Tax Court of Canada Judgments

Docket: 2003-147(IT)I

BETWEEN:

BEVERLEY BAILEY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on December 11, 2003 at Toronto, Ontario

Before: The Honourable Justice J.E. Hershfield
Appearances:
For the Appellant:	The Appellant herself
Counsel for the Respondent:	Arnold H. Bornstein, Nimanthika Kaneira

____________________________________________________________________

AMENDED JUDGMENT

          The appeal from the assessment made under the Income Tax Act for the 2000 taxation year is dismissed for the reasons set out in the attached Amended Reasons for Judgment. All references to paragraph 56(1)(a) of the Income Tax Act are amended to read as references to paragraph 56(1)(b).

Signed at Toronto, Canada, this 6th day of February 2004.

"J.E. Hershfield"

Hershfield J.

Citation: 2004TCC98

Date:20040206

Docket: 2003-147(IT)I

BETWEEN:

BEVERLEY BAILEY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

AMENDED REASONS FOR JUDGMENT

Hershfield J.

[1]      This is an appeal from reassessments of the Appellant's 2000 taxation year that included taxable income of $55,000.00 received by her in the year in spousal support payments from her former spouse due to a break-up of the marriage some years earlier. The support payments were for the sole benefit of the Appellant. There was no provision for children. The payments received were pursuant to an order of the Superior Court of Justice of Ontario (the "SCJ"). The issue to be dealt with in this appeal is the taxability of the support payments.

[2]      The particular order dealing with the support payments in the subject year was an interim order of the SCJ. An unsuccessful appeal of the interim order was launched by the Appellant's former spouse.

[3]      The Appellant refers to the interim order as precedent setting in that it set aside a separation agreement entered into between the Appellant and her former spouse notwithstanding that the agreement provided that payments agreed to would under no circumstances be varied. This included the Appellant's express covenant that under no circumstances was the time to be extended for which the agreed payments were to be made. The Appellant also agreed that no further claim would be made under either the Family Law Act or the Divorce Act regardless of a change in circumstance. Almost nine years after the support payments ended under the agreement, the Appellant began the proceedings that led to the interim order. The interim order set aside the agreement. Providing for further relief as it did might well, in the circumstances of that case and prevailing authorities at the time, be described as precedent setting.[1]

[4]      The interim order acknowledges in the Reasons for Decision that the Appellant had not achieved self-sufficiency since the break-up and that she was suffering an economic hardship due to the marriage breakdown which the Court was required to relieve. Based on the budget proposed by the Appellant, the SCJ found that the amount of $5,000.00 per month was justified. In 2000, 11 months' support was received as the interim order was effected commencing February 2000. [2]

[5]      The Appellant urges me to accept that the SCJ intended her to receive, based on her budget, the full benefit of the support payments on an after tax basis. Her evidence is that there was no consideration of the tax liability by the SCJ and that it could not have been taken into account in satisfying the stated objective of the award which was to enable self-sufficiency since taking it into account, she was not self-sufficient. It appears her proposed budget did not include the tax obligation in question that arises in respect of the support payments. In any event, I accept that the SCJ may not have considered the tax liability in question. The Reasons for Decision make no reference to income tax considerations.

[6]      The Respondent relies on paragraph 56(1)(b) of the Income Tax Act (the "Act") to include the subject support payments in the Appellant's income. Under that paragraph for the support payments to be included in the Appellant's income they must be "support amounts" as defined in subsection 56.1(4). These provisions of the Act read as follows:

56.        (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year

. . .

            (b)         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;

. . .

56.1(4) The definitions in this subsection apply in this section and section 56.

. . .

"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 common-law partner or former spouse or common-law partner of the payer, the recipient and payer are living separate and apart because of the breakdown of their marriage or common-law partnership 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]      Once it is established (or acknowledged as in the case at bar) that the "support amount" received in the year, is not a "child support amount" as defined in subsection 56.1(4) and that the support amount has not been brought into income in an earlier year, paragraph 56(1)(b) includes such support amount in the recipient's income in the year of receipt. That acknowledgement being present, all that needs to be determined, aside from a Canadian Charter of Rights and Freedoms[3] issue which has been raised, is whether the subject support payments are a "support amount". If they are, the payments are included in the recipient's taxable income and are deductible from the payer's taxable income under paragraph 60(b) of the Act.[4]

[8]      The definition of "support amount" requires that the amount be receivable as "an allowance on a periodic basis for the maintenance of the recipient --- where the recipient has discretion as to the use of the amount". This has not been brought into question in the case at bar. Further, paragraph (a) of the definition of "support amount" requires that the recipient be the spouse or common law partner or former spouse or common law partner of the payer and that they be living separate and apart by virtue of the breakdown of their marriage or common law partnership. No issue has been raised in respect of these requirements. The last requirement also set out in paragraph (a) of the definition of "support amount" is that "the amount is receivable under an order of a competent tribunal or under a written agreement". Notwithstanding that the payments received in this case were pursuant to the interim order of the SCJ, the Appellant argued in her Notice of Appeal that the tax liability attached to the support payments results in an economic effect that was not as ordered by the SCJ. This, she argues, causes the support received to be something other than "under the order" of that court.

[9]      While I accept that the interim order made no provision for tax liability and that the SCJ may not have considered such liability in making its order, there is no question that the amounts received were payable and receivable under the interim order. That is all the Act requires. The sufficiency of the amount, after tax, is not contemplated by the Act. That is a matter of family law to be determined by the appropriate court - the SCJ in this case. That the tax liability may render the support insufficient in terms of giving effect to the objectives of the order is not relevant. It is incumbent on the party seeking support to persuade the court hearing the maintenance plea of the quantum required to give effect to the objectives of the order. If a liability to a creditor of the support recipient is a factor in determining the appropriate support and the court fails to take it into account, the payments under the order are still under the order even if they do not give effect to the stated objective of the order. The order simply requires revision on terms the court may determine appropriate so as to give effect to its intended objective applying family law principles. That is, if the liability (for taxes or otherwise) frustrates the objective of the order, the remedy is to be found in the court that granted the order.[5]

[10]     This takes me to the principle argument of the Appellant. She argues that paragraph 56(1)(b) and the inclusion/deduction system employed in the Act, infringe on her rights under the Charter of Rights and Freedoms in that they are discriminatory. The Appellant relies on section 15 of the Charter to strike down the source of such discrimination.[6] More particularly it is subsection 15(1) upon which she relies. That subsection reads as follows:

15. (1) Every individual is equal before and under the law and has the right to the equal protection and equal benefit of the law without discrimination and, in particular, without discrimination based on race, national or ethnic origin, colour, religion, sex, age or mental or physical disability.

[11]     I note at this point that both counsel for the Respondent and I had a difficult time identifying the basis of the asserted discrimination. She does not assert discrimination on the basis of sex. In the broadest terms she asserts discrimination against supported persons who are economically disadvantaged, not self-sufficient, following the breakdown of a relationship (marriage) that contributed to such non-self-sufficiency. Family law recognizes this group and requires that such dependent state be addressed. With this group in mind I have distilled the Appellant's principle Charter arguments down to the following two:

(1) supported persons do not have equal benefits under the law under the inclusion/deduction system compared to supporting persons; and

(2) paragraph 56(1)(b) discriminates against separated persons who are economically disadvantaged (not self-sufficient) by reason of dependence created during marriage.

[12]     While I will elaborate on these arguments, I note that Respondent's counsel relied principally on the Supreme Court of Canada decisions in Thibaudeau v. The Queen in 1995[7] and Law v. Canada (Minister of Human Resources Development) in 1999[8] in his argument that paragraph 56(1)(b) did not offend the Charter. The former case supports the view that the adequacy of the support payments to the Appellant is not determined by the tax system but is governed by family law so that the taxation of support payments cannot be said to offend the Charter. In respect of the decision in Law, Respondent's counsel points out that that case requires me to ask the following three questions:

(1)      Does paragraph 56(1)(b) treat the Appellant differently than others on the basis of personal characteristics?

(2)      If there is a distinction, is the ground of that distinction enumerated, or analogous to the grounds enumerated, in subsection 15(1) of the Charter?

(3)      If so, is the differential treatment discriminatory?

The decision in Law supports the view that differential treatment imposed by the Act will not offend the Charter unless the differential treatment is based on a personal characteristic. The Respondent argues that to the extent there is differential treatment in the case at bar, it is not due to a personal characteristic of the Appellant. It is due to her economic and civil status which are not personal characteristics.

[13]     I note as well that Respondent's counsel came well prepared to defend the inclusion/deduction system under attack by the Appellant. He called a witness from the Department of Finance to speak to the policy and fiscal issues arising in respect of the Charter questions raised by the appeal and filed two Affidavits sworn by this witness.[9] The first Affidavit deals with concepts of ability to pay and horizontal and vertical equity policies underlying the operation of the Act. The second Affidavit deals with fiscal issues should the symmetry of the present inclusion/deduction be lost. For the most part both Affidavit submissions have relevance to the alternative position advanced by the Respondent were I to find that paragraph 56(1)(b) did violate section 15 of the Charter. The alternative position of the Respondent is that section 1 of the Charter would apply to save paragraph 56(1)(b) were I to find that it violated section 15. [10] Section 1 of the Charter provides as follows:

1. The Canadian Charter of Rights and Freedoms guarantees the rights and freedoms set out in it subject only to such reasonable limits prescribed by law as can be demonstrably justified in a free and democratic society.

[14]     I turn now to the specific Charter arguments noted above.

Supported persons do not have equal benefits under the law under the inclusion/deduction system compared to supporting persons

[15]     The Appellant argues that the inclusion/deduction system is founded on the theory that the fiscal benefit afforded by the deduction (to the supporting person) is to be shared, the theory being that the deduction to the person in a higher tax bracket permits a transfer of the tax savings to the person in the lower tax bracket. The Appellant argues that in practice such benefit is not shared and that the effect is discriminatory. She argues that the system in reality continues, indeed increases, the imbalance between the former partners that an order for spousal support is intended to remedy. In this context the Appellant compares her group of economically disadvantaged persons with the group of which her former husband is a part. She is a formerly married person. So is her husband. As a supporting person in that category he is better off under the current tax system than a supported person in the same category. She does not have equal benefit under the law.

[16]     Respondent's counsel argued that the theory behind the inclusion/deduction system is based on the payer's "ability to pay" and the recipient's "discretionary use" of the support amounts and not on the notion of sharing the fiscal benefit afforded by the deduction (to the supporting person) or by the "income splitting" effect of the inclusion/deduction system.

[17]     I accept the Respondent's position that the rationale behind the inclusion/deduction system is founded (on the deduction side) in notions of ability to pay. However, as noted above, I am of the view that such position forms part of a justificatory analysis which is not relevant in the examination of the application of subsection 15(1) of the Charter and even if it were relevant (such as under section 1 of the Charter), the "ability to pay" justification is, in any event, weak at best. Affording a deduction on the basis of ability to pay is a very subjective exercise which is to say that it (the ability to pay theory) offers, objectively, no justification for the inclusion/deduction system being applied to support payments. Indeed, one could rationalize any number of tax models for the tax treatment of support payments. Prior to May 1, 1997 payment of child support was deductible under the Act. Did a supporting parent's ability to pay tax change? Clearly not. The subjective rationalization of the tax policy associated with the tax treatment of these types of payments changed. There are many other cases where support payments ordered by the courts are not deductible for tax purposes even though the ability to pay tax has been reduced. I might be ordered to support a parent or to support a person I have injured. My ability to pay tax is affected by such court ordered obligations but the tax system makes no accommodation. Whatever the rationalizations are for different types of support payments, they go far beyond such simplistic notions as "ability to pay". Parliament, not the courts, is accountable for such subjective rationalizations.

[18]     Similarly, justifying the inclusion on theories of "discretionary use" is weak at best. There is no objective basis for such justification. I suggest that the assumption in respect of alimony type payments is that they are a distribution or sharing of earnings not a distribution or sharing of capital. That is, the assumption is that the source of the paid-out funds is not yet taxed where a deduction is permitted. The reason for taxing it in the hands of the recipient is to ensure that it is taxed somewhere. This is not a policy that can be objectively justified on some notion of "discretionary use". This, again, is a subjective policy imposed by Parliament. It is reflective, to some extent at least, of the degree of separateness of the persons involved in these support payment regimes. Separated persons are treated as two tax units in respect of one income source so as to "allow" income splitting but they are not considered so independent as not to require accountability in respect of that income source - as between the two of them. While a reasonable fiscal philosophy, it is subjective nonetheless. That the Act might be replete with subjective distinctions does not make those distinctions discriminatory.

[19]     Regardless of the justification, the Appellant is correct in her assertion that she does not share the benefit afforded her former husband. There is a benefit to the former spouse who pays support and, as Respondent's counsel asserted, it is a benefit not intended, necessarily, to be shared. To support his position, Respondent's counsel referred to excerpts from the 1942 House of Commons Debates:[11]

Mr. Bence:

It seems to me most unfair that when a man is divorced and is supporting his ex-wife by order of the court, he should not be allowed to deduct, for income tax purposes, the amount paid in alimony. If that were done, the ex-wife could be required to file an income tax return as a single woman, as she should, and she would have to acknowledge receipt of that income in making up that return. In many cases the man has married again, but still he must pay a very high tax on the $60, $70 or $80 a month he must pay his former wife. I am not thinking of it so much from the point of view of the husband, though I believe he is in a very bad spot. In the cases with which I have become acquainted, the husband has defaulted in his payments because he has not been able to make them, and in those cases it is the former wife who suffers, and accordingly I believe she should be given as much consideration as the husband.[12]

While the Appellant argued this passage might be taken to support her position that the supported person was expected to benefit from the current inclusion/deduction system, the benefit suggested by the passage is indirect at best. Further, some Members of Parliament appear to have had only the support payer in mind in considering changes to the provisions of the Act dealing with support payments. Consider the following passages from the same Commons Debate:

Mr. Green:

I really think it is an impossible situation, with the tax so greatly increased, as it has been this year. After all, our law recognizes divorce, and once the parties are divorced they are entitled to marry again. In some cases that have been brought to my attention the husband has remarried and had children by the second wife, but is forced to pay income tax on the alimony that he pays the first wife, and I suggest that the position is absolutely unfair.

[20]     Parliament has permitted the subject support payments to be deductible. The intention was to benefit the supporting person. There is no need to intellectually elevate this clear concession by arguing that the inclusion/deduction system provides an overall benefit to persons living separate and apart by virtue of marriage break-up. There is no collective unit that could be presumed to share any such benefit. The Appellant is correct in this. The "benefit" in our tax system of an inclusion (by recipient of the support payments) and a deduction (by the payer of the support payment under paragraph 60(b) of the Act) is not to permit income splitting which is to allow a second taxpayer the benefit of access to lower marginal rates of tax. That a support recipient might have a lower rate applied is no benefit to the recipient. The recipient suffers a tax consequence without abatement from the supporter unless that abatement is redirected by the application of family law principles which is where Parliament and the Supreme Court of Canada in Thibaudeau recognized the "sharing" (if any) of the deduction benefit (given to the supporter) should be addressed. Weighing all the circumstances and applying family law principles to such circumstances enables the family law court to act as it deems appropriate on a case-by-case basis.[13]

[21]     This is essentially the conclusion arrived at by the majority in Thibaudeau in their finding that paragraph 56(1)(b) of the Act was not discriminatory. While paragraph 56(1)(b) has been amended since that case was decided in respect of income inclusions for child support and while that case dealt with the taxability of child support as opposed to spousal support, the basis for attacking the subject paragraph of the Act in that case is in all relevant ways on all fours with the present case. This was the implicit conclusion as well in Latsay v. Canada, [1997] T.C.J. No. 3. where spousal support payments being brought into income under paragraph 56(1)(b) was found, based on Thibaudeau, not to be in violation of the Charter.

[22]     In Thibaudeau, the taxpayer claimed to be a member of a group of separated or divorced persons that by reason of self-sufficiency received no personal support but rather received support as custodian parent for the maintenance of children.[14] That group was found in Thibaudeau not to be discriminated against by the application of paragraph 56(1)(b). While the Supreme Court of Canada may be said to have been divided on some issues presented in that case, the majority view does not seem to take exception to the findings of Cory J. and Iacobucci J. at pages 5274-76 which were that where there is a displacement of the tax liability between former spouses:

"... the responsibility for this lies not in the Income Tax Act, but in the family law system and the procedures from which the support orders originally flow. This system provides avenues to revisit support orders that may erroneously have failed to take into account the tax consequences of the payments. Therefore, in light of the interaction between the Income Tax Act and the family law statutes, it cannot be said that s. 56(1)(b) of the Income Tax Act imposes a burden upon the respondent within the meaning of s. 15 jurisprudence".

This passage, applied to the parent group of which Thibaudeau was a member, applies equally if not more so to the group the Appellant places herself in, namely that group who are not self-sufficient and whose dependency is intended to be addressed by family law. Persons in this group requiring assistance can resort to the family courts to ensure their right to receive it is enforced.

[23]     A similar view is expressed in Thibaudeau by Gonthier J. at page 5289:

In closing I would note that the inadequacy of maintenance is due to numerous factors governed by family law and is not the result of these provisions of the ITA. The distribution of the additional amounts freed up by the system does not, within the meaning of s. 15 of the Charter, have to be made equally between the members of the couple, as it is properly governed by family law in accordance with the child's best interests.

This passage too applies, in my view, in respect of family law principles governed in accordance with the interests and needs of a non-self-sufficient partner without children. That benefits of the system are not equally shared or distributed under the Act is not an infringement of rights under the Charter.

[24]     Further, applying the tests in Law, the Appellant's first argument under subsection 15(1) of the Charter would fail as well. While the Appellant's argument does underline that the supporter is better off under the inclusion/deduction system, there is no discrimination on the basis of personal characteristics. The Appellant's disadvantaged situation is an economic one and it is not an immutable (or constructively immutable) personal characteristic. That her former husband is afforded a tax benefit does not entitle her to such benefit or to a share of it. As a separated person in need of support she is distinct from the person paying her support but the basis of that distinction is not enumerated or analogous to an enumerated basis in subsection 15(1) of the Charter. The Respondent cites the following passage from Corbière v. Canada (Minister of Indian and Northern Affairs)[15] which for the purposes of this appeal is sufficient authority for these findings:

The thrust of identification of analogous grounds at the second stage of the law analysis is to reveal grounds based on characteristics that we cannot change as if the government has no legitimate interest in expecting us to change to receive equal treatment under the law. To put it another way, section 15 targets the denial of equal treatment on grounds that are actually immutable, like race, or constructively immutable, like religion.

Paragraph 56(1)(b) discriminates against separated persons who are economically disadvantaged - not self-sufficient - by reason of dependence created during marriage

[25]     The Appellant argues that the subject inclusion provision discriminates against her and others like her by creating an economically crippling liability on amounts awarded to relieve an already existing economic hardship. One social policy working against another effectively discriminating against separated persons who are economically disadvantaged, not self-sufficient, by reason of dependence created during marriage. Paragraph 56(1)(b) targets this group. To target this disadvantaged group by clawing back that which is granted to alleviate their hardship is, or so it is argued, is to discriminate against them. She argues her need for (and right to) support is a personal characteristic shared by others in her group which is subjected to discriminatory treatment under the Act relative to the treatment given persons such as her former partner (and others in his group) who are able to (and have the legal obligation to) provide the required support.

[26]     The Appellant also argues that marriage establishes a right to be supported which continues on marriage break-up. If the basis for the responsibility for support flows from the marriage, measures and means giving effect to such responsibility must be on a consistent and equivalent basis both before and after marriage break-up. Inconsistent tax treatment imposed in respect of expenditures arising from a responsibility attached to marriage (whether during marriage or after marriage break-up) operates in a discriminatory fashion against persons who have become dependent by virtue of marriage but who are living separate and apart by virtue of marriage breakdown.

[27]     Again, applying the tests in Law, the Appellant's second challenge under subsection 15(1) of the Charter must fail. There is no discrimination on the basis of personal characteristics of the type afforded protection under the Charter. Being economically disadvantaged is not a personal characteristic. The Appellant's income warranted the support order but one's income level (one's economic situation) is not a personal characteristic enumerated under section 15 nor is it a characteristic analogous to those which are enumerated.[16] That one area of law might warrant an order for support does not make it discriminatory for another area of the law to bring it into the tax net. These are policy decisions within the purview of Parliament. What the Appellant is suggesting as discriminatory is really a perceived anomaly. The anomaly that one might perceive is in applying an "ability to pay" justification in the case of the supporter and not applying it in the case of the supported. However, as stated, the ability to pay theory is, objectively at least, no rationalization for the tax treatment that offends the Appellant. It is a subjective justification within the purview of Parliament to employ.

[28]     While it is true that marriage gives rise to support obligations both during marriage and after marriage break-up, marriage break-up is an event that crystalizes support rights. It is an event that creates a material distinction in civil status. However, a change in civil status is not a personal characteristic of the type afforded protection under the Charter. Nor, in the context of the Act, is it an analogous characteristic afforded protection under the Charter.

[29]     Gonthier J. remarks in Thibaudeau[17] that "... one should not confuse the concept of fiscal equity, which is concerned with the best distribution of the tax burden in light of the need for revenue, the taxpayer's ability to pay and the economic and social policies of the government, with the concept of the right to equality, ...". In these remarks Gonthier J. seems to echo the views of Letourneau J.A. who gave a dissenting opinion in the Thibaudeau case at the Federal Court of Appeal level.[18] Indeed, at page 5279, Gonthier J. refers to Letourneau J.A.'s dissenting judgment in some detail. Letourneau J.A.'s thesis is that we cannot take civil status into account when determining if there has been discrimination in the context of a provision of the Act. Social, political, legal and economic realities will cause taxpayers to experience different treatments under the Act. The Act by its nature sets up distinctions and imposes different burdens based on different economic and civil status realities and same is not prima facie discriminatory. That is, that Parliament has recognized in the Act a need to accommodate a supporting person without accommodation to the supported person is not prima facie discriminatory. In the context of paragraph 56(1)(b) the Supreme Court of Canada has, in Thibaudeau, gone one step further and held that paragraph not to be discriminatory (prima facie or otherwise) on facts that are not distinguishable in any relevant way from the case at bar.

[30]     For all these reasons I find that paragraph 56(1)(b) does not offend subsection 15(1) of the Charter. Accordingly, the appeal is dismissed.

Signed at Toronto, Canada, this 6th day of February 2004.

"J.E. Hershfield"

Hershfield, J.

CITATION:

2004TCC98

COURT FILE NO.:

2003-147(IT)I

STYLE OF CAUSE:

Beverley Bailey and Her Majesty the Queen

PLACE OF HEARING:

Toronto, Ontario

DATE OF HEARING:

December 11, 2003

AMENDED REASONS FOR JUDGMENT BY:

The Honourable Justice J.E. Hershfield

DATE OF AMENDED JUDGMENT:

February 6, 2004

APPEARANCES:

For the Appellant:

The Appellant herself

Counsel for the Respondent:

Arnold H. Bornstein, Nimanthika Kaneira

COUNSEL OF RECORD:

For the Appellant:

Name:

Firm:

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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