Carol Bishop v. Minister of National Revenue and William Bishop (Joined Party), [1993] 1 CTC 2333, 93 DTC 333

Kempo, T.C.CJ.:—The respondent, acting through the Minister of National Revenue (hereafter sometimes referred to as the"M.N.R."), obtained an order pursuant to subsection 174(1) of the Income Tax Act (the "Act") requiring the Court's determination of the following question:

. . .. whether the whole or any part of the $8,994 paid by William Bishop to the Treasurer of Ontario in the 1988 taxation year is an amount which is deemed by subsections 56.1(1) and 60.1(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") to have been paid to and received by Carol Bishop in 1988 for the purposes of paragraphs 56(1)(b), 56(1)(c) and 56(1)(c.1), and paragraphs 60(b), 60(c) and 60(c.1), and is therefore deductible by William Bishop in computing his income for the 1988 taxation year and is to be included by Carol Bishop in computing her income for the 1988 taxation year.

Counsel for the appellant and counsel for the respondent, no appearance being made for or on behalf of William Bishop, proceeded by way of written agreed statement of facts with written submissions and written arguments thereon.

The agreed facts follow. Because interpretative differences arose respecting some particular nomenclature employed in the statement of facts, my own commentary will be inserted immediately following the numbered paragraph affected. The schedules referred to in the facts are not reproduced here.

Agreed statement of facts

1. The appellant, Carol Ann Bishop, married William Russell Bishop, August 6, 1965 in Norwich, Ontario. There were three children in the marriage: William John Bishop born October 16, 1965; Robert Dean Bishop born October 1, 1966 and Darrel Bishop born September 12, 1969. The parties separated in 1973.

2. By order of the Provincial Court (Family Division) of the County of Essex in the Province of Ontario, dated July 16, 1973 William Russell Bishop was required to pay Carol Bishop under the Deserted Wives’ and Children's Maintenance Act the sum of $15 per week for her support and $20 per week in respect of each of the children, totalling $75 per week. A copy of the said order is attached hereto as Schedule "A" [not reproduced].

3. The appellant, Carol Ann Bishop, petitioned for divorce from her husband which petition was granted by decree nisi dated June 26, 1975 and signed January 13, 1976. The decree nisi reiterated [1] the order of July 16, 1973 of the Provincial Court (Family Division) with respect to support; custody and access. A copy of the said decree nisi is attached hereto as Schedule “B” [not reproduced].

3. AND THIS COURT DOTH FURTHER ORDER AND ADJUDGE that the respondent, William Russell Bishop, do pay to the Petitioner, Carol Ann Bishop, for the care, maintenance and support of each of the said infants, William John, Robert Dean and Darrel, the sum of $20 per week, according to the order of the Provincial Court (Family Division) of the County of Essex made the 16th day of July, 1973.

4. AND THIS COURT DOTH FURTHER ORDER AND ADJUDGE that the respondent, William Russell Bishop, do pay to the Petitioner, Carol Bishop, the sum of $15 per week for her own support and maintenance, together with arrears according to the order of the Provincial Court (Family Division) of the County of Essex made the 16th day of July, 1973.

4. The decree nisi was made absolute by order dated March 29, 1976, a copy of which is attached hereto as Schedule "C" [not reproduced].

5. At no time prior to 1988 did the appellant's former husband William Russell Bishop make any support payments to the appellant, Carol Ann Bishop. Carol Ann Bishop was forced [2] to seek and obtain social assistance payments from the Government of Ontario pursuant to the Family Benefits Act. This Act is administered provincially by the Minister of Community and Social Services although since 1984 the City of Windsor under agreement with the provincial government has administered the Family Benefits Act for its own residents.

6. The appellant, Carol Ann Bishop, received these family benefits, formerly known as" Mother's Allowance” from 1973 almost continuously until 1988 when she was able to return to the work force. Pursuant to the regulations under the Family Benefits Act the amount a qualifying individual may receive is determined on the basis of income level and the right to receive support payments is considered income for purposes of that calculation. The appellant, Carol Ann Bishop, accordingly assigned her right to receive support payments to the Minister of Community and Social Services. An original copy of this assignment obtained from the files of the Social Services Department of the City of Windsor is attached hereto as Schedule"D" [not reproduced]. The said assignment states that it assigns the support order of the Supreme Court dated June 26, 1975 but also states [3] that the assignment begins August 1, 1973.

7. In 1987 the Ontario Government established in Windsor the Support and Custody Enforcement Office to assist in the collection of support payment due spouses pursuant to court order. In May, 1988, the Director of the Support and Custody Enforcement Office acting for the benefit of the Minister of Community and Social Services commenced garnishment proceedings in the Provincial Court (Family Division) against the appellant's former husband, William Russell Bishop, in respect of support arrears of $26,630. Copies of the notice of garnishment, [4] notice of garnishment hearing, dispute by debtor [5] and the order dated August 17, 1988 which rescinded the garnishment proceedings [6] are attached hereto as Schedule "E" [not reproduced]. [7]

8. The appellant, Carol Ann Bishop, was unaware of any actions taken to collect outstanding support arrears owing by her former husband or of any payments having been made by him on account of such arrears, of which fact situation the respondent has no knowledge. At all material times, Carol Ann Bishop reported as required for tax purposes all income received by her, however Family Benefits income is, under paragraph 110(1)(f) of the Income Tax Act, not subject to tax.

9. The appellant's former husband, William Russell Bishop, deducted as support payments the sum of $8,994.41 in calculating his income on filing his 1988 tax return. The respondent by notice of assessment has allowed this deduction under section 60.1 of the Income Tax Act and has reassessed the appellant, Carol Ann Bishop, including in her income the said sum of $8,994.41 deemed to have been received as support payments under section 56.1 of the Income Tax Act.

10. As a result of inquiries made following receipt of the notice of reassessment, the appellant was advised by the City of Windsor, Social Services Department, that her former husband, William Russell Bishop, had made five payments to the Minister of Community and Social Services totalling in 1988 $8,994.41 and in 1989 the sum of $60.34. The said letter is attached hereto as Schedule "F". [8]

Issues and submissions

Counsel for Mrs. Bishop raised the following arguments against her assessment for tax:

1. Subsection 56.1(1) of the Act is not applicable to her situation because:

(a) the operative support order is a 1973 order which predates these provisions;

(b) neither the 1973 support order nor the 1975 decree nisi mandated any third party payments;

(c) Mrs. Bishop did not receive the payment in question nor had she derived any benefit therefrom; and

(d) the 1988 pre-amended version is applicable here which is ambiguous and of no force and effect, viz: M.E. Anderson v. M.N.R., [1988] 1 C.T.C. 2293, 88 D.T.C. 1198 (T.C.C.).

2. Paragraph 56(b) of the Act is not applicable because Mrs. Bishop:

(a) assigned for value all her rights under the support order which effectively conveyed all her tax obligations thereunder; and

(b) she received no amounts from Mr. Bishop nor did she derive any benefit from the amount paid by him in 1988.

3. Generally, as a matter of public policy it is improper to allow a former husband who has shirked his support obligations, leaving his former spouse and children to depend on public welfare, to reap the financial benefit of a tax deduction on account of a partial arrears payment made fifteen years after the support obligation began.

4. Double taxation occurs if the amount is included into Mrs. Bishop's income.

Respondent's counsel's position was that:

1. The operative support order is the 1975 decree nisi which antedates sections 56.1 and 60.1 of the Act.

2. The assignment was made after the 1975 decree nisi and not before May 6, 1974. It did not obviate or convey Mrs. Bishop's tax liability. Pursuant to subsection 56.1(1) she is a deemed recipient of the amount paid.

3. Subsection 56.1(1) of the Act does apply for the reasons that:

(a) the amended provision governs which is not ambiguous;

(b) its purpose is to extend the basic alimony and maintenance provisions found in paragraphs 56(1)(b), (c) and (c.1) to bring into income taxpayer support payments made to third parties for the benefit of the taxpayer. It is to prevent the avoidance of tax, in cases where payments are made to third parties by whatever means or authority, that this provision was introduced in 1974; and

(c) it does not require that the support order itself make provision for third party payments.

4. The payment by Mr. Bishop to the third party, the Ontario government, was for the benefit of Mrs. Bishop which is deemed for the purposes of paragraphs 60(b) and (c) of the Act to have been paid to and received by her and the same is applicable respecting the application of paragraphs 56(1)(b) and (c) of the Act.

5. There is no double taxation here.

6. Matters of public policy, if applicable here, remain within legislative domain.

The applicable legislation

With respect to alimony and maintenance, the relevant portions of the Income Tax Act follow:

56(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(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;

(c) any amount received by the taxpayer in the year, pursuant to an order of a competent tribunal, as an allowance payable on a periodic basis for the maintenance of the taxpayer, children of the taxpayer, or both the taxpayer and children of the taxpayer if, at the time the payment was received and throughout the remainder of the year, the taxpayer was living apart from his spouse who was required to make the payment;

The counterpart to the income inclusion required by these provisions is found within paragraphs 60(b) and (c):

60. There may be deducted in computing a taxpayer's income for a taxation year such of the following amounts as are applicable:

(b) an amount paid 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 he was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, his spouse or former spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year;

(c) an amount paid by the taxpayer in the year, pursuant to an order of a competent tribunal, as an allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the recipient, or both the recipient and children of the recipient if, at the time the payment was made and throughout the remainder of the year, he was living apart from his spouse to whom he was required to make the payment;

Where amounts are paid by a spouse to a third party the following provisions come into play:

56.1(1) Where, after May 6, 1974, a decree, order, judgment or written agreement described in paragraph 56(1)(b), (c) or (c.1), or any variation thereof, has been made providing for the periodic payment of an amount

(a) to a taxpayer by a person who is

(i) the taxpayer's spouse or former spouse, or

(ii) . . . [not applicable],

(b) for the benefit of the taxpayer, children in the custody of the taxpayer or both the taxpayer and those children,

the amount or any part thereof, when paid, shall be deemed, for the purposes of paragraphs 56(1)(b), (c) and (c.1), to have been paid to and received by the taxpayer.

The statutory counterpart to the above provides:

60.1(1) Where, after May 6, 1974, a decree, order, judgment or written agreement described in paragraph 60(b), (c) or (c.1), or any variation thereof, has been made providing for the periodic payment of an amount by a taxpayer

(a) to a person who is

(i) the taxpayer's spouse or former spouse, or

(ii) . . . [not applicable],

(b) for the benefit of the person or children in the custody of the person, or both the person and those children,

the amount or any part thereof, when paid, shall be deemed, for the purposes of paragraphs 60(b), (c) and (c.1), to have been paid to and received by that person.

By S.C. 1988, c. 55, subsections 34(6) and 56(12) was added applicable, with respect to decrees, orders, judgments and written agreements made or entered into before March 28, 1986 or after 1987, to the 1986 and subsequent taxation years, except that, for the 1986 and 1987 taxation years, subsection 56(12) was to be read as set out in subsection 34(12) of c. 55, S.C. 1988 which is of no application here. Subsection 56(12) reads:

56(12) Subject to subsections 56.1(2) and 60.1(2), for the purposes of paragraphs (1)(b), (c) and (c.1) (hereinafter in this subsection referred to as the “former paragraphs”) and 60(b), (c) and (c.1) (hereinafter in this subsection referred to as the "latter paragraphs"), “ allowance” does not include any amount that is received by a person, referred to in the former paragraphs as “the taxpayer" and in the latter paragraphs as“ "the recipient", unless that person has discretion as to the use of the amount.

With respect to social assistance payments, paragraph 56(1)(u) of the Act as amended and applicable to the 1982 and subsequent taxation years required inclusion into the income of a recipient "a social assistance payment made in the year on the basis of means, needs or income test" and by subparagraph 110(1)(f)(iii), (similarly as amended and applicable 1982 and thereafter) permitted its deduction to the extent that it had been included in the taxpayer's income computation. Put another way, this kind of receipt was not exempt. It formed part of reportable income followed by permitted deduction.

With respect to the Ontario Family Benefits Act, appellant's counsel provided relevant extracts therefrom. Respondent's counsel neither addressed nor commented upon these provisions.

Subsection 7(1) therein provided.

7(1) An allowance shall and other benefits may be provided in accordance with the regulations to any person in need who is resident in Ontario. . . .

The following relevant portions of regulations passed under the above enactment provided:

10(1) Where moneys are due and owing or may become due and owing to an applicant, recipient or beneficiary for maintenance that would, if received by the applicant, recipient or beneficiary be included in income for the purposes of subsection 13(1), the Director may require as a condition of eligibility for a benefit that an applicant or recipient agree in writing to reimburse Ontario for all or any part of the benefit or benefits paid or to be paid out of the moneys when they become payable in respect of the same period of time to which the moneys apply.

(3) The written agreement referred to in subsection (1) may include,

(b) an assignment to Ontario by the applicant or recipient of his or her right to such moneys from the person or agency from whom such moneys are receivable.

(4) The amount of any moneys paid to Ontario under an agreement under subsection (1) shall in no case exceed the total amount of the benefit or benefits paid to the applicant or recipient during the period in respect of which the money are payable.

(5) An applicant or recipient is not ineligible for an allowance solely by reason of the failure of any other person or agency to deduct and remit moneys to Ontario under an authorization and direction or an assignment under subsection (3).

11. The amount of an allowance shall be equal to the budgetary requirements of an applicant or recipient determined in accordance with section 12 or 30, as the case may be, and section 41, minus the income of the applicant or recipient in accordance with section 13.

13(1) For the purposes of determining a person in need and computing the amounts of allowances, the income of an applicant or recipient shall include all payments of any nature or kind whatsoever, received by or on behalf of,

(a) the applicant or recipient;

(2) For the purposes of subsection (1), and without restricting the generality of subsection (1), income shall include:

8. . . . any payments for support or maintenance received under an order made by a court of competent jurisdiction or under a domestic contract. . . .

The following relevant extracts from the Policy and Procedural Guidelines of the Income Maintenance Branch of the Ontario Ministry of Community and Social Services dated October, 1987 provided:

1.0 AUTHORITY

Sections 13(2)9 and 13(2)10 of the Regulation under the Family Benefits Act require that maintenance or support for the recipient/dependent child must be considered as income.

Section 10(1) of the Regulation provides that where moneys are due and owing or may be due and owing to an applicant, recipient or beneficiary for maintenance, that would if received be included as income, in establishing the entitlement of a benefit, the Director may require as a condition of eligibility for a benefit that an applicant or recipient agree in writing to reimburse Ontario out of the moneys when they become payable for all or any part of a benefit paid or to be paid covering the same period of time to which such moneys apply.

Sections 10(3)(a) and 10(3)(b) of the Regulation provide for an authorization and direction to the person or agency from whom the moneys are receivable to deduct and pay such moneys directly to Ontario; and permit an assignment to Ontario by the applicant or recipient of his or her right to such moneys from the person or agency from whom such moneys are receivable.

2.0 POLICY INTENT

To allow assignment of support when there have been problems in the past; to ensure that a recipient receives the approved level of income in a constant and regular amount regardless of whether the spouse/parent pays the court-ordered support; and to facilitate the recovery of post-F.B.A. support arrears owed to the Treasurer of Ontario.

3.0 PROCEDURE

Divorce orders which contain support provisions and are filed with the Director of Support and Custody Enforcement are then assignable to MCSS. . . .

Analysis

The operative support order

In my view, and with possible exception of monetary arrears which had accumulated to that point of time, the 1973 order for maintenance made under the Ontario provincial legislation did not survive the 1975 maintenance order granted under the federal Divorce Act. The maintenance and support ordered under the latter decree appears, prima facie, to have been a matter raised, considered and dealt with as an ancillary matter to the divorce proceedings, thus precluding the survival of the 1973 order: cf, Carson v. Carson (1979), 9 R.F.L. (2d) 209 (P.E.I.S.C.).

Where a matter of support and maintenance is being considered in a divorce forum after the granting of a divorce, the Court is obliged to consider all the factors relating thereto within the applicable provisions of the Divorce Act. In Rehn v. Rehn (1988), 13 R.F.L. (3d) 440 (Ont. U.F.C.), upon noting that the Divorce Act provided factors for the Court to consider when matters of support were raised in those proceedings, it was opined at page 451:

Where there is no antecedent order made under provincial law and where, in divorce proceedings, the spouse in need does not seek support, a court may well decide to assess support at the behest of the other spouse, who seeks only to ascertain the extent of the support obligation. But what if the parties have obtained a final order for spousal support under provincial legislation? Sometimes, an applicant is content to rely on this order, and to seek, therefore, no order for corollary relief under the Divorce Act, 1985. Sometimes, an applicant seeks to incorporate the provisions of the spousal support order into the divorce judgment. Sometimes, as a consent matter, both parties request that the divorce judgment incorporate support provisions that they have negotiated since the date of the initial order. Relief of this nature seems to give rise to no difficulty. Indeed by subsection 15(5), the factors that a Court shall take into consideration in making an order for support include“ "any order . . . relating to support of the spouse . . .”

There exists a compelling inference here that support and maintenance for Mrs. Bishop and the children were ordered by the 1975 decree nisi, in the manner of incorporating the provisions of the 1973 order, after the Court had considered the factors set out in the Divorce Act. I do not agree with Mrs. Bishop's counsel that, as a matter of substantive law, the 1973 order was merely confirmed and thereby had fully survived in its own right.

Thus, for this matter, the operative order is the decree nisi which antedates the applicable fiscal provisions previously mentioned.

Sections 56.1 and 60.1 of the Act

In the case of Anderson v. M.N.R., [1988] 1 C.T.C. 2293, 88 D.T.C. 1198 (T.C.C.) the Court found, after attempted analysis, that subsection 56.1(1) of the Act as it then read was ambiguous, that it lacked the necessary clarity to be a charging provision and therefore held it was without any force or effect. The taxation year in question was 1984.

Subsection 56.1(1), supra, was substituted by S.C. 1988, c. 55, s. 35(1) applicable (a) in respect of orders made under the laws of Ontario, to the 1986 and subsequent taxation years, and (b) in any other case, to the 1988 and subsequent taxation years. Subsection 60.1(1), supra, was also substituted at the same time. I find no ambiguity in these provisions.

Appellant's counsel advanced the argument that the substituted provision does not apply, that the previous one does and that since it has already been determined to be ambiguous in Anderson, supra, the same result should follow for Mrs. Bishop. His reason, that the predecessor provision applies because it had been stated [in S.C. 1984, c. 45, s. 20(1)] to be applicable respecting payments made after 1983, is simply not tenable. As already stated, the amending provisions of S.C. 1988, c.55 s.35(1) are clear and unambiguous as to the applicability of the substituted provision, supra, which itself is unambiguous.

The assignment

I am of the opinion that the assignment made by Mrs. Bishop to the Ontario Ministry of Community and Social Services (the"Ministry")

(a) was for value; that it

(b) related to the 1975 decree nisi support order as stated in clause 2 of the assignment and operated fully for the period May 31, 1977 to August 31, 1988 (excluding July 1, 1986 to March 31, 1987) as stated in the Social Services letter, reproduced, supra; that it

(c) conveyed to the Ministry both her legal and her equitable interests respecting the income stream derived from the 1975 support order which, effectively, vested in the Ministry's favour all her existing and potential rights of action and recovery as between herself and Mr. Bishop; that it

(d) precluded Mrs. Bishop from benefitting or from being a creditor under her support order for the duration of the assignment which was terminable only by the Ministry; and that it

(e) effectively divested her of any discretion with respect to any amounts paid or to be paid thereunder to the Ministry.

It is of particular signficance that the source of Mrs. Bishop's right to receipt of social assistance benefits and amounts did not arise from the assignment. Rather, their source arose from the Ontario social assistance legislation itself. Her assignment was merely one of the preconditions attached to her enjoyment of these rights.

When the amount in question was paid by Mr. Bishop to the Ministry in its capacity of legal and equitable creditor, it was not paid on behalf of Mrs. Bishop or for her benefit under the 1975 support order. Rather, the payment was made to discharge Mr. Bishop’s indebtedness to the Ministry which arose in consequence of the decree nisi rather than pursuant to it within the meaning of paragraph 60(b) of the Act; cf, M.N.R. v. Armstrong, [1956] S.C.R. 446, [1956] C.T.C. 93, 56 D.T.C. 1044, at pages 447-48 (C.T.C. 94-95, D.T.C. 1045-46). Mr. Bishop's payments at that time were of no consequence to Mrs. Bishop. It therefore was not of the type contemplated by the subject fiscal provisions. If this were to be the case, clear legislative words would be required for such a consequence.

Counsel for the respondent urged in argument that it is to prevent the avoidance of the income tax, in cases that payments are made to third parties "by whatever means or authority”, that subsection 56.1(1) was introduced in 1974.

In my view the answer to the above lies in the very omission of those words in that provision. The terminology employed

the amount or any part thereof, when paid, shall be deemed, for the purposes of paragraphs 56(1)(b), (c) and (c.1), to have been paid to and received by the taxpayer.

does not encompass matters involving payment “by whatever means or authority" to the extent urged by counsel. These words do not, expressly or by implication, contemplate an intervening substantive act which effectively alters the very characterization of a payment only deemed to have been received.

As noted, Mrs. Bishop neither actually received, nor indirectly benefitted from, Mr. Bishop's payment. Further mere physical possession of these funds would not have rendered them her own property, legally or beneficially. There would have been no benefit to her by virtue of its mere possession, nor would it have been her income. As a matter of law, she was without any standing with respect to the creditor/debtor relationship that existed between the Ministry and Mr. Bishop at the time of the payment.

As to any possible impact that subsection 56(12), reproduced, supra, may have had on the matter, I decline to advance any comment thereon because it was neither specifically raised or argued in the case.

With respect to Mr. Bishop's situation, and having already determined that his lump sum payment produced no benefit to or for Mrs. Bishop and/or the children in her custody, and that it had not been made pursuant to the 1975 decree nisi within the meaning of paragraph 60(b) or (c) of the Act, it is not deductible by him pursuant to subsection 60.1(1) of the Act.

Determination of the question

For the reasons given the Court's determination of the question posed is no.

The appeal of Carol Bishop

With respect to the appeal of Carol Bishop, it is allowed with costs on a party to party basis, and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the amount of $8,994 is not includable in her income for her 1988 taxation year in accordance with subsection 56.1(1), and paragraph 56(1)(b) or 56(1)(c) of the Income Tax Act.

Appeal allowed.