JAMES T. GRENON Appellant v. HER MAJESTY THE, 2016 FCA 4

Date: 20160111 Docket: A-473-14 Citation: 2016 FCA 4 CORAM: GAUTHIER J.A. BOIVIN J.A. RENNIE J.A. BETWEEN: JAMES T. GRENON Appellant and HER MAJESTY THE QUEEN Respondent Heard at Calgary, Alberta, on November 5, 2015. Judgment delivered at Ottawa, Ontario, on January 11, 2016. REASONS FOR JUDGMENT BY: RENNIE J.A. CONCURRED IN BY: GAUTHIER J.A. BOIVIN J.A. Date: 20160111 Docket: A-473-14 Citation: 2016 FCA 4 CORAM: GAUTHIER J.A. BOIVIN J.A. RENNIE J.A. BETWEEN: JAMES T. GRENON Appellant and HER MAJESTY THE QUEEN Respondent REASONS FOR JUDGMENT RENNIE J.A. I.

Background [ 1 ] The appellant incurred legal fees and costs in contested proceedings to determine the amount of child support payments to be paid by him to his ex-wife. He then sought to deduct those expenses from his 1999 and 2000 income. The Minister denied the deduction and assessed accordingly. The appellant appealed the assessments to the Tax Court of Canada. [ 2 ] In a decision ( 2014 TCC 265 ) per Justice Graham, the Tax Court dismissed the appellant’s challenge.

The appellant appeals from that decision and, for the reasons that follow, I would dismiss the appeal. [ 3 ] There are three legislative provisions in issue. Paragraph 18(1) (

a) of the Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)) ( ITA ) allows a taxpayer to deduct an expense if it “was made or incurred for the purpose of gaining or producing income from the

business or property.” Subsection 248(1) defines property as including “a right of any kind whatever, a share or a chose in action.” Toround out the legislation in issue,

section 60 prescribes certain expenses which, in addition to those that fall within the ambit of paragraph18(1)(a), are also permissible deductions. [4] The combined effect of subsections 18(1) and 248(1) of the ITA, judicially interpreted, is to allow the deduction of legal feesand costs incurred by a taxpayer in obtaining, enforcing or varying child support payments, but to deny the deduction of the expensesincurred by taxpayers who pay child support payments. II. The Tax Court decision [5] The appellant advanced two arguments before the Tax Court. [6] The first was predicated on what the appellant contended was the correct

interpretation of paragraph 18(1)(

a) of the ITA. Thesecond was predicated on the Canadian Charter of Rights and Freedoms (Constitution Acts, 1867 to 1982,

Part I) (Charter), specifically,that a tax regime which allows recipients of child support payments, but not payors of child support payments, to deduct their legal feesviolates subsection 15(1) of the Charter on the basis of sex and family status. [7] The judge rejected the statutory

interpretation argument. He found that the decision of this Court in Nadeau v. M.N.R., 2003FCA 400 was dispositive of that issue.

In Nadeau, Noël J.A. (now Chief Justice), speaking for the Court, concluded at paragraph 14 that“…the cases have consistently held for more than forty years that the right to support, once established by a court, is ‘property’ withinthe meaning of subsection 248(1) of the Act, and that the income from such support constitutes, in the hands of the person receiving it,income from property.” Graham J. also rejected the argument that it was a necessary corollary to the ruling in Nadeau that legal expensesincurred by the appellant which, by reducing the scope of his obligation to pay support, preserved or maintained his income, were alsoincurred “to gain or produce income from property” and should be deductible. [8] Further, after reviewing the legislative history with respect to the tax treatment of child support payments, the judgeconcluded that Parliament did not intend to alter the longstanding

interpretation of paragraph 18(1)(

a) to include child support paymentsas property. For over 40 years, payors have been precluded from deducting their legal expenses, and Parliament did nothing to intervene.He noted, as did this Court in Nadeau, that the amendments to the ITA in 1996 which eliminated the inclusion of child support paymentsas income, were drafted so as to preserve the deduction of legal expenses under paragraph 18(1)(a). [9] The judge also dismissed the appellant’s Charter argument on the basis that it did not meet the criteria necessary to establisha

section 15 violation most recently articulated in Withler v. Canada (Attorney General), 2011 SCC 12, [2011] 1 S.C.R. 396. In thatdecision, the Supreme Court of Canada instructed a two stage inquiry. The first stage of the

section 15 analysis requires a court todetermine whether the law creates a distinction based on a ground that is enumerated in

section 15 or which is analogous to anenumerated ground. The second step is to determine whether the distinction creates a disadvantage by perpetuating prejudice orstereotype. [10] The judge found that the first branch of the Withler test was not met as paragraph 18(1)(

a) and subsection 248(1) did not, ontheir face, create a distinction on an enumerated or analogous ground. Tracing the reasoning of Nadeau, he noted that the rationale forthe difference in treatment between recipients of child support payments and payors was predicated on the fact that child supportpayments were a pre-existing right, and as such they were “property”, in the hands of the recipient.

In consequence, expenses incurred tomaintain or vary that right were deductible. [11] He noted that while expenses incurred to establish a right or property interest would, under established tax principles, beconsidered to be on account of capital, they had nevertheless also been considered to be on account of income.

While this point is neitherintegral to the judge’s reasoning nor to the disposition of this appeal, a point arises with respect to the characterization (at para. 15) ofexpenditures incurred to “establish” child support. [12] Nadeau is clear that the reason why the tax treatment is on account of income is because there is a pre-existing right tosupport. The expenditures are not, therefore, incurred to establish the right.

It already exists, by operation of the common and civil lawand their provincial codification. [13] The judge concluded that the difference in treatment between payors and payees lay “solely in the fact that recipients of childsupport have a source of property income in the form of their right to child support payments and payors do not”, and that the gender ofthe payor and recipient had no bearing on whether the legal costs were deductible. [14] The judge then turned to the question whether the distinction was based on an analogous ground. Applying the testestablished in Corbiere v.

Canada (Minister of Indian and Northern Affairs), (SCC), [1999] 2 S.C.R. 203, para. 13, heconcluded that having or not having a source of property income was not an analogous ground, as it was not based on a personalcharacteristic that was immutable or changeable only at an unacceptable cost to personal identity. The

section 15 argument thereforefailed. He did not consider the second prong of the Withler test as he did not find it necessary to do so. [15] The judge expressed sympathy for the appellant’s argument, noting that there was no “current logical basis” for the situation.He noted that “what has happened over the course of many years is that the tax system has effectively read into

section 60 of the ITA aparagraph that permits recipients of child support to deduct their legal fees irrespective of whether those fees are actually laid out to earnincome from property.” However, he considered himself bound by Nadeau and confirmed the assessment. [16] Given the likelihood of an appeal, the judge reviewed the evidence of two expert witnesses called on behalf of the appellant.While he discounted much of the expert evidence on the basis of relevance and admissibility, he did accept evidence establishing that92.8% of all payors were men. He concluded that substantially all payors of child support are men.

III. Denial of the request to re-open [17] I will, at this point, open a parenthesis in respect of a matter of evidence. I do so given the importance of the issue in all caseswhere declarations under

section 52 of the Constitution Act are sought. [18] At trial, the Minister did not lead any evidence to support a subsection 15(2) justification or to the justification of aninfringement under

section 1 of the Charter. Nor did the Minister lead any evidence to respond to the appellant’s evidence to the effectthat virtually all payors were men. [19] After the case had been closed and at the conclusion of oral submissions, the Minister’s counsel sought to re-open her case tolead evidence on the subsection 15(2) and

section 1 issues. The judge did not grant leave. This decision was manifestly correct. [20] In her submissions for leave to re-open, counsel for the respondent conceded that the government knew that

section 15 was alive issue and that evidence as to the underlying policy rationale for the distinction in tax treatment should be lead. Counsel indicatedthat the government declined to produce witnesses to give testimony with respect to the rationale underlying the different treatmentbetween payors and payees. Counsel advised that she personally considered this course of action unwise. She would be correct.

Theincompleteness of the record falls squarely at the Crown’s feet. [21] In dismissing the motion for leave to re-open, the judge noted that this proceeding had a long antecedence, having been to theCourt of Appeal twice on interlocutory matters and leave having been sought to the Supreme Court of Canada in respect of one of thosedecisions. The judge observed that the Minister expected to win the case based on reliance on Nadeau alone, and did not “appear to havebeen concerned about introducing evidence to deal with the second part of the test or to deal with a

section 1 defence.” He observed thatthe appellant was no doubt aware that the Tax Court would consider itself bound by Nadeau, but nonetheless introduced the requiredexpert evidence needed to establish a record and to pursue an appeal. He concluded, correctly in my view, that “the Respondent shouldhave known that it needed to lay the evidentiary groundwork at trial to defend a

section 15 challenge on appeal.” [22] Given the disposition of this appeal, the failure to lead evidence is of no consequence. The point remains, however, that theCourt was asked to grant a declaration with respect to the constitutionality of key provisions of the ITA, and to do so in the absence ofrelevant considerations. It is well established that questions of constitutionality should only be determined with a full appreciation of therelevant legislative, legal, social, economic and policy context; Mackay v. Manitoba, (SCC), [1989] 2 S.C.R. 357. IV. Analysis A. The statutory

interpretation argument - does paragraph 18(1)(

a) of theITA allow deduction of a payor’s legal fees? [23] There is no provision in the ITA which specifically allows the deduction of legal expenses incurred to determine child supportobligations. Such expenses can only be deducted if it can be established that they were incurred for the purpose of gaining or producingincome from a business or property.

However, as found by this Court in Nadeau at paragraph 18, “…the expenses incurred by the payerof support (either to prevent it from being established or increased, or to decrease or terminate it) cannot be considered to have beenincurred for the purpose of earning income, and the courts have never recognized any right to the deduction of these expenditures.” [24] In light of the controlling jurisprudence, the judge correctly dismissed the appellant’s argument that as his ex-wife wasobligated under the terms of their separation and parenting agreement, to reimburse him for funds he expended on behalf of the children,he too had a right to income from which legal expenses could be deducted.

The appellant, unlike his ex-wife, had no pre-existing right toreimbursement. As Noël J.A. noted in Nadeau, at paragraph 28, “it still remains that the right to support is ‘property’ under the Act. Ifthe right to support is ‘property’, it is hard to dissociate this ‘property’ from the income which flows from the exercise of this right.” Thisrationale does not apply in respect of the payor, who has no underlying right to be reimbursed. [25] The appellant contends that the Nadeau

interpretation of paragraph 18(1)(

a) should be reconsidered. He argues that staredecisis alone is not a good enough reason to continue that

interpretation. In support, he urges that legal expenses incurred to resist ademand for child support, serve to increase or preserve his income. [26] In my view, this argument does not acknowledge the language in paragraph 18(1)(

a) which requires that the expenses beincurred to “gain or produce” income from business or property. If there was a pre-existing source or right, there would be no issue thatamounts expended to increase the income from that source are deductible. In this context however, the payor has neither a right to childsupport nor a stream of income stemming from a property interest. [27] Finally, the appellant submits that the ITA should be interpreted in light of Charter values. This effectively amounts to aduplication of the appellant’s Charter challenge to the provisions. In any event, Charter values can only be used as an interpretive aidwhere the statute is ambiguous which paragraph 18(1)(

a) is not: Bell ExpressVu Limited Partnership v. Rex, 2002 SCC 42, [2002] 2S.C.R. 559, at para 62; Febles v. Canada (Citizenship and Immigration), 2014 SCC 68, [2014] 3 S.C.R. 431, at para. 67. [28] As the judge noted in his reasons, various judges of the Tax Court of Canada have expressed concern about the underlying taxpolicy with respect to child support payments. In his reasons, the judge set forth various scenarios which illustrated the absence of alogical basis for the current regime.

Under the current law, even a payor who is successful in fending off unreasonable demands in achild support dispute cannot deduct any legal expenses that are not recovered through cost awards. The implication is that through thetaxation system, Parliament penalizes payors who seek vindication of their legal rights, and offers a public subsidy to one side of aprivate dispute. Further, the notion that the child support payment is “property” in the hands of the recipient is arguably an artifice. It isthe child that has the right to be supported.

The child support is money paid to the parent for the benefit of the child. These concerns are

policy matters for Parliament, and do not bear on the legal question of what is “property” and whether child support is a “right of anykind” under the ITA. [29] The appellant urges that Nadeau be reconsidered. In support the appellant referred us to decisions which expressed concernregarding the deductibility of legal expenses to only one side: see Loewig v. Canada, 2006 TCC 476; Rabb v. Canada, 2006 TCC 140;McLaren v. Canada, 2009 TCC 514; Trignani v.

Canada, 2010 TCC 209. [30] This Court will only depart from a previous decision where it is manifestly incorrect or where subsequent decisions requirethat it be reconsidered; Miller v. Canada (Attorney General), 2002 FCA 370. Neither of these criteria apply to the

interpretation accordedparagraph 18(1)(

a) by this Court in Nadeau and, accordingly, this ground of appeal fails. B. The second issue - does subsection 18(1) of the ITA violate subsection15(1) of the Charter?

(1) Direct discrimination [31] Prior to considering the reasons of the judge below, I note that in Nadeau, this Court, at paragraph 37, expressly declined toopine on whether the restriction on deductibility offended

section 15. The Charter question is thus a matter of first impression in thisCourt. [32] The examination of whether a law violates subsection 15(1) proceeds in two steps. At the first step, the claimant mustdemonstrate that the law grants an unequal benefit or imposes an unequal burden on the basis of a ground that is either enumerated in thetext of subsection 15(1) or analogous thereto. At the second step, the claimant must demonstrate that the unequal treatment amounts todiscrimination.

This step inquires into whether the unequal treatment perpetuates stereotypes and prejudices, or whether it suggests thatcertain members of society are less worthy of consideration. If these steps are satisfied a breach of subsection 15(1) results, and theburden shifts to the Crown to justify the breach under either subsection 15(2) (the affirmative action provision) or

section 1. [33] The ITA provisions in question are, on their face, neutral and make no distinction based on an enumerated or analogousground in

section 248. Parliament defined property to include a right of any kind, and paragraph 18(1)(

a) allowed deductions of expensesincurred for the purposes of gaining or producing income. Paragraph 18(1)(

a) makes a distinction only insofar as it bars deductionsunless the expense was incurred “for the purpose of producing or gaining income from property.” Parliament left the precise contours ofthat definition for the judiciary to determine. [34] In the result, the ITA discriminates between those who have income from property and those who do not. The ITA is repletewith such distinctions – between capital and income, loss and profit. The foundations of these distinctions are not the gender of thetaxpayer, but the nature and source of income and the means of which it is produced.

The fact that deductions may be available to limitedsegments of Canadian society, which may, in fact, be largely men, or largely women, does not constitute either an enumerated oranalogous ground. In sum, having income from property is not an inherent or personal characteristic and to characterize this as a Charterviolation conflates unfairness about income distribution with Charter rights. [35] There is, therefore, no direct distinction based on an enumerated or analogous ground. [36] This however, does not dispose of the Charter argument.

A law which is neutral on its face may, unintentionally, have adisproportionate or adverse effect on a group or individual, and if so, satisfy the first step of the Withler analysis. The trial judge, whilecorrect in the result, omitted this element of the

section 15 analysis. He did not consider whether the provisions of the ITA, while notdirectly discriminating on the basis of gender and family status, did so indirectly and unintentionally.

(2) Adverse effect discrimination [37] Adverse effect discrimination has been recognized as an integral part of the

section 15 inquiry; Tétreault-Gadoury v. Canada(Employment and Immigration Commission), (SCC), [1991] 2 S.C.R. 22, at para. 41. The question becomes whetherparagraph 18(1)(

a) and the definition of property in subsection 248(1), by indirectly limiting the deductibility of payors’ legal expenses,intentionally or otherwise, does so on the basis of a personal characteristic. If the answer to that question is affirmative, the questionbecomes whether it is a discriminatory distinction. [38] The evidence before the judge was that 92.8% of payors are men. I note, parenthetically, that while this statistic was the bestevidence available to the judge, it was derived from a 2004 Department of Justice report and may not be reflective of the situation in2014.

In any event, on the evidence before the judge, the facially-neutral provisions of the ITA affect men far more than they do women.But this does not necessarily translate into a finding that the effect is “adverse” as contemplated by

section 15. [39] This is the false syllogism that underlies the appellant’s case. The appellant confounds the fact that virtually all payors aremen with the proof of adverse effect. While it is true that virtually all payors are men, and that it is mostly men that are denied thededuction, it is not a consequence of the legislation. There is no nexus between what the ITA requires and the consequence. [40] Men are denied the deduction not because they are men, but because they are not, in the majority of cases, the custodialparent.

Under the Child Support Guidelines, whether a person is a payor depends either on whether they have more than 60% custody, adetermination made by agreement or a court. In the case of joint custody, whether a person is a payor depends on the respective incomelevels of the parents. The trigger as to whether they pay or receive support payments is entirely unconnected to the ITA. [41] When the Supreme Court of Canada used the language of legislation having an adverse or disproportionate impact, it did so inthe context of the over-arching construct of the

section 15 analysis, which is a search for substantive discrimination. To establish asection 15 violation, the appellant must establish that the law, objectively applied, has an adverse effect on men. The law, when applied

to men as opposed to women, must have a qualitatively different impact on men. A mere numerical imbalance will not suffice. Just asthe inquiry as to whether an impugned provision is “discriminatory” is directed to the identification of substantive inequality, adverseeffect is equally infused with the requirement of substantive discriminatory impact. [42] Paragraph 18(1)(a), as interpreted, does not affect men differently than women. Women payees are affected in the samemanner and to the same extent as male payees.

The impact of the law is, in terms of its effect, neutral. [43] The Charter argument fails because it confounds the underlying social circumstances with the consequences of the law.Assume, for example, a special tax on the highest earning 1% of income earners in Canadian society. Such a tax may falldisproportionately on men, but that does not mean that men are subject to differential treatment within the meaning of

section 15.Similarly, the fact that more women may receive the Guaranteed Income Supplement because of age and income levels than men doesnot mean that women are given a benefit that men are not. Special taxes and withholding provisions in respect of foreign nationals mayaffect people of one ethnicity or country of origin than another. [44] In each case, it must be established that the tax measure affects them because of or by reason of, a prohibited ground, theirgender, age or ethnicity, and not as a consequential effect. [45] Put otherwise, the

section 15 analysis requires that there be a qualitative nexus between the law and the group. As noted byIacobucci in Symes v. Canada, (SCC), [1993] 4 SCR 695, at p. 764 “If the adverse effects analysis is to be coherent, itmust not assume that a statutory provision has an effect which is not proved.” The fact that men are denied the deduction is aconsequence of custody determinations made by agreement or by provincial courts, and, in the case of joint custody, income levels of therespective parents. The Charter analysis thus fails at the first stage. [46] I would dismiss the appeal with costs. "Donald J.

Rennie" J.A. “I agreeJohanne Gauthier J.A.”“I agreeRichard Boivin J.A.” FEDERAL COURT OF APPEAL NAMES OF COUNSEL AND SOLICITORS OF RECORD APPEAL FROM A JUDGMENT OF THE TAX COURT OF CANADA DATED OCTOBER 3, 2014, NO. 2002-3842(IT)G DOCKET: A-473-14 STYLE OF CAUSE: JAMES T. GRENON v. HER MAJESTY THE QUEEN PLACE OF HEARING: Calgary,AlbertaDATE OF HEARING: November5, 2015REASONS FOR JUDGMENT BY: RENNIEJ.A.CONCURRED IN BY: GAUTHIERJ.A.

BOIVINJ.A.DATED: january 11,2016 APPEARANCES: Ronald Robinson For The AppellantWendy Bridges For The Respondent SOLICITORS OF RECORD: Ronald Robinson Barrister & Solicitor Calgary, Alberta For The Appellant

William F. Pentney Deputy Attorney General of Canada Edmonton, Alberta For The Respondent