Shirley M. Driol v. Minister of National Revenue, [1989] 1 CTC 2175, 89 DTC 122

Rip, T.C.J.: —The appellant, Shirley Driol, appeals an income tax assessment for 1985 in which the Minister of National Revenue, the respondent, did not permit her to deduct in computing income the amount of $26,045.22 paid by her to the executrices of her late husband's estate and interest in the amount of $513 paid to the Royal Bank of Canada.

The facts are not in dispute. At all relevant times Shirley Driol was a resident of the City of Regina, in the Province of Saskatchewan. On November 27, 1981, the appellant, a widow, was married to John Alexander George, a widower. They remained married to each other until Mr. George's death on October 28, 1983. However, within a year of their marriage the parties had separated and a separation agreement ('Agreement"), dated October 12, 1982, was drafted and signed. Divorce proceedings were commenced by Mr. George on December 28, 1982, before the Court of Queen's Bench of Saskatchewan but were not completed before his death. Ms. Driol and the children of Mr. George never got along.

Mr. George was employed as a fireman by the City of Regina and was entitled to benefits from the Regina Civic Employees' superannuation and benefit plan (the "pension plan”). However, the pension plan asset was not specifically addressed in the matrimonial property negotiations between the spouses nor was it included in the Agreement. At the time of execution of the Agreement, Ms. Driol was advised by her former solicitor that the pension plan "was not part of the Separation Agreement".

The Agreement contained the usual waiver of claims under the matrimonial property legislation and included, inter alia, the following clauses:

4. In accordance with the provisions of The Matrimonial Property Act, 1979, Ch. M-6.1, the Parties hereby acknowledge that they are familiar with all matrimonial property owned by the Parties and agree to divide their matrimonial property .. . .

12. The parties acknowledge that this Agreement shall be construed as an inter- spousal contract within the meaning of The Matrimonial Property Act, 1979, Ch. M-6.1 and is made in full settlement of any claim which the Husband or Wife would otherwise be entitled to bring pursuant to the provisions of the said Act.

Pursuant to the Matrimonial Property Act, Ms. Driol acknowledged:

THAT I am aware of possible future claims to property which I may have under The Matrimonial Property Act, 1979, and that I intend to give up those claims to the extent necessary to give effect to the attached Separation Agreement.

The designation of beneficiary form with the City of Regina dated September 22, 1982, designated Mr. George's estate as the beneficiary of the pension plan. However, the form indicates that the designation is null and void if the spouse survives him. In such an event the spouse receives benefits provided for in the pension plan, that is, she may elect to receive a monthly pension payable for life in lieu of a lump sum that may be payable.

Pursuant to proceeding with estate matters the pension plan was reviewed and its value ascertained. According to the pension plan any claimant other than the spouse could collect only the contributions made to the plan by the employee, whereas the widow could elect either a lump sum refund or a monthly pension equal to 50 per cent of the pension Mr. George had accrued to his date of death. Both the executrices and the appellant made a claim to the pension benefit. The executrices through their solicitors contended that the Agreement constituted a waiver by the appellant of any interest in the deceased's pension. The City of Regina decided to interplead and prepared an agreed statement of facts. After the execution of the Agreement two judgments of the Saskatchewan Courts came to the attention of Ms. Driol’s new solicitor. [1] The first judgment held that in the absence of gross unfairness or unconscionability within the meaning of subsection 24(1) of The Matrimonial Property Act of Saskatchewan, an inter-spousal contract, which the Agreement is, waiving all claims or causes of action and settling all matrimonial property will be binding, and the unmentioned pension rights will in essence be waived; an inter-spousal agreement, which makes no mention of pension rights, precludes division of such rights. The second judgment held that a husband's right to a pension was matrimonial property capable of division. As a result of these two judgments, Ms. Driol's solicitor advised her to settle the dispute by paying the estate the funds it would have received from the pension plan if the estate had been the named beneficiary. Releases of all claims to a pension were executed by the executrices of Mr. George's estate to the Regina Civic Employees' superannuation and benefit plan administrative board and the City of Regina. Ms. Driol paid the executrices a lump sum of $26,045.22 which was funded by the appellant by way of a loan from the Royal Bank of Canada.

As a result of the payment to the executrices of Mr. George's estate and the releases by the executrices, the estate received an amount of money equal to what it would have been entitled to from the pension plan if it were the sole beneficiary and Ms. Driol commenced receiving a pension in amounts she was entitled to as sole beneficiary of the pension plan. In other words, the $26,045.22 which the estate claimed from the pension plan was paid to the estate by Ms. Driol; Ms. Driol received what she was entitled to under the pension plan as sole beneficiary.

Ms. Driol deducted the amount of $26,045.22 and $513 in computing her taxable income for 1985 in accordance with paragraph 18(1)(a) of the Income Tax Act ('Act") on the basis the expenditures were made or incurred for the purpose of earning income from property. The respondent did not permit the deductions on the basis that within the meaning of paragraph 8(1)(b) of the Act the amount of $26,045.22 was paid as a gift or payment on account of capital and was not made for the purpose of gaining or producing income from a property; the interest amount of $513 also was not paid for the purpose of earning income from a property, says the respondent.

Counsel for Ms. Driol submitted that the payment of the $26,045.22 was made by Ms. Driol to protect a right to income as opposed to capital. Counsel relied on the reasons for judgment of the Supreme Court of Canada in Evans v. M.N.R. [2] The Minister’s counsel insisted the sum of $26,045.22 was a gift by Ms. Driol to her late husband's children and “did nothing for her". The Evans case, he said, is irrelevant and turns on its own facts.

There was no evidence at trial to even suggest relations between Ms. Driol and Mr. George's children improved as a result of the payment in question. The children and Ms. Driol always dealt with each other at arm's length. I have no doubt that the payment of the $26,045.22 by Ms. Driol to the executrices of Mr. George's estate was not a gift to benefit the children of Mr. George.

In Evans the taxpayer obtained a life interest in one-third of the income from the residence of her late father-in-law’s estate. Mrs. Evans' father-in-law had provided in his will that his son, Mrs. Evans' husband, may leave his share of the income from his father's estate to his widow, and he did so by his will. Her sister-in-law, however, disputed her entitlement to this income and as a result the trustee refused to make any payment until the parties’ respective rights were determined by the courts. Ultimately, the Supreme Court of Canada upheld the taxpayer's entitlement to the income; in preparing her income tax return the taxpayer deducted the legal costs she incurred in the course of the various proceedings as an expense made or incurred for the purpose of gaining income from property. Eventually the tax litigation as well reached the Supreme Court of Canada where Mrs. Evans was successful. Cartwright, J. stated that:

. . . the legal expenses paid by the appellant were expended by her for the purpose of obtaining payment of income; they were expenses of collecting income to which she was entitled but the payment of which she could not otherwise obtain. [3]

The payment of the legal fees in question by Mrs. Evans did not bring her right to be paid income from the estate or any asset or advantage into existence. Her right to the income was not derived from any judgment of the court, Mr. Justice Cartwright affirmed, but from the combined effect of the will of which she was a beneficiary. [4]

Cartwright, J. also did not agree with the opinion of the learned trial judge that the fact that a bare right to be paid income can be sold or valued on an actuarial basis at a lump sum requires or permits that right, while retained, to be regarded as a capital asset. [5]

There are differences of fact in the case at bar and Evans. The primary difference is that in Evans, the legal ownership of the appellant's share in the estate was to remain at all times in the trustee and in no circumstances could the appellant ever become entitled to any part of the capital. Mrs. Evans' right was solely to require the trustee to pay the income arising from her share to her. Ms. Driol, however, had the right to receive a lump sum benefit out of the pension plan equal to Mr. George's contributions or she could elect instead to receive a monthly pension. However, nothing turns on this.

It is obvious that the payment to the executrices of Mr. George's estate did not bring her right to be paid income from the estate or any asset or advantage into existence. Contributions had been made to the pension plan over the years by Mr. George and the City of Regina: the aggregate of these amounts constituted the assets of the pension plan which entitled Ms. Driol to a pension. Her right to a pension was not derived from any judgment of a court or the settlement of a dispute between her and the executrices of the estate. Her right was derived from her capacity as widow of Mr. George.

The dispute between Ms. Driol and the executrices of Mr. George's estate was to which of them had a valid right to payment under the pension plan. Because of the payment by Ms. Driol to the executrices, the executrices ceased to prosecute their claim; the City of Regina accepted Ms. Driol's claim for a pension as a valid one under the pension plan and she received income from the pension fund.

Ms. Driol's right to income from the pension plan is property. [6] She cannot deduct the sum of $26,045.22 except to the extent it was made or incurred by her for the purpose of gaining or producing income from property: paragraph 18(1)(a). The amount is not deductible from income if it was an expense "to preserve a capital asset in a capital aspect". [7]

The expenditure of Ms. Driol does not meet the classic characterization of capital : an expenditure “made not only once and for all, but with a view to bringing into existence an asset or an advantage" for the enduring benefit of a trade: British Insulated and Helsby Cables v. Atherton. [8] Whatever rights Ms. Driol may or may not have had in the pension fund remained unchanged subsequent to the payment to the executrices. What the payment achieved was to preclude the executrices from proceeding with their action, whatever its merits, against the City of Regina. No new rights were created in the pension plan itself, nor were any existing rights extinguished.

In Kellogg Company of Canada Limited v. M.N.R. [9] the taxpayer incurred legal expenses in successfully defending its right to use the term “shredded wheat"; the Minister disallowed the deduction of the expenses. The Exchequer Court of Canada, however, allowed the deduction on the basis the taxpayer was at all times entitled to use the term in question and that therefore "the expenditure brought no . . . permanent advantage into existence for the taxpayer's trade". McLean, J. stated further that:

I do not think it can be said that the expenditure in question here brought into existence any asset that could possibly appear as such in any balance sheet, or that it procured an enduring advantage for the taxpayer's trade that must presuppose that something was acquired which had no prior existence. No material’ or positive’ advantage or benefit resulted to the trade of Kellogg from the litigation except perhaps a judicial affirmation of an advantage already in existence and enjoyed by Kellogg. I do not think that the Crown can be heard to say that because the litigation affirmed the right which Kellogg, in common with others, was already entitled to and enjoyed that therefore it acquired something that should be treated as an asset or an enduring advantage to its trade. [10]

Moreoever, where a taxpayer paid $15,000 to a third party in exchange for the latter agreeing to withdraw its opposition to the taxpayer's application for the registration of a trade mark, the Exchequer Court allowed the taxpayer to deduct the $15,000 on the grounds that, while registration may have enabled the taxpayer to enjoy use of the trademark, registration did not in and by itself create the capital asset: Canada Starch Company Limited v.

M.N.R." [11] Jackett, P. (as he then was) held that:

Registration merely facilitates the businessman in enforcing the rights that accrued to him from his business operations. Either VIVA’ (the trademark in question) will be found, if it is ever tested, to have become distinctive of the appellant's wares by virtue of its trading operations, or its registration will be found to be invalid. Mere registration is an empty right if it is not based on a trademark that has business or commercial reality as an incidental consequence of the current operations of the business. In my view, therefore, the trademark in question as an advantage for the enduring benefit of the . . . business’, if it is such an advantage, was not acquired by the payment of $15,000. [12] (Parenthesis added)

At the end of the day one must ask why Ms. Driol paid $25,045.22. The answer, surely, is to receive her pension from the pension fund. Common sense dictated the expenditure by Ms. Driol; otherwise there was a probability she would not receive the pension. The expenditure was not payment for acquisition of an asset. The payment of the $26,045.22 was an expense of obtaining income to which she was entitled but the payment of which the City of Regina would not make until the opposing claim was withdrawn. The expenditure was made or incurred for the purpose of gaining or producing income from a property, the pension fund. There is no capital aspect to the payment.

The money to make the payment was borrowed from the Royal Bank of Canada. The interest paid to the Royal Bank in 1985 is deductible in computing Ms. Driol’s income as it was paid pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from property: paragraph 20(1 )(c) of the Act.

The appeal will be allowed with costs.

Appeal allowed.