Suzanne Thibaudeau v. Her Majesty the Queen, [1994] 2 CTC 4, 94 DTC 6230

Hugessen, J.A. (Pratte, J.A., concurring):— This is an application for judicial review of a reported decision of the Tax Court of Canada ([1992] 2 C.T.C. 2497, 92 D.T.C. 2098) dismissing the applicant's appeal from her 1989 tax assessment. Since the appeal in the Tax Court was governed by that Court's "informal procedure" the only recourse is by means of judicial review. [1]

The applicant is a mother of two minor children of which she has custody. By the terms of the judgment granting the divorce between her and her former husband, the children’s father, she was awarded no alimentary allowance for herself (she is gainfully but fairly modestly employed) but was awarded the sum of $1,150 per month for the maintenance of the children.

Under the provisions of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the ”Act"), the payment received by the applicant for the maintenance of her children was required to be included in her income. Paragraph 56(1 )(b), as it applied to the 1989 taxation year, required the inclusion in income of:

56(1)(b) — any amount received by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if the recipient was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, the spouse or former spouse required to make the payment at the time the payment was received and throughout the remainder of the year;

If it were not for this text such alimony would not otherwise be taxable in the hands of the recipient under the general charging sections of the Act.

A counterpart to this provision, paragraph 60(b), permitted the applicant's former husband to deduct those same maintenance payments in the computation of his income for tax purposes. Companion provisions provide for the similar inclusion and deduction of other payments of a similar nature, for example those made by and to the respective parents of children born out of wedlock. The whole system is frequently referred to compendiously as the inclusion/deduction system.

Before the Tax Court the applicant's claim was in essence that the inclusion/ deduction system violated her equality rights as guaranteed by subsection 15(1) of the Charter:

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.

The Tax Court judge dismissed that claim. Although there was little or no evidence before him on the point, he was prepared to take judicial notice of the fact that “the appellant is part of a group of which the great majority is separated or divorced women, who have a certain degree of financial self-sufficiency (in that they receive no alimony for themselves), who have custody of their children and who receive taxable alimony from their spouse for the benefit of the children” (at page 2506 (D.T.C. 2118).

(It may be noted in passing that, as a result of the intervention by SCOPE, the absence of evidence which was remarked on by the Tax Court judge has been more than amply remedied in this Court. Despite its great volume, however, the evidence does little more than confirm what the Tax Court judge found as fact on this point).

The Tax Court judge then went on to say at page 2507 (D.T.C. 2118):

This group of people described earlier, of whom the appellant is one, is entitled, in my opinion, because of certain personal characteristics, to the guarantee set out in section 15 of the Charter, which prohibits all forms of discrimination based on the stated grounds or on analogous grounds.

The Tax Court judge further found as a fact that "the essential elements of the manner in which the tax impact on the appellant of including the alimony in her income" were “substantially” as they had been suggested by the expert witness Mr. Drouin, namely that in the year 1989, the applicant had suffered a “tax cost" of $3,705 [2] resulting from the inclusion/deduction system.

Notwithstanding those findings, the Tax Court judge dismissed the applicant's appeal because he was of the. view that the Court which had awarded maintenance payments to the applicant had in fact taken account of the effects of income tax in fixing the amount of those payments and that there was, in any event, a general obligation in family law to gross-up maintenance payments to take account of tax consequences. He concluded, at page 2510 (D.T.C. 2121):

I therefore conclude that, if the Court takes into account the tax consequences on both the payer and the recipient of the alimony in determining the amount of the alimony to be paid for the support of the children, the parent who receives the alimony suffers no prejudice even if he or she must include those payments in his or her income. If a trial court fails to consider the tax consequences or assesses them incorrectly, the party concerned should exercise his or her right of appeal to obtain the adjustment to which he or she is entitled. Obviously, where there is an agreement between the parties, the party who receives the alimony must satisfy himself or herself that the alimony is grossed-up to a fair level, in cases where that alimony is taxable, of course. As a corollary arising from the propositions set out in the present paragraph, it is correct to say that the recipient of the alimony for the maintenance of the children is in turn entitled to take into account the tax implicationsfollowing the receipt of such alimony and to withhold from the total amount of the alimony the appropriate portion of this amount which represents the additional income tax that he or she must pay by reason of the inclusion of the alimony payments in his or her income.

After proceedings in judicial review had been launched in this Court, and indeed after the date for hearing had been set, an application to intervene was made by "Support and Custody Orders for Priority Enforcement" ("SCOPE"), an interest group. Leave to intervene was granted and SCOPE duly filed a memorandum and voluminous materials to which reference has already been made.

The grounds of discrimination alleged by the applicant and by the intervenor are different. The intervenor claims that paragraph 56(1 )(b) discriminates, and that the applicant is a member of a group that suffers discrimination, on the grounds of sex. The applicant on the other hand makes a different claim. In her notice of appeal to the Tax Court of Canada she alleges (Avis d'appel, dossier de l'intimée, page 5):

3(f) Les dispositions des articles précités de la Loi créent envers le contribuables [sic] une injustice et une inégalité devant la Loi au seul motif de son statut de "conjoint" ou "d'exconjoint" ou de "parent", gardien d’enfants au bénéfice desquels est payée une pension alimentaire par rapport à tous autres gardiens d’enfants bénéficiaires d'une pension alimentaire”:

(g) Les dispositions des articles précités de la Loi créent envers le contribuable une injustice et une inégalité d'imposition par rapport à tout autre contribuable dont les enfants bénéficient de revenus qui ne sont pas une “pension alimentaire;”

I read those allegations as a claim of discrimination based on a ground analogous to those enumerated in section 15 of the Charter. The group to which the applicant claims to belong and which suffers discrimination can, I think, fairly be described as separated [3] custodial parents receiving maintenance payments for their children.

It is convenient to examine these grounds separately.

The intervenor's claim of discrimination on the ground of sex requires a consideration of the recent decision of the Supreme Court of Canada in Symes v. Canada, [1993] 4 S.C.R. 695, [1994] 1 C.T.C. 40, 94 D.T.C. 6001. In that case the Court had to deal with an attack on the child care allowance provided by section 63 of the Income Tax Act. The attack was based on a section 15 claim of discrimination on the grounds of sex. lacobucci, J., writing for the majority, concluded that the claim failed because it had not been shown that section 63 created a distinction on the basis of sex. That finding was made as a result of the first step of the three stage analysis mandated for section 15 claims by Andrews v. Law Society (B.C.), [1989] 1 S.C.R. 143, 56 D.L.R. (4th), and R. v. Swain, [1991] 1 S.C.R. 933, 63 C.C.C. (3d) 481, which lacobucci, J. summarized as follows at page 761 (C.T.C. 71-72, D.T.C. 6024):

First, it must be determined whether section 63 establishes an inequality: does section 63 draw a distinction (intentionally or otherwise) between the appellant and others, based upon a personal characteristic? Second, if an inequality is found, it must be determined whether the inequality results in discrimination: does the distinction drawn by section 63 have the effect of imposing a burden, obligation or disadvantage not imposed upon others or of withholding or limiting access to opportunities, benefits and advantages available to others? Finally, assuming that both an inequality and discrimination can be found, it must be determined whether the personal characteristic at issue constitutes either an enumerated or analogous ground for the purposes of subsection 15(1) of the Charter.

Paragraph 56(1 )(b) of the Income Tax Act, which is under attack here, like section 63, is facially neutral: it does not, either in terms or by necessary implication, create distinctions based on sex; it is not a colorable stratagem whose provisions can, in fact, and despite the neutrality of the language, apply only to members of one sex (as would be the case, for example, in a text creating a distinction based upon being pregnant or having prostate cancer). That was not the end of the matter for lacobucci J., however, and he went on to undertake a detailed “adverse effects" analysis of the impugned provision. Such an analysis is, of course, necessary to see if the law creates an indirect or unintentional distinction based on sex. It would also be appropriate in a case where it was alleged that the officials charged with administering the law did so in a discriminatory manner, although that was not suggested either in Symes or in the present case.

Sex was the only personal characteristic in issue in Symes and there was no claim based on any other enumerated or analogous ground.

In the course of his consideration of the first step (whether the section creates a distinction based on sex), lacobucci, J. said at page 763 (C.T.C. 72-73, D.T.C. 6025):

. . .I have no doubt that women disproportionately incur the social costs of child care. Whether or not such costs are imposed by society upon women, however, is not the subsection 15(1) issue. The subsection 15(1) issue is whether section 63 of the Act has an adverse effect upon women in that it unintentionally creates a distinction on the basis of sex. In my view, in order to establish such an effect, it is not sufficient for the appellant to show that women disproportionately bear the burden of child care in society. Rather, she must show that women disproportionately pay child care expenses. Only if women disproportionately pay such expenses can section 63 have any effect at all, since section 63's only effect is to limit the tax deduction with respect to such expenses.

[Emphasis in original.]

And again, at pages 766-67 (C.T.C. 74, D.T.C. 6026):

In another case, a different subgroup of women with a different evidentiary focus involving section 63 might well be able to demonstrate the adverse effects required by subsection 15(1). For example, although I wish to express no opinion on this point, I note that no particular effort was made in this case to establish the circumstances of single mothers. If, for example, it could be established that women are more likely than men to head single-parent households, one can imagine that an adverse effects analysis involving single mothers might well take a different course, since child care expenses would thus disproportionately fall upon women.

And again, at pages 767-68 (C.T.C. 75, D.T.C. 6026):

. . .to say that the section 63 deduction is more often denied to women is to recognize a reality, namely, that when there are two supporting persons in a household, the woman is more often the lower income earner. Although both supporting persons contribute to the actual child care expenses incurred, the deduction will be denied to the woman as the lower income earner. In this sense, then, the woman is more often “affected” by section 63. However, to describe section 63 in this fashion is not to admit that section 63 has an "adverse effect" which subordinates women. As I described above, to deny the deduction to women would only exaggerate a societal inequality if the woman in question actually paid more child care expenses. Since, as I have already indicated, proof is lacking on this point, the only obvious distinction is a parental one. And, as just noted, the appellant’s focus has effectively excluded parental status arguments.

Although it was not necessary for him to do so, in the light of his conclusion on the first step, lacobucci, J. also went on to examine the second step, namely, is the impugned provision discriminatory? In this connection he said at pages 770-71 (C.T.C. 76-77, D.T.C. 6027-28):

. . the important thing to realize is that there is a difference between being able to point to individuals negatively affected by a provision, and being able to prove that a group or subgroup is suffering an adverse effect in law by virtue of an impugned provision. As already noted, proof of inequality is a comparative process: Andrews, supra. If a group or subgroup of women could prove the adverse effect required, the proof would come ina comparison with the relevant body of men. Accordingly, although individual men might be negatively affected by an impugned provision, those men would not belong to a group or subgroup of men able to prove the required adverse effect. In other words, only women could make the adverse effects claim, and this is entirely consistent wit statements such as that found in Brooks v. Canada Safeway, [1989] 1 S.C.R. 1219, 59 D.L.R. (4th) 321, to the effect that "only women have the capacity to become pregnant" (at page 1242 (D.L.R. 338)).

Looking at this point a different way, if section 63 creates an adverse effect upon women (or a subgroup) in comparison with men (or a subgroup), the initial subsection 15(1) inquiry would be satisfied: a distinction would have been found based upon the personal characteristic of sex. In the second subsection 15(1) inquiry, however, the sexbased distinction could only be discriminatory with respect to either women or men, not both. The claimant would have to establish that the distinction had "the effect of imposing a burden, obligation or disadvantage not imposed upon others or of withholding or limiting access to opportunities, benefits and advantages available to others" (Swain, supra, at page 992 (C.C.C. 520)). The burden or benefit could not, as a logical proposition, fall upon both sexes. Likewise, to the extent that a court might undertake a broader search for "disadvantage that exists apart from and independent of the particular legal distinction being challenged” (R. v. Turpin, [1989] 1 S.C.R. 1296, 48 C.C.C. (3d) 8, at page 1332 (C.C.C. 34)), I cannot imagine how such disadvantage could be located for both men and women at the same time.

[Emphasis in original.]

These passages give me some difficulty. They are, of course, strictly speaking, obiter, but they are of great authority. They seem to suggest that a facially neutral, uncolorable legislative provision, which is impartially applied in accordance with its terms and affects both men and women, can nonetheless be discriminatory on the grounds of sex. It seems to me that such an assertion, which I, of course, accept, requires some elaboration.

Obviously there can now be no doubt that there will be many cases, both in Charter litigation and under the various human rights statutes, where an adverse effects analysis is necessary and will lead to the conclusion that there has been discrimination. It is also clear that it is no answer to such a claim to show that the impugned policy, action or legislation may also impact adversely on persons other than members of the affected group: a provision which discriminates against Hindus may likewise have an adverse effect upon Buddhists; a policy that discriminated against blacks would not be saved by a showing that it was also harmful to aboriginal people. But surely it cannot be the case that legislation that adversely affects both men and women is discriminatory on the grounds of sex solely because the women (or men) in question are more numerous. Such a mechanistic approach would be likely to defeat the purposes of the Charter. Indeed, in my view it is not because more women than men are adversely affected, but rather because some women, no matter how small the group, are more adversely affected than the equivalent group of men, that a provision can be said to discriminate on grounds of sex.

In this connection it is important to recognize that sex differs significantly from the other enumerated grounds. There is an almost infinite number of religions, races, nationalities etc. and no two subsets within any of those categories could properly be described as opposites. There are only two sexes. [4] One excludes the other. A male is always the opposite of a female and vice versa. Women or any group or subgroup of women who claim that a law discriminates on the basis of sex necessarily do so because it draws a distinction based on their shared characteristic of femaleness which it does not draw for those who have the opposite characteristic of maleness. It would be likewise if there were a claim of discrimination by a group or a subgroup of men.

Accordingly, it seems to me that one cannot logically say that an otherwise neutral rule discriminates on the basis of sex simply because it affects more members of one sex than of the other. Nor do I think that is what lacobucci, J. suggests in Symes when he talks of a law having a “disproportionately” adverse effect upon women or of women being "more likely” to suffer from it than men. The focus, surely, is not on numbers but on the nature of the effect; on quality rather than quantity. If legislation which adversely affects women has the same adverse effect upon men, even though their numbers may be smaller or the likelihood of their suffering be less, it cannot logically be said that the ground of discrimination is sex. This does not mean, of course, that there is no Charter breach for in such circumstances it is very likely that another ground of discrimination will be in play.

To illustrate: it is a shameful truth that far more women in Canada suffer from poverty than men (see Moge v. Moge, [1992] 3 S.C.R. 813, [1993] 1 W.W.R. 481, at pages 853-54 (W.W.R. 508)). Legislation which discriminated against the poor would therefore adversely affect more women than men. It could not be said, however, to discriminate on the grounds of sex unless it also drew a distinction against poor women which did not apply to poor men or unless it created a different effect on women than on men. Otherwise, the outcome of a section 15 attack on such legislation would turn on whether poverty was a ground analogous to those enumerated. On the other hand, legislation which imposed a physical test which could more easily be met by most men would have a disproportionate effect on women even if some men failed the test and some women, with difficulty, met it. The test would be qualitatively different even for those women who succeeded and would be vulnerable to attack as discriminatory on the grounds of sex. In each case the impact of the legislation must be weighed; it is not enough simply to count the numbers affected.

In the context of the present case I, like the Tax Court judge, have simply no doubt that paragraph 56(1 )(b) impacts adversely on more women than men. That is because mothers are far more likely to be custodial single parents than fathers. Since, however, the legislation must also impact in exactly the same way on custodial fathers, although in very much smaller numbers, I do not see how it can be said to differentiate or to discriminate on the basis of sex. In my view, the importance of the material showing the numerically disproportionate effect of paragraph 56(1)(b) on women must come in the context of a section 1 analysis.

And a section 1 analysis there must be. Just as much as the intervenor's claim of discrimination on the ground of sex seems to me to be problematical, so does the applicant's claim of discrimination on an analogous ground seem manifest.

Excluding those "non-personal" characteristics which are required by paragraph 56(1)(b) for the inclusion in a taxpayer's income of maintenance payments destined for her children, the applicant’s claim to discrimination is based on her status as a separated custodial parent. When that claim is subjected to the three- step analysis mandated by Andrews, Swain and Symes, all supra, the result seems to me to oe starkly apparent.

First, paragraph 56(1 )(b) draws an intentional distinction between the applicant and others based upon her eing a separated custodial parent. There can be simply no doubt in my mind that the qualities of being separated and a parent are "personal characteristics”, and I note that on several occasions in Symes, lacobucci, J. refers almost with regret to the fact that the appellant there expressly declined to assert her claim on her status as a parent. I have some doubt as to whether the fact of having the custody of a child can properly be described as a "personal characteristic", but in the light of the view I take of the other two components of the claim asserted by the applicant, it is not necessary to go further into that question. Simply put, there is no requirement that the grounds of discrimination and the definition of the affected group be coterminous; all that is necessary is that at least one of the characteristics of the latter be included within the former. Indeed, though the quality or attribute which is the ground may be one that is possessed by everybody (race, national origin) or by very few (mental or physical disability) the definition of the affected group will almost always be more narrowly focused (Haitian immigrants, blind taxpayers).

Second, the inequality created for separated custodial parents is discriminatory and imposes a burden on them not imposed on others. This may be simply tested by looking at each of the defining components of the group in turn.

Thus, a non-separated custodial parent is not required to include in income maintenance payments received from her or his spouse. This is so even in the rare, but not impossible, circumstance where the maintenance is paid pursuant to a court order or a written agreement but the spouses are living together.

Next, a separated non-custodial parent (for example a divorced father whose own parents pay him money to help with the upbringing or the education of their grandchildren) is not required to include maintenance payments in income.

Finally, separated non-parents having custody of a child, such as a grandmother or an uncle are not obliged to include in their income payments received from either or both of the child’s parents.

The conclusion is inescapable: the law creates for the group as defined a burden which it does not impose on others.

The third and last stage of the section 15 analysis is to inquire whether the personal characteristics at issue constitute grounds analogous to those enumerated. In my view, they do.

The concept of the “analogous ground" as forming a basis for discrimination was adopted by McIntyre, J. in Andrews, supra, where he said at page 175 (D.L.R. 18-19):

The enumerated grounds in subsection 15(1) are not exclusive and the limits, if any, on grounds for discrimination which may be established in future cases await definition. The enumerated grounds do, however, reflect the most common and probably the most socially destructive and historically practised bases of discrimination and must, in the words of subsection 15(1), receive particular attention. Both the enumerated grounds themselves and other possible grounds of discrimination recognized under subsection 15(1) must be interpreted in a broad and generous manner, reflecting the fact that they are constitutional provisions not easily repealed or amended but intended to provide a “continuing framework for the legitimate exercise of governmental power" and, at the same time, for "the unremitting protection" of equality rights.

He then went on, at page 182 (D.L.R. 23), to say that the "enumerated and analogous grounds approach most closely accords with the purposes of section 15” and to conclude, at page 183 (D.L.R. 24), by incorporating the American concept of a "discrete and insular minority”.

The Andrews decision was expanded and commented upon by Wilson, J. in Turpin, supra, as follows at page 1332 (C.C.C. 34-35):

Mcintyre, J. recognized in Andrews, that the "'enumerated and analogous grounds’ approach most closely accords with the purposes of section 15 and the definition of discrimination outlined above” (page 182 (D.L.R. 23)) and suggested that the alleged victims of discrimination in Andrews, i.e., non-citizens permanently resident in Canada were “a good example of a "discrete and insular minority" who came within the protection of section 15" (page 183 (D.L.R. 24)). Similarly, I suggested in my reasons in Andrews that the determination of whether a group falls into an analogous category to those specifically enumerated in section 15 is "not to be made only in the context of the law which is subject to challenge but rather in the context of the place of the group in the entire social, political and legal fabric of our society” (page 152 (D.L.R. 32)). If the larger context is not examined, the section 15 analysis may become a mechanical and sterile categorization process conducted entirely within the four corners of the impugned legislation. A determination as to whether or not discrimination is taking place, if based exclusively on an analysis of the law under challenge is likely, in my view, to result in the same kind of circularity which characterized the similarly situated similarly treated test clearly rejected by this Court in Andrews.

Immediately following the passage from her reasons in Andrews which Wilson, J. refers to in the above quoted extract from Turpin, J., she made the following additional important observation at pages 152-53 (D.L.R. 33):

I believe also that it is important to note that the range of discrete and insular minorities has changed and will continue to change with changing political and social circumstances. For example, Stone, J. writing in 1938, was concerned with religious, national and racial minorities. In enumerating the specific grounds in section 15, the framers of the Charter embraced these concerns in 1982 but also addressed themselves to the difficulties experienced by the disadvantaged on the grounds of ethnic origin, colour, sex, age and physical and mental disability. It can be anticipated that the discrete and insular minorities of tomorrow will include groups not recognized as such today. It is consistent with the constitutional status of section 15 that it be interpreted with sufficient flexibility to ensure the “unremitting protection” of equality rights in the years to come.

As I understand these authorities they do not suggest timidity in the approach to the grounds of discrimination. Rather they require an examination of any alleged analogous ground in the broadest context with a view to determining whether such ground has historically served or today actually serves to single out or distinguish a disadvantaged group. This is a different analysis from that which requires a determination of whether an impugned provision draws a distinction or discriminates on the alleged ground. In particular, and while I have gone to some pains to indicate that I do not think that a mere numerical imbalance or disproportion in the effect of legislation will be enough to establish a distinction or discrimination based on the particular ground of sex, it seems to me that the opposite is the case when the question is to know whether some other ground is analogous to those enumerated in section 15. If one were to suppose, for example, that race had been left out of the enumeration, one would not, in determining whether it was "analogous", ask whether, race was always a ground of discrimination. Clearly, it is not any more than are the other enumerated grounds. What would be important would be to establish that race frequently serves as a basis for the kind of prejudicial, stereotypical, mindless categorization that is the hallmark of discrimination. That is what makes all the enumerated grounds analogous to one another.

To put the matter another way, when determining whether or not a ground is analogous to those enumerated in section 15 it is legitimate to look to see if it has frequently served as a ground for discrimination in other circumstances but it is clearly not necessary that it should always do so: if "race" was not enumerated we would not have to show that humankind invariably discriminates against those of different races in order to establish that it is an analogous ground. By contrast, where the question is to know whether a law draws a distinction, imposes a burden or confers an advantage on the ground of sex the causal connection between the ground and the distinction, burden or advantage can only be established if none of the members of the opposite sex would feel those effects in the same way, assuming the law were properly applied.

This highlights a further important point to which I have already alluded: different considerations come into play where it is alleged (as more frequently happens in human rights claims) that a law or policy, whether or not it is discriminatory on its face, is applied in a discriminatory way; an uneven and unfair application on the ground of sex, even though it might affect some who were not members of the target group, would, of course, still be discriminatory. In such a case it is not so much the law which is attacked as the manner of its implementation. There is no suggestion here, however, that the Income Tax Act is applied otherwise than strictly in accordance with its terms.

I have identified the group to which the applicant claims to belong as separated custodial parents. Neither that phrase nor any of its components constitute as such a ground analogous to those enumerated in section 15 but that is hardly surprising. As previously indicated, the definition of the group must have within it some component which is included within the alleged ground but it is unlikely to be the ground itself. An individual or group does not suffer discrimination because they are "race" or "religion" but rather because they belong to a particular race or practise a particular religion. Or, approaching the matter from the other end, a Haitian or a Hindu who suffers discrimination does so not on the ground of being Haitian or Hindu but of race or religion.

The appropriate description of the ground of discrimination to which separated custodial parents are subject would, it seems to me, be “family status". I consider it to be almost self-evident that such status has historically been, and is still, used as a basis for stereotyping. One has only to call to mind such traditional expressions as the “happily married man", the “old maid”, the "gay [5] bachelor" or the "merry widow” to find examples. Even the law is not above such stereotypes and the civilian counterpart of the reasonable man (itself a stereotype) is the “bon père de famille’. And, of course, it is only in comparatively recent times that the shocking disabilities imposed by both Common Law and Civil Law on married women have been done away with; since such disabilities did not apply to single women they were not based only on sex but on family status as well.

The fact that family status or some similar expression figures as a prohibited ground of discrimination in most human rights statutes also serves to confirm its analogous nature to the grounds enumerated in the Charter.

Finally, the group to which the applicant belongs and which claims discrimination on the ground of family status, separated custodial parents, can readily be seen as a discrete and insular minority which has historically suffered prejudice and has need of protection.

Before concluding on this aspect of the matter it is necessary to say a few words about the reasons for which the Tax Court judge dismissed the applicant's claim. As indicated, he was of the view that any adverse tax effects of the inclusion/ deduction system on the applicant could and should have been corrected by the ordinary operation of the family law system.

While there can be no doubt that the judge was right in his view that courts should take account of income tax consequences and that the Court which granted the applicant's divorce did in fact do so, I think, with respect that he was wrong to see that as an answer to a Charter based attack on paragraph 56(1)(b). My reasons are twofold.

In the first place, there is substantial material in this record to indicate that in practice the family law system does not always, or even usually, operate to correct the inequality created by paragraph 56(1)(b). In the second place, even if it did, it seems to me that it is simply not legitimate to look outside the income tax system to correct an injustice which that system has itself created.

As to the first point, I start from the proposition that the Income Tax Act and the family law system are almost polar opposites when it comes to their approach to the determination of sums of money. Income tax seeks to be precise, virtually to the last penny, and income tax liability is established by a code of rules whose detail and complexity is legendary. The awarding of child support on the other hand, somewhat like the evaluation of damages, is notoriously imprecise. There are a number of guiding principles such as the welfare of the children and the obligation of both parents to contribute in accordance with their means, but within those principles there is a very large range of judicial discretion. As one who has had the duty of fixing child support, I know that it never amounts to a simple mathematical calculation. In those circumstances, it is virtually impossible, in my view, to rely upon the family law system as a corrective to any injustice created by the inclusion/deduction system. It is simply too blunt an instrument for the job.

Furthermore, the evidence available in this record is strongly suggestive of a failure of the family law system to in fact correct the injustice created by paragraph 56(1)(b). In the Report of the Federal/Provincial/Territorial Family Law

Committee, The Financial Implications of Child Support Guidelines Research Report, (May 1992), one finds the following extracts at page 90:

Tax consequences should be considered by everyone involved in determining child support awards whether they are the result of agreements between the parties, negotiations between lawyers or determined by the courts. Although the tax consequences should be an element of every child support determination, there is evidence to suggest that these calculations may not always be made.* Moreover, where the tax consequences are considered, there are no formal guidelines showing how they should be taken into consideration.

*A survey of judges was conducted in February 1990 by Judge R. James Williams. One hundred and forty-seven judges responded to this survey. The results indicate that only a minority of lawyers present income tax calculations to the courts where it would be appropriate to do so. Furthermore the survey shows that a majority of judges will not do their own tax calculations if they are not presented by counsel.

Judge R. Williams, Child Support, An Update and Revision of Quantification of Child Support, (1989) 18 R.F.L. 234), May 2, 1990.

And again, at pages 91-92:

Negotiations and settlements occur in the majority of support determinations in Canada. In cases where support awards have been negotiated and agreed upon by the parties it is impossible to determine how or whether the income tax implications have been taken into account. Whether income tax implications have been taken into account or not support payors are allowed to deduct the total support amount paid.

If tax implications are to be taken into account there are a number of issues to consider. There is no guidance in the Divorce Act, nor provincial or territorial legislation as to how the calculations should be made or how the benefit of the deduction should be shared between the parties.

In most cases, where the Court has arrived at a specific amount for the child's needs, that amount will then be divided in proportion to each parent's income. Then, the non- custodial parent's share is increased to compensate the custodial parent for the tax that he or she will have to pay. The support payer would then deduct the total amount paid from his or her income, which may represent a greater tax benefit than the amount he actually paid to cover the tax which the custodial parent would have to pay. Where the tax implications have been dealt with in this way, the tax subsidy is often not passed on to the custodial parent for the children.

Where it is obvious that the parties do not have the means to cover the child’s needs, the benefit of the deduction to the non-custodial parent may be raised as an incentive to slightly increase the amount of child support. However, there is no consensus or guidance as to how this deduction should be shared between the parties.

In order to ensure that the tax benefits are taken into account fairly, two extra steps would have to be performed in each child support determination: (1) the benefit of the deduction to the non-custodial parent would have to be determined and (2) the benefit should be divided between the parties. However, even if these two steps were applied, there remains the problem of how the benefit should be allocated between the parties. Arguments could be made that the benefit should be totally allocated to the child or that it should be divided equally between the parties or in proportion to both parents’ share of the child’s costs.

For custodial parents who are taxable, the responsibility of including the amount of support received within their income is another issue which deserves to be addressed. For custodial parents, saving the portion of the support payment that must be paid in income tax at the end of the year can be a significant burden. Although some may argue that this burden should not be recognized, custodial parents should be saving the portion of the award that applies to tax. In some cases, it is not financially possible to save this money each month without depriving the children. It is important to consider this issue in the context in which it actually occurs; namely that two-thirds of Canadian women and children live in poverty following divorce. However, in certain cases, the Child Tax Credit and Goods and Services Tax Credit could offset the taxes that are payable.

Another important issue is that the tax implications of a support award may vary with the passage of time. Ideally, child support orders should be varied to reflect the parties’ changing marginal rates as such changes occur. This would ensure that the parties continue to be responsible for the same proportion of the children’s needs throughout the years.

At present, the legal costs of seeking a variation of support orders could serve as a deterrent for such applications.

By the same token, in a paper entitled “Child Support Policy: Income Tax Treatment and Child Support Guidelines”, by Helen B. Zweibel and Richard Shillington, following an analysis of the impact of the alleged "tax subsidy” given by the inclusion/deduction system, the authors comment at page 17:

What about the 49% of cases in Table 2.3 (Evaluation awards) and the 48% of cases in Table 2.5 (Melson/Delaware awards) where the deduction/inclusion provisions did not produce a subsidy? How do family lawyers and judges respond to the conundrum presented by the Income Tax Act's effect on these households?

Family law determines child support based on the children’s needs and the parent's relative abilities to meet those needs. In some cases, the child support is then adjusted for income tax. When the custodial mother’s tax liability exceeds the father’s tax savings, the tax adjustment becomes more problematic and less likely. The father’s tax savings can no longer be used to persuade him to pay a fully grossed-up award. If the father indemnifies the mother for her tax liability, the effect on his disposable income is greater than he anticipated and arguably greater than he originally agreed to. But, if the support payment is not fully grossed up, then the effective value of the child support payment is considerably diminished. The custodial mother receives less child support than she originally anticipated and is left to make up any shortfall. The deduction/inclusion provisions do not work for these cases and the Finance Department's primary rationale supporting the current tax regime ignores them.

Under the right circumstances, the deduction/inclusion provisions can provide a beneficial subsidy to separated and divorced families. The payor's tax savings must exceed the recipient's tax liability. The payor and recipient must have a common goal of increasing the support available for the children and they must be assisted by accountants and lawyers.

However, circumstances are not always right. This research shows the real possibility that little or no subsidy is available to a sizeable number of separated and divorced families. The current policy also ignores the reality that child support is a contentious issue and that non-custodial fathers seeking to minimize their payments may not readily agree to either a gross-up or to a further sharing of any tax savings above the gross-up. The Finance Department's rationale also ignores the number of persons who settle their child support arrangements on their own, without the assistance of lawyers or accountant, the number of lawyers and judges who rely on rough estimates and the number of cases where, despite the custodial mother's lawyer's careful tax calculations, the “glass ceiling" moves in to reduce the award.

[Emphasis in original.]

These materials, in my view, greatly weaken any argument that the family law system can be relied upon to correct problems created by paragraph 56(1)(b).

My second objection to the position taken by the Tax Court judge is more fundamental. It relates in effect to causation. Both in theory and in fact, income tax comes after income. If there is no income there is no tax. Thus, when the Income Tax Act creates a charge it necessarily does so on the basis that there is a source of income upon which that charge can operate. If the charge itself offends the equality provisions of the Charter, however, it is logically indefensible to claim that there is no breach because the source can adjust to correct the inequality. In concrete terms, if the family law system requires a gross-up of maintenance for income tax, that can only be because the Income Tax Act taxes maintenance payments made to the custodial single parent. If that tax is itself in breach of section 15 of the Charter, calling the family law system in aid is putting the cart before the horse.

Accordingly, I conclude that paragraph 56(1)(b) offends the rights of single custodial parents to equality before and under the law and to equal benefit of the law and that it can only apply to the applicant if it can be saved by section 1.

The various steps of a section 1 analysis are well known and have been many times restated since the landmark decision of the Supreme Court of Canada in R. v. Oakes, [1986] 1 S.C.R. 103, 26 D.L.R. (4th) 200.

The first stage requires an assessment of the objectives sought to be achieved by the impugned provision and a determination of whether they are important enough to warrant a Charter breach.

The objectives of the inclusion/deduction system are described as follows by Beetz, J. in Gagnon v. The Queen, [1986] 1 S.C.R. 264, [1986] 1 C.T.C. 410, 86 D.T.C. 6179, at page 268 (C.T.C. 412, D.T.C. 6181):

Thus, the amount deductible by the taxpayer under paragraph 60(b) is taxable in the hands of the recipient under paragraph 56(1 )(b).

The purpose of these provisions, by allowing income splitting between former spouses or separated spouses, is to distribute the tax burden between them. As C. Dawe wrote in an article titled "Section 60(b) of the Income Tax Act: An Analysis and Some Proposals for Reform", (1980) 5 Queen's L.J. 153:

This allows the spouses greater financial resources than when living together, compensating in part for the lost economics of maintaining a single household.

Likewise, in the Report of the Federal/Provincial/Territorial Family Law Committee, supra, the following appears at pages 84-85:

There are a number of policy considerations for the deduction of support payments by the payer and inclusion of these amounts as taxable income to the recipient. The rationale for this policy has been provided by the Department of Finance. First, it is a principle of taxation that, where a deduction has been claimed by a payor in respect of a payment, the recipient of that payment should pay income tax on it. Second, by requiring support recipients to include the amount of child support within their income, the system recognizes the basic principle of fairness that taxpayers with the same incomes from different sources should pay the same amount of tax. Third, the tax assistance offered by the deduction may provide an incentive for the payer to make regular and complete payments.³⁵ Fourth, the tax treatment provides a subsidy which benefits the children since it encourages higher support payments.

When the policy was developed, the majority of support payors were in a higher tax bracket than the recipients. Since a dollar of support payment gives rise to a greater tax reduction to the payer than tax increase to the recipient, the deduction lowers the combined federal plus provincial taxes of the separated couple and may provide an incentive for the payer to increase the support payments. However, since the number of tax brackets have been reduced, support creditors and debtors are not necessarily in different tax brackets although one may earn more than the other.

According to 1988 taxation statistics provided by Revenue Canada, about 60 per cent of support payers were in the top two tax brackets prior to the deduction of support payments Almost 90 per cent of recipients were either non-taxable or in the lowest tax racket. After the deduction/inclusion of child support, 50 per cent of payers remain in the top two brackets, while 80 per cent of recipients remain non-taxable or in the lowest tax bracket. Again, these figures demonstrate the great disparity of income between support recipients (who are mostly women with children)³⁶ and support payers (who are mostly men). This evidence also suggests that, in the large majority of cases, there may be some need for sharing the tax savings from the deduction of support payments with the children.

The custodial mother received greater tax recognition of the cost of raising children than the non-custodial father in 56 per cent of the cases (95 of 171 cases). However, 97 per cent of these cases (92 of 95 cases) involved custodial mothers with taxable income (pre-child support) in the lowest tax bracket and 90 per cent (85 of 95 cases) had incomes under $20,000. Thus, the custodial mother’s tax recognition exceeded the noncustodial father's primarily when her income was low enough to qualify for the full refundable child tax credit.

It is important to note that not all custodial mothers in the lowest income tax bracket were favoured. Approximately one third of these mothers (45 of 137) had less tax recognition than the non-custodial fathers from whom they received payments.

There is a significant disadvantage for custodial mothers in the middle income tax bracket.

The picture changes dramatically once the custodial mother’s income rises above the first income tax bracket In 91 per cent of these cases (31 of 34 cases), her tax recognition is less than the non-custodial father’s. There were 38 cases (22 per cent of total cases in the data base) where the custodial mother effectively received no recognition of the cost of raising children because her tax liability on the support payment exceeded her child related tax credits. These cases were concentrated in the middle income tax bracket where 65 per cent of the custodial mothers were in this position.

The tax system contributes to custodial mother's downward trend in standard of living.

A snapshot of the relative standard of living of the non-custodial and custodial households, both in relationship to each other and to the family’s pre-separation standard of living is provided in Table 2.7. The custodial mother's household standard of living always declines relative to the family’s pre-separation standard of living. In stark contrast, 57 per cent of the non-custodial fathers maintain or improve their standard of living.

³⁵ Despite this policy, Ontario recently announced that 75 per cent of support payers were in some default in the payment of support orders.

³⁶ According to the Divorce Act Evaluation, women were awarded sole custody of the children in three-quarters of the cases, and in 98 per cent of the cases, the direction of support is from the father to the mother.

Despite the strong indication in the last two paragraphs of the quoted extract that the "tax subsidy” objective (clearly the most important) is not being achieved (as to which I shall have more to say presently), I have little difficulty in concluding that such objective meets the required level of importance.

Likewise, the next step, which requires the Court to be satisfied that there is a rational connection between the impugned provision and the legislative objective, presents little difficulty. While it might, in some cases, be argued that the ineffectiveness of a provision is so great as to cast doubt on the rational connection between it and its objective, I do not think that can be said to be the case here.

The last two stages of the section 1 analysis, minimum impairment and proportionality, present far more difficulty, however. The last two paragraphs of the Federal/Provincial/Territorial Family Law Committee Report, just quoted, hint at the manner in which the inclusion/deduction system operates in an unduly intrusive and disproportionate manner in some cases.

By the same token, the passage from Zweibel and Shillington, quoted earlier, which is based on an analysis by those authors of data produced by the government itself, [6] suggest that the inclusion/deduction system only produces a tax subsidy in slightly over 50 per cent of the cases.

The same authors, after examining other forms of “tax recognition” granted to single custodial parents such as tax credits, conclude as follows at pages 22-23:

Custodial mothers receive greater tax recognition than the non-custodial fathers primarily when they qualify for the refundable child tax credit. Otherwise the non-custodial father is favoured.

The custodial mother received greater tax recognition of the cost of raising children than the non-custodial father in 56 per cent of the cases (95 of 171 cases). However, 97 per cent of these cases (92 of 95 cases) involved custodial mothers with taxable income (pre-child support) in the lowest tax bracket and 90 per cent (85 of 95 cases) had incomes under $20,000. Thus, the custodial mother’s tax recognition exceeded the noncustodial father's primarily when her income was low enough to qualify for the full refundable child tax credit.

It is important to note that not all custodial mothers in the lowest income tax bracket were favoured. Approximately one third of these mothers (45 of 137) had less tax recognition than the non-custodial fathers from whom they received payments.

There is a significant disadvantage for custodial mothers in the middle income tax bracket.

The picture changes dramatically once the custodial mother’s income rises above the first income tax bracket In 91 per cent of these cases (31 of 34 cases), her tax recognition is less than the non-custodial father’s. There were 38 cases (22 per cent of total cases in the data base) where the custodial mother effectively received no recognition of the cost of raising children because her tax liability on the support payment exceeded her child related tax credits. These cases were concentrated in the middle income tax bracket where 65 per cent of the custodial mothers were in this position.

The tax system contributes to custodial mother's downward trend in standard of living.

A snapshot of the relative standard of living of the non-custodial and custodial households, both in relationship to each other and to the family’s pre-separation standard of living is provided in Table 2.7. The custodial mother's household standard of living always declines relative to the family’s pre-separation standard of living. In stark contrast, 57 per cent of the non-custodial fathers maintain or improve their standard of living.

The Justice Department Evaluation, supra, itself talks in similar terms at page 132:

It is beyond the scope of the present evaluation to enter into the debate about the most appropriate model for apportioning the costs of raising children. The data suggest, however, that as in Phase 1, the burden falls disproportionately on the custodial parent who is, usually, but not exclusively, the woman. Some indications of this are that, except in the very lowest income groups, men were ordered to pay about 18 per cent of their gross income in support or about $250 per child per month. At the same time, the bare minimum cost of raising a preschool-child in a single parent family has recently been estimated at $350 without child care and $790 per month with child care. While some proportion of this cost will be borne by the custodial parent who will generally earn less than the non-custodial parent, the more telling statistics are that most men without custody have incomes after paying support which leave them considerably above the poverty line while a majority of women with custody of the children have, after receiving support, incomes putting them below the poverty lines for various family sizes.

The government takes issue with the figures produced by Zweibel and Shillington, primarily on the basis that the data base used by them (which, as noted, was published by the government itself) is too small and is also unreliable. The affidavit of Nathalie Martel [7] produced by the respondent proposes use of a larger and more up to date data base also generated by the Department of Justice: “Child Support Award Database". Based on this Ms. Martel develops her own figures to show how many couples enjoy a net tax gain and how many suffer a net tax loss as a result of the application of the present system. She divides the couples according to income of the custodial parent into income ranges of $10,000 (a classification different from that used in the Income Tax Act to establish marginal rates and relied on by Zweibel & Shillington). The results follow.

Only in the $0 — $10,000 and $10 - $20,000 ranges are the number of winners (90 and 279 respectively) greater than the number of losers (0 and 62). In the other income categories the majority are always net losers from an income tax perspective (i.e., there is a greater tax burden as a result of the inclusion/deduction system). These are the figures:

Overall, in 59 per cent of the cases the parents pay less tax on the maintenance payments than they would if there was no inclusion/deduction requirement ("winners"); 37 per cent of parents suffer a tax disadvantage under the present regime ("losers") and in four per cent of cases the result is neutral.

Because Ms. Martel was of the view that the figures reported in the data base which she had chosen were possibly skewed by alleged under-reporting (a proposition which in my view has not been demonstrated) she has massaged them so as to make them conform to the general profile of Canadian taxpayers. Assuming, for argument's sake only, that this is a legitimate exercise, the results are not very much more favourable to the government's case:

Again the winners outnumber the losers only where the income of the custodial parent is in the two lowest ranges. Amongst such persons there must be a substantial number who, because of their very low incomes, pay no tax at all and are therefore bound to be net “winners” from the inclusion of maintenance payments in an income which attracts no tax. In all the other income ranges the losers outnumber the winners.

The respective percentages under the revised figures are 67 per cent winners, 29 per cent losers and four per cent neutral.

Under either calculation, and even when a couple "wins", i.e., jointly pay less tax than they would without the inclusion/deduction system, the Income Tax Act imposes no requirement that the tax saving or “subsidy” thus created will be passed on to the children who are the intended beneficiaries. And, as we have seen, there is good reason to doubt that this actually takes place in many cases and that the family law system effectively corrects the problem. On the other hand, of course, the non-custodial parent is virtually always a winner by reason of having his taxable income reduced. Only in the very unusual circumstances where (a) the payments are fully and accurately grossed up for tax consequences and (b) the custodial recipient is in a higher marginal tax bracket than the noncustodial payer, would the latter end up being disadvantaged by the present system. While such a case may exist I have never heard of it.

The upshot of all the foregoing is that even on the government's own figures the inclusion/deduction system, whose alleged purpose is to benefit single custodial parents and their children, cannot do so in at least one third of the cases. There is no guarantee that it actually does so in the remaining two thirds of the cases and there is evidence to suggest that it does not.

Since the burden of proving section 1 justification lies upon the government, it is my view that this material falls lamentably short of the mark. Indeed, far from being a measured, proportionate response to a perceived problem, the inclusion/ deduction system frequently fails to give any benefit at all to those whom it is allegedly designed to assist, almost always benefits those who do not need assistance, and contains no corrective or control mechanisms designed to remedy the problem. The system does not meet the minimum impact and proportionality tests and the section 1 justification fails.

Before concluding, there are a number of relatively minor and ancilliary points which require to be mentioned.

First, there was some suggestion by the respondent that the tax disadvantage suffered by separated custodial parents was offset in other parts of the Income Tax Act. Notably, reference was made to the equivalent to married credit (paragraph 118(1)(b)), the dependant tax credit (paragraph 118(1 )(d)) and the child tax credit (section 122.2). Those credits were fully and adequately dealt with by the Tax Court judge who concluded that each of them was independent of the inclusion/ deduction system and therefore could not be said to be a corrective to it. In any event, the aggregate of all such credits in 1989 was less than the amount of the tax loss actually suffered by the applicant as a result of the inclusion/deduction system.

Second, counsel for the respondent suggested that any finding that paragraph 56(1 )(b) was invalid or inoperative by reason of section 15 of the Charter would necessarily carry with it a finding that the “deduction” counterpart in paragraph 60(b) must also fail and she asked us to so find. I am not prepared to accede to that request. In the first place, paragraph 60(b) has not been the focus of this litigation and it is not impossible that other considerations, or indeed other evidence, could result in a Court finding that the paragraph could survive a Charter attack. Second, and more important, paragraph 60(b) plays no role in the calculation of the applicant’s income or her assessment. Since it is not directly in issue in these proceedings it would be most improper for us to make any finding with regard to it.

Next, respondent's counsel asked that, in the event that we should allow the application, we delay any declaration of invalidity of paragraph 56(1)(b) for a period of time to allow the government to introduce the necessary amendments to the Act. There are several reasons why this cannot be done. At a technical level, these proceedings take the form of an application for judicial review of an income tax appeal. In such a proceeding our powers as a reviewing Court are limited. [8] In particular, we can only ultimately order that the Tax Court dispose of the applicant's appeal in a way that that Court itself might have done originally; subsection 171(1) of the Income Tax Act limits the power of the Tax Court to allowing or dismissing the appeal. On a more fundamental level, we are dealing here with the rights of individuals which are guaranteed to them by the supreme law of the country. It would take very strong reasons indeed to justify any suspension of those rights. None has been suggested. Lastly, and as a practical matter, the chances of this Court's having the last word on the subject are rather less than those of winning first prize in the lottery.

Finally, I would note the somewhat ironic fact that the applicant herself may well not emerge from this litigation as a winner. As previously indicated, the judge who granted her decree of divorce took account, even if only in rather approximate terms, of the impact of income tax on both the applicant and her former husband. That being so, one may anticipate that the latter will now apply to have the payments varied to take account of the fact that the applicant will receive them free of tax.

I would allow the application, I would set aside the decision of the Tax Court and I would remit the matter to the Tax Court for redetermination on the basis that paragraph 56(1)(b) of the Income Tax Act violates the applicant’s rights under section 15 of the Charter.

Letourneau, J.A. (dissenting):— I have had the benefit of reading the opinion of my colleague Hugessen, J.A., and I agree with him, for the reasons he gives, that there is no discrimination on the basis of sex in the present case. However, I believe, contrary to what he contends, that the applicant has not been subject to discrimination because of her civil status or social condition.

I agree with my colleague that paragraph 56(1)(b) of the Act imposes a burden on the applicant and on the class of persons to which she belongs which it does not impose on other groups with different civil status. [1] However, I cannot share his view that the difference in treatment that it creates is discriminatory on that basis.

First, the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") sets up a whole set of distinctions and differences in treatment which take into account the economic reality that is a result of the taxpayer's civil status. This is the case, for example, and this is not an exhaustive list, for the married tax credit (paragraph 118(1 )(a)), the equivalent to married tax credit for a wholly dependent person (paragraph 118(1)(b)), the tax credit for children or dependants (paragraph 118(1)(d)), the rules for attribution of income between related persons (subsection 74.1(2) and section 251), the transfer or attribution of property to a surviving spouse (subsection 70(6)), the transfer of property accumulated in a registered retirement savings plan to the registered retirement savings plan owned by the spouse (paragraph 146(16)(b)), child care expenses (section 63) the inter vivos transfer of property to a spouse (section 73) and the transfer of certain unused tax credits to a spouse (section 118.8).

It may be unfortunate that the Act uses civil status, a category that is laden with discriminatory potential, to identify the various groups that are subject to different taxation. Because that taxation is based on varying income and capacity to pay, it could also, undoubtedly, be collected from those same groups by using other more neutral categories, so that the different treatment would then not be unfairly coloured with a discriminatory tint by the category used.

In my opinion, it is not necessarily discriminatory per se to treat different civil statuses differently. For example, it goes without saying that it costs more for a divorced couple to live under two roofs than to live together under the same roof. On the contrary, it might be discriminatory to treat different civil statuses identically, when they create different duties and responsibilities for the people in question, and which consequently demand different treatment in social, political, economic and legal terms. In Turpin, supra, at pages 1331-32 (C.C.C. 34-35), and later in Symes v. Canada, supra, at pages 756-57 (C.T.C. 69, D.T.C. 6022), the Supreme Court recalled, as follows, that we must examine the general context surrounding the Act, to determine whether there is discrimination:

In determining whether there is discrimination on grounds relating to the personal characteristics of the individual or group, it is important to look not only at the impugned legislation which has created a distinction that violates the right to equality but also to the larger social, political and legal context. McIntyre, J. emphasized in Andrews (at page 167 (D.L.R. 12)):

For, as has been said, a bad law will not be saved merely because it operates equally upon those to whom it has application. Nor will a law necessarily be bad because it makes distinctions.

Accordingly, it is only by examining the larger context that a court can determine whether differential treatment results in inequality or whether, contrariwise, it would be identical treatment which would in the particular context result in inequality or foster disadvantage. A finding that there is discrimination will, I think, in most but perhaps not all cases, necessarily entail a search for disadvantage that exists apart from and independent of the particular legal distinction being challenged.

. . . Similarly, I suggested in my reasons in Andrews that the determination of whether a group falls into an analogous category to those specifically enumerated in section 15 is "not to be made only in the context of the law which is subject to challenge but rather in the context of the place of the group in the entire social, political and legal fabric of our society" (page 152 (D.L.R. 32)). If the larger context is not examined, the section 15 analysis may become a mechanical and sterile categorization process conducted entirely within the four corners of the impugned legislation. A determination as to whether or not discrimination is taking place, if based exclusively on an analysis of the law under challenge is likely, in my view, to result in the same kind of circularity which characterized the similarly situated similarly treated test clearly rejected by this Court in Andrews.

[Emphasis added.]

To undertake only a purely textual analysis of the provisions of the Income Tax Act, which establishes a distinction that takes civil status into account, and then concluded that there is discrimination amounts to ignoring the social, political, legal and economic reality which this Act and its provisions inhabit, and which are experienced differently by taxpayers whose family situations differ. In my view, the difference in treatment created by paragraph 56(1)(b) does notcreate the inequality to which the Supreme Court referred in Turpin, and accordingly it is not discriminatory.

The Income Tax Act is essentially economic legislation, which may even be described as amoral [2] , its purpose being to trace income and tax it on the basis of the social and economic needs of the community, taking into account the reality of the taxpayer’s economic situation, which may vary depending on whether or not he or she is married or supporting a family. To ignore this economic context, the reality that underlies it and the importance that the government must necessarily place on it would mean that the numerous provisions of this Act which set up a distinction and impose different burdens based on different economic realities, because different civil statuses produce different needs, would be prima facie discriminatory.

For all practical purposes, the applicant’s argument amounts to saying that the Income Tax Act is discriminatory, in its essence and its structure, because it takes into account the economic reality that results from, inter alia, different civil statuses, and that accordingly its constitutional validity must be justified under section 1 of the Charter. I cannot accept this argument precisely because, first, the difference in treatment accorded does not create inequality since Parliament treats different situations differently. Second, the difference is not based on civil status, and accordingly on a ground that is analogous to those listed in section 15, but rather results from the different physical constraints and duties that fall upon taxpayers who live in different economic situations because of their different personal statuses.

Moreover, we must take into account the actual nature of the impugned legislative provision. Before the amendments made Dy paragraph 56(1)(b), the manner in which the Act dealt with married and divorced couples was identical, ignoring the different economic circumstances in which these people lived and thereby aggravating their social and economic situations. Paragraph 56(1 )(b), which is in issue here, is intended precisely as a remedy for the disadvantages that this group of taxpayers, to which the applicant belongs, had suffered at one time. In addition, married taxpayers complain of the favourable treatment accorded to the applicant and to divorced spouses since, unlike them, they cannot split their income and reduce their tax. [3] The remedial measure necessarily creates a distinction by taking into account these people's civil status, since this is the group it is addressing, and this is the group that is living in a different and difficult economic situation as a result of the breakdown of the family unit. This distinction does not necessarily constitute discrimination. When read and taken literally in isolation, the measure may appear discriminatory, but it is not when it is placed in its socioeconomic and socio-political context and the goal in mind is taken into account.

This action, which arises out of paragraph 56(1)(b), questions the constitutional validity of a legislative measure designed to remedy the disadvantaged situation in which the applicant's group was placed before. It also questions the standard of effectiveness that such a measure must meet if it is to be constitutionally valid.

In the case at bar, the beneficiaries of the deduction/inclusion system are in very large part women, and a majority of them, particularly of low-income women, receive an advantage and a benefit from the income-splitting permitted by the system. [4] Paragraph 56(1 )(b) of the Act therefore produces a beneficial effect in a majority of cases and helps to partially remedy the inequalities suffered by this group of taxpayers in the past. [5]

Of course, the remedy is not perfect and could be improved. [6] However, this does not mean that it is discriminatory in its present form. Section 15 of the Charter does not require that a remedy or mitigation of an earlier prejudice be 100 per cent effective, flawless and without secondary effects if it is to be constitutionally valid. To impose such an obligation in terms of the result would have a paralysing effect on any initiative contemplated or taken to correct the prejudicial effects of a policy in the past.

In conclusion, I am of the opinion that the remedy created by paragraph 56(1)(b) treats the applicant and the people in her group differently from other taxpayers because of their different social, political and economic circumstances which are the result of their different civil status, and that despite its imperfections this measure is not discriminatory. As my colleague Linden, J.A. stated Schachtschneider, supra, footnote 21, at page 342:

[61] Treating both married and unmarried people fairly under the Income Tax Act without discrimination is no easy task. Past efforts to achieve this in the United States have led not to peace but only to an "uneasy truce", (see Druker v. Commissioner of Internal Revenue (1982), 697 F. 2d 46 (U.S.C.A. 2nd Circuit); see also Bittker, Federal Income Taxation and the Family (1975), 27 Stan. L. Rev. 1389), It is apparently virtually impossible to erect a scheme that is perfectly fair to all. Because of this, some latitude must be accorded to legislatures in settling the terms of that truce. (Ibid., at page 51, per Friendly, J.).

The applicant also claims to have been the victim of discrimination on the basis of social condition. If I understand the argument properly as it is formulated, divorced women have a unique social condition because of their income and their level of education, and are in a disadvantaged position in society.

In short, she contends that she is a member of a disadvantaged group, a minority, and is a victim of stereotypes, historical disadvantages or social or political prejudice. At page 74 of their memorandum, counsel for the applicant write:

In the case at bar, we believe that paragraphs 56(1)(b), 56(1)(c) and 56(1)(c.1) are discriminatory in their wording and in their application when they add to the income of a former spouse or a parent who has custody of a child for whom support payments are received; it is obvious in practice that 99 per cent of the time mothers and former wives must bear the burden of the legal and physical custody of the children of the marriage with the person who is required to pay support and these provisions of the Income Tax Act operate to solidify their misery, with no justification whatsoever.

[Translation; emphasis added.]

This is therefore an argument based on a ground that is analogous to those listed in section 15 of the Charter.

The applicant’s claim that the discrimination of which she is a victim is based on social condition is without merit, in my view. What the applicant is describing is the social condition or situation or, if you prefer, status in which she says she and the members of her group find themselves. She is describing the result of discrimination, if such there be, and not the cause: she is confusing cause and effect. Moreover, while it is possible that a group may be discriminated against because of its social condition, there is no evidence in the case at bar to establish that the alleged discrimination created by paragraph 56(1 )(b) of the Act is in any way dictated by the applicant’s social condition. It cannot be argued that this section imposes a tax burden on the applicant because of her social condition. On the contrary, this legislative provision is designed to remedy the social condition in which taxpayers in her group find themselves because of divorce or separation as a result of the breakdown of the marriage.

For these reasons, the application for judicial review should be denied.

[Indexed as: Antosko (H.B.) v. Canada]

Supreme Court of Canada (LaForest, L'Heureux-Dubé, Gonthier, lacobucci and Major, JJ.A.), May 26, 1994 (Court File Nos. 23282, 23283, 23284), on appeal from a decision of the Federal Court of Appeal reported at [1992] 2 C.T.C. 350.

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63)—12(1)(c), 20(14), 40(3)—Interpretation Bulletin IT-410R—Deduction of accrued

A provincial board became the controlling shareholder of a company, holding 80 per cent of the company’s issued and outstanding shares. In 1971, the board guaranteed a loan from a bank to the company. The parties agreed that, in the event of default by the company on the repayment, the board could pay to the bank the amounts in default and these payments would then constitute a further charge on the lands and premises of the company.

Between January 1972 and July 1973, the board made four direct loans to the company totalling $1.425 million and received demand promissory notes for the principal amounts of these loans, with interest. In September 1974, the company defaulted on the bank loan, and the board was compelled to make good on its guarantee. The board paid $3.375 million to the bank in full satisfaction of all outstanding principal and interest on the loan. By March 1975, the total indebtedness of the company to the board was approximately $5 million. On March 1, 1975, the board entered into an agreement with the appellants in which the appellants acquired all of the board’s common shares in the company for $1. The board also covenanted to ensure that the company was debt free, except for the indebtedness to the board in the amount of $5 million plus accrued interest, and to postpone the obligation to repay this indebtedness, and interest thereon, for a period of two years. In return, the appellants promised to operate the company during this two-year period in a good and business-like manner. The board agreed that upon expiration of the two-year period and if all its conditions were met, it would then sell to the appellants the $5 million debt plus accrued interest for the sum of $10. The appellants satisfied their obligation under the agreement and thus, on July 6, 1977, the board sold to them the total indebtedness of the company. In addition, the debenture, promissory notes, realty mortgage and chattel mortgage that had been given as security for the outstanding indebtedness of the company to the board were assigned to the appellants.

In the 1977 taxation year, the appellants each received $38,335 from the company in partial payment of interest which had accrued on the total debt prior to transfer. The appellants included this interest as income pursuant to paragraph 12(1)(c) and then claimed deductions of these amounts pursuant to paragraph 20(14)(b). In the 1980 taxation year, the appellant Trzop received $283,363 from the company as a similar payment of interest. This amount was also included as income and then claimed as a deduction. The Minister disallowed the deductions. The appellants appealed and their appeal went through several level of appeals until it was finally dismissed by the Federal Court of Appeal. The appellants then appealed to the Supreme Court of Canada.

HELD:

In order to come within the opening words of subsection 20(14), there must be an assignment or a transfer of a debt obligation and the transferee must become entitled, as a result of the transfer, to interest accruing before the date of the transfer but not payable until after that date. Since the appellants had satisfied these conditions, the transaction came within the ambit of subsection 20(14) notwithstanding that this was not the type of transaction for which the subsection had been enacted. The motives of the parties, and the setting in which the transfer took place, were simply not determinative of the application of the subsection. In the absence of evidence that the transaction was a sham or an abuse of the provisions of the Act, it is not the role of the court to determine whether the transaction in question is one which renders the taxpayer deserving of a deduction. If the terms of the section are met, the taxpayer may rely on it. Accordingly, the transaction fell within the ambit of subsection 20(14). Furthermore, on the plain meaning of the subsection, the ability of a taxpayer to claim a deduction pursuant to paragraph 20(14)(b) is not dependent on the inclusion by the transferor pursuant to paragraph 20(14)(a) of the same amount in his or her calculation of income. Accordingly, the appellants were entitled to rely on paragraph 20(14)(b) to claim a deduction of the interest in question. Finally, the appellants were entitled to a deduction of the full amounts claimed because the interest which accrued during the period that repayment of the debt was suspended did not become payable until after the transfer. However, since the parties agreed that the appellants’ entitlement to the full deduction claimed could have other tax consequences for the appellants, such as a taxable capital gain pursuant to subsection 40(3), the appeals were allowed and the matters were referred back to the Minister for reassessment. Appeals allowed.

Eugene J. Mockler, Q.C., for the appellants.

Donald G. Gibson and Josée Tremblay for the respondent.

Cases referred to:

Hill\/. M.N.R., [1981] C.T.C. 2120, 81 D.T.C. 167;

Courtwright v. M.N.R., [1980] C.T.C. 2632, 80 D.T.C. 1609;

Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84

D.T.C. 6305;

McClurg v. M.N.R., [1990] 3 S.C.R. 1020, [1991] 1 C.T.C. 169, 91 D.T.C. 5001;

Mattabi Mines Ltd. v. Ontario (Minister of Revenue), [1988] 2 S.C.R. 175, [1988] 2

C.T.C. 294, at page 194 (C.T.C. 304);

Symes v. Canada, [1993] 4 S.C.R. 695, [1994] 1 C.T.C. 40, 94 D.T.C. 6001;

Husain v. M.N.R., [1991] 1 C.T.C. 2266, 91 D.T.C. 278.

lacobucci, J.:—These appeals concern the interpretation of subsection 20(14) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). This section permits a transferee of a debt instrument to deduct from the calculation of his or her taxable income the interest accruing on the instrument prior to the date of transfer. The narrow issue in these appeals is whether, when the debt in question was transferred from a non-taxable government body to investors trying to rehabilitate a failing company, such a transaction came within the scope of subsection 20(14). As the three appeals are based on essentially identical facts, and indeed relate to the same transaction, I will refer to them collectively as "the appeal."

I. Facts

Atlantic Forest Products Ltd. (the "company") was the owner of a plant, located in Minto, New Brunswick, which manufactured charcoal briquettes. The New Brunswick Industrial Finance Board (the "board"), a provincially incorporated agency of the Province of New Brunswick, provided financing to the company. The board became the controlling shareholder of the company, holding 80 per cent of its issued and outstanding shares. In February and March 1971, the board guaranteed a $3 million loan from the Bank of Nova Scotia (the "bank") to the company. The company executed in favour of the board a fixed and floating charge debenture securing the board’s guarantee of the loan. This debenture contained a covenant on the part of the company to repay all expenditures made by the board in protecting its security, together with interest, and to repay the bank loan according to a specified schedule. The parties agreed that, in the event of default by the company on the repayment, the board could pay to the bank the amounts in default and these payments would then constitute a further charge on the lands and premises of the company.

Between January 1972 and July 1973, the board made four direct loans to the company totalling $1.425 million. The board received four demand promissory notes for the principal amounts of these loans, with interest payable monthly at rates varying from five to 9.5 per cent. In September 1974, the company defaulted on the bank loan, and the board was compelled to make good on its guarantee. The board paid $3.375 million to the bank in full satisfaction of all outstanding principal and interest on the loan. By March 1975, the total indebtedness of the company to the board was approximately $5 million.

On March 1, 1975, the board entered into an agreement with the appellants, Antosko and Trzop, in which the appellants acquired all of the board's common shares in the company for a consideration of $1. The board also covenanted to ensure that the company was debt free, except for the indebtedness to the board in the amount of $5 million plus accrued interest, and to postpone the obligation to repay this indebtedness, and interest thereon, for a period of two years. In return, the appellants promised to operate the company during this two-year period in a good and business-like manner. The board agreed that, upon expiration of the two-year period and if all its conditions were met, it would then sell to the appellants the $5 million debt plus accrued interest for the sum of $10.

Following the execution of the above agreement, the appellants changed the name of the company to Resort Estates Ltd. In 1976, the obligations of the board passed to the Province of New Brunswick as represented by the Minister of Commerce and Development. The agreement, however, remained unchanged. The appellants satisfied their obligations under the agreement and thus, on July 6, 1977, the board sold to them the total indebtedness of the company. The Minister of Commerce and Development assigned to the appellants the debenture, promissory notes, realty mortgage and chattel mortgage that had been given as security for the outstanding indebtedness of the company to the board.

Interest on the debenture issued by the company as security for the $3.375 million paid by the board to the bank in fulfilment of its loan guarantee was treated as accruing daily at a rate of 11.5 per cent per annum from the date the bank was paid. Interest on the four promissory notes had also accrued daily. In the 1977 taxation year, the appellants each received $38,335 from the company in partial payment of interest which had accrued on the total debt prior to transfer. The appellants included this interest as income pursuant to paragraph 12(1 )(c) of the Income Tax Act, and then claimed deductions of these amounts pursuant to paragraph 20(14)(b). In the 1980 taxation year, the appellant Trzop received $283,363 from the company as a similar partial payment of interest. This amount was also included as income and then claimed as a deduction.

The Minister of National Revenue disallowed the deductions. The appellants successfully appealed these disallowances to the Tax Court of Canada ((unreported), T.C.C. File Nos. 82-736, 82-737, 84-271, St-Onge, J.T.C.C., July 25, 1985). An appeal by the respondent Minister to the Federal Court—Trial Division was allowed ([1990] 1 C.T.C. 208, 90 D.T.C. 6111), and a further appeal by the appellants to the Federal Court of Appeal was dismissed ([1992] 2 C.T.C. 350, 92 D.T.C. 6388), with the result that the deductions were disallowed. The appellants now appeal the decision of the Federal Court of Appeal to this Court.

Il. Relevant statutory provisions

Income Tax Act

12(1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

(c) any amount received by the taxpayer in the year or receivable by him in the year (depending upon the method regularly followed by the taxpayer in computing his profit) as, on account or in lieu of payment of, or in satisfaction of, interest;

20(14) Where, by virtue of an assignment or other transfer of a bond, debenture or similar security (other than an income bond or an income debenture), including for greater certainty an assignment or other transfer after June 18, 1971 of a bill, note, mortgage, hypothec or similar obligation, the transferee has become entitled to interest in respect of a period commencing before the time of transfer and ending after that time that is not payable until after the time of transfer, an amount equal to that proportion of the interest that the number of days in the portion of the period that preceded the day of transfer is of the number of days in the whole period

(a) shall be included in computing the transferor’s income for the taxation year in which the transfer was made, and

(b) may be deducted in computing the transferee's income for a taxation year in the computation of which there has been included

(i) the full amount of the interest under section 12, or

(ii) a portion of the interest under paragraph (a).

III. Judgments below

Tax Court of Canada (St-Onge, J.T.C.C.)

The Tax Court judge began his discussion by considering the decisions in Hill v. M.N.R., [1981] C.T.C. 2120, 81 D.T.C. 167 (T.R.B.), and Courtwright v. M.N.R., [1980] C.T.C. 2632, 80 D.T.C. 1609 (T.R.B.), relied upon by the respondent for the correct interpretation of subsection 20(14). The Tax Court judge held that these decisions were distinguishable; in Hill, no legal transfer of a debt took place, and in Courtwright, there was no evidence to show that any accrued interest was due and transferred. In this case, the existence of both of these factors was not in doubt.

The Tax Court judge interpreted subsection 20(14) as stating that, when a transfer of a debt with accrued interest took place, the transferor was required to include this interest in his or her income in the year of transfer, while the transferee could deduct the amount of accrued interest that he or she received. In the view of the Tax Court judge, the ability of the transferee to deduct the income was not dependent on the transferor's inclusion of it:

This section does not say that the transferee has to inquire to know whether the transferor has included the said accrued interest in his income. The taxpayer is not an employee nor an investigator for the Department of National Revenue. Furthermore, a taxpayer has no means to know if another taxpayer has reported all his income.

Subsection 20(14) did not state that the right of the transferee to deduct the accrued interest was in any way affected in a case where the transferor was tax exempt. The Tax Court judge concluded that the appellants met the terms of the exempting section, and allowed the taxpayers’ appeals with costs.

Federal Court—Trial Division, [1990] 1 C.T.C. 208, 90 D.T.C. 6111 (McNair, J.)

McNair, J. agreed with the factual finding of the Tax Court judge that interest had accrued on the debt during the time that its repayment was suspended. However, McNair, J. rejected the construction advanced by the appellants and accepted by the Tax Court judge as to the correct interpretation of subsection 20(14). Relying on the decision of this Court in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305, he concluded at page 213 (D.T.C. 6115):

. . .one cannot blithely ignore the mandatory requirement of paragraph 20(14)(a) that the amount of accrued interest must be included in the transferor’s income before the transferee of the debt obligation can deduct it under paragraph 20(14)(b). In my view, the section was designed to provide for the apportionment of accrued interest as between the transferor and transferee of a bond or other debt obligation where the same is transferred between interest dates, thus avoiding the incidence of double taxation.

The appellants were therefore not entitled to rely on the deduction provision, as there was no evidence that the interest sought to be deducted was included in the income of the transferor during the years in question. Relying on the reasoning of the Tax Appeal board in Courtwright, supra, and in Hill, supra, McNair, J. allowed the appeals.

Federal Court of Appeal, [1992] 2 C.T.C. 350, 92 D.T.C. 6388 (Isaac, C.J., Heald and Stone, JJ.A.)

Writing for the Federal Court of Appeal, Stone, J.A. approached the matter by considering, in light of economic and commercial reality, the purpose of subsec tion 20(14) at the time it was adopted. Stone, J.A. relied on the reasons of this Court in Stubart, supra, and McClurg v. M.N.R., [1990] 3 S.C.R. 1020, [1991] 1 C.T.C. 169, 91 D.T.C. 5001, which indicated that the object and spirit of the section should be derived from the existing jurisprudence. Stone, J.A. found at page 356 (D.T.C. 6393) that the purpose of subsection 20(14) was the avoidance of double taxation:

The effect is that, ordinarily, interest which accrues before the transfer date becomes taxable in the hands of the transferor only and that the transferee is taxable on the interest which accrues after that date.

In the view of Stone, J.A., when this purpose was compared to the specific transaction at issue, it was clear that the board did not receive payment from the appellants for the interest which had accrued on the debt obligations during the two-year period immediately following the agreement to transfer these debts at a later date. What bound the board to carry out the transfer was not the nominal monetary consideration received, but rather the fulfilment by the appellants of their promise to operate the company in a business-like manner. Similarly, the objectives of the appellants were not to purchase accrued interest by acquiring debt obligations, but rather to take control of a company in distress and turn its fortunes around, to the benefit of themselves and its employees. Stone, J.A. stated at page 357 (D.T.C. 6393-94):

In my opinion, the subsection was not intended to apply in such unique circumstances. If, on the other hand, the debt obligation could be viewed as one to which the subsection applies, I would agree that a deduction under paragraph (b) is not available because it has not been shown that the board, whose identity is unquestioned, included the same amount in computing its income. In my view, the word “and” at the end of paragraph (a) and the object and spirit of the subsection support this construction.

Stone, J.A. concluded that the deduction was not open to the appellants, and dismissed the appeals with costs.

IV. Issues

1. Whether the transaction at issue in these appeals falls within the ambit of subsection 20(14) of the Income Tax Act and

2. If so, whether subsection 20(14) is to be interpreted as stating that no deduction pursuant to paragraph 20(14)(b) is available to the transferee unless it is shown that the transferor included this same amount in the computation of its income, pursuant to paragraph 20(14)(a); and

3. Whether, if the appellants have otherwise fulfilled the requirements for deduction, all of the interest sought to be deducted by them meets the conditions set out in subsection 20(14).

V. Analysis

A. Does this transaction come within the ambit of subsection 20(14) of the Income Tax Act?

The Federal Court of Appeal, while agreeing with the conclusion of the Trial Division that the appellants were not entitled to a deduction of interest because the board, as a non-taxable entity, had not included that amount in the calculation of its own income, also found against the appellants on another ground. The Court of Appeal held that the transaction in this appeal, within which the accrued interest was transferred, was not meant to give rise to a deduction pursuant to subsection 20(14).

For the purposes of analysis, I repeat the operative portion of subsection 20(14):

20(14) Where, by virtue of an assignment or other transfer of a bond, debenture or similar security. . .the transferee has become entitled to interest in respect of a period commencing before the time of transfer and ending after that time that is not payable until after the time of the transfer, an amount equal to that proportion of the interest that the number of days in the portion of the period that preceded the day of transfer is of the number of days in the whole period

(a) shall be included in computing the transferor’s income for the taxation year in which the transfer was made, and

(b) may be deducted in computing the transferee’s income for a taxation year in the computation of which there has been included (i) the full amount of the interest under section 12, or (ii) a portion of the interest under paragraph (a).

In order to come within the opening words of the subsection, two conditions must be satisfied. First, there must be an assignment or a transfer of a debt obligation. Second, the transferee must become entitled, as a result of the transfer, to interest accruing before the date of the transfer but not payable until after that date. All of the courts below agreed that these two conditions were met in fact.

However, the Federal Court of Appeal, the only Court to deal with this point, took the view that the transaction in question in this appeal was nonetheless not included within the class of transactions giving rise to a deduction pursuant to this section. The Court of Appeal held that this transfer of accrued interest was not in accord with the purpose of the section, when the section was viewed in light of economic and commercial reality. In its view, the object or spirit of the provision was the avoidance of double taxation, and the transfer between the board and the appellants had nothing to do with such a purpose. An evaluation of the correctness of this conclusion requires first, a review of the proper approach to the interpretation of taxing statutes and, second, a closer scrutiny of the transaction that took place between the appellants and the board.

The starting point for this inquiry is the judgment of this Court in Stubart, supra. That case concerned a sale of assets from one sister company to another. The transferee ran the transferor's business as agent for the transferor, and sought to avail itself of a deduction of the transferor's loss carry-forward. Estey, J. reaffirmed the traditional position that the taxpayer is entitled to structure his or her affairs so as to avoid liability for tax. He also noted that the legislature provided general standards for the determination of what sorts of tax avoidance mechanisms are unacceptable. Where these limitations are inapplicable, the court has no authority to legislate additional ones.

However, the courts will not permit the taxpayer to take advantage of deductions or exemptions which are founded on a sham transaction. Such a situation would arise where (at page 572 (C.T.C. 313, D.T.C. 6320-21)):

The transaction and the form in which it was cast by the parties and their legal and accounting advisers [can] be said to have been so constructed as to create a false impression in the eyes of a third party, specifically "the taxing authority”.

In this case, the respondent agrees that this transaction cannot be characterized as a sham. There was a legally valid transfer of the assets of the company to the appellants, and a subsequent transfer to them of the company's debt obligations.

Estey, J. went on to reject the submission that the courts should adopt a test which required a strict business purpose for the transaction, independent of the goal of tax avoidance, before an entitlement to a deduction or exemption would be recognized. In his view, this would run counter to the modern legislative intent infusing the provisions of the Income Tax Act. The statute had to be viewed as not only a tool for raising revenue, but also as a device for the attainment of certain economic policy objectives. Estey, J. concluded at page 576 (C.T.C. 315, D.T.C. 6322):

It seems more appropriate to turn to an interpretation test which would provide a means of applying the Act so as to affect only the conduct of a taxpayer which has the designed effect of defeating the expressed intention of Parliament. In short, the tax statute, by this interpretive technique, is extended to reach conduct of the taxpayer which clearly falls within “the object and spirit" of the taxing provisions.

In this appeal, the appellants argue that their transaction was not structured so as to defeat the intention of Parliament. They sought to acquire the company’s debt to preserve their economic control of the company. The respondent argues that the conduct of the taxpayers in this case does not fall within the object and spirit of subsection 20(14), and that to interpret the section to cover the transaction in this appeal is to give to the appellants a windfall not intended by Parliament.

In my view, this disagreement can be resolved by viewing the passage of Estey, J. quoted above in the context of his subsequent comments on statutory interpretation. After setting out the traditional approach of strict construction of taxing statutes, Estey, J. notes at page 578 (C.T.C. 316, D.T.C. 6323):

Gradually, the role of the tax statute in the community changed, as we have seen, and the application of strict construction to it receded. Courts today apply to this statute the plain meaning rule, but in a substantive sense so that if a taxpayer is within the spirit of the charge, he may be held liable.

Estey, J. relied at page 578 (C.T.C. 316, D.T.C. 6323) on the following passage from Driedger, Construction of Statutes (2nd ed. 1983), at page 87:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

It is this principle that must prevail unless the transaction is a sham or is so blatantly synthetic as to be effectively artificial. As Estey, J. concludes at page 580 (C.T.C. 317, D.T.C. 6324):

. . .where the substance of the Act, when the clause in question is contextually construed, is clear and unambiguous and there is no prohibition in the Act which embraces the taxpayer, the taxpayer shall be free to avail himself of the beneficial provision in question.

This principle is determinative of the present dispute. While it is true that the courts must view discrete sections of the Income Tax Act in light of the other provisions of the Act and of the purpose of the legislation, and that they must analyze a given transaction in the context of economic and commercial reality, such techniques cannot alter the result where the words of the statute are clear and plain and where the legal and practical effect of the transaction is undisputed: Mattabi Mines Ltd. v. Ontario (Minister of Revenue), [1988] 2 S.C.R. 175, [1988] 2 C.T.C. 294, at page 194 (C.T.C. 304); see also Symes v. Canada, [1993] 4 S.C.R. 695, [1994] 1 C.T.C. 40, 94 D.T.C. 6001.

It is quite true that, as the respondent points out, this transaction was not one where a debt obligation was purchased on the open market. It is equally true that the motivation of the parties was not specifically to buy and sell accrued interest. The parties were concerned with returning the company to a solvent and stable position so as to generate profit and preserve jobs in a small community. All this, however, is somewhat tangential to the application of subsection 20(14). The section requires the transfer of a debt obligation whose value includes interest accruing before the date of transfer, but payable after that date. The motives of the parties, and the setting in which the transfer took place, are simply not determinative of the application of the subsection.

The respondent relies on two cases in which deductions under subsection 20(14) were disallowed because of the nature of the transactions at issue. In my view, these cases are distinguishable from the present appeal. The first of these is Courtwright, supra. In that case the taxpayer purchased Government of Canada bonds with accrued interest shortly before maturity. The taxpayer had the bonds delivered to his bank as collateral against a loan and, on maturity, the bonds were redeemed and credited to the taxpayer. The taxpayer sought to deduct as an interest expense the interest accruing prior to the transfer.

The Minister opposed this deduction on three grounds. First, the Minister argued that the bonds were not "assigned" or "transferred" to the taxpayer within the meaning of subsection 20(14). Second, the Minister argued that the accrued interest on transfer was capital in the hands of the taxpayer such that no interest was earned from the ownership of the bonds within the meaning of paragraph 12(1 )(c) of the Income Tax Act. Finally, the Minister argued that no interest was receivable in the 1975 taxation year within the meaning of paragraph 12(1 )(c). As is evident then, the issue in Courtwright was whether the taxpayer met the terms of these sections on their face. This required some consideration of the commercial reality of the transaction, but did not involve disallowing reliance on a provision when the factual requirements for its application were met.

In this appeal, despite conceding that these factual elements are present, the respondent is asking the Court to examine and evaluate the transaction in and of itself, and to conclude that the transaction is somehow outside the scope of the section in issue. In the absence of evidence that the transaction was a sham or an abuse of the provisions of the Act, it is not the role of the Court to determine whether the transaction in question is one which renders the taxpayer deserving of a deduction. If the terms of the section are met, the taxpayer may rely on it, and it is the option of Parliament specifically to preclude further reliance in such situations.

The respondent also relies on another “bond flip” case, Hill, supra. There the taxpayer sold a quantity of bonds within four days of their purchase. Again the Minister supported the disallowance of the deduction by arguing that there had been no assignment or transfer within the meaning of subsection 20(14), and that the taxpayer was not entitled to interest within the meaning of that section. The Minister also argued that no interest was receivable within the meaning of paragraph 12(1 )(c). Chairman Cardin found at page 2125 (D.T.C. 170):

The evidence forces me to conclude that what we have here is a classic example of so-called bond flip transactions, the very nature of which and indeed their ultimate purpose and use do not. . .meet the requirements of subsection 20(14) of the Act.

Chairman Cardin stated that there was no evidence that there had been any physical transfer and assignment of the bonds to the taxpayer. After discussing the relationship of paragraphs 20(14)(a) and 20(14)(b), an issue which is dealt with later in these reasons, he stated at page 2126 (D.T.C. 171):

What I find to be contrary to the provisions of subsection 20(14) of the Act is that the taxpayer in acquiring and in disposing of the bonds within a very short period of time, confers upon himself simultaneously the role of both the transferor and transferee of the bonds in each of the transactions. This sort of artificial blending of the role of transferor and transferee by the taxpayer in the acquisition and disposition of bonds in bond flip cases does not, in my view, come within the wording and the meaning of the interest of subsection 20(14) of the Act.

The reasoning in this case does not assist the respondent herein. The Tax Review board in Hill was again faced with the basic question of the applicability of subsection 20(14) on the terms of its own express wording. This required an analysis of the transaction which occurred, but did not dilute or obscure the plain meaning of the requirements of the section. The board found that no transfer or assignment had been proved. The alternate conclusion of the board that this sort of transaction did not create a transfer of accrued interest was again based on an analysis of the transaction, and not a reinterpretation of a clearly drafted subsection. The board found that the transfer was artificial, since the taxpayer acted as both transferor and transferee for bonds that were acquired and resold almost instantaneously.

In this case, the substance of the transaction meets the requirements of subsection 20(14). The respondent argues that the transaction in this appeal is akin to a “bond flip" in that it is obvious from the nominal monetary consideration paid for the transfer of the debt obligation that its purchase price did not reflect the fact that interest had accrued. The Court of Appeal found, as did the other courts below, that a purchase of accrued interest by the appellants in the acquisition of debt obligations did occur. Once that is established, the adequacy of the consideration is not relevant, absent allegations of artificiality or of a sham. The issue in all commercial transactions, where there is no claim of unconscionability or of a similar vitiating factor, is the validity of the consideration. This principle is recognized in Interpretation Bulletin IT-410R, "Debt Obligations — Accrued Interest on Transfer", which states (in paragraph 3), the amount, if any, of the interest determined for the purpose of subsection 20(14) is unaffected by either the prospects of its payment or non-payment or the nature or value of any consideration given by the transferee". Moreover, the consideration for the transfer at issue in this appeal included not only the nominal $10, but also the undertaking to operate the company in a good and business-like manner. It was only in fulfilment of this latter promise that the corresponding promise by the board to transfer the debt obligations became binding.

This transaction was obviously not a sham. The terms of the section were met in a manner that was not artificial. Where the words of the section are not ambiguous, it is not for this Court to find that the appellants should be disentitled to a deduction because they do not deserve a "windfall", as the respondent contends. In the absence of a situation of ambiguity, such that the Court must look to the results of a transaction to assist in ascertaining the intent of Parliament, a normative assessment of the consequences of the application of a given provision is within the ambit of the legislature, not the courts. Accordingly, I find that the transaction at issue comes within subsection 20(14).

B. Does subsection 20(14) permit the deductions?

The respondent argues in the alternative that, even if subsection 20(14) is prima facie applicable to the transaction in this case, the appellants are not entitled to claim a deduction pursuant to paragraph 20(14)(b), because the amount of interest accrued prior to the transfer was not included in the calculation of the income of the transferor, as required by paragraph 20(14)(a). It is not disputed in this case that the board, as transferor, is a non-taxable entity which did not file a tax return in the time period in question. The Trial Division found, and the Court of Appeal agreed, that these two paragraphs were to be interpreted conjunctively such that no deduction could be claimed under paragraph 20(14)(b) in the absence of evidence that the amount deducted had been included in the transferor's income under paragraph 20(14)(a). The respondent points to the word "and", which links the two subsections, and argues that an interpretation which precludes a deduction, unless the interest is included in the transferor's income, best accords with the object and spirit of the provision.

The respondent characterizes the purpose of subsection 20(14) as the avoidance of double taxation. I agree. Subsection 20(14) operates to apportion accrued interest between transferor and transferee so as to avoid the double taxation that would occur if both parties included all the interest accrued in their respective calculations of income. The interest that has accrued prior to the date of transfer is allocated to the transferor’s calculation of income, based presumably on the reasoning that the transferor, as owner of the debt obligation, will be legally entitled to interest up to the date of transfer and that this fact will be reflected in the consideration to be paid by the transferee for the debt obligation. The accrued interest is therefore part of the income of the transferor, and not of the income of the transferee.

The respondent, however, goes on to argue that since amounts received or receivable as interest are included in the calculation of income under paragraph 12(1 )(c), subsection 20(14) acts to ensure not only that double taxation is avoided, but also that the entire amount of interest is included in someone's taxable income. In my view, such an assertion transforms the proposition that the section is meant to avoid double taxation into one that the section is designed to ensure taxation of the entire amount of interest accrued during the taxation year. This is, however, not true, since if the board as non-taxable owner of the debt obligation did not transfer it, none of the accrued interest would be taxable. Parliament anticipates just such an outcome in creating a tax-exempt status for certain entities. Subsection 20(14) deals with the allocation of interest. Whether the government will ultimately recover tax on that interest is governed by other sections of the Act. In this regard I find helpful the comments of M.D. Templeton, in “Subsection 20(14) and the Allocation of Interest-Buyers Beware” (1990), 38 Can. Tax J. 85, at pages 87-88, on the reasons of the Trial Division on this point:

. . .no words in subsection 20(14) or the Act as a whole make paragraph (b) of the subsection conditional on the application of paragraph (a). On the contrary, the grammatical construction of subsection 20(14) suggests that paragraphs (a) and (b) become applicable, independent of one another, once the conditions set out in the paragraph of subsection 20(14) that precedes paragraphs (a) and (b) are met.

The grammatical structure of subsection 20(14) is similar to a number of other provisions in the Act in which Parliament lists the income tax consequences that arise when certain preconditions are met. Usually, the preconditions are set out in an introductory paragraph or paragraphs and the consequences in separate subparagraphs. We do not Know of any canon of statutory interpretation that makes a tax consequence listed in the text of a provision subject to the taxpayer’s compliance with all the other tax consequences listed before it.

To carry this observation further, where specific provisions of the Income Tax Act intend to make the tax consequences for one party conditional on the acts or position of another party, the sections are drafted so that this interdependence is clear: see, e.g., section 68 and subsections 69(5), 70(2), (3) and (5).

The respondent relies on the comments of the Tax Review board in Court- wright, supra, and in Hill, supra, that the entitlement to a deduction under paragraph 20(14)(b) is dependent upon inclusion by the transferor in income of the amount sought to be deducted, pursuant to paragraph 20(14)(a). The statements of the Tax Appeal Board to that effect in those cases were obiter, and not necessary to the disposition of those appeals. The "bond flips" were designed to give the taxpayer a double deduction under both paragraph 20(14)(b) and section 110.1 (now repealed). They were wholly synthetic transactions that did not even meet the facial requirements of the section, let alone accord with its object and spirit when analyzed in light of economic and commercial reality: see Claude Nadeau, "The Interpretation of Taxing Statutes Since Stubart" (1990), 42 Can. Tax Found. 49:1, at p. 49:21. As discussed above, the same cannot be said of the transaction in this case. The interpretation of the relationship between paragraphs

(a) and (b) was not necessary to the result reached in those cases and, in my view, should not be considered to be a correct statement of the law.

The same can be said for the more recent decision of the Tax Court in Husain v. M.N.R., [1991] 1 C.T.C. 2266, 91 D.T.C. 278. There the Court held that the taxpayer could not rely on paragraph 20(14)(b) to claim a deduction of interest on Canada Savings Bonds which accrued prior to the date of transfer. The taxpayer acquired the bonds under a testamentary disposition from her husband who, at the time of his death, was not a resident of Canada. While the Court may well have been correct in concluding that paragraph 20(14)(a) was inapplicable to the taxpayer’s non-resident husband, it does not follow, for the reasons set out above, that the taxpayer should have been disentitled from relying on paragraph 20(14)(b).

This conclusion is fortified by the consequences that would ensue were subsection 20(14) not read in this straightforward manner. Subsection 20(14) does not draw distinctions between the contexts in which debt instruments are transferred. The interpretation advanced by the Trial Division and endorsed by the Court of Appeal would be equally applicable in open-market bond transactions. It is simply unworkable to require market purchasers to discern whether the vendor of the bond is tax-exempt in order to be able to assess whether a paragraph 20(14)(b) deduction is permitted. Without this knowledge, the prospective purchaser would thus be unable to gauge the true value of the security.

Moreover, a debt instrument held by a non-taxable entity would be worth less than an identical instrument held by a body that was liable to tax. Any taxpayer who purchased a security previously held by either the federal or the provincial Crown, or by one of the persons enumerated in subsection 149(1) of the Act, would be disentitled from deducting. Given that many of the bonds sold on the open market are sold by the Bank of Canada, a body to whom paragraph 20(14)(a) does not apply, the interpretation of the section advanced by the respondent would mean that these bonds would have to be sold at a discount compared with identical bonds sold by other parties: Templeton, supra, at page 88; see also John

M. Ulmer, "Taxation of Interest Income" (1990), 42 Can. Tax Found. 8:1, at page 8:20.

Therefore, I am of the view that, on the plain meaning of the section, the ability of a taxpayer to claim a deduction pursuant to paragraph 20(14)(b) is not dependent on the inclusion by the transferor pursuant to paragraph 20(14)(a) of the same amount in his or her calculation of income. The consequences of this straightforward grammatical reading do not persuade me that it is incorrect. In fact, the opposite is true.

Given that the inability of the transferor to include the amount of accrued interest transferred in its calculation of income is irrelevant to the ability of the appellants to claim a deduction of that interest, and in light of the earlier finding that there was in this case a transfer of a debt obligation which included interest accruing before the transfer but not payable until after the transfer, I am of the view that the appellants are entitled to rely on paragraph 20(14)(b) to claim a deduction of this interest.

C. What is the amount of the deduction to which the appellants are entitled?

The respondent argued that, if the appellants were entitled to a paragraph 20(14)(b) deduction, the correct amount of the deduction was far less than the amounts claimed by the appellants. The appellants each claimed a deduction of $38,335 in the 1977 taxation year, and the appellant Trzop claimed a further $283,363 in 1980. As will be explained below, the respondent argues that the total deduction to which the appellants were entitled was $3,345.

It appears that this argument was raised for the first time before the Federal Court—Trial Division. By the operation of the former subsection 175(3), this appeal was deemed to be an action in the Trial Division, such that it was permissible to raise this new submission. However, neither the Trial Division nor the Court of Appeal considered the argument, as it was unnecessary to do so, having found that no deduction under subsection 20(14) was available. The respondent argued before the Tax Court judge that the accrued interest on the debt was far less than the approximately $1,000,000 calculated by the appellants, because the promissory notes stated that interest was not payable between 1975 and 1977, pursuant to the agreement between the board and the appellants to suspend repayment of the debt. The Tax Court judge rejected this argument, stating:

It is obvious from the evidence adduced that what happened in the period between 1975 to 1977 was not a forgiveness of the accrued interest, but a suspension thereof. The appellants had the right to sue the company and obtain the accrued interest that they did receive in the years under appeal.

The reasons of the Tax Court judge do not indicate that he considered the alternate argument advanced by the respondent that most of the interest deducted by the appellants did not meet the requirement of subsection 20(14) that it must have accrued prior to the transfer but be payable after the transfer. The argument of the respondent, simply put, is that interest on the promissory notes accrued daily and was payable monthly, and that interest on the debenture accrued daily and was payable on demand. Therefore, nearly all of the interest accruing during the two-year period during which repayment of the debt was suspended became payable on demand at the time of the transfer of the debt to the appellants. The fact that the appellants chose not to collect on it immediately does not alter that fact.

Therefore, the respondent argues, since this interest was payable at the time of, rather than after, the transfer, it does not meet the terms of subsection 20(14). The only interest which satisfies the opening words of the subsection is the interest accruing on the four promissory notes between the June and July payment dates. The appellants are consequently entitled to deduct $3,325 as the amount which accrued prior to the transfer but was not payable until after the transfer.

This argument cannot succeed. The interest which accrued during the two-year period during which the debt was suspended was payable after the transfer and therefore meets the terms of subsection 20(14). This agreement to suspend repayment of accruing interest that would otherwise have been payable was legally enforceable by the appellants so long as they continued to fulfil their part of the agreement. Therefore, the accrued interest was not payable before the transfer.

Moreover, to say that the interest became payable at the very moment of the transfer, rather than after it, is somewhat artificial. It must be remembered that the board, as transferor, could not collect that accrued interest at all, so long as the appellants met the terms of the agreement. Therefore, the interest that accrued during that period became payable on demand immediately after the transfer of the debt to the appellants was completed. I find it difficult to understand how the appellants could have made a valid demand for payment of the interest until after the debt had been fully transferred to them. Therefore, this means that the interest accrued before the transfer but was payable after that time, and that it gave rise to a permissible deduction under paragraph 20(14)(b).

VI. Conclusion and disposition

The appellants are entitled to a deduction of interest accruing prior to the transfer and payable thereafter. The transaction between the appellants and the board meets the requirements of subsection 20(14). The interest which accrued during the period that repayment of the debt was suspended did not become payable until after the transfer. However, the parties agree that this result may have other tax consequences for the appellants, such as a taxable capital gain pursuant to subsection 40(3). In this connection, these and any other possible consequences can be taken into account by the respondent in reassessment.

Therefore, the appeals are allowed, the judgment of the Federal Court of Appeal is set aside, and the matters referred back to the Minister for reassessment in accordance with these reasons. The appellants shall have their costs here and in the courts below.

Appeals allowed.