Thomas Barton Howes v. Minister of National Revenue, [1988] 2 CTC 2328, 88 DTC 1585

Kempo, T.C.J.:—Mr. Howes has appealed the respondent's reassessments of his 1982 and 1983 taxation years on the basis that the Minister had erred (a) in disallowing the amount of $433.56 for each of the said two years that was paid by the appellant to his former spouse as alimony or maintenance and (b) in disallowing the further amount of $800 for each of the said two years that was paid by him to or on behalf of David Howes, one of his children. Counsel for the Minister has conceded error only on the first matter.

The Facts

By written separation agreement dated 1981 it was agreed between the appellant and his former spouse that, inter alia:

(Extracts from Exhibit A-T)

4. (a) The spouses are to remain joint guardians and have joint custody of the children, their care, control and education. The children shall reside with the wife.

5. Children

(a) The Husband covenants and agrees that he shall pay to the Wife for the maintenance and support of the children, David, James Howes, Andrew Barton Howes and Bruce Gregson Howes, so long as they are in the wife’s custody, care and control and living in her home, the amount of $200.00 per month per child commencing on the first day of October 1980 and continuing on the first day of each and every month thereafter until such child becomes independent, ceases to be in full time attendance at a high school, college or university, marries or dies, which ever event shall first occur.

(b) When and if each of the children of the marriage, to whom maintenance is presently being paid, commences taking post secondary education, the maintenance payable pursuant to subparagraph (a) shall cease and then only so long as that child attends such post secondary education on a full time basis shall the husband pay for the maintenance of each said child the sum of $100.00 per month.

Mr. Howes testified that a decree nisi was obtained in May of 1981 and that it had been made absolute after three months but that he was unable to locate a copy of the nisi.

Only the child, David, was involved in this appeal. The evidence was that in September of 1981 he began his post-secondary education on a full-time basis at Cariboo College in Kamloops, B.C. in a two-year pre-engineering program. His electrical engineering degree was thereafter completed at a university. In 1982 and 1983 David was living with the appellant in Merritt, B.C. when he was not at Cariboo College. The appellant admitted that David was not living with his mother during these years and testified that he had given him $100 a month for the eight months that he was at the College to help defray his college and living costs. David had worked during the summer months, earning approximately $7,600 in 1982 and $9,300 in 1983. In 1982 and 1983 David would have been 19 and 20 years of age respectively.

In 1985, the appellant was reassessed and denied deduction of the said amounts paid to David presumably for the reasons outlined in the respondent's reply to notice of appeal that, inter alia, David was not then living in the former spouse's home as required by paragraph 5(a) of the separation agreement, supra, and that the payments made to David were not payments made directly to a third party on his behalf, nor were they payments made to the former spouse pursuant to paragraphs 5(a) or 5(b) of the separation agreement or pursuant to an order of a court of competent jurisdiction.

The appellant filed a notice of objection and the deductibility was denied under the provisions of paragraph 60(b) of the Income Tax Act (the "Act"). Following the advice he said he had obtained from the tax department and his lawyer, a consent order was obtained on May 23, 1986 (Exhibit A-3) out of the Supreme Court of British Columbia, pursuant to the Divorce Act, 1985, (hereafter called the “variation order") which provided that:

(Extracts from Exhibit A-3)

THIS COURT ORDERS THAT the Judgment by Way of Decree Nisi pronounced [sic] on the 8th day of May, 1981, be varied by the addition of the following paragraphs:

(a) THIS COURT FURTHER ORDERS THAT when and if each of the children of the marriage to whom maintenance is being paid, commences taking postsecondary education, the maintenance payable, pursuant to subparagraph

(a) of paragraph 5 of the Separation Agreement entered into between the parties on the 14th day of January, 1981, shall cease and then only so long as that child attends such post-secondary education on a full time basis, shall the husband pay for the maintenance of each said child, the sum of $100.00 per month.

(b) THIS COURT FURTHER ORDERS THAT the Respondent is to make all payments due and owing, pursuant to this Order and payable to the children of the marriage, directly to Third Parties, on behalf of the children of the marriage, instead of making such payments to the Petitioner for the children of the marriage;

(d) THIS COURT FURTHER ORDERS THAT the Respondent is to indemnify and save harmless the Petitioner from any and all income tax liabilities that may accrue to her as a result of the variation of the Decree Nisi of Divorce by this Order;

(e) THIS COURT FURTHER ORDERS THAT this Order pronounced on the 10th day of February, 1986 is to have effect as of the 8th day of May, 1981.

The decree nisi which the variation order purported to vary was not produced in evidence and the appellant was unable to say whether it had incorporated the provisions of the separation agreement. His recollection was that it probably had not.

The appellant submitted that the retroactive effect of the 1986 variation order enabled him to say that he had complied with the fiscal legislation during his 1982 and 1983 taxation years.

Applicable Legislation

The applicable words of paragraph 60(b) and section 60.1 of the Act read as follows:

60. There may be deducted in computing a taxpayer's income for a taxation year such of the following amounts as are applicable:

(b) Alimony payments, —an amount paid 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 . . . children of the marriage . . . if he was living apart from. . . his spouse or former spouse to whom he was required to make the payment. . . .

60.1. Where, after May 6, 1974, a decree, order or judgment or written agreement described in paragraph 60(b) . . . or any variation thereof, has been made providing for the periodic payment of an amount by the taxpayer to or for the benefit of a person who is his spouse, former spouse, . . . or for the benefit of children in the custody of such a person, the amount or any part thereof, when paid, shall be deemed, for the purposes of paragraphs 60(b) . . . to have been paid to and received by that person if, at the time the payment was received . . . the taxpayer was living apart from that person.

[Emphasis added.]

Paragraph 17(1)(a) of the Divorce Act provided that:

17. (1) A court of competent jurisdiction may make an order varying, rescinding or suspending, prospectively or retroactively,

(a) a support order or any provision thereof on application by either or both former spouses;

[My Emphasis.]

The Position of the Parties

The Appellant asserted that the above provisions contemplate allowable deductions for payments made to third parties for the benefit of his child, David, and that the third party recipient could also be that particular child. In this respect, he urged, the 1982 and 1983 payments were made "pursuant to" the variation order due to its retroactive effect which obliged him to have made such payments to his child and not to his former spouse. The appellant admitted that the variation order had been obtained specifically to gain this result. He conceded that the words employed in paragraph (b) of the variation order presented a significant ambiguity and was unable to explain just what was meant by the phrase therein that he was to make all "payments due and owing . . . payable to the children . . . directly to third parties on behalf of the children . . .” except to say that they were intended to fit into the requirements of fiscal deductibility.

Counsel for the Respondent submitted firstly that the retroactive provisions of the Divorce Act do not, or should not be allowed to, supersede the provisions of the Income Tax Act and in this respect she relied on Hillis et al. v. The Queen, [1983] C.T.C. 348; 83 D.T.C. 5365 (F.C.A.), Allen C. Bentley v. M.N.R., 11 Tax A.B.C. 413; 54 D.T.C. 510 (T.A.B.) and Hobbs v. M.N.R., [1970] Tax A.B.C. 1187; 70 D.T.C. 1744 (T.A.B.). In any event, and alternatively, even if there was operative fiscal retroactivity, the variation order had not varied the mandate of paragraph 5(a) of the separation agreement wherein the obligation on the appellant to make the payments "pursuant to" the separation agreement rested upon him so long as David was in the wife's custody, care and control and living in her home. Also it was urged that the variation order did not specifically provide that the payments were to be made directly to the child, therefore any payments that had been made in this manner were not "pursuant to" the variation order. Finally, it was submitted that the applicable deduction provisions of the Income Tax Act as they then read did not envision payments when made directly to a child as being payments made to a third party on that child’s behalf.

Analysis

(a) Retroactivity

The basic rule of statutory construction is that there is a presumption against retrospective operation. An expression of the rule may be found in Maxwell on Interpretation of Statutes, 12th ed. (1969) at p. 215:

It is a fundamental rule of English law that no statute shall be construed to have retrospective operation unless such a construction appears very clearly in the terms of the Act, or arises by necessary and distinct implication.

While the presumption has been rebutted in circumstances where the enactment had sought to abolish legal fictions, viz. Barber v. Pigden, [1937] 1 K.B. 664 at 678, the same would not pertain in the reverse unless clearly and unambiguously stated. Le Dain, J. in Re Latif and Canadian Human Rights Commission, [1980] 1 F.C. 687 (C.A.) at 702 reasoned that:

The fact that legislation serves a generally laudable or desirable purpose is not by itself sufficient to displace the rule against retrospective operation.

In Hobbs v. M.N.R., supra, the taxpayer had obtained a variation of a previous order obtained under provincial maintenance legislation to include the higher amounts he had actually paid in the previous three years. At page 1189 (D.T.C. 1745) the presiding Board Member noted that while the variation order was to be retroactive in its effect, he denied the taxpayer's appeal on the basis that the payments could not have been made "pursuant to" a court order which was not then in existence and he followed his previous decision to that effect in Bentley v. M.N.R., supra.

The case of Hillis v. The Queen, supra, similarly involved matters of retrospectivity of provincial legislation and its impact on federal legislation. At page 353 (D.T.C. 5369) Clement, D.J. noted that the Income Tax Act “takes its operation in the realities of the circumstances, subject only to such directives as it may itself prescribe” and at page 354 (D.T.C. 5370) he noted that the retrospective operation of the disclaimers could not affect or modify the operation of the provincial Intestate Succession Act in that having been done ex post facto there was "no justification or need to assign to [them] a retrospective application [and that they] took effect in reality upon their execution" which was after the subject prescribed period. Pratte, J. at page 358 (D.T.C. 5374) noted that the “effects of the disclaimers and the court order, in spite of their retroactivity, did not exist as long as [they] were not executed and the Court order was not pronounced" and that the effects arose only when so executed and pronounced, respectively, which was after the prescribed time period in question. Heald, J. at page 361 (D.T.C. 5376) did not subscribe to the above analysis and conclusions because of the imperatives which he found to exist in the statutory deeming provisions of the Dependants' Relief Act taken together with its objectives and intent. He noted at page 362 (D.T.C. 5377) that a restrictive interpretation would have subjected the intended beneficiaries to "a number of contingencies beyond their control”. However no such problems were presented in the case before me as the appellant has shown no impediment in seeking and obtaining variation orders on a timely basis in response to current circumstances.

In my view the above three cases are distinguishable. The Divorce Act and the Income Tax Act are both federal enactments. Section 60.1 of the Income Tax Act by the phrase "or any variation thereof" prima facie complements and integrates with the effect of the words “an order varying . . . retroactively" as used in subsection 17(1) of the Divorce Act. In any event there is no clear imperative that the operative fiscal provisions were intended to derogate from those of the Divorce Act.

The operative retrospectivity here arises both by virtue of the statutory power to make such orders as granted by the Divorce Act and the pronouncement to that effect in the variation order itself. Obviously the effect thereof does not, on its surface, accord with the fiscal imperative that an amount, to be deductible, must be paid “in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement". Clearly the amounts that were paid by the appellant in 1982 and 1983 were not then paid "pursuant to”, or paid to carry out the terms of, the separation agreement at that time. A fiction was created essentially from the 1986 retrospective variation order, which fiction was being relied upon by the appellant.

In my view the retrospectivity of variation orders made under the Divorce Act do impact on the phrases "pursuant to" in subsection 60(b) and "or any variation thereof" in section 60.1 of the Income Tax Act. To hold otherwise would be to ignore the very words used in the Income Tax Act itself. This situation did not arise in Hillis and section 60.1 was not in the fiscal legislation when Hobbs and Bentley were decided.

(b) Whether Amounts Paid Pursuant to the Variation Order

The 1986 variation order purported to vary the 1981 decree nisi by adding matters that one must conclude were not there before. Clause (a) of the variation order referred to paragraph 5(a) of the separation agreement but it did not rescind that paragraph. Clause (b) of the order was an attempt at redirection of payments to the children according to the appellant's testimony because that was the only reason why it was sought. However I concur with counsel for the respondent's observation that the effect of clause (a) of the variation order was to incorporate paragraph 5(a) of the separation agreement, a term of which clearly provided that payment of the monthly amount was conditional on the child living in the home of the former spouse. Even though paragraph 5(b) of the separation agreement was substantively incorporated into the words of clause (a) of the variation order, the condition that the child was then to be living in the home of the former spouse remained intact and unaffected. While this may have been an oversight on the part of the drafters of the variation order, for fiscal purposes it negates the payments as having been made "pursuant to" the variation order.

The Federal Court of Appeal in The Queen v. Barbara Sills, [1985] 1 C.T.C. 49 at 52; 85 D.T.C. 5096 at 5098 noted:

The Shorter Oxford Dictionary defines "pursuant", inter alia, as “in accordance with”. The Fifth Edition of Black’s Law Dictionary defines “pursuant”, inter alia, as "to execute or carry out in accordance with or by reason of something.” It also defines "pursuant to”, inter alia, as follows: “pursuant to" means “in the course of carrying out; in conformance to or agreement with; according to”.

That the appellant had made support payments to his child, David, while living with him was undoubtedly commendable; but they were not, in context of the above analysis, “pursuant to" either the separation agreement or the variation order. The parties had agreed to joint custody of the children, that the children were to live with the former spouse (thus placing them under her primary management and care) and that child support would be paid under those circumstances. The variation order retrospectively varied the designated recipient of the child support payments; it did not vary the conditions under which the payments were to have been made, nor the custodial arrangement, nor the place where the children were to live. Accordingly when the child support payments were paid to David when he was no longer living with his mother, they were not paid pursuant to the separation agreement or the decree nisi as required by subsection 60(b) or section 60.1 of the Income Tax Act either initially or as retrospectively varied.

The appellant's position was essentially argued on the single narrow premise as to whether a child of the marriage could be the third party recipient on a plain meaning of the words used in section 60.1 of the Act. However he had turned a blind eye to the actual conditions underlying his obligation to pay, relying on the simple belief that the agreed joint custody arrangement would have resolved that impediment. Given this situation no definitive answer to the appellant's direct question is called for because the agreed to living condition attached to the payment had not been met.

Conclusion

The appeals are to be allowed in part, without costs, only as to the amounts that the respondent had conceded at the outset of these reasons for judgment as being properly deductible. In this respect therefore the matter is to be referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant be allowed a deduction of $433.56 pursuant to paragraph 60(b) of the Income Tax Act for each of the 1982 and 1983 taxation years.

Appeal allowed in part.