Marie Hasbani v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2810

Couture, C.J.T.C.C.:—This appeal heard under the rules of the informal procedure concerns the 1991 taxation year of the appellant. The latter acted for herself.

In computing her income for the taxation year under appeal, the appellant deducted the sum of $5,000 in legal expenses, which sum was disallowed as a deduction by the Minister pursuant to an assessment dated June 29, 1992.

The relevant facts that led to this appeal are relatively simple.

On June 15, 1989, pursuant to a counter-petition for divorce and corollary relief by the appellant and her former husband, the Honourable Judge Réjane L. Colas of the Quebec Superior Court ordered the latter to pay the appellant child support of $1,200 per month. In addition to granting the divorce between the parties, the judgment granted joint legal custody of the parties' three children and provided that family allowances and tax exemptions be allocated to the appellant for only one child and to her former husband for the other two children.

According to the evidence, the appellant’s former husband eventually reduced the support payments in question on his own initiative and appealed from the Superior Court judgment.

In her judgment, in order to arrive at the amount of the support, the Honourable Judge Colas took into consideration the direct and indirect costs related to the maintenance of the children, as established by the appellant in her evidence.

The former husband's grounds of appeal are summarized at page 9 of the Court of Appeal judgment and I I cite:

The appellant claims the right to provide for the children’s needs for clothing, activities and sports equipment himself when they are at his home. Why pay the respondent (the appellant) support, so that she can buy clothing intended to be worn and to stay at his home? He can very well purchase this clothing as well as the sports equipment, and he can very well take charge of the children’s activities.

[Translation.]

The Court did not accept this argument of the former husband and confirmed the support in the amount of $950. The difference of $250 reflected the family allowances which were granted to the appellant, since the Court of Appeal concluded that dividing those allowances as the Honourable Judge Colas had ordered was contrary to the provisions of the Family Allowances Act, 1973 (S.C. 1973-74, c. 44).

Counsel for the respondent claimed that the effect of the Court of Appeal decision had been to rule on the appellant’s right to support and, consequently, that the legal expenses incurred by her to establish that right therefore had not been incurred for the purpose of gaining or producing income from property within the meaning of paragraph 18(1 )(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). Consequently, it must simply be determined whether the expenses in question were incurred in order to secure the right to support or to determine the amount of the support itself to which the appellant was entitled.

The question which the Court must address is whether, in the circumstances described above, the amount of $5,000 in legal expenses incurred by the appellant constitutes an expense in order to gain or produce income within the meaning of paragraph 18(1 )(a) of the Act.

In light of the situation described above, it appears clear to me that the former husband of the appellant did not contest the latter's right to child support, but simply requested a reduction in that support to take into account the economic effects inherent in joint custody of the children of the marriage.

There is no doubt that the greater the support received by the appellant, the more her income increases as a consequence, given that such support constitutes income for her under the provisions of section 56 of the Act.

It should be noted that the circumstances between the appellant and her former husband did not change between the date of the judgment rendered by the Honourable Judge Colas and the date on which an appeal from that judgment was entered. This was simply a claim by the appellant's former husband to secure a reduction in the support which he paid her. In other words, he did not dispute the appellant's right to support, but only the amount.

Counsel filed two judgments in support of his argument. The first was a judgment of the Honourable Judge Cattanach of the Federal Court of Canada, Trial Division, in The Queen v. Burgess (the English version is reported at [1981] C.T.C. 258, 81 D.T.C. 5192) and that of my colleague the Honourable Judge Dussault in Raymond v. Canada, [1993] 2 C.T.C. 2014.

In the appeal of Burgess, Judge Cattanach maintained that the right to alimony does not arise from the marriage between the parties since, following a divorce, their respective obligations arising from that marriage are extinguished. The right to the alimony in question is established by the judgment which grants the divorce. In that case, ne argued that the legal expenses incurred by Mrs. Burgess to obtain alimony from her former husband had been incurred in order to acquire a right and consequently fell within paragraph 18(1)(a) of the Act.

He wrote as follows at page 261 (D.T.C. 5192):

The question is, as I view it, whether the legal expenses paid by the defendant were expended by her for the purpose of obtaining income which was hers as of right. Put yet another way, were the legal fees expended by her for the purpose of collecting income to which she was entitled. If this be so then the expenses are properly deductible.

The learned judge also cited the comments of the Honourable Judge Cartwright of the Supreme Court of Canada in Evans v. M.N.R. [1960] S.C.R. 391, [1960] C.T.C. 69, 60 D.T.C. 1047, at page 398 (C.T.C. 76, D.T.C. 1050):

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 out 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.

The relevant facts in that case were as follows at page 392 (C.T.C. 71, D.T.C. 1048):

[T]he appellant became entitled on September 20, 1953, for the remainder of her lifetime to the income from a one-third share. . .of the estate of Thomas Alexander Russel [sic]. [T]he trustee would not pay. . .[the income to the appellant] until the matter had been passed upon by the Court.

[Translation.]

The Supreme Court maintained that Mrs. Evan's right to the income arose from Russel’s [sic] will and that the legal expenses had been incurred in order to receive that income.

In Raymond, supra, the legal expenses had been incurred in order to challenge an action to set aside a support order pursuant to section 17 of the Divorce Act, R.S.C. 1985 (2nd Supp.), c. 3. The relevant facts were stated in the reply to the notice of appeal and read as follows at page 2015:

7(b) a judgment rendered on February 4, 1982 by Jacques Vaillancourt, J. of the Superior Court (case 500-12-109846-810) intervened in the appellant’s favour and granted her an increase in alimony;

(c) the appellant’s former husband filed in the Superior Court (case 600-12-001660-705) an application for a variation order to rescind prospectively the alimony order applicable between the parties since February 4,1982. . . .

The Honourable Judge Dussault came to the following conclusion, stating at page 2016-17:

In this sense, I consider that outlays incurred to oppose an application to rescind an alimony order or a previous variation order were incurred essentially, if not to gain new prospective recognition of the existence of entitlement to alimony in view of changes that may have occurred in the situations of one or other spouse, at least to protect the right resulting from the preceding variation order which is still in effect. Seen from either standpoint, the application for a variation order made by the appellant’s former husband to rescind the preceding order challenged the right itself which the appellant had previously acquired. The outlays incurred by the appellant were not, in any way, related to ensuring the performance of her former husband's obligation to pay the alimony or to collect that alimony, but clearly in order to establish her prospective right to the alimony.

I do not see the relevance of this judgment to the appellant's situation. What Mrs. Leclair Raymond sought to do was to have her right to alimony recognized as the Honourable Judge Dussault said, not to ensure that an obligation arising from a right that had been acquired by the appellant pursuant to a Superior Court judgment was executed.

In the instant appeal, in my opinion, the appellant sought to have the amount of the support maintained at the level that had been granted her under the judgment of the Honourable Judge Colas, which judgment had indeed conferred the right to support on her. In the circumstances, I am of the view that the legal expenses incurred by the appellant were incurred in order to earn income.

For these reasons, the appeal is allowed and the appellant is entitled to her party-and-party costs.

Appeal allowed.