Chantal Patry v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 3043

Tremblay, T.C.C.J.:—This appeal was heard under the informal procedure on June 15, 1993, in Montreal, Quebec.

1. Point at issue

The point for determination is whether the appellant was correct in deducting the sum of $1,460.20 in legal expenses in computing her income for the 1991 taxation year. These expenses were incurred with a view to contesting an application for variation of a support order. In fact, her former common law spouse was trying to obtain a reduction of the weekly alimony of $98.29. Following the steps taken by her counsel, the appellant obtained a weekly amount of $115.

The respondent disallowed the expense, alleging that it did not meet the conditions set by the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

2. Burden of proof

The onus is on the appellant to prove the facts relevant to the point at issue. Since all the facts are admitted in the instant case, the point at issue is only a point of law.

3. Facts

The facts assumed by the respondent and described at subparagraphs (a) to (g) of paragraph 6 of the reply to the notice of appeal were admitted by the appellant. They clearly describe the overall situation and read as follows:

6. In order to make this reassessment, the Minister took for granted, in particular, the following facts:

(a) From the common law relationship of the appellant and her former spouse, Guy-Paul Cossette, was born a daughter, Jennifer Patry Cossette, on April 24, 1989;

(b) A judgment delivered on December 20, 1989 by Mr. Justice Gilles Gauthier of the Superior Court (case no. 410-04-000218-894) granted the appellant's application for child custody and support and approved and made executory an agreement signed between the parties on December 20, 1989;

(c) On May 2, 1991, the appellant's former common law spouse, Guy-Paul Cossette, filed an application for variation of corollary relief with the Superior Court to reduce for the future the support order binding between the parties since December 20, 1989;

(d) On May 27, 1991, the appellant filed an application for variation of corollary relief with the Superior Court to increase for the future the support order signed on December 20, 1989 binding between the parties;

(e) On June 5, 1991, the appellant and her former common law spouse, Guy- Paul Cossette, signed a consent on the applications for variation of corollary relief. The parties then agreed to increase the support order payable to the appellant by Guy-Paul Cossette to $115 per week;

(f) This agreement was approved in a judgment of the Superior Court on June 5, 1991;

(g) During the 1991 taxation year, the appellant incurred legal expenses amounting to $1,460.20 in order to challenge her former common law spouse's application to reduce the support order and in order to file an application herself to increase that support order. . . .

[Translation.]

4. Appellant's argument

In her notice of appeal, the appellant made the following argument:

According to the federal general income tax guide, allowable expenses include those paid "to collect late alimony. . . .”

In Quebec, however, every person who is owed alimony may retain the services of the alimony collector” free of charge” by contacting the nearest courthouse in order to recover late alimony.

This collector's authority is limited to enforcement action. However, the collector cannot represent the person who is owed alimony if the person who owes it requests a variation of the alimony.

If Parliament had wanted to allow only legal expenses incurred to recover late alimony, that would prove to be virtually pointless for Quebec residents in light of this remedy.

Parliament’s intention was surely to include the expenses incurred to maintain a right to alimony.

The expenses of $1,460.20 which I paid were incurred to maintain such a right. The alimony was increased from $98.29 to $115 per week, that is $16.71 more per week.

[Translation.]

The Court cannot accept this argument because it is the Income Tax Act — of federal jurisdiction — which applies in the instant case, not the Taxation Act of provincial jurisdiction. The free service of the alimony collector instituted by the provincial legislature cannot be invoked as a fact which the federal legislator of the Income Tax Act took into account in order to govern legal expenses. Each Act is independent of the others unless specific reference is made.

5. Respondent's argument

In his argument, counsel for the respondent referred first to paragraph 8(1)(b) of the Act permitting an employee to deduct legal expenses incurred against his employer in order to collect unpaid salary.

The same principle applies to the legal expenses incurred by a spouse to collect, inter alia, the alimony provided under an agreement or judgment.

In the instant case, however, it was admitted that the appellant's former common law spouse was not late in the payments provided by the judgment. Paragraphs 16, 17 and 18 of Interpretation Bulletin IT-99R4 of August 2, 1991 clearly sum up the respondent's position on the subject. They read as follows:

Alimony and Maintenance

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 or a 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.).

18. From the payer's standpoint, legal costs incurred in negotiating or contesting an application for alimony or maintenance are not deductible. Legal expenses relating to the custody of children are also non-deductible, even where these expenses are necessary to receive Family Allowance payments.

In The Queen v. Burgess, supra, Cattanach, J. of the Federal Court ruled that the legal expenses incurred in obtaining a divorce including alimony are not deductible. The obtaining of the divorce and alimony constituted a new right. The action was not an action for enforcement of an existing right to which the other party had not submitted.

The appellant in the instant case has caused a new right to be established by the Court.

Furthermore, Cattanach, J. rejected the argument based on paragraph 18(1)(a) of the Act. It reads as follows:

18. General limitations.

(1) In computing the income of a taxpayer from a business or property 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 the business or property;. . .

As in the instant case, Mrs. Burgess argued that the obtaining of alimony is the obtaining of a right within the meaning of the definition of the word "property" as described at subsection 248(1) I.T.A.:

Property"—" property” means property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes

(a) a right of any kind whatever, a share or a chose in action . . .

[Emphasis added.]

Thus, according to Mrs. Burgess, the expense was made within the meaning of paragraph 18(1)(a) of the Act.

The Court ruled that the legal expenses were paid by the taxpayer to establish a new right to alimony, not to enforce someone to submit to the existing right, which he did not respect.

In Corbeil-Labelle v. M.N.R., [1978] .T.C. 3226, 78 D.T.C. 1892 at page 322 (D.T.C. 3229), Taylor, J., then a membei of the Tax Review Board, refuted the argument of paragraph 18(1)(a) as follows:

It is clear that this section allows as a deduction only an amount incurred "for the purpose of gaining (or producing) income from the business or property". It does not allow such a deduction in order to gain (or produce)"property". Counsel for the appellant stated that in his view, "the alimony or right to alimony which the appellant had and which was increased is property". I agree with this opinion in principle, but we must ask ourselves whether the expense was incurred to establish the right or to gain income from the right. According to the evidence, the appellant received regularly as income the original alimony ($900 per month) to which she was entitled. The $4,500 was not spent to collect this alimony. It is not possible, in my view, to" gain or produce income from property" that is more than the maximum. In this case the maximum income was $900 per month. When counsel for the appellant spoke of “increasing” the alimony, I think he should have said "replace", since that is exactly what happened. The expense of $4,500 was incurred in order to” substitute” for one form of property another form which would allow the appellant to obtain the sum of $1,525 per month. Such an expense—to establish a right—is not deductible in these circumstances.

I therefore come to the conclusion that the legal expenses paid by the appellant are not deductible.

6. Conclusion

For the above reasons, the appeal must be dismissed.

Appeal dismissed.