[1] By notices of reassessment, income tax was imposed on child support payments received by the appellant Karen Kennedy in 1997 and 1998. Ms. Kennedy appealed the reassessment to the Tax Court of Canada on the basis that the child support payments are not taxable because of certain amendments made to the Income Tax Act, R.S.C. 1985, c. 1 (5th supp.) by the Income Tax Act Budget Amendments Act, 1996, S.C. 1997, c. 25, s. 9. Her appeal was dismissed, for reasons reported as Kennedy v. Canada, [2003] 4 C.T.C. 2263, (2003) 39 R.F.L. (5th) 314. Ms. Kennedy now appeals to this Court.

[2] In 1991, Ms. Kennedy and her husband were separated and there was litigation pending in the Ontario Court (General Division) relating to the separation. In March of 1991, an interim child custody and support order was made, with Mr. Kennedy's consent. The order provided, among other things, for weekly child support payments for each of their children. The amount was fixed, with no provision for cost-of-living increases.

[3] In December of 1991, the litigation was settled on terms set out in a written agreement, entitled "Minutes of Settlement". That agreement required, among other things, that Mr. Kennedy pay the same amount specified in the earlier order to Ms. Kennedy each week for each child. However, the Minutes additionally provided that the amount would be adjusted annually on the basis of a stipulated cost-of-living formula.

[4] On September 24, 1997, on Ms. Kennedy's motion, the Ontario Court (General Division) issued a judgment providing for the payment of child support in the same amounts and on the same terms and conditions, including the cost-of-living adjustment, as set out in the Minutes of Settlement.

[5] Subsequent to the issuance of the 1997 Judgment, Ms. Kennedy's lawyer wrote to her confirming that because the Judgment was issued after May 1, 1997, any support payments paid to her would no longer be taxable in her hands, nor would they be deductible for her husband.

[6] Ms. Kennedy explained that the court order was obtained in order to ensure that her husband's legal obligation to pay the cost-of-living increases, which he had apparently not been making, would be readily enforceable. As I understand it, there is no doubt that Ms. Kennedy's husband has had a legal obligation, since the 1991 Minutes of Settlement were entered into, to pay the cost-of-living increases, but Ms. Kennedy submitted that unless that obligation was set out in a court order, it would not be enforceable through the Family Responsibility Office. The advantage to Ms. Kennedy of using that means of enforcement is that she bears no enforcement costs.

[7] The issue in the appeal in the Tax Court was whether the child support payments received by Ms. Kennedy in 1997 and 1998 are subject to the "old regime" for child support payments (the "inclusion-deduction system"), in which child support payments paid under a written agreement or court order were deductible by the payer and taxable in the hands of the recipient. The Tax Court Judge found that Ms. Kennedy's child support payments are subject to the old regime. On that basis, he dismissed Ms. Kennedy's appeal.

[8] Ms. Kennedy argued in the Tax Court, and argues in this Court, that the child support payments she received after September 27, 1997 are not subject to the old regime, but rather are subject to the "new regime" established by the 1996 amending legislation referred to above. Under the new regime, child support payments payable under a written agreement or court order are not taxable in the hands of the recipient or deductible by the payer.

[9] The 1996 amending legislation provided a number of methods by which parties to a child support agreement or court order in effect during the old regime could become subject to the new regime after April 1997. The methods are set out in the definition of "commencement day", the term used to describe the day after which the new regime will apply to child support payments made under a particular written agreement or court order. Generally, if an agreement or court order has no commencement day, the new regime does not apply to any payments made under it. The definition of "commencement day" appears in subsection 56.1(4) of the Income Tax Act, and reads as follows:

... "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.

... « _date d'exécution_ » Quant à un accord ou une ordonnance_:

a) si l'accord ou l'ordonnance est établi après avril 1997, la date de son établissement;

b) si l'accord ou l'ordonnance est établi avant mai 1997, le premier en date des jours suivants, postérieur à avril 1997_:

(i) le jour précisé par le payeur et le bénéficiaire aux termes de l'accord ou de l'ordonnance dans un choix conjoint présenté au ministre sur le formulaire et selon les modalités prescrits,

(ii) si l'accord ou l'ordonnance fait l'objet d'une modification après avril 1997 touchant le montant de la pension alimentaire pour enfants qui est payable au bénéficiaire, le jour où le montant modifié est à verser pour la première fois,

(iii) si un accord ou une ordonnance subséquent est établi après avril 1997 et a pour effet de changer le total des montants de pension alimentaire pour enfants qui sont payables au bénéficiaire par le payeur, la date d'exécution du premier semblable accord ou de la première semblable ordonnance,

(iv) le jour précisé dans l'accord ou l'ordonnance, ou dans toute modification s'y rapportant, pour l'application de la présente loi.

[10] The issue in the present case is whether the 1997 Judgment created a commencement day within the meaning of the statutory definition in s. 56.1(4) of the Income Tax Act, so as to make the child support payments made to Ms. Kennedy non-taxable in her hands.

[11] It was argued by the appellant that because it was necessary for her to obtain a judgment in order to obtain an enforcement procedure to compel payment of the cost of living increases, the 1997 Order which was made after April 1997 created a commencement day within the meaning of paragraph (a) of the definition of s. 56.1(4).

[12] I cannot accept this interpretation of the legislation. The obligation to pay the support payments was created by the Order of the Court in 1991. The obligation to pay the cost of living increases was created by the Minutes of Settlement which were signed in 1991. The 1997 Judgment did not alter either of those obligations. It may have made collection procedures simpler for Ms. Kennedy but the obligations themselves existed well prior to April 1997. Ms. Kennedy did not need to obtain the 1997 Judgment to enforce payment. She could have obtained relief in the Ontario Court by bringing an action to enforce the terms of the Minutes of Settlement.

[13] It seems to me that, although the statutory definition of "commencement day" in subsection 56.1(4) might be more clearly drafted, the intention of the legislation is that orders or agreements made after April 1997 which actually create new obligations will be subject to the new regime. Obligations created under the old regime will remain subject to the old provisions. This intention is borne out by subparagraph (b)(ii) which specifies that agreements or orders which are varied after April 1997 so as to change child support amounts payable, will qualify as creating a commencement day. In such a case, a new obligation will have been created by the variance after April 1997. The same can be said of subparagraph (b)(iii) which provides that a subsequent agreement or order made after April 1997 which changes the total amount of child support payments creates a commencement day.

[14] The Tax Court on earlier occasions has interpreted the legislation in a similar manner. See Katsoras v. Canada, [2002] T.C.J. No. 254 (T.C.C.), at paras. 8-10; Pieper v. Canada, [2004] T.C.J. No. 256 (T.C.C.), at para. 6; Bolt v. Canada, [2002] T.C.J. No. 401 (T.C.C.), at para 9; Price v. Canada, [2001] T.C.J. No. 355 (T.C.C.), at para 9.

[15] I conclude then that the 1997 Order does not create a commencement day so as to free Ms. Kennedy from being taxed on the payments received from her husband in 1997 and 1998.

[16] Nor am I able to conclude that paragraph (b) of the definition of "commencement day" in subsection 56.1(4) is of assistance to the appellant by creating a commencement day in respect of the 1991 Minutes of Settlement:

(a) Subparagraph (i) does not apply because Ms. Kennedy and her husband have not filed a joint election specifying a commencement day for the 1991 Minutes of Settlement.

(b) Subparagraph (ii) does not apply because the 1991 Minutes of Settlement have not been varied to change the amount of child support payable to Ms. Kennedy.

(c) Subparagraph (iii) does not apply because there is no subsequent agreement or court order that has the effect of changing the amount of child support payable to Ms. Kennedy.

(d) Subparagraph (iv) does not apply because there is no commencement day specified in the 1991 Minutes of Settlement.

[17] Therefore, while I have some sympathy for the appellant because of the assurance by her lawyer that the support amounts were not taxable, and because, even in Revenue Canada there were some who took the view that Ms. Kennedy should not have to include the support amounts in her income, I believe her appeal must be dismissed. However, in the circumstances, it should be without costs.

"J. Edgar Sexton"

J.A.

"I agree

Gilles Létourneau"

"I agree

K. Sharlow"

FEDERAL COURT OF APPEAL

NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET: A-109-04

STYLE OF CAUSE: KAREN KENNEDY

Appellant

and

HER MAJESTY THE QUEEN

Respondent

PLACE OF HEARING: TORONTO, ONTARIO

DATE OF HEARING: DECEMBER 13, 2004

REASONS FOR

JUDGMENT BY: SEXTON J.A.

CONCURRED IN BY: LÉTOURNEAU J.A.

SHARLOW J.A.

DATED: DECEMBER 16, 2004

APPEARANCES BY: Ms. Karen Kennedy

For the Appellant, on her own behalf

Mr. Roger LeClaire

For the Respondent

SOLICITORS OF RECORD: Karen Kennedy

Niagara Falls, Ontario

For the Appellant, on her own behalf

Morris Rosenberg

Deputy Attorney General of Canada

For the Respondent

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Kennedy v. Canada, 2004 FCA 437

Citations2004 FCA 437

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2004 FCA 437