Citation: 2011 TCC 427
Date: 20111028
Docket: 2010-2063(IT)I
BETWEEN:
MONIQUE MERCIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1]
This is an appeal from
a reassessment dated March 19, 2009, by which the Minister of National Revenue
(the Minister) disallowed the deductions for legal costs of $12,000 for 2006
and of $30,025 for 2007 claimed by the appellant.
[2]
The appellant and her
ex-spouse ceased living together on May 30, 2006. At the time, the couple had
three children aged 22, 18 and 14. The appellant retained the services of a law
firm on July 4, 2006, for the purpose of discussing the situation and, particularly,
settlement of the parties’ financial interests.
[3]
On August 2, 2006, the appellant
received a demand letter involving an application for divorce and child support.
The demand letter was followed by an application for divorce filed by her ex-spouse
on August 17, 2006, which included an application for corollary relief involving,
inter alia, custody of the children and child support, which was to be
established on the basis of the ex-spouse’s exclusive custody from May 30, 2006,
to August 21, 2006, and on the basis of shared custody as of August 21, 2006.
[4]
The application for
divorce was also accompanied by a motion for interim relief. The ex-spouse
reiterated, inter alia, his application for child support for the two
younger children on the same bases as those described above. The motion was
scheduled to be heard on September 28, 2006. However, the hearing had to be
rescheduled as the appellant filed a motion asking the Quebec Superior Court
not to deal with the application for divorce and motion for interim relief. That
motion by the appellant was heard on September 19, 2006, and dismissed on
October 4, 2006.
[5]
According to the appellant,
from September 20 to December 19, 2006, a number of communication exchanges took
place between the lawyers to prepare for the hearing of the motion for interim
relief, which was now scheduled for December 19, 2006. While the motion for
interim relief was heard as scheduled, the decision was made to uphold and make
enforceable an interim agreement between parties on the same date as that of
the hearing and filed in the Court docket.
[6]
The interim agreement
involves support payments for the two youngest children as they are children of
the marriage as defined by the Divorce Act. The parties agreed to share and
alternate custody. They agreed on the calculation of their respective income
and accepted each other’s calculations, which showed that the appellant had a
higher income than the ex‑spouse by more than $150,000 annually. The appellant,
therefore, amicably agreed to pay her ex-spouse child support in the amount of $400
per month as of September 1, 2006, for both children of the marriage and $450 per
month, in arrears, for the months of June, July and August 2006, during which
her ex‑spouse had custody of the children. They also agreed to share
certain child-related expenses by a ratio of 62% for the appellant and 38% for
the ex-spouse. They also agreed on their
income estimates for 2007.
[7]
In 2007, certain legal counsel invoices
for the preparation of the proposed defence and counterclaim in the divorce
proceedings. The appellant claimed a deduction for a portion of the legal costs,
which, according to her, were paid to seek child support. She claimed, inter
alia, from her ex-spouse, that child support be established in accordance
with child support guidelines, albeit reflective of reality with respect to the
sharing of time spent with the children and the children’s life, retroactively
to January 1, 2007, as she argued that her eldest daughter had been staying
with her on a full-time basis for several months.
[8]
The application for divorce was
heard on November 6, 2007, and the Court, inter alia, upheld and made enforceable an agreement on corollary relief which the parties signed on October 10 and 12, 2007. Under
the heading "child support," the parties agreed that the base child
support payable for the benefit of the children would be established in
accordance with the Regulation respecting the determination of child support
payments, based on the annual income of each parent, and would reflect reality
as to custody arrangements and/or their residence. The parties agreed to have
the child support varied the event that one of the children decided to live with
one of them full-time.
[9]
The method used to calculate their
respective income was the same as that provided for in their agreement on interim relief upheld by the
Superior Court. Each of the parties disclosed their income for 2006 and their
projected income for 2007. The gap between their income in 2006 was still the
same and was even greater for 2007. The situation benefitted the ex-spouse, who,
as a result, became the one who received child support. The parties agreed,
finally, that if there were any significant changes in their income, they would
inform one another so that changes could be made and, no later than May 15, 2008,
and subsequent years, they would confirm their respective taxable income in
order to recalculate the child support to be paid and the sharing of particular
expenses retroactively.
[10]
Such a child support agreement was
therefore based, according to the appellant, on the real income of each of the parties
and on the place of residence of the children of the marriage.
[11]
After 2007, the appellant made
requests with her ex-spouse to vary the child support so as to become the person
who received child support. Her request were to no avail and the appellant has
yet to commence legal proceedings to have the child support she paid in 2006, in
2007 and in 2008 varied
[12]
For his part, the ex-spouse explained
that he commenced divorce proceedings in 2006 by which he sought to obtain child
support for the three children, who resided with him. He stated that he made a
request with the appellant to that effect, but she refused. It was not until
after such steps were undertaken and a number of witnesses were called to
testify at the hearing of the motion
for interim relief that he was successful in coming to an agreement with
the appellant, without the presence of their respective counsel, on December 19,
2006. In that agreement, the appellant accepted to pay him child support in the
amount of $400 per month as of September 1, 2006, and $450 per month in child
support arrears since June 2006.
[13]
At the time of the hearing of the
application for divorce, which was held on August 31, 2007, the parties had
already agreed, since October 12, that the appellant would pay her ex-spouse child
support in the amount of $408.40 per month for the benefit of the two children
of the marriage. It was, according to the ex-spouse, base child support and he
said all this would eventually have to be settled.
[14]
The issue is therefore whether the
legal costs of $12,000 for the 2006 taxation year and of $30,025 for the 2007
taxation year, of which the deduction was claimed by the appellant, are indeed
deductible from her income for each of the taxation years.
[15]
It is trite law that the legal
costs incurred to obtain child support for the benefit of a child are
deductible in computing income. See Wakeman v. Canada, [1996] T.C.J. No. 477 (QL), [1996] 3 C.T.C. 2165 and McColl v. Canada, [2000] T.C.J. No. 335 (QL), 2000 DTC 2148. Such a principle
has also been recognized by the Canada Revenue Agency in its Interpretation Bulletin IT-99R5 at paragraph
17, of which the relevant passage is as follows:
. . . However, since children have a pre-existing right, arising from legislation, to support or maintenance, legal costs to obtain an order for child support are deductible. . . .
[16]
Indeed, in Nadeau c. M.N.R.,
2003 FCA 400, [2004] F.C.R. 587, 2003 DTC 5736, the Federal Court of Appeal
stated that income from a support payment is income
from property and that as such the expenses incurred in obtaining the payment
thereof may be deducted under the rules set out in subdivision b (see
paragraphs 29 and 34).
[17]
Furthermore, it is on Nadeau
that the respondent bases her argument that first and foremost, it is necessary
to have income from property before legal expenses incurred in order to earn such
income may be deducted. In other words, only the person who receives child
support is entitled to deduct his or her legal expenses.
[18]
Although that may be the case in
the vast majority of cases, in situations where the parties engaged in divorce proceedings
have comparable income and where they each claim custody of the children and
child support, seeing as they each have a reasonable expectation of being
awarded custody and support, it appears to me that it is completely justified
to grant the deduction to both parties, even if one of the parties makes his or
her claim in a defence and counterclaim, or even if he or she withdraws his or
her claim before the issuance of a judgment, as long as it is possible to demonstrate
that at the time the claim was made, the party had a reasonable expectation of earning
income from property.
[19]
Indeed, the Tax Court of Canada
accepted that position in Trignani v. The Queen, 2010 TCC 209, 2010 DTC
1153, in which Woods J. dealt with the respondent’s argument that the taxpayer abandoned
his child support claim and therefore was not entitled to a deduction. Woods J.
dismissed that argument on the basis that the evidence had not established that
fact, and she concluded as follows at paragraphs 27 and 28 of her decision:
[27] In cross-examination, the appellant acknowledged that the
child support claim was abandoned, as evidenced by a clause in the 2006 court
order. I am not prepared to take the leap that the claim was abandoned before
the relevant legal services were provided. It is quite possible that the claim
was abandoned only when the minutes of settlement were entered into, which
likely was after most of the legal services were rendered.
[28] The evidence as a whole makes a strong case that the claim
for child custody (and consequently child
support) in 2001 was bona fide, not frivolous, and
had a reasonable prospect of success. In the absence of evidence to the
contrary, I am not willing to presume that this claim was not being vigourously
pursued in 2006.
[Emphasis
added.]
[20]
The appellant submits
that all the legal costs she incurred from July 2006 to January 2007 were in
relation to the determination of child support payments and establishment of
the legal context to be applied in order to determine who would be the payer of
the child support, that is, $41,265.63. She also submits that the invoices dated
June 14, 2007, and July 17, 2007, for the amounts of $1,334.13 and $6,423.63, respectively,
concerned the preparation of a proposed defence and counterclaim. Considering
that the counterclaim also dealt with other issues, the appellant only claimed
the deduction of 30% of those invoices, that is, the percentage involving the
issue of child support. She also added that invoices of September 10, October
10 and November 5, 2007, whose amounts are $440.24, $1,116.17 and $215.98, respectively,
and she did so in the same ratio of 30%, which she links to the legal context
for the payment of child support by her or by her ex-spouse. It is the
establishment of legal context that caused the appellant to incur most of the
expenses.
[21]
I cannot however accept
the appellant’s argument that their case is unique and that astronomical legal
costs had to be incurred to establish the legal context that would be used to
determine who the payer of child support was. That issue is a basic issue: child
support is paid based on who has custody of the children and based on the ability
of either parent to pay once it is established who will have custody.
[22]
What I take from the
particular facts of the case is that the appellant and her ex-spouse ceased
living together in May 2006. The couple’s children continued to reside with
their father, and in August 2006 the issue in matter was joint custody of the
two children of the marriage, who would alternate their residence.
[23]
The appellant’s ex-spouse
asked the appellant to pay him child support and seeing as she refused, he
filed for divorce and a motion for interim relief on August 17, 2006. In my
view, the appellant’s efforts in August and in September 2006 focused more on a
motion for removal of jurisdiction of the Quebec Superior Court in the divorce proceedings
than on a claim to obtain child support from her ex-spouse. The details of the appellant’s
legal counsel invoices throughout fall 2006 reflect more efforts made by
counsel to pursue the motion for removal than to seek child support. In fact, it was not until early December that the
invoices began to refer to the hearing of the motion for interim relief and preparation of the hearing. No claim for child
support was made by the appellant from her ex-spouse. In fact, no claim for
child support was made by the appellant prior to the filing of her defence and
counterclaim on July 11, 2007. It therefore seems obvious to me that the appellant
was merely defending herself against the claim for child support during much of
the judicial process.
[24]
It also seems obvious to me that, according
to the arrangements in the judgment on interim motion, which upheld the amicable
agreement between the parties, as well as the in the final judgment on the application
for divorce, which also upheld an amicable agreement between the parties, there
was a significant gap between the appellant’s salary and that of her ex-spouse throughout
the entire relevant period. It is clear to see that, considering the age of the
children and joint custody of the children, the appellant would be the payer of
child support, despite her counterclaim of July 2007.
[25]
As to the appellant’s argument
that she believed she ought to have received child support considering that her
eldest daughter spent 65% of her time with her, it should be noted that the appellant
did not proceed with her action and, more specifically, she did not do so
within the years following 2007.
[26]
Given this situation, it is impossible
for me to conclude that, under these circumstances, the appellant could have
incurred legal costs in an honest and good faith belief that the she had a
reasonable chance of success of earning income from property.
[27]
The appeal is dismissed.
Signed at Ottawa, Canada, this
28th day of October 2011.
“François Angers”
Translation certified true
on this 13th day
of December 2011.
Daniela Possamai, Translator
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