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Docket: 2002-4652(IT)I |
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BETWEEN: |
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MARY JANE WILKINSON, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeal heard on March 27, 2003, at Ottawa, Ontario.
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Before: The Honourable Judge Lucie Lamarre |
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Appearances: |
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For the Appellant: |
The Appellant herself |
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Counsel for the Respondent: |
Jennifer Neill |
____________________________________________________________________
JUDGMENT
The appeal from the assessment under the Income Tax Act for the 1998 taxation year is dismissed.
Signed at Ottawa, Canada, this 2nd day of May 2003.
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"Lucie Lamarre" |
J.T.C.C.
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Citation:2003TCC311 |
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Date: 20030502 |
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Docket: 2002-4652(IT)I |
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BETWEEN: |
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MARY JANE WILKINSON, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Lamarre, J.T.C.C.
[1] This is an appeal under the informal procedure from a reassessment made by the Minister of National Revenue ("Minister") pursuant to paragraph 56(1)(b) and subsection 56.1(4) of the Income Tax Act ("Act") for the appellant's 1998 taxation year. In reassessing the appellant, the Minister increased her income for that year by an amount of $18,392 representing child support or maintenance payments received by her in 1998.
[2] The facts upon which the Minister relied are stated in paragraph 5 of the Reply to the Notice of Appeal, which reads as follows:
. . .
b) the Appellant and her former spouse, namely Richard Wilkinson (the "Former Spouse"), married on June 26, 1981 and divorced on September 14, 1990; (admitted)
c) at all relevant times, the Appellant and the Former Spouse had two children, namely Ben, born August 15, 1986 and Melissa, born November 18, 1983 (the "Children"); (admitted)
d) pursuant to a Divorce Judgment (the "Judgment") of the Supreme Court of Ontario dated August 14, 1990, the Former Spouse was required to pay a total of $500 per month commencing March 1, 1988 to the Appellant as child support; (admitted)
e) during the 1998 taxation year, the Appellant received $18,392 as child support pursuant to the Judgment;
f) the Appellant and the Former Spouse were living apart at the time the payments were made and throughout the remainder of the 1998 taxation year; (admitted)
g) the Judgment was made before May 1997 for the purposes of subsection 56.1(4) of the Income Tax Act (the "Act"); (admitted)
h) the Appellant and the Former Spouse did not file with the Minister a joint election in prescribed form and manner as required in subparagraph 56.1(4)(b)(i) of the Act, under the definition "Commencement Day"; (admitted)
i) the Judgment was neither nullified nor replaced by a successive Judgment; (admitted)
j) the Judgment does not have a 'Commencement Day' as defined in subsection 56.1(4) and paragraph 56(1)(b) of the Act; and
k) during the 1998 taxation year, the Appellant did not include the child support income in the amount of $18,392. (admitted)
[3] The Divorce Judgment of the Supreme Court of Ontario was filed as Exhibit A-1. It is dated August 14, 1990 and the relevant portions thereof read as follows:
3. (1) THIS COURT FURTHER ORDERS AND ADJUDGES that commencing on the 1st day of March, 1988 and on the 1st day of each subsequent month, the Respondent shall pay to the Petitioner for the support and maintenance of the children the sum of $250.00 per month, per child until one of the following occurs:
(a) The child ceases to reside full-time with the Petitioner. "Reside" includes the child living away from home to attend an educational institution, pursue summer employment or a vacation, but otherwise maintaining a residence with the Petitioner;
(b) The child becomes 18 years of age and ceases to be in full-time attendance at an educational institution;
(c) The child has completed a first post-secondary degree;
(d) The child marries;
(2) The amount of support to be paid by the Respondent to the Petitioner shall be increased at yearly intervals, the first of such increase [sic] to take place on the 1st day of January, 1989 and on the 1st day of January each and every year thereafter, provided that the amount of such increase shall be equal to the lesser of:
(a) The percentage increase in the Consumer Price Index as published by Statistics Canada for the City of Ottawa for the preceding twelve months; or
(b) The percentage increase in the Respondent's income for the preceding twelve months.
(3) The Respondent agrees not to show these payments as a deduction on his income tax and the Petitioner will not include them as income.
(4) The Respondent and the Petitioner intend this paragraph to be final except for variation in the event of a material change or changes in circumstances. If such change or changes occur, the Respondent or Petitioner seeking the variation will give to the other a written notice of the variation he or she is seeking and the Respondent and Petitioner will then confer either personally or through their respective solicitors to settle what, if any, variation should be made. If no agreement has been reached 30 clear days after notice has been given, variation may be determined at the instance of either the Respondent or the Petitioner by an application pursuant to the Family Law Act, or the Divorce Act. The terms of this agreement are otherwise final.
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5. THIS COURT FURTHER ORDERS that unless the support order is withdrawn from the Office of the Director of Support and Custody Enforcement, it shall be enforced by the Director and amounts owing under the support order shall be paid to the Director, who shall pay them to the person to whom they are owed.
[4] In her testimony, the appellant said that her ex-husband made child support payments regularly from March 1, 1988 till March 1, 1989. He then disappeared and ceased paying child support. In the early 1990s, the Office of the Director of Support and Custody Enforcement of Ontario located the appellant's ex-husband in British Columbia, and a portion of his salary was seized in order to make child support payments in accordance with the Divorce Judgment. The payments thus received by the appellant did not come to the total amount due pursuant to the Divorce Judgment. In fact, the appellant testified that she only received sporadic payments for child support in that period and that she never knew when such amounts would be deposited in her bank account. Indeed, in 1998 the appellant was credited with a large lump sum amount without knowing where it came from. After making enquiries, she learnt that the Office of the Director of Support and Custody Enforcement had seized an amount that was due to her ex-husband when he left his employment with Immigration Canada in British Columbia. Although she did not remember the exact amount deposited in her bank account (she was under the impression that she had received $16,000), she did concede that it could have been the amount assessed, namely $18,392. She said that that amount represented payment of three years of arrears but did not cover the whole amount of arrears due, and that more than $12,000 in arrears is still owed.
[5] The main point raised by the appellant is that the Divorce Judgment specifically stated that the child support payments were not taxable. This is why she did not include the lump sum payment received in 1998 in her income for that year. Furthermore, she stated that it is unfair to be taxed in one year on payments that should have been paid periodically over three years. Finally, she said that child support payments have not been taxable in the hands of recipients since 1997 and that she received the lump sum payment in question in 1998. Therefore, in her view, it should not be taxable.
[6] Concerning this last point, it is paragraph 56(1)(b) of the Act that is applicable in determining whether child support payments are taxable in the hands of the recipient. It reads as follows:
SECTION 56: Amounts to be included in income for year.
(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,
456(1)(b)3
(b) Support - the total of all amounts each of which is an amount determined by the formula
A - (B + C)
where
A is the total of all amounts each of which is a support amount received after 1996 and before the end of the year by the taxpayer from a particular person where the taxpayer and the particular person were living separate and apart at the time the amount was received,
B is the total of all amounts each of which is a child support amount that became receivable by the taxpayer from the particular person under an agreement or order on or after its commencement day and before the end of the year in respect of a period that began on or after its commencement day, and
C is the total of all amounts each of which is a support amount received after 1996 by the taxpayer from the particular person and included in the taxpayer's income for a preceding taxation year;
456.1(4)3
(4) Definitions. The definitions in this subsection apply in this section and section 56.
"child support amount" - "child support amount" means any support amount that is not identified in the agreement or order under which it is receivable as being solely for the support of a recipient who is a spouse or former spouse of the payer or who is a parent of a child of whom the payer is a natural parent.
"support amount" - "support amount" means an amount payable or receivable as an allowance on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient and children of the recipient, if the recipient has discretion as to the use of the amount, and
(a) the recipient is the spouse or former spouse of the payer, the recipient and payer are living separate and apart because of the breakdown of their marriage and the amount is receivable under an order of a competent tribunal or under a written agreement; or
(b) the payer is a natural parent of a child of the recipient and the amount is receivable under an order made by a competent tribunal in accordance with the laws of a province.
[7] Therefore, child support payments will not be included in the recipient's income if they become receivable under an agreement or order on or after its commencement day. The commencement day of an agreement or order is defined in subsection 56.1(4) as follows:
"commencement day" - "commencement day" at any time of an agreement or order means
(a) where the agreement or order is made after April 1997, the day it is made; and
(b) where the agreement or order is made before May 1997, the day, if any, that is after April 1997 and is the earliest of
(i) the day specified as the commencement day of the agreement or order by the payer and recipient under the agreement or order in a joint election filed with the Minister in prescribed form and manner,
(ii) where the agreement or order is varied after April 1997 to change the child support amounts payable to the recipient, the day on which the first payment of the varied amount is required to be made,
(iii) where a subsequent agreement or order is made after April 1997, the effect of which is to change the total child support amounts payable to the recipient by the payer, the commencement day of the first such subsequent agreement or order, and
(iv) the day specified in the agreement or order, or any variation thereof, as the commencement day of the agreement or order for the purposes of this Act.
[8] Here, the only order pursuant to which child support amounts were payable was made in August 1990. That order was never varied and the appellant and her ex-husband never filed a joint election with the Minister specifying a commencement day after April 1997 for the order of August 1990 (such a joint election could not be filed as the appellant has had no contact with her ex-spouse since the early 1990s). Therefore, the child support payments did not become receivable under the Divorce Judgment on or after its commencement day, as there is no commencement day in the particular circumstances of this case. Consequently, those payments had to be included in the income of the recipient when received, pursuant to paragraph 56(1)(b) of the Act.
[9] Furthermore, it was decided by the Federal Court of Appeal in The Queen v. Sills, [1985] 2 F.C. 200, that support payments do not change in character as a result of not being made on time and on a periodic basis as required by the judgment or agreement under which the amounts are payable. Heald J. said at page 205:
. . . So long as the agreement provides that the monies are payable on a periodic basis, the requirement of the paragraph [56(1)(b)] is met. The payments do not change in character merely because they are not made on time.
[10] It is also clear from the evidence that the payment at issue was not made by the ex-husband to release him from any further liability under the Divorce Judgment, unlike the situation in M.N.R. v. Armstrong, [1956] S.C.R. 446, a case in which it was decided that a lump sum payment made in full settlement of all amounts payable in the future was not deductible for the payer and therefore not taxable in the hands of the recipient. Here it is clear that the lump sum paid in 1998 was seized from the ex-husband to pay child support arrears he owed and that the ex-husband was still liable for the payment of child support under the Divorce Judgment. He had not been released from any further liability under the Divorce Judgment by a subsequent order.
[11] Unfortunately for the appellant, the payment received in 1998 had to be included in her income for that year in accordance with paragraph 56(1)(b) and subsection 56.1(4) of the Act. The fact that the Divorce Judgment indicated that the child support payments were not taxable in the hands of the recipient cannot change the explicit terms of the Act. It is only in the special circumstances referred to in sections 56.1 and 60.1 of the Act (for example, where a payer is ordered to make payments to a third party for the benefit of the supported person) that an agreement or order may stipulate that such payments will be deductible for the payer and taxable for the recipient under those two sections, assuming that the payments otherwise qualify for the deduction and for inclusion in income. Otherwise, it is not open to a court to determine in an order that support payments shall not be taxable for the recipient nor deductible for the payer, if the Act expressly provides that they are.
[12] As for the appellant's argument that she has been assessed for more tax on the lump sum received in 1998 than would have been the case if the amount had been received over three years, I refer the parties to the retroactive averaging provisions contained in sections 110.2 and 120.31 of the Act, which might (but also might not) provide some relief. (See Milliken v. The Queen, 2002 DTC 1510 (T.C.C.), on the application of these provisions.)
[13] Finally, the appellant testified that she was assessed interest and penalties for late filing. It is my understanding that she did not file her 1998 tax return on time because all her income tax was paid for the year, with the exception of the lump sum amount in question, which she thought was not taxable in accordance with her Divorce Judgment. In the circumstances of this appeal, which I find are particularly harsh as they were beyond the appellant's control, I strongly recommend to the appellant that she make an application to the Minister to obtain a waiver of the late-filing penalty and the interest pursuant to subsection 220(3.1) of the Act. Guidelines for the cancellation and waiver of interest and penalties may be found in Information Circular 92-2, dated March 18, 1992.
[14] The appeal is dismissed.
Signed at Ottawa, Canada, this 2nd day of May 2003.
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"Lucie Lamarre" |
J.T.C.C.
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CITATION: |
2003TCC311 |
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COURT FILE NO.: |
2002-4652(IT)I |
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STYLE OF CAUSE: |
Mary Jane Wilkinson v. The Queen |
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PLACE OF HEARING: |
Ottawa, Ontario |
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DATE OF HEARING: |
March 27, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Judge Lucie Lamarre |
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DATE OF JUDGMENT: |
May 2, 2003 |
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APPEARANCES: |
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For the Appellant: |
The Appellant herself |
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Counsel for the Respondent: |
Jennifer Neill |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |