REASONS
FOR JUDGMENT
C. Miller J.
[1]
The difficult provisions of subsections 118(1),
(5) and (5.1) of the Income Tax Act (the “Act”)
are once again before me. I expressed concerns in my Reasons in the case of Ochitwa
v The Queen
vis-à-vis the application of these provisions and how the wording of an order
or agreement can so significantly impact the entitlement to the subsection
118(1) of the Act credit. This case makes that point in spades. Mr.
Letoria claims $11,038 for the eligible dependent amount pursuant to
subparagraph 118(1)(b) of the Act and $2,234 for the child amount
pursuant to subparagraph 118(1)(b.1) of the Act, both of
which the Minister of National Revenue (the “Minister”)
has denied.
[2]
The facts are straightforward.
[3]
The Appellant and his former spouse were
separated throughout 2013 due to the breakdown of their marriage. They had two
children, both minors at the time. They shared custody of the children.
[4]
Mr. Letoria claimed the eligible dependent
amount and the child amount on his 2013 tax return in respect of one of the
children. The Supreme Court of British Columbia issued an order (the “1st Order”) on November 12, 2012. It
required the Appellant to pay his former spouse monthly child support of $962
commencing September 1, 2011 until further order. The Supreme Court of British
Columbia issued a further order (the “2nd
Order”) on October 22, 2013. This order required the Appellant to pay
his former spouse monthly child support of $746 commencing August 1, 2013.
[5]
The wording of the orders that pertains to the
2013 taxation year is critical. The 1st Order filed in January
2013 reads in part as follows:
5.a. The Respondent will pay to the Claimant the sum of $962
per month for the support of the Children of the marriage, payable on the first
day of each and every month, commencing on the first day of September, 2011,
and continuing to the 1st day of each month thereafter until further
order.
b. On or before May 31, 2013 and on May 31 in each and every
year thereafter, for so long as the children are “children
of the marriage”, the Claimant and the Respondent will provide to each other a
copy of all documents required to be produced by them pursuant to Section 21(1)
of the Federal Child Support Guidelines. The Respondent’s basic child support
payments will be adjusted annually to comply with the Federal Child Support
Guidelines commencing on August 1, 2013 and the adjusted amount will be based
on the previous year’s income.
[6]
The 2nd Order reads in part as
follows:
2. By consent the Claimant’s 2012 income for the purposes of
the Federal Child Support Guidelines is $34,006, and the Respondent’s 2012
income for the purposes of the Federal Child Support Guidelines $84,472.
3. By consent and based on the Federal Child Support
Guidelines the Respondent would pay to the Claimant $1,271 a month for the
children and the Claimant would pay to the Respondent $525 a month for the
children.
4. By consent the Respondent will pay to the Claimant the
offset amount of $746 a month for the children commencing August 1, 2013, based
on the 2012 agreed annual incomes. This is decrease from the original Order
amount of $962 a month registered January 4, 2013.
[7]
The pertinent provisions of the Act are
as follows:
118(1)(b) in the case of an individual who does not claim a
deduction for the year because of paragraph 118(1)(a) and who, at any time in
the year,
(i)
is
(A) a person who is unmarried and who does not live in a common-law
partnership, or
(B) a person who is married or in a common-law partnership, who neither
supported nor lived with their spouse or common law-partner and who is not
supported by that spouse or common-law partner, and
(ii) whether alone or jointly with one or more other persons,
maintains a self-contained domestic establishment (in which the individual
lives) and actually supports in that establishment a person who, at that time,
is
(A) except in the case of a child of the individual, resident in Canada,
(B) wholly dependent for support on the individual, or the individual
and the other person or persons, as the case may be,
(C) related to the individual, and
(D) except in the case of a parent or grandparent of the individual, either
under 18 years of age or so dependent by reason of mental or physical
infirmity,
an amount equal to the total of
(iii) $10,527, and
…
(b.1) $2,000 for each child, who is under the age of 18 years at
the end of the taxation year, of the individual and who, by reason of mental or
physical infirmity, is likely to be, for a long and continuous period of
indefinite duration, dependent on others for significantly more assistance in
attending to the child’s personal needs and care, when compared to children of
the same age if
(i) the child ordinarily resides throughout the taxation
year with the individual together with another parent of the child, or
(ii) except if subparagraph (i) applies, the individual
(A) may deduct an amount under paragraph (b) in respect of the child, or
(B) could deduct an amount under paragraph (b) in respect of the child
if
(I)
paragraph (4)(a) and the reference in paragraph
(4)(b) to “or the same domestic establishment” did not apply to the individual
for the taxation year, and
(II)
the child had no income for the year,
…
(5) No amount may be deducted under subsection
(1) in computing an individual’s tax payable under this Part for a taxation
year in respect of a person where the individual is required to pay a support
amount (within the meaning assigned by subsection 56.1(4)) to the individual’s
spouse or common-law partner or former spouse or common-law partner in respect
of the person and the individual
(a) lives separate and apart from the spouse or common-law
partner or former spouse or common-law partner throughout the year because of
the breakdown of their marriage or common-law partnership; or
(b) claims a deduction for the year because of section 60 in
respect of a support amount paid to the spouse or common-law partner or former
spouse or common-law partner.
(5.1) Where, if this Act were read without reference
to this subsection, solely because of the application of subsection (5), no
individual is entitled to a deduction under paragraph (b) or (b.1) of the
description of B in subsection (1) for a taxation year in respect of a child,
subsection (5) shall not apply in respect of that child for that taxation year.
[8]
The effect of these provisions is that if both
parents are required to pay a support amount, then subsection 118(5) of the Act
is inoperative and amounts under subsection 118(1) of the Act are
deductible. The question is therefore ‑ was Mr. Letoria’s
former spouse required to pay a support amount?
[9]
I dealt with a somewhat similar situation in the
case of Ochitwa where I stated:
8. While I cannot disagree with the Respondent’s
conclusions, I am perturbed by the implications that in the same circumstances
of a shared custody arrangement, that simply due to the crafting of an order or
agreement a parent will or will not get the eligible dependant amount. For
example, where there is a shared custody arrangement with two children it
strikes me there are three possible ways to craft the child support, where each
parent earns some income:
1. Each parent agrees to or is ordered to pay support for one
child ($400 for one for example and $300 for the other – net $100.00): both
could claim the eligible dependant amount.
2. As in example 2 above, both parents agree or are ordered
to pay support for both children (one pays $300 for example and one pays $400 –
net $100.00: both can rely on subsection 118(5.1) of the Act kicking out the
effect of subsection 118(5) of the Act).
3. As Mr. Ochitwa did, the higher earning parent is
obligated to pay support for both children (net $100.00: no eligible dependant amount
would be allowed).
9. So, same shared custody arrangement, same fiscal effect,
but different result. This is unfortunate. Why should each parent (where both
parents earn income), in a two or more child shared custody arrangement of at
least two children, not be able to claim the eligible dependant amount – one
child each? I suggest these provisions could be clarified to more clearly
ensure the policy objectives are being met, presumably for the benefit of the
children.
10. Ms. Softley, Respondent’s counsel, suggested the case of
Marc Verones v Her Majesty the Queen,[1] recently issued by the Federal Court
of Appeal, is a complete answer to this case. It too involved a shared custody
arrangement and an order representing a setoff of the amount the appellant in
that case was required to contribute to the childrens’ needs versus the amount
the former spouse was required to contribute in accordance with the Federal
Child Support Guidelines. The court found that:
The whole discussion about the
concept of setoff is a mere distraction from the real issue, ie. whether or not
the appellant is the only parent making the “child support payment” in virtue
of “an order of a competent tribunal or an agreement”, as defined under the
Act.
…
… the setoff concept does not
translate the parents’ respective obligation to contribute to child rearing
into a “support payment” as defined in the Act.
11. I agree that the offset is just a means of determining who
is required to make the payment: it is not an obligation of two support
payments going both ways, but as I illustrated earlier, it could readily have
been drafted to be otherwise.
[10]
The 1st Order makes no mention of any
possible obligation on Mr. Letoria’s former spouse to make any support
payment. Only Mr. Letoria is so obliged. As such, he is clearly caught by the
provisions of subsection 118(5) of the Act which precludes him from
getting the credit where he is “required to pay a
support amount”. He can be relieved of this prohibition, however, under
subsection 118(5.1) of the Act if both he and his former spouse were
required to pay support amounts. In such a case, the legislation recognizes an
unfairness would result in that neither parent could claim a credit and,
therefore, the legislation, in such a situation, renders subsection 118(5) of
the Act inoperative. That is not, however, the situation under the 1st
Order. Mr. Letoria’s former spouse was not required to pay support amounts.
[11]
With respect to the 2nd Order, the
wording has changed to indicate that, based on the Federal Child Support
Guidelines, Mr. Letoria’s former spouse “would
pay to the respondent” and yet in paragraph 4, it is made clear that
Mr. Letoria “will pay to the Claimant the
offset amount”.
[12]
Is paragraph 3 of the 2nd Order, a
requirement that both spouses pay or is it simply an explanation of how the parties
get to the offset amount of $746 which the 2nd Order explicitly
states in paragraph 4 that “the Respondent will pay”?
Mr. Letoria’s agent argued the intent is clear that both parties are
required to pay and, only out of convenience, especially in the Letorias’ case
where the matrimonial dispute was bitter, was there just the one payment. The
agent went on, however, to suggest the agreements were drafted in error in not
being more explicit. I agree. I do not read the 2nd Order as
requiring Ms. Letoria to pay; only Mr. Letoria “will
pay”. That is clear. The rest of the order simply addresses the offset
arrangement.
[13]
The Federal Court of Appeal in the case of Verones
v The Queen
said the following about offset:
6. The whole discussion about the concept of set-off is a
mere distraction from the real issue, i.e. whether or not the appellant is the
only parent making a "child support payment" in virtue of "an
order of a competent tribunal or an agreement", as defined under the Act.
…
8. Once each parent’s obligation vis-à-vis the children is
determined, the higher income parent may be obligated to make child support
payments to the lower income parent as part of his or her performance of said
obligation. However, in the end, the set-off concept does not translate the
parents’ respective obligation to contribute to child rearing into a
"support payment” as defined in the Act.
[14]
It follows that for subsection 118(5.1) of the Act
to benefit Mr. Letoria by rendering subsection 118(5) of the Act
inoperative, his former spouse must be required to pay child support under the
order. She is not. The order is clear that the obligation rests solely with the
higher income earner – Mr. Letoria.
[15]
It is regrettable that those involved in
counselling couples on breakup and drafting their agreements or orders are not
intimately familiar with these tax provisions to ensure their clients get the
credits they deserve.
[16]
This order could have been drafted so as to
impose an obligation on the former spouse. It was not. I cannot pretend that it
was. Mr. Letoria is precluded by the operation of subsection 118(5) of the Act
from claiming this credit and he is not saved by subsection 118(5.1) of the Act,
as his former spouse had no legal obligation imposed by the order to make
support payments.
[17]
The Appeal is dismissed.
Signed at Ottawa, Canada,
this 11th day of September 2015.
“Campbell J. Miller”
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