John David Philp v. Minister of National Revenue, [1982] CTC 2081, 82 DTC 1104

The Chairman:—The appeal of John David Philp is from an assessment with respect to the 1976 taxation year. In his Notice of Appeal the appellant claims:

(a) that the Department of National Revenue failed to allow as proper deductions support and alimony payments made by the appellant pursuant to a written separation agreement;

(b) the Department failed to allow as deductions “monies expended in legal and accounting fees in alimony and divorce action expended to preserve income producing assets.

Assessment

In his 1976 return, the appellant deducted an amount of $12,700 as alimony and $29,275 for “carrying charges” of which $18,500 was with respect to legal and accounting fees related to alimony or divorce proceedings.

By notice of assessment dated December 1, 1978 the respondent disallowed both the $12,700 for alimony and $29,275 for carrying charges.

By notice of reassessment dated February 27, 1980 the respondent, for the 1976 taxation year, allowed a deduction for alimony in the amount of $6,000. The basis on which the Minister allowed the deduction is a written separation agreement dated April 10, 1973 (Exhibit A-1) signed by the appellant and his former wife which states in part as follows:

4) John David Philp to pay mortgage and taxes only with respect to the home and $500 monthly support for wife and “Philp” children.

Findings

The determination of the issue with respect to the support or alimony payments made by the appellant in 1976 pursuant to provisions of paragraph 60(b) and/or paragraph 60(c) of the Income Tax Act is predicated on the terms of the 1973 agreement. Only the $500 monthly payment for the support of the wife and the “Philp” children meet the conditions of the said sections and the respondent correctly allowed a deduction of $6,000. The evidence was that the balance of $6,700 or $6,368 as claimed by the appellant, was paid to third parties for the mortgage and taxes on the matrimonial home. Since the 1973 agreement was made prior to May 6, 1974, the effective date of the provisions of section 60.1 of the Act, the mortgage and tax payments claimed by the appellant in 1976 are not deductible. Contending that the mortgage payments were deductible in 1976, the appellant made a half-hearted attempt to establish that the mortgage payments referred to in the 1973 agreement were confirmed in a subsequent agreement dated October 27, 1976 which was produced as Exhibit A-2.

He relied on paragraph 6 of the latter agreement which reads in part as follows:

upon delivery of a registerable conveyance of the matrimonial home aforesaid . . . that’s 1276 Cambridge: . . . to the wife, the husband shall be freed of the obligation, heretofore existing, of paying $500 per month as interim disbursements to the wife in respect of the matrimonial home for herself and the children.

I find no confirmation in the above of any mortgage payment. The $500 per month clearly refers to the alimony to be paid for the support of the wife and “Philp” children, the deduction of which was allowed in 1976. As I read Exhibit A-2, the agreement was made with a view to settling all issues between the parties by setting up one or more trust funds and it had little if any bearing on the payment provisions of the 1973 agreement.

Turning now to the second issue: an amount of $18,872 claimed by the appellant as being properly deductible as legal and accounting expenses incurred in relation to the alimony and divorce arrangements.

As suggested by counsel for the respondent, the appellant did not adequately establish the exact amount of the expenses claimed. Indeed the appellant suggested that roughly between 10% and 15% of the $18,872 may have been incurred in the divorce action and he no longer claimed that amount. What the appellant, as I understand him, did claim as being deductible was the whole balance of the $18,872 after the 15% had been subtracted.

The appellant further estimated that 50% of the balance of the fees was incurred to protect and preserve income-producing assets; the other 50% was spent in negotiating a reasonable amount for the support of his children.

There can be no question that the appellant has the onus of establishing that the Minister was wrong in disallowing the deductions. In so doing, the appellant must state precisely the amounts in issue and indicate on what basis he claimed them to be deductible. A very rough approximation of the amounts claimed by the appellant as being deductible, is unacceptable.

The appellant cited the case of Dr Beverly A Burgess v MNR, [1979] CTC 2374; 79 DTC 347, in support of his claim to the deductibility of the legal fees.

In Burgess (supra) the appellant was allowed a deduction for that part of the total legal fees which were incurred in obtaining maintenance for herself and her children on the ground that they were laid out to earn income from an existing right arising out of the marriage.

The decision in Burgess (supra), however, was appealed from by the Minister of National Revenue. In reversing the Board’s decision, the Trial Division of the Federal Court in The Queen v Dr Beverly A Burgess, [1981] CTC 258; 81 DTC 5192, held that the legal fees were not paid by the taxpayer to earn income from an existing right, but were paid to acquire a new right to maintenance. The Court concluded that the legal expenses were therefore in the nature of capital and not deductible.

On the basis of the principle enunciated by the Supreme Court of Canada in Gladys (Geraldine) Evans v MNR, [1960] CTC 69; 60 DTC 1047, which was cited and followed by the Trial Division of the Federal Court in its decision in Burgess (supra), the appellant on this issue cannot succeed. Indeed, the appellant admitted that the legal and accountant fees claimed, were not to earn income from a business (right) but to protect and preserve existing capital assets. Their deduction is clearly prohibited by both paragraphs 18(1)(a) and (b) of the Act.

Both issues in this appeal are therefore dismissed.

Appeal dismissed.