Tax Court of Canada Judgments

Date: 20010516

Docket: 2000-248-IT-I

BETWEEN:

DALE F. HINKELMAN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Hershfield, J.T.C.C.

[1]            This is an appeal under the Informal Procedure from a Notice of Reassessment respecting the Appellant's 1998 taxation year, denying the deduction of $25,000.00 claimed by the Appellant in that year in respect of a payment for the maintenance of a child in the custody of Mr. Steve McKee. The amount so claimed was paid by the Appellant pursuant to an Order of the Supreme Court of British Columbia made on August 1, 1996 ("Order"). The relevant facts of this case are not in dispute and the issue is whether the provisions of the Income Tax Act (the "Act") relating to child support payments permit the deduction as claimed by the Appellant.

[2]            The payment was made after 1996 under a pre-May 1997 Order. Since there is no dispute here as to the application of various transitional aspects of the applicable provisions of the Act, I will not recite them in detail. The payments are governed by the post-April 1997 provisions of the Act. The deductibility of the subject payment is governed, pursuant to paragraph 60(b) of the Act, by a formula which includes in the deductible amount a "support amount" as defined in subsection 56.1(4). Whether the subject payment is included in that formula as a "support amount" (i.e. in the "A" amount referred to in that formula) is the sole issue in this case. Formula reductions of the deductible amount are not applicable since the Order is a pre-May 1997 Order.

Facts

[3]            The Appellant married Deborah Anne McKee in or about 1989.

[4]            Deborah McKee, by a previous marriage to Mr. McKee, had two children, namely, Shawna and Nicole McKee. Both children lived with the Appellant and Deborah during their marriage. Although the Appellant is not the natural parent of Shawna McKee or Nicole McKee, he was in a stepfather relationship with both children.

[5]            The Appellant separated from Deborah in 1995. Although custody was an issue, Shawna went to live with her natural father, Mr. McKee. Nicole continued to live with Deborah. The Order required the Appellant to pay monthly support payments to his former spouse for the maintenance and support of Nicole, and also ordered the Appellant to pay monthly support payments to Mr. McKee for the maintenance and support of Shawna.

[6]            In the Reasons for Judgment accompanying the Order, Justice Warren found that the Appellant stood in the place of a parent to both Shawna and Nicole and was in loco parentis to both such children, responsible for the needs of those children, whether the spousal relationship with Deborah continued or not. Maintenance responsibility in respect of the children was found pursuant to the provisions of the Divorce Act, and in accordance with the provisions of that Act, the Order found that the Appellant was responsible for ongoing maintenance of both Shawna and Nicole on the basis that they were children of his marriage with Deborah. At page 27, paragraph 55 of the Reasons for Judgement, Mr. Justice Warren makes the following finding:

In my view, once a court determines that the parent was in loco parentis the responsibility continues, provided the child remains a child of the marriage as defined by the Act. I cannot find that the Act, which can create long term obligations as between spouses, is not intended to create long term obligations with respect to children. Certainly a husband cannot unilaterally opt out of his spousal support obligations under the Act on the basis that he had no intention of creating a long term obligation. How then could a child's rights be any less?

[7]            With respect to Shawna's support, the Order required Deborah to pay Mr. McKee for the maintenance and support of Shawna the monthly sum of $252.00 (being 12% of Shawna's needs) grossed up to $550.00 on a pre-tax basis.[1] The amount the Appellant was ordered to pay to Mr. McKee for the maintenance and support of Shawna was the monthly sum of $630.00 (being 30% of Shawna's needs) grossed up to $1,374.34 on a pre-tax basis. That is, the total expenses for Shawna, estimated at $2,100.00 per month, were apportioned amongst each "supporting" person according to their respective share of financial responsibility as determined by the Court. Mr. McKee was responsible for 58% of Shawna's maintenance. Respective shares were determined strictly on the relative incomes of the three parents. Justice Warren did not accept that a step-parent's responsibility was less than that of a natural parent. At page 37, paragraph 76, he expressed his view on the point as follows:

... My view is that the Act is a complete guide and the obligation should be apportioned in relation to the respective abilities of the parents and not on the basis of a genetic link.

[8]            The Appellant was also ordered to pay Deborah for the maintenance and support of Nicole. There is no question as to the deductibility of these payments made by the Appellant to Deborah in respect of Nicole. Such payments were to a former spouse and are included in the definition of "support amount" as defined in subsection 56.1(4) of the Act. "Support amount" is defined in that subsection as follows:

"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 the 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.

[9]            The difficulty in this case is with the deductibility of the payments made by the Appellant to Mr. McKee in respect of Shawna. Since the Appellant was never married to Mr. McKee, he must rely on the second part of the definition of "support amount" (paragraph (b) of the definition) in order to have his support payment for the benefit of Shawna treated as a "support amount". Such treatment is a condition for the deduction by the Appellant of the subject payment. Since the subject payment is in respect of a child to whom the Appellant is not the natural parent, the payment does not fit the requirements of paragraph (b) of the definition of "support amount". As such the Respondent's counsel maintains that the subject payment is not deductible.[2]

[10]          The amount paid by the Appellant to Mr. McKee for the maintenance and support of Shawna, namely $25,000.00, is an aggregate of monthly payments that accumulated as arrears from the date of the Order to the date of payment. The reason that the arrears accumulated is that the Appellant took issue with the Order in respect of his being found responsible to support a child that was living with her natural father and he appealed the Order. The appeal was lost and the Appellant testified that it was only on losing the appeal that he accepted his obligation to pay Mr. McKee the arrears owing which amount was agreed between them to be $25,000.00. The Appellant also testified that Mr. McKee had promised him that he would not pursue any further payments under the Order if he paid the sum of $25,000.00. Counsel for the Respondent argued that the Appellant's testimony, that he made the subject payment as a final settlement of all obligations under the Order, rendered the payment not deductible[3]. In this regard I note that subparagraph (k) of paragraph 8 of the Respondent's Reply to the Notice of Appeal sets out as an assumption in respect of the reassessment the following:

(k)            The amount in issue represented arrears for the support and maintenance of Shawna McKee.

Since the amount in issue is the $25,000.00, and since it was accepted as arrears and not as a settlement payment in the reassessment, I cannot now permit the Respondent to take a contrary position without assuming the onus of proof. In respect of that onus I do not find the Appellant's testimony sufficient to support a finding that the $25,000.00 was paid in settlement of all obligations under the Order. The obligation, as arrears, was already owing at the time the payment was made. The appeal had been lost. As such there is no evidence of fresh consideration having been paid by the Appellant which would bind Mr. McKee not to pursue his rights under the Order. That the Appellant never paid any further amounts pursuant to the Order and that Mr. McKee has never required him to make such further payments, cannot change the character of the subject payment as arrears when they were already due and payable as arrears at that time.[4]

Argument re Paragraph (b) of the Definition of "Support Amount"

[11]          The Appellant's representative argued that Deborah should be considered as a deemed recipient under subsection 60.1(1) of the Act of the subject payment made by the Appellant to Mr. McKee for Shawna's maintenance. If Deborah were the deemed recipient, the deduction of the subject amount might be permitted under paragraph (a) of the definition of "support amount". Alternatively, the Appellant's representative argued that the subject payment was received by Mr. McKee as agent for Deborah who should be seen as the constructive recipient of the payment. The Appellant's representative argued that either alternative could ensure that the intention of the legislation would be given effect to and that any discriminatory aspect of paragraph (b) of the definition of support amount would be avoided. While I see no evidence of an intent or purpose of the legislation to allow deductions, in general, for maintenance of another person's children, I do favour any realistic approach to interpreting a statutory provision in a manner consistent with the Charter and in light of it. One might also hope that the social policies of a province in respect of a particular fact situation, as reflected by an order of a superior court of that province, might co-exist harmoniously with federal tax policy as reflected by the application of the provisions of the Act to that fact situation. In the case at hand the issue is whether the terms of the Order and the provisions of the Act lend themselves to a construction that would allow recognition of the subject support payment as a "support amount".

[12]          I will deal firstly with the argument that subsection 60.1(1) applies so as to deem Deborah the recipient of the $25,000.00. If she is deemed to be the recipient under that provision, the payment will be deductible pursuant to the definition of support amount in paragraph (a) of that definition if the other requirements of that definition are met.[5] Subsection 60.1(1) provides as follows:

(1)            For the purposes of paragraph 60(b) and subsection 118(5), where an order or agreement, or any variation thereof, provides for the payment of an amount by a taxpayer to a person or for the benefit of the person, children in the person's custody or both the person and those children, the amount or any part thereof

(a)            when payable, is deemed to be payable to and receivable by that person; and

(b)            when paid, is deemed to have been paid to and received by that person.

[13]          For this subsection to apply, there must be a finding that the payments ordered are for the benefit of a particular person (Deborah) even though they are, in fact, being made to a different person (Mr. McKee).

[14]          The question under subsection 60.1(1) is whether the Order "provides for the payment of an amount by a taxpayer (the Appellant) for the benefit of" (emphasis added) Deborah. The Appellant argues that the Order, including him as a contributor to Shawna's maintenance, benefits Deborah even though she is not the recipient of the payment. The argument requires a careful analysis of the apportionment of responsibility amongst the three parents in this case. The apportionment in respect of Shawna was 30% on the Appellant, 12% on Deborah and the balance on Mr. McKee. It is argued that the Appellant's payments to Mr. McKee benefit Deborah in that, but for such payments, her share of support requirements for Shawna would be larger than 12%. I agree with this position. It was the relative incomes of the three parents that determined their respective support obligations. But for the inclusion of the Appellant in the support scheme Deborah would have had an increased support obligation payable to Mr. McKee. This benefit to Deborah however is an indirect benefit. The payment was for Shawna's benefit payable to Mr. McKee as custodial parent. Further, a finding that the subject payment to Deborah was intended as a benefit for her could result in Deborah being taxable on the payment. This was clearly not intended by Justice Warren. In respect of the payments to Mr. McKee, Justice Warren specifically states at page 41, paragraph 83, that:

... Both figures shall be grossed up to take into account the income tax consequences in the hands of Mr. McKee.

[15]          The alternative argument relies on agency. In the case at hand Mr. McKee is clearly not Deborah's agent in respect of the receipt of the support payment made by the Appellant. None of the authorities cited by the Appellant's representative supports this position.[6] Even if it can be said that Deborah should be regarded as a recipient of support payments for Shawna, Mr. McKee is not her agent. He receives the amount in his own capacity (as principal) under the Order. Of this there is no doubt. Further, to find Mr. McKee as Deborah's agent would expose her to liability for tax on the payment as the constructive recipient of it. Again, this result is clearly not intended by the Order. Mr. McKee was to be subject to tax on the payment.

[16]          There is a construction of the Order however that would allow the payment to be regarded as having been made by the Appellant on Deborah's behalf. That construction would acknowledge the Order's intention to recognize that the Appellant's responsibility for maintenance derives from his relationship with Deborah. Indeed that is the only way to give effect to the results intended by the Order. It was the Appellant's marriage to Deborah that put him in loco parentis to her children. His maintenance responsibility derives from her - from the home he made for her and her children. Deborah is the connecting person; the connecting link in the payments ordered for Shawna's support.[7] If the Order had expressly recognized this and provided that the Appellant pay Deborah additional support of $1,374.34 and that Deborah in turn pay Mr. McKee a like amount, both the Appellant and Deborah would be entitled to deduct the payments as "support amounts" as each such payment would then fall within paragraph (a) of the definition of "support amount".[8]

[17]          In my view, the payment requirement in the Order can and should be read as an Order routing the payments in this way. Although the copy of the Reasons for Judgement filed as Exhibit A-1 was incomplete (starting at "Child Support Issues" at page 24), it is apparent that Deborah was seeking custody of both children and child support from the Appellant for both as well. Paragraph 51 on page 24 provides as follows:

As between the Hinkelmans, the respondent/mother claims that the two girls are children of her marriage with Mr. Hinkelman and she seeks child support from him. [emphasis added]

[18]          That Deborah lost custody of Shawna would not affect her former spouse (the Appellant) obtaining a deduction for a support amount paid to her, Deborah, pursuant to her claim (see footnote 8). There is reason here to find that her claim should not be ignored and was not, in fact, intended to be ignored by Justice Warren. Her entitlement to receive support was clear (if she had been given custody of Shawna). That support entitlement should not be seen as vitiated when she lost custody (at least in terms of the Act which makes no distinction vis-à-vis custody). What happened on the loss of custody is that Deborah became subject to a support obligation. The Order for all intents and purposes recognizes the Appellant's obligation to Deborah to support both their children and requires the Appellant to pay that part of the support that relates to Shawna to Mr. McKee. The payment to Mr. McKee satisfies his obligation to Deborah to support the children of their marriage. Deborah in turn is required to defer the payment or like amount to Mr. McKee as the custodial parent. Deborah's consent to the use of these support payments in this way, if required, can be inferred from the particular facts of this case.

[19]          As stated above, the foregoing findings as to the proper construction of the Order are necessary to give effect to its clear and unambiguous intent. Mr. McKee was not to have a tax-free support receipt from the Appellant. Shawna's required maintenance was calculated on a pre-tax basis. To find that Mr. McKee did not receive the payment from the Appellant as a taxable "support amount" would be to bestow an unintended windfall on Mr. McKee and an unintended penalty on the Appellant. In Chute v. The Queen, [1999] 2 C.T.C. 2864 (T.C.C.) Judge Sarchuk observed, in respect of giving effect to the intention of an order, as follows:

... In my view, although the 1994 Order does not use specific language indicating that the payments to Erin are being made on behalf of the spouse, that was unequivocally the intent and effect of the agreement and the subsequent Order.

[20]          The Respondent's argument was devoted almost entirely to the statutory construction of the defined term "support amount". I agree with the Respondent that this provision of the Act is clear in prescribing that payments made by a person who is not the natural parent of a supported child are not deductible support amounts unless received (or deemed under the Act to be received) by a spouse or former spouse of the payer. There is no ambiguity in such provision and I do not construe it otherwise. Such clear statutory language, however, does not deny the deduction of support payments where they are made to a spouse or former spouse and that is the factual issue that I have found need to address.

[21]          In the case at hand the intent of the Order is unequivocal. The Appellant's payment is, together with Deborah's payment, to assist in the support of Shawna and to give rise to deductions under paragraph 60(b). To be treated the same they both must be taken together, recognizing under the Order that Deborah is the essential link in the chain that gives rise to the Appellant's obligation to Mr. McKee. I would therefore read the Order accordingly and allow the appeal on that basis.

[22]          It should go without saying that giving full force and effect to an order of a Superior Court should be facilitated where possible. To do otherwise can do little else but undermine respect for and confidence in our judicial system. There was nothing in our tax system, as it applied to the subject year in this case, that prohibited the deduction of a maintenance payment intended to benefit step-children for whom responsibility derived from a marriage to the natural parent of such children. To give effect to this permissive scheme was the express directive of Justice Warren. Recognizing that Deborah is the link in the chain that connects the Appellant's support obligation to Mr. McKee gives effect to both such scheme and such express directive of Justice Warren.

[23]          The appeal is therefore allowed.

Signed at Ottawa, Canada, this 16th day of May 2001.

"J.E. Hershfield"

J.T.C.C.

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