moved that Bill C-241, an act to amend the Income Tax Act (child support payments), be read the second time and referred to a committee.
Mr. Speaker, I am very pleased to stand in the House today to speak to my private member's Bill C-241, an act to amend the Income Tax Act so that child support payments are not taxable as income for the recipient. As well, it includes child support payments within the meaning of earned income for the purposes of child support deductions.
It is important to ensure that a tax free child support payment to the custodial parent is initiated and that a more appropriate and limited tax credit is equitably distributed to child support payers. I do not suggest what the specific credit should be. I believe it more appropriately falls within the purview of the Minister of Finance.
Bill C-241 is an issue which is very important to me and one with which I have been associated for a number of years. It became clear to me that the taxation of child support payments was a significant concern to many people in the riding of Nepean and to individuals across the country. I continue to receive letters from many people who are experiencing great difficulty as a result of the existing tax laws.
On February 23, 1994 my Motion No. 14 was placed on the Order Paper, deemed votable, debated and adopted on May 30, 1994. The motion at that time read:
That, in the opinion of this House, the government should amend the Income Tax Act so that child support payments are no longer considered taxable income for recipients.
However, the government of the day has still not responded to the motion.
The 1994 budget recognized perceived inequalities in the tax treatment of child support and committed itself to exploring ways to improve the system to ensure, first and foremost, that the needs of children are met. However, as of this date, as I said, the government has still not moved on it.
The Minister of Justice indicated his intention to address the issue of child support guidelines and enforcement. I will be looking forward to hearing from him. Bill C-241 only asks for changes to the treatment of income tax for child support which falls under the purview of the Minister of Finance.
The current tax treatment of child support payments makes a very complicated issue out of one that should be as straightforward and as simple as possible. It is most important that it is children who now bear the immediate consequence because the current system is not providing the effect it was designed to produce. If the current policy is not changed it is the children who will go on paying the consequences every day, not just in some cases and not by accident but deliberately because of our failure to redesign an outdated tax mechanism.
This is not just a tax issue but one of wider social justice that affects the well-being of Canada's children and of Canada's future.
The tax treatment of child support payments allows a payer to deduct the full amount of the payment from his income while the recipient must include the full amount in hers. The policy has been criticized as discriminatory to women because it places an unfair tax burden on the custodial parent, and the custodial parent is usually the woman and the one who is responsible for the children.
How this situation evolved can be partially explained by historical changes in the patterns of the lives of men and women in Canada over the past half century. The current tax treatment of child support was initiated in the 1940s, probably just after World War II, and reflects the social realities of that time.
There are historical reasons for the bill. From 1940 to 1992 there have been significant changes in society and government policy which lead to the question of whether or not this tax policy also requires revision.
When the current policy was developed it was designed to provide relief to the taxpayer burdened with both a post-war increase in taxes and the obligation of spousal and child support. The father was typically the sole wage earner and the primary taxpayer in the separated family. It was logical at that time that tax relief be targeted to him.
In the current reality both parents are considered individual within our tax structure today. Even those who do not pay taxes file their own tax returns to have access to benefits delivered through the income tax system. Most lone parents also have paid work and pay taxes on their own earned income whether or not they receive support.
The labour force participation of all women has been steadily increasing, including women with children. In 1988, 62.2 per cent of women with partners and a child under five years of age were in the labour force and 73 per cent for those with children aged six to fifteen years. With lower fertility rates and a later age of first birth, women are spending more time in the paid labour force. This allows women to establish some earning power before interruption for child birth and care.
The labour force participation of women who are lone parents is also increasing. In 1988 the rate was 51 per cent for those with children under five and 72.3 per cent for those with children six to fifteen.
While women are increasingly participating in the labour force they are still concentrated in lower paying and less secure forms of employment. The wage gap is narrowing extremely slowly. Canada is not narrowing the gap as quickly as many other industrialized nations. For example, women's relative wage in Canada in 1990 was 67.6 per cent of men's, compared with Australia at 87.9 per cent and France at 81.8 per cent.
Due to changing economic conditions most families now require the labour force participation of women. Even for two-parent families two incomes are needed to maintain a single household. Upon divorce family resources are often inadequate to continue to meet children's needs as two households must be maintained.
Most lone parents continue to be solely or primarily responsible for the financial needs of children. One of the key reasons for this phenomenon is the high rate of default on child support awards, estimated in the province of Ontario to be disgracefully around the 75 per cent level.
There have been numerous policy changes since 1940 which have had a significant impact on the situation of women, families with children and lone parent families in particular. In 1970 the report of the Royal Commission on the Status of Women documented women's economic and social disadvantage in Canada for the first time. Since 1976 there has been a federal policy commitment to examine the impact of programs and policies on women. This was reinforced when the charter of rights and freedoms came into force.
Better research and data collection as a result of this work continues to identify and describe the feminization of poverty and its direct relation to the unpaid work involved in raising children and other tasks related to human maintenance.
There has been decreasing support for families with children through the tax transfer system over the past two decades. For example, the value of deductions and credits for children as a proportion of income has been steadily reduced. The reduction of the number of tax brackets to three and other changes to deduction and credits have all had an impact on families and on the tax treatment of child support.
Divorce law has evolved from a system based on fault to a no-fault system. Under the no-fault system there is an increasing tendency for support orders to focus on the children with the expectation that women, even those who are not in the labour force, will become self-supporting in an unreasonably short period of time.
There is growing political support for the plight of lone parents. Provincial governments are trying to crack down on non-custodial parents, usually fathers, who are not making their support payments to their children. Growing welfare rolls have spurred the search for alternatives and particularly the need to make fathers responsible for their children.
The women's movement, in combination with economic and policy changes, has reinforced women's need for and right to both paid work and a sharing of family responsibilities. My previous comments highlighted several significant changes in Canadian society from the forties to the nineties. Individuals and families are in very different situations today than in the forties. Given these changes it is timely to ask whether our tax policy on child support is still meeting the original goals of providing tax relief to the tax burdened and encouraging the payment of child support.
My bill is intended to bring the tax treatment of child support payments into the context of the world we live in today. I am cognizant of the increasing levels of child poverty. Any and all changes considered must focus on this fact as the guiding principle.
The general consensus is that the non-custodial parent benefits from the current tax policy, not the children. Presently the total child support award rarely specifies the total needs of the child and the specific amounts needed to compensate for the tax owing on this amount.
Actual evidence on the current levels of child support demonstrates that average support payments are low and would rise considerably with the introduction of guidelines based on actual expenditures on children. If the support award is not high enough to meet the children's needs, it cannot compensate for the tax owing. In practice the tax system further reduces the already inadequate amount available for the children.
Even if a support award is adequate to meet the children's needs calculating the gross up, which is the amount set aside for tax purposes, and deciding how to split any tax saving are extraordinarily complex.
In the Thibaudeau case the Federal Court of Appeal ruled invalid under the charter of rights and freedoms the requirement that the parent who has custody of a child include child support payments as income. Since the decision did not deal with the deductibility of child support by the payer, it left in question how the tax will be
paid on income directed to child support. Following the finding of a Federal Court of Appeal, the attorney general asked that the Thibaudeau decision be suspended while an expedited appeal was brought before the Supreme Court of Canada. On May 25, the supreme court handed down its decision and supported the existing provisions.
The result of the appeal, the court ruled five to two, was that it is not unconstitutional to require the custodial parent who receives child support payments to pay the taxes on that money. However the question of taxation of child support was not totally resolved by the supreme court decision.
Madam Justice Beverly McLachlin of the supreme court was one of the two dissenting judges in that decision. She wrote in her dissenting opinion:
The impugned taxation scheme imposes a burden on separated or divorced custodial parents which it does not impose on separated or divorced non-custodial parents.
The custodial parent must include child support payments from which she gains no personal benefit. The non-custodial parent may deduct support payments from his taxable revenue.
The 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.
Not only must the custodial parent request any adjustment from the court but it is not always certain that the court will correctly assess the tax impact or will award a sufficient amount to enable the recipient to discharge her additional burden.
The logic of a deduction inclusion scheme is further called into question by the fact that our society strongly encourages women to obtain financial self-sufficiency and, in pursuit of that essential objective, to increase their income. The higher the income of the custodial parent, the greater will be her tax rate and the more she will be penalized by the requirement of including the amount of child support in computing her own taxable income.
One of the premises on which the logic of the deduction inclusion scheme rests, that custodial parents are generally subject to a lower tax rate than those who pay the child support, is less and less in accord with present reality and undermines the importance our society places on women attaining financial self-sufficiency.
I might add that if we take families where the husband, the wife and the children remain as the family unit, when the husband gives money to the wife to support the children she is not taxed on it. Nor is he given a deduction. The way it is set up is unfair to the whole family unit.
Following the Thibaudeau decision the government stated its intention to announce a comprehensive approach to reforming the child support system including guidelines to determine the amounts, the tax treatment of payments and the enforcement of child support orders.
Let me refer to why the current system is not working. According to research done by Karen Cooper and Ellen Zweibel on the current system of deduction inclusion, there is a gap between tax theory and family experience. The deduction inclusion as designed is expected to produce an overall tax savings for the ultimate benefit of the children in divorced and separated families. Custodial mothers have made it clear the current system undermines their ability to support their children and increases their vulnerability to poverty.
Fathers from the highest income group obtain the most tax savings when paying support to custodial mothers who have not yet fully entered the job market. Little or no overall tax savings accrue when separated parents are either both low income earners or are both moderate income earners. In a minority of cases, the provisions can even have an opposite effect.
SCOPE, which is an Ottawa based support group for custodial mothers, in its report to the parliamentary task force examining the current system of taxation of child support payments, described how the current system is impacting on the lives of custodial parents. I will quote from the submission:
How they have had to apply for bank loans, borrow money from friends and family, cash in RRSPs, or have been subject to collection proceedings from unpaid taxes.
However, if the non-custodial parent doesn't make full child support payments, the custodial mother must still pay a portion of the partial payment in income tax-Although she cannot meet all the children's budgeted-for expenses from the partial support payment, what she does receive shrinks even further because of the income tax burden. How, after struggling for months and years to get by without full support payments, when they do manage to collect the support arrears, the tax owed on those arrears is often greater than they would have been if the amount had been paid on time.
The Canadian Advisory Council on the Status of Women in its submission to the same task force stated:
In summary, the government's main policy justification fails custodial mothers and their children. Rather than providing greater resources for children, the current tax policy puts greater pressure on the custodial mother. First, she must bargain with the non-custodial father and/or his lawyer for an income tax "gross-up". There is no guarantee the income tax "gross-up" will be included: in some cases he does not have enough tax savings to pay a "gross-up"; in other cases, he may not agree to it or the judge may order a lower amount.
Whenever the custodial mother is unsuccessful in getting a fully tax-augmented child support award, she must stretch her already limited budget to cover the income taxes. When the non-custodial father makes only a partial payment, the custodial mother is left without enough funds to meet the children's budgeted needs and yet the already insufficient amount she received is still further reduced by income taxes. For those important reasons, the Canadian Advisory
Council on the Status of Women strongly recommends repeal of the current inclusion/deduction provisions.
In summary, the movement to reform the income tax treatment of child support has been ongoing since the 1970s. It received significant attention in the 1990s for a number of reasons. The work of the federal-provincial-territorial family law committee which over a period of almost four years oversaw original research on child support in Canada, reviewed the research results and consulted widely with Canadians representing custodial and non-custodial parents and with experts in the child support area.
My previous motion that I mentioned earlier in the House of Commons has essentially raised the visibility of the issue. The Thibaudeau case has further brought attention to this matter.
The parliamentary task force was headed by the Secretary of State for the Status of Women who is in the House today. I wish to comment on the good work that she and two of our colleagues on the task force did in their travels across the country, holding round table discussions. The input they received was heart rending, emotional and traumatic. This has further raised the profile and the importance of the need for change.
It is my hope that the debate in the House of Commons today will once again move this issue to the forefront. To quote C. Brock Chisholm from a speech in Washington, C.D. in 1945:
The most important thing in the world today is the bringing up of children.
Designing fairer, simpler systems of providing tax relief is essential in order to respond to the needs of children whose parents live apart. We must remember this as we draft the laws which impact on our children. Their welfare must determine our priorities.