The Queen v. Burgess, 81 DTC 5192, [1981] CTC 258 (FCTD)

Cattanach, J:—This is an appeal, on behalf of the Minister of National Revenue, from a decision of the Tax Review Board dated April 9, 1979 whereby, following the defendant’s admission, an amount of $11,700 paid to her by her former husband pursuant to an order for maintenance of $75 per week for each of herself and her two children was properly included in her income for the 1974 taxation year, an amount of $4,402.77, being the legal expenses paid by her in obtaining a divorce a vinculo and in the amount attributable to obtaining maintenance, was allowed as a deduction in computing her taxable income for that year.

Prior to trial counsel for the parties agreed upon the following statement of facts:

AGREED STATEMENT OF FACTS

1. During the 1974 taxation year, Dr Burgess received the sum of $11,700.00 as maintenance for herself and children from her former husband.

2. During the 1973 taxation year, Dr Burgess expended the sum of approximately $5,900.00 as fees and disbursements paid to her solicitors to obtain a decree absolute of divorce and an award of maintenace for herself and her two children.

3. There was no contest concerning the granting of the Divorce or the custody of the children between the Defendant and her former husband.

4. The trial on the Divorce lasted two days in the Supreme Court of Ontario, before Mr. Justice Stark.

5. The Divorce, custody and access aspects occupied approximately one-half hour, and approximately 1.5 days of the 2 days of trial concerned the issue of maintenance for Dr Burgess and her children.

6. The Court awarded maintenance to Dr Burgess of $75.00 per week, and a further $75.00 per week for maintenance of each of the two children, for a total payment of $225.00 per week.

7. By Judgment dated April 9, 1979, the Tax Review Board ordered that the Appellant be allowed to deduct the sum of $4,402.66 in the computation of her income for the 1974 taxation year, which amount was found by the presiding member, Mr Bonner, to be that part of the $5,900.00 expended by the Defendant which was attributable to obtaining maintenance for herself and her children.

I have deleted from paragraphs 3, 4 and 5 the references to the transcript of the divorce proceedings because the statements are not disputed.

I would add however that the amount of $4,402.66 found by the Board to be that portion of the defendant’s legal expenses attributable to maintenance is an allegation of fact made by the defendant in paragraph 5 of her statement of defence.

The basic contention upon which the plaintiff’s appeal is based is that the amount expended by the defendant for legal expenses was not deductible from her income in her 1974 taxation year since those expenses were not expended to earn income from a business or property within the meaning of paragraph 18(1 )(a) of the Income Tax Act which reads:

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 the business or property.

In contradiction thereof the contention on behalf of the defendant is that the right to maintenance is “property” within the definition thereof in section 248 of the Act which reads in part:

“property” means property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes

(a) a right of any kind whatever . . .

It is implicit in the defendant’s contention that her right to maintenance arose upon her marriage and, from that premise, the further contention is that the maintenance payment ordered by the Court is not the creation of a new right but is rather the continuation of the defendant’s prior right to maintenance. That being so the legal fees were expended to assert or declare that right from which it follows that the deduction sought is not prohibited by paragraph 18(1 )(a) having been laid out to preserve income from property ie, the right to maintenance.

Alimony or maintenance payments are included in the income for the taxation year of the recipient by virtue of paragraph 56(1 )(b) of the Income Tax Act. By virtue of complementary paragraph 60(b) the taxpayer who pays alimony or maintenance to the other spouse may deduct the payments so made in computing income for the taxation year.

Paragraphs 56(1 )(b) and 60(b) read:

56. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

. . . (b) any amount received by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if the recipient was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, the spouse or former spouse required to make the payment at the time the payment was received and throughout the remainder of the year;

60. There may be deducted in computing a taxpayer’s income for a taxation year such of the following amounts as are applicable;

. (b) an amount paid by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children

of the marriage, if he was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, his spouse or former spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year.

My understanding of the words “alimony” and “maintenance” has always been that they are technical and terms of art. “Alimony” strictly refers to an allowance made while the marriage continues to subsist and “maintenance” strictly refers to the allowance made when the marriage is dissolved. Thus an order nisi provision for payment of an interim allowance pending the order absolute is “alimony” and a like order after dissolution of the marriage is “maintenance”. An allowance ordered to be paid on the grant of a divorce a mensa et thoro (less technically as a judicial separation) is alimony as are payments agreed upon between the parties to a marriage in a written separation agreement.

Paragraph 56(1 )(b) covers both “alimony” and “maintenance” since “maintenance” would fall within the words “other allowance . . . payable for the maintenance of the recipient thereof,”.

It is not disputed the maintenance awarded to the defendant and her two children falls precisely within paragraph 56(1 )(b).

Therefore I have made no reference to paragraph 56(1 )(c) and its exact complement paragraph 60(c) for hte reason that those paragraphs must have been included in the Statute to cover those instances, less formal instances, such as allowances granted for non-support rather than the more formal instances of divorce, judicial separation or a written separation agreement covered by paragraph 56(1 )(b) but I need not so decide and I do not do so.

Alimony and maintenance were not deemed to be income to the recipient nor a deduction to the payer until 1942 when the payer was allowed a tax credit. By the Statutes of 1944-45, c 28, the payer was allowed a straight deduction and the recipient was obliged to take the payments into income and were assessable as such although it is difficult to ascertain the concept under which the payments fit into income in the hands of the recipient or as deductions rather than personal expenditures of the payer.

But the Statute provides that the maintenance awarded is income to the recipient. This the defendant has accepted. The Statute leaves no other choice.

The question is, as I view it, whether the legal expenses paid by the defendant were expended by her for the purpose of obtaining income which was hers as of right. Put yet another way, were the legal fees expended by her for the purpose of collecting income to which she was entitled. If this be so then the expense are properly deductible.

There is no doubt that the defendant was entitled to the payments but the question is by virtue of that circumstance did that entitlement arise. That entitlement is the right under which the defendant receives the payment and that right is “property” within the broad definition in section 248 previously quoted.

The question which next arises is what was the circumstance which gave rise to the defendant’s right to maintenance, (1) was it a right which arose upon the defendant’s marriage as contended by her counsel, or (2) was it a right which arose upon the order absolute granted by the High Court of Ontario as contended by counsel for the plaintiff.

Put yet another way, did the judgment of the High Court of Ontario create the right to maintenance or was that judgment merely a continuation and quantification of a right to maintenance already vested in the defendant.

By section 2 of The Judicature Act (RSO 1970 c 228) the Supreme Court has all the jurisdiction, power and authority which had been vested in its predecessor on December 31, 1912. That includes the power to make provision for the future maintenance of a wife whose marriage has been dissolved as the court might think reasonable. The necessity for such power is readily apparent.

In England prior to 1857 it was not competent for any court to dissolve a marriage. That was done by Act of Parliament. In 1857 the courts were given the power to dissolve the marriage tie by a decree of divorce. That decree not only affects the relationship of the husband and wife one to another but it also changes the status of each of them.

Divorce differs from judicial separation and any form of separaton agreement. Judicial separation is nothing more than enforcing through an order of the court an arrangement which the parties, assuming they were willing, could have as equally well effected for themselves. A right to alimony provided in such an agreement arises by judicial sepration. Divorce is entirely different. It destroys the whole relationship. As a consequence of this change in status the courts have authority to decree maintenance.

In this regard Lord Atkin in Hyman v Hyman, [1929] AC 601 said at 628:

While the marriage tie exists the husband is under a legal obligation to maintain his wife. The duty can be enforced by the wife, who can pledge his credit for necessaries as an agent of necessity, if, while she lives apart from him under a decree of separation, he fails to pay the alimony ordered by the Court. But the duty of the husband is also a public obligation, and can be enforced against him by the State under the Vagrancy Acts and under the Poor Relief Acts. When the marriage is dissolved the duty to maintain arising out of the marriage tie disappears. In the absence of any statutory enactment the former wife would be left without any provision for her maintenance other than recourse to the poor law authorities. In my opinion the statutory powers of the court to which I have referred were granted partly in the public interest to provide a substitute for this husband’s duty of maintenance and to prevent the wife from being thrown upon the public for support.

The problem with which Lord Atkin was faced was whether a wife who had covenanted by a deed of separation not to take proceedings against her husband for alimony or maintenance and thereafter obtains a decree for divorce is precluded by her covenant from petitioning for permanent maintenance. The House of Lords held that she was not so precluded.

The significant statement by Lord Atkin for the purposes of this appeal is in the sentence:

When the marriage is dissolved the duty to maintain arising out of the marriage tie disappears.

As he subsequently adds the court has the power to provide a substitute for the husband’s duty of maintenance.

In Lilley v Lilley, [1959] 3 All ER 283, Lord Hodson at 288 stated the common law in these words:

The common law right was not a right to an allowance but to be supported by being given bed and board.

Of course, at common law, should the husband, fail to provide the wife with the necessities of life in accordance with the standard of living to which she was entitled, then the wife might pledge the husband’s credit to provide those necessities. But on divorce the right to bed and board and the right to pledge the husband’s credit both end with the dissolution of the relationship.

Thus it is for the court to provide the substitute for the right to maintenance.

The authority to grant an order for corollary relief upon granting a decree nisi for divorce is discretionary.

Section 11 of the Divorce Act, RSC 1979 c D-1 makes this abundantly clear. The court, if it thinks it fit and just to do so having regard to the circumstances of the parties, may make the order named in paragraph 11 (1 )(a) requiring the husband to provide for the maintenance of the wife and conversely in paragaph 11 (1 )(b) require the wife to likewise provide for the husband.

Fulton, J in Vnuk v Vnuk and Felotick, [1975] 3 RFL 117 had occasion to consider the discretionary aspects of section 11 of the Divorce Act. He considered the circumstances therein contemplated as justifying an award for maintenance as being first, the ability of the spouse seeking maintenance to maintain herself at the same level enjoyed during marriage without the assistance of the other spouse. If this is not so the next question is whether the spouse asked to pay the maintenance has the capacity to do so and if that spouse has that capacity then the court must decide upon a reasonable amount of maintenance.

In this instance the wife had no need for maintenance but against the possibility of a change in the wife’s circumstances at a future date she asked for an “in case” order fixing maintenance as a nominal quantum of $1.00 per year to preclude being faced with the reluctance of the courts to reopen the question of maintenance when no order was made at decree nisi.

This he refused to do. He said at 122:

But to make an order on that basis would, it seems to me, be to base it on an asusmption which is not valid: that is, that there arises merely by reason of a marriage a right of a wife to maintenance at all times, and that this right must be maintained or preserved, even after divorce and even although at the time of the divorce there was no proper or sufficient ground for making an order for entitlement.

The invalid assumption which Mr Justice Fulton had in mind is that a right of a wife to maintenance at all times arises merely by reason of marriage.

This is consistent with the law as reiterated by Lord Atkin in Hyman v Hyman (supra) when he said: “When the marriage is dissolved the duty to maintain arising out of the marriage tie disappears” and by Lord Hodson in Lilley v Lilley (supra) where he said that the common law right was not a right to an allowance but merely to be supported by being given bed and board. Even that ungenerous right would end in divorce.

In Re Freedman, 55 OLR 206, Ferguson, JA had for consideration a petition by a woman against her former husband for a receiving order, her claim as a creditor being based upon a failure to pay alimony from time to time under orders of the court.

After an extensive review of the authorties he considered that alimony is not property and is not assignable.

He quoted Cotton, LJ in Re Robinson (1884), 27 Ch Div 160 when he said at 167:

Alimony is an allowance which, having regard to the means of the husband and wife, the Court thinks right to be paid for her maintenance from time to time, and the Court may alter it or take it away whenever it pleases. It is not in the nature of property, but only money paid by the order of the Court from time to time to provide for the maintenance of the wife.

and Lindley, LJ when he said at 165:

It is not property in its proper sense; it is like an allowance made by a husband to his wife of a father to his child.

There is no question in my mind that in the light of the foregoing jurisprudence maintenance is not property in the proper sense of that term. However the definition of property in section 248 of the Act includes “a right of any kind whatever” and that is broad enough to include a right to maintenance.

The learned member of the Tax Review Board in concluding that the defendant was entitled to deduct the legal expenses incurred by her in obtaining a judgment by which her husband was obligated to pay maintenance for the support of herself and two children in the amount determined did so by placing reliance on the decision of the Supreme Court of Canada in Evans v MNR, [1960] SCR 391; [1960] CTC 69; 60 DTC 1047.

That was an appeal from the decision of Cameron, J ([1959] Ex CR 54; [1958] CTC 362; 58 DTC 267) allowing an appeal from the decision of the Tax Appeal Board.

Cameron, J, whose reasoning and conclusion were agreed with by Judson and Fauteux, JJ, who dissented from the majority of the Supreme Court, was of the opinion that an amount of $11,974.93 in legal fees expended by her to obtain payment of an annual income of $25,000 from the estate of her father-in-law was an outlay on account of capital and so barred from deduction by paragraph 12(1 )(b) and accordingly he found it unneccessary to consider whether the payment fell within paragraph 12(1 )(a)), (now paragraph 18(1 )(b)), that is an expense incurred for the purpose of gaining income from property.

Cartwright, J, speaking for himself and Taschereau and Ritchie, JJ, disagreed with the conclusion by Cameron, J that the right was a capital asset.

In considering the origin of the right to income he said at 397 (SCC), 75 (CTC):

In the case at bar, as has already been pointed out, the appellant, on September 20, 1953, became entitled for the remainder of her life-time to be paid the income from the one-third share. The legal ownership of that share remains at all times in the trustee and the capital of which it consists will be paid on the appellant’s death, to those entitled under the will of Thomas Alexander Russell. In no circumstances can the appellant ever become entitled to any part of that capital; her right is solely to require the trustee to pay the income arising from the share to her; this is a right enforceable in equity and everything received by the appellant by virtue of the right will be taxable income in her hands. The payment of the legal fees in question did not bring this right or any asset or advantage into existence. Her right to receive the income is derived not from the judgment of the Court but from the combined effect of the wills of Thomas Alexander Russell and John Alexander Russell. Wrongly, as it turned out, the trustee entertained doubts, presumably engendered by the claims of Mrs Andersen, as to whether it should pay to the appellant the income to which she was entitled and it would not pay anything until the matter had been passed upon by the Court.

The appellant’s right to income from shares arose from the will of her father-in-law and the appointment in the will of her husband and not from the judgment of the court. That right had existed throughout.

In speaking of the purpose of the legal expenses Mr Justice Cartwright said at 398 (SCC), 76 (CTC):

The precise form in which the matter was submitted to the Court appears to me to be of no importance; the legal expenses paid by the appellant were expended by her for the purpose of obtaining payment of income; they were expenses of collecting income to which she was entitled but the payment of which she could not otherwise obtain. So viewed, it could scarcely be doubted that the expenses were properly deductible in computing the appellant’s taxable income. This, in my opinion, is the right view of the matter and is not altered by the circumstance that it was mistakenly claimed by Mrs. Andersen that the appellant was not entitled to any income at all.

The legal expenses had been included to obtain payment of the income to which she was entitled.

Mr Bonner, the member of the Tax Review Board, in his reasons for judgment quoted the same extracts from the Evans case which I have quoted above. Before doing so however he prefaced them with his own premise:

If I am correct in the conclusion reached above that the Appellant in this case incurred the legal expense in order to produce income form a right which arose on marriage the decision of the Supreme Court in the Evans case is conclusive against the Respondent’s contention that the expenditures made by the Appellant in the present case are on capital account.

With respect I disagree with that premise.

The defendant’s income does not stem from a right which arose on marriage. In my view the right which arose on marriage was the right to maintenance during the currency of the marriage but that right terminated upon the dissolution of the marriage. If the circumstances so warranted the court which grants the divorce may also substitute, as its discretion dictates, maintenance in a reasonable amount. It is the order of the court which grants the defendant her right to maintenance.

This being so the principles in the Evans case are not applicable to the present appeal.

In the Evans case the appellant had an existing right to the income and expended the legal fees to obtain payment of that income which was denied her. The suit was for income.

In the present case the defendant’s right to maintenance which arose on marriage ended with the divorce and her right to subsequent maintenance arose from the court order. The suit was for divorce and corollary thereto an award of maintenance.

Therefore the legal expenses are in the nature of a capital expenditure, by bringing the right into being, rather than in the nature of a revenue expenditure to enforce payment of income from a right in being.

The appeal is therefore allowed.

I was informed that there are conflicting decisions by different members of the Tax Review Board but that the amount of payable tax in controversy in this appeal by the Minister is less than $2,500.

In accordance with subsection 178(2) of the Act the Minister shall pay all reasonable and proper costs of the defendant in connection with the appeal.

With the concurrence of counsel for the parties I have fixed those costs in the sum of $1,000.00 in lieu of taxed costs in accordance with Rule 344(1).