Candice Y. Senger-Hammond v. Her Majesty the Queen, [1997] 1 CTC 2728 (Informal Procedure)

Bowman J.T.C.C.: — These appeals are from assessments for the appellant’s 1992 and 1993 taxation years. The issues are, for 1992, the deductibility of $4,000.00 claimed by the appellant as child care expenses and, for 1992 and 1993, the inclusion of $1,954.00 and $12,314.00 in the appellant’s income of maintenance payments.

The appellant was divorced from Calvin Conrad Hammond on March 1, 1985. By a Consent Order dated March 14, 1989 in the Court of Queen’s Bench of Alberta. Calvin Conrad Hammond was to pay to the appellant $400.00 per month for the maintenance for the infant children of the marriage.

The appellant’s ex-husband did not behave responsibly with respect to his obligation to pay maintenance. He was delinquent in his payments and ultimately she was obliged to enlist the assistance of the Family Maintenance Enforcement Program of British Columbia.

By dint of assiduous efforts the Family Maintenance Enforcement Program succeeded in recovering a portion of the amounts owing by Mr. Hammond - $1,954.00 in 1992 and $12,389.00 in 1993. On May 4, 1993 he paid $8,504.14. The total of $14,343 received in the two years is approximately the same as the $14,400 that he was obliged to pay under the order of March 14, 1989 over the three years 1991, 1992 and 1993.

The question is whether these amounts must be included in the income of the appellant under paragraphs 56(1 )(b) or (c) of the Income Tax Act as an amount received by her in the year pursuant to a decree order or judgment of a competent tribunal as an

...allowance payable on a periodic basis.

It is unfortunate, considering that the appellant received the maintenance payments owing to her in irregular amounts and late, but this does not in my view alter the fact that the amounts represented her former husband’s obligation under the order of March 14, 1989.

In Minister of National Revenue v. Armstrong, [1956] S.C.R. 446, [1956] C.T.C. 93, 56 D.T.C. 1044, the divorce decree provided for a monthly payment of alimony of $100.00. After two years, the former spouse agreed to a lump sum payment of $4,000.00 in full settlement of all amounts payable in the future. The Supreme Court of Canada held that the amount of the settlement was not payable pursuant to the divorce decree but was, rather, paid to obtain a release from the divorce decree. This case, however, appears to be governed by R. v. Sills, (sub nom. R. v. Sills (formerly La Brash)) [1985] 1 C.T.C. 49, 85 D.T.C. 5096 (F.C.A.) and not by Armstrong. In Sills, the former spouses entered into a written separation agreement providing for monthly alimony and maintenance payments. In fact, the former husband paid three lump sums at random times. They were not in the amounts agreed or at the times stipulated in the agreement. The Federal Court of Appeal held that they were nonetheless received as alimony or other allowance “payable on a periodic basis”. Heald J. stated, at page 52 (D.T.C. 5098):

Some of the money was payable to the Respondent as alimony, the remainder was payable to her as maintenance for the dependant children. All of it was payable on a monthly basis as stipulated in the separation agreement. Where the Trial judge erred, in my view, was in not having due regard to the use of the word “payable” in the subsection. So long as the agreement provides that the monies are payable on a periodic basis, the requirement of the subsection is met. The payments do not change in character merely because they are not made on time. The learned Tax Review Board member made the same error, in my view, when he said that the amounts to be included in income “must be received exactly according to the terms of the agreement”. The subsection does not say that. If the learned Tax Review Board member and the learned Trial Judge are right, then any monthly payment made to the Respondent on the second day of the month for which it is due, for example, would not be taxable in the hands of the Respondent. This is surely not a reasonable or a proper interpretation of the subsection.

To the same effect see Soldera v. Minister of National Revenue, [1991] 2 C.T.C. 2097, 91 D.T.C. 987 (T.C.C.). In the present case, I have concluded that the payments from the appellant’s former husband that she obtained through the Family Maintenance Enforcement Program continued be taxable under paragraphs 56(1 )(b) and (c).

The second issue is the deductibility of child care expenses under section 63. In 1992, the appellant claimed child care expenses in the amount of 4,000.00 in respect of her three infant children. All of the conditions to ieductibility were present except for one — she did not file with the Minister receipts issued by the care-givers containing those persons’ social insurance numbers. At trial she submitted the names of a number of persons whom she paid to care for her children, as well as the amounts paid. She testified that she paid them $20 per day per child. Although I have little doubt that she spent at least the $4,000.00 that she claimed and probably more, I am satisfied that she has proved $2,950.00. She testified that she endeavored to obtain receipts and social insurance numbers but the payees whom she could find refused to give them to her, and others had moved away and could not be located.

The question is whether the words in section 63:

and the payment of which is proven by filing with the Minister one or more receipts each of which was issued by the payee and contains, where the payee is an individual, that individual’s social insurance number

are a mandatory condition precedent to deductibility or merely an administrative direction, non-compliance with which is not fatal to deductibility where, as here, the taxpayer is able to establish that the payments have been made. Put differently, are they imperative or directory?

There are at the court’s disposal a vast array of interpretive tools: the teleological approach, the words-in-total context approach, the functional, non-mechanical approach, object and spirit, scheme of the act, plain words and the avoidance of absurdity principle, to mention only a few.

The question cannot be answered in a vacuum. One must endeavour to answer it within the context of a larger question: was it the intent of Parliament to give the child care expenditure deduction only to those parents who can arrange for child care by persons who are willing to give receipts with their social insurance numbers, and to deny it to those who, for financial or other reasons beyond their control cannot do so. If this is indeed the intent it follows that parents may in many cases be forced to choose between a care giver who will issue a receipt and one who is the most suitable one to take care of their children.

Hamlyn J. of this court in Barclay v. R., (sub nom. Barclay v. Canada), [1995] 1 C.T.C. 2345(D) (T.C.C.) and Mr. A.W. Prociuk, Q.C. in the Tax Review Board in Grodski v. Minister of National Revenue, [1978] C.T.C. 2340, 78 D.T.C. 1273 were faced with essentially the same situation as on this case. Hamlyn J. dismissed the appeal whereas Mr. Prociuk allowed it.

The problem stems from an attempt by the government to achieve two incompatible goals — to allow parents to deduct child care expenses in appropriate cases — a commendable social objective - and to protect the revenue by ensuring that the Department of National Revenue can find, and tax, the payees and not be faced with fraudulent or inflated claims — a purely fiscal objective. As a practical matter, what the government in this instance gives with one hand it takes away with the other. It does not require much imagination to realize that persons who receive payment in cash for taking care of children may very well not include those amounts in income. For this reason, they will refuse to give receipts or provide their social insurance numbers, or, if they do, they will demand higher fees because they know that they will be taxed. Thus, persons who need the deduction for child care expenses must in many cases choose between non-deductibility or the payment of higher fees. Affluent parents who can afford to send their children to more expensive caregivers who issue receipts will benefit from the deduction. Lower income groups or, as in this case, single parents in more straitened circumstances, must make do with caregivers who expect to be paid cash and will not issue receipts or give their social insurance numbers [1] . Nor is it necessarily a matter of economics. The most appropriate caregiver may be one who will not issue a receipt.

It would seem therefore that where a court is faced with two interpretations, one of which achieves one goal and the other of which achieves a goal that is incompatible with the first goal, it must choose one that best achieves the predominant objective of the legislation, or, as Cartwright J. (as he then was) stated in Highway Sawmills Ltd. v. Minister of National Revenue, [1966] S.C.R. 384, [1966] C.T.C. 150, 66 D.T.C. 5116, at pages 157-58 (D.T.C. 5120):

it may be of assistance to consider which of two constructions contended for brings about a result which conforms to the apparent scheme of the legislation.

To say that the failure to file receipts with the payees’ social insurance numbers even where it has been established beyond a shadow of a doubt that the expenses were paid, results in non-deductibility under section 63 would be to adopt a “purely mechanical” rather than a “functional” approach.

In Swantje v. R., (sub nom. Swantje v. Canada) [1994] 2 C.T.C. 382, (sub nom. R. v. Swantje) 94 D.T.C. 6633 (F.C.A.), affirmed [1996] 1 S.C.R. 73, [1996] 1 C.T.C. 355, 96 D.T.C. 6310, the Federal Court of Appeal said, at page 384:

The approach adopted by the learned judge was a purely mechanical one, focussed on the method, the means devised to achieve the goal. The proper approach must be a functional one, and the scheme must be considered as a whole, taking into account the intent of the legislation, its object and spirit and what it actually accomplishes (Stubart Investments Ltd. v. R., [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305). What Part 1.2 of the Act, completed by paragraph 60(w), realizes is the repayment of social benefits by taxpayers who, because of their higher incomes, have a lesser need of them.

The overriding object of section 63 is to permit the deduction of child care expenses, not to assist the Minister of National Revenue to collect tax from baby- sitters. To focus on

the method, the means, to achieve the goal....

is to ignore the principle stated by the Federal Court of Appeal and to ignore the telos encompassed in the teleological approach.

In Dib v. R., [1996] 1 C.T.C. 2342 (T.C.C.), the taxpayer failed to file a prescribed form. It was held that this was not fatal to her claim under section 146.01, because it would make the object of the law subordinate to form. At page 2346 the following appears:

Given the remedial nature of section 146.01, and the object that it obviously seeks to attain, I would regard Mrs. Dib’s failure to file the prescribed form as at most imperfect compliance as opposed to non-compliance with the Act. Indeed, as I have observed above, it was impossible for her to comply with the provision that her request to the bank be in prescribed form. See Elance Steel Fabricating v. Falk Bros. Industries Ltd., [1989] 2 S.C.R. 778 at pages 782-83. The distinction was also discussed at some length by Lederman J. in Thomas v. Hickey (1995) 22 O.R. (3d) 331 (Gen. Div.) at pages 339-41.

To deny deductibility on the basis of a purely mechanical interpretation would lead to an absurdity (Victoria (City) v. Bishop of Vancouver Island, [1921] 2 A.C. 384, 59 D.L.R. 399 (B.C.P.C.)). One cannot of course ignore the words of section 63 quoted above. They must be given some effect, as Isaac C.J. said in Hawboldt Hydraulics (Canada) Inc. (Trustee of) v. Canada, (sub nom. Hawboldt Hydraulics Inc. Estate (Trustee of) v. Canada) [1994] 2 C.T.C. 336, (sub nom. R. v. Hawboldt Hydraulics (Canada) Inc.) 94 D.T.C. 6541 (F.C.A.), at page 342 (D.T.C. 6546):

But these principles are not invitations to Courts toignore other well- acceptedrulesof construction, such as that which requires Courts to construe statutes so as “to ascribe some meaning to each word used by the legislature,” Atco v. Calgary Power Ltd., [1982] 1 S.C.R. 557 at 569.

Nonetheless, their effect must be interpreted in a manner that is consonant with the object of the legislation. To mechanically treat the filing of receipts with social insurance numbers as an inflexible condition precedent to deductibility defeats the predominant objective of the legislation.

There is much jurisprudence in Canada, the United Kingdom and the United States in which the question whether provisions in a statute are directory or imperative has been considered.

Black’s Law Dictionary defines “directory” as follows:

Directory, adj. A provision in a statute, rule of procedure, or the like, which is a mere direction or instruction of no obligatory force, and involving no invalidating consequence for its disregard, as opposed to an imperative or mandatory provision, which must be followed. The general rule is that the prescriptions of a statute relating to the performance of a public duty are so far directory that, though neglect of them may be punishable, yet it does not affect the validity of the acts done under them, as in the case of a statute requiring an officer to prepare and deliver a document to another officer on or before a certain day.

A “directory” provision in a statute is one, the observance of which is not necessary to the validity of the proceeding to which it relates; one which leaves it optional with the department or officer to which it is addressed to obey or not as he may see fit. Generally, statutory provisions which do not relate to the essence of the thing to be done, and as to which compliance is matter of convenience rather than substance are “directory,” while provisions which relate to essence of thing to be done, that is, matters of substance, are “mandatory.” Rodgers v. Meredith, 274 Ala. 179, 146 So. 2d 308, 310.

Under a general classification, statutes are either “mandatory” or “directory,” and, if mandatory, they prescribe, in addition to requiring the doing of the things specified, the result that will follow if they are not done, whereas, if directory, their terms are limited to what is required to be done. A statute is mandatory when the provision of the statute is the essence of the thing required to be done; otherwise, when it relates to form and manner, and where an act is incident, or after jurisdiction acquired, it is directory merely.

The first paragraph of the above entry is identical to that in Jowitt’s Dictionary of English Law, (2nd Ed.). I believe that these passages correctly state the law of Canada as well.

Maxwell on Interpretation of Statutes, 12th Edition, discusses the matter at pages 314-315:

The first such question is: when a statute requires that something shall be done, or done in a particular manner or form, without expressly declaring what shall be the consequence of non- compliance, is the requirement to be regarded as imperative (or mandatory) or merely as directory (or permissive)? In some cases, the conditions or forms prescribed by the statute have been regarded as essential to the act or thing regulated by it, and their omission has been held fatal to its validity. In others, such prescriptions have been considered as merely directory, the neglect of them involving nothing more than liability to a penalty, if any were imposed, for breach of the enactment. “An absolute enactment must be obeyed or fulfilled exactly, but it is sufficient if a directory enactment be obeyed or fulfilled substantially.” [2] It is impossible to lay down any general rule for determining whether a provision is imperative or directory. [3] “No universal rule,” said Lord Campbell L.C., “can be laid down for the construction of statutes, as to whether mandatory enactments shall be considered directory only or obligatory with an implied nullification for disobedience. It is the duty of Courts of Justice to try to get at the real intention of the Legislature by carefully attending to the whole scope of the statute to be construed.” [4] And Lord Penzance said: “I believe, as far as any rule is concerned, you cannot safely go further than that in each case you must look to the subject-matter; consider the importance of the provision that has been disregarded, and the relation of that provision to the general object intended to be secured by the Act; and upon a review of the case in that aspect decide whether the matter is what is called imperative or only directory.” [5]

The essence of section 63 is the deduction of child care expenses, not the collection of tax from babysitters. The language of the provision does not support the view that the filing of receipts is mandatory. For one thing, the word “shall” is not used [6] . Rather it describes a method of proof, which is clearly formal, evidentiary and procedural. Indeed, one may usefully compare the words in section 63 with those in subsection 118.1(2) of the Income Tax Act, which reads:

(2) — A gift shall not be included in the total charitable gifts, total Crown gifts or total cultural gifts of an individual unless the making of the gift is proven by filing with the Minister a receipttherefor that contains prescribed information.

The requirement in subsection 118.1(2) is clearly imperative. Had Parliament intended that the same effect be given to the words in section 63 it was quite capable of saying so.

I think that the words in section 63 requiring the filing of receipts with the payee’s social insurance numbers are directory rather than imperative, and that the failure to do so is not fatal to deductibility. This conclusion is consistent with the wording of the Act and its object.

The appeal from the assessment for 1992 is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment to allow the deduction of $2,950.00 as child care expenses under section 63.

The appeal from the assessment for 1993 is dismissed.

There will be no order for costs.

Appeal dismissed.