Thibaudeau v. Canada [1995] 2 S.C.R. 627: -- Alimony -- Income tax -- Divorced wife refusing to include in computing income amounts received from ex-husband as alimony for maintenance of children --

Present: La Forest, L'Heureux-Dubé, Sopinka, Gonthier, Cory, McLachlin and Iacobucci JJ.


Constitutional law -- Charter of Rights -- Equality rights -- Alimony -- Income tax -- Divorced wife refusing to include in computing income amounts received from ex-husband as alimony for maintenance of children -- Whether tax provision requiring her to include amounts in income infringes s. 15 of Canadian Charter of Rights and Freedoms -- If so, whether provision can be justified under s. 1 of Charter -- Income Tax Act, S.C. 1970-71-72, c. 63, s. 56(1)(b).

Under the decree granting her divorce the respondent was awarded custody of her two minor children and alimony of $1,150 a month from her ex-husband for the exclusive benefit of the children. In determining the said amount the court took into account the cost of maintaining the children, the tax impact on the former spouses and the respondent's duty also to provide for the maintenance of her children. The court recognized, however, that the amount so determined required a greater contribution from the respondent than would be required by the ratio between the respective incomes of the former spouses. Section 56(1)(b) of the Income Tax Act ("ITA") requires a separated or divorced parent to include in computing income any amounts received as alimony for the maintenance of children, while s. 60(b) ITA allows a parent who has paid such amounts to deduct them from income. The respondent challenged the constitutionality of s. 56(1)(b) in the Tax Court of Canada. She argued that by imposing a tax burden on money which she was to use exclusively for the benefit of her children, s. 56(1)(b) infringed her right to equality guaranteed by s. 15(1) of the Canadian Charter of Rights and Freedoms. The court found that s. 56(1)(b) was not discriminatory and dismissed the respondent's appeal from her 1989 tax assessment. A majority of the Federal Court of Appeal reversed this decision and concluded that s. 56(1)(b) infringed s. 15(1) and could not be justified under s. 1 of the Charter.

Held (L'Heureux-Dubé and McLachlin JJ. dissenting): The appeal should be allowed. Section 56(1)(b) ITA does not infringe the equality rights guaranteed by s. 15(1) of the Charter.

Per La Forest and Sopinka JJ.: There is agreement with Cory and Iacobucci JJ. and with Gonthier J. that s. 56(1)(b) ITA does not impose a burden or withhold a benefit so as to attract the application of s. 15(1) of the Charter.

Per Cory and Iacobucci JJ.: Section 56(1)(b) ITA does not violate s. 15(1) of the Charter. The purpose of s. 15(1) is to protect human dignity by ensuring that all individuals are recognized at law as being equally deserving of concern, respect and consideration. Consequently, it is the effect that an impugned distinction has upon a claimant which is the prime concern under s. 15(1). Here, the group of single custodial parents receiving child support payments is not placed under a

burden by the inclusion/deduction regime. Although there may be some cases in which the gross-up calculations shift a portion of the payer's tax liability upon the recipient spouse, one cannot necessarily extrapolate from this that a "burden" has been created, at least not for the purposes of s. 15(1). Sections 56(1)(b) and 60(b) operate at the level of the couple and are designed to minimize the tax consequences of support payments, thereby promoting the best interests of the children by ensuring that more money is available to provide for their care. If anything, the inclusion/deduction regime confers a benefit on the post-divorce "family unit". The fact that one member of the unit might derive a greater benefit from the legislation than the other does not, in and of itself, trigger a s. 15(1) violation, nor does it lead to a finding that the distinction in any way amounts to a denial of equal benefit or protection of the law. Sections 56(1)(b) and 60(b), which incorporate federal and provincial statutes under which child support orders are issued, must be examined in conjunction with those statutes in order to assess the effect of ss. 56(1)(b) and 60(b) upon the claimant. The amount of income taxable under ss. 56(1)(b) and 60(b) is determined by the family law system and, unless it operates in a defective manner, the amount of child support will include grossing-up calculations to account for the tax liability that the recipient ex-spouse will incur on the income. If there has been an error, the family law system provides avenues to revisit the support order to correct the situation. Any disproportionate displacement of the tax liability between the former spouses lies in the family law system, not in the ITA. Therefore, in light of the interaction between the ITA and the family law statutes, s. 56(1)(b) does not impose a burden upon the respondent within the meaning of s. 15(1).

The disagreement with McLachlin J.'s conclusion that ss. 56(1)(b) and 60(b) occasion a burden is limited to an application of her approach to the facts of this case, not with her methodology per se, which is endorsed. By corollary, the concurrence with Gonthier J. in the disposition of this appeal is one of result, not of method.

Per Gonthier J.: The special nature of the ITA is a significant factor that must be taken into account in defining the scope of the right to the "equal benefit of the

law" provided for in s. 15(1) of the Charter. It is of the very essence of the ITA to make distinctions, so as to generate revenue for the government while equitably reconciling a range of necessarily divergent interests. In view of this, the right to the equal benefit of the law does not mean that each taxpayer has an equal right to receive the same amounts, deductions or benefits, but merely that he or she has a right to be equally governed by the law. The concept of fiscal equity should not be confused with the concept of the right to equality. There is discrimination under s. 15(1) when the impugned provision creates a prejudicial distinction affecting the complainant as a member of a group, based on an irrelevant personal characteristic shared by the group.

The first stage in the method of analysis under s. 15(1) involves determining whether the provision in question creates a distinction between the individual, as a member of a group, and others. The inclusion/deduction system, adopted to deal with the unfavourable economic consequences resulting from the breakup of the family unit, creates a distinction since it applies only to separated or divorced spouses, where one parent is paying alimony to the other under a judgment or agreement. The system exceptionally permits income splitting between the latter in order to increase their available resources. This group of separated or divorced couples clearly cannot be subdivided by income level, as income level is not a characteristic attaching to the individual.

The second stage involves determining whether this distinction creates prejudice in respect of the group in question. A comparison between the treatment of couples subject to the general taxation system and that applicable to separated or divorced couples subject to ss. 56(1)(b) and 60(b) indicates that the inclusion/deduction system does not produce a prejudicial effect on the latter group. The general rule is that the income of parents used for the maintenance of their children shall be taxed in the hands of the parents. The special system applicable to separated or divorced parents maintains this rule, but taxes the income in the hands of the parent who ultimately receives it rather than in the hands of the parent who earned it. Imposing the tax on the person who can dispose of the income is not a prejudicial measure in itself. Further, this comparison indicates that the parents to whom the special inclusion/deduction system applies enjoy an overall lessening of their tax burden. In fact, although the tax savings generated by the inclusion/deduction system depend on a variable -- the difference between the tax rates of the members of the couple -- it was shown that on the whole members of the group derive a benefit from it since most of the parents receiving alimony for the children are subject to a marginal tax rate lower than that of the parents paying the maintenance. It can thus be said that the purposes for which the system was created have been to a large extent achieved. In view of the substantial savings generated by the inclusion/deduction system, the group of separated or divorced parents cannot as a whole claim to suffer prejudice associated with the very existence of the system in question. Even accepting that a comparison should be made between those who receive and those who pay the maintenance, it was not shown that in the context at issue here the distinction created by the ITA in making the maintenance taxable in the hands of the recipient alone entails a disadvantage. The tax burden of the couple is reduced and this has the result of increasing the available resources that can be used for the benefit of the children, in satisfaction of their parents' obligation to support them.

The question of the distribution of the resources available for the benefit of the children is important in assessing the prejudice alleged by the respondent. This question is governed by the rules of family law which are incorporated into ss. 56(1)(b) and 60(b) by reference. As the fiscal impact resulting from the obligation of inclusion is one of the factors to be taken into account in computing the alimony, the very way in which that impact is distributed between the parents for the ultimate benefit of the child must still be subject to the fundamental criterion of the latter's best interests. That criterion expresses a fundamental value of our society. Since it is governed by that criterion the distribution of the fiscal impact is therefore not open to challenge under the Charter. The fact that the tax saving resulting from the inclusion/deduction system does not benefit both parents in equal proportion therefore does not infringe the equality rights protected by the Charter. Additionally, there is no evidence to show that the recipient parent or the children would benefit by taxation in the hands of the payer of the alimony. In short, the fact that the support may not be increased by an amount equal to the payer's tax relief or the recipient's tax increase does not as such place the latter at a disadvantage since in principle the distribution takes place in accordance with family law, which is incorporated into the tax system by reference and the aims of which are promoted by contributing to an alleviation of the tax burden. Additionally, such results, if any, depend primarily on the individual case. They do not establish a disadvantage for the group.

Finally, a review of the principal provisions of the ITA dealing with tax credits which the respondent could claim (ss. 118(1)(b) and (d) and 122.2) does not alter the conclusion that there is no prejudicial effect. That review indicates that these credits are independent of the inclusion/deduction system and do not depend on receipt of alimony. In enacting these provisions it would appear that the legislature instead intended to alleviate the tax burden of a wide range of persons whose only common denominator is having dependants. This arrangement is not de facto contrary to the custodial parent in a separation situation generally being the one able to claim such credits.

As no prejudice exists, there is no need to go on to the third step in the analysis and consider the relevance of the personal characteristic on the basis of which the distinction was created. Section 56(1)(b) ITA does not infringe the equality rights guaranteed by s. 15(1) of the Charter.

Per McLachlin J. (dissenting): An analysis under s. 15(1) of the Charter involves two stages: (1) the claimant must show that the impugned legislation treats him or her differently by imposing a burden not imposed on others or denying a benefit granted to others; and (2) the claimant must show that this unequal treatment is discriminatory. In the great majority of cases the existence of prejudicial treatment based on an enumerated or analogous ground leads to a conclusion that s. 15(1) has been infringed.

Section 56(1)(b) ITA imposes on one member of the separated or divorced couple a burden which does not affect the other member of that couple. This section requires the separated or divorced custodial parent to include child support payments, while the non-custodial parent may deduct these payments from his taxable income, under s. 60(b) ITA. This inequality between the custodial and non-custodial spouse is exacerbated by the fact that the latter enjoys an automatic and absolute right of deduction of support payments from personal income, while the former's ability to offset the increase in her taxes by obtaining an adjustment of support is unpredictable. Further, one of the premises on which the inclusion/deduction scheme rests -- namely that custodial parents (the great majority of whom are women) are generally subject to a lower tax rate than non-custodial parents) -- is less and less in accord with present reality and undermines the importance our society places on women attaining financial self-sufficiency. Furthermore, the inclusion/deduction scheme overlooks the custodial parent's financial contribution to the support of the children. The custodial parent not only cannot deduct amounts she spends on maintaining the children, but must also pay the tax that the non-custodial parent would ordinarily have had to pay on the income devoted to child support. Apart from s. 56(1)(b) ITA, child support is not included in the taxable income of other persons in situations similar to that of the custodial parent. The general principle of individual taxation applies, and the person having custody is not taxed on amounts which do not personally belong to him or her. In short, the requirement of s. 56(1)(b) ITA that separated or divorced custodial parents include child support in their taxable income imposes obligations on separated or divorced custodial parents that do not apply to others in similar situations and denies benefits which the law accords to others. The fact that the inclusion/deduction scheme confers a benefit on the majority of divorced or separated couples as compared with other couples is no bar to concluding that that same scheme imposes prejudicial treatment within the couple by imposing on one of its members a burden not imposed on the other.

Even if the legislation is viewed from the perspective of the couple, however, the inclusion/deduction scheme works significant inequality. When the custodial parent's marginal tax rate is greater than that of the non-custodial parent, the scheme has the effect of increasing the total tax paid by both parents. From the outset, the inclusion/deduction scheme imposes prejudicial treatment on separated or divorced couples in about 30 percent of cases. Moreover, where the scheme constitutes a benefit for the couple, the tax savings it generates often benefit only the non-custodial parent since the legislation contains nothing to encourage an equitable division between family members of any benefits that may result from tax savings granted to the non-custodial parent by means of the deduction.

The family law regime does not in practice succeed in rectifying the inequality created by the inclusion/deduction scheme. The tax impact of support payments is not always considered by the courts and, when it is, the adjustment is often insufficient to cover the additional tax which the custodial parent must pay as a result of being subject to the scheme. The amount of child support is determined in light of several factors and thus leaves room for the exercise of a very wide discretionary judicial power which precludes, in many cases, complete neutralization of the negative effects that may result from the inclusion requirement provided for in s. 56(1)(b). The legality of the inclusion/deduction scheme is not preserved by the fact that the custodial parent can appeal a judgment which does not adequately take the tax impact into account or obtain an increase in child support when new circumstances increase the additional tax burden she must bear as a result of including child support in her taxable income.

While the status of separated or divorced custodial parent is not one of the grounds enumerated in s. 15(1), it constitutes an analogous ground of discrimination.

This conclusion results from the following considerations: (1) the imposition of prejudicial treatment solely on the basis of this status may violate the dignity of an individual and his or her personal worth to a degree affecting the individual's personal, social or economic development; (2) separated or divorced custodial parents considered as a group have historically been subject to disadvantageous treatment; (3) the special difficulties with which separated or divorced custodial parents must live and their minority position as compared with Canadian families as a whole justifies viewing them as a discrete and insular minority; (4) classification as a separated or divorced custodial parent may give rise to adverse distinctions on the basis of immutable personal characteristics in the broad sense of the term, rather than on the merit and actual circumstances of a particular individual; and (5) the status of separated or divorced custodial parents is linked to the enumerated ground of sex given that the great majority of the members of this group are women. The distinction in s. 56(1)(b), based on the status of separated or divorced custodial parent, is discriminatory and infringes s. 15(1) since it runs directly counter to the values underlying it.

Section 56(1)(b) cannot be justified under s. 1 of the Charter. The objective of the inclusion/deduction scheme is to increase the resources of the family as a unit in order to increase child support and ease the discharge of the non-custodial parent's obligations. This legislative objective is of sufficient importance to justify an infringement of a constitutional right, but s. 56(1)(b) does not meet the proportionality test. Even in the absence of mechanisms for dividing the tax saving, there is a tenuous rational connection between the means chosen by Parliament and the objective pursued. However, while Parliament does not have to choose the least intrusive means of all to meet its objective, it did not select one of a range of choices so as to impair a constitutional right as little as possible. The inclusion/deduction scheme does not reasonably minimize the impairment of the equality rights of the respondent and persons in her situation. Alternatives less intrusive of that right protected by the Charter may be readily envisaged. The tax credits provided by the ITA do not attenuate any inequality which the inclusion requirement may work on the custodial parent. Finally, the inclusion/deduction scheme does not meet the proportionality of effects test. The harmful effects of the scheme are disproportionate to the benefits it may produce. While the scheme seems, in the majority of cases, to produce tax savings for the broken family as a whole, in view of the importance of the interest at stake, an adverse tax impact in more than 30 percent of cases is unacceptable. The inclusion/deduction scheme exacerbates the significant financial difficulties encountered by custodial parents and children upon the breakup of the family.

Section 56(1)(b) thus infringes the equality rights guaranteed by s. 15(1) in an unjustifiable manner in so far as it applies to amounts paid between separated or divorced parents for child support. In this case, a reading down of s. 56(1)(b) to exclude child support payments appears appropriate. Since the issue turned essentially on s. 56(1)(b), there should be no ruling on the constitutionality of s. 60(b) ITA. Except as regards the respondent, the effects of the declaration of unconstitutionality respecting s. 56(1)(b) should be suspended for a period of one year from the date of the judgment.

Per L'Heureux-Dubé J. (dissenting): In an analysis under s. 15(1) of the Charter, it is preferable to focus on the group adversely affected by the distinction as well as on the nature of the interest affected, rather than on the grounds of the impugned distinction. A claimant under that section must establish that: (1) there is a legislative distinction; (2) this distinction results in a denial of one of the four equality rights on the basis of the claimant's membership in an identifiable group; and (3) this distinction is "discriminatory" within the meaning of s. 15(1).

Section 56(1)(b) ITA makes distinctions and these distinctions have the effect of imposing a burden unequally on the basis of one's membership in an identifiable

group -- separated or divorced custodial parents. Although the inclusion/deduction regime confers a net tax saving upon a majority of divorced or separated couples, its effect is not experienced equally by both members of the couple. The regime imposes at the outset a tax burden uniquely on custodial spouses, and confers a tax benefit uniquely on non-custodial spouses. As a practical matter, the family law system is incapable of remedying the initial unequal distribution effectuated by the inclusion/deduction regime. It does not address to any meaningful extent the inequalities flowing from the burden imposed upon custodial spouses of an imperfect "gross-up" of the support award to account for tax payable, as well as from the benefits accruing to non-custodial spouses as a result of the "upside-down subsidy" that occurs when custodial spouses are in a lower marginal tax bracket. Even if the family law system were to operate perfectly, it could not completely offset the redistributive effects of the inclusion/deduction regime. Thus, whereas the family law system perpetuates an inequality, the regime is undoubtedly the source of this inequality. A denial of equality does not necessarily require that all members of a group be adversely affected by the distinction. It suffices that a particular group is significantly more likely to suffer an adverse effect as a result of a legislative distinction than any other group. Here, the inclusion/deduction regime is, on the whole, very likely to disadvantage custodial spouses and, concomitantly, very likely to advantage non-custodial spouses. A regime that materially increases the vulnerability of a particular group imposes a burden on that group which violates one of the four equality rights under s. 15. As such, the inclusion/deduction regime imposes upon separated or divorced custodial spouses an unequal burden of the law and denies them the equal benefit of the law.

The distinction made by s. 56(1)(b) is discriminatory within the meaning of s. 15(1) of the Charter. Separated or divorced custodial spouses, the vast majority of whom are women, are, on the whole, an economically and socially vulnerable group, bound together by traits that are personal, though not necessarily wholly immutable. Adverse legislative distinctions on the basis of membership in this group are likely to be reasonably perceived to have a discriminatory impact by members of this group, and are capable of touching upon essential aspects of personal self-worth and dignity. The interest most directly and adversely affected by s. 56(1)(b) is the economic situation of separated or divorced custodial parents and their children -- an important societal interest. The impugned distinction may visit significant economic hardship upon this group. In view of the nature of the group and the interest affected, the distinctions drawn in the inclusion/deduction regime, and in particular in s. 56(1)(b), are reasonably capable of having a material discriminatory impact on separated or divorced custodial parents. The fact that some isolated individuals within this group may not be adversely affected does not alter the general validity of this conclusion. Section 56(1)(b) therefore violates s. 15(1) of the Charter, since it is capable of either promoting or perpetuating the view that separated custodial parents are less capable, or less worthy of recognition or value as human beings or as members of Canadian society, equally deserving of concern, respect, and consideration.

Section 56(1)(b) cannot be saved under s. 1 of the Charter. The modern purpose of the inclusion/deduction regime -- to place more money in the hands of the separated or divorced "couple" for the purposes of raising the level of child support -- is a pressing and substantial objective, but the regime does not achieve this objective in a proportionate manner. While the regime is rationally connected to its objective, it lies outside the reasonable range of minimally intrusive alternatives available to the government. The government has not demonstrated that the benefit accruing to the separated or divorced "couple" is fairly and equitably shared between the two individuals. The initial unequal distribution will only be equally divided by the good graces of the non-custodial spouse or in the unlikely event that the family law system fully understands, anticipates, and applies the principles of tax expenditure analysis. Other alternatives could more effectively achieve the objective. Further, the deleterious effects of the impugned distinction outweigh its salutary effects. The fact that the inclusion/deduction regime often imposes a very real disadvantage upon the very group it is intended to help is not outweighed by the net tax savings to couples that it frequently occasions. Accordingly, s. 56(1)(b) should be declared invalid in respect of child support payments. The declaration of invalidity should be suspended for a 12-month period to enable Parliament to implement a less discriminatory alternative. No pronouncement is made on the constitutionality of s. 60(b) ITA.

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