Date: 19990602
Docket: 2000-445-IT-I
BETWEEN:
HEATHER McCOLL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] This is an appeal for the 1997 taxation year. In computing
her income for the 1997 taxation year, the Appellant claimed
legal fees of $10,949.89.
[2] By Notice of Reassessment the Minister of National Revenue
reassessed the Appellant’s income tax return for the 1997
taxation year and disallowed the amount of $10,949.89.
Admitted Facts from the Pleadings
[3] The Appellant and her husband Paul McColl were married on
April 8, 1995 and separated on July 10, 1997. The Appellant
and Paul McColl have one son, Andrew Peter William McColl born on
March 14, 1997. During the 1997 taxation year the Appellant paid
legal expenses in the amount of $10,949.89. The Appellant and
Paul McColl entered into a separation agreement dated January 13,
1998. Under the terms of the agreement Paul McColl was required
to pay the Appellant $1,200 per month to Mrs. McColl in child
support payments effective February 1, 1998; $7,500 in
spousal support on February 1, 1998 and $2,500 per month in
spousal support as of March 1, 1998.
Evidence at Trial
[4] The Appellant’s evidence was clear and compelling.
All the legal expenses were incurred to determine her
husband’s income who was, as admitted, the father of her
son. The legal expenses were to enforce a pre-existing right to a
support amount as provided by law.
[5] The father through the matrimonial breakdown litigation
period took the position of denying his son’s right to a
determination of a maintenance amount by hiding his source or
sources of income as well as understating the amounts of income.
According to the Appellant, the child’s father stated that
if fathers did not want to pay maintenance, they did not do so.[1] The litigation
negotiation period was filled with acrimony and violence.
[6] The legal expenses incurred were considerable as the
Appellant had to expose and demonstrate the father’s
ability to pay. The Appellant eventually succeeded in negotiating
the aforementioned separation agreement.
[7] The Appellant acknowledged that she benefited from the
final agreement, but the costs incurred were primarily from her
point of view directed at enforcing the child’s
pre-existing right to maintenance payments. As a consequence of
this view she believed she would be entitled to deduct all the
legal expenses of $10,949.89 for 1997.
Issue
[8] The issue is whether or not the Appellant was entitled to
deduct legal fees in the amount of $10,949.89 in computing her
income for the 1997 taxation year.
The Minister's Pleaded Position
[9] (i) The legal expenses were paid prior to and for the
purpose of obtaining the separation agreement; (ii) the legal
fees were not incurred for the purpose of enforcing payment of
child or spousal support where the right has been established by
a court order or valid separation agreements; (iii) the legal
fees are expenses on account of capital; (iv) the legal fees were
not incurred by the Appellant for the purpose of gaining or
producing income from business or property but were personal or
living expenses of the Appellant; (v) the right of the Appellant
to receive support constitutes income from other sources under
subdivision d (Other Sources of Income) of the Income Tax
Act (the “Act”); and (vi) there is no
provision in subdivision d of the Act to allow the
Appellant to make the deduction.
Appellant's Position
[10] Legal costs incurred to enforce pre-existing rights to
support amounts are deductible. A pre-existing right for the
child for support from his father arises from Part III of the
Family Law Act of Ontario. Enforcing such a right does not
create or establish a new right and as such is deductible from
the computation of income.
Analysis
[11] Legal costs to establish a right to support amounts
(spousal or child) are non-deductible because they are
costs on account of capital or are personal or living expenses,
but legal costs incurred to enforce a pre-existing right to
either interim or permanent support (spousal or child) are
deductible, R. v. Burgess, [1981] C.T.C. 258, 81 DTC 5192;
Evans v. Minister of National Revenue, [1960] S.C.R. 391,
[1960] C.T.C. 69, 60 DTC 1047.[2] In Kathy L. Wakeman v. The Queen, 1996
DTC 3220, [1996] 3 C.T.C. 2165, cited by the Appellant, the issue
was whether “the Appellant could deduct legal expenses of
$5,320 paid by her to obtain a permanent court order against her
divorced husband for maintenance for their two children.”
The Court accepted the Appellant’s evidence and found
“that the expenses claimed did not relate to custody but
solely to the establishment of the amount of maintenance for the
two children of whom the Appellant had custody.” The Court
found that there was no pre-existing right to maintain a
spouse but there was a pre-existing legal right to support
a child (the Family Law Act of Ontario, the
Divorce Act, and Richardson v. Richardson, [1987] 1
S.C.R. 857, 38 D.L.R. (4th) 669, 22 O.A.C. 1). The
Court therefore found the expenses were deductible.
[12] The Minister of National Revenue has taken the position
in Interpretation Bulletin IT-99R5 under the heading
“support amounts”:
17. Legal costs incurred in establishing the right to support
amounts, such as the costs of obtaining a divorce, a support
order under the Divorce Act or a separation agreement, are
not deductible as these costs are on account of capital or are
personal and living expenses. . . .
18. Legal costs incurred to enforce pre-existing rights to
either interim or permanent support amounts are deductible. A
pre-existing right to support can arise from ... legislation
such as Part III of the Family Law Act of Ontario,
and enforcing such a right does not create or establish a new
right; ...
[13] It would appear, since the judgment in Pierre Bergeron
v. Her Majesty the Queen, (98-547(IT)I), Tax Court of
Canada (Informal Procedure) Archambault T.C.J., the Minister
of National Revenue has changed his view in relation to
IT-99R5.
[14] In that decision after lengthy reasoning the judge found
“...there is no provision in the Act authorizing the
deduction of legal expenses incurred to collect or contest the
payment of support...”. While the finding “legal
expenses incurred to collect ... the payment of
support...” was an obiter finding,[3] I find the judgment was
of interest and of concern.
[15] The Minister now takes the position the right of an
Appellant to receive support payments constitutes income from
other sources under subdivision d of the Act as a
consequence there is no provision in subdivision d of the
Act to allow the Appellant to make the deduction in
issue.
[16] From the facts of this case and my reading of the
Act I conclude the following: the pre-existing right to a
support as a result of Part III of the Family Law Act of
Ontario is a property right under the Act.[4] This right has been
embodied into a separation agreement. This is the right of the
child of the Appellant. The legal expenses that were incurred by
the Appellant to enforce the child’s pre-existing legal
right were not expenditures on account of capital.
[17] The right to receive income from a property right falls
within section 9 of the Act. (It also falls within
subdivision d and this, I conclude, only provides for greater
certainty in terms of the definition of what is income).[5] Income under
section 9 is net income and expenses incurred are deductible
under section 9.
[18] The legal expenses incurred to enforce the pre-existing
right are considered current expenses to which the prohibitions
in paragraph 18(1)(a) and 18(1)(h) do not apply.
The prohibition in paragraph 18(1)(a) does not apply
because the expenses were incurred for the purpose of gaining
income from a pre-existing legal right, which I have
concluded (at paragraph 17) is property according to the broad
definition of “property” found in subsection 248(1)
of the Act. The prohibition in paragraph 18(1)(h)
does not apply because the legal expenses are not personal or
living expenses of the Appellant. They are expenses incurred by
the Appellant on behalf of the child to obtain support to raise
the child and to which the Appellant and the child are legally
entitled.
[19] In this case, the Appellant incurred $10,949.89 in legal
expenses to enforce the pre-existing legal right to support by
quantifying the amount for the child. While the Appellant did
obtain a personal benefit from the expenses, that personal
benefit did not diminish the totality of the legal expenditure to
enforce the same pre-existing right of the child to a
support payment.
[20] As a final conclusion I can find no better statement than
that of Bowman J. (as he then was) of the Tax Court of
Canada in Marise Nissim v. Her Majesty the Queen, 1999 [1
C.T.C.] 2119 at page 2125:
. . . . .
To deny to wives the right to deduct the cost of compelling
husbands to pay their fair share of the cost or raising children
and yet to tax the wives on such maintenance as they can get from
the husbands seems to me to be contrary to both common sense and
ordinary principles of fairness. Whatever validity there may be
to the distinction between the cost of enforcing an existing
right to income and establishing such a right I do not think that
the courts should strain to find legalistic reasons to deny the
deductibility of these very necessary expenses. It must be
recognized that the law relating to revenue and capital
expenditures has developed since the last century and
distinctions that may have carried weight in 1898 may be less
meaningful in 1998. In Minister of National Revenue v. Algoma
Central Railway (1968), 68 DTC 5096 (S.C.C.), the Supreme
Court of Canada said at page 5097:
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, 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.
One cannot read the decision of the Supreme Court of Canada in
Symes v. R. (1993), 94 DTC 6001 (S.C.C.) (which otherwise
has nothing to do with this case) without being struck by that
court’s recognition of and sensitivity to the changing
realities and exigencies of modern life.
Decision
[21] The appeal is allowed and the assessment is referred back
to the Minister of National Revenue for reconsideration and
reassessment on the basis that the legal expenses in the amount
of $10,949.89 are deductible.
Signed at Ottawa, Canada, this 2nd day of June
2000.
"D. Hamlyn"
J.T.C.C.
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