J.G. Spence v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2902, 94 DTC 1545

Archambault, J.T.C.C.:—In this appeal governed by the informal procedure, the appellant is contesting the assessment issued by the Minister of National Revenue (the "Minister") for the 1991 taxation year. The Minister assessed a tax of $3,237.26 pursuant to subsection 180.2(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). Under this section, the appellant was required, in effect, to repay a large portion of the family allowance of $4,616.47 received by his spouse as family allowance benefits because his income exceeded the base exemption amount provided for in Part 1.2 of the Act. There are no disputes with respect to the facts. The appellant admitted at the beginning of the hearing all of the assumptions of facts on which the Minister made the assessment except the conclusion whereby the appellant was obliged to pay the special tax. Following are the assumptions of facts outlined in paragraph 6 or the respondent's reply to the notice of appeal:

(a) the appellant included in the calculation of his income for the 1991 taxation year an amount of $4,616.47 received by his spouse as family allowances benefits;

(b) the appellant claimed a personal tax credit for his wholly dependant children for whom the said family allowances were received;

(c) throughout 1991, the appellant was married and his income for 1991, without reference to family allowances, exceeded that of his spouse, Reva Spence;

(d) throughout 1991, the appellant and his spouse, Reva Spence, were living together; (e) for 1991, the net income of the appellant’s spouse was $17;

(f) the appellant’s net income for the 1991 taxation year, under Part I of the Income Tax Act, was $73,346.70; this amount exceeded the base exemption amount of $51,765 provided for in Part 1.2 of the Act;

(g) as a consequence, the Minister determined that for 1991, the appellant must repay an amount of $3,237.26 (as social benefits repayable) taking into account that the net income of the appellant exceeded the said base exemption amount.

Appellant's position

The appellant is contesting the assessment made by the Minister on the basis that he is suffering unreasonable discrimination because of the particular circumstances of his family. He stated in his notice of appeal that a family with equal or greater income than his could be exempt from this provision if the individual income of each spouse is less than $53,040. Therefore, a total family income of up to $106,080 would not attract this Part 1.2 tax. In the taxpayer's case, he contends that his family is of a traditional type in which one spouse stays at home and relies mostly on the husband's income. His net income for 1991 is $73,346.70 and because it exceeds the base exemption amount of $51,765, he is liable for the Part 1.2 tax. He also states that the Part 1.2 tax represents more than 70 per cent of the family allowance received by his wife ($3,237 over $4,616). Finally, the assessment constitutes also an arbitrary confiscation of property because the family allowance was received by his wife and it is he who has to pay taxes on it.

Respondent's position

The position of the respondent is that Part 1.2 tax is not discriminatory and is not in violation of section 15 of the Canadian Charter of Rights and Freedoms ("Canadian Charter"). Her counsel cited several cases dealing with this issue which has helped the Court to come to a conclusion. I shall refer to them in my analysis.

Analysis

Part 1.2 tax

One of the appellant’s complaints is that the tax he was assessed represents more than 70 per cent of the family allowance received by his wife. To properly understand the scope of this special Part 1.2 tax, it is useful to review the legislative background. Family allowances paid pursuant to the Family Allowances Act, R.S.C. 1985, c. F-1, in 1991 had to be included in the income of the higher income spouse pursuant to subsections 56(5) and 56(6) of the Act as they read for the 1991 taxation year. [1] This requirement for the inclusion of family allowance in the higher income spouse resulted from the 1987 Tax Reform and this measure was intended to make the tax system fairer. [2] Presumably that meant that people with high income would be subject to an effective higher rate of tax on family allowances and in effect, the family allowance would be less for the richer people. [3] These measures were effective starting in the 1988 taxation year. Before that time, the family allowance had to be included in the income of the person who claimed the child exemption. Given that Mr. Spence had in 1991 substantially more income than his spouse, he was required to include in his income for tax purposes the family allowance received by his wife for the benefit of their children.

The Act was further amended applicable to the 1990 taxation year and following to add a special tax under Part 1.2. The key subsection reads as follows:

180.2(1) Every individual (other than a trust) shall pay a tax under this Part for each taxation year that is equal to the lesser of

(a) the aggregate of all amounts each of which is the amount of any pension, supplement or spouse's allowance under the Old Age Security Act or family allowance under the Family Allowances Act included in computing the individual's income under Part I for the year, to the extent that no deduction is allowed under paragraph 60(n) or (p) for the year or any subsequent taxation year in respect of that amount, and

(b) 15 per cent of the amount, if any, by which

(i) the amount that would, but for paragraph 60(w), be the individual's income under Part I for the year

exceeds

(ii) $50,000.

Pursuant to paragraph 117.1 (1 )(b), the $50,000 threshold amount is adjusted for increases in the consumer price index in excess of three per cent. The threshold amount was $51,765 in 1991.

When he introduced this measure in the budget speech of April 27, 1989, the Honourable Michael H. Wilson, then Minister of Finance, gave the following explanation:

I am now proposing that high-income taxpayers repay, through the tax system, old age security and family allowance benefits at the rate of 15 per cent of individual net income exceeding $50,000. . . .

This measure maintains the universal character of these transfer programs. Everyone eligible for these programs will continue to receive their benefits, regardless of income. Those who need assistance most will continue to retain all their benefits. Recipients with high income will retain less. This preserves the social safety net and helps provide a sound financial basis for social programs into the future.

This special tax constitutes a repayment by the higher income spouse of all or part of the family allowance when the individual’s income is greater than, in 1991, $51,765. This provision is also known as the "clawback tax” of family allowances. In effect, the government takes back with one hand what it ave with the other. As can be seen from subsection 180.2(1), the clawback tax works gradually at the rate of 15 per cent of the individual’s income that exceeds the threshold amount up to a maximum of the net family allowance received and included in income. The rate of taxation is therefore not 70 per cent as claimed by the appellant, although he is right in saying that the effective rate of taxation in his particular case, amounts to 70 per cent of the family allowance. [4]

Section 15 of the Canadian Charter

The appelant is not contesting the computation of tax under Part 1.2 of the Act made b the Minister. His main complaint is that this Part 1.2 tax is discriminatory and is in violation of his right to equal benefit of the law provided for in subsection 15(1) of the Canadian Charter. This section reads as follows:

15(1) Every individual is equal before and under the law and has the right to the equal protection and equal benefit of the law without discrimination and, in particular, without discrimination based on race, national or ethnic origin, colour, religion, sex, age or mental or physical disability.

One remedy for a breach of subsection 15(1) of the Canadian Charter is to be found in subsection 52(1) of the Constitution Act, 1982:

52(1) The Constitution of Canada is the supreme law of Canada, and any law that is inconsistent with the provisions of the constitution is, to the extent of the inconsistency, of no force or effect.

Does subsection 180.2(1) infringe the right to equality guaranteed by subsection 15(1) of the Canadian Charter?

If there was any doubt as to whether or not the Canadian Charter applied to the provisions of the Income Tax Act, that issue has been resolved for good in the recent decision of the Supreme Court of Canada in Symes v. Canada, [1993] 4 S.C.R. 695, [1994] 1 C.T.C. 40, 94 D.T.C. 6001. At page 753 (C.T.C. 67, D.T.C. 6021), Mr. Justice lacobucci states the "Income Tax Act is certainly not insulated against all forms of Charter review".

In his reasons for judgment, he also outlines the most recent description of the analytical approach that should be followed when dealing with an equality issue under subsection 15(1) of the Canadian Charter at page 761 (C.T.C. 71-72, D.T.C. 6024):

As my summary of subsection 15(1) jurisprudence above demonstrates, the answer to this question must come in parts. First, it must be determined whether section 63 establishes an inequality: does section 63 draw a distinction (intentionally or otherwise) between the appellant and others, based upon a personal characteristic? Second, if an inequality is found, it must be determined whether the inequality results in discrimination: does the distinction drawn by section 63 have the effect of imposing a burden, obligation or disadvantage not imposed upon others or of withholding or limiting access to opportunities, benefits and advantages available to others? Finally, assuming that both an inequality and discrimination can be found, it must be determined whether the personal characteristic at issue constitutes either an enumerated or analogous ground for the purposes of subsection 15(1) of the Charter.

The first question to be determined is therefore: does subsection 180.2(1) of the Act draw a “distinction” (intentionally or otherwise) between the appellant and others, based upon a “personal characteristic"? The appellant alleges that he is being discriminated because of his "family status". More specifically, he draws the following distinction: he says he is part of a “traditional family” in which the husband is the income earner and the wife is at home raising the children. The other family type which 1 will call for lack of better expression the "modern family”, is a family with children where both husband and wife work. The appellant states that there was an obvious discrimination because as a sole income earner of a traditional family who earns $73,346 of income, he must reimburse $3,237 of the family allowance. The husband and the wife of a modern family could each earn $53,040 without being subject to any clawback of the family allowance.

Is this a distinction based on the family status of the appellant? I do not believe so. In my opinion, the comparative analysis of the appellant is flawed. Indeed, if the appellant earns an income of $73,346, he will be required to make the same refund of family allowance whether the appellant is a husband in a traditional family or one in a modern family. [5] In addition, a traditional family husband earning less than the $51,765 threshold will not be subject to any clawback of family allowance while a modern family husband earning $73,346 will be re- oui red to refund a portion of the family allowances. It seems to me therefore that the Act does not create a different tax burden based on family status. In my view, this indicates that Part 1.2 tax distinguishes taxpayers on the basis of their level of income. My colleagues, Judge Tremblay and Judge Taylor came respectively to a similar conclusion in Thomson v. The Queen (unreported), File No. 92-899 (Tremblay, J.), September 11, 1992 (T.C.C.), and Triantis v. The Queen (unreported), File No. 92-1088, (Taylor, J.), November 25,1992 (T.C.C.). These two cases dealt with the same subsection 180.2(1) but in connection with Old Age Security benefits under the Old Age Security Act, R.S.C. 1985, c. O-9. In these cases, the taxpayers had alleged that there was discrimination based on age, this being a specific ground outlined in subsection 15(1) of the Canadian Charter. In rejecting the allegations of Mr. Thomson, Judge Tremblay made the following statement:

Tax under Part 1.2 of the Income Tax Act is not an additional tax on the total income of senior citizens. It is a recovery system for old age security and family allowance payments from high income recipient.

Part 1.2 excludes from its application low and middle income taxpayers: "these taxpayers do not have to repay any part of the benefits. Part 1.2 has an effect on recipient of old age security benefits (and family allowances) whose net income was higher than $50,000 in 1989 and $50,850 in 1990.

In Triantis, supra, Judge Taylor came to the same conclusion. He stated at page 2 in response to the allegation that there was discrimination on account of age because the appellant was over 65 years of age:

It is quite clear that the impugned legislation creates a distinction between certain classes of taxpayers 65 years and older, but that distinction is based on a level of income as asserted by the respondent.

The distinction being based on the level of income and not on family status, it remains to be determined whether the level of income of an individual constitutes a "personal characteristic". Judge Tremblay in Thomson, supra, also dealt with this issue and he concluded on page 12 of his judgment:

In view of these judgments and many others: George v. A.G. (Canada), 116 N.R. 185, Tanguay c. Ministère de la main d'oeuvre et de la sécurité du revenu, A.G. (Canada) v. Pattinson, 123 N.R. 156, my opinion is that the distinction made in Part 1.2 of the Income Tax Act is not a distinction based on a personal characteristic. it is a distinction based on economic grounds that does not come within section 15 of the Charter.

I see no reasons, in this particular case, to adopt a different conclusion. Section 15 of the Canadian Charter does not apply to the circumstances of the appellant and therefore subsection 180.2(1) must be applied. The appellant did not show that the respondent had made an error in assessing the appellant for the 1991 taxation year.

I can sympathize for the position taken by the appellant who is the father of six children. His position has merits from a tax policy point of view. Indeed, the legislator seems to have adopted his point of view when it amended subsection 180.2(1) to delete any reference to any allowances under the Family Allowances Act (as a consequence of the repeal of this Act for taxation years after 1992). The family allowance program was replaced by a new child tax credit scheme which takes into account the family income instead of the individual income. [6] I realize, however, that this does not reduce his clawback tax for 1991.

For these reasons, the appeal will be dismissed without costs.

Appeal dismissed.