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Citation: 2005TCC43
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Date: 20050114
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Docket: 2004-1732(IT)I
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BETWEEN:
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STUART MCGOWAN,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Little J.
A. FACTS:
[1] The Appellant had established a
common law relationship with Nancy Ford
("Ford").
[2] After the common law relationship
between the Appellant and Ford was terminated the Appellant filed
a Notice to Creditors of the Appellant in the Court of
Queen's Bench of Alberta on August 30, 2001 for a
Consolidation Order under the Orderly Payment of Debts provisions
of Part X of the Bankruptcy Act.
[3] Pursuant to a Consolidation Order
dated October 10, 2001 (the "Consolidation Order") the
Appellant was ordered to pay the following:
(i) to Credit Counselling Services of
Alberta the sum of $900.00 per month commencing November 30,
2001; and
(ii) once properties in Ontario are sold the
Appellant will pay proceeds towards the debts.
[4] Mr. Justice James of the Ontario
Superior Court, Family Division, heard a Notice filed by the
Appellant and issued a Temporary Order dated February 20, 2002
(the "Temporary Order") which ordered as follows:
(i) the request for a restraining
order is declined;
(ii) the request for delivery of certain
personal items is declined;
(iii) the net proceeds of the sale of the cottage
owned by the Appellant and Ford shall be remitted to the Credit
Counselling Services of Alberta;
(iv) the Appellant and Ford agree on the listing
agent and sign a listing agreement.
[5] The Appellant incurred legal costs
to defend an application by Ford for the Appellant to pay her
spousal support and for the settlement of matrimonial
assets and debts.
[6] The Appellant paid $15,938.40 to
James Jagtoo, a lawyer in Ontario.
[7] When the Appellant filed his
income tax return for the 2002 taxation year he deducted legal
fees in the amount of $14,143.00 that he had paid to
Mr. Jagtoo.
[8] The Minister of National Revenue
(the "Minister") issued a Notice of Reassessment for
the 2002 taxation year and disallowed all legal fees that were
claimed by the Appellant.
B. ISSUE:
[9] The issue is whether the Appellant
is allowed to deduct the legal fees that he paid to Mr. Jagtoo in
determining his income for the 2002 taxation year.
C. ANALYSIS:
[10] It will be noted that the legal fees
paid by the Appellant were paid to defend an application by the
former common law spouse for spousal support. The legal fees were
also paid for the settlement of matrimonial assets and debts.
[11] In Nadeau v. The Queen, 2003 DTC
5736 Mr. Justice Noël of the Federal Court of Appeal
considered an application for judicial review of a decision by
Archambault J. of the Tax Court. Justice Archambault had refused
the applicant's deduction of legal costs incurred in
contesting a motion for an increase in support payments filed by
his former wife.
[12] In his decision in Nadeau
Noël J.A. said:
[3] The facts
underlying this case are straightforward. The applicant obtained
a divorce in July 1996 pursuant to a judgment by the Superior
Court of Quebec. The judgment ordered him to pay support to his
former wife for the benefit of the couple's children.
[4] Some time later,
his former wife commenced judicial proceedings to have the
pension increased and extended to her as well. The applicant
contested this proceeding before the Superior Court and won. He
then requested non-taxation of the support payments, and they
were consequently reduced by half by the Court of Appeal. In
1999, the amount of the legal costs stood at $4,284 and it is the
deduction of this sum that is the subject matter of this
litigation.
[5] The Minister of
National Revenue (the Minister or respondent) refused the
deduction of this expense on the ground that it had not been
incurred for the purpose of earning income from a business or
property (confirmation of the assessment, Applicant's Record,
page 8).
. . .
[14] The cases have consistently
held for more than forty years that the right to support, once
established by a court, is "property" within the
meaning of subsection 248(1) of the Act, and that the income from
such support constitutes, in the hands of the person receiving
it, income from property (see in particular Boos v. Minister
of National Revenue (1961), 27 Tax A.B.C. 283 (Can. Tax App.
Bd.), R. v. Burgess Bayer v. Minister of National Revenue,
[1991] 2 C.T.C. 2304 (T.C.C.), Evans v. Minister of National
Revenue, [1960] S.C.R. 391 (S.C.C.) and Sembinelli v. R.,
supra).
...
[16] Thus the courts have
consistently held that income from support payments is computed
by reference to the regime applicable to income derived from
property (or from a business) that is found in subdivision b of
the Act. Under this regime, an expenditure incurred in order to
constitute a source of income is a payment on account of capital
and its deduction is prohibited (see paragraph 18(1)(b)).
However, an expenditure incurred in order to earn income from
this source (i.e. after it has originated) is referred to as a
"current" expense which falls within the exception in
paragraph 18(1)(a):
...
[17] This regime, as it was
applied by the courts over the years, has meant that from the
perspective of the recipient, an expenditure, the purpose of
which is to give rise to a right to support is a capital
expenditure and therefore cannot be deducted. But an expenditure
incurred in recovering an amount owing under a pre-existing right
is a "current" expense and may therefore be
deducted.
[18] Conversely, the expenses
incurred by the payer of support (either to prevent it from being
established or increased, or to decrease or terminate it) cannot
be considered to have been incurred for the purpose of earning
income, and the courts have never recognized any right to the
deduction of these expenditures (see, for example, Bayer,
supra).
[13] Based on the finding of Noël J.A.
in Nadeau I have concluded that the legal fees paid by the
Appellant to prevent his former common law spouse from obtaining
support payments cannot be considered to have been incurred for
the purpose of earning income.
[14] I have also concluded that the legal
fees paid by the Appellant to settle the division of matrimonial
assets and debts were personal and living expenses and are
prohibited from deduction by paragraph 18(1)(h) of the
Act.
[15] The appeal will be dismissed, without
costs.
Signed at Vancouver, British Columbia, this 14th day of
January 2005.
Little J.
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