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Citation:2003TCC311
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Date: 20030502
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Docket: 2002-4652(IT)I
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BETWEEN:
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MARY JANE WILKINSON,
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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
Lamarre, J.T.C.C.
[1] This is an appeal under the
informal procedure from a reassessment made by the Minister of
National Revenue ("Minister") pursuant to
paragraph 56(1)(b) and subsection 56.1(4) of the
Income Tax Act ("Act") for the
appellant's 1998 taxation year. In reassessing the appellant,
the Minister increased her income for that year by an amount of
$18,392 representing child support or maintenance payments
received by her in 1998.
[2] The facts upon which the Minister
relied are stated in paragraph 5 of the Reply to the Notice of
Appeal, which reads as follows:
. . .
b) the Appellant and her former
spouse, namely Richard Wilkinson (the "Former Spouse"),
married on June 26, 1981 and divorced on September 14, 1990;
(admitted)
c) at all relevant times, the
Appellant and the Former Spouse had two children, namely Ben,
born August 15, 1986 and Melissa, born November 18, 1983
(the "Children"); (admitted)
d) pursuant to a Divorce Judgment (the
"Judgment") of the Supreme Court of Ontario dated
August 14, 1990, the Former Spouse was required to pay a total of
$500 per month commencing March 1, 1988 to the Appellant as child
support; (admitted)
e) during the 1998 taxation year, the
Appellant received $18,392 as child support pursuant to the
Judgment;
f) the Appellant and the Former
Spouse were living apart at the time the payments were made and
throughout the remainder of the 1998 taxation year;
(admitted)
g) the Judgment was made before May
1997 for the purposes of subsection 56.1(4) of the Income
Tax Act (the "Act"); (admitted)
h) the Appellant and the Former Spouse
did not file with the Minister a joint election in prescribed
form and manner as required in subparagraph 56.1(4)(b)(i) of
the Act, under the definition "Commencement Day";
(admitted)
i) the Judgment was neither
nullified nor replaced by a successive Judgment; (admitted)
j) the Judgment does not have a
'Commencement Day' as defined in subsection 56.1(4) and
paragraph 56(1)(b) of the Act; and
k) during the 1998 taxation year, the
Appellant did not include the child support income in the amount
of $18,392. (admitted)
[3] The Divorce Judgment of the
Supreme Court of Ontario was filed as Exhibit A-1. It is dated
August 14, 1990 and the relevant portions thereof read as
follows:
3. (1) THIS COURT FURTHER ORDERS AND ADJUDGES that commencing
on the 1st day of March, 1988 and on the 1st day of each
subsequent month, the Respondent shall pay to the Petitioner for
the support and maintenance of the children the sum of $250.00
per month, per child until one of the following occurs:
(a) The child ceases to reside full-time with the Petitioner.
"Reside" includes the child living away from home to
attend an educational institution, pursue summer employment or a
vacation, but otherwise maintaining a residence with the
Petitioner;
(b) The child becomes 18 years of age and ceases to be in
full-time attendance at an educational institution;
(c) The child has completed a first post-secondary degree;
(d) The child marries;
(2) The amount of support to be paid by the Respondent
to the Petitioner shall be increased at yearly intervals, the
first of such increase [sic] to take place on the 1st day
of January, 1989 and on the 1st day of January each and every
year thereafter, provided that the amount of such increase shall
be equal to the lesser of:
(a) The percentage increase in the Consumer Price Index
as published by Statistics Canada for the City of Ottawa for the
preceding twelve months; or
(b) The percentage increase in the Respondent's
income for the preceding twelve months.
(3) The Respondent agrees not to show these payments as
a deduction on his income tax and the Petitioner will not include
them as income.
(4) The Respondent and the Petitioner intend this
paragraph to be final except for variation in the event of a
material change or changes in circumstances. If such change or
changes occur, the Respondent or Petitioner seeking the variation
will give to the other a written notice of the variation he or
she is seeking and the Respondent and Petitioner will then confer
either personally or through their respective solicitors to
settle what, if any, variation should be made. If no agreement
has been reached 30 clear days after notice has been given,
variation may be determined at the instance of either the
Respondent or the Petitioner by an application pursuant to the
Family Law Act, or the Divorce Act. The terms of
this agreement are otherwise final.
. . .
5. THIS COURT FURTHER
ORDERS that unless the support order is withdrawn from the Office
of the Director of Support and Custody Enforcement, it shall be
enforced by the Director and amounts owing under the support
order shall be paid to the Director, who shall pay them to the
person to whom they are owed.
[4] In her testimony, the appellant said
that her ex-husband made child support payments regularly from
March 1, 1988 till March 1, 1989. He then disappeared and ceased
paying child support. In the early 1990s, the Office of the
Director of Support and Custody Enforcement of Ontario located
the appellant's ex-husband in British Columbia, and a portion
of his salary was seized in order to make child support payments
in accordance with the Divorce Judgment. The payments thus
received by the appellant did not come to the total amount due
pursuant to the Divorce Judgment. In fact, the appellant
testified that she only received sporadic payments for child
support in that period and that she never knew when such amounts
would be deposited in her bank account. Indeed, in 1998 the
appellant was credited with a large lump sum amount without
knowing where it came from. After making enquiries, she learnt
that the Office of the Director of Support and Custody
Enforcement had seized an amount that was due to her
ex-husband when he left his employment with Immigration
Canada in British Columbia. Although she did not remember
the exact amount deposited in her bank account (she was under the
impression that she had received $16,000), she did concede that
it could have been the amount assessed, namely $18,392. She said
that that amount represented payment of three years of arrears
but did not cover the whole amount of arrears due, and that more
than $12,000 in arrears is still owed.
[5] The main point raised by the appellant
is that the Divorce Judgment specifically stated that the child
support payments were not taxable. This is why she did not
include the lump sum payment received in 1998 in her income for
that year. Furthermore, she stated that it is unfair to be taxed
in one year on payments that should have been paid periodically
over three years. Finally, she said that child support payments
have not been taxable in the hands of recipients since 1997 and
that she received the lump sum payment in question in 1998.
Therefore, in her view, it should not be taxable.
[6] Concerning this last point, it is
paragraph 56(1)(b) of the Act that is applicable in
determining whether child support payments are taxable in the
hands of the recipient. It reads as follows:
SECTION 56: Amounts to be included in income for
year.
(1) Without
restricting the generality of section 3, there shall be included
in computing the income of a taxpayer for a taxation year,
456(1)(b)3
(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;
456.1(4)3
(4)
Definitions. The definitions in this subsection apply in this
section and section 56.
"child support amount" - "child support
amount" means any support amount 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
payer is a natural parent.
"support amount" - "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 and the amount is
receivable under an order of a competent tribunal or under a
written agreement; or
(b) the payer is a natural parent of a child of the
recipient and the amount is receivable under an order made by a
competent tribunal in accordance with the laws of a province.
[7] Therefore, child support payments
will not be included in the recipient's income if they become
receivable under an agreement or order on or after its
commencement day. The commencement day of an agreement or order
is defined in subsection 56.1(4) as follows:
"commencement day" - "commencement
day" at any time of an agreement or order means
(a) where the agreement or order is made after April
1997, the day it is made; and
(b) where the agreement or order is made before May
1997, the day, if any, that is after April 1997 and is the
earliest of
(i) the day specified as the commencement day of the agreement
or order by the payer and recipient under the agreement or order
in a joint election filed with the Minister in prescribed form
and manner,
(ii) where the agreement or order is varied after April 1997
to change the child support amounts payable to the recipient, the
day on which the first payment of the varied amount is required
to be made,
(iii) where a subsequent agreement or order is made after
April 1997, the effect of which is to change the total child
support amounts payable to the recipient by the payer, the
commencement day of the first such subsequent agreement or order,
and
(iv) the day specified in the agreement or order, or any
variation thereof, as the commencement day of the agreement or
order for the purposes of this Act.
[8] Here, the only order pursuant to
which child support amounts were payable was made in August 1990.
That order was never varied and the appellant and her
ex-husband never filed a joint election with the Minister
specifying a commencement day after April 1997 for the order of
August 1990 (such a joint election could not be filed as the
appellant has had no contact with her ex-spouse since the early
1990s). Therefore, the child support payments did not become
receivable under the Divorce Judgment on or after its
commencement day, as there is no commencement day in the
particular circumstances of this case. Consequently, those
payments had to be included in the income of the recipient when
received, pursuant to paragraph 56(1)(b) of the
Act.
[9] Furthermore, it was decided by the
Federal Court of Appeal in The Queen v. Sills, [1985] 2
F.C. 200, that support payments do not change in character as a
result of not being made on time and on a periodic basis as
required by the judgment or agreement under which the amounts are
payable. Heald J. said at page 205:
. . . So long as the agreement provides that the monies are
payable on a periodic basis, the requirement of the paragraph
[56(1)(b)] is met. The payments do not change in character
merely because they are not made on time.
[10] It is also clear from the evidence that
the payment at issue was not made by the ex-husband to release
him from any further liability under the Divorce Judgment, unlike
the situation in M.N.R. v. Armstrong, [1956] S.C.R. 446, a
case in which it was decided that a lump sum payment made in full
settlement of all amounts payable in the future was not
deductible for the payer and therefore not taxable in the hands
of the recipient. Here it is clear that the lump sum paid in 1998
was seized from the ex-husband to pay child support arrears he
owed and that the ex-husband was still liable for the payment of
child support under the Divorce Judgment. He had not been
released from any further liability under the Divorce Judgment by
a subsequent order.
[11] Unfortunately for the appellant, the
payment received in 1998 had to be included in her income for
that year in accordance with paragraph 56(1)(b) and
subsection 56.1(4) of the Act. The fact that the Divorce
Judgment indicated that the child support payments were not
taxable in the hands of the recipient cannot change the explicit
terms of the Act. It is only in the special circumstances
referred to in sections 56.1 and 60.1 of the Act (for
example, where a payer is ordered to make payments to a third
party for the benefit of the supported person) that an agreement
or order may stipulate that such payments will be deductible for
the payer and taxable for the recipient under those two sections,
assuming that the payments otherwise qualify for the deduction
and for inclusion in income. Otherwise, it is not open to a court
to determine in an order that support payments shall not be
taxable for the recipient nor deductible for the payer, if the
Act expressly provides that they are.
[12] As for the appellant's argument
that she has been assessed for more tax on the lump sum received
in 1998 than would have been the case if the amount had been
received over three years, I refer the parties to the retroactive
averaging provisions contained in sections 110.2 and 120.31 of
the Act, which might (but also might not) provide some
relief. (See Milliken v. The Queen, 2002 DTC 1510
(T.C.C.), on the application of these provisions.)
[13] Finally, the appellant testified that
she was assessed interest and penalties for late filing. It is my
understanding that she did not file her 1998 tax return on time
because all her income tax was paid for the year, with the
exception of the lump sum amount in question, which she thought
was not taxable in accordance with her Divorce Judgment. In the
circumstances of this appeal, which I find are particularly harsh
as they were beyond the appellant's control, I strongly
recommend to the appellant that she make an application to the
Minister to obtain a waiver of the late-filing penalty and the
interest pursuant to subsection 220(3.1) of the Act.
Guidelines for the cancellation and waiver of interest and
penalties may be found in Information Circular 92-2, dated March
18, 1992.
[14] The appeal is dismissed.
Signed at Ottawa, Canada, this 2nd day of May 2003.
J.T.C.C.
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