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Citation: 2004TCC98
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Date:20040206
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Docket: 2003-147(IT)I
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BETWEEN:
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BEVERLEY BAILEY,
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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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AMENDED REASONS FOR JUDGMENT
Hershfield J.
[1] This is an appeal from
reassessments of the Appellant's 2000 taxation year that
included taxable income of $55,000.00 received by her in the year
in spousal support payments from her former spouse due to a
break-up of the marriage some years earlier. The support payments
were for the sole benefit of the Appellant. There was no
provision for children. The payments received were pursuant to an
order of the Superior Court of Justice of Ontario (the
"SCJ"). The issue to be dealt with in this appeal is
the taxability of the support payments.
[2] The particular order dealing with
the support payments in the subject year was an interim order of
the SCJ. An unsuccessful appeal of the interim order was launched
by the Appellant's former spouse.
[3] The Appellant refers to the
interim order as precedent setting in that it set aside a
separation agreement entered into between the Appellant and her
former spouse notwithstanding that the agreement provided that
payments agreed to would under no circumstances be varied. This
included the Appellant's express covenant that under no
circumstances was the time to be extended for which the agreed
payments were to be made. The Appellant also agreed that no
further claim would be made under either the Family Law
Act or the Divorce Act regardless of a change in
circumstance. Almost nine years after the support payments ended
under the agreement, the Appellant began the proceedings that led
to the interim order. The interim order set aside the agreement.
Providing for further relief as it did might well, in the
circumstances of that case and prevailing authorities at the
time, be described as precedent setting.[1]
[4] The interim order acknowledges in
the Reasons for Decision that the Appellant had not achieved
self-sufficiency since the break-up and that she was suffering an
economic hardship due to the marriage breakdown which the Court
was required to relieve. Based on the budget proposed by the
Appellant, the SCJ found that the amount of $5,000.00 per month
was justified. In 2000, 11 months' support was received as
the interim order was effected commencing February 2000. [2]
[5] The Appellant urges me to accept
that the SCJ intended her to receive, based on her budget, the
full benefit of the support payments on an after tax basis. Her
evidence is that there was no consideration of the tax liability
by the SCJ and that it could not have been taken into account in
satisfying the stated objective of the award which was to enable
self-sufficiency since taking it into account, she was not
self-sufficient. It appears her proposed budget did not include
the tax obligation in question that arises in respect of the
support payments. In any event, I accept that the SCJ may not
have considered the tax liability in question. The Reasons for
Decision make no reference to income tax considerations.
[6] The Respondent relies on paragraph
56(1)(b) of the Income Tax Act (the
"Act") to include the subject support payments
in the Appellant's income. Under that paragraph for the
support payments to be included in the Appellant's income
they must be "support amounts" as defined in subsection
56.1(4). These provisions of the Act read as follows:
56. (1) Without
restricting the generality of section 3, there shall be included
in computing the income of a taxpayer for a taxation year
. . .
(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 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;
. . .
56.1(4) The definitions in this subsection apply in this
section and section 56.
. . .
"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 common-law partner or former spouse or
common-law partner of the payer, the recipient and payer are
living separate and apart because of the breakdown of their
marriage or common-law partnership 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.
[7] Once it is established (or
acknowledged as in the case at bar) that the "support
amount" received in the year, is not a "child support
amount" as defined in subsection 56.1(4) and that the
support amount has not been brought into income in an earlier
year, paragraph 56(1)(b) includes such support amount in
the recipient's income in the year of receipt. That
acknowledgement being present, all that needs to be determined,
aside from a Canadian Charter of Rights and Freedoms[3] issue
which has been raised, is whether the subject support payments
are a "support amount". If they are, the payments are
included in the recipient's taxable income and are deductible
from the payer's taxable income under
paragraph 60(b) of the Act.[4]
[8] The definition of "support
amount" requires that the amount be receivable as "an
allowance on a periodic basis for the maintenance of the
recipient --- where the recipient has discretion as to the use of
the amount". This has not been brought into question in the
case at bar. Further, paragraph (a) of the definition of
"support amount" requires that the recipient be the
spouse or common law partner or former spouse or common law
partner of the payer and that they be living separate and apart
by virtue of the breakdown of their marriage or common law
partnership. No issue has been raised in respect of these
requirements. The last requirement also set out in paragraph
(a) of the definition of "support amount" is
that "the amount is receivable under an order of a competent
tribunal or under a written agreement". Notwithstanding that
the payments received in this case were pursuant to the interim
order of the SCJ, the Appellant argued in her Notice of Appeal
that the tax liability attached to the support payments results
in an economic effect that was not as ordered by the SCJ. This,
she argues, causes the support received to be something other
than "under the order" of that court.
[9] While I accept that the interim
order made no provision for tax liability and that the SCJ may
not have considered such liability in making its order, there is
no question that the amounts received were payable and receivable
under the interim order. That is all the Act requires. The
sufficiency of the amount, after tax, is not contemplated by the
Act. That is a matter of family law to be determined by
the appropriate court - the SCJ in this case. That the tax
liability may render the support insufficient in terms of giving
effect to the objectives of the order is not relevant. It is
incumbent on the party seeking support to persuade the court
hearing the maintenance plea of the quantum required to give
effect to the objectives of the order. If a liability to a
creditor of the support recipient is a factor in determining the
appropriate support and the court fails to take it into account,
the payments under the order are still under the order even if
they do not give effect to the stated objective of the order. The
order simply requires revision on terms the court may determine
appropriate so as to give effect to its intended objective
applying family law principles. That is, if the liability (for
taxes or otherwise) frustrates the objective of the order, the
remedy is to be found in the court that granted the order.[5]
[10] This takes me to the principle argument
of the Appellant. She argues that paragraph
56(1)(b) and the inclusion/deduction system
employed in the Act, infringe on her rights under the
Charter of Rights and Freedoms in that they are
discriminatory. The Appellant relies on section 15 of the
Charter to strike down the source of such
discrimination.[6]
More particularly it is subsection 15(1) upon which she relies.
That subsection reads as follows:
15. (1) Every individual is equal before and under the law and
has the right to the equal protection and equal benefit of the
law without discrimination and, in particular, without
discrimination based on race, national or ethnic origin, colour,
religion, sex, age or mental or physical disability.
[11] I note at this point that both counsel
for the Respondent and I had a difficult time identifying the
basis of the asserted discrimination. She does not assert
discrimination on the basis of sex. In the broadest terms she
asserts discrimination against supported persons who are
economically disadvantaged, not self-sufficient, following the
breakdown of a relationship (marriage) that contributed to such
non-self-sufficiency. Family law recognizes this group and
requires that such dependent state be addressed. With this group
in mind I have distilled the Appellant's principle
Charter arguments down to the following two:
(1) supported persons do not have equal benefits under the law
under the inclusion/deduction system compared to supporting
persons; and
(2) paragraph 56(1)(b) discriminates
against separated persons who are economically disadvantaged (not
self-sufficient) by reason of dependence created during
marriage.
[12] While I will elaborate on these
arguments, I note that Respondent's counsel relied
principally on the Supreme Court of Canada decisions in
Thibaudeau v. The Queen in 1995[7] and Law v. Canada (Minister of
Human Resources Development) in 1999[8] in his argument that paragraph
56(1)(b) did not offend the Charter.
The former case supports the view that the adequacy of the
support payments to the Appellant is not determined by the tax
system but is governed by family law so that the taxation of
support payments cannot be said to offend the Charter. In
respect of the decision in Law, Respondent's counsel
points out that that case requires me to ask the following three
questions:
(1) Does paragraph 56(1)(b)
treat the Appellant differently than others on the basis of
personal characteristics?
(2) If there is a distinction, is the
ground of that distinction enumerated, or analogous to the
grounds enumerated, in subsection 15(1) of the
Charter?
(3) If so, is the differential
treatment discriminatory?
The decision in Law supports the view that differential
treatment imposed by the Act will not offend the
Charter unless the differential treatment is based on a
personal characteristic. The Respondent argues that to the extent
there is differential treatment in the case at bar, it is not due
to a personal characteristic of the Appellant. It is due to her
economic and civil status which are not personal
characteristics.
[13] I note as well that Respondent's
counsel came well prepared to defend the inclusion/deduction
system under attack by the Appellant. He called a witness from
the Department of Finance to speak to the policy and fiscal
issues arising in respect of the Charter questions raised
by the appeal and filed two Affidavits sworn by this witness.[9] The first
Affidavit deals with concepts of ability to pay and horizontal
and vertical equity policies underlying the operation of the
Act. The second Affidavit deals with fiscal issues should
the symmetry of the present inclusion/deduction be lost. For the
most part both Affidavit submissions have relevance to the
alternative position advanced by the Respondent were I to find
that paragraph 56(1)(b) did violate section
15 of the Charter. The alternative position of the
Respondent is that section 1 of the Charter would apply to
save paragraph 56(1)(b) were I to find that it violated
section 15. [10]
Section 1 of the Charter provides as follows:
1. The Canadian Charter of Rights and Freedoms
guarantees the rights and freedoms set out in it subject only to
such reasonable limits prescribed by law as can be demonstrably
justified in a free and democratic society.
[14] I turn now to the specific
Charter arguments noted above.
Supported persons do not have equal benefits under the law
under the inclusion/deduction system compared to supporting
persons
[15] The Appellant argues that the
inclusion/deduction system is founded on the theory that the
fiscal benefit afforded by the deduction (to the supporting
person) is to be shared, the theory being that the deduction to
the person in a higher tax bracket permits a transfer of the tax
savings to the person in the lower tax bracket. The Appellant
argues that in practice such benefit is not shared and that the
effect is discriminatory. She argues that the system in reality
continues, indeed increases, the imbalance between the former
partners that an order for spousal support is intended to remedy.
In this context the Appellant compares her group of economically
disadvantaged persons with the group of which her former husband
is a part. She is a formerly married person. So is her husband.
As a supporting person in that category he is better off under
the current tax system than a supported person in the same
category. She does not have equal benefit under the law.
[16] Respondent's counsel argued that
the theory behind the inclusion/deduction system is based on the
payer's "ability to pay" and the recipient's
"discretionary use" of the support amounts and not on
the notion of sharing the fiscal benefit afforded by the
deduction (to the supporting person) or by the "income
splitting" effect of the inclusion/deduction system.
[17] I accept the Respondent's position
that the rationale behind the inclusion/deduction system is
founded (on the deduction side) in notions of ability to pay.
However, as noted above, I am of the view that such position
forms part of a justificatory analysis which is not relevant in
the examination of the application of subsection 15(1) of the
Charter and even if it were relevant (such as under
section 1 of the Charter), the "ability to pay"
justification is, in any event, weak at best. Affording a
deduction on the basis of ability to pay is a very subjective
exercise which is to say that it (the ability to pay theory)
offers, objectively, no justification for the inclusion/deduction
system being applied to support payments. Indeed, one could
rationalize any number of tax models for the tax treatment of
support payments. Prior to May 1, 1997 payment of child support
was deductible under the Act. Did a supporting
parent's ability to pay tax change? Clearly not. The
subjective rationalization of the tax policy associated with the
tax treatment of these types of payments changed. There are many
other cases where support payments ordered by the courts are not
deductible for tax purposes even though the ability to pay tax
has been reduced. I might be ordered to support a parent or to
support a person I have injured. My ability to pay tax is
affected by such court ordered obligations but the tax system
makes no accommodation. Whatever the rationalizations are for
different types of support payments, they go far beyond such
simplistic notions as "ability to pay". Parliament, not
the courts, is accountable for such subjective
rationalizations.
[18] Similarly, justifying the inclusion on
theories of "discretionary use" is weak at best. There
is no objective basis for such justification. I suggest that the
assumption in respect of alimony type payments is that they are a
distribution or sharing of earnings not a distribution or sharing
of capital. That is, the assumption is that the source of the
paid-out funds is not yet taxed where a deduction is permitted.
The reason for taxing it in the hands of the recipient is to
ensure that it is taxed somewhere. This is not a policy that can
be objectively justified on some notion of "discretionary
use". This, again, is a subjective policy imposed by
Parliament. It is reflective, to some extent at least, of the
degree of separateness of the persons involved in these support
payment regimes. Separated persons are treated as two tax units
in respect of one income source so as to "allow" income
splitting but they are not considered so independent as not to
require accountability in respect of that income source - as
between the two of them. While a reasonable fiscal philosophy, it
is subjective nonetheless. That the Act might be replete
with subjective distinctions does not make those distinctions
discriminatory.
[19] Regardless of the justification, the
Appellant is correct in her assertion that she does not share the
benefit afforded her former husband. There is a benefit to the
former spouse who pays support and, as Respondent's counsel
asserted, it is a benefit not intended, necessarily, to be
shared. To support his position, Respondent's counsel
referred to excerpts from the 1942 House of Commons Debates:[11]
Mr. Bence:
It seems to me most unfair that when a man is divorced and is
supporting his ex-wife by order of the court, he should not be
allowed to deduct, for income tax purposes, the amount paid in
alimony. If that were done, the ex-wife could be required to file
an income tax return as a single woman, as she should, and she
would have to acknowledge receipt of that income in making up
that return. In many cases the man has married again, but still
he must pay a very high tax on the $60, $70 or $80 a month he
must pay his former wife. I am not thinking of it so much from
the point of view of the husband, though I believe he is in a
very bad spot. In the cases with which I have become acquainted,
the husband has defaulted in his payments because he has not been
able to make them, and in those cases it is the former wife who
suffers, and accordingly I believe she should be given as much
consideration as the husband.[12]
While the Appellant argued this passage might be taken to
support her position that the supported person was expected to
benefit from the current inclusion/deduction system, the benefit
suggested by the passage is indirect at best. Further, some
Members of Parliament appear to have had only the support payer
in mind in considering changes to the provisions of the
Act dealing with support payments. Consider the following
passages from the same Commons Debate:
Mr. Green:
I really think it is an impossible situation, with the tax so
greatly increased, as it has been this year. After all, our law
recognizes divorce, and once the parties are divorced they are
entitled to marry again. In some cases that have been brought to
my attention the husband has remarried and had children by the
second wife, but is forced to pay income tax on the alimony that
he pays the first wife, and I suggest that the position is
absolutely unfair.
[20] Parliament has permitted the subject
support payments to be deductible. The intention was to benefit
the supporting person. There is no need to intellectually elevate
this clear concession by arguing that the inclusion/deduction
system provides an overall benefit to persons living separate and
apart by virtue of marriage break-up. There is no collective unit
that could be presumed to share any such benefit. The Appellant
is correct in this. The "benefit" in our tax system of
an inclusion (by recipient of the support payments) and a
deduction (by the payer of the support payment under
paragraph 60(b) of the Act) is not to permit
income splitting which is to allow a second taxpayer the benefit
of access to lower marginal rates of tax. That a support
recipient might have a lower rate applied is no benefit to the
recipient. The recipient suffers a tax consequence without
abatement from the supporter unless that abatement is redirected
by the application of family law principles which is where
Parliament and the Supreme Court of Canada in Thibaudeau
recognized the "sharing" (if any) of the deduction
benefit (given to the supporter) should be addressed. Weighing
all the circumstances and applying family law principles to such
circumstances enables the family law court to act as it deems
appropriate on a case-by-case basis.[13]
[21] This is essentially the conclusion
arrived at by the majority in Thibaudeau in their finding
that paragraph 56(1)(b) of the Act
was not discriminatory. While paragraph
56(1)(b) has been amended since that case
was decided in respect of income inclusions for child support and
while that case dealt with the taxability of child support as
opposed to spousal support, the basis for attacking the subject
paragraph of the Act in that case is in all relevant ways
on all fours with the present case. This was the implicit
conclusion as well in Latsay v. Canada, [1997] T.C.J.
No. 3. where spousal support payments being brought into
income under paragraph 56(1)(b) was
found, based on Thibaudeau, not to be in violation of the
Charter.
[22] In Thibaudeau, the taxpayer
claimed to be a member of a group of separated or divorced
persons that by reason of self-sufficiency received no personal
support but rather received support as custodian parent for the
maintenance of children.[14] That group was found in Thibaudeau not to be
discriminated against by the application of paragraph
56(1)(b). While the Supreme Court of Canada may be said to
have been divided on some issues presented in that case, the
majority view does not seem to take exception to the findings of
Cory J. and Iacobucci J. at pages 5274-76 which were that where
there is a displacement of the tax liability between former
spouses:
"... the responsibility for this lies not in the
Income Tax Act, but in the family law system and the
procedures from which the support orders originally flow. This
system provides avenues to revisit support orders that may
erroneously have failed to take into account the tax consequences
of the payments. Therefore, in light of the interaction between
the Income Tax Act and the family law statutes, it cannot
be said that s. 56(1)(b) of the Income Tax Act
imposes a burden upon the respondent within the meaning of s. 15
jurisprudence".
This passage, applied to the parent group of which Thibaudeau
was a member, applies equally if not more so to the group the
Appellant places herself in, namely that group who are not
self-sufficient and whose dependency is intended to be addressed
by family law. Persons in this group requiring assistance can
resort to the family courts to ensure their right to receive it
is enforced.
[23] A similar view is expressed in
Thibaudeau by Gonthier J. at page 5289:
In closing I would note that the inadequacy of maintenance is
due to numerous factors governed by family law and is not the
result of these provisions of the ITA. The distribution of the
additional amounts freed up by the system does not, within the
meaning of s. 15 of the Charter, have to be made equally
between the members of the couple, as it is properly governed by
family law in accordance with the child's best interests.
This passage too applies, in my view, in respect of family law
principles governed in accordance with the interests and needs of
a non-self-sufficient partner without children. That benefits of
the system are not equally shared or distributed under the
Act is not an infringement of rights under the
Charter.
[24] Further, applying the tests in
Law, the Appellant's first argument under subsection
15(1) of the Charter would fail as well. While the
Appellant's argument does underline that the supporter is
better off under the inclusion/deduction system, there is no
discrimination on the basis of personal characteristics. The
Appellant's disadvantaged situation is an economic one and it
is not an immutable (or constructively immutable) personal
characteristic. That her former husband is afforded a tax benefit
does not entitle her to such benefit or to a share of it. As a
separated person in need of support she is distinct from the
person paying her support but the basis of that distinction is
not enumerated or analogous to an enumerated basis in
subsection 15(1) of the Charter. The Respondent cites
the following passage from Corbière v. Canada (Minister
of Indian and Northern Affairs)[15] which for the purposes of this
appeal is sufficient authority for these findings:
The thrust of identification of analogous grounds at the
second stage of the law analysis is to reveal grounds based on
characteristics that we cannot change as if the government has no
legitimate interest in expecting us to change to receive equal
treatment under the law. To put it another way, section 15
targets the denial of equal treatment on grounds that are
actually immutable, like race, or constructively immutable, like
religion.
Paragraph 56(1)(b) discriminates against
separated persons who are economically disadvantaged - not
self-sufficient - by reason of dependence created during
marriage
[25] The Appellant argues that the subject
inclusion provision discriminates against her and others like her
by creating an economically crippling liability on amounts
awarded to relieve an already existing economic hardship. One
social policy working against another effectively discriminating
against separated persons who are economically disadvantaged, not
self-sufficient, by reason of dependence created during marriage.
Paragraph 56(1)(b) targets this group. To
target this disadvantaged group by clawing back that which is
granted to alleviate their hardship is, or so it is argued, is to
discriminate against them. She argues her need for (and right to)
support is a personal characteristic shared by others in her
group which is subjected to discriminatory treatment under the
Act relative to the treatment given persons such as her
former partner (and others in his group) who are able to (and
have the legal obligation to) provide the required support.
[26] The Appellant also argues that marriage
establishes a right to be supported which continues on marriage
break-up. If the basis for the responsibility for support flows
from the marriage, measures and means giving effect to such
responsibility must be on a consistent and equivalent basis both
before and after marriage break-up. Inconsistent tax treatment
imposed in respect of expenditures arising from a responsibility
attached to marriage (whether during marriage or after marriage
break-up) operates in a discriminatory fashion against persons
who have become dependent by virtue of marriage but who are
living separate and apart by virtue of marriage breakdown.
[27] Again, applying the tests in
Law, the Appellant's second challenge under subsection
15(1) of the Charter must fail. There is no discrimination
on the basis of personal characteristics of the type afforded
protection under the Charter. Being economically
disadvantaged is not a personal characteristic. The
Appellant's income warranted the support order but one's
income level (one's economic situation) is not a personal
characteristic enumerated under section 15 nor is it a
characteristic analogous to those which are enumerated.[16] That one area of law
might warrant an order for support does not make it
discriminatory for another area of the law to bring it into the
tax net. These are policy decisions within the purview of
Parliament. What the Appellant is suggesting as discriminatory is
really a perceived anomaly. The anomaly that one might perceive
is in applying an "ability to pay" justification in the
case of the supporter and not applying it in the case of the
supported. However, as stated, the ability to pay theory is,
objectively at least, no rationalization for the tax treatment
that offends the Appellant. It is a subjective justification
within the purview of Parliament to employ.
[28] While it is true that marriage gives
rise to support obligations both during marriage and after
marriage break-up, marriage break-up is an event that crystalizes
support rights. It is an event that creates a material
distinction in civil status. However, a change in civil status is
not a personal characteristic of the type afforded protection
under the Charter. Nor, in the context of the Act,
is it an analogous characteristic afforded protection under the
Charter.
[29] Gonthier J. remarks in
Thibaudeau[17] that "... one should not confuse the concept of
fiscal equity, which is concerned with the best distribution of
the tax burden in light of the need for revenue, the
taxpayer's ability to pay and the economic and social
policies of the government, with the concept of the right to
equality, ...". In these remarks Gonthier J. seems to echo
the views of Letourneau J.A. who gave a dissenting opinion in the
Thibaudeau case at the Federal Court of Appeal level.[18] Indeed, at page
5279, Gonthier J. refers to Letourneau J.A.'s dissenting
judgment in some detail. Letourneau J.A.'s thesis is that we
cannot take civil status into account when determining if there
has been discrimination in the context of a provision of the
Act. Social, political, legal and economic realities will
cause taxpayers to experience different treatments under the
Act. The Act by its nature sets up distinctions and
imposes different burdens based on different economic and civil
status realities and same is not prima facie
discriminatory. That is, that Parliament has recognized in the
Act a need to accommodate a supporting person without
accommodation to the supported person is not prima facie
discriminatory. In the context of paragraph
56(1)(b) the Supreme Court of Canada has, in
Thibaudeau, gone one step further and held that paragraph
not to be discriminatory (prima facie or otherwise) on
facts that are not distinguishable in any relevant way from the
case at bar.
[30] For all these reasons I find that
paragraph 56(1)(b) does not offend
subsection 15(1) of the Charter. Accordingly, the appeal
is dismissed.
Signed at Toronto, Canada, this 6th day of February 2004.
Hershfield, J.
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