Date: 20010516
Docket: 2000-248-IT-I
BETWEEN:
DALE F. HINKELMAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hershfield, J.T.C.C.
[1]
This is an appeal under the Informal Procedure from a Notice of
Reassessment respecting the Appellant's 1998 taxation year,
denying the deduction of $25,000.00 claimed by the Appellant in
that year in respect of a payment for the maintenance of a child
in the custody of Mr. Steve McKee. The amount so
claimed was paid by the Appellant pursuant to an Order of the
Supreme Court of British Columbia made on August 1, 1996
("Order"). The relevant facts of this case are not in
dispute and the issue is whether the provisions of the Income
Tax Act (the "Act") relating to child
support payments permit the deduction as claimed by the
Appellant.
[2]
The payment was made after 1996 under a pre-May 1997 Order. Since
there is no dispute here as to the application of various
transitional aspects of the applicable provisions of the
Act, I will not recite them in detail. The payments are
governed by the post-April 1997 provisions of the Act. The
deductibility of the subject payment is governed, pursuant to
paragraph 60(b) of the Act, by a formula which
includes in the deductible amount a "support amount" as
defined in subsection 56.1(4). Whether the subject payment is
included in that formula as a "support amount" (i.e. in
the "A" amount referred to in that formula) is the sole
issue in this case. Formula reductions of the deductible amount
are not applicable since the Order is a pre-May 1997 Order.
Facts
[3]
The Appellant married Deborah Anne McKee in or about 1989.
[4]
Deborah McKee, by a previous marriage to Mr. McKee, had two
children, namely, Shawna and Nicole McKee. Both children
lived with the Appellant and Deborah during their marriage.
Although the Appellant is not the natural parent of Shawna McKee
or Nicole McKee, he was in a stepfather relationship with both
children.
[5]
The Appellant separated from Deborah in 1995. Although custody
was an issue, Shawna went to live with her natural father,
Mr. McKee. Nicole continued to live with Deborah. The Order
required the Appellant to pay monthly support payments to his
former spouse for the maintenance and support of Nicole, and also
ordered the Appellant to pay monthly support payments to
Mr. McKee for the maintenance and support of Shawna.
[6]
In the Reasons for Judgment accompanying the Order,
Justice Warren found that the Appellant stood in the place
of a parent to both Shawna and Nicole and was in loco
parentis to both such children, responsible for the needs of
those children, whether the spousal relationship with Deborah
continued or not. Maintenance responsibility in respect of the
children was found pursuant to the provisions of the Divorce
Act, and in accordance with the provisions of that Act, the
Order found that the Appellant was responsible for ongoing
maintenance of both Shawna and Nicole on the basis that they were
children of his marriage with Deborah. At page 27, paragraph 55
of the Reasons for Judgement, Mr. Justice Warren makes the
following finding:
In my view, once a court determines that the parent was in
loco parentis the responsibility continues, provided
the child remains a child of the marriage as defined by the
Act. I cannot find that the Act, which can create
long term obligations as between spouses, is not intended to
create long term obligations with respect to children. Certainly
a husband cannot unilaterally opt out of his spousal support
obligations under the Act on the basis that he had no
intention of creating a long term obligation. How then could a
child's rights be any less?
[7]
With respect to Shawna's support, the Order required Deborah
to pay Mr. McKee for the maintenance and support of Shawna
the monthly sum of $252.00 (being 12% of Shawna's needs)
grossed up to $550.00 on a pre-tax basis.[1] The amount the Appellant was ordered
to pay to Mr. McKee for the maintenance and support of
Shawna was the monthly sum of $630.00 (being 30% of Shawna's
needs) grossed up to $1,374.34 on a pre-tax basis. That is, the
total expenses for Shawna, estimated at $2,100.00 per month, were
apportioned amongst each "supporting" person according
to their respective share of financial responsibility as
determined by the Court. Mr. McKee was responsible for 58%
of Shawna's maintenance. Respective shares were determined
strictly on the relative incomes of the three parents. Justice
Warren did not accept that a step-parent's responsibility
was less than that of a natural parent. At page 37, paragraph 76,
he expressed his view on the point as follows:
... My view is that the Act is a complete guide and the
obligation should be apportioned in relation to the respective
abilities of the parents and not on the basis of a genetic
link.
[8]
The Appellant was also ordered to pay Deborah for the maintenance
and support of Nicole. There is no question as to the
deductibility of these payments made by the Appellant to Deborah
in respect of Nicole. Such payments were to a former spouse and
are included in the definition of "support amount" as
defined in subsection 56.1(4) of the Act.
"Support amount" is defined in that subsection 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 former spouse of the payer, the
recipient and the 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.
[9]
The difficulty in this case is with the deductibility of the
payments made by the Appellant to Mr. McKee in respect of
Shawna. Since the Appellant was never married to Mr. McKee,
he must rely on the second part of the definition of
"support amount" (paragraph (b) of the
definition) in order to have his support payment for the benefit
of Shawna treated as a "support amount". Such treatment
is a condition for the deduction by the Appellant of the subject
payment. Since the subject payment is in respect of a child to
whom the Appellant is not the natural parent, the payment does
not fit the requirements of paragraph (b) of the
definition of "support amount". As such the
Respondent's counsel maintains that the subject payment is
not deductible.[2]
[10] The
amount paid by the Appellant to Mr. McKee for the
maintenance and support of Shawna, namely $25,000.00, is an
aggregate of monthly payments that accumulated as arrears from
the date of the Order to the date of payment. The reason that the
arrears accumulated is that the Appellant took issue with the
Order in respect of his being found responsible to support a
child that was living with her natural father and he appealed the
Order. The appeal was lost and the Appellant testified that it
was only on losing the appeal that he accepted his obligation to
pay Mr. McKee the arrears owing which amount was agreed
between them to be $25,000.00. The Appellant also testified that
Mr. McKee had promised him that he would not pursue any
further payments under the Order if he paid the sum of
$25,000.00. Counsel for the Respondent argued that the
Appellant's testimony, that he made the subject payment as a
final settlement of all obligations under the Order, rendered the
payment not deductible[3]. In this regard I note that subparagraph (k) of
paragraph 8 of the Respondent's Reply to the Notice of Appeal
sets out as an assumption in respect of the reassessment the
following:
(k)
The amount in issue represented arrears for the support and
maintenance of Shawna McKee.
Since the amount in issue is the $25,000.00, and since it was
accepted as arrears and not as a settlement payment in the
reassessment, I cannot now permit the Respondent to take a
contrary position without assuming the onus of proof. In respect
of that onus I do not find the Appellant's testimony
sufficient to support a finding that the $25,000.00 was paid in
settlement of all obligations under the Order. The obligation, as
arrears, was already owing at the time the payment was made. The
appeal had been lost. As such there is no evidence of fresh
consideration having been paid by the Appellant which would bind
Mr. McKee not to pursue his rights under the Order. That the
Appellant never paid any further amounts pursuant to the Order
and that Mr. McKee has never required him to make such
further payments, cannot change the character of the subject
payment as arrears when they were already due and payable as
arrears at that time.[4]
Argument re Paragraph (b) of the Definition of
"Support Amount"
[11] The
Appellant's representative argued that Deborah should be
considered as a deemed recipient under subsection 60.1(1) of the
Act of the subject payment made by the Appellant to Mr.
McKee for Shawna's maintenance. If Deborah were the deemed
recipient, the deduction of the subject amount might be permitted
under paragraph (a) of the definition of "support
amount". Alternatively, the Appellant's representative
argued that the subject payment was received by Mr. McKee as
agent for Deborah who should be seen as the constructive
recipient of the payment. The Appellant's representative
argued that either alternative could ensure that the intention of
the legislation would be given effect to and that any
discriminatory aspect of paragraph (b) of the definition
of support amount would be avoided. While I see no evidence of an
intent or purpose of the legislation to allow deductions, in
general, for maintenance of another person's children, I do
favour any realistic approach to interpreting a statutory
provision in a manner consistent with the Charter and in
light of it. One might also hope that the social policies of a
province in respect of a particular fact situation, as reflected
by an order of a superior court of that province, might co-exist
harmoniously with federal tax policy as reflected by the
application of the provisions of the Act to that fact
situation. In the case at hand the issue is whether the terms of
the Order and the provisions of the Act lend themselves to
a construction that would allow recognition of the subject
support payment as a "support amount".
[12] I will
deal firstly with the argument that subsection 60.1(1) applies so
as to deem Deborah the recipient of the $25,000.00. If she is
deemed to be the recipient under that provision, the payment will
be deductible pursuant to the definition of support amount in
paragraph (a) of that definition if the other requirements
of that definition are met.[5] Subsection 60.1(1) provides as follows:
(1)
For the purposes of paragraph 60(b) and subsection 118(5),
where an order or agreement, or any variation thereof, provides
for the payment of an amount by a taxpayer to a person or for the
benefit of the person, children in the person's custody or
both the person and those children, the amount or any part
thereof
(a)
when payable, is deemed to be payable to and receivable by that
person; and
(b)
when paid, is deemed to have been paid to and received by that
person.
[13] For this
subsection to apply, there must be a finding that the payments
ordered are for the benefit of a particular person (Deborah) even
though they are, in fact, being made to a different person (Mr.
McKee).
[14] The
question under subsection 60.1(1) is whether the Order
"provides for the payment of an amount by a taxpayer (the
Appellant) for the benefit of" (emphasis added)
Deborah. The Appellant argues that the Order, including him as a
contributor to Shawna's maintenance, benefits Deborah even
though she is not the recipient of the payment. The argument
requires a careful analysis of the apportionment of
responsibility amongst the three parents in this case. The
apportionment in respect of Shawna was 30% on the Appellant, 12%
on Deborah and the balance on Mr. McKee. It is argued that
the Appellant's payments to Mr. McKee benefit Deborah in
that, but for such payments, her share of support requirements
for Shawna would be larger than 12%. I agree with this position.
It was the relative incomes of the three parents that determined
their respective support obligations. But for the inclusion of
the Appellant in the support scheme Deborah would have had an
increased support obligation payable to Mr. McKee. This benefit
to Deborah however is an indirect benefit. The payment was
for Shawna's benefit payable to Mr. McKee as
custodial parent. Further, a finding that the subject payment to
Deborah was intended as a benefit for her could result in Deborah
being taxable on the payment. This was clearly not intended by
Justice Warren. In respect of the payments to Mr. McKee, Justice
Warren specifically states at page 41, paragraph 83, that:
... Both figures shall be grossed up to take into account the
income tax consequences in the hands of Mr. McKee.
[15] The
alternative argument relies on agency. In the case at hand Mr.
McKee is clearly not Deborah's agent in respect of the
receipt of the support payment made by the Appellant. None of the
authorities cited by the Appellant's representative
supports this position.[6] Even if it can be said that Deborah should be regarded
as a recipient of support payments for Shawna, Mr. McKee is
not her agent. He receives the amount in his own capacity (as
principal) under the Order. Of this there is no doubt. Further,
to find Mr. McKee as Deborah's agent would expose her to
liability for tax on the payment as the constructive recipient of
it. Again, this result is clearly not intended by the Order.
Mr. McKee was to be subject to tax on the payment.
[16] There is
a construction of the Order however that would allow the payment
to be regarded as having been made by the Appellant on
Deborah's behalf. That construction would acknowledge the
Order's intention to recognize that the Appellant's
responsibility for maintenance derives from his relationship with
Deborah. Indeed that is the only way to give effect to the
results intended by the Order. It was the Appellant's
marriage to Deborah that put him in loco parentis to her
children. His maintenance responsibility derives from her -
from the home he made for her and her children. Deborah is the
connecting person; the connecting link in the payments ordered
for Shawna's support.[7] If the Order had expressly recognized this and
provided that the Appellant pay Deborah additional support
of $1,374.34 and that Deborah in turn pay Mr. McKee a like
amount, both the Appellant and Deborah would be entitled to
deduct the payments as "support amounts" as each such
payment would then fall within paragraph (a) of the
definition of "support amount".[8]
[17] In my
view, the payment requirement in the Order can and should be read
as an Order routing the payments in this way. Although the copy
of the Reasons for Judgement filed as Exhibit A-1 was incomplete
(starting at "Child Support Issues" at page 24), it is
apparent that Deborah was seeking custody of both children and
child support from the Appellant for both as well.
Paragraph 51 on page 24 provides as follows:
As between the Hinkelmans, the respondent/mother claims that
the two girls are children of her marriage with
Mr. Hinkelman and she seeks child support from him.
[emphasis added]
[18] That
Deborah lost custody of Shawna would not affect her former spouse
(the Appellant) obtaining a deduction for a support amount paid
to her, Deborah, pursuant to her claim (see footnote 8). There
is reason here to find that her claim should not be ignored and
was not, in fact, intended to be ignored by Justice Warren.
Her entitlement to receive support was clear (if she had been
given custody of Shawna). That support entitlement should not be
seen as vitiated when she lost custody (at least in terms of the
Act which makes no distinction vis-à-vis
custody). What happened on the loss of custody is that Deborah
became subject to a support obligation. The Order for all intents
and purposes recognizes the Appellant's obligation to
Deborah to support both their children and requires the
Appellant to pay that part of the support that relates to Shawna
to Mr. McKee. The payment to Mr. McKee satisfies his
obligation to Deborah to support the children of their marriage.
Deborah in turn is required to defer the payment or like amount
to Mr. McKee as the custodial parent. Deborah's consent to
the use of these support payments in this way, if required, can
be inferred from the particular facts of this case.
[19] As stated
above, the foregoing findings as to the proper construction of
the Order are necessary to give effect to its clear and
unambiguous intent. Mr. McKee was not to have a tax-free
support receipt from the Appellant. Shawna's required
maintenance was calculated on a pre-tax basis. To find that Mr.
McKee did not receive the payment from the Appellant as a taxable
"support amount" would be to bestow an unintended
windfall on Mr. McKee and an unintended penalty on the Appellant.
In Chute v. The Queen, [1999] 2 C.T.C. 2864 (T.C.C.)
Judge Sarchuk observed, in respect of giving effect to the
intention of an order, as follows:
... In my view, although the 1994 Order does not use specific
language indicating that the payments to Erin are being made on
behalf of the spouse, that was unequivocally the intent and
effect of the agreement and the subsequent Order.
[20] The
Respondent's argument was devoted almost entirely to the
statutory construction of the defined term "support
amount". I agree with the Respondent that this provision of
the Act is clear in prescribing that payments made by a
person who is not the natural parent of a supported child are not
deductible support amounts unless received (or deemed under the
Act to be received) by a spouse or former spouse of the
payer. There is no ambiguity in such provision and I do not
construe it otherwise. Such clear statutory language, however,
does not deny the deduction of support payments where they are
made to a spouse or former spouse and that is the factual issue
that I have found need to address.
[21] In the
case at hand the intent of the Order is unequivocal. The
Appellant's payment is, together with Deborah's
payment, to assist in the support of Shawna and to give rise to
deductions under paragraph 60(b). To be treated the same
they both must be taken together, recognizing under the Order
that Deborah is the essential link in the chain that gives rise
to the Appellant's obligation to Mr. McKee. I would
therefore read the Order accordingly and allow the appeal on that
basis.
[22] It should
go without saying that giving full force and effect to an order
of a Superior Court should be facilitated where possible. To do
otherwise can do little else but undermine respect for and
confidence in our judicial system. There was nothing in our tax
system, as it applied to the subject year in this case, that
prohibited the deduction of a maintenance payment intended to
benefit step-children for whom responsibility derived from a
marriage to the natural parent of such children. To give
effect to this permissive scheme was the express directive of
Justice Warren. Recognizing that Deborah is the link in
the chain that connects the Appellant's support obligation to
Mr. McKee gives effect to both such scheme and such express
directive of Justice Warren.
[23] The
appeal is therefore allowed.
Signed at Ottawa, Canada, this 16th day of May 2001.
"J.E. Hershfield"
J.T.C.C.
Email this Content