Anthony Muggli v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2705

Bowman, J.T.C.C.:—This appeal is from an assessment for 1992. In fact the appellant endeavoured to raise the same issue for 1993 but since he had not yet been assessed for that year his purported appeal for 1993 was quashed.

I informed Mr. Muggli that I would render brief written reasons but that I had great difficulty in seeing how I could assist him, notwithstanding the sympathy that ! felt for his unfortunate situation.

Mr. Muggli seeks to deduct the sum of $6,687 in legal fees in the computation of his income. This expense arose in the following way.

After 14 years of marriage Mr. Muggli’s wife left him and took with her $35,000 in cash, household goods valued at $10,000 and a new van which he had purchased for her for $23,000. She now claims 50 per cent of the rest of his property which appears to be substantially his farm. He pays her maintenance for the two children of which she has custody. His son lives with him on the farm.

In order to determine how much more he will have to pay his wife he had to have a valuation made of the rest of his property, including the farm, as of the date of marriage and also as of the date of separation. Essentially he required the services of a lawyer to assist in making that determination and, generally, in resolving the division of property and other matters related to the separation.

Mr. Muggli testified that the expenses were necessary to keep his farm, or at all events the one-half that his wife was claiming. The farm is the basis of his livelihood.

The respondent's position is that the amounts were not laid out for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1 )(a), that they were "personal or living expenses" within the meaning of paragraph 18(1 )(h) and that they were in any event payments on account of capital within paragraph 18(1)(b). She also relied upon the exclusion in paragraph 60(0.1).

There is a sufficient nexus between the preservation of the farm, his principal means of livelihood, and the legal expenses claimed that I would not be justified in rejecting his claim on the basis of paragraph 18(1)(a) alone. There is, of course, also a personal element in any cost relating to a marriage breakdown but I should have thought that that factor alone does not, of itself, detract from the commercial nature of the cost. Where an expenditure has two purposes, a commercial one that excludes the prohibition in paragraph 18(1 )(a) and a personal element that could arguably render applicable the prohibition in paragraph 18(1)(h) it is a matter for the court to determine which of the two purposes is predominant or whether one element vitiates or is subordinate to the other (see Javex Co. v. Oppenheimer, [1961] S.C.R. 170, 26 D.L.R. (2d) 523; Jay-Kay Publications v. M.N.R., [1972] C.T.C. 539, 72 D.T.C. 6453 (F.C.A.)). I should not have thought that, ordinarily, a personal motive in making an expenditure could outweigh a clear commercial purpose so as to render the expense non-deductible. The determination of such a question obviously must depend on the particular facts of the case.

The real hurdle in the way of the appellant is paragraph 18(1)(b). Even accepting that the cost of protecting his ownership of the farm was an expense or outlay made for the purpose of gaining or producing income, it was, nonetheless, a cost of preserving his ownership of a capital asset. The law is clear that such expenses are on capital account and their deduction is prohibited by paragraph 18(1)(b). This case is in my view squarely within the principle stated by Martland, J. in Farmers Mutual Petroleums Ltd. v. M.N.R., [1968] S.C.R. 59, [1967] C.T.C. 396, 67 D.T.C. 5277, at pages 65-66 (C.T.C. 400-01, D.T.C. 5280):

It can certainly be said that the appellant, in resisting the lawsuits launched against it, was seeking to protect its income, because it was seeking to protect the assets from which its income was derived. It can, therefore, be argued that the expenses were properly deductible under paragraph 12(1)(a). This is not contested by the respondent. The object and purpose of the lawsuits, however, was to compel the restoration to the land owners of the mineral rights which the appellant had purchased. The learned trial judge has found, and the evidence establishes, that those rights were items of fixed capital, and were so regarded by the appellant. At the time the litigation occurred, the sum total of the mineral rights acquired by the appellant, all of which were of the kind involved in the litigation, represented all of the appellant’s capital assets. The appellant did not trade in them, but intended to retain them perpetually.

It was to protect those capital assets from attack that the legal costs of the litigation were incurred, and, to quote the words of Dixon, J. (later Chief Justice) in Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946), 72 C.L.R. 634 at page 650, referring to the costs of defending title to land:

Next to the outlay of purchase money and conveyancing expense in acquiring the title to land, it would be hard to find a form of expenditure in relation to property more characteristically of a capital nature.

The fact that the leases acquired by the appellant, along with the mineral rights, were more immediately connected with the production of income than was the franchise involved in the Dominion case does not affect the matter in principle. It is relevant in relation to the application of paragraph 12(1 )(a), but in relation to paragraph 12(1 )(b) we must ask the question, was this outlay for the purpose of preserving a capital asset? In my opinion it clearly was and, if that is so, paragraph 12(1 )(b) prevents its deduction.

See also, Brault v. M.N.R., [1988] 2 C.T.C. 2316, 88 D.T.C. 1736 (T.C.C.); The Queen v. Burgess, [1981] C.T.C. 258, 81 D.T.C. 5192 (F.C.T.D.).

In light of the conclusion that I have reached it is not necessary to deal with paragraph 60(0.1) which was also relied upon by the respondent in her reply. That paragraph permits the deduction of legal expenses incurred for a number of purposes enumerated therein. It specifically excludes legal expenses “relating to a division or settlement of property arising from a marriage or other conjugal relationship". The exclusion fits the appellant exactly but the legal expenses here were not incurred for any of the purposes set out in paragraph 60(0.1). Therefore paragraph 60(0.1) has in any event no relevance to this case.

In reaching the conclusion that the legal expenses are not deductible I do so with regret. The appellant is a victim of circumstances beyond his control. I have, however, no alternative but to dismiss the appeal.

Appeal dismissed.