REASONS
FOR JUDGMENT
Masse D.J.
[1]
This is an Appeal from a Notice of Reassessment
in relation to the 2011 taxation year whereby the Minister of National Revenue (the
“Minister”) disallowed legal expenses in the
amount of $42,283.24 incurred by the Appellant in an attempt to have his former
spouse contribute towards child support.
Factual Context
[2]
Mr. Mills is a teacher. He was married in August
1993. This marriage produced three children now aged 12, 11 and 9. He also has
a 19 year old step‑daughter. The marriage broke down in April 2007 and
this led to divorce litigation between the Appellant and his former spouse. Mr.
Mills is of the view that he was not well represented by his legal counsel
throughout this litigation. He is of the view that his counsel pressured him
into signing Minutes of Settlement that were very one-sided and disadvantageous
to him.
[3]
These Minutes of Settlement were incorporated
into a Final Order of Divorce dated November 4, 2008 (the “first order”). By the terms of this first order,
Mr. Mills’ ex-wife was granted full custody of the three children and Mr. Mills
was granted specified unsupervised access.
[4]
Paragraph 3(1) of this first order provided that
Mr. Mills was to pay to his former spouse child support for the three children
of the marriage pursuant to the Federal Child Support Guidelines in accordance
with his salary at the time. Paragraph 3(3) of the first order provided for
annual adjustments to the quantum of child support on September 1st of each
year commencing in 2009 based upon any changes to Mr. Mills’ income. Paragraph
3(8) of the first order provided that:
the obligation of
the Applicant in (1) [re child support] shall continue notwithstanding that his
parenting time as set out in paragraph 2 may exceed 40%.
It is this
provision of the first order that Mr. Mills finds to be most unfair since, by
the terms of paragraph 3(8) of the first order, he was effectively precluded
from varying the support provisions even if the children of the marriage were
in his actual custody for more than 40% of the time. I tend to agree with
Mr. Mills that the effect of this provision is indeed unfair.
[5]
Mr. Mills’ former spouse is also a high school
teacher and she earns just about the same income as he does.
[6]
The children of the marriage are now with Mr.
Mills about half the time. Mr. Mills certainly thought it was unfair for him to
pay full child support to his former spouse when he had the care of the
children about half the time. In September 2011, he brought an Application to
Vary the Final Order of Divorce so as to oblige his ex-wife to pay her fair
share of child support. Effectively, this Application sought a “set-off” of
support payable for the children on the basis that the children were with him
more than 40% of the time. What Mr. Mills wanted was for his former spouse
to pay her fair share of the costs related to raising the children in
proportion to her annual income – which was the same as his.
[7]
After a three day trial held in September 2011
before the Ontario Superior Court of Justice, a second order was issued. The
reasons for decision regarding this second order were released July 12, 2012.
This second order dismissed Mr. Mills’ claim for a “set-off” of child
support. Therefore, neither the first order nor the second order required
Mr. Mills’ former spouse to pay any child support for any of the children. Mr.
Mills continues to pay full child support even though he has the care of the
children for almost half the time. Mr. Mills did not appeal either of
these orders and so they are valid and binding. I am not asked to vary them and
even if I were, I do not have the jurisdiction to do so.
[8]
Mr. Mills’ efforts to vary the first order
resulted in legal expenses to him exceeding $42,000.00. He sought to claim
these legal fees as a deduction and this deduction was denied. This is what
brings him before this Court.
Theory of the
Appellant
[9]
Mr. Mills argues that he incurred these legal
expenses in an effort to enforce a right to child support. He is of the view
that he was not incurring legal expenses for the purposes of reducing his child
support obligations, but rather he incurred these expenses in order to have his
wife pay to him her fair share of child support. It is his position that he
should therefore be allowed to deduct these legal expenses from income.
Theory of the
Respondent
[10]
The Respondent submits that the legal fees
incurred by the Appellant were incurred in order to reduce child support
payments payable by the Appellant. As such, they were not incurred or paid in
order to gain or produce income and so the legal expenses are not deductible
through the operation of paragraph 18(1)(a) of the Income Tax Act,
R.S.C., 1995, c. 1 (5th Supp.) (the “Act”).
Legislative
Provisions
[11]
The relevant provisions of the Act are as
follows:
18(1) In
computing the income of a taxpayer from a business or property, no deduction
shall be made in respect of
(a)
an outlay or expense, except to the extent that it was made or incurred by the
taxpayer for the purpose of gaining or producing income from business or
property.
248(1) “property”
means property of any kind whatsoever whether real or personal, immovable or
movable, tangible or intangible, or corporeal or incorporeal and, without
restricting the generality of the foregoing, includes
(a)
a right of any kind whatever, a share or a chose in action,
Thus, a right to
sue is considered property under the Act.
[12]
The relevant provisions of the
Federal Child Support Guidelines, SOR/97‑175, are as follows:
8. Where each
spouse has custody of one or more children, the amount of a child support order
is the difference between the amount that each spouse would otherwise pay if a
child support order were sought against each of the spouses.
9. Where a
spouse exercises a right of access to, or has physical custody of, a child for
not less than 40 per cent of the time over the course of a year, the amount of
child support order must be determined by taking into account
(a)
the amounts set out in the applicable tables for each of the spouses;
(b)
the increased costs of shared custody arrangements; and
(c)
the conditions, means, needs and other circumstances of each spouse and of any
child for whom support is sought.
Analysis
[13]
The effect of the above noted provisions of the Act
is such that the right to receive child support is considered to be property
and so an expenditure incurred to earn income from this property is deductible
under paragraph 18(1)(a) of the Act. Unfortunately, expenses
incurred by a taxpayer in an attempt to contest, decrease or terminate child
support payments are considered to be personal expenses and not expenditures in
order to receive income from property. This is a well settled proposition of
tax law that has been consistently recognized in the jurisprudence. A brief
survey of case law will establish the point.
[14]
In the case of Bayer v. Canada (M.N.R.),
[1991] T.C.J. No. 511, the taxpayer incurred legal fees as the result of a
legal action to reduce the amount of his alimony payments to his former spouse.
He then deducted the amount of the legal fees in calculating his income for the
year, on the basis that the fees were incurred to reduce his expenses, and thus
to increase his income. The Minister disallowed the deductions on the grounds
that they were not incurred for the purpose of gaining or producing income. The
taxpayer appealed to the Tax Court of Canada. Justice Lamarre-Proulx in
dismissing the appeal stated in the last paragraph of the reasons for judgment:
The moneys expended
by the Appellant for the legal fees incurred, has as an effect to increase the
taxpayer’s income as calculated under Division B of the Act but this increase
did not come from an income producing property but from a reduction of an
obligation that he had which was not an income producing property. In these
circumstances, the expenses in question were not within the meaning of those
contemplated by paragraph 18(1)(a) of the Act. It is not moneys expended for
any property that may be deducted by virtue of paragraph 18(1)(a) of the Act,
it is moneys expended for a property that, in itself, produces income.
[15]
In Nadeau v. Canada, [2003] F.C.J. No.
1611, Mr. Justice Noel of the Federal Court of Appeal was unequivocal when he
stated at paragraphs 14 and 18 of his reasons for decision:
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 form property …
…
18. … 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 expenses …
[16]
In Berry v. Canada, [2005] T.C.J. No.
605, Justice Sheridan of this Court was dealing with the case of a taxpayer who
was claiming a deduction from income for legal fees related to the litigation
of child support issues wherein he was self-represented. The Minister had disallowed
the deduction. Justice Sheridan held that the Appellant’s legal expenses
were incurred in proceedings to decrease the amount of child support he was
obliged to pay. Such expenditures are not deductible and accordingly the appeal
was dismissed.
[17]
Melnyk v. Canada,
[2007] T.C.J. No. 549, is a case that bears some similarities to the case at
bar. The taxpayer appealed a 2005 income tax assessment denying a claimed
deduction for legal fees incurred in relation to child support. The taxpayer
had been ordered to pay child support. The mother also had an obligation to
contribute to the child’s support but this was set-off in the calculation of
support owing. Mr. Justice Webb of the Tax Court of Canada, as he then was,
dismissed the appeal and held that the amount of set-off would not be income to
the Appellant father. Justice Webb defined the issue very clearly in paragraph
4 of his decision:
4. The position
of the Appellant is that this child support amount is only the net amount
payable. His position is that because Kaila Melnyk was also employed (although
at a lower salary than the Appellant), she was obliged to pay to him an amount
of child support which was set off against his obligation to pay child support
to her (based on 100% of the Guideline amount) and this amount payable by him
is the net result of this set-off. Hence, it is the position of the Appellant
that he did incur legal fees to earn income, i.e., the amount of child support
that the Appellant claims was payable to him by Kaila Melnyk. I am unable
to agree with this position.
[18]
Justice Webb then went on to discuss paragraphs
8 and 9 of the Federal Child Support Guidelines which deal with split custody
and shared custody respectively. He then continued at paragraph 7:
7. In my
opinion in determining the amount of support payable under paragraph 9 of the
Federal Child Support Guidelines, the factors set out in s. 9 of these
Guidelines are to be analyzed to determine the amount of child support that
will be payable by one parent to the other. While it is recognized that in
situations where both spouses are earning income that each will contribute to
the support of the child, the contributions are not made from one parent to the
other. While Graeme [the child] was with Kaila Melnyk the amount that she would
be paying for his food, clothing, shelter and other items that would be
purchased for him would not be made by payments made from Kaila to the
Appellant, but rather would be paid directly by Kaila to the provider of these
goods and services. Kaila had an obligation to contribute towards the support
of Graeme but not by making payments to the Appellant, but by making payments
directly to the persons who were providing the goods and services to Graeme
while Graeme was with her. Her contributions to the support of Graeme would not
be income to the Appellant.
[19]
There is one decision that counsel for the
Respondent has referred to me that goes in the opposite direction and favours
the Appellant. Rabb v. Canada, [2006] T.C.J. No. 94, was an appeal by
the taxpayer from an assessment refusing a claim for deduction of legal fees. A
separation agreement provided for split custody of the two children of the
marriage. The taxpayer was required to pay child support to his wife as his
income was higher, but he paid only the offset amount as his wife was obliged
to pay support for the child who was in the taxpayer’s care. The taxpayer
claimed legal fees incurred to establish his former wife’s income in order to
determine the amount of support payable to him. Justice Lamarre of this Court
allowed the appeal holding that the Appellant’s purpose in incurring the legal
fees was in part to establish entitlement to support for the one child that was
in his custody. The Rabb decision is distinguishable from the other
cases cited since it dealt with the situation of split custody of children
pursuant to section 8 of the Federal Child Support Guidelines where one parent
has custody of one or more children and the other parent has custody of the
other children of the marriage. On the other hand, the case at bar deals with
shared custody pursuant to section 9 of the Guidelines where a parent exercises
a right of access to, or has the physical custody of a child for not less than
40% of the time over the course of a year. Unfortunately, the Appellant waived
his section 9 right to apportion child support even if he had access or
physical custody more than 40% of the time. Some might say that this
distinction is a distinction without a difference and I would tend to agree;
however, I hesitate to follow Rabb in the face of constant and
unwavering jurisprudence to the contrary.
[20]
I have much sympathy for Mr. Mills. I agree with
him that it is not right that a parent who incurs legal expenses in order to
obtain child support is entitled to deduct the legal expenses from income
whereas the parent who incurs legal expenses in order to prevent child support
from being established or increased or to decrease or terminate child support
cannot deduct these legal expenses from income. Such a result is unjust, unfair
and inequitable. In my opinion both parents should have the right to deduct
legal expenses in such circumstances or neither one should.
[21]
However, the Tax Court of Canada is not a court
of equity. The Tax Court of Canada does not have the legal authority to set
aside or vary a tax assessment for reasons based essentially on equity. In
other words, the role of a judge of this Court is to decide whether or not an
assessment is well founded, not to make or change the law: see Smith v.
M.N.R., 1989, 89 DTC 299; Lamash Estate v. M.N.R., 1990, 91 DTC 9; Sunil
Lighting Products v. M.N.R. [1993] T.C.J. No. 666; Tignish Auto Parts
Inc. v. M.N.R. [1993] T.C.J. No. 446; Impact Shipping v. Canada,
[1995] T.C.J. No. 409; Lassonde v. Canada, 2005 FCA 323; and Dubois
v. the Queen, 2008 DTC 3205.
[22]
If I could provide Mr. Mills with some relief, I
would do so. However, the position argued by Mr. Mills goes contrary to the
weight of a strong body of jurisprudence. The principle of law that a payer
cannot deduct legal fees incurred to prevent child support from being established
or increased, or to have child support decreased or terminated, is so well
entrenched that only Parliament can bring about legislative changes to the law.
The fact that Parliament has not done so speaks to the will of our law-makers.
Conclusion
[23]
For all of the foregoing reasons, this Appeal is
dismissed.
Signed at Kingston, Ontario, this 21st day of May 2014.
"Rommel G. Masse"
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