Date: 20001026
Docket: 1999-4300-IT-I
BETWEEN:
RAYMONDE GALLIEN,
Appellant,
and
HER MAJESTY THE QUEEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] This is an appeal under the informal procedure for the 1997 taxation year.
[2] The issue is whether the appellant, in computing her income, is entitled to deduct the legal expenses she incurred to obtain support during divorce proceedings.
[3] The facts on which the Minister of National Revenue ("the Minister") relied in making his assessment are set out as follows in paragraph 4 of the Reply to the Notice of Appeal ("the Reply"):
[TRANSLATION]
(a) the appellant filed her income tax return for the taxation year at issue without claiming any deduction for legal expenses;
(b) on June 1, 1998, the Minister assessed the appellant for the 1997 taxation year on the basis of her return as filed;
(c) on or about March 31, 1999, the appellant served an objection on the Minister requesting a change to her tax return for the taxation year at issue, namely the inclusion of a $2,655 deduction ($2,950 x 90%) for legal expenses;
(d) the amount referred to in the preceding subparagraph had been paid by the appellant for the purpose of establishing (and revising) the amount of her support;
(e) there is no provision in the Income Tax Act (hereinafter "the Act") permitting the deduction of legal expenses incurred to collect or vary support or to establish a right to support;
(f) the Minister therefore refused to allow the appellant to deduct the $2,655 in legal expenses she was claiming for the taxation year at issue.
[4] The appellant admitted subparagraphs 4(a) to (d) of the Reply. As regards subparagraph 4(d), it was a matter of establishing the amount of support. The parties to the proceedings agreed to strike out the words "and revising".
[5] During argument, the respondent made no reference to the statement in subparagraph 4(e) of the Reply that there is no provision in the Income Tax Act ("the Act") permitting the deduction of legal expenses incurred to collect or vary support or to establish a right to support.
[6] The appellant stated that, following a tragedy in their family, she and her husband left their village in the county of Portneuf. Her husband was a doctor. He accepted an administrative position in Montréal. Once there, the appellant lost her mother and her husband got involved with someone else. The spouses decided to end their marriage after 32 years together. They separated in 1995 and divorced in 1996. In November 1995, her husband obtained employment in Québec and went to live there. The appellant stayed in their condominium in Montréal. Her husband paid the costs relating to the condominium, which was sold in May 1996. The appellant then moved to Hull, where she rented an apartment with one of her daughters. Her husband was giving her $400 a month at that time.
[7] According to the appellant, she was not and is not financially independent. She described her marriage as traditional in the sense that she was a wife, mother and homemaker. In Montréal, she had worked in a garden. She now works as a travel agent.
[8] She incurred nearly $13,000 in legal expenses. She claimed 90 percent of them as expenses incurred to determine the amount and secure payment of support. That proportion, which was determined by her lawyer, was not contested by the respondent. In her 1996 tax return, the appellant claimed the portion of the expenses that she had paid that year, namely $5,240.16. The claim was disallowed. For 1997, she claimed a $2,655 deduction, as alleged in subparagraph 4(c) of the Reply.
[9] The divorce judgement was filed as Exhibit A-3. It is dated October 17, 1996, and took effect on November 17, 1996. It confirms and gives effect to the provisions of the corollary relief agreement ("the agreement") signed by the parties on October 11, 1996, which was appended to the judgment.
[10] The agreement was filed as Exhibit A-2. Paragraph 14 thereof reads as follows:
[TRANSLATION]
14. The applicant shall pay the respondent, retroactive to May 24, 1996, support of four hundred and forty dollars ($440) a week while his income is limited to his wage-loss insurance benefit representing a gross annual amount of fifty-four thousand six hundred and thirty-six dollars ($54,636), and the said support shall be increased to seven hundred dollars ($700) when the applicant returns to his position as a doctor with the Société de l'assurance-automobile du Québec (S.A.A.Q.), as his gross annual income will then increase to eighty-two thousand two hundred and thirty dollars ($82,230); the support is payable in advance at the respondent's place of residence on Friday of each week.
[11] The other clauses of the agreement concern the division of the patrimony or the establishment of patrimonial rights.
[12] According to the appellant, there is no long-term certainty about the payment of support. It will depend on how long her former husband works. He will be 59 years old this year. As far as she knows, he is thinking of stopping working when he turns 62. She does not know what his ability to pay will be then.
Argument
[13] The appellant relied on two decisions by this Court: Nissim v. Canada, [1998] T.C.J. No. 658, and Donald v. Canada, [1998] T.C.J. No. 866. She argued that the legal expenses she incurred were incurred for the purpose of gaining or producing income but not to acquire capital.
[14] Before setting out the respondent's position, I will cite the relevant passages from Judge Bowman's decision in Nissim:
[24] The substantial question is whether the legal expenses were laid out for the purpose of gaining or producing income or were capital or, alternatively, were personal or living expenses.
. . .
[28] . . . 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 56(1)(b) or (c) of the Income Tax Act.
. . .
[30] Cattanach J., in reversing the Tax Review Board, distinguished Evans and said at page 5197 [81 DTC 5192]:
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.
[31] 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.
[32] 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. . . . In M.N.R. v. Algoma Central Railway, 68 D.T.C. 5096, 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 non-application 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.
[15] I will also quote what Judge Bonner stated in Donald, supra:
[7] 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 The Queen v. Dr. Beverley Burgess, 81 D.T.C. 5192, 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. 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, Burgess must now be viewed as wrongly decided.
[16] Counsel for the respondent argued that what must be determined is whether the legal expenses are deductible under paragraph 18(1)(a) of the Act. That paragraph allows expenses incurred for the purpose of gaining or producing income from property to be deducted. As she saw it, the definition of "property" found in section 248 of the Act includes a right of any kind and thus a right to support. However, she submitted that capital outlays are not deductible under paragraph 18(1)(b) of the Act, and it was on that paragraph that she based her argument. Counsel for the respondent relied on the decision of Cattanach J. in The Queen v. Burgess, [1982] 1 F.C. 849, in which he stated the following at page 860:
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.
[17] Counsel for the respondent also referred to the Supreme Court of Canada's decision in Bracklow v. Bracklow, [1999] 1 S.C.R. 420, and cited the following two passages:
When a marriage breaks down, however, the situation changes. The presumption of mutual support that existed during the marriage no longer applies. Such a presumption would be incompatible with the diverse post-marital scenarios that may arise in modern society and the liberty many claim to start their lives anew after marriage break-down. . . .
. . .
. . . For practical purposes, however, it may be useful to proceed by establishing entitlement first and then effecting necessary adjustments through quantum. . . .
Counsel argued that these words by the Supreme Court of Canada indicate that Cattanach J.'s decision in Burgess, supra, was correct and that, in the case of divorce, the right to support results from a court decision. Thus, legal expenses incurred to obtain support in divorce proceedings are incurred to create a right and are therefore of a capital nature. Burgess was correctly decided and this Court's decisions in Nissim and Donald, rendered prior to Bracklow, should be set aside.
Conclusion
[18] Paragraph 56(1)(b) of the Act provides that the total of all amounts each of which is a support amount received in the year must be included in the recipient's income. For the purposes of the present discussion, it is useful to note the introductory portion of section 56, which reads as follows:
56(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year . . . .
[19] Given this reference to the generality of section 3 of the Act, one has to think that the general provisions on the computation of income apply to the sources of income described in section 56 of the Act in the absence of specific provisions of the Act concerning the deduction of support-related legal expenses. There are in fact no such specific provisions, although one might wish that there were.
[20] In any event, the respondent is not disputing the fact that we are dealing here with an expense incurred for the purpose of gaining or producing income. However, the respondent's argument is that the expense is a capital outlay because its purpose is to establish a right and that it is therefore not deductible since it is excluded by paragraph 18(1)(b) of the Act.
[21] My reading of the Supreme Court of Canada's decision in Bracklow, supra, does not lead me to conclude that the right to support in divorce proceedings is created by the judge. In my view, what the Supreme Court of Canada is saying is that a right to support exists between divorced spouses but that the right has a different basis than the right that exists between spouses who are not divorced. During marriage, that basis is the presumption of mutual support. After divorce, the obligation to provide support is governed by the Divorce Act and the applicable provincial statutes. The judge does not create the right. It was created by legislators. The judge's role is to determine whether the spouses' circumstances justify payment of support and what the amount of the support must be.
[22] It is therefore my view that this Court's decisions in Nissim and Donald, supra, are correct and that there is a pre-existing right to support between divorced spouses. It is that right that a person is asserting when securing an entitlement to support. In this regard, the Supreme Court of Canada's decision in Evans v. Minister of National Revenue, [1960] S.C.R. 391, is being applied, for just as in Evans, the appellant's legal expenses were incurred not to create a right but for the purpose of seeking and obtaining income to which she was entitled.
[23] In my opinion, even if a right were being created, this would not change the outcome. Not every establishment of a right is necessarily of a capital nature. It must be determined whether the right established is related to the person's capital. In the instant case, I think that two questions are relevant: is it a patrimonial right, and is it a long-term right? In answer to the first question, the right to support is a personal and not a patrimonial right. The obligation to provide support belongs exclusively to the person of the payer, and the right to receive support, to the person of the beneficiary. It is a right to income, not a proprietary right. As for its duration, it is a right that may last but that may also be of very short duration. It is a right that varies depending on the financial circumstances of the payer and the beneficiary and is a function of each person's life situation. Since it is not a patrimonial right and its duration is uncertain, it seems to me that a commonsense appreciation of all these features, as Lord Pearce put it in B.P. Australia Ltd., supra, quoted above, leads to the conclusion that it is not a right related to the person's capital or capital property.
[24] I would add as well that the interpretation of Evans based on that in Burgess seems to emphasize the creation or non-creation of a right as the ratio decidendi of Evans. In my view, this needs to be qualified. Evans is based on the fact that the legal expenses had been incurred for the purpose of gaining or producing income and not to obtain capital property.
[25] For these reasons, the legal expenses in question here must not be excluded from the computation of the appellant's income by paragraph 18(1)(b) of the Act, as argued by the respondent. Since that was the respondent's only argument, the appeal is allowed, without costs.
Signed at Ottawa, Canada, this 26th day of October 2000.
"Louise Lamarre Proulx"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]