Nissim v. R., [1998] 4 CTC 2496

Bowman T.C.J.:

These appeals are from assessments for 1991, 1992, 1993, 1994 and 1995.

There are two issues:

(a) the deductibility of legal expenses incurred by the appellant in 1993, 1994 and 1995;

(b) the deductibility of certain business expenses claimed by the appellant in 1991 and 1992.

The appellant in the years in question was a self-employed associate with Financial Concept Group.

The appellant filed her 1991 and 1992 returns of income late and was assessed arbitrarily under subsection 152(7) of the Income Tax Act. In the assessment she was allowed $1,649 and $2,002 as expenses. This was simply an estimated amount (10% and 20% respectively of her gross income from Financial Concept Group). At trial the respondent conceded that she was entitled to $4,042 and $4,241 for 1991 and 1992 as expenses. This represented additional expenses in respect of licensing, automobile and her home office.

In addition, the Minister agreed to delete $4,000 and $5,000 from her income for 1991 and 1992. These amounts were arbitrarily included as income that the Minister assumed she received from Tax Associates of Canada. She testified that she received nothing from that business and the Minister now accepts that these amounts should not have been included.

So far as her expenses are concerned I am persuaded that she is entitled to a much larger deduction than she was given.

Her work with Financial Concept Group was remunerated solely by commissions. Financial Concept Group is a subsidiary of Midland Walwyn. She travelled around Ontario holding financial planning seminars and encouraging clients to invest with Midland Walwyn. She had to pay all of her own expenses.

In 1991 and 1992, she claimed $12,912.86 and $13,609.79 respectively as expenses. These figures are made up as follows:

1991 EXPENSES:

Also, in 1991 she carried forward $3,584.97 office overhead from a prior year. There is no evidence of the makeup of this particular figure and I can therefore grant her no relief on this point, but I assume that when the Minister reassesses he will verify the correctness of the amount as he did not consider it on assessing.

So far as the other expenses claimed are concerned, I find as follows.

Advertising and Development

She put in a detailed schedule of entertainment expenses totalling $791 for 1991. 80% of that amount is $632. I am satisfied that this amount is allowable. Her business requires a great deal of entertainment and travelling and the claim of $632 is in my view reasonable.

For 1992, the $800 she claimed was merely a guesstimate. While I do not insist on receipts I have to have something to go on, and ball park estimates are of so little weight that I can allow nothing under this head for 1992.

Automobile

She submitted a detailed schedule, based on receipts, showing automobile expenses of $5,869.48 for 1991 and $5,437.97 for 1992. She stated that she claimed 90% of her car expenses. In fact, she claimed about 75% in 1991 and 92% in 1992.

I see no reason to disagree with her estimate of 75%. I find that it is reasonable given the amount of travelling she has to do in her work. Therefore she is entitled to $4,401 in 1991 and $4,075 in 1992.

Depreciation

She was allowed nothing in the arbitrary assessments for 1991 and 1992 under subsection 152(7). The capital cost allowance schedules that she submitted are detailed and she stated that they were based on her records and on receipts. I accept her testimony. She should be allowed the amount claimed for capital cost allowance of $1,809.52 for 1991 and $1,942.72 for 1992.

Licensing

The respondent agrees that $375 for each year is an allowable expense.

Office expenses

For 1991, she proved office expenses of $2,493.41 by the production of receipts and a schedule. In fact she claimed only $1,436.80. I think she is entitled for 1991 to claim $2,493.41. I am satisfied as well that the amount of $1,316.79 claimed for 1992 is allowable. She neglected, perhaps through inadvertence, to put in a schedule for 1992 but on a balance of probabilities I am convinced the figure claimed is accurate and she should be allowed it as a deduction. She struck me as a meticulously careful and honest witness.

Office overhead

In 1991 the appellant claimed $4,036.54. This was a portion of the cost of maintaining her house, where she had an office. She stated that she claimed 25% of her expenses of maintenance, heating and electricity, prop erty tax, mortgage interest and insurance. In fact, she proved $20,970.02, and 25% of that amount would be $5,242.51. $4,036 works out to 19.24%. Her office occupies a substantial portion of the first floor of her house, a split-level bungalow. This allocation is completely reasonable. For 1992, she claimed $4,147.20. Although she did not put in a similar schedule it is an obvious inference that the expenses would be about the same and I think she should be allowed the amount claimed.

It is not without significance that she claimed similar business expenses in 1993, 1994 and 1995 and they were allowed without any challenge by the Minister.

I think her problem stemmed from the fact she was late in filing her 1991 and 1992 returns and the Minister having made arbitrary assessments for those years was not prepared to consider her returns as filed.

1993, 1994 and 1995

The issue in these years is the deductibility of legal expenses. The amounts claimed were $3,983, $13,914.26 and $8,500 respectively.

Based on the appellant’s obvious credibility I am satisfied that the amounts claimed were incurred and were in fact paid. A substantial part of the amounts claimed in 1994 and 1995 were paid by The Ontario Legal Aid Plan and she owes the amounts to the plan which has put a lien on her house for that indebtedness.

It was argued that she did not pay the amounts. I am unable to accept this contention. She became liable for the legal fees. The Ontario Legal Aid Plan paid them on her behalf and continues to demand payment from her. The situation does not differ significantly from that which would prevail had she borrowed the money to pay the fees from the bank.

The substantial question is whether the legal èxpenses were laid out for the purpose of gaining or producing income or were capital or, alternatively, were personal or living expenses.

The expenses were incurred in the course of a bitter divorce proceeding brought by her ex-spouse Miko Nissim. 1991 and 1992 were difficult years for the appellant. In that period her stepfather, to whom she was strongly attached, died, her mother suffered a severe stroke, she became pregnant with her second child (the first was born in 1983 and the second in 1993), her husband instituted divorce proceedings and she suffered from bad health. Her husband was abusive in the extreme and as well, on the basis of her testimony, which I accept, the first lawyer she consulted was also verbally abusive and, it seems, rapacious.

Throughout the years in question her predominant and overriding concern was the welfare of her children. She did not contest the divorce and, in light of her husband’s abusive behaviour and evident lack of concern for the children, custody of the children, for whom she had sole responsibility, was not an issue.

The divorce was finalized in 1995.

All of the numerous court proceedings and all of her dealings with the several lawyers whose services she retained had as their predominant and overriding purpose the enforcement of the husband’s obligation to pay support for the children. I find as a fact that the husband failed to honour his obligation to pay support ordered by the court. Ultimately he began paying and the amounts were declared as income by the appellant and deducted by the husband. The purpose in my view of the incurring of the legal expenses was to force the husband to live up to his obligation to pay support for the two children. Thus, the expenses were incurred for the purpose of earning income in the form of maintenance payments which of course are taxable in the appellant’s hands under paragraph 60(b) or (c) of the Income Tax Act.

Counsel referred to the decision of Cattanach J. in R. v. Burgess (1981), 81 D.T.C. 5192 (Fed. T.D.) . In that case, the Tax Review Board ((1979), 79 D.T.C. 347 (T.R.B.)) had allowed the wife’s legal expenses as a deduction. They had been incurred in connection with the claim for maintenance upon the divorce. The Tax Review Board in allowing the appeal relied upon the judgment of the Supreme Court of Canada in Evans v. Minister of National Revenue, [1960] S.C.R. 391 (S.C.C.), in which the majority of the Supreme Court of Canada held that legal fees incurred to obtain an annual income of $25,000 from the taxpayer’s father’s estate was a deductible expense. Cartwright J. speaking for the majority said at page 398:

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 but 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.

Cattanach J., in reversing the Tax Review Board, distinguished Evans and said at page 5197:

The defendant’s income does not stem from a right which arose on marriage. In my view the right which arose on marriage was the right to maintenance during the currency of the marriage but that right terminated upon the dissolution of the marriage. If the circumstances so warrant the Court which grants the divorce may also substitute, as its discretion dictates, maintenance in a reasonable amount. It is the order of the Court which grants the defendant her right to maintenance.

This being so the principles in the Evans case are not applicable to the present appeal.

In the Evans case the appellant had an existing right to the income and expended the legal fees to obtain payment of that income which was denied her. The suit was for income.

In the present case the defendant’s right to maintenance which arose on marriage ended with the divorce and her right to subsequent maintenance arose from the Court order. The suit was for divorce and corollary thereto an award of maintenance.

Therefore the legal expenses are in the nature of a capital expenditure, by bringing the right into being, rather than in the nature of a revenue expenditure to enforce payment of income from a right in being.

The legal expenses in this case were incurred prior to the dissolution of the marriage and were designed to force the husband to honour his existing obligation to pay maintenance. On this basis, I think the case is governed by Evans rather than by Burgess.

Quite apart from that distinction, I would add that I think, notwithstanding the great respect that I have for the judgments of Cattanach J., that the distinction that he drew in 1981 may not accord with the social and economic realities of the world in 1998. We are all too familiar with the phenomenon of husbands who fail to live up to their obligations to their wives and children to pay maintenance. To deny to wives the right to deduct the cost of compelling husbands to pay their fair share of the cost of raising children and yet to tax the wives on such maintenance as they can get from the husbands seems to me to be contrary to both common sense and ordinary principles of fairness. Whatever validity there may be to the distinction between the cost of enforcing an existing right to income and establishing such a right I do not think that the courts should strain to find legalistic reasons to deny the deductibility of these very necessary expenses. It must be recognized that the law relating to revenue and capital expenditures has developed since the last century and distinctions that may have carried weight in 1898 may be less meaningful in 1998. In Minister of National Revenue v. Algoma Central Railway (1968), 68 D.T.C. 5096 (S.C.C.), the Supreme Court of Canada said at page 5097:

Parliament did not define the expressions “outlay... of capital” or “payment on account of capital”. There being no statutory criterion, the application or nonapplication of these expressions to any particular expenditures must depend upon the facts of the particular case. We do not think that any single test applies in making that determination and agree with the view expressed, in a recent decision of the Privy Council, B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, (1966) A.C. 224, by Lord Pearce. In referring to the matter of determining whether an expenditure was of a capital or an income nature, he said, at p. 264:

The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer.

One cannot read the decision of the Supreme Court of Canada in Symes v. À. (1993), 94 D.T.C. 6001 (S.C.C.) (which otherwise has nothing to do with this case) without being struck by that court’s recognition of and sensitivity to the changing realities and exigencies of modern life.

The appeals are allowed and the assessments are referred back to the Minister of National Revenue on the following basis:

(a) the business expenses in 1991 and 1992 are deductible to the extent set out in the reasons for judgment and the amounts of $4,000 and $5,000 are to be deleted from the appellant’s income for these years respectively;

(b) the legal expenses claimed for 1993, 1994 and 1995 are deductible.

The appellant is entitled to her costs, if any.

Appeal allowed.