Donald v. R., [1999] 1 CTC 2025

Bonner 17.C.J.:

The Appellant appeals from assessments under the Income Tax Actfor her 1991, 1992 and 1993 taxation years. The first issue relates to the taxability of child support payments made by the Appellant’s former spouse. The payments in question were included in income under paragraph 56(1)(b) of the Act. That provision required the inclusion in income of:

(b) any amount received by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if the recipient was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, the spouse or former spouse required to make the payment at the time the payment was received and throughout the reminder of the year.

The payments in question were the result of an Order of the Ontario Court General Division dated October 2, 1990 in an action between the Appellant as petitioner and her husband as Respondent. By that Order, custody of the three children of the marriage was awarded to the Appellant. Further the Court ordered that ... “interim interim support for the children to be paid by the Respondent, David Harry Donald, in the sum of $500.00 per child per month commencing October 16, 1990.”

The assessments in issue were made on the basis that the Appellant received the following child support payments pursuant to the Order:

The Appellant testified that she did receive money in 1991, 1992 and 1993 for the care of the children. The payments were made at irregular intervals. The Appellant stated that she received no money for months at a time because her husband paid only when threatened with jail. She explained that she did not report the receipt of the payments in her returns of income because she believed that support payments are taxable only if the payments are made on a periodic basis. It will be observed that paragraph 56(1)(b) requires the inclusion of income of amounts received as an “...allowance payableon a periodic basis...” (emphasis added). Irregularity in the making of the payments does not remove amounts described in paragraph 56( 1)(b) from the ambit of that provision.[1]

Nevertheless it is clear that some part of the $23,514.00 included in the Appellant’s 1992 income cannot have been paid pursuant to the Court Order. Even allowing for the payment in 1992 of 1991 arrears, such arrears must have been slightly less than $2,000.00 which figure, added to the total sum of $18,000.00 payable under the order in respect of 1992, is less than the amount included in the Appellant’s 1992 income. The Appellant is therefore entitled to judgment limiting the paragraph 56(1)(b) inclusions to amounts paid pursuant to the Order of October 2, 1990.

I turn next to the deductibility of the legal and accounting costs incurred by the Appellant in securing the Order referred to above and in enforcing compliance with it. The Appellant testified that she paid $32,564.00 in legal fees between February of 1992 and March of 1994 to “establish child support” and that she paid her accountant $3,130.00 for the same purpose. The Appellant’s testimony on this point was not supported by the production of written records or vouchers. Nevertheless I accept it. It must be remembered that the Appellant has been subjected to great pain and stress caused by the breakdown of her marriage and by the financial struggle to support her children with minimal assistance from a spouse who was unwilling to live up to his obligation to support his own children. In my view deficiencies in proof are explained by the Appellant’s emotional state. They do not stem from any desire to conceal or misstate the facts.

Counsel for the Respondent conceded that legal expenses incurred with a view to the enforcement of the order for payment of child support are deductible in the computation of income. He took the position however that, in light of the decision of the Federal Court Trial Division in R. v. Burgess (1981), 81 D.T.C. 5192 (Fed. T.D.), the legal costs of securing the order directing payment of support are on account of capital and that deduction of them is prohibited by paragraph 18(1)(b) of the Act. In my view the decision in Burgess is not of assistance in this case. Insofar as part of the payments made by the Appellant relate to the securing of the Court order, that order cannot be viewed as a capital asset. What is in question here is a right to payment of an allowance which is described in the order as “interim interim support”. The order was replaced in February of 1994. It had none of the lasting qualities which are characteristic of a capital asset.[2] The order of October 2, 1990 did not create a right; it simply quantified the pre-existing obligation of the Appellant’s spouse to support his children and directed compliance with that obligation. Furthermore, Burgessmust now be viewed as wrongly decided[3] .

The Appellant signed a document dated December 30, 1996, entitled “Waiver of Right of Objection or Appeal”. In it she waived “...any right of objection or appeal in respect of legal costs incurred in enforcing payment of Court ordered payments for maintenance of my children if Revenue Canada reassesses as follows:

Allows a $5,000. deduction for the taxation year 1992 for legal costs incurred in enforcing payment of court ordered payments for the maintenance of my children.

The typewritten portion of the document must be read with the handwritten portion which reads:

I have signed this document as I have no choice but to accept your $5,000 ruling. 1 still believe the amount for legal fees to collect child support arrears exceeds $20,000. You know I am a single parent, working on a teacher's salary, to support myself and 3 teenage children - without benefit of child support from their father. I do not have the financial resources nor the emotional resources to continue to fight you on this issue. I expect all of the issues documented by L. Brode will be presented for the internal reviews.

When the document is read as a whole I take the waiver to relate to the 1992 taxation year only. It would be unreasonable to regard it as a waiver of the Appellant’s right to deduct expenditures made in years other than 1992, the year in respect of which it was agreed that a deduction of $5,000.00 and no more be allowed. Furthermore nothing in the language of the document limits the deduction of accounting costs incurred by the Appellant in connection with the enforcement of her children’s right to support by their father. The waiver may effect an enforceable compromise[4] but it can operate only to preclude an appeal in respect of the issue which it does cover, the 1992 legal costs.

The evidence is unclear as to the years in which the legal and accounting fees were paid.[5] The appeals for all three years will be therefore allowed and the assessments referred back to the Minister of National Revenue for reassessment to permit the deduction of accounting fees to the extent expended in each year and to permit the deduction of legal fees to the extent expended in 1991 and 1993.

I cannot leave the matter without expressing concern regarding the use of waivers in dealings between the professionals employed by Revenue Canada and taxpayers who are inexperienced in the intricacies of income tax law. In such cases, there exists a real danger that an uninformed taxpayer may make an improvident settlement. The danger inherent in such a situation increases in the case of a taxpayer such as the Appellant whose emotional resources were depleted by a protracted legal battle with her former spouse and who was then required to revisit a distressing topic for purposes of dealing with the income tax aspects of it. I do not suggest that there was overreaching on the part of the Revenue Canada officials who dealt with the Appellant. That question was not explored. Nevertheless, the handwritten portion of the waiver is very disquieting. It is far from clear that the Appellant really understood the effect of the waiver or, if she did, that she unequivocally consented to it. The matter was not explored in detail at the hearing of the appeal. In the circumstances, it would in my view be entirely fitting for the Minister to resolve the ambiguity by discarding the waiver and allowing the Appellant to deduct the full amount of her 1992 legal costs in addition to the other amounts which must be allowed by virtue of the judgment.

Appeal allowed in part.