Tax Court of Canada Judgments

Date: 19990602

Docket: 2000-445-IT-I

BETWEEN:

HEATHER McCOLL,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Hamlyn, J.T.C.C.

[1] This is an appeal for the 1997 taxation year. In computing her income for the 1997 taxation year, the Appellant claimed legal fees of $10,949.89.

[2] By Notice of Reassessment the Minister of National Revenue reassessed the Appellant’s income tax return for the 1997 taxation year and disallowed the amount of $10,949.89.

Admitted Facts from the Pleadings

[3] The Appellant and her husband Paul McColl were married on April 8, 1995 and separated on July 10, 1997. The Appellant and Paul McColl have one son, Andrew Peter William McColl born on March 14, 1997. During the 1997 taxation year the Appellant paid legal expenses in the amount of $10,949.89. The Appellant and Paul McColl entered into a separation agreement dated January 13, 1998. Under the terms of the agreement Paul McColl was required to pay the Appellant $1,200 per month to Mrs. McColl in child support payments effective February 1, 1998; $7,500 in spousal support on February 1, 1998 and $2,500 per month in spousal support as of March 1, 1998.

Evidence at Trial

[4] The Appellant’s evidence was clear and compelling. All the legal expenses were incurred to determine her husband’s income who was, as admitted, the father of her son. The legal expenses were to enforce a pre-existing right to a support amount as provided by law.

[5] The father through the matrimonial breakdown litigation period took the position of denying his son’s right to a determination of a maintenance amount by hiding his source or sources of income as well as understating the amounts of income. According to the Appellant, the child’s father stated that if fathers did not want to pay maintenance, they did not do so.[1] The litigation negotiation period was filled with acrimony and violence.

[6] The legal expenses incurred were considerable as the Appellant had to expose and demonstrate the father’s ability to pay. The Appellant eventually succeeded in negotiating the aforementioned separation agreement.

[7] The Appellant acknowledged that she benefited from the final agreement, but the costs incurred were primarily from her point of view directed at enforcing the child’s pre-existing right to maintenance payments. As a consequence of this view she believed she would be entitled to deduct all the legal expenses of $10,949.89 for 1997.

Issue

[8] The issue is whether or not the Appellant was entitled to deduct legal fees in the amount of $10,949.89 in computing her income for the 1997 taxation year.

The Minister's Pleaded Position

[9] (i) The legal expenses were paid prior to and for the purpose of obtaining the separation agreement; (ii) the legal fees were not incurred for the purpose of enforcing payment of child or spousal support where the right has been established by a court order or valid separation agreements; (iii) the legal fees are expenses on account of capital; (iv) the legal fees were not incurred by the Appellant for the purpose of gaining or producing income from business or property but were personal or living expenses of the Appellant; (v) the right of the Appellant to receive support constitutes income from other sources under subdivision d (Other Sources of Income) of the Income Tax Act (the “Act”); and (vi) there is no provision in subdivision d of the Act to allow the Appellant to make the deduction.

Appellant's Position

[10] Legal costs incurred to enforce pre-existing rights to support amounts are deductible. A pre-existing right for the child for support from his father arises from Part III of the Family Law Act of Ontario. Enforcing such a right does not create or establish a new right and as such is deductible from the computation of income.

Analysis

[11] Legal costs to establish a right to support amounts (spousal or child) are non-deductible because they are costs on account of capital or are personal or living expenses, but legal costs incurred to enforce a pre-existing right to either interim or permanent support (spousal or child) are deductible, R. v. Burgess, [1981] C.T.C. 258, 81 DTC 5192; Evans v. Minister of National Revenue, [1960] S.C.R. 391, [1960] C.T.C. 69, 60 DTC 1047.[2] In Kathy L. Wakeman v. The Queen, 1996 DTC 3220, [1996] 3 C.T.C. 2165, cited by the Appellant, the issue was whether “the Appellant could deduct legal expenses of $5,320 paid by her to obtain a permanent court order against her divorced husband for maintenance for their two children.” The Court accepted the Appellant’s evidence and found “that the expenses claimed did not relate to custody but solely to the establishment of the amount of maintenance for the two children of whom the Appellant had custody.” The Court found that there was no pre-existing right to maintain a spouse but there was a pre-existing legal right to support a child (the Family Law Act of Ontario, the Divorce Act, and Richardson v. Richardson, [1987] 1 S.C.R. 857, 38 D.L.R. (4^th) 669, 22 O.A.C. 1). The Court therefore found the expenses were deductible.

[12] The Minister of National Revenue has taken the position in Interpretation Bulletin IT-99R5 under the heading “support amounts”:

17. Legal costs incurred in establishing the right to support amounts, such as the costs of obtaining a divorce, a support order under the Divorce Act or a separation agreement, are not deductible as these costs are on account of capital or are personal and living expenses. . . .

18. Legal costs incurred to enforce pre-existing rights to either interim or permanent support amounts are deductible. A pre-existing right to support can arise from ... legislation such as Part III of the Family Law Act of Ontario, and enforcing such a right does not create or establish a new right; ...

[13] It would appear, since the judgment in Pierre Bergeron v. Her Majesty the Queen, (98-547(IT)I), Tax Court of Canada (Informal Procedure) Archambault T.C.J., the Minister of National Revenue has changed his view in relation to IT-99R5.

[14] In that decision after lengthy reasoning the judge found “...there is no provision in the Act authorizing the deduction of legal expenses incurred to collect or contest the payment of support...”. While the finding “legal expenses incurred to collect ... the payment of support...” was an obiter finding,[3] I find the judgment was of interest and of concern.

[15] The Minister now takes the position the right of an Appellant to receive support payments constitutes income from other sources under subdivision d of the Act as a consequence there is no provision in subdivision d of the Act to allow the Appellant to make the deduction in issue.

[16] From the facts of this case and my reading of the Act I conclude the following: the pre-existing right to a support as a result of Part III of the Family Law Act of Ontario is a property right under the Act.[4] This right has been embodied into a separation agreement. This is the right of the child of the Appellant. The legal expenses that were incurred by the Appellant to enforce the child’s pre-existing legal right were not expenditures on account of capital.

[17] The right to receive income from a property right falls within section 9 of the Act. (It also falls within subdivision d and this, I conclude, only provides for greater certainty in terms of the definition of what is income).[5] Income under section 9 is net income and expenses incurred are deductible under section 9.

[18] The legal expenses incurred to enforce the pre-existing right are considered current expenses to which the prohibitions in paragraph 18(1)(a) and 18(1)(h) do not apply. The prohibition in paragraph 18(1)(a) does not apply because the expenses were incurred for the purpose of gaining income from a pre-existing legal right, which I have concluded (at paragraph 17) is property according to the broad definition of “property” found in subsection 248(1) of the Act. The prohibition in paragraph 18(1)(h) does not apply because the legal expenses are not personal or living expenses of the Appellant. They are expenses incurred by the Appellant on behalf of the child to obtain support to raise the child and to which the Appellant and the child are legally entitled.

[19] In this case, the Appellant incurred $10,949.89 in legal expenses to enforce the pre-existing legal right to support by quantifying the amount for the child. While the Appellant did obtain a personal benefit from the expenses, that personal benefit did not diminish the totality of the legal expenditure to enforce the same pre-existing right of the child to a support payment.

[20] As a final conclusion I can find no better statement than that of Bowman J. (as he then was) of the Tax Court of Canada in Marise Nissim v. Her Majesty the Queen, 1999 [1 C.T.C.] 2119 at page 2125:

. . . . .

To deny to wives the right to deduct the cost of compelling husbands to pay their fair share of the cost or raising children and yet to tax the wives on such maintenance as they can get from the husbands seems to me to be contrary to both common sense and ordinary principles of fairness. Whatever validity there may be to the distinction between the cost of enforcing an existing right to income and establishing such a right I do not think that the courts should strain to find legalistic reasons to deny the deductibility of these very necessary expenses. It must be recognized that the law relating to revenue and capital expenditures has developed since the last century and distinctions that may have carried weight in 1898 may be less meaningful in 1998. In Minister of National Revenue v. Algoma Central Railway (1968), 68 DTC 5096 (S.C.C.), the Supreme Court of Canada said at page 5097:

Parliament did not define the expressions “outlay...of capital” or “payment on account of capital”. There being no statutory criterion, the application or non-application of these expressions to any particular expenditures must depend upon the facts of the particular case. We do not think that any single test applies in making that determination and agree with the view expressed, in a recent decision of the Privy Council, B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, (1966) A.C. 224, by Lord Pearce. In referring to the matter of determining whether an expenditure was of a capital or an income nature, he said, at p.264:

The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer.

One cannot read the decision of the Supreme Court of Canada in Symes v. R. (1993), 94 DTC 6001 (S.C.C.) (which otherwise has nothing to do with this case) without being struck by that court’s recognition of and sensitivity to the changing realities and exigencies of modern life.

Decision

[21] The appeal is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the legal expenses in the amount of $10,949.89 are deductible.

Signed at Ottawa, Canada, this 2^nd day of June 2000.

"D. Hamlyn"

J.T.C.C.

---