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Citation: 2003TCC425
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Date: 20030626
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Docket: 2002-3898(IT)I
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BETWEEN:
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ROBERT G. RITCHIE,
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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
Hershfield, J.T.C.C.
[1] The appeal was dismissed from the
Bench on June 13, 2003 with oral reasons. However, the parties
were reminded that the judgment was not final until signed.[1] The reminder was
given following a discussion of my findings in respect of certain
coming into force provisions of the Income Tax Act
("the Act").
[2] In the year under appeal, 2000,
the Appellant claimed a non-refundable tax credit for the
equivalent-to-spouse amount under paragraph 118(1)(b)
of the Act. The Minister denied his claim pursuant to
subsection 118(5) on the basis that the Appellant was
required to pay a "support amount" (as defined in
subsection 56.1(4) of the Act) to his spouse in the
subject year and on the basis that at least one of two further
conditions for the application of subsection 118(5) had been met.
Such conditions are set out in paragraphs (a) and
(b) of subsection 118(5) which reads as follows:
(5) No amount may
be deducted under subsection (1) in computing an individual's
tax payable under this Part for a taxation year in respect of a
person where the individual is required to pay a support amount
(as defined in subsection 56.1(4)) to the individual's spouse
or former spouse in respect of the person and the individual
(a) lives
separate and apart from the spouse or common-law partner or
former spouse or common-law partner throughout the year because
of the breakdown of their marriage or common-law partnership;
or
(b) claims a
deduction for the year because of section 60 in respect of a
support amount paid to the spouse or common-law partner or former
spouse or common-law partner.
[3] It is clear on the facts of the
case that the condition in paragraph (a) has been met. The
Appellant and his spouse were living separate and apart due to
marriage breakdown at least since May 1996 when they entered into
a written separation agreement. The agreement provided for
support payments for the children of the marriage. However, the
agreement provided that the Appellant would not claim a deduction
for the support payments. Condition (b) then has not met.
Still, subsection 118(5) seems to apply as condition (a)
is met provided the Appellant was required to pay a "support
amount" in the subject year. As will be noted later in these
Reasons there will be no "support amount" unless the
parties are living separate and apart by reason of marriage
breakdown which at first glance seems to make the condition in
paragraph 118(5)(a) redundant. The difference however is
that the latter condition limiting access to the
equivalent-to-spouse amount must be met throughout the year
whereas a "support amount" can come into being in
respect of a part of a year where the parties are living separate
and apart for part of the year.
[4] Before examining the question as
to whether a "support amount" (a defined term
introduced in the Act in 1997) is payable in this case, I
note two peculiarities in this case. Firstly, we seem to have a
"support amount" in this case as defined in subsection
56.1(4) even though the support payments were required under a
1996 agreement in respect of which there is no "commencement
day". Under a somewhat complicated formula in paragraph
56(1)(b) "commencement day" is generally only
relevant in computing a "child support amount", not a
"support amount". However there is a transitional
coming into force provision that addresses this. The second
peculiarity of this case is the affect of the 1997 amendment to
subsection 118(5) that occurred at the same time the definition
of "support amount" was introduced into the Act.
Subsection 118(5), of course, has its own coming into force
provision but it does not have a transitional measure applicable
in this case to the year 2000 in respect of support payments made
under a 1996 separation agreement.
[5] Before considering the
transitional provisions of the relevant sections, consider the
following paragraph in the 1996 separation agreement:
3. CHILD
SUPPORT:
The husband shall pay to the wife child support for the support
of the said children, in the total sum of $250.00 per month,
payable on the 1st day of each and every month, commencing on the
1st day of June, 1996. The parties agree that the husband shall
not be entitled to deduct the said child support payments and the
wife shall not be required to claim the said child support
payments as income, for Income Tax purposes.
[6] The first line of this paragraph
sets out a support payment that meets a number of tests
applicable in a number of contexts. For example, it is a periodic
payment under a written agreement. On its face it is an allowance
with discretion as to use. This latter point was put in issue by
the Appellant. The Appellant's argument, supported by the
evidence, was that he agreed to the support payments intending
and believing it would be used for specific extraordinary
expenses for his children (swimming and dance lessons and certain
tuition fees). Supporting his position there is, for example,
correspondence evidencing her claim for additional, specific
expenses of the type he had agreed to support. There is evidence
that some of these expenses were paid directly by the Appellant.
There were court records indicating that specific expense claims
needed resolution. There is a Consent Order in 2002 confirming
the Appellant's obligation, prospectively at least, to pay
for specific extraordinary expenses for the maintenance of the
children in lieu of the monthly payments. On the other hand, the
evidence also underscored that his intentions and beliefs may not
have defined his legal obligations under the 1996 agreement. On
the face of the agreement he could not pay less than the agreed
amount regardless of how the money was spent. On the face of the
agreement he could not obtain an accounting or a refund if his
support payments exceeded or were not used for the extraordinary
expenses he intended to support. Of course these are hypothetical
examples as there is no evidence that such situations arose. The
Appellant's spouse incurred all, and more, of the
extraordinary expenses he had intended to support. However in
this case, where the extraordinary expenses were higher than his
support payments, it appears he could not be held to account. In
fact when asked by his spouse's lawyer to account, in equity,
for more expenses, he appears to have acted on his legal right
not to do so and made only such additional contributions as he
felt able to make. Conceivably, the $250.00 per month was
intended as a cap in respect of his obligation to support these
specific, extraordinary expenses.
[7] I also note that the
Appellant's spouse testified at the trial on behalf of the
Respondent. Her testimony supported the clear language of the
first line of paragraph 3 of the agreement. She believed she had
discretion as to use of the support payments.
[8] The second line of paragraph 3 of
the separation agreement contradicts the effect under the
Act of the first line of the agreement as the Act
read in 1996. If the first line is taken on its face, the support
payments are deductible by the payer and must be included in the
income of the recipient. While the Appellant has agreed not to
claim a deduction (which may be binding on him as a matter of
contract law) that does not mean that under the Act he was
not entitled to the deductions. The question that arises however
is whether I should draw an inference from the second line that
it was intended to reflect, regardless of the first line, that
the payments were tainted by the tacit but understood
disqualifying condition that the support payments were for
specific, extraordinary expenses. While ordinarily this would be
an untenable stretch given the clear language of the first line
of paragraph 3 of the agreement, there may be circumstances where
the intentions of the parties as to their respective tax
treatment may tip the balance in determining whether an express
provision in an agreement means what it purports to mean. As it
turns out I do not have to decide this point as the appeal must
be allowed for other reasons regardless of the outcome of this
question.
[9] I will now turn to the
transitional provisions respecting the sections of the Act
that bear to the outcome of this case. I am faced with the
following situation. In 1996 an agreement was entered into with a
provision that the Appellant would not deduct the support
payments. At that time subsection 118(5) read as follows:
(5)
Where an individual in computing the individual's income for
a taxation year is entitled to a deduction under paragraph
60(b), (c) or (c.1) in respect of a payment
for the maintenance of a spouse or child, the spouse or child
shall, for the purposes of this section (other than the
definition "qualified pension income" in subsection
(7)) be deemed not to be the spouse or child of the individual.
(emphasis added)
[10] Under this provision it seems that the
Appellant may have been entitled to a deduction under
paragraph 60(b) of the Act as it then read and
in that case he would not be eligible to claim the
equivalent-to-spouse amount. This of course depends on whether
the support payments were an allowance with discretion as to
use.
[11] Subsection 118(5) was amended by S.C.
1997, c. 25, s. 25(8) applicable to the 1997 and subsequent
years. Under this coming into force provision, new subsection
118(5), cited above at paragraph 3 of these Reasons, applies
notwithstanding that this is a 1996 agreement.[2] Under the new provision there
must be a "support amount" which is defined as
follows:
"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.
[12] This definition of "support
amount" was added, applicable after 1996, by S.C. 1997, c.
25, s. 9(6) but the coming into force provision was amended
effective April 25, 1997 by S.C. 1998, c. 19, s. 307(1) as
follows[3]:
(8) Subsection (6)
applies after 1996, except that
(a) a support
amount, as defined in subsection 56.1(4) of the Act, as enacted
by subsection (6), does not include an amount
(i) that was
received under a decree, order or judgment of a competent
tribunal, or under a written agreement, that does not have a
commencement day (within the meaning assigned by that subsection
56.1(4)), and
(ii) that if paid
and received would, but for this Act, not be included in
computing the income of the recipient of the amount;
[13] Since there is no "commencement
day" for the 1996 agreement,[4] there is no "support amount" in this
case. This means that subsection 118(5) cannot apply to prevent
the equivalent-to-spouse claim and the appeal must thereby be
allowed.
[14] This finding is based on a construction
of this transitional provision to the effect that there are two
situations where there will be no "support amount":
firstly, there will be no "support amount" where
payments are made under an old agreement that has not been
brought into the new system by virtue of having a
"commencement day"; secondly, there will be no
"support amount" where payments received under an old
agreement would not be included in the income of the recipient
(i.e. the payments would have failed to meet a required condition
such as being periodic or having discretion as to use). In either
case there will be no "support amount".[5] At the hearing I suggested
the "and" between subparagraphs (i) and (ii) in the
above transitional provision meant that both (i) and (ii) had to
be met for there not to be a "support amount". I am now
of a different view. There is no "support amount" in
this case for the purposes of subsection 118(5). The transitional
provisions for the amendments to the Act preserve the
status quo for old agreements.[6]
[15] Accordingly the appeal is allowed with
costs.
Signed at Toronto, Canada, this 26th day of June 2003.
J.T.C.C.
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