Norma McCready Sembinelli v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 2345

Lamarre Proulx, T.C.C.J.:— This is an appeal, by way of the informal procedure, for the year 1991.

The question at issue is whether legal expenses, incurred by the appellant to contest a motion by the appellant's former husband to rescind a support order, are deductible by virtue of paragraph 18(1)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act").

The appellant's marriage with Mr. Sembinelli took place on April 5,1952. On September 17,1984, an irrevocable judgment of divorce was rendered making absolute the conditional judgment of divorce pronounced May 28, 1984. The conditional judgment ratified an agreement signed between the parties whereby the appellant would receive a monthly alimony in the amount of $1,000 adjusted in accordance with the annual pension index established pursuant to section 119 of the Act respecting the Quebec Pension Plan and whereby the parties would otherwise renounce all other possible recourses.

On February 28, 1990, there was a motion made by the appellant's former husband to rescind the support order, Judgment of the Superior Court, Family Chamber, was rendered January 15, 1991, by Madame Justice Warren, upholding the support order for the reason that there was no legal and factual ground to disturb the agreement between the parties. There was an appeal taken from this judgment to the Quebec Court of Appeal on February 8, 1991. The evidence is not clear as to what happened with this appeal, whether it was pursued or was dismissed. In any event, it has no bearing on the outcome of the present issue.

The amount and the purpose of the legal fees are not in dispute. The appellant paid, in the year 1991, an amount of $3,000 representing part of the legal fees incurred in defending against her former husband's motion.

The appellant referred the Court to:

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

Driol v. M.N.R., [1989] 1 C.T.C. 2175, 89 D.T.C. 122 (T.C.C.).

Counsel for the respondent brought to the attention of the Court, among other things, paragraphs 16 and 17 of the Interpretation Bulletin IT-99R4 dated August 2, 1991.

These paragraphs 16 and 17 read as follows:

16. In computing the income of an individual, a deduction is allowed for legal costs incurred by the individual in enforcing

(a) payment of alimony or other maintenance allowance that is included in the individual’s income under paragraph 56(1)(b) (i.e., where the right thereto has been established by written agreement or by court order), or

(b) a court order for a maintenance allowance that is included in the individual's income pursuant to paragraph 56(1)(c) or (c.1).

17. Legal costs incurred in establishing the right to the payments described in 16(a) above, 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. Similarly, legal costs of seeking to obtain an increase in such payments are also non-deductible. However, legal costs incurred in obtaining a court order described in 16(b) above, are considered to be deductible in computing the individual's income where the individual must sue the spouse ora person described in subparagraph 56(1)(c.1)(iii) for maintenance in a Family Court or under legislation such as the Family Services Act of New Brunswick, Part III of the Family Law Act of Ontario or other similar legislation. The latter types of expenses are considered to relate to the enforcement of a preexisting right provided by law, and not to the creation of a new right; see the decision of The Queen v. Burgess, reported at [1981] C.T.C. 258, 81 D.T.C. 5192 (F.C.T.D.).

[Emphasis added.]

An Interpretation Bulletin is not the law and, although I need not proceed to its analysis, I am not prevented from saying a few words about it. I believe that the above paragraph 17 intends to reflect the conclusion of Mr. Justice Cattanach in the Burgess case where he says at page 265 (D.T.C. 5197):

In the present case the defendant's right to maintenance which arose on marriage ended with the divorce and her right to subsequent maintenance arose from the court order. The suit was for divorce and corollary thereto an award of maintenance.

Therefore the legal expenses are in the nature of a capital expenditure, by bringing the right into being, rather than in the nature of a revenue expenditure to enforce payment of income from a right in being.

However, the circumstances of the present appeal are such that, if one reads the judgment rendered by Madame Justice Warren, supra, one can see that her judgment did not create a new right. Indeed, it determined that the appellant's right to income should not be disturbed.

Regarding the analysis of this present case, I rather wish to refer to Mr. Justice Cartwright of the Supreme Court of Canada in Evans v. M.N.R., [1960] S.C.R. 391, [1960] C.T.C. 69, 60 D.T.C. 1047, where he says at pages 398-99 (C.T.C. 76-77, D.T.C. 1050-51):

If the circumstances of the case at bar are viewed in the light most favourable to the respondent it can be said that the legal expenses were incurred not only to collect the income to which the appellant was entitled and which was being wrongly withheld from her but also to prevent the right to receive that income being destroyed; the right in question remains throughout a right to income. /n the Dominion Natural Gas case, on the other hand, the expenses were incurred in litigation the subject matter of which was an item of fixed capital.

In my opinion, in the circumstances of this case there are two relevant questions both of which must, on the admitted facts, be answered in the affirmative; (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? It does not appear to me to be either necessary or relevant to inquire further as to what were the grounds (held by the Court to be without substance) upon which the payment of the income was

withheld. /t would be a strange result if the question, whether legal expenses incurred in enforcing or preserving a right should be regarded as an outlay on account of capital or on account of income, fell to be determined on a consideration not of the true nature of that right but of the nature of the ill-founded grounds on which it was disputed.

For the above reasons it is my opinion that the outlay of the legal expenses in question was not a payment on account of capital falling within paragraph 12(1)(b) but was an expense, falling within paragraph 12(1)(a), incurred by the appellant for the purpose of gaining income from property, to which income she was at all relevant times entitled but of which she was unable to obtain payment without incurring these expenses.

[Emphasis added.]

A right to an alimony is a personal right. The obligation is attached exclusively to the person of the payor and the right to the alimentary support, to the person of the payee. It is an obligation intuitu personae.' [1] It is a right that may vary with the financial circumstances of the payor and the payee and also depends on the life of each person. It is a right to income that is not of a capital nature. At Evans, supra, page 398 (C.T.C. 76, D.T.C. 1050):

I do not think that in ordinary language a right to receive income such as that enjoyed by the appellant would be described as a capital asset. If it were all that she possessed, I think that the natural and accurate answer to the question "Has she any capital?" which would be made by either the man on the Clapham omnibus or a professional accountant would be “No, but she has a substantial income".

I thus find that the proper answers to the questions proposed by Mr. Justice Cartwright, in the circumstances of this case are, as in the Evans case, in the affirmative. The claim in regards to which the expenses were incurred is a claim to income to which the appellant was entitled.

I conclude that the legal expenses incurred by the appellant” to prevent the right to receive that income being destroyed", supra, were incurred for the purpose of gaining income from an existing income producing right and not for the purpose of acquiring an asset of an enduring nature nor to defend an item of fixed capital.

The appeal is allowed without costs.

Appeal allowed.