Citation: 2005TCC191
Date: 20050316
Docket: 2004-3351(IT)I
BETWEEN:
DARWIN LAUBER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre
Proulx, J.
[1] The appeal concerns the 2002 taxation year. It was
agreed by the parties that there was no dispute as to the facts. Counsel for
the Respondent agreed that the legal costs had been incurred mainly for the
purpose of collecting overpayment of alimony payments made to the Appellant's
ex‑wife.
[2] The Appellant's representative stated that the
Appellant will have to include the reimbursement of support payments, pursuant
to subparagraph 56(1)(c.2) of the Income Tax Act
(the "Act"), in his 2003 and 2004 taxation years in the
respective amounts of $2,761 and $6,000.
[3] The assumptions of fact on which the Minister of National
Revenue (the "Minister") relied on to establish and confirm the
assessment are described at paragraph 10 of the Reply to the Notice of
Appeal (the "Reply") as follows:
a) The Appellant and
Mrs. Maral Torossian (hereinafter, the "former spouse") were
married on the 1st of September 1984;
b) The Appellant and his
former spouse had two children: Jason, born on March 2, 1988, and Jeffrey,
born on May 22, 1992 (hereinafter, the "children");
c) The Appellant and the
former spouse were divorced by Judgment dated January 13, 1994;
d) On or about
January 13, 1994, the Appellant provided the Minister with a copy of the
"Consent to Provisional and Accessory Measures", signed on
December 15, 1993;
e) According to the document
described in the preceding subparagraph:
i) The legal care and
custody of the two minor children, was conferred to the former spouse;
ii) The Appellant had to pay
an alimentary pension to the former spouse, both for herself and the two minor
children, in the amount of $2,200 per month, payable in advance on the first
day of each month, the said amount of $2,200 representing a payment of $1,000
towards the children's needs and a payment of $1,200 towards the former
spouse's needs, to cover for personal living requirements; the said alimentary
pension being indexed annually;
iii) Agreement was made
between the two parties:
A. That the former spouse have
the right to work and receive a remuneration without claiming a reduction of
the alimentary pension until the former spouse's gross income attains $16,000
per annum;
B. That the Appellant have
the right to reduce the share paid out of the alimentary pension on account of
the former spouse, by a sum of $100 per month, for each $2,000 increment above
$16,000 former spouse's employment income;
C. That, for the 1993 income
tax year, each party submit their returns for the fiscal year, the former
spouse declaring the income received as alimentary pension paid on a consensual
and voluntary basis for her and the minor children; the Appellant having the
right to declare on his own tax return the said alimentary pension paid;
f) In filing his income tax
return for the 2002 taxation year, the Appellant claimed an amount of $8,785 as
other deductions;
g) As of "a conduct of
review program", the Minister has selected the Appellant's 2002 income tax
return;
h) On July 18, 2002, the
Minister sent a letter to the Appellant, requesting him to provide details on
the kind of deduction claimed, plus receipts and support documentation;
i) On September 19,
2003, the Minister sent another letter to the Appellant, explaining to him that
the documentation provided showed non‑allowable legal costs;
j) On September 25,
2003, the Minister disallowed the amount of $8,785 claimed by the Appellant as
legal fees, for his 2002 taxation year, on the basis that, there is no
provision in the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as
amended (hereinafter, the "Act"), to allow the deductibility
of such fees;
k) By letter sent to our
Appeals Division on or about April 8, 2004, the Appellant's representative
mentioned that the amount of $8,785.04 related to legal fees incurred, were
primarily for the recovery of overpayments made by the Appellant to the former
spouse as a result of misrepresentations made by her with respect to a court
order;
l) A copy of a letter from
the lawyer, identifying the legal fees, was attached to the letter mentioned in
the preceding subparagraph;
m) The Appeals officer in the
Objection section analyzed the preceding information and came to the same
conclusion as the Audit section, that is "the documentation provided
showed non‑allowable legal costs";
n) The assumptions of fact
outlined in subparagraph 10 k), 10 l) and 10 m) above, were
first made by the Minister in confirming the assessment dated
September 25, 2003 for the taxation year 2002.
[4] The letter mentioned at paragraph 10 l) of
the Reply, a letter dated March 29, 2004 from the Appellant's lawyer,
reads as follows:
...
This letter is
to confirm the fact that your legal expenses with our firm were primarily
related to the recovery of five years worth of overpayments made as a result of
false reporting by Ms. Torossian with respect to a court order.
Firstly, all
custodial and visitation related issues were resolved based on recommendations
in a Psycho‑Legal expertise, which was accepted without challenge by
either party, therefore required an insignificant amount of time. Secondly,
Ms. Torossian's motion requesting increased support payments was dismissed
in its entirety in court without challenge from either party, therefore
consumed no measurable time. Thirdly, the revised child support amount has been
derived from the standard child support calculation and was not challenged by
either party, therefore required an insignificant amount of time. Finally, the
vast majority of all fees, where attributed to processing your motion to
recover overpayments made to Ms. Torossian that occurring monthly over a
period of five years, were related to a pre existing court order and were
overpaid due solely and directly to misrepresentations made by
Ms. Torossian.
...
[5] The overpayment claimed for the years 1998 to June
2002 was in the amount of $22,562.62. The Appellant's lawyer filed a motion to
that effect August 6, 2002.
[6] This motion is mentioned in the Consent to
Modification of Accessory Measures ratified by a judgment of the Superior Court
dated July 2, 2003. I quote the relevant passage of the said consent:
WHEREAS Plaintiff's
motion is dated April 30, 2002, and seeks the re‑determination of
the amount of child support payable by Defendant based on the application of
the Guidelines;
Arguments
[7] The reasons submitted in the Appellant's Notice of
Appeal represent well what was argued by the Appellant's representative at the
hearing. They are as follows:
1. The deduction for legal
fees requires that the expense be for the purpose of earning income from a
business or property. (paragraph 18(1)(a)), and that it not be a
personal or living expense (18(1)(h)).
2. The amount of the overpayment
which resulted from the misreporting of income by Mr. Lauber's ex‑wife
created a right to recover such amount at the time of each overpayment. The
legal expenses therefore related to the collection of an existing right and
were not to create a right.
3. The amount recovered by
Mr. Lauber is required to be included in income according to
paragraph 56(1)(c.2).
4. As explained in Income Tax
Technical News No. 24, the legal costs related to collecting support
payments are considered deductible because the legal fees relate to the
collection of a pre‑existing right. The recovery of an overpayment is
also the collection of a pre‑existing right and should therefore be
deductible. The comments in Income Tax Technical News No. 24 are the
result of the decision in the case of Gallien v. The Queen, 2000 DTC
2514, in which the Judge cites with approval the reasoning in Evans v.
Minister of National Revenue ((1960) SCR 391) allowing the deduction of
legal fees to collect an amount owing.
5. The deduction of the fees
conforms to the basic structure of the Income Tax Act in which only the
net income is to be taxed, as indicated in section 3. It is clearly
inequitable to require the inclusion in income of the amount, but deny the
expenses incurred to generate the income. The expense was incurred for the
purpose of earning income, and in all respects cannot be distinguished from the
fees incurred to collect support payments.
6. For all of the foregoing
reasons, we submit that the expense should be deductible.
[8] Counsel for the Respondent referred the Court to the
decision of the Federal Court of Appeal in Nadeau v. M.N.R. (F.C.A.),
[2003] F.C.J. No. 1611 (Q.L.), and more particularly to the following
paragraphs:
14 The
cases have consistently held for more than 40 years that the right to support,
once established by a court, is "property" within the meaning of
subsection 248(1) of the Act, and that the income from such support
constitutes, in the hands of the person receiving it, income from property (see
in particular Boos v. Minister of National Revenue (1961), 27 Tax A.B.C.
283; R. v. Burgess, supra; Bayer v. M.N.R., [1991] 2 C.T.C. 2304
(T.C.C.); Evans v. Minister of National Revenue, [1960] S.C.R. 391 and Sembinelli
v. Canada, [1994] 2 C.T.C. 378 (F.C.A.)).
15 The
definition of "property" in subsection 248(1) reads as follows:
248(1) ...
(a) a right of any kind whatever, a share or a
chose in action,
...
17 This
regime, as it was applied by the courts over the years, has meant that from the
perspective of the recipient, an expenditure, the purpose of which is to give
rise to a right to support is a capital expenditure and therefore cannot be
deducted. But an expenditure incurred in recovering an amount owing under a
pre-existing right is a "current" expense and may therefore be
deducted.
18 Conversely,
the expenses 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 (see, for
example, Bayer, supra).
...
34 ...
This jurisprudential solution, I repeat, is a function of the fact that the
income from a support payment is income from property, and as such the expenses
incurred in order to earn this income may be deducted.
[9] Counsel for the Respondent also referred to a decision
of this Court in Bayer v. Canada (Minister of National Revenue – M.N.R.), [1991] T.C.J. No. 511 (Q.L.)
and more particularly to the following passage:
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.
Analysis and conclusion
[10] Subparagraph 56(1)(c.2) of the Act reads
as follows:
56(1) Amounts to be included in
income for year — Without restricting the generality of section 3,
there shall be included in computing the income of a taxpayer for a taxation
year,
...
(c.2) an amount received
by the taxpayer in the year under a decree, order or judgment of a competent
tribunal as a reimbursement of an amount deducted under paragraph 60(b)
or (c), or under paragraph 60(c.1) as it applies, in computing
the taxpayer's income for the year or a preceding taxation year to decrees,
orders and judgments made before 1993;
[11] An amount received by a taxpayer under a decree, order
or judgment as a reimbursement of an amount deducted under paragraph 60(b)
or (c) or under paragraph 60(c.1) shall be included in the
income pursuant to subparagraph 56(1)(c.2).
[12] It is a fact that both the alimony payment and the
reimbursement of support payments have to be included in the calculation of
income under section 56 of the Act. Thus, can the same reasoning
that applies to the deduction of legal costs to obtain alimony payments apply
to the deduction of costs to enforce a reimbursement of overpayment of support
payments?
[13] The nature of the two payments at issue must be analyzed.
On analysis, it becomes apparent that their nature is quite different. The
claim for an alimony payment is a claim for a payment on account of income, whereas
a claim for a reimbursement of overpayment is a claim of a property right, therefore
a claim on account of capital. Paragraph 18(1)b) of the Act does
not allow a deduction for an expense made on account of capital except as
expressly permitted by Part 1 of the Act. I was not directed to such an
exception nor I am aware that one exists.
[14] Accordingly, the appeal must be dismissed.
Signed at Ottawa, Ontario, this 16th day of March, 2005.
"Louise Lamarre Proulx"
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