Date: 20011122
Docket: 2000-5195-IT-I
BETWEEN:
MOHAMMAD SABOUR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Bowie J.
[1]
This appeal concerns the Appellant's claim that, in computing
his income for the 1998 taxation year, he is entitled to deduct
the amount of $8,129 paid by him to his lawyer for services in
connection with the negotiation and execution of a separation
agreement between him and his former spouse. The appeal was heard
under the Court's informal procedure.
[2]
The facts are not in dispute. The parties entered into an Agreed
Statement of Facts, which I reproduce here in its entirety:
1.
The Appellant and his former spouse, Nahid Azad (the "Former
Spouse") married on April 25, 1974 and separated in June,
1993.
2.
The Appellant and Former Spouse have three children, Azadeh, born
on December 7, 1974, Arash, born on August 7, 1977 and
Camron, born on January 6, 1989.
3.
During the 1998 taxation year, the Appellant paid legal expenses
in the amount of $8,129.
4.
The Appellant and the Former Spouse entered into a separation
agreement dated June 7, 1999 (the "Agreement").
5.
By judgment issued July 28, 1999, the Ontario Superior Court of
Justice pronounced the divorce of the Appellant and the Former
Spouse.
6.
Under the terms of the Agreement referred to in paragraph 4
above, the Former Spouse was required to transfer $50,000
invested in a Registered Retirement Savings plan to the
Appellant.
7.
The Former Spouse transferred $50,000 invested in a Registered
Retirement Savings plan to the Appellant on June 12, 1999,
pursuant to the Agreement referred to in paragraph 4 above.
Paragraphs 6 and 7 are perhaps not entirely clear. The $50,000
amount (the amount) was transferred from a Registered Retirement
Savings Plan (RRSP) owned by the former spouse into one owned by
the Appellant. The effect of subsection 146(16) of the
Income Tax Act (the Act) is that the former spouse
is not subject to tax in respect of the amount on account of the
transfer. However, the Appellant will be subject to tax on it,
either upon its withdrawal in a lump sum, when he receives it in
the form of annuity payments, or upon his death.[1]
[3]
The Appellant testified that his former spouse, a physician,
earned about $250,000 per year, and that he earned about $85,000.
He is now 65 years of age, and in poor health; his former spouse
is some 17 years younger than he is. For all these reasons, his
concern at the time of their separation was that she make a
suitable contribution to his income after his retirement, which
he considered to be imminent. He also testified that the $8,129
was the portion of his legal fees in connection with the
separation which was attributable entirely to the negotiation of
clause number 10 in the separation agreement, which deals with
spousal support. The division of their marital property had been
concluded in December 1994. None of this evidence was challenged
by the Respondent.
[4]
The Appellant's position is that the amount was paid into his
RRSP to provide for his support following his retirement, and
that on the authority of Evans v. M.N.R.[2] and Sembinelli v. The
Queen[3], the legal fees that he paid are deductible as
an amount expended for the purpose of gaining or producing income
from property. His right to maintenance, he says, is to be found
in the Family Law Act[4] of Ontario and in the Divorce Act,[5]and it is
"property" within the expanded definition of that word
found in section 248 of the Act. As the legal fees were
paid to enforce that right, they are deductible pursuant to
paragraph 18(1)(a).
[5]
Counsel for the Respondent referred me to the judgment of
Archambault J. in Bergeron v. The Queen,[6] wherein he suggests that legal
fees incurred in connection with support payments between
spouses, or former spouses, can never qualify for deduction under
paragraph 18(1)(a) of the Act, because those
support payments cannot properly be characterized as income from
property. Counsel also argued that the legal fees would not be
deductible in any event, as they were not paid to gain or produce
income, because the $50,000 amount is capital, not income.
Finally, counsel argued that if I found the amount to be income,
then it could only be exempt income as defined in section 248 of
the Act. The amount, she argued, is not included in
computing the Appellant's income, because paragraph
146(16)(c) provides that upon a transfer of an amount from
the RRSP of one person to that of another to implement a term in
a separation agreement, "the amount shall not, solely
because of the payment or transfer, be included in computing the
income of the transferor or the transferor's spouse or former
spouse". Nor can the amount meet the exception for a
"support amount", because the definition of that term
in subsection 56.1(4) requires that it be
"... payable or receivable as an allowance on a
periodic basis ...".
[6]
For convenience, I reproduce here the relevant sections of the
Act:
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;
(b)
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;
(c)
an outlay or expense to the extent that it may reasonably be
regarded as having been made or incurred for the purpose of
gaining or producing exempt income or in connection with property
the income from which would be exempt;
...
56.1(4)"support amount" means an amount payable or
receivable as an allowance on a periodic basis for the
maintenance of the recipient, children of the recipient or both
the recipient and children of the recipient, if the recipient has
discretion as to the use of the amount, and
(a)
the recipient is the spouse or common-law partner or former
spouse or common-law partner of the payer, the recipient and
payer are living separate and apart because of the breakdown of
their marriage or common-law partnership and the amount is
receivable under an order of a competent tribunal or under a
written agreement; or
(b)
the payer is a natural parent of a child of the recipient and the
amount is receivable under an order made by a competent tribunal
in accordance with the laws of a province.
...
146(16)Notwithstanding any other provision in this section, a
registered retirement savings plan may at any time be revised or
amended to provide for the payment or transfer before the
maturity of the plan, on behalf of the annuitant under the plan
(in this subsection referred to as the "transferor"),
of any property thereunder by the issuer thereof
...
(b)
to a registered retirement savings plan or registered retirement
income fund under which the spouse or common-law partner or
former spouse or common-law partner of the transferor is the
annuitant, where the transferor and the transferor's spouse
or common-law partner or former spouse or common-law partner are
living separate and apart and the payment or transfer is made
under a decree, order or judgment of a competent tribunal, or
under a written separation agreement, relating to a division of
property between the transferor and the transferor's spouse
or common-law partner or former spouse or common-law partner in
settlement of rights arising out of, or on the breakdown of,
their marriage or common-law partnership,
and, where there has been such a payment or transfer of such
property on behalf of the transferor before the maturity of the
plan,
(c)
the amount of the payment or transfer shall not, solely because
of the payment or transfer, be included in computing the income
of the transferor or the transferor's spouse or common-law
partner or former spouse or common-law partner,
...
248(1) In this Act,
...
"exempt income" means property received or
acquired by a person in such circumstances that it is, because of
any provision of Part I, not included in computing the
person's income, but does not include a dividend on a share
or a support amount (as defined in subsection 56.1(4));
[7]
With the greatest of respect to my colleague Judge Archambault, I
am of the opinion that it is much too late for this Court to
conclude that support payments cannot qualify as income from
property for the purpose of permitting a deduction under
paragraph 18(1)(a). Forty years ago the Tax Appeal Board,
apparently with the concurrence of counsel for the Minister,
allowed the deduction of legal fees incurred by the Appellant in
pursuit of a support order.[7] Some twenty years later, in The Queen v.
Burgess,[8]
Cattanach J. reaffirmed the general proposition that where a
right to spousal maintenance exists, it is a property right, and
the legal fees expended to enforce it are deductible under
paragraph 18(1)(a). The taxpayer was unsuccessful, but
only because Cattanach J. was of the view that an order for
maintenance made within a judgment granting a divorce created a
new right, rather than enforcing an existing one, and so the
deduction was barred by paragraph 18(1)(b). I note
parenthetically my agreement with Judge Bowman's comments as
to that distinction which he expressed at paragraph 32 of his
Reasons for Judgment in Nissim v. The Queen.[9]
[8]
Since Burgess, there have been decisions of this Court too
numerous to catalogue applying the principle. Among those cited
to me by the Appellant are Sol v. The Queen,[10] where Sarchuk J.,
following a decision of O'Connor J.,[11] permitted the deduction of legal
fees expended to obtain a variation upward of the amount of child
support previously awarded to the Appellant, and Gallien v.
The Queen,[12] where Lamarre Proulx J. reached a conclusion contrary
to that of Cattanach J. in Burgess,[13] and allowed the deduction under
paragraph 18(1)(a) of that portion of the legal fees
in the Appellant's divorce proceeding which were attributable
to obtaining support payments by way of corollary relief. In
arriving at this decision Judge Lamarre Proulx relied on the
earlier decisions of this Court in Nissim[14] and Donald.[15] Counsel for
the Appellant also referred me to the decision of Lamarre Proulx
J. in Sembinelli,[16] where the Appellant succeeded in her claim to deduct
under paragraph 18(1)(a) the legal expenses she had
incurred to resist her former husband's motion to rescind an
Order requiring him to make support payments to her. This
decision was affirmed by the Federal Court of Appeal upon an
application for judicial review.[17] The very brief reasons of the Court
were given by Hugessen J.A., who endorsed the reasoning of
Lamarre Proulx J., and added:
... the claim in regard to which the expenses were incurred
was a claim to income to which the Respondent was entitled, and
[the legal] expenses were properly incurred in order to obtain
payment of that income ...
[9] I
note also that in McColl v. The Queen,[18] Hamlyn J., considering a claim
to deduct the legal fees incurred in obtaining an Order for child
support, considered Bergeron[19] and decided not to apply it, preferring to
treat the right to child support as a pre-existing right under
the Family Law Act of Ontario, and the legal fees as an
amount spent to enforce that right. In my view he was correct to
do so.
[10] As
Archambault J. has said, the line of reasoning that he developed
in Bergeron was not specifically considered in any of the
decided cases. Nevertheless, I believe that such a long line of
authority in this Court, endorsed as it has been by the Federal
Court of Appeal, should be followed until it has been overruled
by a higher Court, or the Act has been amended by
Parliament. It is not totally irrelevant to this conclusion that
the position of the Minister, as expressed in Interpretation
Bulletin IT-99R5, paragraphs 17 to 20, is that legal fees spent
to obtain support amounts from a spouse or a former spouse are
deductible, so long as the amounts are not capital amounts, on
the authority of Burgess.[20]
[11] In
considering whether the amount in question here is in the nature
of income or capital, I start with this statement of Fauteux J.
in M.N.R. v. Algoma Central Railway:[21]
Parliament did not define the expressions "outlay ... of
capital" or "payment on account of capital". There
being no statutory criterion, the application or non-application
of these expressions to any particular expenditures must depend
upon the facts of the particular case. We do not think that any
single test applies in making that determination and agree with
the view expressed, in a recent decision of the Privy Council,
B.P. Australia Ltd. v. Commissioner of Taxation of the
Commonwealth of Australia [[1966] A.C. 224, [1965] 3 All E.R.
209.], by Lord Pearce. In referring to the matter of determining
whether an expenditure was of a capital or an income nature, he
said, at p. 264:
|
|
The solution to the problem is not to be found by any
rigid test or description. It has to be derived from
many aspects of the whole set of circumstances some of
which may point in one direction, some in the
other. One consideration may point so clearly that it
dominates other and vaguer indications in the contrary
direction. It is a commonsense appreciation of all the
guiding features which must provide the ultimate
answer.
|
In R. v. McKimmon,[22] the Federal Court of Appeal enumerated some of
the factors to be taken into account in determining this question
in the context of an amount paid as maintenance. It is not
necessary to reiterate those here, as it is beyond question that
the payment in this case would, if it had not been paid into an
RRSP in the name of the Appellant, be considered the payment of a
capital amount. What, then, is the effect of the fact that the
payment was made from the RRSP of the former spouse to the RRSP
of the Appellant?
[12] The
amount has not been subject to tax as income in the hands of the
former spouse. Nor was it subject to tax upon the transfer. There
is no doubt that the intention of the Appellant was that the
amount would accumulate, free of tax, to provide him with an
annuity on his retirement at some unspecified time in the future.
That annuity, and any lump sum that the Appellant might choose to
withdraw from the RRSP in the meantime, will be subject to tax in
his hands under paragraph 56(1)(h), and subsection 146(8)
of the Act. Nevertheless, a capital amount which carries
with it a liability to future taxation is still a capital amount.
If the Appellant were to withdraw the amount from his RRSP,
paying the resulting income tax, as is open to him, the remainder
would clearly be a capital amount in his hands, and its character
cannot be changed by his expression of intention to do otherwise.
The Appellant's argument, in effect, is that because the
amount will be taxed at some time in the future it must be
income. The potential for the amount to be taxed in the future
was no doubt a factor in the negotiation of the quantum, but it
cannot change the character of the amount from capital to income.
The present case is the converse of Evans,[23] where the majority
held that legal fees spent to enforce the right to an income
under an estate were deductible, because what the taxpayer there
secured for herself was only the income for her lifetime from a
share of the estate; the capital from which it flowed remained in
the hands of the trustees to be distributed to another upon her
death. Here the capital, carrying with it the nascent liability
to taxation, has passed to the taxpayer, and it is open to him to
deal with it as chooses.
[13] Counsel
for the Appellant argued that the amount in question here should
be considered income for the purposes of paragraph
18(1)(a), because Dr. Sabour will at some future time be
required to pay tax on the income that he derives from it. He
cited no authority that supports that proposition, nor have I
been able to find any, although it might be said to find some
support, at least by analogy, in the Supreme Court's recent
judgment in Ludco v. Canada.[24] Even if the Appellant were able to
surmount this hurdle, however, he could not, in my view, succeed,
because the amount would then fall within the definition of
"exempt income" in section 248. Paragraph
18(1)(c) would therefore apply to prohibit deduction of
the legal fees. For convenience, I repeat here the definition of
"exempt income".
|
"exempt income" means property received or
acquired by a person in such circumstances that it is,
because of any provision of Part I, not included in
computing the person's income, but does not include a
dividend on a share or a support amount (as defined in
subsection 56.1(4));
|
" revenu exonéré "*
Les biens reçus ou acquis par une personne dans des
circonstances faisant qu'ils ne sont pas inclus, par
l'effet d'une disposition de la partie I, dans le
calcul de son revenu. Ne sont pas un revenu
exonéré le dividende sur une action et la
pension alimentaire au sens du paragraphe 56.1(4).
|
[14] It is
clear from both the English and the French text of this
definition that it applies to the transfer from the RRSP of the
former spouse to that of the Appellant. That transfer is exempt
from taxation by reason of paragraph 146(16)(c). While
subsequent annuity payments, or withdrawals of lump sums, will be
taxed in the Appellant's hands, those cannot be characterized
as the amounts "... received or acquired ..."
to which the definition applies. Any annuity payments that the
Appellant might later derive from the amount transferred would be
different amounts. It is the $50,000 amount transferred that is
the amount "... received or acquired ..." for
purposes of the definition. Counsel for the Appellant argued that
the amount here in question is excluded from that which is, by
definition, exempt income, because it is a support amount.
However, the definition of "exempt income" very clearly
excludes only a support amount that falls within the definition
of that expression found in subsection 56.1(4). That
definition begins with the words "'support amount'
means an amount payable or receivable as an allowance on a
periodic basis for the maintenance of the recipient ...". A
lump sum payment therefore cannot be a "support
amount", and so cannot be within that which is excluded from
the definition of "exempt income" by its concluding
words.
[15] Whether
the amount is considered to be capital or income, therefore, the
legal fees expended by the Appellant in pursuit of it are not
deductible by him in computing his income. The appeal is
dismissed.
Signed at Ottawa, Canada, this 22nd day of November, 2001.
"E.A. Bowie"
J.T.C.C.
COURT FILE
NO.:
2000-5195(IT)I
STYLE OF
CAUSE:
Mohammad Sabour and
Her Majesty the Queen
PLACE OF
HEARING:
Ottawa, Ontario
DATE OF
HEARING:
June 21, 2001
REASONS FOR JUDGMENT
BY:
The Honourable Judge E.A. Bowie
DATE OF
JUDGMENT:
November 9, 2001
APPEARANCES:
Counsel for the
Appellant:
Philip W. Augustine and Tony Chambers
Counsel for the
Respondent:
Anne-Marie Lévesque and Patrick Folz
COUNSEL OF RECORD:
For the
Appellant:
Name:
Philip W. Augustine
Firm:
Augustine Bater Polowin LLP
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-5195(IT)I
BETWEEN:
MOHAMMAD SABOUR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on June 21, 2001, at Ottawa,
Ontario, by
the Honourable Judge E.A. Bowie
Appearances
Counsel for the
Appellant: Philip
W. Augustine and Tony Chambers
Counsel for the Respondent: Anne-Marie
Lévesque and Patrick Folz
JUDGMENT
The
appeal from the assessment of tax made under the Income Tax
Act for the 1998 taxation year is dismissed.
Signed at Ottawa, Canada, this 22nd day of November, 2001.
J.T.C.C.
Email this Content