Mathieu v. The Queen, docket 2000-1443-IT-I (Informal Procedure)

Date: 20010815

Docket: 2000-1443-IT-I

BETWEEN:

PIERRE MATHIEU,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Tardif, J.T.C.C.

[1]            This appeal for the 1998 taxation year concerns the deductibility of professional fees paid to have support arrears cancelled by a court.

[2]            The part of the case relating to the payment of support was withdrawn, since the respondent admitted that the appellant had indeed paid $3,080 rather than $2,695, thus recognizing that he was right about that aspect of the appeal.

[3]            The facts assumed in support of the assessment are admitted; they can be summarized as follows:

[TRANSLATION]

(a)            the appellant and Denyse Bergeron (hereinafter the "former spouse") have been divorced since April 25, 1990;

(b)            an agreement setting out an understanding arrived at by the appellant and her former spouse on August 18, 1998, was submitted to the court at the same time as a motion by the appellant to cancel arrears and support;

(c)            on August 18, 1998, the Honourable Mr. Justice Ross Goodwin of the Superior Court rendered judgment on the motion to cancel arrears and support brought by the appellant against his former spouse;

(d)            by the said judgment, that court confirmed and gave effect to paragraphs 2 and 4 of the agreement signed on August 18, 1998, and formally recognized the parties' understanding set out in paragraphs 1, 3 and 5-9 of that agreement;

(e)            in paragraph 2 of the agreement, the appellant's former spouse waived all support arrears owing to her by the appellant on August 18, 1998;

(f)             according to paragraph 3 of the agreement, all the other clauses of the agreement confirmed by the divorce judgment continued to apply, the parties being of the view that paragraph 9 applied from then on, which meant that support was set at $385 payable every two weeks;

(g)            each party was held to be responsible for paying his or her own legal expenses;

(h)            to back up his claimed deduction for support payments, the appellant submitted the following supporting documents:

·          a list of cheques for the support payable to his former spouse during the 1998 taxation year;

·          photocopies of cheques payable to his former spouse, which are practically illegible;

·          a photocopy of his bankbook, some of the entries in which are also illegible;

(i)             the Minister was able to identify eight payments of $385 each and therefore allowed a total of $3,080 as a deduction for support payments;

(j)             during the year at issue, the appellant paid $3,125.43 to the law firm of Garneau, Verdon, Michaud of Québec for professional fees and disbursements in connection with proceedings to have support and arrears cancelled;

(k)            the $3,125.43 in legal expenses incurred by the appellant for the 1998 taxation year were not so incurred for the purpose of gaining or producing income from a property or business but are considered personal or living expenses.

[4]            The appellant had initially been ordered to make support payments to his former spouse by a judgment rendered by the Honourable Mr. Justice Paul-Étienne Bernier on April 25, 1990, which read as follows:

[TRANSLATION]

DIVORCE JUDGMENT,

COROLLARY RELIEF ORDER

and

PARTIAL RENUNCIATION

                IN VIEW OF the divorce action, with additional submissions concerning corollary relief, brought by the applicant against the respondent;

                WHEREAS the respondent has failed to appear and default has therefore been recorded against her;

                IN VIEW OF the evidence adduced in this case, including the exhibits filed in the record;

                WHEREAS that evidence shows a breakdown of the marriage;

                WHEREAS, with regard to corollary relief, the parties have entered into the record an agreement reached and signed by them on August 15, 1989, the original of which is appended hereto;

                IN VIEW OF the partial renunciation set out in paragraph 22 of that agreement;

                IN VIEW OF the provisions of sections 8 and 12 of the 1985 Divorce Act and article 462.10 C.C.Q.;

                FOR THESE REASONS, THE COURT

                ALLOWS the divorce action;

                DECLARES that the parties, who were married on May 29, 1965, in St-Antoine de Tilly (Lotnière, QC), are divorced effective the thirty-first day following the date of this judgment;

                CONFIRMS and GIVES EFFECT TO the said corollary relief agreement between the parties and ORDERS THEM to comply therewith as if it were set out here in full;

                RECORDS for them the partial renunciation of certain items included in the family patrimony;

                THE WHOLE         with each party paying his or her own costs.

                . . .

                NOW THEREFORE, THE PARTIES AGREE AS FOLLOWS:

                . . .

3.              Pierre Mathieu shall pay Denyse Bergeron, for her and the three children, Claude, David and Annie, $960 in support payable every two weeks at the place to be indicated to him by Denyse Bergeron, and he shall do so retroactively to July 6, 1989;

. . .

6.              The said support shall be indexed at the rate of 5 percent a year on July 1 of each year;

. . .

9.              Should any of the following occur, Pierre Mathieu shall—until he stops working—pay Denyse Bergeron $385 in support payable every two weeks:

                (a)             Annie and David leave home;

(b)            Annie and David become self-sufficient even if they still live with Denyse Bergeron;

10.            The said $385 in support shall be indexed at the rate of 5 percent a year each year, starting with the 27th payment;

                . . .

[5]            Since he had lost his job, the appellant brought another action in the Superior Court to cancel the support arrears. This resulted in the following judgment by the Honourable Mr. Justice Ross Goodwin:

[TRANSLATION]

JUDGMENT ON MOTION TO CANCEL

ARREARS AND SUPPORT

                The application should be granted since sufficient evidence has been adduced.

An agreement referring to the understanding arrived at by the parties has been submitted. After reviewing it, it is appropriate to confirm it as follows:

FOR THESE REASONS, THE COURT:

CONFIRMS AND GIVES EFFECT TO paragraphs 2 and 4 of that agreement and FORMALLY RECOGNIZES the parties' understanding set out in paragraphs 1, 3 and 5-9.

                . . .

AGREEMENT

                IN VIEW OF the divorce judgment rendered by the Honourable Mr. Justice Paul-Étienne Bernier of the Superior Court of Quebec on April 25, 1990, confirming an agreement reached by the parties;

                IN VIEW OF the parties' desire to have the said agreement, and in particular paragraph 9 thereof, continue to apply to them;

                WHEREAS, since bringing the motion to cancel support, the applicant has found employment in which he earns about $80,000 a year;

                WHEREAS the respondent has employment in which she earns $34,000 a year;

                IN VIEW OF the waiver by the respondent of all support arrears now owing to her by the defendant;

                WHEREAS Annie and Claude are no longer in school, are over 16 years old and are no longer financially dependent;

                WHEREAS David is 24 years old, is studying for his master's degree and earns substantial income from his part-time jobs;

THE PARTIES, DULY REPRESENTED BY COUNSEL, AGREE AS FOLLOWS AND ASK THE COURT TO RENDER A JUDGMENT CONFIRMING THIS AGREEMENT AND ORDERING THEM TO COMPLY HEREWITH:

1.              The preamble shall form an integral part of this agreement;

ARREARS

2.              The respondent waives any support owing on the date this agreement is signed;

3.              All the other clauses of the agreement confirmed by the divorce judgment shall continue to apply, the parties being of the view that paragraph 9 applies from now on;

WAIVER OF SUPPORT

4.              The parties irrevocably waive any support as of September 1, 2003, whatever their financial situation;

5.              The parties agree that the mere fact that David ends his studies shall not be a sufficient change for the purposes of section 17(4) of the Act given the respondent's waiver of support in the preceding paragraph;

6.              The parties acknowledge that they have read and understood this agreement, in particular with regard to the waiver of support;

7.              Each party acknowledges that this agreement has been explained to him or her and that it accurately reflects his or her wishes and choices freely expressed, without duress or pressure from either side;

8.              Each party declares that he or she is satisfied with this agreement and acknowledges that he or she was properly informed before signing it;

9.              Each party shall pay his or her own legal expenses;

. . .

[6]            The appellant thus had to pay $3,125.43 in professional fees to be represented by counsel in order to obtain the judgment ordering that the support arrears be cancelled.

[7]            The appellant would like to deduct the $3,125.43 from his income for the 1998 taxation year, arguing that it was an expense that enabled him to obtain a benefit or at least avoid the impoverishment of his patrimony.

[8]            The appellant's agents argued that the outlay in question could be deducted from his income. In support of their arguments, they submitted a lengthy book of authorities containing the following decisions:

                -                Canada Starch Co. Ltd. v. M.N.R., 68 DTC 5320;

                -                M.N.R. v. Kellogg Co. Ltd., 2 DTC 601;

                -                Kellogg Co. of Canada v. M.N.R., 2 DTC 548;

                -                R. v. Sills, [1985] 2 F.C. 201;

-                Dionne v. The Queen, T.C.C., No. 94-3025(IT)G, December 23, 1996 (97 DTC 265);

-               Boulangerie St-Augustin v. The Queen, 95 DTC 164;

                -                Royal Trust Co. v. M.N.R., 57 DTC 1055;

                -                Premium Iron Ores Ltd. v. M.N.R., [1966] S.C.R. 685;

                -                Evans v. M.N.R., 60 DTC 1047;

                -                R. v. Burgess, 81 DTC 5192;

-                Gallien v. Canada, [2000] T.C.J. No. 729 (Quicklaw);

-                McCready Sembinelli v. Canada, [1993] T.C.J. No. 236 (Quicklaw);

                -                Nissim v. Canada, [1998] T.C.J. No. 658 (Quicklaw);

                -                Haley v. Canada, [2000] T.C.J. No. 233 (Quicklaw);

-                Corporation Notre-Dame de Bon-Secours v. Communauté Urbaine de Québec, 95 DTC 5017;

-                The Fundamentals of Canadian Income Tax, V. Krishna, 5th edition (Carswell);

                -                P.W. Hogg, J.E. Magee and T. Cook, Principles of Canadian Income Tax Law;

                -                Interpretation Bulletin IT-99R5, Collection fiscale du Québec - February 2001;

                -                Report of the Royal Commission, volume I (1966);

                -                Report of the Royal Commission, volume II (1996).

[9]            The respondent referred to the following decisions:

-                The Queen v. Dr. Beverley A. Burgess, [1982] 1 F.C. 849 (F.C.T.D.);

-                Bayer v. Canada (Minister of National Revenue - M.N.R.), [1991] T.C.J. No. 511 (Quicklaw);

-                Leclair Raymond v. Canada, [1992] T.C.J. No. 640 (Quicklaw);

-                McCready Sembinelli v. Canada, [1993] T.C.J. No. 236 (Quicklaw);

-                Sembinelli v. Canada, [1994] F.C.J. No. 1352 (F.C.A.) (Quicklaw);

-                Bergeron v. Canada, [1999] T.C.J. No. 510 (Quicklaw);

-                Gallien v. Canada, [2000] T.C.J. No. 729 (Quicklaw).

[10]          In my view, the most relevant of all the decisions referred to by the appellant and the respondent is that of my colleague the Honourable Judge Pierre Archambault in Bergeron, supra.

[11]          I will therefore refer to that decision in disposing of this appeal. In his judgment, my colleague Judge Archambault made what I consider an exhaustive and very complete analysis of the deductibility of legal expenses (professional fees) incurred to obtain or contest support.

[12]          Since I agree completely with the approach taken by Judge Archambault and with the conclusions he reached, there is no need to repeat the exercise. I will, however, reproduce certain extracts below. In paragraph 7 of his judgment, Judge Archambault stated the following:

                The Act contains a number of provisions that permit the deduction of legal expenses in computing income. One of them is paragraph 8(1)(b), which provides for the deduction of legal expenses incurred by an employee to collect or establish a right to salary owed to that employee. Paragraph 60(o.1) of the Act provides for the deduction of legal expenses incurred to collect or establish a right to a retiring allowance or a benefit under a pension fund. There is also paragraph 60(o), which applies to expenses incurred in preparing, instituting or prosecuting an appeal from an income tax assessment. Paragraph 62(3)(f) of the Act defines moving expenses - which may be deductible under section 62 - as including the cost of legal services in respect of the purchase of a new residence. As can be seen, all of these deductions are in subdivision e, except the first, which is in subdivision a.

[13]          There is no similar provision authorizing the deduction of legal expenses incurred to contest a motion to increase or cancel support. There is therefore nothing in the Income Tax Act ("the Act") allowing such expenses to be deducted in computing income.

[14]          Further on, in paragraph 10, Judge Archambault stated the following:

                In my opinion, the provisions of section 18 have nothing to do with the deduction of legal expenses incurred to obtain or contest the payment of support: that section is relevant only in computing income from a business or property and not in computing support income, which is income from another source.

[15]          In his judgment, Judge Archambault also analysed the main and most important decisions dealing with the deductibility of legal expenses. Following that analysis, he continued as follows:

19             On the basis of these decisions, the legal expenses incurred by Mr. Bergeron's former spouse in order to obtain an increase in her support payments would be deductible while those incurred by Mr. Bergeron to contest such a motion would not. I consider it totally unfair that both spouses are not treated the same for tax purposes. It is already very onerous to have to incur legal expenses to obtain or contest support payments; if it is also the case that one party can deduct them while the other cannot, this may in some circumstances unfairly upset the balance of power between the parties. It must therefore be asked whether the Minister's position and that adopted in certain court decisions are sound.

20            I noted above that Mr. Bergeron could not deduct his legal expenses because there was no specific provision authorizing such a deduction. However, this does not necessarily mean that a taxpayer can never deduct such expenses. For example, a taxpayer who operates a business or owns property from which he or she earns income is entitled to deduct all the expenses incurred for the purpose of gaining or producing income from that business or property, including legal expenses.

. . .

25             Coming back to the question of whether subdivision b is applicable here, it is true that support constitutes income by virtue of paragraph 56(1)(b) of the Act and that the right to support is property within the meaning of subsection 248(1) of the Act. Based on those two propositions, some conclude that support is income from property and that legal expenses incurred to collect support are deductible under paragraph 18(1)(a) of the Act. I am thinking in particular of the decisions in Boos, Burgess, Bayer and Sembinelli . . . .

26             With respect for the opposite view, I believe that it is necessary to reconsider the correctness of those decisions and to determine whether it is fair under the law to apply sections 9 et seq. of subdivision b in deciding on the deductibility of legal expenses incurred to obtain or contest the payment of support. . . .

He went on as follows:

46             Not only is support not income from property within the usual meaning of that term, but it also cannot be considered as such given the overall context in which the term income from property is used in the Act. The provision including support in income is in subsection 56(1) of subdivision d ("Other Sources of Income") and not in subdivision b. If Parliament had wanted support to be treated as income from property, it would have included it in subsection 12(1) of subdivision b as it did with trust income in paragraph 12(1)(m). If it had done so, in computing net income from property (that is, the right to support) under subsection 9(1), legal expenses could have been deducted from the support, subject to certain restrictions as with paragraph 18(1)(h) of the Act.

47             In view of the structure of the Act, how can we make sense of the deductibility under subsection 9(1) of legal expenses incurred to collect support payments that are included in income not as income from property but as other income under subdivision d? It seems totally implausible to me that Parliament intended such a result.

48             This result would moreover violate the basic rule for computing income set out in subsection 4(1) of the Act, namely that a taxpayer is allowed no deductions in computing the taxpayer's income for the taxation year except such deductions as may reasonably be regarded as wholly applicable to the source of that income. Allowing legal expenses incurred to collect support to be deducted under subsection 9(1) of the Act would amount to recognizing that an amount deemed to be income under subsection 56(1) in subdivision d is also income from property within the meaning of subsection 9(1) in subdivision b, which strikes me as an absurd result. For the deduction to be allowable under subsection 9(1), support would have had to be treated as income from property under subsection 12(1) of the Act.

49             Since Parliament has chosen to treat support payments as income from other sources by adding paragraph 56(1)(b) to subdivision d, it must be concluded that it does not consider support to be income from property and that the provisions of subdivision b are not applicable to that "other source of income".

Judge Archambault concluded as follows in paragraph 57:

                Since there is no provision in the Act authorizing the deduction of legal expenses incurred to collect or contest the payment of support, Mr. Bergeron unfortunately cannot claim such a deduction in computing his income. For him to be entitled to such a deduction, Parliament would have to again amend the Act so as to provide for that deduction in section 60. I would add that such an amendment would also be necessary to authorize the deduction of legal expenses incurred to collect or establish a right to support.

[16]          Since I accept without reservation the approach taken by my colleague the Honourable Judge Pierre Archambault, I have no reason to conclude differently. I therefore find that the professional fees were not deductible, and the appeal is accordingly dismissed. However, I formally recognize the respondent's admission that $3,080, and not the amount of $2,695 originally determined, was paid as support for the 1998 taxation year.

Signed at Ottawa, Canada, this 15th day of August 2001.

"Alain Tardif"

J.T.C.C.

Translation certified true on this 27th day of December 2001.

[OFFICIAL ENGLISH TRANSLATION]

Erich Klein, Revisor

[OFFICIAL ENGLISH TRANSLATION]

2000-1443(IT)I

BETWEEN:

PIERRE MATHIEU,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on April 5, 2001, at Québec, Quebec, by

the Honourable Judge Alain Tardif

Appearances

Agents for the Appellant:            Yannick Blouin and Marco Lavoie

Counsel for the Respondent:      Vlad Zolia

JUDGMENT

          The appeal from the assessment made under the Income Tax Act for the 1998 taxation year is dismissed in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 15th day of August 2001.

"Alain Tardif"

J.T.C.C.

Translation certified true

on this 27th day of December 2001.

Erich Klein, Revisor