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Citation: 2003TCC338
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Date: 20030515
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Docket: 2001-3034(IT)I
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BETWEEN:
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KAREN KENNEDY,
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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
Mogan, J.
[1] During 1998 and 1999, the
Appellant received certain amounts from her former husband as
child support payments. The only issue in this appeal is whether
the Appellant is required to include those amounts in computing
her income. The Appellant has elected the informal procedure.
[2] The Appellant was married to Colin
Martin Kennedy ("CMK") in 1979. There were two children
born of the marriage: Jamie Colleen (January 7, 1981) and Jillian
Breanne (August 24, 1987). The Appellant and CMK separated in
December 1990. By Court Order dated March 26, 1991 (Exhibit A-1),
the Appellant was granted custody of the children; CMK was
granted reasonable access to the children; and CMK was ordered to
pay to the Appellant as support for the children $80 per week per
child commencing February 27, 1991. The Appellant and CMK
signed Minutes of Settlement in December 1991
(Exhibit A-2) which, in effect, confirmed the terms of
the prior court order (Exhibit A-1) and provided in paragraph
4:
4. The amount
of child support payable under this agreement will be increased
annually on the 26th day of March 1992 and each and every year
thereafter by the indexing factor as defined by the Family Law
Act, namely the percentage increase in the Consumer Price
Index for Canada for prices of all items as published by
Statistics Canada since March of the previous year.
[3] In September 1997, the Appellant
applied to the Ontario Court (General Division) for Judgment
pursuant to terms contained in the Minutes of Settlement (Exhibit
A-2) which had been signed in December 1991. On September 24,
1997, a judgment was issued by the Ontario Court (General
Division) which for all practical purposes, contained the same
terms as the Minutes of Settlement. That judgment of the Ontario
Court is Exhibit A-3 in this appeal. Because that judgment was
issued after April 30, 1997 and required payments for only child
support, the Appellant concluded that she was not required to
include in her income any amounts received from CMK for the
support of her children.
[4] When the Appellant filed her
income tax return for 1997, she did not include any child support
payments received after April 30, 1997. Also, when she filed her
income tax returns for 1998 and 1999, she did not include in her
income any child support payments. By Notices of Reassessment,
the Minister of National Revenue added to the Appellant's
reported income the amounts $8,473 for 1998 and $12,514 for 1999
representing the aggregate child support payments which the
Appellant received from CMK in those two respective taxation
years. The Appellant has appealed from those two reassessments.
There is no dispute with respect to the amounts. As stated above,
the only issue is whether the Appellant is required to include in
computing her income the amounts she received as child
support.
[5] The Appellant introduced some
documents from Revenue Canada (Exhibits A-5 and A-7) which
indicate that there were different views among certain employees
of Revenue Canada as to whether the child support payments
received by the Appellant after April 30, 1997 were required to
be included in her income. Also, Exhibit R-1 is a letter from the
Appellant's family law lawyer in Niagara Falls, Ontario dated
October 7, 1997 confirming prior advice that child support
payments received after the judgment (Exhibit A-3) dated
September 24, 1997 would no longer be taxable in her hands.
[6] I am satisfied that the Appellant
honestly believed that child support payments which she received
after April 30, 1997 or September 24, 1997 were not taxable in
her hands. The question in this appeal, however, is not what the
Appellant honestly believed when she filed her income tax returns
for 1998 and 1999 but what the law requires in all the
circumstances of her situation.
[7] The income tax law with respect to
alimony, maintenance and child support payments was, until
recently, simple and easily understood by any reasonable person.
The relevant provisions were contained in a few paragraphs in
subsection 56(1) and section 60 of the Income Tax
Act. After the decision of the Supreme Court of Canada in
Thibaudeau (95 DTC 5273), members of parliament decided
around 1997 that simplicity was not a virtue. Accordingly, the
Act with respect of alimony, maintenance and child support
payments was amended so as to become complicated and not easily
understood by any reasonable person. The holy grail of the
amendment was to benefit the recipient of child support payments
by not including those payments in the computation of income and,
collaterally, to burden the payor by not permitting the deduction
of those payments in the computation of income. The new
provisions are contained in paragraphs 56(1)(b) and
60(b) and in sections 56.1 and 60.1. With respect to
comprehension, the definitions in subsection 56.1(4) and the
formula [A-(B+C)] are challenging.
[8] The main purpose of the new
provisions is achieved in the definitions of "child support
amount" and "support amount" in subsection
56.1(4).
56.1(4) The definitions in this subsection apply in this
section and section 56.
"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
common-law partner or former spouse or common-law partner of the
payer or who is a parent of a child of whom the payer is a
natural parent.
"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.
Paragraph 56(1)(b) describes the kind of support
payments which are required to be included in the computation of
income:
56(1) Without restricting the generality of
section 3, there shall be included in computing the income of a
taxpayer for a taxation year,
(a) ...
(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;
[9] The broad definition of
"child support amount" (i.e. any support amount not
identified as solely for the support of the adult recipient)
permits a more generous reduction in the amounts required to be
included in income under the formula in paragraph 56(1)(b)
because "B" in the formula is the total of child
support amounts. The new scheme applies to any couple who
separate and, after April 1997, enter into a separation agreement
or obtain a court order. The new scheme may also apply in
particular circumstances to any couple who separated and, before
May 1997, entered into a separation agreement or obtained a court
order. The particular circumstances are set out in the definition
of "commencement day" in subsection 56.1(4):
"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.
[10] Exhibit A-3 is the judgment of Justice
M.P. Forestell of the Ontario Court (General Division) dated
September 27, 1997 issued on the Appellant's motion pursuant
to the terms of the Minutes of Settlement (Exhibit A-2). Exhibit
R-1 is a copy of a letter dated October 7, 1997 from the
Appellant's lawyer (Wendy L. MacPherson) to the Appellant
stating in part:
Further to our meeting in August 1997 and in accordance with
your instructions, we confirm that we have now filed the Minutes
of Settlement with the Ontario Court (General Division) in
Welland and the terms of the Minutes of Settlement have been
incorporated into a Judgment.
We now enclose a copy of the Judgment of Mr. Justice Forestell
dated September 24, 1997.
As previously indicated to you, the Judgment is automatically
filed with the Family Responsibility Office and that Office will
perform the usual calculation with regard to the indexing of the
support payments.
We also confirm that we previously advised that as the
Judgment is dated after May 1, 1997, any support payments that
are made would no longer be taxable in your hands, nor will they
be deductible to Mr. Kennedy.
[11] The Minutes of Settlement (Exhibit A-2)
were signed by the Appellant and CMK in December 1991. I am
satisfied that the Appellant obtained the judgment from the
Ontario Court (General Division) in September 1997 (Exhibit A-3)
in the expectation that, because the judgment was after May 1,
1997, subsequent child support payments would be free from tax in
her hands. The Appellant's lawyer (Ms. MacPherson)
obviously thought that such payments would be free from tax
having regard to the fourth paragraph of her letter quoted in
paragraph 10 above.
[12] The child support payments received by
the Appellant from CMK in 1998 and 1999 are the subject of this
appeal. Can the judgment of the Ontario Court dated September 24,
1997 (Exhibit A-3) qualify as a "commencement date"
with respect to those payments? The answer is found in the
definition of "commencement date" set out in paragraph
9 above. The basic payments of $80 per child per week plus a
cost-of-living adjustment on March 26, 1992 (and each year
thereafter) were determined in the Minutes of Settlement (Exhibit
A-2) signed in December 1991. Because those Minutes of Settlement
were signed long before May 1997, and the payments in question
were made pursuant to those Minutes of Settlement, the judgment
of September 1997 (Exhibit A-3), standing alone, does not qualify
under clause (a) of the definition of "commencement
day".
[13] Under clause (b) of the
definition of "commencement day", there are four
conditions which could possibly establish a commencement day for
the Appellant after April 1997. The Appellant and CMK have never
filed a joint election with the Minister, and so the condition in
subparagraph (i) cannot be satisfied. Exhibit A-3 did not
change the child support amounts payable to the Appellant, and so
subparagraph (ii) cannot be satisfied. There is no
subsequent agreement or order made after April 1997 which changed
the total child support amounts payable, and so subparagraph
(iii) cannot be satisfied. There is no agreement or order which
specifies a day as the "commencement day" for the
purposes of the Income Tax Act, and so subparagraph (iv)
cannot be satisfied.
[14] In Kovarik v. The Queen, 2001
DTC 3716, Bowman A.C.J. considered the old scheme and the new
scheme of child support payments and stated:
[8] Under what I may
describe as the old régime (pre May 1997) spouses making
payments to separated or ex spouses for the support of children
could deduct those payments and the recipient had to include them
in income. Following the decision of the Supreme Court of Canada
in Thibaudeau v. Canada, [1995] 2 S.C.R. 627, the
legislation changed. So long as a pre May 1997 agreement remained
unchanged the deduction/inclusion system under the old
régime prevailed.
[9] If a new
agreement were entered into, or an old agreement was changed in a
particular way, the deduction/inclusion régime ceased and
only payments made up to the "commencement day", as
defined, were deductible by the payor and includible by the
payee.
[15] The above statement is a succinct
description of the way the Act changed in 1997 with
respect to child support payments. In the circumstances of this
appeal, there were no changes after April 1997 concerning the
amounts received by the Appellant as child support pursuant to
the Minutes of Settlement signed in December 1991 (Exhibit A-2).
Therefore, the old scheme continued to apply to the child support
payments received by the Appellant in 1998 and 1999. The appeals
for 1998 and 1999 are dismissed.
Signed at Ottawa, Canada, this 15th day of May, 2003.
J.T.C.C.
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