DR Beverly a Burgess v. Minister of National Revenue, [1979] CTC 2374, 79 DTC 347

M J Bonner:—The appellant appeals from an assessment of income tax for her 1974 taxation year. The respondent, on assessing, disallowed the appellant’s claim to deduct in computing income the sum of $5,900 in legal fees and disbursements incurred as the cost of obtaining a judgment against her husband. By that judgment the marriage was dissolved and the appellant was awarded custody of her two children and maintenance of $75 per week for each of herself and the children.

At the hearing of this appeal the parties agreed that if any amount was deductible it was $4,402.66, being that part of the total fees and disbursements paid by the appellant to her two lawyers which was attributable to the maintenance issue.

The appellant argued that the legal expense incurred in obtaining maintenance should be deductible because the maintenance ordered was income. The appellant relied on the decision of the Tax Appeal Board in Jean Boos v MNR, 27 Tax ABC 283; 61 DTC 520. In that case, however, the Minister did not argue that the legal expenses incurred by the taxpayer in asserting her claim for maintenance were not deductible.

The respondent argued that the decision in Boos was wrong. His principal submission was that the deduction in issue was prohibited by paragraph 18(1 )(a) of the Income Tax Act. He submitted, and I agree, that the expense in question was not incurred for the purpose of gaining or producing income from a business. His proposition was that “property” is not so broadly defined by section 248 of the Income Tax Act as to include . . the right to obtain maintenance pursuant to a Decree Absolute”. In support of this proposition the Respondent’s counsel referred to the following cases:

(a) Estate of Norman K MacDonald v MNR, 1 Tax ABC 250; 50 DTC 109,

(b) No 481 v MNR, 18 Tax ABC 294; 58 DTC 41,

(c) The Canadian Rock Salt Company Limited v MNR, [1973] CTC 143; 73 DTC 5122, and

(d) Canada Safeway Limited v MNR, [1957] CTC 335; 57 DTC 1239.

I can find nothing in those cases which supports the respondent’s position.

The section 248 definition of “property” is very broad. It includes “a right of any kind whatever”. The appellant, prior to divorce, had a right to look to her husband for maintenance. By section 11 of the Divorce Act, RSC 1970, c D-8, there was conferred upon the Court a jurisdiction to order maintenance upon granting a Decree Nisi of divorce. The maintenance which a Court may order is, as I understand it, a substitute for the maintenance payable by the husband, qua husband, while the marriage exists*. [1] Thus it appears to me that the appellant spent the sum of $4,402.66 in order to produce income from a right which fundamentally arose upon her marriage.

It was not suggested that the payments to be made pursuant to the Decree were such as would not be income of the appellant. It appears to me that they were of a type which would be required to be included in the computation of the appellant’s income, if not by virtue of section 3 of the Income Tax Act, at least by virtue of paragraph 56(1 )(b) of the Act. The deduction sought is therefore not prohibited by paragraph 18(1 )(a) of the Act.

The Respondent further argued that the deduction was prohibited by paragraph 18(1 )(b) of the Act. In Gladys (Geraldine) Evans v MNR, [1960] CTC 69; 60 DTC 1047, (a case to which neither counsel referred) the Supreme Court of Canada considered the question whether legal fees spent by a taxpayer in an attempt to establish an entitlement to an annual income for life were deductible. The Minister had argued that the legal costs paid by the appellant were a capital outlay. The Court held that the appellant’s right to income arose from the combined effect of two wills. If I am correct in the conclusion reached above that the appellant in this case incurred the legal expense in order to produce income from a right which arose on marriage the decision of the Supreme Court in the Evans case is conclusive against the respondent’s contention that the expenditures made by the appellant in the present case are on capital account. Speaking for the majority in the Evans case, Cartwright, J, stated that the appellant’s . . .

.. . right is solely to require the trustee to pay the income arising from the share to her; this is a right enforceable in equity and everything received by the appellant by virtue of the right will be taxable income in her hands. 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. Wrongly, as it turned out, the trustee entertained doubts, presumably engendered by the claims of Mrs Andersen, as to whether it should pay to the appellant the income to which she was entitled and it would not pay anything until the matter had been passed upon by the Court.

The precise form in which the matter was submitted to the Court appears to me to be of no importance; 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. This, in my Opinion, is the right view of the matter and is not altered by the circumstance that it was mistakenly claimed by Mrs Andersen that the appellant was not entitled to any income at all.

It does not appear to me that it would be proper or accurate to describe the appellant’s action in invoking the exercise of the jurisdiction of the Court under section 11 of the Divorce Act as an action taken with a view to bringing into existence a capital asset. In this case, as in the Evans case, the appellant took action to enforce an existing right. It is true that the Court exercised, under section 11 of the Divorce Act, a discretion. That discretion is, however, exercised on the basis of established principles and the resultant order is one which should be regarded as reflecting rather than creating a right of the person who is the payee of the maintenance. The appellant is entitled to succeed in this appeal. The deduction sought is not prohibited by either paragraphs (a) or (b) of subsection 18(1).

In the result, the appeal will be allowed and the assessment referred back to the respondent for reconsideration and reassessment on the basis that the appellant is entitled to deduct, in computing her income for 1974, the sum of $4,402.66 on account of legal fees.

Appeal allowed.