Hamer v. R., [1998] 3 CTC 2030, 97 DTC 1273

Dussault T.C.J.:

These appeals were heard together under the informal procedure. In the case of Denyse Hamer, the appeals were from assessments for her 1990 to 1994 taxation years inclusive. In the case of Danielle Serra, they were appeals from assessments for her 1990 to 1993 taxation years inclusive.

During the. years at issue Denyse Hamer received weekly support pursuant to a divorce decree exclusively for the maintenance of their three children who were in her custody.

Danielle Serra received from her ex-husband monthly support pursuant to a divorce decree for the sole benefit of their daughter, who was in her custody. She also received from her former de facto spouse under a custody order monthly support for their two children who were in her custody.

The appellants challenged the inclusion in their income of money received as support paid exclusively for the benefit or maintenance of their children. In view of this limitation, the appellants argued that this money did not belong to them and they could not use it at their discretion. Since they had no such discretion, they considered that the money in question could not be regarded as an “allowance” under s. 56(12) of the Income Tax Act (“the Act”), and so did not have to be included in their income pursuant to s. 56(1 )(£>), (c) or (c.l) of the Act.

The two appellants testified regarding the money received each year and the use made by them of it for the benefit of their children. It was clear from their testimony that each of them decided on the allocation which seemed appropriate to pay current family expenses (housing, food, clothing, day care, recreation and so on) for the children for the benefit of whom the support was paid.

Counsel for the appellants first analysed the characteristic features of the obligation of support in civil law and then the child support proceeding in the event of a divorce, emphasizing the fact that this proceeding resulted from a right possessed by the children although it was usually exercised in such cases by the parent to whom custody was awarded and to whom the support awarded was payable. [1]

Referring to several judgments in which a child’s right as an alimony creditor has been recognized and sanctioned, [2] counsel for the appellants argued that the amounts they received for the benefit or maintenance of their children did not belong to the appellants and that they could not use them for other purposes: such use would be penalized by the court. Counsel for the appellants accordingly argued that the limitations inherent in the use of the payments received and the fact that the appellants did not have complete enjoyment of the money meant that it also could not be regarded as income under the rules laid down in Sura [3] and Poynton. [4]

Referring also to the judgments in Pascoe [5] and Gagnon [6] and to the adoption by Parliament of s. 56(12), counsel for the appellants argued that the fact that the appellants could not dispose of the money received completely for their benefit within the meaning of the judgment in Gagnon or use that money at their discretion within the meaning of that term in s. 56(12) of the Act implied that it also could not be regarded as an allowance. In this connection, counsel for the appellants noted the limited meaning given to the expression “pension alimentaire” (the meaning of the English word “alimony”) by the Federal Court of Appeal in Gagnon’ [7] as applying only to an alimony which one spouse must pay another from whom he or she is separated during the marriage. In any other cases, in order to be taxable it must be possible to regard the payments as an “allowance”.

Counsel for the appellants concluded from the foregoing that payments for the exclusive benefit of the children were not covered by s. 56(1 )(/>), (c) or (c. 1 ) of the Act, though these continued to be applicable in so far as the conditions provided for in ss. 56.1(2) and 60.1(2) were met. In the submission of counsel for the appellants the result sought is thus not absurd, even though it was not contemplated, and clear legislative language must be given effect as the Federal Court of Appeal did in Armstrong [8] in deciding on the application of s. 56(12) to determine the scope of s. 60.1(1) of the Act. Finally, counsel for the appellants maintained that his interpretation led to an equitable outcome and he relied on the residual presumption in the taxpayers’ favour proposed in Notre-Dame de Bon Secours? [9] in so far as two interpretations could prove to be equally valid.

Counsel for the respondent, for her part, argued that the Act nowhere requires that a person be owner of the amounts received as an alimony or allowance payable on a periodic basis for such amounts to be taxable in the hands of the recipients. Thus, for example, s. 56(1)(b) deals with money received in this way by the recipient parent, whether for the maintenance of the parent, the children or both the parent and the children. Accordingly, it does not matter whether the money was received as owner or as trustee or agent or in any other capacity for the benefit of the children, so long as it is an allowance received for their maintenance. Although the word “allowance” is not defined in the Act, counsel for the respondent acknowledged that the limitation imposed by s. 56(12) is significant since to be so designated in the hands of the person receiving it that person must have discretion as to its use. However, she submitted, the word discretion is not synonymous with complete or absolute discretion to the point where no limitation is placed on it. In fact, it is by reference to the judgments ordering the payment of the support to the appellants, and by examining whether they con- tain provisions which specify the type of expenses that the money paid and received is intended to cover, that it can be determined whether they had discretion as to the use of the money received. As these judgments contain no indication to this effect and the evidence has shown that the appellants alone decided on how the money received to cover expenses they deemed necessary to meet the children’s needs would be used, counsel for the respondent concluded that the appellants did have discretion as to the use of this money.

Reviewing the problems raised from the Federal Court of Appeal judgment in Pascoe to that of the Supreme Court of Canada in Gagnon, counsel for the respondent then argued, with budgetary documents and explanatory notes in support, [10] that the adoption of s. 56(12) and the amendments to ss. 56.1 and 60.1 in 1988 were intended essentially to address the problems relating to payments to third parties and payments to former spouses to cover or reimburse specified expenses. Accordingly, she said, the fact that the principle stated in Pascoe was reinstated by the adoption of these new provisions essentially means that this type of payment (with respect to which discretion as to the use had been eliminated) is excluded from allowances subject to the inclusion and deduction provisions in ss. 56 and 60 and that this type of payment is treated in accordance with the new conditions laid down in ss. 56.1 and 60.1 of the Act. Counsel for the respondent stated that there was nothing in the case law or elsewhere to indicate that by adopting s. 56(12) Parliament intended to make alimony or allowances paid for the benefit of children non-taxable and non-deductible. She argued that there was no indication Parliament intended to make such a significant change, having the effect of rendering s. 56(1 )(£?), in particular, meaningless. She relied on the writers Driedger [11] and Côté [12] as a basis for the proposition that it is preferable to adopt an interpretation that gives effect to the

provisions of the Act as a whole, which she considered could be done without even having to depart from the ordinary meaning of the words used.

In short, counsel for the respondent argued that the appellants received money which they had the discretion to use so long as they used it for the specific purpose for which it was paid. In fact, it was shown that the appellants created expense items which could vary depending on the circumstances and that they had the power to decide from month to month how much would be allocated to a particular type of expense. In this sense, she argued, the appellants did not have to account to anyone and the possible control under the civil law was simply not relevant in the circumstances, since the amounts could be used as they wished provided the ultimate purpose thereof was achieved by them. In support of this argument counsel for the respondent referred to the decisions in Assa/, [13] Fontaine [14] and Trépanier) [15] 15

Finally, counsel for the respondent challenged the validity of the decision in Armstrong and also considered it was inapplicable to the instant case since the Court had to deal with the application of a different provision, namely s. 60.1 of the Act.

1 I agree with the respondent’s position. Neither the application of the

usual rules of interpretation nor a historical analysis can lead to the result sought by the appellants, however equitable it may seem.

First, s. 56(1) provides for the specific inclusion in a taxpayer’s income of the amounts listed in the various paragraphs of that section, without limiting the generality of s. 3.

1 Section 56( 1 )(Z>) [16] relates specifically to an amount received by a spouse

or former spouse “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” provided the other condi tions stated in the paragraph are met. Paragraphs (c) and (c. 1 )’ [17] cover similar payments in different circumstances. Nothing in these provisions requires that the spouse or former spouse receiving amounts for the benefit or maintenance of children in his or her custody be the owner or be himself or herself the creditor of the alimony. The Civil Code of Quebec^ [18] provides that proceedings for the support of a minor child may be instituted by the holder of parental authority and that the alimony or allowance may be ordered payable to the person who has custody of the child. The Divorce Act}? [19] also provides that the spouse or former spouse may apply to a tribunal for a support order for dependent children. Certainly, an alimony or an allowance paid pursuant to a judgment or order for the maintenance of children only gives a spouse or former spouse receiving it authority to use it in his or her discretion while achieving its ultimate purpose, unless the judgment or order makes some other provision by indicating or specifying the purpose to which it must be allocated or how it should be used for the children’s benefit. The usual and consistent interpretation of s. 56(12) in its context leads to the conclusion that the purpose of adopting it was simply to exclude from the word “allowance” for the purposes of s. 56(1 )(£?), (c) and

(c.1) and corresponding paragraphs of s. 60 any amount the use of which was specified in this way, with the obvious. consequence of substituting the payer’s wishes for the free will of the recipient as to the manner in which the money should be used. I do not think that s. 56(12) can be given a wider meaning, the effect of which would be to neutralize the application of s. 56(1 )(/>), (c) and (c.1) and of the corresponding paragraphs of s. 60 simply because an alimony or allowance is paid for the maintenance of children only.

Where the interpretation of tax legislation is in question, it is quite clear that the residual presumption in the taxpayer’s favour cannot be used to support a result which seems abnormal, even before considering what the Supreme Court of Canada recognized, inter alia in Stubart [20] as the modern rule of interpretation as stated by the writer E.A. Dreidger [21] as follows:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act and the intention of Parliament. 22 [22]

The application of this rule requires reference to what the writer P.A. Côté describes in his text The Interpretation of Legislation in Canada [23] ^ as the rule that the law is coherent and systematic, a rule which has long been recognized by the authorities. In his analysis the writer emphasizes the need to analyse a legislative provision in its context, and he refers inter alia to the following:

In City of Victoria v. Bishop of Vancouver Island, Lord Atkinson admitted the context’s importance in determining the meaning of the words:

In the construction of statutes their words must be interpreted in their ordinary grammatical sense, unless there be something in the context, or in the object of the statute in which they occur, or in the circumstances with reference to which they are issued, to show that they were used in a special sense different from their ordinary grammatical sense. ^ [24]

And Justice Kellock, in R. v. Assessor of the Town of Sunny Brae, stated the principle in this way:

A statute is to be construed, if at all possible, “so that there may be no repugnancy or inconsistency between its portions or members”. ^ [25]

Finally, in R. v. Nabis, ^ [26] Beetz J. recalled that “...legal interpretation must tend to integrate various enactments into a coherent system rather than towards their discontinuity”, [27] ?

Arguing, as counsel for the appellants did, that they could not have used money received for the benefit or maintenance of their children in their discretion because they had to comply with the ultimate purpose thereof gives the phrase “has discretion as to the use” an absolute meaning which would automatically neutralize the application of s. 56(1 )(Z?), (c) or (c.1) and the corresponding paragraphs of s. 60, unless ss. 56.1(2) and 60.1(2) cannot apply in the circumstances. Such an outcome not only seems inconsistent with the context and the wording of various provisions providing for the deduction and inclusion of alimony or other allowances paid and received for the benefit of children, it would lead to a conclusion that Parliament deliberately used a method of the most contorted and hermetic kind to attain this. result.

Only the appellants could control the use of the money they received, decide how it was allocated for maintenance of the children, set priorities and decide on how much would be spent on each type of expense. As the appellants had this power of controlling the use of the money received and in fact exercised this power, the Court can only conclude that they could use the money received in their discretion, and hence that what they received was allowances within the meaning of s. 56(12) for the purposes of applying s. 56(1 )(/?), (c) or (c.1) of the Act. As such, these allowances must be included in their respective incomes. What is more, the control over the money received and their power to dispose of it in my opinion gives it the nature of income in their hands under the rules. laid down in Sura and Poynton, if indeed this requirement needs to be added to the clear wording of s. 56(1), which stipulates specifically and unambiguously that income from alimony and other allowances received in the circumstances described in paras. (b), (c) and (c.1) of that provision should be included. Furthermore, the mere possibility that an account would have to be rendered or that there might be control a posteriori does not in any way alter the situation.

As to the question whether the appellants could dispose of the money received for their own benefit, some would argue, as their counsel did, that this is not so because this money was only paid for the children’s maintenance. However, this approach seems to me somewhat narrow if we take into account the fact that the money received was for the specific purpose of relieving the financial burden resulting from the necessity of maintaining the children in their custody. This is a more than theoretical economic benefit.

As with the usual and consistent interpretation of s. 56(12), analysis of the historical background to its adoption leads to the conclusion that Parliament only intended to neutralize the effects of the Supreme Court of Canada judgment in Gagnon and return to the parameters of an allowance as earlier developed by the courts, in particular the Federal Court of Appeal in Pascoe. This can be seen simply by referring to the explanatory notes to legislation (Bill C-139) relating to income tax tabled in June 1988. [28] The comment on the introduction of s. 56(12) reads as follows:

Paragraphs 56(1 )(b), (c) and (0.1) of the Act provide for the inclusion of certain amounts paid as an allowance in respect of alimony or the maintenance of the recipient, children of the recipient or both the recipient and children of the recipient. As a result of the Supreme Court of Canada decision, Gagnon vs. The Minister of National Revenue in which the definition of allowance was modified, payments which the recipient is required by the terms of a decree, order, judgement or written agreement to use to defray specific expenses, must now be included in computing the recipient’s income. Certain third party payments must also be included in computing the income of the beneficiary of these payments even where the parties to the court order or separation agreement providing for the payment had not expressly agreed to this treatment.

New subsection 56(12) restores the definition of allowance as it was understood prior to the Gagnon decision. For the purposes of paragraphs 56(1 )(b), (c) and (0.1) and 60(b), (c) and (0.1) an “allowance” will not include any amount that is received by a person unless that person has discretion as to the use of the amount, This provision is subject to subsections 56.1(2) and 60.1(2) which, under certain conditions, deem amounts which are not otherwise considered allowances to have been paid and received as an allowance.

This amendment is applicable with respect to decrees, orders, judgements and written agreements made or entered into before March 28, 1986 or after 1987, except that, for the 1986 and 1987 taxation years, the exclusion from an “allowance” of amounts over which the recipient does not have discretion as to their use shall apply only for the purposes of paragraphs 56(1 )(b), (c) and (0.1). While the recipient is not required to include such amounts in computing income, the payor of such amounts will, for the 1986 and 1987 taxation years, be permitted to deduct such amounts in accordance with the Gagnon?? [29] definition of “allowance”.

Based on the foregoing I have come to the conclusion that the appellants cannot obtain the result sought under the Act as it applied in the years at issue.

The appeals are accordingly dismissed.

Appeals dismissed.