The ruling by the Tax Court of Canada loosens rules on who can get the tax-free monthly payment from the federal government, placing parental incarceration as a more unusual exemption alongside hospitalization and boarding school enrolment.

Camille Bouchard is a single father from Nanaimo, B.C., who was living in a two-bedroom apartment with his teenaged daughter in 2005 when he was sentenced in court and sent to a federal prison, according to court documents.

His daughter, then 17, continued to stay in the apartment for a few months before moving in with a friend's family. While her father was in prison - until she turned 18, when child tax benefits end - she lived with three different families, court heard.

"Throughout this time, Mr. Bouchard kept in regular contact with both his daughter and the families. He also supplied funds for the payment of rent to the families and for his daughter's other expenses," wrote Justice Judith Woods in her ruling.

Bouchard's child tax benefit payments, however, were later disallowed by the Canada Revenue Agency because, under the Income Tax Act, the money is to be paid to the parent who is the primary care giver while residing with the child.

There was no question that Bouchard took care of his daughter as a single parent for several years prior to imprisonment but, clearly, he was not living with her while he was in a federal prison on a charge that his lawyer would not reveal.

The tax department demanded Bouchard pay back $2,479. With the help of the British Columbia Public Interest Advocacy Centre, a Vancouver non-profit society that champions the disadvantaged, Bouchard challenged his tax bill in court.

Justice Woods cites a previous case that said when a child is hospitalized for a long period, it should not necessarily disentitle the parents to the benefit; similarly, another ruling said parents may still be eligible if a child lived somewhere else in order to go to school.

"These are examples of where a child leaves the family home for a period of time. Should the answer be any different if the parent leaves the home?" Justice Woods writes.

"What if a custodial parent is required to work out of town for an extended period and hires a babysitter to look after the child? Or what if the custodial parent is absent for a period of time because they have been committed to prison.

"In my view, the child tax benefit provisions should be interpreted in a compassionate way in these types of circumstances so as not to frustrate the obvious intention of Parliament."

Addressing the case of the Bouchard family, Justice Woods writes: "The circumstances in which the daughter found herself in here are tough for a 17 year old. To deny the benefit to her custodial parent who took care of her would be the antithesis of what Parliament had in mind in enacting the family benefit regime."

For Eugene Kung, a staff lawyer with the advocacy centre who argued Bouchard's case in Vancouver, the ruling is a triumph of the spirit of the law over its literal words.

The child tax benefit was designed to help low- and middle-income families with the cost of raising children through a tax-free monthly payment.

"The purpose of the benefit is to help the children and alleviate child poverty. That was the purpose in this case," said Mr. Kung. "Not one single dollar went to him. Every dollar was used by the child for her clothes, food and board, allowing her to remain in school."

In fact, when the tax department stopped making the payments, she was forced to drop out of school to take a job, he said.

The government is considering whether to appeal the decision, said Lyse Cantin, a spokeswoman for the Department of Justice. Bouchard declined to comment.

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