Kathy L. Wakeman v. Her Majesty the Queen, [1996] 3 CTC 2165

O’Connor J.T.C.C.: — This appeal was heard in Toronto, Ontario on February 29, 1996 pursuant to the Informal Procedure of this Court.

The Appellant represented herself, gave testimony and filed several exhibits.

Issue

The only issue is whether, in the 1993 taxation year, the Appellant could deduct legal expenses of $5,320 paid by her to obtain a permanent court order against her divorced husband for maintenance for their two children.

The principal submissions of the Minister of National Revenue (“Minister”) were (i) that the legal expenses claimed were not incurred for the purpose of enforcing payment of a maintenance allowance where the right thereto has previously been established by court order but were rather expenses incurred in seeking to obtain an increase in such payments (i.e., the creation of a new right), thus capital in nature and prohibited by paragraph 18(1 )(b) of the Income Tax Act (“Act”); (ii) that they related to the custody of the children of the marriage; and/or; (iii) they were not expenses incurred for the purposes of gaining or producing income from a business or property within the meaning of paragraph 18(l)(a) of the Act but were personal or living expenses of the Appellant within the meaning of paragraph 18(1 )(h) of the Act.

The exhibits and the testimony of the Appellant, whose credibility the Court accepts, established that the expenses claimed did not relate to custody but solely to the establishment of the amount of maintenance for the two children of whom the Appellant had custody.

The Appellant referred to paragraphs 16 and 17 of Interpretation Bulletin IT-99R4 which 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.l).

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. l)(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 pre-existing right provided by law, and not to the creation of a new right; see the decision of R. v. Burgess, reported at [1981] C.T.C. 258, 81 D.T.C. 5192 (F.C.T.D.).

Analysis

The starting point for resolution of the matter in question is the Supreme Court decision in Evans v. Minister of National Revenue, [1960] S.C.R. 391, [1960] C.T.C. 69, 60 D.T.C. 1047. The issue was whether legal expenses expended by a person to enforce an income right under two wills was capital in nature and therefore not deductible or were of an income nature. Judge Cartwright, speaking for the majority of the Supreme Court, stated:

The payment of the legal fees in question did not bring this right or any asset or advantage into existence. Her right to receive the income is derived not from the judgment of the Court but from the combined effect of the wills of Thomas Alexander Russell, and John Alexander Russell....

...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. So viewed, it could scarcely be doubted that the expenses were properly deductible in computing the appellant’s taxable income....

The Federal Court-Trial Division in R. v. Burgess, [1981] C.T.C. 258, 81 D.T.C. 5192 (F.C.T.D.) addressed the question of the deductibility of legal expenses paid by a mother to obtain maintenance for herself and her children as part of a divorce. Judge Cattanach, in finding that the expenses were capital in nature, stated at page 265 (D.T.C. 5197):

The defendant’s income does not stem from a right which arose on marriage. In my view the right which arose on marriage was the right to maintenance during the currency of the marriage but that right terminated upon the dissolution of the marriage. If the circumstances so warrant the Court which grants the divorce may also substitute, as its discretion, dictates, maintenance in a reasonable amount. It is the order of the Court which grants the defendant her right to maintenance.

While it may be, as stated by Judge Cattanach, that there is no obligation to maintain a former spouse both parents have an obligation, at least in Ontario, to support a child before and after a divorce.

In Part III of the Family Law Act of Ontario, R.S.O. 1990, Chap. F-3, section 31 provides that:

(1) Every parent has an obligation to provide support, in accordance with need, for his or her unmarried child who is a minor or is enrolled in a full time program of eduction, to the extent that the parent is capable of doing so.

(2) The obligation under subsection (1) does not extend to a child who is sixteen years of age or older and has withdrawn from parental control.

Further, section 33, so far as material, provides:

(7) An order for the support of a child should,

(a) recognize that each parent has an obligation to provide support for the child;

(c) apportion the obligation according to the capacities of the parents to provide support.

Similarly, the Divorce Act, R.S.C. 1985, (2nd Supp.), c. 3 at section 15 reads, so far as material:

(8) An order made under this section that provides for the support of a child of the marriage should:

(a) recognize that the spouses have a joint financial obligation to maintain the child; and

(b) apportion that obligation between the spouses according to their relative abilities to contribute to the performance of the obligation.

The obligation borne by parents to support children was described in the Supreme Court of Canada in Richardson v. Richardson, [1987] 1 S.C.R. 857, 38 D.L.R. (4th) 669, 22 O.A.C. 1 at page 869:

The legal basis of child maintenance is the parents’ mutual obligation to support their children according to their need. That obligation should be borne by the parents in proportion to their respective incomes and ability to pay: ... The duration of the obligation of support varies with the provisions of each provincial statute. ... Child maintenance, like access, is the right of the child: ...

Thus, it is clear that by law, at least in Ontario, parents have a duty to support their children and this duty is not extinguished by a divorce. Thus a suit by a custodial mother against the divorced father for child support does not create the right to the child support but rather simply establishes the amount based on the conditions set forth in the statutes. As the Court stated in Burgess, supra, at page 261 (D.T.C. 5194):

The question which next arises is what was the circumstance which gave rise to the defendant’s right to maintenance, (1) was it a right which arose upon the defendant’s marriage as contended by her counsel, or (2) was it a right which arose upon the order absolute granted by the High Court of Ontario as contended by counsel for the plaintiff.

Put yet another way, did the judgment of the High Court of Ontario create the right to maintenance or was that judgment merely a continuation and quantification of a right to maintenance already vested in the defendant.

Counsel for the Minister referred to certain cases holding that legal expenses incurred to increase alimony were not deductible because they created a new right which was capital in nature. In the present case the maintenance amount for the children was in fact slightly increased by the final order dated August 24, 1993 over the amount fixed for child maintenance in a previous interim order. In my opinion, however, the cases cited are not applicable. They did not distinguish between maintenance for the wife and maintenance for the child. As mentioned, the maintenance right of children is created by law.

It is true that the right created by law is a property right of the child. However the custodial mother is the one who receives the maintenance amount for the child or children and must include that amount in her income. Consequently the legal expenses incurred to quantify the maintenance may be deducted by the custodial mother.

From. the foregoing analysis it would therefore appear that the Interpretation Bulletin mentioned above is correct in providing that legal costs incurred in obtaining a court order for maintenance (at least with respect to child maintenance) that is included in an individual’s income “are considered to be deductible in computing the individual’s income where the individual must sue the spouse ... for maintenance in a family court or under legislation such as ... Part III of the Family Law Act of Ontario.... The latter types of expenses are considered to relate to the enforcement of a pre-existing right provided by law and not to the creation of a new right.

In conclusion the legal expenses were deductible under paragraph 18(1 )(a) of the Act and were not excluded from deductibility by paragraph 18(1 )(b) nor paragraph 18(l)(h) since they were neither capital in nature nor did they constitute personal and living expenses.

For all of the above reasons the appeal is allowed, without costs.

Appeal was allowed.