Federal Court of Appeal Decisions

Date: 20070511

Docket: A-565-05

Citation: 2007 FCA 145

 

CORAM:       NADON J.A.

                        SHARLOW J.A.                   

                        MALONE J.A.

 

BETWEEN:

NICOLETTE HOLBROOK

Appellant

and

HER MAJESTY THE QUEEN

Respondent

 

 

 

Heard at Toronto, Ontario, on March 15, 2007.

Judgment delivered at Ottawa, Ontario, on April 11, 2007.

 

REASONS FOR JUDGMENT BY:                                                                          SHARLOW J.A.

CONCURRED IN BY:                                                                                                MALONE J.A.

DISSENTING REASONS BY:                                                                                     NADON J.A.

 

Date: 20070511

Docket: A-565-05

Citation: 2007 FCA 145

 

CORAM:       NADON J.A.

                        SHARLOW J.A.                   

                        MALONE J.A.

 

BETWEEN:

NICOLETTE HOLBROOK

Appellant

and

HER MAJESTY THE QUEEN

Respondent

 

 

REASONS FOR JUDGMENT

SHARLOW J.A.

[1]               The appellant Nicolette Holbrook is appealing the judgment of the Tax Court of Canada (2005 TCC 671) dismissing her income tax appeal for 1998, 1999 and 2000. The issue in the Tax Court and in this appeal is whether Ms. Holbrook is required to pay income tax on child support amounts she received in those years from her former spouse, Mr. Gorgan.

 

[2]               The child support amounts in issue are not taxable to Ms. Holbrook if, in the words of paragraph 56(1)(b) of the Income Tax Act, R.S.C. 1985 (5^th Supp.), c. 1, they are amounts that:

 

 

 

[3]               This provision asks the following questions:

(1)      Under what agreement or order was the amount payable?

(2)      Does that agreement or order have a “commencement day”?

 

[4]               Both questions are critical to the determination of the correct tax treatment of child support amounts once they are paid. The answers distinguish child support amounts that are governed by the current provisions of the Income Tax Act (the “new regime”) from those that are governed by the former inclusion/deduction regime (the “old regime”). The difference is significant. Under the old regime, child support amounts were taxable to the recipient and deductible by the payer. Under the new regime, child support amounts are not taxable to the recipient or deductible by the payer.

 

[5]               In my view, the Judge in the court below erred in failing to consider the first question.

 

[6]               The term “commencement day” is defined in subsection 56.1(4) of the Income Tax Act. The definition reads as follows:

 

 

 

[7]               Child support amounts are subject to the new regime only if they are payable under an agreement or order with a commencement day of May 1, 1997 or later. The commencement day of an agreement or order made after April 1997 is determined by paragraph (a) of the definition of “commencement day”. Paragraph (a) says that the commencement day of an agreement or order made after April 1997 is the day it is made. It follows that a child support amount payable under an agreement or order made after April 1997 is subject to the new regime.

 

[8]               Generally, a child support amount payable under an agreement or order made before May 1997 is subject to the old regime. However, there are four exceptions to that general rule. The four exceptions operate by attributing a post-April 1997 commencement day to a pre-May 1997 agreement or order.

1)        The first exception applies if the parties to an agreement or order file a joint election specifying a post-April 1997 commencement day for a pre-May 1997 agreement or order (subparagraph (b)(i) of the definition of “commencement day”). Because of this provision, it is always open to parties to agree to be subject to the new regime.

 

2)        The second exception applies if a pre-May 1997 agreement or order is varied after April 1997 to change the child support amounts payable. In that case, the commencement day of the pre-May 1997 agreement as varied is the day on which the first varied amount is payable (subparagraph (b)(ii) of the definition of “commencement day”).

 

3)        The third exception applies if there is a pre-May 1997 agreement or order under which child support amounts are payable, and another agreement or order is made after April 1997, the effect of which is to change the total child support amounts payable (subparagraph (b)(iii) of the definition of “commencement day”). This provision may cover a number of different situations. Generally, it is intended to ensure that where there is an increase in the total child support amounts payable, the new regime cannot be avoided by having the original amount governed by pre-May 1997 agreement or order and the increase governed by a post-April 1997 agreement or order.

 

4)        The fourth exception applies if a pre-May 1997 agreement or order (or a variation of a pre-May 1997 agreement or order), specifies a particular day after April 1997 as the commencement day of the agreement or order (subparagraph (b)(iv) of the definition of “commencement day”). In that case, the commencement day is the specified day. Whether that condition is met in a particular case turns on the interpretation of the agreement or order, which may in certain cases require consideration of extraneous evidence. This condition may be met by any variation of an old agreement or order, whether or not there is a change to total child support amounts payable, as long as a commencement day is specified in the agreement or order in which the variation is made.

 

[9]               The four exceptions in paragraph (b) do not expressly deal with the situation where there is a pre-May 1997 agreement or order and a post-April 1997 agreement or order, both requiring the payment of the same amount of child support, where the later agreement or order does not expressly stipulate a commencement day and the parties do not make a joint election. In that situation, the later agreement or order may be construed as merely recognizing the continuation of the obligation set out in the earlier agreement or order, in which case the child support amounts would be payable under the earlier agreement or order and the old regime would apply even after the later agreement or order is made because the later agreement or order would not be relevant. Alternatively, the later agreement or order may be construed as terminating the child support obligation in the previous agreement or order, and replacing it with a new child support obligation, in which case the child support amounts paid after the later agreement or order is made would be payable under that later agreement or order, which would have a post-April 1997 commencement day pursuant to paragraph (a) of the definition of “commencement day”. Therefore, the new regime would apply after the later agreement or order is made. I will illustrate with two examples.

 

[10]           In the first example, parties enter into an agreement in 1996 that stipulates an obligation to pay child support, and in 1999 the entire agreement is embodied in a court order. The court order does not stipulate a commencement day and the parties do not make a joint election. If as a matter of law the child support obligation stipulated in the 1996 agreement is capable of being enforced, the 1999 order may be construed as merely recognizing the continuation of the existing obligation, unless there is some provision in the 1999 order that precludes that interpretation.  If that is the correct interpretation of the order, it would be consistent with the statutory scheme to conclude that child support amounts paid after 1999 are payable under the 1996 agreement rather than the 1999 order, so that there would be no commencement day and the old regime would apply.

 

[11]           In the second example, an interim child support order is made in 1996, and a final child support order is made in 1999 stipulating the same amounts. It is generally the case that an interim order ceases to have effect when it is replaced by a final order. In that event, child support payments after the final order is in place normally should be presumed to have been made under the final order, not the interim order, and the new regime would apply to those payments. That presumption may be rebutted by appropriate language in the final order.

 

[12]           The facts of this case are not in dispute. In 1994, an interim child support order was made by the General Division of the Ontario Court requiring Mr. Gorgan to pay Ms. Holbrook child support payments of $500 per month for each of their two children, starting on June 1, 1994. It is undisputed that the interim order established a binding obligation to pay child support. That obligation would subsist as long as the interim order remained in force.

 

[13]           In April of 1998, the parties entered into a separation agreement that apparently was intended to resolve all outstanding issues, and to survive any divorce judgment. It states that Mr. Gorgan is obliged to pay child support of $1,000 per month ($500 per child) starting May 1, 1998. Of that amount, $836 was specified as the base amount under the Federal Child Support Guidelines, SOR/97-175 and $164 was specified as special and extraordinary expenses. On May 28, 1999, the Ontario Court issued a judgment for divorce requiring Mr. Gorgan to pay monthly child support of $1,000 commencing May 1, 1998, of which $873 was said to be the base amount under the Guidelines and $127 was special and extraordinary expenses.

 

[14]           As I understand the separation agreement, it stipulates a $1,000 per month child support obligation in place of the obligation established under the interim order, which ceased to have effect once the separation agreement came into force. If the agreement had been intended merely to recognize and continue the obligations created by the interim order, there would be no reason to stipulate that monthly payments under the agreement would commence on May 1, 1998. I conclude that all child support payments that were payable to Ms. Holbrook on May 1, 1998 or later are payable under the separation agreement and not the interim order. Because that separation agreement was entered into after April 1997, its commencement day is the day it was made in April of 1998. Therefore, all child support amounts payable on or after May 1, 1998 are subject to the new regime and are not taxable to Ms. Holbrook.

 

[15]           In the circumstances, it is not necessary to consider whether the 1999 divorce judgment has a commencement day because the child support amounts payable to Ms. Holbrook were already subject to the new regime by virtue of the separation agreement. However, if there had been no separation agreement, I would have concluded that the divorce judgment is a final order that terminated the interim order effective May 28, 1999, so that child support amounts payable on or after June 1, 1999 would have been subject to the new regime.

 

[16]           The Judge determined that all child support amounts payable to Ms. Holbrook were subject to the old regime. He reached that conclusion because he considered himself bound to follow the decision of this Court in Kennedy v. Canada, 2004 FCA 437. He interpreted that case as establishing a principle to the effect that where the amount of a child support obligation is established in a pre-May 1997 agreement or order, the new regime can never apply unless there is an agreement or order that changes the total child support amounts payable.

 

[17]           In my view, Kennedy establishes no such principle. The existence of that supposed principle is based on subparagraph (iii) of the definition of “commencement day’ in subsection 56.1(4) (quoted above), which establishes a commencement day for a “subsequent agreement or order” made after April 1997 that changes total child support amounts payable. In Kennedy, there was an interim order for child support in 1991, followed by minutes of settlement entered into in 1991 stipulating the same payments plus a cost of living adjustment. In September of 1997, a final order was made incorporating the terms set out in the minutes of settlement. Not only were the amounts unchanged, the obligation itself continued to be grounded in the 1991 minutes of settlement. That obligation was confirmed by the court order, not replaced.

 

[18]           Kennedy did not consider the situation where a post-April 1997 agreement or order terminates the child support obligation in a pre-May 1997 agreement or order, and replaces it with a new child support obligation. In that situation, it is not relevant to ask whether there has been a change to the child support amount payable because the pre-May 1997 agreement or order has ceased to have effect.

 

[19]           It was suggested in argument that subparagraph (iii) of the definition of “commencement day” in subsection 56.1(4) is rendered pointless if a post-April 1997 agreement or order that does not change the total child support amounts payable under a pre-May 1997 agreement or order is found to have a “commencement day”. I do not accept that argument.  In my view, the intention of Parliament would be respected, as well as the intention of the parties in making the later agreement or the court in making the later order, by asking whether the later agreement or order terminates and replaces the child support obligation established in the previous agreement or order, or continues it. If the later agreement or order terminates and replaces the prior obligation, then no injustice results from finding the post-April 1997 agreement to have a “commencement day” pursuant to paragraph (a) of the definition in subsection 56.1(4).

 

[20]           For these reasons, I would allow this appeal with costs in this Court and in the Tax Court, set aside the judgment of the Tax Court, allow Ms. Holbrook’s income tax appeal for 1998, 1999 and 2000, and refer this matter back to the Minister for reassessment in accordance with these reasons.

 

 

        "K. Sharlow"

"I agree

     B. Malone J.A."

 

 

 

 

 

 

 

NADON J.A. (Dissenting)

[21]           I cannot agree with my colleague Sharlow J.A. In my view, this appeal should be dismissed.

[22]           The issue in this appeal stems from legislative amendments which were brought to the Income Tax Act in 1996 (Income Tax Budget Amendments Act 1996, S.C. 1997 c.25, s.9). Prior to these amendments, child support payments made under a written agreement or court order were taxable in the hands of the recipient and deductible by the payer (the “old regime”). However, following the amendments, such payments were no longer either taxable or deductible (the “new regime”).

[23]           The amendments provide for a number of ways by which parties who entered into a child support agreement or court order under the old regime can render the payment thereof subject to the new regime. Although the definition of “commencement day” in paragraph 56.1(4)(b) of the Income Tax Act sets out four scenarios pursuant to which the payment of child support under an agreement or a court order made before May 1997 falls under the new regime, I need only address the scenario set out at subparagraph (iii) thereof which, in my view, is the only relevant one in this appeal.

[24]           The sole issue on this appeal is whether there is a “commencement day” within the meaning of the statutory definition found in subsection 56.1(4) of the Income Tax Act (quoted above in paragraph 6 of Sharlow J.A.’s Reasons).

[25]           Sharlow J.A. concludes that because as of May 1, 1998, the child support payments were payable under a separation agreement dated April 1998, i.e. an agreement made after April 1997, that terminated and replaced a previous child support order, there is a “commencement day” as defined in paragraph (a) of the statutory definition. This leads Sharlow J.A. to conclude that April 28, 1998 is the “commencement day” and that, as result, all child support payments commencing May 1, 1998 fall into the new regime and hence are not taxable to the appellant. Put another way, my understanding of my colleague’s approach is that since the separation agreement of April 28, 1998 is, pursuant to paragraph (a), an “… agreement made after April 1997,” the commencement day for the purpose of the paragraph is April 28, 1998, i.e. the date the agreement was made.

[26]           In my respectful view, on the facts before us, that conclusion cannot be correct.

[27]           I start with the proposition that there cannot be any doubt that an interim order is an order which can create an obligation to pay child support payments. That point was made abundantly clear by this Court in Kennedy v. Canada, 2004 FCA 437, where Sexton J.A., writing for a unanimous Court, held that the obligation to pay for child support had been created by an interim child custody and support order made in 1991 (see paragraph 12 of the reasons in Kennedy, supra).

[28]           In the present matter, I have no hesitation in finding, as the Judge below did, that the interim order of June 22, 1994 created the former spouse’s obligation to pay child support. Thus, contrary to my colleague, it is my view that the relevant provision for the determination of this appeal is paragraph (b) of the definition of “commencement day” in subsection 56.1(4) of the Income Tax Act and not paragraph (a).

[29]           Consequently, the real issue before us is whether the separation agreement of April 1998 or, for that matter, the divorce judgment of May 1999, had the effect of changing, in the words of subparagraph (b)(iii) of the definition of “commencement day”, “the total child support amounts payable” to the appellant by her former spouse. In my view, there can be only one answer to that question and that answer is no.

[30]           It is clear that neither the separation agreement nor the judgment for divorce made any change to the child support payments payable to the appellant by her former spouse. They remained at $1000 per month for the two children of the marriage. In view of the wording of subparagraph (iii) of the statutory definition, no other conclusion is possible.

[31]           I would add that it is immaterial whether the child support payments, which commenced May 1, 1998, became payable under the separation agreement in lieu of the interim order of June 1994. What is relevant, however, is whether the agreement concluded after April 1997 had the effect of changing the child support payments which had been created by the interim order of 1994. As I have already indicated, the answer to the question is no.

[32]           Consequently, there is no “commencement day” under paragraph (b) of the statutory definition and, as a result, the child support payments fall under the old regime and are thus taxable to the appellant.

[33]           Before concluding, I must point out that if my colleague is right in her view that there was no order made prior to May 1997 within the meaning of paragraph (b) of the statutory definition, then subparagraph (b)(iii) is meaningless. In other words, whenever an agreement or order made prior to May 1997 is superseded or replaced by an agreement or order made after April 1997, there will be a “commencement day” for the purposes of the section whether or not the subsequent agreement has the effect of changing or modifying the child support amounts.

[34]           I am thus satisfied that in concluding that the Minister’s reassessments of tax for taxation years 1998, 1999, and 2000 was correct and hence in dismissing the appellant’s appeal therefrom, the Tax Court judge made no error.

[35]           I would therefore dismiss the appeal with costs.

 

 

 

"M. Nadon"

FEDERAL COURT OF APPEAL

 

NAMES OF COUNSEL AND SOLICITORS OF RECORD

 

 

 

DOCKET:                                                                              A-565-05

 

APPEAL FROM A JUDGMENT OF THE HONOURABLE JUSTICE E.A. BOWIE  DATED OCTOBER 25, 2005, NO. 2005TCC671

 

STYLE OF CAUSE:                                                              NICOLETTE HOLBROOK v. HER MAJESTY THE QUEEN

 

PLACE OF HEARING:                                                        TORONTO, ONTARIO

 

DATE OF HEARING:                                                          MARCH 15, 2007

 

REASONS FOR JUDGMENT BY:                                     SHARLOW J.A.

 

CONCURRED IN BY:                                                         MALONE J.A.

DISSENTING REASONS BY:                                            NADON J.A.

 

DATED:                                                                                 APRIL 11, 2007

 

 

APPEARANCES:

 

Ron C. Peterson	FOR THE APPELLANT
Margaret J. Nott John W. Grant	FOR THE RESPONDENT

 

SOLICITORS OF RECORD:

 

Ron C. Peterson Toronto Ontario	FOR THE APPELLANT
John H. Sims, Q.C. Deputy Attorney General of Canada	FOR THE RESPONDENT