Halligan v. R., [1996] 2 CTC 2555 (Informal Procedure)

Sarchuk J.T.C.C.: — This is an appeal by Janice Halligan from assessments of tax with respect to the 1990 and 1991 taxation years.

Certain basic facts are not disputed. In 1980, the Appellant and her then husband, Allan Bruce Shaver, (the former spouse) resided in the State of Georgia, U.S.A. On August 13, 1980, they were divorced pursuant to a Total Divorce Judgment and Decree (the Decree) issued by the Superior Court of Houston County, in the state of Georgia, U.S.A. (Exhibit A-l). Prior to the divorce, the parties (each acting upon the advice of counsel) negotiated a Separation Agreement (the Agreement) which included provisions for support payments for the maintenance of the children. This Agreement was incorporated into and forms part of the Decree. Paragraph 4 thereof provides that the former spouse would pay, inter alia, an amount of $250.00 per month in United States dollars per child to the Appellant, commencing August 1, 1980 as support for and maintenance of their two children. Paragraph 8 of the Agreement provides that if the Appellant moved to Canada, the said amounts would be payable either in U.S. dollars or their equivalent in Canadian dollars.

The Appellant has resided in Canada since 1981. In each of the 1990 and 1991 taxation years she received child maintenance payments in the amount of $7,500.00 (Cdn.) in respect of the children referred to in the Decree. The Appellant included these payments in computing her income for each of those taxation years. The Minister of National Revenue (the Minister) assessed the Appellant’s income tax for those years based on the returns as filed. Subsequently, in serving Notices of Objection, the Appellant requested that the Minister reduce the said maintenance income to nil with respect to each taxation year. The Minister, by Notice dated June 3, 1993, confirmed the assessments in respect of both taxation years.

Appellant’s Position

The Appellant contends that the Agreement which was negotiated by her and her former spouse reflected the fact that the amounts payable by him for child maintenance would not be taxable in her hands or be deductible by him in computing income for tax purposes. The Appellant asserts that was because such payments were not subject to taxation in the hands of the custodial parent in the United States of America. She argues that taxation of these payments by the Minister treats them as though they had been negotiated under Canadian law and had been “grossed- up” for income tax purposes, which was not the case.

It is also the Appellant’s position that she was unable to effect an adjustment or variance of these maintenance payments because the agreement was drawn up some place other than in Canada. Her evidence in this regard was that shortly after her return to Canada, she consulted a lawyer and was advised that no variation of the maintenance payments could be obtained in the Ontario Courts, because subsection 11(2) of the Divorce Act! [1] , as it read at that time, did not provide for variation of a support Order except by the Court which granted the Order. The Appellant argues that it is inequitable that the “tax law requires payment of tax without regard for the tax and legal conditions under which the support agreement was arranged, thereby treating all agreements as if they originated in Canada, while at the same time the Family Law does not recognize this agreement as equivalent to one originating in Canada with respect to applications for variances and the amounts payable based on changed material conditions ... ”. The Appellant further adds that she was not aware of certain amendments made to the Divorce Act? [2] in 1985 which broadened the basis for exercising jurisdiction to vary such Orders until she had occasion to consult a lawyer in 1992. The Appellant subsequently engaged a lawyer and an application for a variation of the Agreement with respect to maintenance of the children was filed. The application was heard in September and an Order favourable to her was made by the Ontario Court. She states that although it was retroactive to the date of the application (i.e. 1993), no variation or compensation was awarded regarding “the additional burden imposed upon her by virtue of the application of subsection 56(1) of the Income Tax Act in taxation years 1990 and 1991.”

Based on the foregoing the Appellant contends that if the Agreement was not recognized under Canadian family law then the maintenance payments received pursuant to the Decree should be treated as intended, i.e. as they would have been under the laws of the country where the Decree originated. Accordingly, in the taxation years in issue, the maintenance payments should not be deductible for tax purposes by the non-custodial parent and should not be taxable to the Appellant.

Respondent's Position

The Decree in issue was issued by a competent tribunal within the meaning of paragraph 56(1 )(b) of the Act. For divorces granted after July 1, 1968 but before February 13, 1986 (the coming into force of the Divorce Act, R.S.C. 1985) the recognition of a foreign divorce Decree was based on the domicile of the wife in the jurisdiction of the Court granting the divorce. [3] In this instance, the Respondent contends that no evidence has been provided by the Appellant to suggest that she was not domiciled in Georgia at the time that the divorce was granted or that the Superior Court of Houston, Georgia was not a competent Court under the laws of that jurisdiction to grant a divorce. The Respondent relies upon the assumption in paragraph 8(g) of the Reply to the Notice of Appeal and says that the Appellant has failed to disprove that the Georgia Court was a competent tribunal.

With respect to the effect of the absence of a gross-up of the child support award, the Respondent contends that the payments received for child support must be included in accordance with paragraph 56(1 )(b) of the Act since all the requirements of that section have been met. Counsel contends that the only basis for not requiring that the amounts be included in income would be if the provision of the Act was invalid. In Thibaudeau v. R. the Supreme Court of Canada decided that such was not the case. [4] It is the Respondent’s position that the Decree in issue does not take into consideration the Canadian tax implications of the payment. The Respondent however argues that the principles applied in Thibaudeau are nonetheless relevant. In Thibaudeau, the Supreme Court indicated that any inequity caused by the failure of the Court awarding support to take into consideration the tax implications of the payment are to be resolved by the Family Law system. [5] Furthermore, counsel for the Respondent argues that pursuant to subsection 5(1) of the Divorce Act, a Provincial Court does have jurisdiction in variation proceedings if either spouse is a resident of the Province at the commencement of the proceeding. In this instance, the Appellant is a resident of Ontario and in fact in 1993 sought and was successful in her application before the Ontario Court for a variation of the child support Order to include a gross-up indemnifying her for the tax implications of the Order.

Conclusions:

The relevant provision of the Income Tax Act is paragraph 56(1 )(b) which reads:

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

(b) Alimony. — 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;

There is no dispute that the amounts in issue were an allowance payable on a periodic basis for the maintenance of the children of the marriage; that the recipient (the Appellant) was living apart from the former spouse at the time the payments were received and throughout the remainder of the taxation years in issue and that these amounts were paid pursuant to a Decree of a competent tribunal. Furthermore, in this case it appears fair to conclude that the amount of maintenance payable pursuant to the Decree did not take into consideration any income tax factors. Would it be appropriate to disregard or consider not applicable the principles enunciated in Thibaudeau because of this factual distinction? I think not. I refer in this context to the following comments of Cory J. and Iacobucci J (at S.C.R. 703, C.T.C. 410-11):

In the present appeal, ss. 56(1 )(b) and 60(b) of the Income Tax Act are triggered by the issuance of a support order pursuant to the Divorce Act, R.S.C. 1970, c. D-8. Accordingly, the taxation provisions operate in close conjunction with family law. The amount of income taxable under ss. 56(1 )(b) and 60(b) is determined by the divorce or separation decree and, unless the family law system operates in a defective manner, the amount of child support will include grossing-up calculations to account for the tax liability that the recipient ex-spouse shall incur on the income. If there is any disproportionate displacement of the tax liability between the former spouses (as appears to be the situation befalling Ms. Thibaudeau), the responsibility for this lies not in the Income Tax Act, but in the family law system and the procedures from which the support orders originally flow. This system provides avenues to revisit support orders that may erroneously have failed to take into account the tax consequences of the payments. Therefore, in light of the interaction between the Income Tax Act and the family law statutes, it cannot be said that s. 56(1 )(b) of the Income Tax Act imposes a burden upon the respondent within the meaning of s. 15 jurisprudence.

Since the amount of the maintenance paid to the Appellant could have been adjusted by a Court of competent jurisdiction in Ontario (pursuant to the Divorce Act, 1985) to offset the increased tax burden resulting from the inclusion of these amounts in the Appellant’s taxable income in Canada, I can only conclude based on the rationale in Thibaudeau, that the provisions of paragraph 56(1 )(b) of the Act which require her to include these amounts in income did not infringe section 15 of the Canadian Charter of Rights and Freedoms.

The Appellant’s submissions regarding her inability to move for a variance of the maintenance Order prior to 1992 and her argument that the attraction of tax liability was not within her control were primarily directed to her contention that this Court should “rectify an inequitable situation”. In order to do so, this Court would have to be vested with equitable jurisdiction which it is not. This Court must deal with the facts as they existed in 1990 and 1991 and not as they might have been had the Appellant learned of the amendments to the Divorce Act earlier and moved for a variance of the Agreement as she ultimately did.

In the course of her argument, the Appellant also questioned whether the Decree was issued by a competent tribunal within the meaning of paragraph 56(1 )(b) of the Income Tax Act. Since this issue had not been raised in the pleadings, the parties were given permission to submit written arguments. The Appellant now says that she was not referring to the competency of the Georgia Court to grant the divorce, but rather the competency of that Court to consider the effect of the provisions of the Income Tax Act regarding child support. She is no doubt correct that it was not a matter that the Georgia Court would have concerned itself with since it was not relevant to that proceeding. But that is of little assistance to her cause since what facts the Georgia Court may have considered or was entitled to consider in granting the Decree is not germane to my determination of whether the maintenance payments received by the Appellant in 1990 and 1991 were properly included in her income by the Minister.

For the foregoing reasons, I find that the Minister’s assessment was made in accordance with the relevant provisions of the Income Tax Act. The appeal is dismissed.

Appeal dismissed.