Bayer v. MNR, 91 DTC 1035, [1991] 2 CTC 2304 (TCC)

Lamarre Proulx, T.C.J.: —This is an appeal from an assessment of tax for the year 1988.

The question at issue is whether legal costs incurred by the appellant to obtain a court order reducing the amount of alimony payments to his former spouse may be deducted in the calculation of the appellant's income as being within the meaning of paragraph 18(1)(a) of the Income Tax Act, R.S.C. 1952,

c. 148 (am. S.C. 1970-71-72, c. 63) (the 'Act").

The facts are not in dispute and are described in paragraph 6 of the reply to notice of appeal as follows:

6. In assessing the Appellant, the Respondent relied, inter alia, on the following assumptions of facts:

a) the Appellant was making alimony payments to his ex-wife pursuant to a consent to judgment signed on July 30th, 1985;

b) during the taxation year in dispute, the Appellant paid legal fees in the amount of $5,064.00 to reduce alimony payments to his ex-wife;

c) in computing his income for the 1988 taxation year, the Appellant sought to deduct the legal fees in the amount of $5,064.00;

d) by a consent to judgment signed between the Appellant and his ex-wife on August 1st, 1988, the Appellant reduced his alimony payments from $2,825.06 to $1,400.00 and settled all rights arising out of the marriage, by paying a lump sum of $30,000.00 to his ex-wife in the following manner:

(i) the amount of $7,500.00 in cash on June 14th 1988;

(ii) the transfer of $22,500.00 from the Appellant's registered retirement saving plan by way of roll over to a registered retirement savings plan designated by his ex-wife;

(e) the legal fees of $5,064.00 claimed as a deduction by the Appellant were not incurred for the purpose of gaining or producing income from business or property.

The appellant produced to the Court the brochure prepared by the respondent for the use of the Quebec taxpayers in the preparation of their tax returns (Exhibit A-2). It is entitled "Your Guide” and it is for the year 1988. At age 21 of this guide, there is an explanation as to the circumstances where legal and accounting fees may be claimed as deductions in the calculation of income. It says:

You may deduct the fees or expenses you paid

to obtain a court order for maintenance payments where you must sue your spouse or former spouse for maintenance in a Family Court.

The appellant, as many other taxpayers, as these cases come before us from time to time, has difficulty in understanding why a spouse enforcing a right to maintenance may deduct the legal expenses incurred where the paying spouse cannot deduct his or her legal expenses in defending against that action or in suing to reduce the amount of the alimony payments.

The appellant puts forward that his income calculated in accordance with the provisions of Division B of the Act is increased by the fact that the deduction to which he had the right pursuant to paragraph 60(b) of the Act is reduced and that therefore the legal expenses incurred should be allowed pursuant to paragraph 18(1)(a) of the Act.

This paragraph reads 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 the business or property;

Property is defined by subsection 248(1) of the Act as follows:

248.(1) "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, a share or a chose in action,

(b) unless a contrary intention is evident, money,

(c) a timber resource property, and

(d) the work in progress of a business that is a profession.

This definition would include any right to sue.

Respecting the statement made in the respondent's brochure that legal fees may be deducted when they are expended to obtain a court order for maintenance payments, it would seem to come from the decision of the Tax Appeal Board in Jean Boos v. M.N.R. (1961), 27 Tax A.B.C. 283; 61 D.T.C. 520 where Mr. Chairman Snyder found that the legal expenses incurred for the purpose of obtaining such a court order were deductible. Mr. Chairman Snyder does not quote his authorities but says at page 286 (D.T.C. 521-22):

There are a number of recent decisions by the Exchequer Court and by this Board to the effect that under certain circumstances legal fees expended by a taxpayer appellant may be deducted as permitted by the last-quoted section of the Income Tax Act.

He also says: “In the present appeal, counsel for the Minister did not contest the appellant's claim to have these legal fees deducted."

Though Mr. Chairman Snyder has not referred to the Supreme Court of Canada, I believe that the decision reached by that court in Gladys (Geraldine) Evans v. M.N.R., [1960] S.C.R. 391; [1960] C.T.C. 69; 60 D.T.C. 1047 would have been the leading case at that time in this matter. This decision determined that a taxpayer had the right to deduct the legal fees incurred to obtain a judgment requiring the trustee to pay her the income arising from a share of an estate. I quote from this case at page 76 (D.T.C. 1050):

. . .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 appellants taxable income. This, in my opinion, is the right view of the matter and is not altered by the circumstances that it was mistakenly claimed by Mrs. Andersen that the appellant was not entitled to any income at all.

The decision of Mr. Chairman Snyder in Boos is following the same line of reasoning: the right for alimony was an existing right and the legal expenses were not incurred to establish that right but to obtain income from that right, therefore, the expenses were not made on account of capital but on account of income.

In the case of The Queen v. Dr. Beverly A. Burgess, [1980] C.T.C. 258; 81 D.T.C. 5192 at 265 (D.T.C. 5197), Mr. Justice Cattanach reviews the Evans case and says the following:

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 and 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.

Counsel for the respondent referred the Court to two cases: Robert C. Ivey v. M.N.R., [1982] C.T.C. 2034; 82 D.T.C. 1082, and John McCombe v. M.N.R., [1985] 1 C.T.C. 2330; 85 D.T.C. 268.

In both cases it appears that arguments similar to the ones made in the present case had been submitted. Mr. Bonner, (Board Member) as he then was, found in the Ivey case, supra at page 2035 (D.T.C. 1083):

Paragraphs 60(b) and 60(c) of the Act permit deductions in respect of payments made in the circumstances described therein of amounts which, were it not for those provisions, would have nothing whatever to do with the computation of income. Expenditures of the type described in those provisions are essentially expenditures of a personal nature made out of capital or income after it has been earned. For this reason the Courts have, with considerable consistency, denied deductions of alimony and maintenance payments not falling within the precise words of those provisions. To permit deductions of the sort sought here would be to engage in “judicial legislation” quite unwarranted by the law and would result in the extension of those anomalous provisions far beyond anything in the contemplation of the Legislature at the time that they were enacted.

Judge Cardin found in the McCombe case, supra at page 2332 (D.T.C. 269):

The principle which is particularly applicable to the facts of the instant appeal is that expenses are deductible under paragraph 18(1)(a) only if they are incurred for the purpose of gaining income from property as are existing right or entitlement. Expenses incurred to bring a future or potential right into being are not deductible. In the case at bar, the legal expenses were clearly incurred by the appellant in an effort to reduce or eliminate the maintenance payments he was then obligated to pay his estranged wife. Whether or not the appellant succeeded in doing so, and whether by paying less alimony to his spouse he increased his taxable income, is in no way material to the issue.

Usually paragraph 18(1)(a) is applied in commercial undertakings. However in view of the language used in paragraph 18(1)(a) that is "business or property", and in view of the Evans case, supra, property need not be part of a commercial undertaking. However, the expense has to be made to gain or produce income from a property, and that means from what I gather from the aforementioned case law, that the property has to be an income producing property. A spouse enforcing a right to alimony payments is enforcing an income producing right. A spouse enforcing a right to obtain a court order for reducing alimony payments is not enforcing an income producing right, but is enforcing a right to sue to diminish the amount to be paid by virtue of an obligation to pay.

The moneys expended by the appellant for the legal fees incurred, had 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.

Consequently, the appeal is dismissed.

Appeal dismissed.