Citation: 2012 TCC 92
Date: 20120321
Docket: 2011-1105(IT)I
BETWEEN:
Samir Sarophim,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre J.
[1]
This is an appeal from
a reassessment made by the Minister of National Revenue (Minister) under
the Income Tax Act (ITA) for the appellant’s 2009 taxation year.
The minister disallowed legal fees in the amount of $15,875 that were claimed
by the appellant in the computation of his income for that year. The legal fees
were disallowed pursuant to paragraph 18(1)(a) of the ITA on the basis
that they were incurred for the purpose of renegotiating or contesting the
support payments that were required to be made under a Consent Order of the
Supreme Court of British Columbia dated August 24, 2006, and
therefore were not incurred to produce income (paragraphs 8 and 13 of the Reply
to the Notice of Appeal).
[2]
The appellant opposes
the reassessment on the basis 1) that the legal fees were incurred by him to
establish an income for himself (and therefore to produce income) by protecting
the amount to be paid to his ex-spouse, which he refers to as income retention as
opposed to income generation (Issue and reason for Appeal, page 4), and 2) that
the practice of denying the deduction of legal fees to a person defending
himself against an action by his ex-spouse for support payments while the claimant
ex-spouse’s legal fees are deductible is unfair and discriminatory. In his
Notice of Constitutional Question, the appellant claims that this practice is
discrimination based on sex, as most payers of support tend to be males, and that
it is therefore unconstitutional by virtue of section 15 of the Canadian
Charter of Rights and Freedoms (Charter).
Statutory Provisions
Income Tax Act
Deductions
SECTION 18:
18(1)
(1) General
limitations. In computing the income of a taxpayer from a business or
property no deduction shall be made in respect of
18(1)(a)
(a)
General limitation — 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;
18(1)(b)
(b)
Capital outlay or loss — an outlay, loss or replacement of capital, a
payment on account of capital or an allowance in respect of depreciation,
obsolescence or depletion except as expressly permitted by this Part;
Canadian Charter
of Rights and Freedoms
Equality Rights
Equality
before and under law and equal protection and benefit of law
15. (1) Every individual is equal before and
under the law and has the right to the equal protection and equal benefit of
the law without discrimination and, in particular, without discrimination based
on race, national or ethnic origin, colour, religion, sex, age or mental or
physical disability.
Facts
[3]
By Consent Order dated
August 24, 2006 (Exhibit A-2), the appellant was ordered to pay to
his ex-spouse child support and spousal support. The spousal support amount was
reviewable on or after September 30, 2008 (Exhibit A-2, paragraph
19).
[4]
On May, 26, 2009,
the appellant’s former spouse filed before the Supreme Court of British
Columbia a Review Application, which was amended on September 8, 2009.
This was an application seeking, inter alia, to have varied
retroactively the amount of spousal support payable in accordance with the
Consent Order dated August 24, 2006, and to obtain further
contribution from the appellant to the payment of tuition costs for the two
children, to which the appellant was opposed (Reasons for Judgment attached to
the Order dated March 8, 2011, Exhibit A-3, paragraphs 1, 2, 3, 14 and
20).
[5]
The March 8, 2011 Order
signed by Savage J. provided for higher spousal support for part of 2009
and thereafter. The amount could be revised when the younger child ceased to be
a child of the marriage, that is, as of September 24, 2010. The spousal
support payment to be made by the appellant to his ex-spouse was based on the
annual income of the appellant, which was significantly higher than his former
spouse’s. The order also provided for the payment of the appellant’s
proportionate share of the children’s tuition costs.
[6]
On November 12, 2010,
another Review Application was filed before the Supreme Court of British
Columbia, this time to fix spousal support payable by the husband. The major
issue in that application was whether all aspects of the husband’s income
should be considered for spousal support purposes and whether there should be
imputation of income in regard to the wife (Reasons for Judgment of Groves J. attached
to the Order dated May 18, 2011, Exhibit A-4, paragraph 18). The
Court did impute a modest amount of additional income to the wife while
establishing a significantly higher income amount for the husband for spousal
support purposes, resulting in an increase in the spousal support payable by
the appellant (paragraphs 25, 29, 39, 48 and 50 of the Reasons for Judgment).
[7]
The appellant and the
respondent in the present case filed as Exhibits A-1 and R-1 the billings by the
appellant’s lawyers for 2009. Included with Exhibit R-1 were similar letters
from two law firms (one from Farris, Vaughan, Wills & Murphy LLP dated
March 16, 2010, and the other from Pepper Longe de Guzman LLP dated
April 28, 2010), stating that 70% of the firm’s total invoices (70%
representing $9,128.11 in the first letter and $6,747.75 in the second letter)
would have been in respect of a child support order with ongoing income-related
disclosure requirements. While I see that the total of those amounts is $15,875,
which is the amount at issue, no explanations were really given as to how the
same percentage of 70% had been established by the two different law firms.
Analysis
[8]
It is now settled law
that legal fees 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 (Nadeau
v. M.N.R., 2003 FCA 400, [2004] 1 F.C.R. 587, at paragraph 18). The Canada
Revenue Agency (CRA) has enunciated this position in Interpretation
Bulletin IT-99R5 (dated December 11, 1998 and revised December 5, 2007),
in paragraph 21, stating that from the payer’s standpoint, legal costs incurred
in negotiating or contesting an application for support payments are not
deductible since these costs are personal or living expenses. This statement
was approved by Bowman C.J. as being a correct statement of the law in Loewig
v. Canada, 2006 TCC 476, at paragraph 10.
[9]
In the present case, it
appears that the appellant is in exactly such a situation. Except with regard
to the adjustment for the children’s tuition costs, which are clearly personal
expenses, the legal fees incurred in 2009 were in relation to an application by
his ex-spouse for an increase in the spousal support amount previously determined
in the Consent Order. It is also obvious that, considering the gap between the
appellant’s income and that of his ex-spouse, it was the appellant who would be
called upon to pay support and that the appellant could have no reasonable
expectation of being awarded any support. In this context, the appellant could
not argue, and he did not argue, that at the time the legal fees were incurred
he had a reasonable expectation of earning income from property with regard to
his contestation of the application (Mercier v. Canada, 2011 TCC 427, at
paragraph 18).
[10]
The appellant’s
argument that the legal fees were incurred by him to establish an income for
himself (and therefore to produce income) by protecting the amount to be paid
to his ex-spouse, which he refers to as income retention as opposed to income
generation, cannot stand in the circumstances. Protecting income, by the
appellant’s reasoning, means not paying support or paying less support so that
there would be more money left in his pocket. This is not the same as deriving
income from a source. A source of income is an activity undertaken in pursuit
of profit or in a sufficiently commercial manner (Stewart v. Canada,
[2002] 2 S.C.R. 645, par. 51, 52 and 60). For an expenditure to be deductible
pursuant to paragraph 18(1)(a) of the ITA, the expenditure must be attributed
to a particular business or property source (Stewart, par. 56). Legal
fees incurred to fight against the payment of support cannot therefore be
classified as expenses incurred to earn income flowing from a source.
[11]
With respect to the
Charter argument, as suggested by the Federal Court of Appeal in Nadeau,
supra, at paragraphs 37 and 39, referring to the decision of the Supreme
Court of Canada in Law v. Canada (Minister of Employment and
Immigration), [1999] 1 S.C.R. 497, at paragraph 57, the appellant must
demonstrate that the impugned legislation (in the present case, paragraph
18(1)(a) of the ITA) creates a differential treatment between the
claimant and others on the basis of enumerated or analogous grounds, which
results in discrimination. In the absence of a proper factual record on which
to base such a determination, it would be inappropriate for the Court to
attempt to adjudicate on this issue.
[12]
As was the case in Nadeau,
supra, the appellant’s submissions are limited to saying that the legal
expenses of each former spouse should be subject to the same treatment. The
appellant further asserts that the fact that they are not is discrimination
based on sex, as most payers of support tend to be males, and that the current
practice is therefore unconstitutional by virtue of section 15 of the Charter.
However, “[a]s the Supreme Court said in Symes v. Canada, [1993] 4
S.C.R. 695 (at page 764), it obviously must not be assumed that a statutory
provision has the effect of sex-based discrimination in the absence of any
evidence supporting such a contention” (see Nadeau, supra, at
paragraph 39). In the present case, apart from making a broad assertion, the
appellant did not provide any evidence of discrimination based on sex.
[13]
In addition, in Calogeracos
v. The Queen, 2008 TCC 389, referred to by counsel for the respondent, Webb
J. of this Court stated at paragraphs 21 and 22, in speaking of the child tax
credit that, pursuant to subsection 118(5) of the ITA, was denied to the father
paying child support:
21 However
it is subsection 118(5) of the Act that is to be analyzed to determine
whether this subsection of the Act draws a distinction between males and
females. It does not. Both men and women who pay child support are, as a result
of the provisions of subsection 118(5) of the Act, denied the claim for
a credit under paragraph 118(1)(b) of the Act. As noted above,
Justice Iacobucci in Law stated that:
First, does the
impugned law (a) draw a formal distinction between the claimant and others on
the basis of one or more personal characteristics, or (b) fail to take into
account the claimant's already disadvantaged position within Canadian society
resulting in substantively differential treatment between the claimant and
others on the basis of one or more personal characteristics?
22 In
this case the provision in question neither makes a formal distinction between
males and females nor does it fail to take into account the Appellant's already
disadvantaged position within Canadian society. It draws a distinction based on
whether the individual is paying child support, which is based on the income
levels of the parents since the obligation to pay child support is based on the
relative income of the parents. The fact that in most joint or shared custody
arrangements it is the male who is making child support payments cannot be
grounds for a claim for discrimination by the Appellant as males who make more
money than females are not in a disadvantaged position in Canadian society.
[14]
I agree with counsel
for the respondent that the same reasoning applies with respect to the deductions
disallowed pursuant to paragraph 18(1)(a) of the ITA in the present case.
Hence the constitutional attack cannot succeed.
[15]
The appeal is dismissed
Signed at Ottawa, Canada, this 21st day of March 2012.
“Lucie Lamarre”
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