Rita Leclair Raymond v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 2014

Dussault, T.C.C.J.:—This appeal was heard pursuant to the informal procedure. It is an appeal from a reassessment for the appellant's 1990 taxation year. By that assessment, the Minister of National Revenue (the "Minister") disallowed the deduction of $6,851.70 claimed by the appellant as legal and travel expenses incurred for opposing an application to rescind a support order pursuant to section 17 of the Divorce Act, R.S.C. 1985, 2nd supplement. Though the notice ratifying the assessment issued by the Minister on June 12, 1992, pursuant to the appellant’s notice of objection, refers only to the sum of $1,650, it is the amount of $6,851.70, disallowed by the reassessment, which is actually at issue.

In arriving at the reassessment the Minister assumed the facts stated in paragraph 7(a) to (f) of the reply to the notice of appeal, which reads:

(a) the divorce of the appellant and her former husband was made by a decree nisi in 1970, which was made absolute on January 28, 1971;

(b) a judgment rendered on February 4, 1982 by Jacques Vaillancourt J. of the Superior Court (case 500-12-109846-810) intervened in the appellant’s favour and granted her an increase in alimony;

(c) the appellant’s former husband filed in the Superior Court (case 600-12-001660-705) an application for a variation order to rescind prospectively the alimony order applicable between the parties since February 4, 1982;

(d) the appellant opposed this application for a variation order to rescind prospectively the alimony order applicable between the parties since 1982;

(e) during the 1990 taxation year, the appellant incurred travel expenses of $1,341.70 and legal expenses of $5,510, making a total of $6,851.70, to avoid rescission of alimony;

(f) the total of $6,851.70 spent by the appellant during the 1990 taxation year for travel and legal expenses was not made or incurred for the purpose of gaining or producing income from a business or property.

[Translation.]

These facts are not in dispute and the parties also agreed in adding that the application to rescind was dismissed by a Superior Court judgment in October 1991 and that this judgment was appealed.

The challenge turned essentially on the question of whether the expenses incurred by the appellant are deductible in calculating her income for 1990. The Minister's assessment concludes that paragraphs 18(1)(a) and (h) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") prohibits the deduction of such an expense. Counsel for the respondent further argued that paragraph 18(1)(b) of the Act should be applied since the expenses incurred are to be regarded as capital outlays the deduction of which is prohibited by that paragraph. He submitted that the expenses incurred by the appellant were incurred essentially to protect and preserve her right to alimony, not to ensure its payment in accordance with the order made. Even assuming that the appellant already had the right to such alimony under the variation order of February 4, 1982, counsel for the respondent's argument was that the outlays made to protect that right must be treated in the same way as those made to establish it initially, that is as outlays connected with the very existence of the right and so of a capital nature. In his submission, the expenses incurred by the appellant are different from those the purpose of which is to compel a debtor to carry out his obligations, namely to ensure the payment of previously specified alimony or compensatory allowance. Counsel for the respondent noted that this distinction is in fact made in paragraph 16 of Interpretation Bulletin IT-99R4, dated August 2, 1991, entitled “Legal and Accounting Fees”. In alimony of his arguments he referred to the following decisions:

—Bayer v. M.N.R., [1991] 2 C.T.C. 2304, 91 D.T.C. 1035 (T.C.C.);

—BP Pétroles Ltée v. The Queen, [1979] C.T.C. 174, 79 D.T.C. 5121 (F.C.T.D.); aff'd [1980] C.T.C. 408, 80 D.T.C. 6252 (F.C.A.);

-Corbeil-Labelle v. M.N.R., [1978] C.T.C. 3226, 78 D.T.C. 1892 (T.R.B.);

—Filteau v. M.N.R., [1991] 1 C.T.C. 2159, 91 D.T.C. 507 (T.C.C.);

—The Queen v. Burgess, [1981] C.T.C. 258, 81 D.T.C. 5192 (F.C.T.D.);

—Solomon v. M.N.R., [1978] C.T.C. 3039, 78 D.T.C. 1760 (T.R.B.):

—McCombe v. M.N.R., [1985] 1 C.T.C. 2330, 85 D.T.C. 268 (T.C.C.);

—Ivey v. M.N.R., [1982] C.T.C. 2034, 82 D.T.C. 1082 (T.R.B.).

Counsel for the appellant argued, first, that a variation order pursuant to section 17 of the Divorce Act should be distinguished from an alimony order made pursuant to subsection 15(2). Accordingly, she said, outlays incurred to prevent a variation of the order under section 17 should be regarded as outlays made to ensure the payment of the alimony previously determined by order, not to establish a new right to such alimony as would be the case for an application made under section 15. In this sense, counsel for the appellant considered that the facts of the instant case should be distinguished from those of Filteau, supra, as in that case the outlays incurred were for the purpose of establishing the right to alimony. In the instant case, she considered that this right had already been established and that the appellant's purpose was in the nature of a claim for execution in order to maintain the payment.

First, I think it is important to note that the decisions in Ivey, Bayer, McCombe and Solomon, all supra, have no bearing on the instant case since they all concern outlays incurred by the payer of alimony to challenge an increase of the alimony, to claim a reduction of it or to be entirely relieved of the duty of paying it.

The appellant was first granted alimony by order at the time of her divorce by decree nisi in 1970, which was made a decree absolute on January 28, 1971. A variation order was made on February 8, 1982 in the appellant's favour increasing the alimony to which she was entitled. Several years later, the appellant's former husband in turn applied for a variation order to prospectively rescind in its entirety the order made in 1982. In October 1991, this application was dismissed and the judgment appealed. In my opinion, this series of events clearly illustrates the interaction of sections 15 and 17 of the Divorce Act in arriving at their real meaning. Subsection 15(4) first provides that [T]he Court may make an order . . . for a definite or indefinite period or until the happening of a specified event" and that” [it] may impose such other terms, conditions or restrictions in connection therewith as it thinks fit and just”. Additionally, subsection 15(5) provides that in making an alimony order the Court shall take into consideration inter alia" the condition, means, needs and other circumstances of each spouse As to the variation order under section 17, subsection 4 of that section clearly states that the Court” shall satisfy itself” before making such an order" that there has been a change in the condition, means, needs or other circumstances of either former spouse The real meaning of these provisions seems clear. An alimony order establishes a right in terms of the existence of means, needs and a certain situation at the time it is made. However, this right is far from being absolute and final. Subsection 17(1) provides that an alimony order may be varied, suspended or even completely rescinded by a variation order, "prospectively or retroactively”.

In this sense, I consider that outlays incurred to oppose an application to rescind an alimony order or a previous variation order were incurred essentially, if not to gain new prospective recognition of the existence of entitlement to alimony in view of changes that may have occurred in the situations of one or other spouse, at least to protect the right resulting from the preceding variation order which is still in effect. Seen from either standpoint, the application for a variation order made by the appellant's former husband to rescind the preceding order challenged the right itself which the appellant had previously acquired. The outlays incurred by the appellant were not, in any way, related to ensuring the performance of her former husband's obligation to pay the alimony or to collect that alimony, but clearly in order to establish her prospective right to the alimony.

Having made those distinctions, the decisions in Burgess, Filteau, and Corbeil-Labelle, all supra, clearly establish that outlays incurred to assert one's right to alimony are not incurred to produce income from property.

In a completely different area, the judgment of the Federal Court-Trial Division and that of the Federal Court of Appeal in BP Pétroles Ltée, supra, are to the same effect when the outlays are incurred for the purpose of protecting an asset ora a right.

In such cases, the outlays are generally regarded as of a capital nature or as personal or living expenses. Additionally, I have also examined the possible application of the Supreme Court of Canada judgment in Evans v. M.N.R., [1960] S.C.R. 391, [1960] C.T.C. 69, 60 D.T.C. 1047. In that case, Mrs. Evans had incurred legal expenses to secure the payment of income to which she was entitled under a will and which, as the result of an action brought by another heir, the trustee was refusing to pay her until judgment was rendered in her favour. Mrs. Evans claimed to deduct those expenses, and the Minister disallowed them. In rendering his judgment for the majority in Mrs. Evans’ favour, Cartwright, J. (as he then was) asked two questions that define the issue, considering that only a positive answer to those two questions could allow him to rule in Mrs. Evans’ favour. The questions were as follows at pages 398-99 (C.T.C. 76-77, D.T.C. 1051):

(i) was the appellant’s claim in regard to which the expenses were incurred a claim to income to which she was entitled?

(ii) were the legal expenses properly incurred in order to obtain payment of that income?

In the instant case, the appellant testified that her former husband had never failed to pay her the alimony awarded by the judgment of February 4, 1982. Accordingly, the expenses incurred by the appellant could not be regarded as having been incurred to claim income to which she was entitled or to secure payment of that income. It is thus impossible here to answer the two questions presented positively.

Consequently, I consider that the legal expenses should be treated as capital outlays. The travel expenses should be treated as personal or living expenses. Paragraphs 18(1 )(b) and (h) of the Act prohibit the deduction of these two types of outlays.

For these reasons, the appeal is dismissed.

Appeal dismissed.