Nadeau v. Canada (Minister of National Revenue), 2003 FCA 400

                                                                                                                                            Date: 20031027

                                                                                                                                         Docket: A-511-02

Citation: 2003 FCA 400

CORAM:        RICHARD C.J.

LÉTOURNEAU J.A.

NOËL J.A.

BETWEEN:

BRUNO NADEAU

Applicant

and

MINISTER OF NATIONAL REVENUE

Respondent

Hearing held at Montréal, Quebec, October 1, 2003.

Judgment delivered at Ottawa, Ontario, October 27, 2003.

REASONS FOR JUDGMENT:                                                                                                  NOËL J.A.

CONCURRING:                                                                                                                 RICHARD C.J.

                                                                                                                                     LÉTOURNEAU J.A.

Date: 20031027

                                                                                                                                         Docket: A-511-02

Citation: 2003 FCA 400

CORAM:        RICHARD C.J.

LÉTOURNEAU J.A.

NOËL J.A.

BETWEEN:

BRUNO NADEAU

Applicant

and

MINISTER OF NATIONAL REVENUE

Respondent

REASONS FOR JUDGMENT

NOËL J.A.

[1]         This is an application for judicial review of a decision by Archambault T.C.J. of the Tax Court of Canada ([2002] T.C.J. No. 601) refusing the applicant's deduction of legal costs incurred in contesting a motion for an increase in support payments filed by his former wife.

[2]         In rendering this decision, Archambault T.C.J. relied on his previous decision in Bergeron v. Canada, [1999] T.C.J. No. 510; 99 DTC 1265, which is at the source of a major controversy that continues to this day in the Tax Court of Canada concerning the tax treatment of expenses in relation to support payments.

Facts and procedural context

[3]         The facts underlying this case are straightforward. The applicant obtained a divorce in July 1996 pursuant to a judgment by the Superior Court of Quebec. The judgment ordered him to pay support to his former wife for the benefit of the couple's children.

[4]         Some time later, his former wife commenced judicial proceedings to have the pension increased and extended to her as well. The applicant contested this proceeding before the Superior Court and won. He then requested non-taxation of the support payments, and they were consequently reduced by half by the Court of Appeal. In 1999, the amount of the legal costs stood at $4,284 and it is the deduction of this sum that is the subject matter of this litigation.

[5]         The Minister of National Revenue (the Minister or respondent) refused the deduction of this expense on the ground that it had not been incurred for the purpose of earning income from a business or property (confirmation of the assessment, Applicant's Record, page 8).

[6]         However, the applicant's former wife, as a recipient of the support payment, would have been treated differently if one is to rely on the Departmental policy set out in Interpretation Bulletin IT-99R5, as amended:

¶ 18. Legal costs incurred to enforce pre-existing rights to interim or permanent support amounts are deductible. A pre-existing right to a support amount can arise from a written agreement, a court order or legislation . . . and enforcing such a right does not create or establish a new right; see The Queen v. Burgess, [1981] CTC 258, 81 DTC 5192 (F.C.T.D.). In addition, legal expenses incurred to defend against the reduction of support payments are deductible since the expenses do not create any new rights to income; see The Attorney General of Canada v. Norma McCready Sembinelli, [1994] 2 CTC 378, 94 DTC 6636 (FCA.).

[7]         As Archambault T.C.J. comments in Bergeron (paragraphs 17 and 18), some recent judgments of the Tax Court of Canada, which have been accepted by the Minister (see Technical News No. 24, October 10, 2002), have extended this right to legal costs incurred for the purpose of increasing support or even establishing its recognition, since it is said to be a pre-existing right (St-Laurent v. Canada, [1999] 1 CTC 2478; Donald v. Canada, [1999] 1 CTC 2025; Nissim v. Canada, [1999] 1 CTC 2119; [1998] 4 CTC 2496; Gallien v. Canada, 2000 DTC 2514). [I accept the conclusions of these decisions for the purposes of disposing of the present application without, however, taking a position on their merits. I think it is worth noting that these judgments are in conflict with the decision of the Federal Court, Trial Division in The Queen v. Burgess, supra, and that the issue of whether the right to support arises upon the judgment pronouncing the divorce or before that time has not so far been considered by the Court of Appeal.]

[8]         The applicant, in his appeal before Archambault T.C.J., claimed the right to be treated in the same way as the recipient of support, that is, to be able to deduct the legal costs he had incurred. In doing so, the applicant, who represented himself, attempted to invoke the Charter without having served the necessary notice of constitutional question under section 57 of the Federal Court Act.

[9]         In a departure from the case law, Archambault T.C.J. concluded that neither the payer nor the recipient of support can deduct the costs pertaining thereto. Before dismissing the applicant's appeal on the ground that the treatment he complained of was the same for everyone, Archambault T.C.J. made a point of explaining (paragraph 6) that:

[translation] Had I thought there was any possibility that the provisions of the Act were discriminatory, I would have granted Mr. Nadeau time in which to give notice to the attorneys general of Canada and the provinces.

Position of the parties

[10]       In support of his application for judicial review, the applicant contends that Archambault T.C.J. wrongly held that he was not a victim of discrimination. The notice of constitutional question that he served and filed for the first time in this court refers to paragraph 18(1)(a) of the Income Tax Act (the Act).

[11]       It is not easy to discern the sense of the constitutional issue that the applicant is attempting to raise. But in reading between the lines, the applicant's position seems to be that, to the extent that paragraph 18(1)(a) prevents the payer of support from deducting legal costs incurred while allowing the recipient of that support to do so, it is discriminatory and contrary to the Charter.

[12]       The respondent, for his part, submits that the constitutional issue raised by the applicant cannot be resolved since no contextual evidence bearing on subsection 15(1) of the Charter has been filed. The respondent also reminds us that even if there is a contradiction between the Minister's approach based on the previous case law and the approach taken by Archambault T.C.J., the application for judicial review is doomed irrespective of the solution that is adopted.

[13]       The respondent asks that we nevertheless decide this question in order to put an end to the controversy that has existed in the Tax Court of Canada since the Bergeron decision. In this regard, the respondent cited the decisions of Tardif T.C.J. in Mathieu v. Canada, [2001] T.C.J. No. 542; Lemieux v. Canada, [2001] T.C.J. No. 703 and Dussault T.C.J. in Casavant v. Canada, [1999] T.C.J. No. 938, who followed the reasoning in Bergeron, and the decisions of Morgan, Rowe, Hamlyn, Bowie and Lamarre T.C.JJ. in Ryan v. Canada, [2000] 2 CTC 2329, Haley v. Canada, [2000] T.C.J. No. 233, McColl v. Canada, [2000] T.C.J. No. 335, Sabour v. Canada, [2001] T.C.J. No. 783 and Lanthier v. Canada, [2003] T.C.J. No. 149, respectively, who declined to do so.

Controversy in the Tax Court of Canada

[14]       The cases have consistently held for more than forty years that the right to support, once established by a court, is "property" within the meaning of subsection 248(1) of the Act, and that the income from such support constitutes, in the hands of the person receiving it, income from property (see in particular Jean Boos v. M.N.R. (1961), 27 Tax A.B.C. 283, The Queen v. Burgess, supra, Bayer v. M.N.R., [1991] 2 CTC 2304, [1960] S.C.R. 391">Evans v. M.N.R., [1960] S.C.R. 391 and Sembinelli v. Canada, supra).

[15]       The definition of property in subsection 248(1) reads as follows:

[Emphasis added]

[16]       Thus the courts have consistently held that income from support payments is computed by reference to the regime applicable to income derived from property (or from a business) that is found in subdivision b of the Act. Under this regime, an expenditure incurred in order to constitute a source of income is a payment on account of capital and its deduction is prohibited (see paragraph 18(1)(b)). However, an expenditure incurred in order to earn income from this source (i.e. after it has originated) is referred to as a "current" expense which falls within the exception in paragraph 18(1)(a):

[Emphasis added]

[17]       This regime, as it was applied by the courts over the years, has meant that from the perspective of the recipient, an expenditure, the purpose of which is to give rise to a right to support is a capital expenditure and therefore cannot be deducted. But an expenditure incurred in recovering an amount owing under a pre-existing right is a "current" expense and may therefore be deducted.

[18]       Conversely, the expenses incurred by the payer of support (either to prevent it from being established or increased, or to decrease or terminate it) cannot be considered to have been incurred for the purpose of earning income, and the courts have never recognized any right to the deduction of these expenditures (see, for example, Bayer, supra).

[19]       In Bergeron, Archambault T.C.J., obviously intent on eliminating the unequal treatment of the former spouses resulting from this approach (Bergeron, paragraph 19), declined to follow the previous case law. No one, he said, can deduct the expenses pertaining to a support payment since the applicable regime is the one in subdivisions d and e of the Act (excluding subdivision b) and no right to the deduction is provided therein. Archambault T.C.J. held that the right to support is "property" but, he said, that does not necessarily mean that the income derived therefrom is income from "property" (Bergeron, paragraph 33).

[20]       The structure of the Act suggests, he says, the contrary interpretation. "The provision whereby support is included in income is subsection 56(1) of subdivision d ('Other Sources of Income')," he says (Bergeron, paragraph 46). How can legal expenses incurred to recover support payments be deducted under subdivision b when one considers that these payments are included in income, not as income from property but as income from another source (Bergeron, paragraph 47)? It is subdivision d that provides for inclusion of support in the computation of income, he notes, and the only deductions allowed are those provided in subdivision e. In his view, these two subdivisions constitute "a complete code on the subject" (Bergeron, paragraph 51).

[21]       Referring to different definitions of the word "income" that are found in the dictionaries and among the authors, Archambault T.C.J. concludes that the sources covered in subdivision b must be a "productive source of income". A support payment is not productive of anything and the right to receive it is essentially personal and cannot be transferred (Bergeron, paragraphs 36 to 43). The resulting income is therefore derived from a source other than property (Bergeron, paragraphs 45 and 46).

[22]       In Stewart v. Canada, [2002] 2 S.C.R. 645, the Supreme Court added some weight to this view. It is true that in that case the Court was seeking primarily to counter the judicial overkill with which the "reasonable expectation of profit" test had been used in determining the existence of a source of income. But it must be acknowledged that in order to determine whether a taxpayer has a source of income that is property, it must now be determined whether the conduct of the taxpayer (technically commercial) denotes profit-seeking or is more closely associated with a personal element (Stewart, supra, paragraph 56).

[23]       Be that as it may, the reasoning of Archambault T.C.J. has been rejected by a majority of the judges in the Tax Court of Canada. The reasons of Bowie J. in Sabour, supra provides a fair illustration of the view shared by these judges. In Bowie J.'s opinion, "it is much too late" to conclude that support payments cannot qualify as income from property (paragraph 7); "there have been decisions of this Court too numerous to catalogue applying the principle" (paragraph 8). Such a long line of authority, he says, should be followed until it has been overruled by a higher court or the Act has been amended by Parliament. Finally, he says, it cannot be overlooked that the position developed by the courts has always been the position held by the Minister, the effect of which is to allow a deduction that the Bergeron decision would effectively preclude (paragraph 10).

Analysis and decision

[24]       The question dividing the judges of the Tax Court of Canada is one of statutory interpretation: Is it Parliament's intention to consider the income from support payments to be income from property and as such subject to computation under subdivision b, or is it rather to treat it as income from "Other Sources" subject to the exclusive regime of subdivisions d and e?

[25]       The approach that should guide the courts confronted with this type of question was restated by Mr. Justice Iacobucci in Ludco Enterprises Ltd. v. Canada, [2001] 2 S.C.R. 1082:

36     The modern rule of statutory interpretation was put succinctly by E. A. Driedger in Construction of Statutes (2nd ed. 1983), at p. 87:

Today there is only one principle or approach, namely, 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. . . .

37     This passage from Driedger "best encapsulates" the preferred approach to statutory interpretation: Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R. 27, at paras. 21 and 23. This is the case for the interpretation of any statute, and it is noteworthy that Driedger's famous passage has been cited with approval by our Court on numerous occasions both in the non-tax and in the tax context [citations omitted].

38     Furthermore, when interpreting the Income Tax Act courts must be mindful of their role as distinct from that of Parliament. In the absence of clear statutory language, judicial innovation is undesirable: Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411, at para. 112. Rather, the promulgation of new rules of tax law must be left to Parliament: Canderel Ltd. v. Canada, [1998] 1 S.C.R. 147, at para. 41.

[26]       According to Archambault T.C.J., the income derived from a support payment cannot originate from two sources. It is, he says, income from "other sources" and since the applicable rules for computing this type of income do not include any provision that would allow the deduction of legal costs, no one is entitled to this deduction.

[27]       I do not think the sources of income are watertight to the point which Archambault T.C.J. suggests. While it is true that most of the "Other Sources" of income listed in subdivision d are independent of the sources expressly recognized in section 3 (employment, business or property), it is inaccurate to say that these "Other Sources" can never go back to those referred to in section 3 and be subject to the same rules.

[28]       The income from support is a clear illustration of how two seemingly distinct sources may link up with one another. Although the taxation of support payments as income is explicitly provided for in subdivision d, which deals with "Other Sources", it remains that the right to support is "property" under the Act. If the right to support is "property", it is hard to dissociate this "property" from the income which flows from the exercise of this right. That is where lies the statutory authority invoked by the courts, over the years, to allow the deduction of costs pertaining to support in the circumstances we have seen by invoking subdivision b and in particular paragraph 18(1)(a).

[29]       Were it not for this well-established jurisprudence, the thesis developed by Archambault T.C.J. would be quite tenable. But at the point where we are now, I have little difficulty in finding that income from a support payment is income from property and that as such the expenses incurred in obtaining the payment thereof may be deducted under the rules set out in subdivision b.

[30]       As Judge Bowie noted in Sabour, supra, this is the treatment that the Minister has advocated and applied for more than 40 years. It is logical to assume that if this treatment was in some way contrary to Parliament's wishes, an amendment would have been brought.

[31]       From the governmental standpoint, the treatment of support-related expenditures is of more than passing interest. This approach, which has endured over 40 years, has an impact on public finances and raises important questions of social policy. The state of the law in the matter cannot have gone unnoticed. Notwithstanding his ardent plea, Parliament clearly cannot have the intention attributed to it by Archambault T.C.J.

[32]       The amendments to the Act that accompanied the decision made in 1997 to no longer tax support payments intended for the children of the marriage are, in this regard, unequivocal. This decision could have had a significant impact on the deduction that support recipients could claim under paragraph 18(1)(a), since paragraph 18(1)(c) stipulates that no expense may be deducted "in connection with property the income from which would be exempt".

[33]       To maintain the right to the deduction, Parliament amended the definition of "exempt income" in subsection 248(1) to exclude the part of the support that is intended for children, even if it is now non-taxable. Clearly, this amendment would be pointless if Parliament was of the view that income from support was not income from property within the meaning of

subdivision b.

[34]       It appears from this that not only has Parliament accepted the solution adopted by the courts over the years, it has intervened to preserve that solution when confronted with an amendment that effectively would have precluded it. This jurisprudential solution, I repeat, is a function of the fact that the income from a support payment is income from property, and as such the expenses incurred in order to earn this income may be deducted.

[35]       I therefore conclude, like a majority of the judges of the Tax Court of Canada, that Judge Archambault's thesis must be rejected.

[36]       This brings us to the applicant's argument that paragraph 18(1)(a) is contrary to the Charter. The applicant, who did not serve a notice of constitutional question in the Tax Court of Canada, remedied this defect in this Court. As stated previously, the applicant alleges that paragraph 18(1)(a) is contrary to the Charter because it has the effect of imposing differential treatment on the payer and recipient of support.

[37]       Paragraph 18(1)(a) of the Income Tax Act may lead to differential treatment, but not all distinctions are discriminatory. In Law v. Canada (Minister of Employment and Immigration), [1999] 1 S.C.R. 497 at 531, Justice Iacobucci stated :

[...] The object of a s. 15(1) analysis is not to determine equality in the abstract; it is to determine whether the impugned legislation creates differential treatment between the claimant and others on the basis of enumerated or analogous grounds, which results in discrimination. [...]

The applicant has not even attempted to demonstrate that the distinction created by paragraph 18(1)(a) of the Income Tax Act is based on an enumerated or analogous ground as required under subsection 15(1) of the Charter. Further, in the absence of the proper factual record on which to base its determination, it would be inappropriate for this Court to attempt to adjudicate on this issue. See e.g. MacKay v. Manitoba, [1989] 2 S.C.R. 357; Eaton v. Brant County, [1997] 1 S.C.R. 241.

[38]       The reasons of the judge below can be read as implying that the discrimination alleged by the applicant is based on a personal characteristic, sex. I have read the transcript of the hearing before the Tax Court of Canada and the evidence and pleading, and nowhere is there mention of discrimination based on sex. The applicant's submissions are limited to saying that the legal expenses of each former spouse should be subject to the same treatment, and that paragraph 18(1)(a) is contrary to the Charter to the extent that it does not allow that result.

[39]       Even if I was to infer that the Charter argument is based on sex, nothing suggests that the applicant intended or would have been in a position to provide any evidence of discrimination based on sex if Judge Archambault had given him the opportunity to do so. As the Supreme Court said in Symes v. Canada, [1993] 4 S.C.R. 695 (at page 764), it obviously must not be assumed that a statutory provision has the effect of sex-based discrimination in the absence of any evidence supporting such a contention. The constitutional attack cannot succeed.

[40]       For these reasons, I would dismiss the application for judicial review. In view of the contradictory decisions in the Tax Court of Canada, I would not make any award as to costs notwithstanding the dismissal of the application.

"Marc Noël"

                                                                       J.A.

Certified true translation

Suzanne Gauthier, C.Tr., LL.L.

FEDERAL COURT OF APPEAL

SOLICITORS OF RECORD

DOCKET:                                              A-511-02

STYLE:                                                   BRUNO NADEAU v. THE MINISTER OF NATIONAL REVENUE

PLACE OF HEARING:                      Montréal, Quebec

DATE OF HEARING:                         October 1, 2003

REASONS FOR JUDGMENT:       Noël J.A.

CONCURRING:                                  Richard C.J.

Létourneau J.A.

DATED:                                                 October 27, 2003

APPEARANCES:

Bruno Nadeau                                                                  FOR HIMSELF

Chantal Jacquier                                                                             FOR THE RESPONDENT

SOLICITORS OF RECORD:

Bruno Nadeau                                                                  FOR HIMSELF

Morris Rosenberg                                                                           FOR THE RESPONDENT

Deputy Attorney General of Canada

Ottawa, Ontario