DR Samuel Solomon v. Minister of National Revenue, [1978] CTC 3039, [1978] DTC 1760

Guy Tremblay:—This case was heard at Montreal, Quebec, on May 18, 1978.

1. Point at Issue

The point at issue is, whether the legal expenses of $500 incurred by the appellant by contesting his wife’s demand for an increase in the alimentary allowance, are deductible as an expense under paragraph 18(1 )(a) of the new Act ie as an expense “incurred for the purpose of gaining or producing, income from the business or property”. According to the appellant, an alimentary allowance is a “right” and as such constitutes a “property” within the meaning of paragraphs 248(1 )(a) and 18(1 )(a) of the new Act.

2. Burden of Proof

The appellant has the burden of showing that the respondent’s assesment was not justified. This burden of proof is based not on a particular section of the Income Tax Act but on several judicial decisions, among them a decision of the Supreme Court of Canada renedered in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. The Facts

The facts are not in dispute. They are well described in the respondent’s Reply to Notice of Appeal in subparagraphs (a), (b) and (c) of paragraph 5, as amended at the beginning of the sitting:

5. In assessing the Appellant for his 1974 taxation year, Respondent relied, inter alia, upon the following presumptions of facts:

(a) During the relevant taxation year, the Appellant deducted the sum of $500 under the following heading: legal fees relating only to Court action with respect to deduction of alimony payment;

(b) This deduction was refused by the Respondent, as it does not constitute an alimony payment under article 60(b) of the Income Tax Act, 1970-71-72, SC c 63;

(c) The Appellant himself admitted that this sum cannot constitute an alimony payment under the said Act.

4. Law—Comments

4.1 The main sections of the law concerned in the case at bar are paragraphs 18(1)(a) and 248(1)(a) definition of “property” which read as follows:

18. General limitations. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) General limitation—an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property.

248.(1) “Property” means property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes

(a) a right of any kind whatever, a share or a chose in action.

4.2 The Appellant’s Contention

According to the appellant, an alimentary allowance is a “right” and as such constitutes a “property” within the meaning of paragraphs 18(1)(a) and 248(1)(a) quoted above. “Property . . . includes a right of any kind whatever. .

By contesting his wife’s demand, the appellant was successful in maintaining the alimentary obligation at its existing level.

Legal expenses incurred with respect to establishing the amount payable under an alimentary right are expenses incurred for the purpose of gaining income from a property as any reduction to the taxpayer of such payments, or successful defence against an increase in such payments have the effect of earning income to the taxpayer for the reason that such alimentary payments represent a deduction to the taxpayer in arriving at his net income. It is an admitted accounting principle that a reduction of an expense must be considered as income.

4.3 Respondent’s Contention

According to the respondent, if an alimony for the one who receives it is a right, then it is an obligation for the one who has to pay it. An obligation is not a right.

Counsel for the respondent quoted articles 1059 and 1486 of the Civil Code which read as follows:

1059: those things only which are objects of commerce can become the object of an obligation.

1486: everything may be sold which is not excluded from being an object of commerce by its nature or destination or by special provision of law.

Concerning the right which is the alimony, it is a right “intuitu personae”. (Article 165 CC ss, concerning the obligations arising from marriage and article 173 CC concerning the respective rights and duties of husband and wife were quoted.) It is not a right which is an object of commerce.

If the alimony is considered as an expense by the Income Tax Act, it is not in virtue of the basic principle expressed in paragraph 18(1 )(a) (which is a general accounting principle) but because it is expressed in a specific article (paragraph 60(b) of the new Act). Otherwise it would not be deductible.

The legal fees concerning such alimony, not being specifically provided as deductible, the expense cannot be deducted in the computation of the net income.

4.4 Comments

The Board understands the reasons given by the appellant but concurs with those given by the respondent. Moreover, the Board adds that the legal fees concerning a right, or property is not automatically deductible. Such a property or right can be of capital or personal nature. The Board is of the opinion that an alimony that a person has to pay, is of a personal nature. That is why to be deductible the alimony had to be specific. It is the same for the legal expense concerning alimony. The appeal must be dismissed.

The Board maintains that opinion even if there is at least one judgment (not cited by the appellant) which confirms his contention.

It is the case of. Jean Boos v MNR, 27 Tax ABC 283; 61 DTC 520. In that case, among other things, an amount of $1,737.90 of legal expense (incurred by Mrs Boos in pursuing her appeals in the various courts to obtain alimony) was claimed as expense in the computation of the net income.

After quoting paragraph 12(1)(a) of the old Act (paragarph 18(1)(a) of the new Act) the Chairman Cecil L Snyder of the former Tax Appeal Board, expressed as follows:

The point was readily disposed of as to whether the legal expenses might be deducted from the income received. There are a number of recent decisions by the Exchequer Court and by this Board to the effect that under certain circumstances legal fees expended by a taxpayer appellant may be deducted as permitted by the last-quoted section of the Income Tax Act. In the present appeal counsel for the Minister did not contest the appellant’s claim to have these legal fees deducted.

The terms used by Mr Snyder are very general. The Board has not found any judgment specifically allowing legal expense in obtaining or contesting alimony, nor any judgment where principles justifying a decision to deduct such expense could be found.

A specific article should be included in the Act to permit that kind of expense. Under the strict interpretation of the present Act the Board unfortunately must dismiss the appeal.

5. Conclusion

The appeal is dismissed in accordance with the above Reasons for Judgment.

Appeal dismissed.