Date: 19990817
Docket: 98-547-IT-I
BETWEEN:
PIERRE BERGERON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Archambault, J.T.C.C.
[1] Pierre Bergeron is appealing from an income tax assessment
made under the Income Tax Act (Act) for the
1996 taxation year. The Minister of National Revenue
(Minister) disallowed the deduction of $9,182 in legal
expenses that Mr. Bergeron incurred to contest a motion to
increase support payments brought by his former spouse for the
benefit of their child, Mélanie. There is no dispute
between the parties as to the relevant facts. Moreover, aside
from the admissions made by Mr. Bergeron, no evidence was
adduced at the hearing.
[2] What is at issue is rather a question of law. The Minister
argued that the expenses were not incurred for the purpose of
gaining or producing income from a business or property as
required by paragraph 18(1)(a) of the Act.
Mr. Bergeron argued that it is totally unfair for the
Minister to disallow the deduction of his legal expenses, since
they were incurred to prevent an increase in the support he had
to pay, an increase which would have decreased his income
accordingly under section 60 of the Act. Since he was
partly successful, his income is higher than if he had not
contested his former spouse’s motion.
Analysis
[3] To determine the extent to which a taxpayer may deduct
legal expenses under the Act, it is important to first
determine the purpose for which those expenses were paid. Here,
legal services were provided with respect to the contesting of a
motion to increase child support payments. What is involved is
therefore a basically personal obligation of
Mr. Bergeron’s. Next, it must be determined whether
there is any statutory provision permitting the deduction of such
legal expenses. Before answering that question, the structure of
the Act must be analyzed.
Legislative framework
[4] Part I of the Act, which deals with income tax, has
11 divisions, the first two of which are Division A, which deals
with liability for tax, and Division B, which concerns the
computation of income. The basic rules for computing income are
found at the beginning of Division B, including in particular
those set out in section 3 and paragraph 4(1)(a),
which provide as follows:
3. Income for taxation year — The income of a taxpayer
for a taxation year for the purposes of this Part is the
taxpayer’s income for the year determined by the following
rules:
(a) determine the total of all amounts each of which is
the taxpayer’s income for the year (other than a taxable
capital gain from the disposition of a property) from a source
inside or outside Canada, including, without restricting the
generality of the foregoing, the taxpayer’s income
for the year from each office, employment, business and
property,
(b) determine the amount, if any, by which
(i) the total of
(A) all of the taxpayer’s taxable capital gains for the
year from dispositions of property other than listed personal
property, and
(B) the taxpayer’s taxable net gain for the year from
dispositions of listed personal property,
exceeds
(ii) the amount, if any, by which the taxpayer’s
allowable capital losses for the year from dispositions of
property other than listed personal property exceed the
taxpayer’s allowable business investment losses for the
year,
(c) determine the amount, if any, by which the total
determined under paragraph (a) plus the amount determined
under paragraph (b) exceeds the total of the deductions
permitted by subdivision e in computing the taxpayer’s
income for the year (except to the extent that those deductions,
if any, have been taken into account in determining the total
referred to in paragraph (a)), and
(d) determine the amount, if any, by which the amount
determined under paragraph (c) exceeds the total of all
amounts each of which is the taxpayer’s loss for
the year from an office, employment, business or
property or the taxpayer’s allowable business
investment loss for the year,
and for the purposes of this Part,
(e) where an amount is determined under paragraph
(d) for the year in respect of the taxpayer, the
taxpayer’s income for the year is the amount so determined,
and
(f) in any other case, the taxpayer shall be deemed to
have income for the year in an amount equal to zero.
4. (1) Income or loss from a source or from sources in a place
— For the purposes of this Act,
(a) a taxpayer’s income or loss for a
taxation year from an office, employment, business,
property or other source, or from sources in a particular
place, is the taxpayer’s income or loss, as the case may
be, computed in accordance with this Act on the assumption
that the taxpayer had during the taxation year no income or loss
except from that source or no income or loss except from
those sources, as the case may be, and was 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 that source or to those
sources, as the case may be, and except such part of any other
deductions as may reasonably be regarded as applicable thereto .
. . .
[Emphasis added.]
[5] Division B is then broken up into 11 subdivisions, the
first five of which are as follows:
subdivision a: “Income or loss from an office or
employment” (subdivision a)
subdivision b: “Income or loss from a business or
property” (subdivision b)
subdivision c: “Taxable Capital Gains and Allowable
Capital Losses” (subdivision c)
subdivision d: “Other Sources of Income”
(subdivision d)
subdivision e: “Deductions in Computing Income”
(subdivision e)
[6] Recently, in Fortino v. R., [1997] 2 C.T.C.
2184, at paragraphs 39-40, my colleague Judge Lamarre made
the following comments on this structuring of the Act and
the significance of taxation based on source of income:
39 In contrast, segregation of income by source is the
essence of the structure of the Canadian income tax system.
Section 3 of the Act states the basic rules to be applied in
determining a taxpayer’s income for a given year and
identifies, in paragraph (a), the five principal sources
from which income can be generated: office, employment, business,
property and capital gains. Other sources of income are also
identified in subdivision d of Division B of Part I,
entitled “Other Sources of Income”. These
“other sources” relate to certain types of income
which cannot conveniently be identified as originating from the
five sources enumerated in paragraph 3(a) of the Act.
40 The fundamental concept of the Act is that income from
each source must be separately calculated according to the rules
applicable to that particular source. The source concept
would have been borrowed from the United Kingdom’s tax
system under which income is taxable if it falls into one of the
Schedules of the Income and Corporation Taxes Act, 1970 (Eng.),
c.10. However, while under the English schedular system, a
receipt is not taxable as income unless it comes within one of
the named schedules, which are mutually exclusive, the named
sources in section 3 of the Act are not exhaustive and literally
income could arise from any other unnamed source. Indeed,
paragraph 3(a) of the Act contains an “omnibus
clause” couched in the following terms: “without
restricting the generality of the foregoing, ...”.
[Emphasis added.]
[7] 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.
[8] However, there is no similar provision authorizing the
deduction of legal expenses incurred to contest a motion to
increase support payments. Thus, the simple and short answer to
the arguments of Mr. Bergeron, who is seeking to deduct such
expenses, is that there is no provision in the Act that
allows him to deduct them in computing his income.
[9] However, I do not consider that to be a sufficient answer
in the circumstances. First of all, it does not adequately
explain to Mr. Bergeron why his appeal must be dismissed. It must
be noted that there is also no specific provision permitting the
deduction of legal expenses incurred to collect support, yet the
Minister has acknowledged that such expenses are deductible in
Interpretation Bulletin IT-99R5. As well, a more thorough
analysis is necessary because I do not believe the reason given
by the Minister to justify his refusal to allow Mr. Bergeron to
deduct his legal expenses is well founded in law.
[10] 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.
(ii) Minister’s position and supporting case law
[11] Before setting out my thinking on these points, it would
be helpful to look again at the position the Minister has taken
in this case and to analyze the decisions on which it is based.
His position is that sections 9 et seq. of
subdivision b are where the rules on the deductibility or
non-deductibility of legal expenses incurred to obtain or contest
the payment of support are to be found.
[12] To begin with, the position adopted here by the Minister
corresponds to that set out by him in Bulletin IT-99R5 of
December 11, 1998, which deals with legal and accounting fees. In
paragraph 21 of that Bulletin, he explains as follows why the
payer cannot deduct anything:
21. From the payer’s standpoint, legal costs incurred in
negotiating or contesting an application for support payments are
not deductible since these costs are personal or living
expenses. Similarly, legal costs incurred for the purpose of
terminating or reducing the amount of support payments are not
deductible since success in such an action does not produce
income from a business or property. Legal expenses relating
to obtaining custody of or visitation rights to children are also
non-deductible.
[Emphasis added.]
[13] This position taken by the Minister is consistent with
that adopted by this Court inter alia in Bayer v.
M.N.R., [1991] 2 C.T.C. 2304, a decision rendered by
Judge Lamarre Proulx. In that case, the taxpayer, who was seeking
to deduct his legal expenses under paragraph 18(1)(a) of
the Act, advanced the following reasoning:
5 The appellant puts forward that his income calculated in
accordance with the provisions of Division B of the Act is
increased by the fact that the deduction to which he had the
right pursuant to paragraph 60(b) of the Act is reduced and that
therefore the legal expenses incurred should be allowed pursuant
to paragraph 18(1)(a) of the Act.
Judge Lamarre Proulx stated the following in rejecting that
reasoning:
16 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.
[14] In paragraph 18 of Bulletin IT-99R5, the Minister
confirms that legal costs incurred to enforce pre-existing
rights to support amounts or to defend against an application for
the reduction of support payments are deductible. The Minister
does not explicitly state which provision of the Act he is
relying on in allowing such a deduction. However, he does refer
to the decision rendered by Cattanach J. in R. v.
Burgess, [1981] CTC 258, and that of the Federal Court
of Appeal in Attorney General of Canada v. Sembinelli,
[1994] 2 C.T.C. 378. In Burgess, the Minister
relied on paragraph 18(1)(a) of the Act in
disallowing the taxpayer’s deduction. Although the judge
allowed the Minister’s appeal on the basis of paragraph
18(1)(b) of the Act, he seems to have recognized
the validity of the argument based on paragraph 18(1)(a)
of the Act. He stated the following:
16 The question is, as I view it, whether the legal expenses
paid by the defendant were expended by her for the purpose of
obtaining income which was hers as of right. Put yet another way,
were the legal fees expended by her for the purpose of collecting
income to which she was entitled. If this be so then the expense
[sic] are properly deductible.
17 There is no doubt that the defendant was entitled to the
payments but the question is by virtue of that [sic]
circumstance did that entitlement arise. That entitlement is the
right under which the defendant receives the payment and that
right is “property” within the broad definition in
section 248 previously quoted.
[15] In Bayer, supra, Judge Lamarre Proulx also
provided the following explanation of the Minister’s
position:
9 Respecting the statement made in the respondent’s
brochure that legal fees may be deducted when they are expended
to obtain a court order for maintenance payments, it would seem
to come from the decision of the Tax Appeal Board in Jean
Boos v. M.N.R. (1961), 27 Tax A.B.C. 283; 61 D.T.C,
520 where Mr. Chairman Snyder found that the legal expenses
incurred for the purpose of obtaining such a court order were
deductible. Mr. Chairman Snyder does not quote his
authorities but says at page 286 (D.T.C. 521-22):
There are a number of recent decisions by the Exchequer Court
and by this Board to the effect that under certain circumstances
legal fees expended by a taxpayer appellant may be deducted as
permitted by the last-quoted section of the Income Tax
Act.
He also says: “In the present appeal, counsel for the
Minister did not contest the appellant’s claim to have
these legal fees deducted.”
10 Though Mr. Chairman Snyder has not referred to the Supreme
Court of Canada, I believe that the decision reached by that
court in Gladys (Geraldine) Evans v. M.N.R., [1960] S.C.R.
391, [1960] C.T.C. 69, 60 D.T.C. 1047 would have been the leading
case at that time in this matter. This decision determined that a
taxpayer had the right to deduct the legal fees incurred to
obtain a judgment requiring the trustee to pay her the income
arising from a share of an estate. I quote from this case at
page 76 (D.T.C. 1050):
...the legal expenses paid by the appellant were expended by
her for the purpose of obtaining payment of income; they were
expenses of collecting income to which she was entitled but the
payment of which she could not otherwise obtain. So viewed, it
could scarcely be doubted that the expenses were properly
deductible in computing the appellant’s taxable income.
This, in my opinion, is the right view of the matter and is not
altered by the circumstances that it was mistakenly claimed by
Mrs. Andersen that the appellant was not entitled to any income
at all.
[16] In paragraph 17 of Bulletin IT-99R5, the Minister states
that legal costs incurred in establishing the right to support
amounts are not deductible since they are on account of capital
or are personal and living expenses. He adds: [s]imilarly,
legal costs of seeking to obtain an increase in such amounts are
also non-deductible. This position is obviously based
on the decision in Burgess, supra.
[17] However, in a number of recent decisions, this Court has
taken a position more generous than the one set out in paragraph
17 of Interpretation Bulletin IT-99R5. In
St-Laurent v. R., 1998 CarswellNat 2366, my
colleague Judge Lamarre concluded that expenses incurred to
obtain an order increasing alimony were deductible because they
did not constitute costs on account of capital. She wrote the
following at paragraph 10 of her reasons: In my view, no asset
was created or defended by the judgment obtained as a consequence
of the motion to vary corollary relief.
[18] Two other recent decisions by this Court confirm that an
order establishing entitlement to support does not create a new
right but rather recognizes a pre-existing right and that
the legal expenses incurred to obtain a support order are
therefore not a capital expenditure: see in particular Donald
v. R., 1998 CarswellNat 1932, at paragraph 7 (decision
by Judge Bonner), and Nissim v. R., 1998 CarswellNat 1488,
at paragraph 32 (decision by Judge Bowman). Moreover,
according to Judge Bonner in Donald, the decision in
Burgess, supra, should be considered
ill-founded.
(iii) Need to reconsider the soundness of the Minister’s
position and the case law on which it is based
[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.[1] 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.
[21] The basis for that rule is that income from a business or
property is computed as net income under subsection 9(1)
of the Act.[2] Thus, a business person who incurs legal expenses to
obtain a reduction in the rent paid for the space occupied by his
or her business can, as a rule, deduct those expenses in
computing business income. The expenses are considered current
business expenses to which the prohibition in paragraph
18(1)(a) of the Act does not apply.
[22] Here, the Minister argued that the exception set out in
paragraph 18(1)(a) of the Act precludes the
deduction of Mr. Bergeron’s legal expenses since they were
not incurred for the purpose of gaining or producing income from
a business or property. He added that the expenses are personal
or living expenses within the meaning of paragraph
18(1)(h) of the Act.
[23] I find it quite surprising that the Minister allows the
deduction of legal expenses incurred by a person seeking to
collect support but disallows such expenses for a person
contesting a motion for support on the ground that they are
personal or living expenses. A spouse who exercises the right to
collect support does so to obtain what he or she needs to live
on. The essence of support is that it provides for the person
receiving it or a dependent child of that person. The fact that
support is deemed to be income under
paragraph 56(1)(b) of the Act does not alter
that reality. I therefore see no distinction between the two
cases.
[24] If subdivision b applies in these circumstances and it is
concluded that the prohibition set out in paragraph
18(1)(a) of the Act is not applicable, paragraph
18(1)(h) of the Act should then apply and prevent
the deduction of legal expenses incurred to collect the money
needed to live on. To escape non-deductibility under paragraph
18(1)(h) of the Act, a specific provision, such as
those found in subsection 20(1) of the Act, would be
required.
[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, all of which have been cited
above.
[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. I will now review the decisions supporting the
Minister’s position in order to determine the circumstances
in which they were rendered.
[27] In Boos, which, as far as I know, is the earliest
decision on this matter, Chairman Snyder wrote the following:
9 . . . Section 12(1) of the Income Tax Act provides as
follows:
In computing income, 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 property or a business of the taxpayer.
10 The point was readily disposed of as to whether the legal
expenses might be deducted from the income received. There are
a number of recent decisions by the Exchequer Court and by this
Board to the effect that under certain circumstances legal fees
expended by a taxpayer appellant may be deducted as permitted by
the last-quoted section of the Income Tax Act. In the present
appeal counsel for the Minister did not contest the
appellant’s claim to have these legal fees
deducted.
[Emphasis added.]
[28] Three comments must be made concerning that analysis.
First, as stated by the Supreme Court of Canada in Symes,
supra, expenses are deductible not under paragraph
18(1)(a) of the Act [paragraph 12(1)(a) of
the 1952 Act] but under subsection 9(1). Moreover, no
authority was cited to support the assertion that a number of
previous decisions had resolved the issue of the deductibility of
legal expenses incurred to obtain support. I have been unable to
find previous decisions by the Exchequer Court or the Board on
this issue. Finally, it should be noted that Chairman Snyder was
not called upon to rule on the correctness of such an
interpretation because counsel for the Minister had not contested
it.
[29] In Burgess, the taxpayer and the Minister both
relied on paragraph 18(1)(a) of the Act, the
former to seek and the latter to disallow the deduction of legal
expenses. As a result, there was no debate as to whether it was
appropriate to rely on the provisions of subdivision b to allow
the deduction of expenses incurred to collect income that was
taxable under subdivision d. Moreover, it must be remembered that
Cattanach J. disallowed the deduction, concluding that what was
involved was a capital expenditure.
[30] In Bayer, my colleague Judge Lamarre Proulx relied
mainly on the decisions in Boos, supra, and
Evans, supra. I have already commented on the
first. As to the second, I do not think that the reasoning
adopted therein by the Supreme Court of Canada can be applied
here, since that case related to the computation of income from
property, specifically income from a trust, which is included in
the computation of income from property under paragraph
12(1)(m) of the Act. In the case at bar, support
income is included not under subsection 12(1) in subdivision b
but under paragraph 56(1)(b) in subdivision d. The Supreme
Court of Canada therefore did not have to rule on the issue I am
raising here.
[31] The application of the provisions of subdivision b was
not contested and was therefore not debated either before the
Federal Court of Appeal in Sembinelli or before my
colleagues in St-Laurent, Donald and
Nissim. The question is accordingly still open.
(iv) Reasons not to apply subdivision b
[32] In my opinion, there are a number of reasons not to apply
sections 9 et seq. of subdivision b to determine
the deductibility of legal expenses incurred to obtain or contest
the payment of support. First of all, I do not think that support
is income from property. Moreover, the right to support is
not property from which income is gained or produced within the
meaning of the provisions of subdivision b. Finally, the
provisions applicable for the purpose of computing such income
are not those in subdivision b but rather those in subdivisions d
and e.
[33] I will now go over each of these points. Even if it is
correct to conclude that the right to support is property within
the meaning of subsection 248(1) of the Act (that
subsection defines “property” very broadly), this
does not necessarily mean that the amount received as support is
income from property within the meaning of section 9 of
the Act.
[34] To interpret the scope of the term income from
property, it is helpful to recall the basic rule of statutory
interpretation found in Driedger, Construction of Statutes
(2nd edition, 1983), at page 87:
. . . the words of an Act are to be read in their entire
context and in their grammatical and ordinary sense harmoniously
with the scheme of the Act, the object of the Act, and the
intention of Parliament.
[35] In R.B. Curran v. M.N.R., [1959] S.C.R. 50, [1959]
C.T.C. 416, at page 421, the Supreme Court of Canada
suggested the following approach to determining what constitutes
income:
The word must receive its ordinary meaning bearing in mind the
distinction between capital and income and the ordinary concepts
and usages of mankind.
[36] In section 9.2 of Principles of Canadian Income Tax
Law by Hogg and Magee, the authors comment as follows on the
concept of income:
However, there is a theory that has been influential in the
drafting and interpreting of the Act. The theory is that
income is a yield from a productive source. That
“source” theory takes as its metaphor the fruit and
the tree. The tree is “capital” while the fruit is
“income”. Increases in the value of the tree,
even if realized by sale, are still capital (the source of
income); only the fruit is income.
It has been suggested that the source theory of income arose
in the United Kingdom at a time when the economy was primarily
agricultural and it was natural to think of income in those
terms. Another factor was probably the distinction between
capital and income that the courts had developed for the law of
trusts, where it was necessary to distinguish between the rights
of a life tenant (or income beneficiary) and those of a
remainderman (or capital beneficiary). The idea that income
was the yield from a productive source, and that the source
itself was capital, became part of the Anglo-Canadian way of
thinking about income. Accordingly, the Income Tax Acts of
the United Kingdom and Canada, while taxing income from
employment, business or property, did not at first attempt to tax
capital gains, gifts, inheritances or windfalls and many other
miscellaneous receipts.
[Emphasis added.]
[37] In Fundamentals of Canadian Income Tax, Professor
Krishna considers the concept of income used in the Act.
Since that term is not defined, he refers to definitions in
various dictionaries. He states the following at paragraph
258:
We start with the first question: what is income? The
characterization of a receipt as being on account of
“income” is always the first step in determining the
taxable base. Webster’s Dictionary defines income as:
. . . a gain which proceeds from labour, business, property,
or capital of any kind, as the produce of a farm, the rent of
houses, proceeds of professional business, the profits of
commerce, or of occupation, or the interest of money or stock in
funds.
The Oxford Dictionary describes income as “periodical
(usually annual) receipts from one’s business, lands, work,
investments, etc.”. Thus, income is seen as a recurring
gain derived from labour or capital. These definitions, which
are a useful starting point, provide an intuitive response that
income represents an increment (“incoming”) to wealth
over a period of time. This intuitive view influenced the early
thinking on the nature of income. In Eisner v. Macomber, for
example, the U.S. Supreme Court said that “income may be
defined as the gain derived from labour, from capital, or from
both combined”.
[Emphasis added.]
[38] A similar meaning can be found in the Petit
Robert:
1 Ce qui revient (à qqn,
à une collectivité) comme
rémunération du travail ou fruit du capital.
gain, produit,
profit, rapport.
“ celui-là sera toujours riche qui ne
dépense pas son revenu ”
(Balzac). Arrondir ses revenus.
[TRANSLATION]
1 That which accrues (to a person or
community) as earnings from work or the product of capital.
gain, yield, profit,
return. “He who does not spend his income is
always rich” (Balzac). Supplement one’s
income.
[39] In my view, the meaning given by these authors and
dictionary definitions is the one to be used with respect to the
concept of income found, inter alia, in sections 3, 9 and
18 of the Act. Rent, interest, dividends and royalties
— which are all terms appearing in subdivision b —
clearly correspond to that definition of income. Each item in
that list represents a payment made for the use of property, be
it a movable or immovable, money loaned or invested in a
corporation’s capital stock, or intellectual property such
as a patent. For the person receiving them, they are a
gain or return on capital.
[40] The example of a royalty paid for the use of a patent is
the one most similar to our case. In both instances, what is
involved is intangible property. A royalty is a payment made by a
person for the use of intellectual property (the patent). For the
inventor, it is a return on or gain from his or her intangible
property.
[41] Moreover, it must be noted that income is not gained or
produced from the right a landlord has to receive rent,
the right a shareholder has to receive dividends, the
right a lender has to receive interest or the right
an inventor has to receive royalties; the property that generates
the income is rather the movable or the immovable, the loan, the
shares or the patent. In other words, it is not the property
right or the right to the yield therefrom that is the productive
source of income, but rather that which is the object of that
right. A property right and the object of that right must
therefore not be confused. It must also be recognized that the
mere fact that someone has a right to receive periodic payments
does not mean that those payments are income from property.
[42] There are certain rights that are property but that do
not produce income from property to which subdivision b applies.
One example is an employee who is a recipient of benefits under
an income maintenance insurance plan referred to in
paragraph 6(1)(f) of the Act. Such a plan is
one to which an employer has contributed. In such circumstances,
the amounts payable on a periodic basis in respect of the loss of
all or any part of the employee’s income from an office or
employment must be included as income from employment and not
income from property. If the employer has not contributed to such
a plan, the payments are not added to the employee’s
income, nor are they added thereto as income from property.[3] Yet they are
amounts paid on a periodic basis by virtue of the
employee’s right to receive them.
[43] The right to support payments is also a right from which
income is not gained or produced. In the case of support, there
is no productive source of income such as work, property or a
combination thereof. The object of the right is to obtain support
from a spouse who owes such support because of the marital or
filial obligation created, for those domiciled in Quebec, by the
Civil Code of Québec. It cannot be said that the
money paid by that spouse represents payment for the use of
property (and it is certainly not payment for the use of the
right to support, nor is it payment for work). Nor can it be said
that, for the recipient of support payments, the money is a
return on a productive source of income or a gain from capital.
That person is exercising only an essentially personal right that
cannot be transferred. The right even ceases to exist on the
death of the person who has it. It is therefore not part of the
spouse’s estate.
[44] The expenses incurred by a taxpayer to provide child
support prior to separation or divorce are generally not
deductible in computing the taxpayer’s income. Had it not
been for paragraphs 60(b) and (c) of the
Act, the support paid after separation or divorce would
not have been deductible in computing the taxpayer’s income
either. In fact, because of recent amendments to those provisions
of the Act, child support is no longer a deductible
expense (or income for the recipient) if it is paid under an
order of a tribunal or a written agreement made after April
1997.
[45] In my opinion, in the absence of
paragraphs 56(1)(b) and (c) of the Act,
the support received by a former spouse would not constitute
income, much less income from property. This is also the opinion
that Cattanach J. seems to have adopted in Burgess:[4]
14 Alimony and maintenance were not deemed to be income to the
recipient nor a deduction to the payer until 1942 when the payer
was allowed a tax credit. By the Statutes of 1944–45, c 28,
the payer was allowed a straight deduction and the recipient was
obliged to take the payments into income and were assessable as
such although it is difficult to ascertain the concept under
which the payments fit into income in the hands of the recipient
or as deductions rather than personal expenditures of the
payer.
[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.[5]
[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”. [6]
[50] It will also be recalled that, under paragraph
56(1)(b), only support paid under an order of a tribunal
or a written agreement is considered income. Support paid under
an oral agreement would not be included in a taxpayer’s
income pursuant to that paragraph. If we were to adopt the
interpretation that support is income from property, then the
support payments would have to be included under subsection 9(1)
of the Act. Yet such a result would clearly be contrary to
Parliament’s intention.
[51] Like the Supreme Court of Canada which, in Symes,
supra, at paragraph 96, cited with approval what, in
the same case, [1991] 2 C.T.C. 1, at
paragraph 49, Décary J.A. of the Federal Court of
Appeal had to say with respect to section 63 which deals with
child care expenses, I consider the provisions on support in
subdivisions d and e to be a complete code on the subject.
[52] It should also be noted that this approach corresponds to
the one taken by the Supreme Court of Canada in Schwartz v.
R., 1996 CarswellNat 422. In particular, La Forest J.
stated the following at paragraph 53:
53 As indicated earlier, Parliament adopted a specific
solution to a specific problem that resulted from a number of
rulings by the courts respecting the taxability of payments
similar to the one received by the appellant. Under these
rulings, damages paid with respect to wrongful dismissal were not
taxable as income from office or employment under subsection
5(1); nor were they taxable as constituting retiring allowances.
The Crown had at that point many options. The Minister could have
argued that such damages were taxable as income from a source
under the general provision in paragraph 3(a) of the Act. It
could also have sought an amendment to the Act making such
payments expressly taxable as income from office or employment.
But neither of these courses was taken. Instead, the Act was
amended twice so that such amounts could be taxable under section
56 as income from “another” source. First, it was
provided that termination payments were taxable. Then, the Act
was amended to make such a payment taxable as constituting a
retiring allowance. It is thus pursuant to these provisions
that taxability should be assessed. To do otherwise would defeat
Parliament’s intention by approving an analytical approach
inconsistent with basic principles of interpretation.
[Emphasis added.]
[53] I am fortified in my position by another indication
resulting from the analysis of the structure of the Act. I
noted above that paragraph 60(o.1) authorizes the
deduction of legal expenses incurred to collect or establish a
right to a retiring allowance or benefits under a pension fund.
That paragraph appears to have been added[7] as a result of two decisions by this
Court finding that legal expenses incurred to obtain damages for
dismissal could not be deducted under
paragraph 8(1)(f) of the Act. The cases in
question are Maruscak v MNR, [1985] 2 CTC 2048, and
Macdonald v. M.N.R., [1990] 2 C.T.C. 2269. An employee who
is laid off without notice is entitled to damages in lieu of the
notice he or she should have been given. Such damages are not
wages added to income under subdivision a but rather a retiring
allowance that since 1981 has been taxable as income under
subparagraph 56(1)(a)(ii) of subdivision d.
[54] If we compare support with a benefit (which is an
analogous type of payment) under a pension fund, it can be seen
that both are amounts paid on a periodic basis that are added to
income under subdivision d. If we applied the approach taken by
the Minister with respect to legal expenses incurred to obtain
support, legal expenses incurred to collect a retiring allowance
or benefits under a pension fund would be deductible. They would
be expenses incurred for the purpose of gaining or producing
income (the allowance or the pension fund benefit) from property
(the right to receive the allowance or the payment). Legal
expenses incurred to establish the right would not be deductible
because of paragraph 18(1)(b) of the Act.
[55] Thus, if Parliament had wanted to authorize the deduction
of legal expenses incurred to establish the right to a retiring
allowance or pension benefit (those incurred to collect such
allowances or benefits already being deductible), one would have
expected it to amend subsection 20(1) in subdivision b.
Parliament did not do so. Rather, it added paragraph
60(o.1) to subdivision e.[8]
[56] In my opinion, by so doing Parliament confirmed that the
complete code for computing retiring allowances and pension
benefits as well as legal expenses incurred to collect or
establish a right to those amounts is found in subdivisions d and
e.[9] This also
means that, for legal expenses incurred to collect or establish a
right to income covered by subdivision d to be deductible, the
deduction must be provided for in subdivision e.
[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.
[58] For these reasons, Mr. Bergeron’s appeal is
dismissed.
Signed at Ottawa, Canada, this 17th day of August 1999.
“Pierre Archambault”
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 29th day of September
1999.
Erich Klein, Revisor
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