REASONS
FOR JUDGMENT
D'Arcy J.
[1]
The Appellant has appealed a reassessment in
respect of his 2014 taxation year. In his return for that year, the Appellant claimed,
in respect of his son P, non-refundable tax credits under paragraph 118(1)(b)
for a wholly dependent person and under paragraph 118(1)(b.1) for a child.
[2]
The Appellant also claimed $6,915 in respect of
legal fees that he asserts were incurred to collect support payments from his
former spouse.
[3]
The Minister, when reassessing the Appellant,
denied the non-refundable credits and the $6,915 of claimed legal fees.
[4]
The Appellant has appealed the reassessment to
this Court. The Court heard the appeal under its informal procedure.
[5]
Ms. Sherry Turanich, the Appellant’s fiancée,
testified on behalf of the Appellant.
I. Summary
of Facts
[6]
The Appellant and his former spouse, Ms. Bobbi Dawn
Ruel (to whom I will refer as the “former spouse”), have two children, P and R. Both children lived
with the former spouse prior to late May 2014. In late May, P began living with
the Appellant.
[7]
P lived with the Appellant until mid-December of
2014. He then moved back into his mother’s home.
[8]
The Court of Queen’s Bench for Saskatchewan
recognized the change in P’s living arrangements in an order issued by the Court
on August 15, 2014 (the “August 15 Court Order”). This order states that:
-
P shall reside with the Appellant.
-
R shall reside with the former spouse.
-
The former spouse shall pay child support to the
Appellant for P in the amount of $246 per month.
-
The Appellant shall pay child support to the
former spouse for R in the amount of $1,251 per month.
-
P and R resided with the former spouse from
September 2013 through to June 2014. For this period, the Appellant is required
to pay child support for P and R to the former spouse in the amount of
$19,989.60.
[9]
The August 15 Court Order notes that the
Appellant is to pay the $19,989.60 of child support he owes in respect of the
period from September 2013 to June 2014 by making a lump sum payment of
$9,405.45 and by setting off the remaining amount of the obligation against the
amounts the former spouse is required to pay the Appellant, beginning in June
2014, in respect of child support for P.
[10]
Ms. Turanich testified that the Appellant made
the $9,405.45 lump sum payment and that the former spouse’s support payments
for the period after June 2014 were set off against the Appellant’s remaining
outstanding support payments for the period prior to June 2014.
[11]
The Respondent provided the Court with a number
of legal bills issued to the Appellant by the law firm Miller Thomson in respect
of a matter referred to as “Bobbi Johnstone
(Family Matter)”. My understanding is that the
bills relate to various discussions between the Appellant and his lawyer with
respect to the support payments provided for in the August 15 Court Order.
II. The
Law
[12]
The Respondent’s primary argument is that, as a
result of the application of subsection 118(5), the Appellant is not entitled
to claim the credits provided for under paragraphs 118(1)(b) and (b.1).
[13]
Her alternative argument is that if, as a result
of the application of subsection 118(5.1), subsection 118(5) does not apply,
then the Appellant is still not entitled to claim the credits as a result of
the application of paragraphs 118(4)(b) and (b.1).
[14]
Subsection 118(5) provides, in part, that an
individual may not deduct an amount under paragraphs 118 (1)(b) and (b.1) in
respect of a person where the individual is required to pay a support amount to
the individual’s former spouse in respect of the person.
[15]
Subsection 56.1(4) defines support amount, in
part, to mean an amount payable or receivable as an allowance on a periodic
basis for the maintenance of the children of the recipient, if the recipient
has discretion with respect to the use of the amount and is the former spouse
of the payer. In addition, the payer and the recipient must be living separate
and apart because of the breakdown of their marriage, and the amount must be
receivable under an order of a competent tribunal or under a written agreement.
[16]
The effect of subsection 118(5) is that a person
making support payments under a court order or written agreement to his/her
former spouse in respect of a child cannot claim the credits under paragraphs 118
(1)(b) and (b.1) in respect of the child.
[17]
However, subsection 118(5.1) provides that
subsection 118(5) does not apply if neither the taxpayer nor his former spouse
is entitled to deduct an amount under paragraphs 118(1)(b) or (b.1). In other
words, subsection 118(5) does not apply if each party is required, under a court
order or written agreement, to pay a support amount to the other party.
[18]
The final provisions to consider are paragraphs
118(4)(b) and (b.1). These paragraphs provide that only one person is entitled
to claim the paragraph 118(1)(b) and (b.1) credits in respect of a
particular child. If two or more individuals are entitled to claim the credits,
then the parties must agree which individual will claim them. If the
individuals cannot agree, then no one is entitled to claim the paragraph
118(1)(b) and (b.1) credits.
III. Application
of the Law to the Facts
[19]
The parties agree that, pursuant to the August
15 Court Order, the Appellant was required to pay a support amount to the
former spouse for P and R for the period from January to June 2014.
[20]
The Appellant argues that, pursuant to the
August 15 Court Order, the former spouse was required to pay an amount to the
Appellant between June 2014 and December 2014 as a periodic allowance for
the maintenance of P.
[21]
I agree with the Appellant. Paragraphs 1 and 3a)
of the August 15 Court Order read as follows:
1. The child of the marriage, namely [P], born
May 23, 1997, shall reside with the Respondent, Aime Ruel.
. . .
3. . . .
a) The Petitioner’s [Bobbi Ruel’s] 2013 income
was $32,242.75, rendering a child support quantum payable to the Respondent for
[P] in the amount of $246.00 per month.
[22]
Similarly, paragraphs 2 and 3b) of the August 15
Court Order provide that the former spouse shall have custody of R and that the
child support quantum payable to the former spouse by the Appellant for R was
an amount of $1,251 per month based on the Appellant’s 2013 income of $150,722.
[23]
The order clearly states that the Appellant
shall have custody of P and that, as a result, the former spouse shall pay
support amounts to the Appellant for P. It also states that the former spouse
shall have custody of R and that as a result, the Appellant shall pay support
amounts to the former spouse for R.
[24]
The Respondent argues that the former spouse did
not pay support amounts to the Appellant. She relies on paragraph 3e) of the
August 15 Court Order, which provides that the parties shall set off the child
support payable by the former spouse to the Appellant under paragraph 3a)
against any child support arrears the Appellant owes the former spouse in
respect of P and R for the period prior to June 2014.
[25]
Counsel for the Respondent argued, relying on
the Federal Court of Appeal’s decision in Verones v. The Queen, (“Verones”) that, as a result of this
set-off, the former spouse was not required to pay a support amount to the
Appellant. I do not agree with the Respondent’s application of the Federal
Court of Appeal’s decision in Verones.
[26]
Verones involved a
situation where the appellant and his former spouse, who were living separate
and apart, were the parents of two children. The children resided 50% of the
time with each parent in a shared custody arrangement.
[27]
The Federal Court of Appeal found that only one
support payment was required to be made under the order of the Court of Queen’s
Bench of Alberta: a payment by the appellant to his former spouse. The Court
noted, at paragraph 3:
. . . This amount
represents a set-off between the total amount the appellant is required to
contribute to his children’s needs ($2,202), and the amount his former spouse
is required to contribute ($439), as set out in the Federal Child Support
Guidelines, SOR/97-175 (the “Federal Guidelines”).
[28]
In reaching this finding, the Federal Court of
Appeal noted (at paragraph 6) that the appellant’s focus on the fact that
the Alberta Court of Queen’s Bench had determined the amount of the single
child support payment by setting off the amount of each parent’s obligation
under the Federal Guidelines was a distraction. The real issue was “whether or not the appellant is the only parent
making a ‘child support payment’ in virtue of an ‘order of a competent tribunal
or an agreement’, as defined under the Act.”
[29]
In the current appeal, the August 15 Court Order
clearly provides that, effective June 2014, the Appellant and the former spouse
were each required to make support payments. The former spouse was required to
make support payments to the Appellant in respect of P and the Appellant was
required to make support payments to the former spouse in respect of R.
[30]
The set-off provided for in paragraph 3e) of the
August 15 Court Order represents a method by which the former spouse can pay a
portion of the child support she is required to pay in respect of P under the August
15 Court Order. That support payment is effected by the set-off. This is
different from the situation in Verones where the Court used the Federal
Guidelines to calculate a single support payment in respect of two children.
[31]
In summary, each of the Appellant and the former
spouse was required, during 2014, to make support payments in respect of P.
Therefore, as a result of the application of subsection 118(5.1), subsection
118(5) did not apply to deny the Appellant the ability to claim the paragraph
118(1)(b) and (b.1) credits.
[32]
The evidence before me is that the Appellant and
the former spouse have not reached an agreement with respect to who should
claim the credits under subsection 118(1)(b) and (b.1) for 2014 in respect of P.
As a result, the credits are denied under paragraphs 118(4)(b) and (b.1). This
is the result since both the Appellant and the former spouse are entitled to
claim the paragraph 118(1)(b) and (b.1) credits in respect of P and the two
cannot agree on who, between the two of them, should claim the credits.
[33]
I will now turn to the legal fees. The Federal
Court of Appeal found in Nadeau v. M.N.R. that support payments received by a person constitute income from
property, and thus, expenses incurred to earn such income, such as legal fees,
may be deductible. However, the Federal Court of Appeal also found that, “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”.
[34]
After reviewing the legal bills and the various
correspondence between the Appellant and his lawyer, I have concluded that the
Appellant paid the legal fees with respect to the following three separate
issues: the payment of child support by the Appellant to the former spouse for
P and R for the period ending in June 2014, the payment of child support
by the Appellant to the former spouse for R for the period beginning in June
2014, and the payment of child support by the former spouse to the Appellant
for P for the period beginning in June 2014.
[35]
It is my view that it is reasonable to allocate
the legal fees equally among the three issues. Therefore, only one-third of the
legal fees incurred in 2014 related to the payment of child support by the
former spouse to the Appellant. The invoices for all services rendered total
$6,853. The Appellant is entitled to a deduction for one-third of this amount
or $2,284.
[36]
For the foregoing reasons, the appeal is allowed
in part, without costs. The reassessment is referred back to the Minister of
National Revenue for reconsideration and reassessment on the basis that the
Appellant is entitled to deduct $2,284 in respect of legal fees incurred in
2014.
Signed
at Antigonish, Nova Scotia, this 25th day of May 2017.
“S. D’Arcy”
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