Date: 19980930
Docket: 97-2758-IT-I
BETWEEN:
CAROLYN M. FREE DONALD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bonner, J.T.C.C.
[1] The Appellant appeals from assessments under the Income
Tax Act for her 1991, 1992 and 1993 taxation years. The first
issue relates to the taxability of child support payments made by
the Appellant's former spouse. The payments in question were
included in income under paragraph 56(1)(b) of the
Act. That provision required the inclusion in income of
:
"(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 reminder of the
year."
[2] The payments in question were the result of an Order of
the Ontario Court General Division dated October 2, 1990 in an
action between the Appellant as petitioner and her husband as
Respondent. By that Order, custody of the three children of the
marriage was awarded to the Appellant. Further the Court ordered
that ... "interim interim support for the children to be
paid by the Respondent, David Harry Donald, in the sum of $500.00
per child per month commencing October 16, 1990."
[3] The assessments in issue were made on the basis that the
Appellant received the following child support payments pursuant
to the Order:
1991 $2,571.00
1992 $23,514.00
1993 $8,293.00
[4] The Appellant testified that she did receive money in
1991, 1992 and 1993 for the care of the children. The payments
were made at irregular intervals. The Appellant stated that she
received no money for months at a time because her husband paid
only when threatened with jail. She explained that she did not
report the receipt of the payments in her returns of income
because she believed that support payments are taxable only if
the payments are made on a periodic basis. It will be observed
that paragraph 56(1)(b) requires the inclusion of income
of amounts received as an "...allowance payable on a
periodic basis..." (emphasis added). Irregularity in the
making of the payments does not remove amounts described in
paragraph 56(1)(b) from the ambit of that
provision.[1]
[5] Nevertheless it is clear that some part of the $23,514.00
included in the Appellant's 1992 income cannot have been paid
pursuant to the Court Order. Even allowing for the payment in
1992 of 1991 arrears, such arrears must have been slightly less
than $2,000.00 which figure, added to the total sum of $18,000.00
payable under the order in respect of 1992, is less than the
amount included in the Appellant's 1992 income. The Appellant
is therefore entitled to judgment limiting the
paragraph 56(1)(b) inclusions to amounts paid
pursuant to the Order of October 2, 1990.
[6] I turn next to the deductibility of the legal and
accounting costs incurred by the Appellant in securing the Order
referred to above and in enforcing compliance with it. The
Appellant testified that she paid $32,564.00 in legal fees
between February of 1992 and March of 1994 to "establish
child support" and that she paid her accountant $3,130.00
for the same purpose. The Appellant's testimony on this point
was not supported by the production of written records or
vouchers. Nevertheless I accept it. It must be remembered that
the Appellant has been subjected to great pain and stress caused
by the breakdown of her marriage and by the financial struggle to
support her children with minimal assistance from a spouse who
was unwilling to live up to his obligation to support his own
children. In my view deficiencies in proof are explained by the
Appellant's emotional state. They do not stem from any desire
to conceal or misstate the facts.
[7] Counsel for the Respondent conceded that legal expenses
incurred with a view to the enforcement of the order for payment
of child support are deductible in the computation of income. He
took the position however that, in light of the decision of the
Federal Court Trial Division in The Queen v. Dr. Beverley
Burgess, 81 DTC 5192, the legal costs of securing the order
directing payment of support are on account of capital and that
deduction of them is prohibited by paragraph 18(1)(b) of
the Act. In my view the decision in Burgess is not
of assistance in this case. Insofar as part of the payments made
by the Appellant relate to the securing of the Court order, that
order cannot be viewed as a capital asset. What is in question
here is a right to payment of an allowance which is described in
the order as "interim interim support". The order was
replaced in February of 1994. It had none of the lasting
qualities which are characteristic of a capital asset.[2] The order of October 2,
1990 did not create a right; it simply quantified the
pre-existing obligation of the Appellant's spouse to
support his children and directed compliance with that
obligation. Furthermore, Burgess must now be viewed as
wrongly decided[3].
[8] The Appellant signed a document dated December 30,
1996, entitled "Waiver of Right of Objection or
Appeal". In it she waived "...any right of objection or
appeal in respect of legal costs incurred in enforcing payment of
Court ordered payments for maintenance of my children if Revenue
Canada reassesses as follows:
Allows a $5,000. deduction for the taxation year 1992 for
legal costs incurred in enforcing payment of court ordered
payments for the maintenance of my children."
The typewritten portion of the document must be read with the
handwritten portion which reads:
I have signed this document as I have no choice but to accept
your $5,000 ruling. I still believe the amount for legal fees to
collect child support arrears exceeds $20,000. You know I am a
single parent, working on a teacher's salary, to support
myself and 3 teenage children - without benefit of child support
from their father. I do not have the financial resources nor the
emotional resources to continue to fight you on this issue. I
expect all of the issues documented by L. Brode will be presented
for the internal reviews.
[9] When the document is read as a whole I take the waiver to
relate to the 1992 taxation year only. It would be unreasonable
to regard it as a waiver of the Appellant's right to deduct
expenditures made in years other than 1992, the year in respect
of which it was agreed that a deduction of $5,000.00 and no more
be allowed. Furthermore nothing in the language of the document
limits the deduction of accounting costs incurred by the
Appellant in connection with the enforcement of her
children's right to support by their father. The waiver may
effect an enforceable compromise[4]but it can operate only to preclude an
appeal in respect of the issue which it does cover, the 1992
legal costs.
[10] The evidence is unclear as to the years in which the
legal and accounting fees were paid.[5] The appeals for all three years will
be therefore allowed and the assessments referred back to the
Minister of National Revenue for reassessment to permit the
deduction of accounting fees to the extent expended in each year
and to permit the deduction of legal fees to the extent expended
in 1991 and 1993.
[11] I cannot leave the matter without expressing concern
regarding the use of waivers in dealings between the
professionals employed by Revenue Canada and taxpayers who are
inexperienced in the intricacies of income tax law. In such
cases, there exists a real danger that an uninformed taxpayer may
make an improvident settlement. The danger inherent in such a
situation increases in the case of a taxpayer such as the
Appellant whose emotional resources were depleted by a protracted
legal battle with her former spouse and who was then required to
revisit a distressing topic for purposes of dealing with the
income tax aspects of it. I do not suggest that there was
overreaching on the part of the Revenue Canada officials who
dealt with the Appellant. That question was not explored.
Nevertheless, the handwritten portion of the waiver is very
disquieting. It is far from clear that the Appellant really
understood the effect of the waiver or, if she did, that she
unequivocally consented to it. The matter was not explored in
detail at the hearing of the appeal. In the circumstances, it
would in my view be entirely fitting for the Minister to resolve
the ambiguity by discarding the waiver and allowing the Appellant
to deduct the full amount of her 1992 legal costs in addition to
the other amounts which must be allowed by virtue of the
judgment.
Signed at Ottawa, Canada this 30th day of September 1998.
"Michael J. Bonner"
J.T.C.C.
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