations will be given
effect, as will such consent, coincident with a judgement that I will sign
disposing of the Appellant’s Notice of Appeal.
Signed at Ottawa,
Canada, this 17th day of August 2005.
Hershfield
J.
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