Tax Court of Canada Judgments

Date: 20001005

Docket: 1999-4153-IT-I

BETWEEN:

WENDY BARBARA SOL,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Sarchuk J.T.C.C.

[1]            This is the appeal of Wendy Barbara Sol from an assessment of tax with respect to her 1997 taxation year. In computing income for that year, the Appellant claimed other deductions as follows:

                Withdrawal of Excess Funds from

                Retirement savings plan ("RRSP")                     $2,010.29

                Legal Fees                                                                                              2,165.54

                Total                                                                                                        $4,175.83

In assessing the Appellant for that taxation year, the Minister of National Revenue (the Minister) disallowed the claim for other deductions in the amount of $4,175.83. At the commencement of the hearing, counsel for the Respondent advised the Court that the Minister now concedes that the Appellant is entitled to a deduction in respect of a refund of undeducted excess contributions to her registered retirement saving plan (RRSP) in the amount of $2,010.29 pursuant to subsection 146(8.2) of the Income Tax Act (the Act).

Facts

[2]            On January 18, 1994, a Judgment of the Manitoba Queen's Bench (Family Division) ordered the Appellant's former spouse, Douglas Robert Budyk (Budyk), to pay child support to the Appellant in respect of two children of the marriage. Subsequently, the Income Tax Act provisions regarding the tax treatment of child support were amended with the result that child support payments would no longer be included in the recipient's income nor deductible to the payer. With specific regard to orders or agreements made before May 1997, the previous inclusion/deduction provision generally applies but the amended system applies where, inter alia, the agreement or order was varied or another order or agreement was made after April 30, 1997 which changed the amount of child support provided in the original order or agreement.[1] In 1997, motions were made by Budyk and by the Appellant to vary the support order granted by Mr. Justice Carr.

[3]            According to the Appellant, it became necessary for her to petition the Court because her former spouse amongst other things, refused to voluntarily supply the financial information that was required in order to bring the child support payments under the Federal Child Support Guidelines. The Appellant's application was successful and as a consequence of the variation of the order, the maintenance paid for the support of the children by Budyk was increased from $800 per month to $978 per month.[2] The variation had the further effect of bringing the Appellant within the scope of the amended provisions of paragraph 56(1)(b).

[4]            It is the Appellant's position that the legal expenses were deductible because they were incurred in the course of a legal proceeding undertaken to enforce an existing order for child maintenance by bringing it into line with the recently enacted Federal Child Support Guidelines.

[5]            The Minister's position is that the legal fees were incurred for the purpose of obtaining an order to vary a previous judgment dated January 18, 1994 under which the Appellant's former spouse, Budyk, was ordered to pay child support in respect of two children of the marriage. The Respondent further contends that the Appellant's application to vary was designed to ensure that the child support payments would no longer be subject to income tax in her hands. Thus, according to the Respondent, no portion of the legal fees were incurred in respect of enforcing the payment of child support nor were they incurred for the purpose of gaining or producing income from business or property but were on account of capital.

Conclusion

[6]            The issue is whether the legal fees claimed were incurred for the purpose of gaining or producing income from a property pursuant to paragraph 18(1)(a) of the Act. There is no dispute that a maintenance right is a property within the meaning of subsection 248(1) of the Act.[3] I turn then to the question whether legal expenses incurred to obtain or increase the amount of child support payments are deductible. In Wakeman v. Canada,[4] O'Connor J. observed that both the Family Law Act of Ontario and the Divorce Act make it clear that every parent has an obligation to provide support for his or her child and that an order made under section 15 of the Divorce Act requires that that obligation be apportioned between the spouses according to their relative abilities to contribute. He then made the following comments:

                The obligation borne by parents to support children was described in the Supreme Court of Canada in Richardson v. Richardson, [1987] 1 S.C.R. 857 at page 869:

	The legal basis of child maintenance is the parents' mutual obligation to support their children according to their need. That obligation should be borne by the parents in proportion to their respective incomes and ability to pay: ... The duration of the obligation of support varies with the provisions of each provincial statute. ... Child maintenance, like access, is the right of the child: ...

                Thus, it is clear that by law, at least in Ontario, parents have a duty to support their children and this duty is not extinguished by a divorce. Thus a suit by a custodial mother against the divorced father for child support does not create the right to the child support but rather simply establishes the amount based on the conditions set forth in the statutes. As the Court stated in Burgess, supra, at page 5194:

	The question which next arises is what was the circumstance which gave rise to the defendant's right to maintenance, (1) was it a right which arose upon the defendant's marriage as contended by her counsel, or (2) was it a right which arose upon the order absolute granted by the High Court of Ontario as contended by counsel for the plaintiff.
	Put yet another way, did the judgment of the High Court of Ontario create the right to maintenance or was that judgment merely a continuation and quantification of a right to maintenance already vested in the defendant.

                Counsel for the Minister referred to certain cases holding that legal expenses incurred to increase alimony were not deductible because they created a new right which was capital in nature. In the present case the maintenance amount for the children was in fact slightly increased by the final order dated August 24, 1993 over the amount fixed for child maintenance in a previous interim order. In my opinion, however, the cases cited are not applicable. They did not distinguish between maintenance for the wife and maintenance for the child. As mentioned, the maintenance right of children is created by law.

                It is true that the right created by law is a property right of the child. However the custodial mother is the one who receives the maintenance amount for the child or children and must include that amount in her income. Consequently the legal expenses incurred to quantify the maintenance may be deducted by the custodial mother.

[8]            I note that subsection 36(1) of the Family Maintenance Act, R.S.M. 1977 c-56, s. 4 provides that "each parent of a child has the obligation, subject to the Child and Family Services Act, to provide reasonably for the child's support, maintenance and education whether or not the child is in that parent's custody". As was the case in McColl v. Canada,[5] the children's right to maintenance existed prior to the divorce and continued to exist thereafter. Although the Appellant receives the amounts payable by her former spouse for the children these amounts are dedicated to the support, maintenance and education of the children and are not for the Appellant's benefit. Accordingly any expenses incurred by her to quantify this amount may be deducted by the Appellant.

[9]            I am also unable to accept the Respondent's position that the legal expenses were not incurred by the Appellant for the purpose of gaining or producing income from a property but rather arose as a result of her desire to increase her disposable income by virtue of not being required to pay taxes on the amounts of the child support payments. The reduction in the amount of income tax this Appellant may be required to pay may well have formed part of the motivation for the Appellant's petition. Nonetheless, the amounts awarded by the Court in the variation order are specifically for the support of the children.

[10]          I am unable to find any principle upon which this appeal may be distinguished from Wakeman, supra.[6] Accordingly, the appeal is allowed and the Appellant is entitled to deduct in computing her income for the 1997 taxation year the amount of $4,175.83.

Signed at Ottawa, Canada, this 5th day of October, 2000.

"A.A. Sarchuk"

J.T.C.C.

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