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Docket: 2005-1521(IT)I |
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BETWEEN: |
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FRANK GAL, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeal heard on January 20, 2006 at Toronto, Ontario
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Before: The Honourable Justice L.M. Little |
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Appearances: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Paolo Torchetti |
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JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 2003 taxation year is allowed, without costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 28th day of March 2006.
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"L.M. Little" |
Little J.
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Citation: 2006TCC157 |
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Date: 20060310 |
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Docket: 2005-1521(IT)I |
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BETWEEN: |
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FRANK GAL, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Little J.
A. FACTS:
[1] The Appellant was married to Maria Patakvolgyi ("Maria") on December 21, 1982.
[2] Two children were born of the marriage:
Daughter - December 29, 1983
Son - February 4, 1984
[3] Certain difficulties arose in the relationship between the parties and they have lived separate and apart since July 1, 1996.
[4] The Appellant maintains that after the separation from Maria he agreed to pay child support of $600.00 per child per month.
[5] On July 29, 1999 the Appellant and Maria entered into a Separation Agreement (the "Agreement"). - (Exhibit A-1)
[6] The Agreement provided for a division of various assets between the parties.
[7] The Agreement contained the following provisions regarding child support:
5. CHILD SUPPORT
(a) Pursuant to the existing Order of the Provincial Court (Family Division), the Husband shall continue to pay to the Wife the sum of six hundred dollars ($600.00) per month for each of the two children of the marriage, indexed in accordance with the Consumer Price Index commencing March 1st, 1997, until one or more of the following occurs with respect to either child, at which point the Husband shall continue to pay the said $600.00 per month plus indexing as aforesaid for the other child, until one or more of the following occurs with respect to the second child:
(i) the child for whom payment is due reaches the age of 18 and ceases to reside full time with the Wife, and "residing full time with the Wife" includes the situation where the child lives away from home to pursue full-time study at an educational institution, pursue summer employment or enjoy a vacation but otherwise maintains a residence with the Wife;
(ii) the child for whom payment is due becomes 21 years of age;
(iii) the child completes one post-secondary degree or diploma;
(iv) the child marries;
(v) the Wife dies;
(vi) the Husband dies;
(vii) the child dies.
[8] In November 2000 Maria commenced a Court Action against the Appellant in the Superior Court of Ontario and the Appellant filed a Counter Claim with the Court. The Appellant testified that he filed the Counter Claim to obtain spousal support for his son since his son was living with him.
[9] The Court Action was heard by Madam Justice Croll.
[10] In the Reasons for Judgment delivered on Friday, January 24, 2003 Madam Justice Croll held as follows:
1. It is declared that the date of separation is July 1, 1996.
2. Mr. Gal is responsible for a hundred percent of the university expenses of Elizabeth Gal for the period commencing September 2003 and forward subject to any re-adjustment based on future income of Mrs. Clark (i.e. Maria).
3. Mr. Gal shall pay child support for the child Elizabeth in the amount of $550.00 per month commencing January 1, 2003 based on his income of $67,400.00 and if he has paid January 1, 2003 at the higher amount, he should be given credit for that.
4. Mr. Gal shall amend the beneficiary designation of his life insurance policy he is required to maintain pursuant to the separation agreement by naming Maria Clark in trust for Elizabeth and Andrew Gal so long as he has a support obligation for Elizabeth.
5. Should Ms. Clark fail to provide Mr. Gal with evidence of her efforts to seek employment by September 2003 Mr. Gal may bring a motion to consider the question of imputing income.
6. Should Ms. Clark obtain employment, she is ordered to provide to Mr. Gal by December 15 of each year a statement of her earnings for that year.
[11] The Appellant received a letter dated March 21, 2003 from Mr. Vasko Kocovski (Exhibit A-7). Mr. Kocovski is Maria's lawyer. In the letter Mr. Kocovski stated as follows:
I do confirm that Justice Croll indicated that you were to pay costs of $15,000.00 which we agreed upon.
[12] An Order of the Superior Court of Ontario dated on July 18, 2003 reads as follows:
THIS COURT ORDERS that the Judgment of the Honourable Madam Justice Croll dated January 24, 2003, be and the same is hereby amended by reversing the words, Applicant and Respondent in paragraph 8 of the said Judgment so that the Judgment will read that "The Respondent shall forthwith pay to the Applicant costs of the action fixed, on consent, at $15,000.00 and payable forthwith".
[13] The Appellant paid the legal fees in the amount of $15,000.00 as required by the Court Order.
[14] When the Appellant filed his income tax return for the 2003 taxation year he deducted the amount of $15,000.00.
[15] The Minister of National Revenue (the "Minister") disallowed the deduction of legal fees in the amount of $15,000.00 and allowed the Appellant to deduct legal fees of $228.00.
B. ISSUE:
[16] Is the Appellant allowed to deduct legal fees in the amount of $15,000.00 in determining his income for the 2003 taxation year?
C. ANALYSIS AND DECISION:
[17] In the Reasons for Judgment Madam Justice Croll ordered that Maria was to seek employment by June 1, 2003. Maria apparently ignored the Order of Madam Justice Croll. Since Maria did not seek employment the Appellant filed a Motion with the Superior Court of Ontario in December 2003.
[18] On March 18, 2004 Madam Justice Greer of the Superior Court of Ontario heard the Appellant's Motion and determined that Maria had imputed income of $15,000.00 per annum. Madam Justice Greer also ordered Maria to pay the Appellant, on behalf of the son, $120.00 per month plus her share of extraordinary expenses.
[19] In her Reasons for Judgment Madam Justice Greer ordered as follows:
March 18/04
Mr. Gal, the Respondent and Moving Party in person Ms. Clark, the Applicant in person. Mr. Gal moves before the Court to impute income for his former wife, Ms Clark, as she is in breach of the Order of Justice Croll, dated January 24, 2003, whereas she ordered Ms. Clark to provide a statement(?) of her efforts to gain employment by Sept. 30/03. She failed to do so. She was also to provide income statements by Dec. 15/03, which she also failed to do. Mr. Gal asks the Court to impute income of $25,950 to her, given her diploma from Centennial as a Disability Social Worker. He also asks that she be ordered to pay, based on this imputed income, her portion of (sic) the children's extraordinary expenses. The parties appeared before O'Connell J. on Dec. 18/03 and although not endorsed on the Record, I am told he gave Clark a 90 day extension to (sic) today's date. She did not with comply to this and appeared today with papers in her hand that relate only to job search inquiries on the Internet. She made no attempt to get even a part-time of which there are many in the hospitality. She pleads age (45) had health issues and the death of her mother in 2003, none of which are relevant to her ability to search. I am satisfied that Clark has made no real effort to obtain employment and now tells the Court she will work for her current husband for $1,000/month, which can have done 1 1/2 year ago. If Clark worked at minimum wage, 40 - 45 hours per week; she could earn approximately $15,000. I therefore impute $15,000 as her income for the 2004 year, beginning January 2004. The Guidelines show that child support for one child, Andrew, is $120 per month. Order to go that Clark pays to Gal, who is supporting both children, this sum per month. In addition, she is ordered to pay 26% of the extraordinary expenses for the children. Mr. Gal shall provide an outline of these expenses quarterly, and Clark shall pay accordingly - Order to go, such support to be indexed.
Madam Justice Greer (See Exhibit A-5)
[20] The Appellant testified that the two Court Actions were mainly about obtaining child support payments for his daughter and son.
[21] In support of his position Counsel for the Respondent referred me to the decision of Mr. Justice Cattanach in The Queen v. Burgess, 81 DTC 5192. In that case the Court held that the legal expenses incurred to obtain maintenance for the wife were capital expenses and not deductible.
[22] In considering the situation of the Appellant in further detail I agree with the comments of Bowman J. (now Chief Justice Bowman) where he said in Nissim v. The Queen [1999] 1 C.T.C. 2119 at pages 2125 and 2126:
...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 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.
One cannot read the decision of the Supreme Court of Canada in Symes v. R. (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.
[23] The Appellant filed a hard copy of the electronic version of the Technical News No. 24 dated October 10, 2002. This document is issued by the Canada Revenue Agency ("CRA"). The Appellant directed my attention to the following comments in Issue No. 24:
Legal Costs to Obtain Support Amounts
Paragraph 17 of Interpretation Bulleting IT-99R5 (Consolidated), Legal and Accounting Fees, provides that legal costs incurred in establishing the right to spousal support amounts, such as the costs of obtaining a divorce, a support order for spousal support under the Divorce Act or a separation agreement, are not deductible as these costs are on account of capital or are personal or living expenses. This position is based on the decision of the Federal Court-Trial Division in the case of The Queen v. Burgess, [1981] CTC 258, 81 DTC 5192. The last sentence of paragraph 17 of the interpretation bulletin also provides that legal costs of seeking to obtain an increase in spousal or child support, or to make child support non taxable under the Federal Child Support Guidelines (the "Guidelines"), are non-deductible.
Following the decision in the case of Gallien v. The Queen, [2001] 2 CTC 2676, 2000 DTC 2514 (T.C.C. - Informal Procedure), the Canada Customs and Revenue Agency (CCRA) has reconsidered the above positions. As a result, we now consider legal costs incurred to obtain spousal support under the Divorce Act, or under the applicable provincial legislation in a separation agreement, to have been incurred to enforce a pre-existing right to support. Consequently, these costs are deductible pursuant to the comments in paragraph 18 of Interpretation Bulletin IT-99R5 (Consolidated). We also now accept that legal costs of seeking to obtain an increase in support or to make child support non taxable under the Guidelines are also deductible.
This change in position will be effective for future assessments and reassessments and will not apply retroactively (unless a notice of objection was filed and is still outstanding, or can still be filed).
[24] While a Technical Note or an Interpretation Bulletin do not have the same authority as legislation a Technical Note or an Interpretation Bulletin is useful in outlining the assessing policy of the CRA.
[25] From my reading of Technical Note No. 24, I have concluded that the assessing policy of the CRA has changed and that legal costs incurred to obtain spousal support or child support are deductible.
[26] The appeal is allowed, without costs, and the Appellant is allowed to deduct legal fees of $15,000.00 in determining his income for the 2003 taxation year.
Signed at Ottawa, Canada, this 28th day of March 2006.
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"L.M. Little" |
Little J.
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CITATION: |
2006TCC157 |
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COURT FILE NO.: |
2005-1521(IT)I |
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STYLE OF CAUSE: |
Frank Gal and Her Majesty the Queen |
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PLACE OF HEARING: |
Toronto, Ontario |
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DATE OF HEARING: |
January 20, 2006 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice L.M. Little |
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DATE OF JUDGMENT: |
March 28, 2006 |
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APPEARANCES: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Paolo Torchetti |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada |