Tax Court of Canada Judgments

                                                                                               Court File No. 2006-820 (IT)I

                                                 TAX COURT OF CANADA

                                                IN RE:   the Income Tax Act

BETWEEN:

                                                              TIM PARR

                                                                                                                                Appellant

                                                                   - and -

                                              HER MAJESTY THE QUEEN

                                                                                                                            Respondent

JUDGMENT FROM THE BENCH

BY MR. JUSTICE EUGENE ROSSITER

                         in the Courts Administration Service, Courtroom No. 6B ,

                        Federal Judicial Centre, 180 Queen Street West, 6^th Floor,

                                                          Toronto, Ontario

                                    on Thursday, February 8, 2007 at 4:15 p.m.

APPEARANCES:

Mr. Mark Greenstein                                                                                       for the Appellant

Ms Sonia Akibo-Betts                                                                                 for the Respondent

Also Present:

Mr. Colin F. Nethercut                                                                                      Court Registrar

                                       A.S.A.P. Reporting Services Inc. 8 2007

200 Elgin Street, Suite 1004              130 King Street West, Suite 1800

Ottawa, Ontario K2P 1L5                  Toronto, Ontario M5X 1E3

(613) 564-2727                                   (416) 861-8720

                                  Toronto, Ontario

--- Upon commencing on Thursday, February 8, 2007        at 4:15 p.m.

THE REGISTRAR:  The hearing is resumed.

JUDGMENT FROM THE BENCH:

JUSTICE ROSSITER:  This matter comes before me due to a reassessment of January 16, 2006 to the appellant.  The facts are not really in dispute.  The appellant was married in August 16, 1980.  There was one child from the marriage, Tanya, born July 28, 1983.

A divorce took place between the appellant and the spouse in September 3, 1987, as shown by Exhibit A-1.  Paragraph 5 of Exhibit A-1 states as follows:

"This Court orders and adjudges that the respondent husband, Timothy James Parr, shall pay to the petitioner, Valerie Ellen Parr, the sum of $250 per month on the first day of each month for the support of the child of the marriage, Tanya Valerie Parr."

The appellant met all his obligations per the order until his spouse left the jurisdiction with the child and, according to him, upon one week's notice.  No forwarding address was given, according to the appellant.

The appellant stopped his payments and contact was eventually made by the family support services office or whatever their name is, and eventually they closed their file or went into abeyance mode.

Eventually the spouse reappears and asserts her entitlement to maintenance in the arrears and on an ongoing basis.  The appellant immediately responds and makes arrangements to continue with payments and also to make payment on the arrears.  The appellant also makes an application for what I presume to be a variation or wiping out of the arrears outstanding.

A settlement was reached with the assistance of the Court, resulting in Exhibit A-4.  By the time of this Exhibit A-4 order of July 19, 2004, arrears were allegedly, according to Exhibit R-1, $49,288.02.

Exhibit A-4, the order of July 19, 2004, does a couple of things.  First of all, it makes no reference whatsoever to Exhibit A-1, the divorce order of September 3, 1987.

No. 2, it fixed the child arrears of support to $10,500 as of July 31, 2004, which was to be paid within 45 days of the order.

No. 3 provides for ongoing support for the child of the marriage, Tanya, of $300 per month commencing August 1, 2004, with certain provisos for its termination.

The issues here are really twofold or threefold.  The first issue is whether the $10,500 payment meets the requirements of the definition of spousal amount as defined in subsection 56.1(4) of the act.  The second issue is whether the commencement day for the $10,500 payment is the date of the divorce judgment or of the order of 2004 that is Exhibit A-4.  Those are the issues.  If it is a spousal amount then is it not also a child support amount and, if it is, the applicable commencement day.

Now the appellant's position is one of common sense.  The payment was a maintenance payment under the original order.  Whether the payment is made on time or not is really neither here nor there.  If there was a periodic payment ordered and it was made by lump sum it is really neither here nor there according to certain case law which I won't necessarily refer to because I don't have to in the case at bar.

Finally, there was an agreement ordered and confirmed by a court order to make the deduction on his income tax and include the amount as income in the spouse's tax return.

One would think that common sense would prevail.  One would think that fairness would prevail, especially given the fact that it was a court order.

The respondent's position is, no. 1, the Income Tax Act determines the amount that is to be deductible, not the court, or not a judge under any particular order.  No. 2, a new commencement date has been triggered and therefore the new deductibility regime comes into effect under section 60(b) of the Income Tax Act.  The amount is a child support.  Under the new regime, the formula kicks in and there is no deduction.

Now what is the law?  Section 56.1(4) defines spousal amount.  To qualify under that, there are a bunch of criteria.  No. 1, it must be an allowance.  No. 2, it must be payable and receivable on a periodic basis.  No. 3, it must be paid for maintenance of the recipient, child of the recipient or both.  No. 4, the recipient must have direction as to the use of the amount.  No. 5, the payer and the recipient must be living separate and apart as a result of the breakdown of the marriage and, no. 6, the amount must be paid pursuant to either written agreement or a court order.

I have canvassed a variety of case law with respect to whether or not this is a periodic payment or a lump sum payment or whatever.  There are three cases, Groleau v. R., which was a decision of Mr. Justice Rip as he then was of the Tax Court, now Associate Chief Justice of the Tax Court of Canada, 2002 DTC 1725.

We had the Lebreton case referred to by both counsel.  I think it is in tab 3 of the respondent's authorities, a decision of Madam Justice Lamarre of the Tax Court of Canada on September 11, 2002.  There is another case called Benham, 2006 Tax Court of Canada 410.

All of those would find this amount not to be a spousal amount, per se, and therefore not deductible.

However, there is another case which is very close to being on point.  That is a case called Soldera v. The Minister of National Revenue, [1991] TCJ No. 142, a decision of Mr. Justice Garon of the Tax Court of Canada.  That particular case can be described as follows:  In Soldera, the taxpayer was initially ordered to pay $200 per month in child support.  The order was subsequently varied after the payments fell into arrears to provide for $100 per month plus $7,500 in arrears.

After the taxpayer made the payment in arrears, the Minister disallowed the $7,500 deduction on the basis that it was not a periodic payment for the purpose of section 60(b) of the act.

Judge Garon as he then was determined that the lump sum payment was deductible because it merely crystallized the amounts due periodically under the first order and really represented a portion of the arrears of maintenance payments that were an allowable allowance payable on a periodic basis under paragraph 60(b).

It was also noted that the taxpayer had not been released from any existing or further liability in respect of maintenance of the children.

That case is almost square on with Mr. Parr's situation.

I have authorities on one side and I have authorities on the other side.  Which side do I go on?  It really is neither here or there as to which side I go on because unfortunately, and I say unfortunately because that is the way I feel, unfortunately the matter is resolved by the issue of the commencement date, but is not resolved in the favour of Mr. Parr.

The commencement date can be a very complicated issue or it can be very simple.  I will try to take the simplest approach by quoting Mr. Associate Chief Justice Bowman, now Chief Justice, in Kovarik v. R., [2001] TCJ No. 181, informal procedure, Tax Court of Canada.  I can give these citations later to counsel, if they require it.

Paragraphs 8 and 9 state as follows:

"Under what I may describe as the old regime (pre-May of 1997) spouses making payments to separated or ex-spouses for the support of children could deduct those payments and the recipient had to include them in income.  Following the decision of the Supreme Court of Canada in Thibaudeau v. Canada in 1995 2 SCR 627, the legislation changed.  So long as a pre-May 1997 agreement remained unchanged, the deduction/inclusion system under the old regime prevailed.

"If a new agreement were entered into or an old agreement was changed in a particular way the deduction/inclusion regime ceased and only payments made up to the commencement day as defined were deductible by the payor and includable by the payee."

In this particular case, the matter is answered by that.  Unfortunately, we can only find that there has been a new agreement entered into.  The old agreement has been changed in a particular way; the deduction regime has therefore been changed.

The $10,500 paid by Mr. Parr was under a new order which was different than the old order.  Since it is child support, it is not deductible from the appellant pursuant to section 60(b) of the Income Tax Act.

I say unfortunate because I am very concerned that if the Minister in this particular case -- and we can't really go there, it is really obiter -- if he allowed the spouse to include this amount in her income and taxed her on that income and did not allow an equivalent deduction for the appellant, there is some unfortunate sense of unfairness in that in my mind.

But the Income Tax Act is what it is.  I am sure there are many other instances where the Income Tax Act will be found not necessarily to be fair.

Again, I also want to point out that there was a court order here.  All that Mr. Parr was doing was complying with a court order, doing what he was basically ordered to do.  Notwithstanding what he was ordered to do, it turns out the Income Tax Act does not allow him the deduction.

Now the law is clear in this particular point.  In the Wilkinson case, as cited  by the respondent, Madam Justice Lamarre stated at paragraph 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 the special circumstance referred to in 56.1 and 60.1 of the act that an agreement or an 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 that 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."

In the circumstances that we have here, Wilkinson applies.

There is another case by Mr. Justice Murray Mogan of this Court, Betts v. The Queen, in which the same provision applies.  Notwithstanding what a judge of another court may say, the deductibility still must be determined within the four corners and confines of the Income Tax Act.

This particular situation does not allow this deduction in the circumstances that we have had had, unfortunate as it may be.

I only hope that the Minister has not taxed the recipient of these monies.  But if they did, there is nothing I can do about it.

The appeal is dismissed.  Anything further?

MR. GREENSTEIN:  No.  Thank you, very much, your honour, for hearing this matter.

MS AKIBO-BETTS:  No, your honour, thank you.

JUSTICE ROSSITER:  Thank you.

THE REGISTRAR:  This matter is concluded.  The Court is closed for this day, and will resume tomorrow morning at 9:30.

--- Whereupon the hearing was concluded

    at 4:32 p.m.

CITATION:                                        2007TCC134

COURT FILE NO.:                             2006-820(IT)I

STYLE OF CAUSE:                           TIM PARR AND HER MAJESTY THE QUEEN

PLACE OF HEARING:                       Toronto, Ontario

DATE OF HEARING:                         February 8, 2007

REASONS FOR JUDGMENT:            The Honourable Justice E. Rossiter

DATE OF REASONS

FOR JUDGMENT:                             March 7, 2007

APPEARANCES:

COUNSEL OF RECORD:

       For the Appellant:

                   Name:                             Mark Greenstein

                   Firm:                               Krol & Krol

                                                          Richmond Hill, Ontario

       For the Respondent:                     John H. Sims, Q.C.

                                                          Deputy Attorney General of Canada

                                                          Ottawa, Canada