John McCombe v. Minister of National Revenue, [1985] 1 CTC 2330, 85 DTC 268

Cardin, TCJ:—The appeal of John McCombe is from an assessment with respect to the 1981 taxation year. In his tax return, the appellant claimed a deduction in the amount of $5,200 as alimony payments made to his estranged wife. This amount was allowed by the Minister of National Revenue. The appellant also claimed as “deduction” an amount of $6,657 in legal fees incurred for the purpose of obtaining a Court ruling exempting him from or reducing his support payments. The Minister of National Revenue disallowed the deduction on the ground that the legal fees were not incurred for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(l)(a).

The appellant’s position is that the legal fees were incurred so as to realize his right of being exempt from the payment of alimony and having succeeded in eliminating or reducing his tax deductible payments to his spouse, he thereby increased his taxable income. His submission is that the legal expenses were incurred for the purpose of gaining or producing income from property since the definition of property in subsection 248(1) includes “a right of any kind whatever . . .”.

The appellant’s agent, as a corollary to the present situation, cited the decision of the Tax Appeal Board in Jean Boos v MNR, 27 Tax ABC 283; 61 DTC 520. In that case the appellant had objected inter alia to the disallowance by the Minister of legal fees incurred for the purpose of obtaining support from her husband. The appellant’s marital dispute had been heard by the Family Court and eventually reached the Ontario Court of Appeal which ruled that the appellant had been deserted by her husband and ordered him to pay her $150 a month in support.

At the hearing of that appeal, the Minister apparently did not contest the deductibility of the legal fees and they were considered by the Board as having been incurred for the purpose of gaining income from property and the appeal was allowed on that point. Counsel for the respondent had considerable reservations with respect to the validity of the decision and to some of the statements contained therein. It seems to me, however, that had the “legal expense” issue been contested, it might have proven useful (at least with respect to the many cases dealing with alimony and maintenance payments) in determining which “rights” can properly be considered “property” for purposes of paragraph 18(1)(a).

I say this because, unlike all the cases cited by counsel for the respondent, when Boos commenced her legal proceedings against her husband they were still married and there was no question at that time of separation, divorce, alimony or maintenance payments. The appellant was simply seeking to enforce an existing legal right of support which had arisen upon the appellant’s marriage. No event or legal procedure, subsequent to the marriage, had intervened at the time to disturb or remove the appellant’s existent right to support or the appellant’s husband’s obligation to provide it, as found by the Ontario Court of Appeal.

In the Federal Court — Trial Division decision in The Queen v Dr Beverley A Burgess, [1981] CTC 258; 81 DTC 5192, cited by the respondent in the instant appeal, Mr Justice Cattanach at 261 (DTC 5194) stated the following:

The question is, as I view it, whether the legal expenses paid by the defendant were expended by her for the purpose of obtaining income which was hers as of right. Put yet another way, were the legal fees expended by her for the purpose of collecting income to which she was entitled. If this be so then the expenses are properly deductible.

Further at 263 (DTC 5196), the learned Justice stated:

There is no question in my mind that in the light of the foregoing jurisprudence maintenance is not property in the proper sense of that term. However the definition of property in section 248 of the Act includes “a right of any kind whatever” and that is broad enough to include a right to maintenance.

At 265 (DTC 5197), he further stated: “The legal expenses had been included to obtain payment of the income to which she was entitled.” And finally, also at 265 (DTC 5197), Mr Justice Cattanach said: “In the Evans case the appellant had an existing right to the income and expended the legal fees to obtain payment of that income which was denied her. The suit was for income.”

The facts in Burgess (supra) are admittedly different from those of Boos (supra) but it would appear that the latter had an existing right to support arising from her marriage. The legal action and the related legal expenses were incurred to obtain payment of income (by way of support) to which she was entitled. In my opinion, Boos (supra) could have made a very strong argument for the deductibility of the legal expenses had the issue been debated based on the decision in Burgess {supra).

Although the circumstances in Boos (supra) might conceivably have permitted the inclusion of a “right” in the definition of property for purposes of applying the exemption clause of paragraph 18(l)(a), it appears evident from the thorough and painstaking reasons of Mr Justice Cattanach in Burgess (supra) that not all “rights” can be so qualified. Nor have the Courts given to the definition of “property” of subsection 248(1), particularly with respect to the inclusion of a “right”, as general an interpretation as the appellant in the case at bar seemed inclined to do.

Indeed, the exemption provision of paragraph 18(l)(a) and paragraphs 60(b) and 60(c) (dealing with alimony and maintenance payments) are, among others, exceptions to the general rule that no deduction shall be made from income, and must be interpreted restrictively when deductions under paragraph 18(1)(a) are being sought. This point, in my view, was clearly made by Mr Justice Cattanach in Burgess (supra) when he stated at 265 (DTC 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.

The appeal is therefore allowed.

The principle which is particularly applicable to the facts of the instant appeal is that expenses are deductible under paragraph 18(1 )(a) only if they are incurred for the purpose of gaining income from property as are existing right or entitlement. Expenses incurred to bring a future or potential right into being are not deductible. In the case at bar, the legal expenses were clearly incurred by the appellant in an effort to reduce or eliminate the maintenance payments he was then obligated to pay to his estranged wife. Whether or not the appellant succeeded in doing so, and whether by paying less alimony to his spouse he increased his taxable income, is in no way material to the issue.

The expenses claimed by the appellant were incurred in order to bring into being a future or potential right of exemption to which he had, at the time, no legal entitlement whatever. The expenses cannot be said to have been incurred for the purpose of gaining or producing income from a property and they do not come within the meaning and intent of paragraph 18(l)(a) and subsection 248(1) and are therefore not deductible.

The appeal is dismissed.

Appeal dismissed.