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Docket: 2004-1732(IT)I |
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BETWEEN: |
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STUART MCGOWAN, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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Appeal heard on November 30, 2004 at Edmonton, Alberta
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Before: The Honourable Justice L.M. Little |
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Appearances: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Elena Sacluti |
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JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 2002 taxation year is dismissed, without costs, in accordance with the attached Reasons for Judgment.
Signed at Vancouver, British Columbia, this 14th day of January 2005.
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"L.M. Little" |
Little J.
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Citation: 2005TCC43 |
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Date: 20050114 |
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Docket: 2004-1732(IT)I |
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BETWEEN: |
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STUART MCGOWAN, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Little J.
A. FACTS:
[1] The Appellant had established a common law relationship with Nancy Ford ("Ford").
[2] After the common law relationship between the Appellant and Ford was terminated the Appellant filed a Notice to Creditors of the Appellant in the Court of Queen's Bench of Alberta on August 30, 2001 for a Consolidation Order under the Orderly Payment of Debts provisions of Part X of the Bankruptcy Act.
[3] Pursuant to a Consolidation Order dated October 10, 2001 (the "Consolidation Order") the Appellant was ordered to pay the following:
(i) to Credit Counselling Services of Alberta the sum of $900.00 per month commencing November 30, 2001; and
(ii) once properties in Ontario are sold the Appellant will pay proceeds towards the debts.
[4] Mr. Justice James of the Ontario Superior Court, Family Division, heard a Notice filed by the Appellant and issued a Temporary Order dated February 20, 2002 (the "Temporary Order") which ordered as follows:
(i) the request for a restraining order is declined;
(ii) the request for delivery of certain personal items is declined;
(iii) the net proceeds of the sale of the cottage owned by the Appellant and Ford shall be remitted to the Credit Counselling Services of Alberta;
(iv) the Appellant and Ford agree on the listing agent and sign a listing agreement.
[5] The Appellant incurred legal costs to defend an application by Ford for the Appellant to pay her spousal support and for the settlement of matrimonial assets and debts.
[6] The Appellant paid $15,938.40 to James Jagtoo, a lawyer in Ontario.
[7] When the Appellant filed his income tax return for the 2002 taxation year he deducted legal fees in the amount of $14,143.00 that he had paid to Mr. Jagtoo.
[8] The Minister of National Revenue (the "Minister") issued a Notice of Reassessment for the 2002 taxation year and disallowed all legal fees that were claimed by the Appellant.
B. ISSUE:
[9] The issue is whether the Appellant is allowed to deduct the legal fees that he paid to Mr. Jagtoo in determining his income for the 2002 taxation year.
C. ANALYSIS:
[10] It will be noted that the legal fees paid by the Appellant were paid to defend an application by the former common law spouse for spousal support. The legal fees were also paid for the settlement of matrimonial assets and debts.
[11] In Nadeau v. The Queen, 2003 DTC 5736 Mr. Justice Noël of the Federal Court of Appeal considered an application for judicial review of a decision by Archambault J. of the Tax Court. Justice Archambault had refused the applicant's deduction of legal costs incurred in contesting a motion for an increase in support payments filed by his former wife.
[12] In his decision in Nadeau Noël J.A. said:
[3] The facts underlying this case are straightforward. The applicant obtained a divorce in July 1996 pursuant to a judgment by the Superior Court of Quebec. The judgment ordered him to pay support to his former wife for the benefit of the couple's children.
[4] Some time later, his former wife commenced judicial proceedings to have the pension increased and extended to her as well. The applicant contested this proceeding before the Superior Court and won. He then requested non-taxation of the support payments, and they were consequently reduced by half by the Court of Appeal. In 1999, the amount of the legal costs stood at $4,284 and it is the deduction of this sum that is the subject matter of this litigation.
[5] The Minister of National Revenue (the Minister or respondent) refused the deduction of this expense on the ground that it had not been incurred for the purpose of earning income from a business or property (confirmation of the assessment, Applicant's Record, page 8).
. . .
[14] The cases have consistently held for more than forty years that the right to support, once established by a court, is "property" within the 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 (see in particular Boos v. Minister of National Revenue (1961), 27 Tax A.B.C. 283 (Can. Tax App. Bd.), R. v. Burgess Bayer v. Minister of National Revenue, [1991] 2 C.T.C. 2304 (T.C.C.), Evans v. Minister of National Revenue, [1960] S.C.R. 391 (S.C.C.) and Sembinelli v. R., supra).
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[16] Thus the courts have consistently held that income from support payments is computed by reference to the regime applicable to income derived from property (or from a business) that is found in subdivision b of the Act. Under this regime, an expenditure incurred in order to constitute a source of income is a payment on account of capital and its deduction is prohibited (see paragraph 18(1)(b)). However, an expenditure incurred in order to earn income from this source (i.e. after it has originated) is referred to as a "current" expense which falls within the exception in paragraph 18(1)(a):
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[17] This regime, as it was applied by the courts over the years, has meant that from the perspective of the recipient, an expenditure, the purpose of which is to give rise to a right to support is a capital expenditure and therefore cannot be deducted. But an expenditure incurred in recovering an amount owing under a pre-existing right is a "current" expense and may therefore be deducted.
[18] Conversely, the expenses incurred by the payer of support (either to prevent it from being established or increased, or to decrease or terminate it) cannot be considered to have been incurred for the purpose of earning income, and the courts have never recognized any right to the deduction of these expenditures (see, for example, Bayer, supra).
[13] Based on the finding of Noël J.A. in Nadeau I have concluded that the legal fees paid by the Appellant to prevent his former common law spouse from obtaining support payments cannot be considered to have been incurred for the purpose of earning income.
[14] I have also concluded that the legal fees paid by the Appellant to settle the division of matrimonial assets and debts were personal and living expenses and are prohibited from deduction by paragraph 18(1)(h) of the Act.
[15] The appeal will be dismissed, without costs.
Signed at Vancouver, British Columbia, this 14th day of January 2005.
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"L.M. Little" |
Little J.
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CITATION: |
2005TCC43 |
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COURT FILE NO.: |
2004-1732(IT)I |
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STYLE OF CAUSE: |
Stuart McGowan and Her Majesty the Queen |
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PLACE OF HEARING: |
Edmonton, Alberta |
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DATE OF HEARING: |
November 30, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice L.M. Little |
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DATE OF JUDGMENT: |
January 14, 2005 |
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APPEARANCES: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Elena Sacluti |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada |