Tax Forum
Open to Interpretation
A closer look at two similar support payment cases with two very different outcomes.
FROM:
MAR-APR 2004 ISSUE | BY
DON GOODISON
In 1997, the rules relating to the deduction from and inclusion in income of support payments were changed for agreements or court orders entered into after
April 30, 1997. Under the "new" (1997) rules, support payments made on behalf of a child are neither taxable to the recipient nor deductible by the payer. Alimony paid to an
ex-spouse continues to be deductible by the payer and taxable to the recipient provided it is not child support. Unless the agreement specifies, support payments are considered to be on behalf of children. Agreements and orders that were in place prior to
May 1, 1997, continued under the prior legislation. However, if an existing agreement was altered in any way after
April 30, 1997, the new rules apply to the "new" agreement.
The formula for the inclusion of support payments in income is contained in
paragraph 56(1)(b), and the corresponding formula for deducting the payments from income is contained in
paragraph 60(b). The amount included in and deductible from income is 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.
Two key words in this formula are contained in the definition of B. The words "commencement date" are very important when dealing with changes made to agreements or orders made prior to 1997. This was the issue to be resolved in
Charles W. Miller (Appellant) vs. Her Majesty the Queen (Respondent)
, Tax Court of Canada,
Docket 2003-1052(IT)I, Citation 2003
TCC 603.
Miller and his wife divorced in 1985. Under the divorce decree, Miller was required to pay support of $200 per month per child on behalf of the three children of the marriage. He made those payments until 1996, when his former spouse made an application to increase the amount of child support she received. On
November 15, 1996, an order was issued by the Supreme Court of
British Columbia increasing the amount of support to $475 per child, for a total of $1,425 per month.
In 1999, Miller and his former spouse again went to court with a joint application that maintenance paid on behalf of the eldest child be discontinued since she was now
22 years of age. The court ordered Miller to continue paying $475 per month on behalf of the other
two children for a total of $950 per month. The change was effective
October 5, 1999.
Miller continued to deduct the support payments in the years 1999, 2000, and 2001. The Canada Revenue Agency disallowed the deductions on the grounds that the change made to the agreement on
October 5, 1999, amounted to a new agreement with a commencement date of
October 5, 1999. Miller appealed to the Tax Court of Canada under the informal procedure.
The issue before the court was simply whether the order made in 1999 created a commencement day within the meaning of
subsection 56.1(4), which states:
"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.
Since the original order was made prior to May 1, 1997,
paragraph (b) of the definition applied. In reviewing
subparagraphs (i) to (iv) of
paragraph (b), the court decided that only two of the four were applicable —
subparagraphs (ii) and (iii). In Miller's case, the order was varied after
April 1997, and the effect was to change the total amount of child support payable. The judge concluded that there was no change under
subparagraph 56.1(4)(b)(ii) because the amount per child did not change. In his view, this subparagraph only applies if the amount per child changed. The court ruled that there was no commencement date with respect to the amounts paid by Miller in 1999, 2000 and 2001.
The court then considered the decision in
Kovarik vs the Queen, (2001)
CTC 2503, an almost identical case, in which
Judge Bowman found that while the liability for one child remained the same, the total changed. In that case, Bowman dismissed Kovarik's appeal. However, in Miller's case, the judge appears to have completely ignored the fact that the total support payments changed, and allowed the appeal.
After reading this case, I am quite puzzled by the decision.
Judge Mogan refers to
subparagraph 56.1(4)(b)(iii) in his decision, but then makes no reference to its effect on his decision. In fact, he concentrates exclusively on
subparagraph 56.1(4)(b)(ii), even after referring to
Judge Bowman's decision in
Kovarik. The only explanation that I can determine is that
Judge Mogan interpreted the provisions to apply to the amount paid for each child, and not the total amount paid. See
paragraphs 14 and 15 of the judgment:
[14] I am not inclined to interpret
subparagraph (b)(ii) of the definition to find a commencement day only because one of two or more children became ineligible for child support payments. In my opinion, a commencement day would be established after April 1997 under
subparagraph ( b)(ii) only if there were a change in the support amount payable per child. When there are two or more children all eligible for child support payments, and when one child becomes ineligible for child support because of age, educational achievement, marriage, moving out, etc., the gross amount payable to the recipient by the payor will, of course, be reduced but such reduction is not, in my view, a "change" in the child support amounts for the purposes of
subparagraph ( b)(ii).
[15] Returning to the facts in this appeal, the second order varied the prior order of
Judge Holmes only by terminating the child support payable for Heather. Otherwise, the second order confirmed the former child support amount ($475 per month) as being still payable for the two younger children (Erin and Sarah). On these facts, I conclude that there was no "commencement day" established by the second order of
December 16, 1999.
Judge Bowman concluded in
Kovarik that he was bound by the plain words of
subparagraph (b)(iii), "
to change the total child support amounts payable to the recipient by the payor" even though the amount payable per child did not change. It seems that
Judge Mogan disagreed with
Judge Bowman's opinion.
Is anything in the
Income Tax Act not subject to differing interpretations? Had Miller sought advice from me, I would have told him that he didn't stand a chance because the total amount of support payments had changed. I might even have found
Judge Bowman's decision in
Kovarik and waved it at him. I would guess that most advisors would have done the same thing. Fortunately for Miller, he didn't seek my advice, represented himself, and won.
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Don Goodison, CFP, FCGA, is a partner of Kemp Harvey Goodison, Certified General Accountants, in Burnaby, B.C. E-mail
goodison@axionet.com.