T-3847-79
The Queen (Plaintiff)
v.
Dr. Beverley A. Burgess (Defendant)
Trial Division, Cattanach J.—Toronto, June 10;
Ottawa, June 19, 1981.
Income tax — Income calculation — Deductions — Appeal
from a decision of the Tax Review Board whereby legal
expenses incurred by the defendant to obtain maintenance for
herself and her children in divorce proceedings were allowed as
a deduction — Plaintiff submits that the expenses were not
made to earn income from a property within the meaning of
para. 18(1)(a) of the Income Tax Act — Defendant submits
that her right to maintenance is `property" within the defini
tion in subs. 248(1) — Whether the legal expenses were
incurred for the purpose of collecting income to which the
defendant was entitled — Whether the right to maintenance
arose upon the defendant's marriage or upon the Court order
— Appeal allowed — Income Tax Act, R.S.C. 1952, c. 148 as
amended by S.C. 1970-71-72, c. 63, ss. 18(1)(a), 56(1)(b),
60(b), 248(1) — Divorce Act, R.S.C. 1970, c. D-8, s.
11(1)(a), (b).
Appeal from a decision of the Tax Review Board whereby
the legal expenses incurred by the defendant to obtain mainte
nance for herself and her children in divorce proceedings were
allowed as a deduction. The plaintiff contends that the expenses
were not made to earn income from a business or property
within the meaning of paragraph 18(1)(a) of the Income Tax
Act. The defendant submits that her right to maintenance is
"property" within the definition thereof in subsection 248(1).
Property is defined to include a right of any kind. It is implicit
in the defendant's contention that her right to maintenance
arose upon her marriage and that the maintenance payment
ordered by the Court is not the creation of a new right, but is
rather the continuation of the defendant's prior right to mainte
nance. The questions are whether the legal expenses were
incurred for the purpose of collecting income to which the
defendant was entitled and whether the right to maintenance
arose upon the defendant's marriage or upon the order
absolute.
Held, the appeal is allowed. Maintenance is not property in
the proper sense of that term. However the definition of
property in subsection 248(1) of the Act includes "a right of
any kind whatever" and that is broad enough to include a right
to maintenance. The defendant's income does not stem from a
right which arose on marriage. 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.
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.
Hyman v. Hyman [1929] A.C. 601 (H.L.), agreed with.
Lilley v. Lilley [1959] 3 All E.R. 283 (C.A.), agreed with.
Vnuk v. Vnuk (1976) 23 R.F.L. 117, agreed with. Re
Freedman (1924) 55 O.L.R. 206, agreed with. In re
Robinson (1884) 27 Ch. D. 160, agreed with. Evans v.
Minister of National Revenue [1960] S.C.R. 391 (revers-
ing [1959] Ex.C.R. 54) distinguished.
INCOME tax appeal.
COUNSEL:
R. B. Thomas and M. Boris for plaintiff.
R. P. Startek for defendant.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
Coombs, Woolcott & Startek, Stoney Creek,
for defendant.
The following are the reasons for judgment
rendered in English by
CATTANACH J.: This is an appeal, on behalf of
the Minister of National Revenue, from a decision
of the Tax Review Board dated April 9, 1979
whereby, following the defendant's admission, an
amount of $11,700 paid to her by her former
husband pursuant to an order for maintenance of
$75 per week for each of herself and her two
children was properly included in her income for
her 1974 taxation year, an amount of $4,402.66,
being the legal expenses paid by her in obtaining a
divorce a vinculo and in the amount attributable to
obtaining maintenance, was allowed as a deduction
in computing her taxable income for that year.
Prior to trial counsel for the parties agreed upon
the following statement of facts:
AGREED STATEMENT OF FACTS
1. During the 1974 taxation year, Dr. Burgess received the sum
of $11,700.00 as maintenance for herself and children from her
former husband.
2. During the 1973 taxation year, Dr. Burgess expended the
sum of approximately $5,900.00 as fees and disbursements paid
to her solicitors to obtain a decree absolute of divorce and an
award of maintenance for herself and her two children.
3. There was no contest concerning the granting of the Divorce
or the custody of the children between the Defendant and her
former husband.
4. The trial on the Divorce lasted two days in the Supreme
Court of Ontario, before Mr. Justice Stark.
5. The Divorce, custody and access aspects occupied approxi
mately one-half hour, and approximately 1.5 days of the 2 days
of trial concerned the issue of maintenance for Dr. Burgess and
her children.
6. The Court awarded maintenance to Dr. Burgess of $75.00
per week, and a further $75.00 per week for maintenance of
each of the two children, for a total payment of $225.00 per
week.
7. By Judgment dated April 9, 1979, the Tax Review Board
ordered that the Appellant be allowed to deduct the sum of
$4,402.66 in the computation of her income for the 1974
taxation year, which amount was found by the presiding
member, Mr. Bonner, to be that part of the $5,900.00 expended
by the Defendant which was attributable to obtaining mainte
nance for herself and her children.
I have deleted from paragraphs 3, 4 and 5 the
references to the transcript of the divorce proceed
ings because the statements are not disputed.
I would add however that the amount of
$4,402.66 found by the Board to be that portion of
the defendant's legal expenses attributable to
maintenance is an allegation of fact made by the
defendant in paragraph 5 of her statement of
defence.
The basic contention upon which the plaintiff's
appeal is based is that the amount expended by the
defendant for legal expenses was not deductible
from her income in her 1974 taxation year since
those expenses were not expended to earn income
from a business or property within the meaning of
paragraph 18(1)(a) of the Income Tax Act,
R.S.C. 1952, c. 148, as amended, which reads:
18. (1) In computing the income of a taxpayer from a
business or property no deduction shall be made in respect of
(a) an outlay or expense except to the extent that it was
made or incurred by the taxpayer for the purpose of gaining
or producing income from the business or property;
In contradiction thereof the contention on behalf
of the defendant is that her right to maintenance is
"property" within the definition thereof in subsec
tion 248 (1) of the Act which reads in part:
248. (1) .. .
"property" means property of any kind whatever whether real
or personal or corporeal or incorporeal and, without restrict
ing the generality of the foregoing, includes
(a) a right of any kind whatever, ...
It is implicit in the defendant's contention that
her right to maintenance arose upon her marriage
and, from that premise, the further contention is
that the maintenance payment ordered by the
Court is not the creation of a new right but is
rather the continuation of the defendant's prior
right to maintenance. That being so the legal fees
were expended to assert or declare that right from
which it follows that the deduction sought is not
prohibited by paragraph 18(1)(a) having been laid
out to preserve income from property, i.e., the
right to maintenance.
Alimony or maintenance payments are included
in the income for the taxation year of the recipient
by virtue of paragraph 56(1)(b) of the Income Tax
Act. By virtue of complementary paragraph 60(b)
the taxpayer who pays alimony or maintenance to
the other spouse may deduct the payments so
made in computing income for the taxation year.
Paragraphs 56(1)(b) and 60(b) read:
56. (1) Without restricting the generality of section 3, there
shall be included in computing the income of a taxpayer for a
taxation year,
(b) any amount received by the taxpayer in the year, pursu
ant to a decree, order or judgment of a competent tribunal or
pursuant to a written agreement, as alimony or other allow
ance 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 remain
der of the year;
60. There may be deducted in computing a taxpayer's income
for a taxation year such of the following amounts as are
applicable:
(b) an amount paid by the taxpayer in the year, pursuant to a
decree, order or judgment of a competent tribunal or pursu
ant 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 he was living apart
from, and was separated pursuant to a divorce, judicial
separation or written separation agreement from, his spouse
or former spouse to whom he was required to make the
payment at the time the payment was made and throughout
the remainder of the year;
My understanding of the words "alimony" and
"maintenance" has always been that they are tech
nical and terms of art. "Alimony" strictly refers to
an allowance made while the marriage continues
to subsist and "maintenance" strictly refers to the
allowance made when the marriage is dissolved.
Thus an order nisi provision for payment of an
interim allowance pending the order absolute is
"alimony" and a like order after dissolution of the
marriage is "maintenance". An allowance ordered
to be paid on the grant of a divorce a mensa et
thorn (less technically known as a judicial separa
tion) is alimony as are payments agreed upon
between the parties to a marriage in a written
separation agreement.
Paragraph 56(1) (b) covers both "alimony" and
"maintenance" since "maintenance" would fall
within the words "other allowance payable . .. for
the maintenance of the recipient thereof".
It is not disputed that the maintenance awarded
to the defendant and her two children falls precise
ly within paragraph 56(1)(b).
Therefore I have made no reference to para
graph 56(1)(c) and its exact complement para
graph 60(c) for the reason that those paragraphs
must have been included in the statute to cover
those instances, less formal instances, such as
allowances granted for non-support rather than the
more formal instances of divorce, judicial separa
tion or a written separation agreement covered by
paragraph 56(1)(b) but I need not so decide and I
do not do so.
Alimony and maintenance were not deemed to
be income to the recipient nor a deduction to the
payer until 1942 when the payer was allowed a tax
credit. By the statutes of 1942-43, chapter 28, the
payer was allowed a straight deduction and the
recipient was obliged to take the payments into
income and they were assessable as such although
it is difficult to ascertain the concept under which
the payments fit into income in the hands of the
recipient or as deductions rather than personal
expenditures of the payer.
But the statute provides that the maintenance
awarded is income to the recipient. This the
defendant has accepted. The statute leaves no
other choice.
The question is, as I view it, whether the legal
expenses paid by the defendant were expended by
her for the purpose of obtaining income which was
hers as of right. Put yet another way, were the
legal fees expended by her for the purpose of
collecting income to which she was entitled? If this
be so then the expenses are properly deductible.
There is no doubt that the defendant was en
titled to the payments but the question is by virtue
of what circumstance did that entitlement arise?
That entitlement is the right under which the
defendant receives the payment and that right is
"property" within the broad definition in subsec
tion 248 (1) previously quoted.
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 mainte
nance or was that judgment merely a continuation
and quantification of a right to maintenance
already vested in the defendant?
By section 2 of The Judicature Act, R.S.O.
1970, c. 228, the Supreme Court has all the juris
diction, power and authority which had been
vested in its predecessor on December 31, 1912.
That includes the power to make provision for the
future maintenance of a wife whose marriage has
been dissolved as the Court might think reason-
able. The necessity for such power is readily
apparent.
In England prior to 1857 it was not competent
for any court to dissolve a marriage. That was
done by Act of Parliament. In 1857 the courts
were given the power to dissolve the marriage tie
by a decree of divorce. That decree not only affects
the relationship of the husband and wife one to
another but it also changes the status of each of
them.
Divorce differs from judicial separation and any
form of separation agreement. Judicial separation
is nothing more than enforcing through an order of
the Court an arrangement which the parties,
assuming they were willing, could have as equally
well effected for themselves. A right to alimony
provided in such an agreement arises by virtue of
that contract with the force of a decree if by
judicial separation. Divorce is entirely different. It
destroys the whole relationship. As a consequence
of this change in status the Courts have authority
to decree maintenance.
In this regard Lord Atkin in Hyman v. Hyman
[1929] A.C. 601 (H.L.) said at pages 628-629:
While the marriage tie exists the husband is under a legal
obligation to maintain his wife. The duty can be enforced by
the wife, who can pledge his credit for necessaries as an agent
of necessity, if, while she lives apart from him ... under a
decree for separation, he fails to pay the alimony ordered by
the Court. But the duty of the husband is also a public
obligation, and can be enforced against him by the State under
the Vagrancy Acts and under the Poor Relief Acts. When the
marriage is dissolved the duty to maintain arising out of the
marriage tie disappears. In the absence of any statutory enact
ment the former wife would be left without any provision for
her maintenance other than recourse to the poor law authori
ties. In my opinion the statutory powers of the Court to which I
have referred were granted partly in the public interest to
provide a substitute for this husband's duty of maintenance and
to prevent the wife from being thrown upon the public for
support.
The problem with which Lord Atkin was faced
was whether a wife who had covenanted by a deed
of separation not to take proceedings against her
husband for alimony or maintenance and thereaf
ter obtains a decree for divorce is precluded by her
covenant from petitioning for permanent mainte
nance. The House of Lords held that she was not
so precluded.
The significant statement by Lord Atkin for the
purposes of this appeal is in the sentence:
When the marriage is dissolved the duty to maintain arising out
of the marriage tie disappears.
As he subsequently adds, the Court has the
power to provide a substitute for the husband's
duty of maintenance.
In Lilley v. Lilley [1959] 3 All E.R. 283 (C.A.)
Lord Hodson at page 288 stated the common law
in these words:
The common law right was not a right to an allowance but to
be supported by being given bed and board ... .
Of course, at common law, should the husband
fail to provide the wife with the necessities of life
in accordance with the standard of living to which
she was entitled, then the wife might pledge the
husband's credit to provide those necessities. But
on divorce the right to bed and board and the right
to pledge the husband's credit both end with the
dissolution of the relationship.
Thus it is for the Court to provide the substitute
for the right to maintenance.
The authority to grant an order for corollary
relief upon granting a decree nisi for divorce is
discretionary.
Section 11 of the Divorce Act, R.S.C. 1970, c.
D-8, makes this abundantly clear. The Court, if it
thinks it fit and just to do so having regard to the
circumstances of the parties, may make the order
named in paragraph 11(1) (a) requiring the hus
band to provide for the maintenance of the wife
and conversely in paragraph 11(1) (b) require the
wife to likewise provide for the husband.
Fulton J. in Vnuk v. Vnuk (1976) 23 R.F.L. 117
had occasion to consider the discretionary aspects
of section 11 of the Divorce Act. He considered the
circumstances therein contemplated as justifying
an award for maintenance as being first, the abili
ty of the spouse seeking maintenance to maintain
herself at the same level enjoyed during marriage
without the assistance of the other spouse. If this is
not so the next question is whether the spouse
asked to pay the maintenance has the capacity to
do so and if that spouse has that capacity then the
Court must decide upon a reasonable amount of
maintenance.
In this instance the wife had no need for mainte
nance but against the possibility of a change in the
wife's circumstances at a future date she asked for
an "in case" order fixing maintenance at a nomi
nal quantum of $1 per year to preclude being
faced with the reluctance of the Courts to reopen
the question of maintenance when no order was
made at decree nisi.
This he refused to do. He said at page 122:
But to make an order on that basis would, it seems to me, be
to base it on an assumption which is not valid: that is, that
there arises merely by reason of a marriage a right of a wife to
maintenance at all times, and that this right must be main
tained or preserved, even after divorce and even although at the
time of the divorce there was no proper or sufficient ground for
making an order for entitlement.
The invalid assumption which Mr. Justice
Fulton had in mind is that a right of a wife to
maintenance at all times arises merely by reason of
a marriage.
This is consistent with the law as reiterated by
Lord Atkin in Hyman v. Hyman (supra) when he
said [at page 628]: "When the marriage is dis
solved the duty to maintain arising out of the
marriage tie disappears" and by Lord Hodson in
Lilley v. Lilley (supra) where he said that the
common law right was not a right to an allowance
but merely to be supported by being given bed and
board. Even that ungenerous right would end in
divorce.
In Re Freedman (1924) 55 O.L.R. 206, Fergu-
son J.A. had for consideration a petition by a
woman against her former husband for a receiving
order, her claim as a creditor being based upon a
failure to pay alimony from time to time under
orders of the Court.
After an extensive review of the authorities he
considered that alimony is not property and is not
assignable.
He quoted [at page 211] Cotton L.J. in In re
Robinson (1884) 27 Ch. D. 160 when he said at
page 164:
Alimony is an allowance which, having regard to the means of
the husband and wife, the Court thinks right to be paid for her
maintenance from time to time, and the Court may alter it or
take it away whenever it pleases. It is not in the nature of
property, but only money paid by the order of the Court from
time to time to provide for the maintenance of the wife.
and Lindley L.J. when he said at page 165:
It is not property in its proper sense; it is like an allowance
made by a husband to his wife or a father to his child.
There is no question in my mind that in the light
of the foregoing jurisprudence maintenance is not
property in the proper sense of that term. However
the definition of property in subsection 248(1) of
the Act includes "a right of any kind whatever"
and that is broad enough to include a right to
maintenance.
The learned member of the Tax Review Board
in concluding that the defendant was entitled to
deduct the legal expenses incurred by her in
obtaining a judgment by which her husband was
obligated to pay maintenance for the support of
herself and two children in the amount determined
did so by placing reliance on the decision of the
Supreme Court of Canada in Evans v. M.N.R.
[1960] S.C.R. 391.
That was an appeal from the decision of Camer-
on' J. [1959] Ex.C.R. 54, allowing an appeal from
the decision of the Income Tax Appeal Board.
Cameron J., whose reasoning and conclusion
were agreed with by Judson and Fauteux JJ. who
dissented from the majority of the Supreme Court,
was of the opinion that an amount of $11,974.93 in
legal fees expended by Mrs. Evans to obtain pay
ment of an annual income of $25,000 from the
estate of her father-in-law was an outlay on
account of capital and so barred from deduction
by paragraph 12(1)(b) (now paragraph 18(1)(b))
and accordingly he found it unnecessary to consid
er whether the payment fell within paragraph
12(1)(a) (now paragraph 18(1)(a)), that is an
expense incurred for the purpose of gaining income
from property.
Cartwright J., speaking for himself and Tas-
chereau and Ritchie JJ., disagreed with the con-
clusion by Cameron J. that the right was a capital
asset.
In considering the origin of the right to income
he said at page 397:
In the case at bar, as has already been pointed out, the
appellant, on September 20, 1953, became entitled for the
remainder of her life-time to be paid the income from the
one-third share. The legal ownership of that share remains at
all times in the trustee and the capital of which it consists will
be paid on the appellant's death, to those entitled under the will
of Thomas Alexander Russell. In no circumstances can the
appellant ever become entitled to any part of that capital; her
right is solely to require the trustee to pay the income arising
from the share to her; this is a right enforceable in equity and
everything received by the appellant by virtue of the right will
be taxable income in her hands. The payment of the legal fees
in question did not bring this right or any asset or advantage
into existence. Her right to receive the income is derived not
from the judgment of the Court but from the combined effect
of the wills of Thomas Alexander Russell and John Alexander
Russell. Wrongly, as it turned out, the trustee entertained
doubts, presumably engendered by the claims of Mrs. Ander-
sen, as to whether it should pay to the appellant the income to
which she was entitled and it would not pay anything until the
matter had been passed upon by the Court.
The appellant's right to income from shares
arose from the will of her father-in-law and the
appointment in the will of her husband and not
from the judgment of the Court. That right had
existed throughout.
In speaking of the purpose of the legal expenses
Mr. Justice Cartwright 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 comput
ing the appellant's taxable income. This, in my opinion, is the
right view of the matter and is not altered by the cricumstance
that it was mistakenly claimed by Mrs. Andersen that the
appellant was not entitled to any income at all.
The legal expenses had been included to obtain
payment of the income to which she was entitled.
Mr. Bonner, the member of the Tax Review
Board, in his reasons for judgment quoted the
same extracts from the Evans case which I have
quoted above. Before doing so however he prefaced
them with his own premise:
If I am correct in the conclusion reached above that the
Appellant in this case incurred the legal expense in order to
produce income from a right which arose on marriage the
decision of the Supreme Court in the Evans case is conclusive
against the Respondent's contention that the expenditures
made by the Appellant in the present case are on capital
account.
With respect I disagree with that premise.
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 substi
tute, as its discretion dictates, maintenance in a
reasonable amount. It is the order of the Court
which grants the defendant her right to mainte
nance.
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 mainte
nance 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 appeal is therefore allowed.
I was informed that there are conflicting deci
sions by different members of the Tax Review
Board but that the amount of payable tax in
controversy in this appeal by the Minister is less
than $2,500.
In accordance with subsection 178(2) of the Act
the Minister shall pay all reasonable and proper
costs of the defendant in 'connection with the
appeal.
With the concurrence of counsel for the parties I
have fixed those costs in the sum of $1,000 in lieu
of taxed costs in accordance with Rule 344(1).
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.