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Citation: 2003TCC177
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Date: 20030328
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Docket: 2002-1036(IT)I
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BETWEEN:
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CYNTHIA LUCAS,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Bell, J.T.C.C.
ISSUE:
[1] The issue is whether the amount of
$8,655 included in the Appellant's 1999 taxation year income
was properly so included.
FACTS:
[2] The Appellant testified that she
was separated from her husband, David Kenneth Lucas
("David") in the fall of 1981. She introduced in
evidence a document dated September 15, 1988 entitled
"Minutes of Settlement" between her and David which
provided that David:
Shall pay to the plaintiff for the support of the child of the
marriage, namely, Mark Ashley Lucas, who was born on December 5,
1979, the following amounts:
i)
$125.00 on the 19th and 26th of September, and
ii) $500.00
per month commencing on October 1, 1988
and continuing on the first day of each month thereafter.
iii) The
support payment referred to herein shall be indexed in accordance
with the provisions of the Family Law Act;
Although that document refers to a Mastercard account which
was in arrears "as at the date of separation" no other
reference to the parties living separate and apart was made.
[3] The Appellant, in her 1999
taxation year, received the amount of $8,655 aforesaid as the
result of David's obligation aforesaid to pay for the support
of the child.
[4] Peculiarly, another document dated
September 15, 1988, bearing no description as to what it is,
contains these three recitals:
WHEREAS the parties hereto are husband and wife;
AND WHEREAS the parties have entered into Minutes of
Settlement in District Court of Ontario Action No. 3500/87 dated
the 15 day of Sept., 1988 ("the Minutes");
AND WHEREAS the parties are desirous of resolving any other
matters in issue between them not otherwise dealt with in the
said Minutes;
No requirement that the parties live separate and apart is
included therein. However, it refers to the above Minutes of
Settlement which, as above stated, speaks of "the date of
separation". An Order of the District Court of Ontario dated
September 28, 1988 provides that David shall make the payments
described in the Minutes of Settlement. It contains no order that
the parties live separate and apart. It does contain a paragraph
to the effect that the Appellant shall have custody of the child
subject to reasonable access in favour of David, indicating that
the Appellant and David were living separate and apart.
[5] On cross-examination, the
Appellant stated that she had not entered into a joint election
with David respecting child support payments. She also stated
that the aforesaid court order was not varied. She stated further
that there was no separation agreement after April, 1997
regarding child support.
[6] At the hearing I ordered written
submissions from the Appellant and Respondent's counsel.
[7] The Appellant, in her written
submissions, said:
The Income Tax Act prior to 1997 revision required that the
separation agreement provides that the parties live separate and
apart.
[8] She referred to paragraph
56(1)(b) of the Income Tax Act
("Act") which, before the 1997 amendments, read
as follows:
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.
[9] She then referred to The
Practitioner's Income Tax Act, 15th Edition 1999 at 305,
which states:
also with respect to marriage breakdowns that occurred before
1993, in order for a recipient to be taxed on support amounts
received, the payer and the recipient had to live apart pursuant
to their divorce, judicial separation or written separation
agreement. The application rules ensure that the new regime does
not subject to tax amounts that were exempt because this
particular requirement was not met in the hands of the
recipients.
[10] The Appellant then referred to a
Canadian Tax Reporter Commentary described as August 2001 Release
by CCH Canadian Limited. It reads, in part, as follows;
Former paragraph 56(1)(b), applicable to amounts
received with respect to the breakdown of a marriage before 1993,
required that the payments be made pursuant to a divorce,
judicial separation or written separation agreement which
provided that the parties would live separate and apart. Where an
agreement does not provide that the parties live separate and
apart, it is not viewed as a separation agreement. Accordingly,
it was possible to structure an arrangement such that payment
would be non-deductible and non-taxable. Under the new test, the
taxpayer must be living separate and apart from his or her spouse
"because of the breakdown of the taxpayer's
marriage" rather than because of a written separation
agreement. This amendment ensures that it is no longer possible
to structure the arrangement such that payments are non-taxable
and non-deductible.
RESPONDENT'S SUBMISSIONS:
[11] The Respondent submitted that it is
implicit from the terms of the Order and the Minutes of
Settlement and agreement dated September 15, 1988 upon which the
Order was made that the parties were living separate and apart.
She referred to the specific reference in the Minutes of
Settlement to "the date of separation".
[12] The Respondent submitted, as a result,
that although not specifically named as such, the agreement may
be considered to be a written separation agreement. Accordingly,
she submitted that the aforesaid payments received pursuant to
the Order were not exempt from income inclusion under paragraph
56(1)(b) as it applies to pre-1993 agreements. She
submitted, in the alternative, that the payments received by the
Appellant were taxable under the old regime pursuant to paragraph
56(1)(c) applicable to amounts received after 1996 and
paragraph 56(1)(c.1) applicable to pre-1993 agreements.
Those provisions read as follows:
(c) maintenance - an amount received by the taxpayer in
the year as an allowance payable on a periodic basis for the
maintenance of the taxpayer, children of the taxpayer or both the
taxpayer and the children if
(i) at the time the amount was received and throughout the
remainder of the year the taxpayer was living separate and apart
from the person who was required to make the payment,
(ii) the person who was required to make the payment is the
natural parent of a child of the taxpayer, and
(iii) the amount was received under an order made by a
competent tribunal in accordance with the laws of a province;
(c.1) idem - any amount received by the taxpayer in the
year, pursuant to an order made by a competent tribunal in
accordance with the laws of a province, as an allowance payable
on a periodic basis for the maintenance of the taxpayer, the
children of the taxpayer or both the taxpayer and the children of
the taxpayer if
(i) the order
was made
(A) after February 10,
1988, or
(B) before February 11,
1988 and the taxpayer and the person required to pay the amount
jointly elected in writing before the end of the year to have
this paragraph and paragraph 60(c.1) apply with respect to all
those amounts,
(ii) at the time the amount was received and throughout the
remainder of the year, the taxpayer was living apart from the
person required to pay the amount, and
(iii) the person required to pay the amount is a person of the
opposite sex who
(A) before the date of the order cohabited with the taxpayer
in a conjugal relationship, or
(B) is the natural parent of a child of the taxpayer.
[13] The Respondent submitted that these
provisions do not require that the parties live separate and
apart pursuant to a divorce, judicial separation or written
separation agreement but that the factual situation that they
live separate and apart is sufficient for a support amount to be
included by those provisions.
[14] The Respondent then submitted that the
definition of "support amount" does not require the
Order to stipulate that the Appellant and the payer live separate
and apart. It reads as follows:
"support amount" means an amount payable or
receivable as an allowance on a periodic basis for the
maintenance of the recipient, children of the recipient or both
the recipient and children of the recipient, if the recipient has
discretion as to the use of the amount, and
(a) the recipient is the spouse or former spouse of the payer,
the recipient and payer are living separate and apart because of
the breakdown of their marriage or common-law partnership and the
amount is receivable under an order of a competent tribunal or
under a written agreement;
[15] She then said that this was a
"child support amount" which is defined to mean:
any support amount that is not that is not identified in the
agreement or order under which it is receivable as being solely
for the support of a recipient who is a spouse or former spouse
of the payer or who is a parent of a child of whom the parent is
a natural parent.
[16] Counsel then referred to paragraph
56(1)(b) which includes certain payments to be included in
income by the recipient, those payments including
"Support". It is defined as follows:
(b) Support -the total of all amounts each of which is
an amount determined by the formula
A - (B + C)
where
A is the total of
all amounts each of which is a support amount received after 1996
and before the end of the year by the taxpayer from a particular
person where the taxpayer and the particular person were living
separate and apart at the time the amount was received,
B is the
total of all amounts each of which is a child support amount that
became receivable by the taxpayer from the particular person
under an agreement or order on or after its commencement day and
before the end of the year in respect of a period that began on
or after its commencement day, and
C is the total of
all amounts each of which is a support amount received after 1996
by the taxpayer from the particular person and included in the
taxpayer's income for a preceding taxation year;
[17] She said, in effect, that the sum of
$8,655 is included in A, that the amount in B is zero because
there was no "commencement day", that only pertaining
to post-April, 1997 periods, and that the amount in C is zero
because the support amount of $8,655 had not been included in the
Appellant's income for a preceding taxation year.
Accordingly, she submits, the sum of $8,655 must be included in
the Appellant's 1999 taxation year in accordance with
paragraph 56(1)(b) of the Act.
[18] Respondent's counsel also submitted
that she did not agree with the Appellant's submission
respecting paragraph 56(1)(b) as it applied to pre-1993
agreements on the basis that that provision did not require a
specific clause in a written agreement stipulating that the
parties live separate and apart. She referred to Simpson v.
Canada, [1996] T.C.J. No. 391 in which Rip, J. stated:
... I do not agree with my former colleague Goetz T.C.J.
that for maintenance payments to be included in income, it is a
requirement of paragraph 56(1)(b) that payments must be
received pursuant to a written agreement that contains a
provision requiring that the parties live separate and apart.
...
[19] The Respondent submitted that it was
implicit from the terms of the Order and the Minutes of
Settlement and Agreement dated September 15, 1988 that the
parties were living separate and apart and that the agreement may
"be considered to be a written separation
agreement".
ANALYSIS AND CONCLUSION:
[20] I agree with Bowman, A.C.J.T.C. as
stated in Kovarik v. Canada, [2001] T.C.J. No. 181
that:
Under what I may describe as the old régime (pre May
1997) spouses making payments to separated or ex spouses for the
support of children could deduct those payments and the recipient
had to include them in income. Following the decision of the
Supreme Court of Canada in Thibaudeau v. Canada, [1995]
2 S.C.R. 627, the legislation changed. So long as a pre May
1997 agreement remained unchanged the deduction/inclusion system
under the old régime prevailed.
If a new agreement were entered into, or an old agreement was
changed in a particular way, the deduction/inclusion
régime ceased and only payments made up to the
"commencement day", as defined, were deductible by the
payor and includible by the payee.
[21] Accordingly if the Appellant is not
correct in her submission that the amount of $8,655 is not
includable in income because she and David did not live apart
pursuant to a "divorce, judicial separation or written
separation agreement", her appeal will fail.
[22] In spite of what the Appellant cited as
support for her position I do not accept her submission. I agree
with Judge Rip's above quoted statement in Simpson
which he expanded as follows:
I prefer the view of Mogan T.C.J. in Lay v. The Queen,
95 DTC 272 at p. 275 that since:
...there is no provision in paragraph 60(b) that the
written agreement must contain a covenant to live separate and
apart, although I would clearly agree with Judge Goetz that it is
an essential ingredient that the parties have agreed to live
separate and apart. Paragraph 60(b) simply states
"... if he was living apart from, and was separated pursuant
to a ... written separation agreement from, his spouse ...".
In this appeal, it is implicit from the terms of the two written
agreements that the Appellant and his wife have agreed to live
apart.
[23] The evidence is clear that the
Appellant and David did live apart at the time of the Minutes of
Settlement, Court Order and ancillary agreement. No new agreement
was entered into, the extant agreements were not changed, no new
Court Order was issued and the existing Court Order was not
altered.
[24] Accordingly, amounts received by the
Appellant pursuant to the Court Order were, and are, includable
in her income. Her appeal is, therefore, dismissed.
Signed at Ottawa, Canada this 28th day of March, 2003.
J.T.C.C.
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