Date: 20030917
Docket: T-799-01
Citation: 2003 FC 1074
OTTAWA, ONTARIO, this 17th day of September 2003
Present: The Honourable Justice Dolores M. Hansen
BETWEEN:
JANA KAROLINA PLATTIG
Applicant
and
ATTORNEY GENERAL OF CANADA
Respondent
REASONS FOR ORDER AND ORDER
[1] The applicant seeks judicial review of a decision of the Minister of National Revenue's delegate made pursuant to subsection 152(4.2) of the Income Tax Act, R.S.C. 1985 c. 1 (5th Supp.) ("Act") denying the applicant's request for reassessment of her income tax returns for the 1989-1997 taxation years. Pursuant to subsection 152(4.2) of the Act, one of the statutory provisions of the "fairness legislation", the Minister may upon application by a taxpayer re-open an otherwise statute-barred taxation year and reassess the income tax return for that year.
Background Facts
[2] The applicant owned and worked for False Creek Realty Ltd. as a real estate agent. In December 1988, she sold the company but remained with the company as an employee. In early 1989, she moved to Remax Select Properties ("Remax"). At this time, the applicant had a large portfolio of commercial and residential listings. As the administrative support and advertising provided by Remax was insufficient to adequately service the listings, the applicant incurred significant additional expenses. During this same period of time, the applicant's common-law relationship came to an end.
[3] In 1989, the applicant commenced an action against her common-law spouse for maintenance and other relief. The claim for maintenance was brought pursuant to section 57 of the Family Relations Act, R.S.B.C. 1979, c.121. The Supreme Court of British Columbia dismissed the claim in 1992. The applicant appealed the decision to the Court of Appeal for British Columbia. In the fall of 1995, the Court of Appeal overturned the earlier decision and awarded the applicant monthly maintenance of $4,500 commencing September 1, 1992 and continuing for the lifetime of the applicant. The Court ordered that the award of maintenance survived the death of the applicant's former common-law spouse and was binding on his estate. As well, the Court ordered that the maintenance payments be secured in a form satisfactory to the Registrar. After prolonged negotiations and further submissions being made to the Court, the required security was put into place in 1997.
[4] In late 1989, the applicant began to suffer severe emotional and mental difficulties stemming from the breakdown of her common-law relationship, the forced relocation of her real estate business, and her attempts to salvage her real estate business. Ultimately, the applicant required psychiatric treatment including a period of hospitalization in 1993. As a result, the applicant was unable to work for a significant period of time.
[5] Although the applicant had claimed and was allowed business expenses of $44,999 and $3,641 for the 1989 and 1990 taxation years, in 1996, during a review of her personal and business files, the applicant discovered unclaimed business expenses of $39,113 and $7,235 for 1989 and 1990 respectively. The applicant applied to the Canada Customs and Revenue Agency ("CCRA") for reassessments of her personal income tax returns for 1989 and 1990 in accordance with her proposed amendments for those taxation years. The applicant sought to amend her returns for the purpose of deducting the unclaimed business expenses. As well, the applicant requested amendments to her 1989-1995 income tax returns to deduct the additional legal fees she incurred in the litigation against her common-law spouse.
The First Level Review
[6] The Assistant Director of Verification, Enforcement and Compliance conducted the first level review of the applicant's request. By letter dated February 16, 1998, she notified the applicant of the Minister's decision to deny her request. The relevant portions of the letter states:
No adjustments will be made to your request for business loses for 1989 and 1990, as all the documentation you provided indicates that the expenses were paid by Saskia Enterprises Ltd. Therefore, it has been determined that these expenses were the expenses of the corporation and may not be claimed on your personal return.
Legal fees claimed in 1993 may only be deducted if they were incurred to enforce an existing court order. As the fees you incurred were to establish your right to spousal support in your initial action in 1992, these legal fess are not deductible.
[7] On January 11, 1999, the applicant requested a second level review. In addition to the earlier request for adjustments to her returns, the applicant also applied for deductions of $13,561 and $1,200 for legal fees incurred in 1996 and 1997 respectively.
The Second Level Review
[8] As part of the second level review process, Joel Laliberte of CCRA prepared a Fairness Package Report recommending that the applicant's adjustment requests be disallowed. In the report, Mr. Laliberte sets out the background facts in relation to the business expenses. He states that the "taxpayer is claiming that business expenses in 1989 were disallowed and is claiming expenses of $39,113". He also states that the "taxpayer is claiming that she failed to claim business expenses in 1990 and is now claiming expenses of $7,235".
[9] He notes, however, that the applicant claimed business expenses in both years and the amounts claimed for each year were allowed. With respect to his review of the file, he observes that the documentation submitted by the applicant in support of her claim consists mainly of cancelled cheques and credit card statements and that the cancelled cheques were on an account in the name of Saskia Enterprises Ltd. ("Saskia"). He also observes that a search of CCRA files did not produce any information about Saskia. Finally, he states that the first level review was refused because the expenses were not paid by the applicant personally and there were no supporting receipts.
[10] According to the report, he took into account the following factors regarding the business expenses:
- the applicant had claimed expenses for both years
- the 1989 expenses previously allowed exceed the amount requested
- the 1990 expenses claimed are greater than the amount previously allowed
- a review of the 1990 record showed that acceptable supported expenses were only $1,240 which was less than the $3,641 previously allowed
- a review of the 1990 taxpayer statement of expenses indicated that the receipts presented were probably already included in the original claim, however, a request for all receipts for 1990 was not made since these had been previously reviewed and disallowed
- the majority of the documentation was in the form of cancelled cheques in the name of Saskia Enterprises Ltd.
[11] Mr. Laliberte recommended that the requested adjustments for the business expenses be disallowed "as the expenses on the returns as filed for 1989 and 1990 exceed the amounts requested".
[12] With respect to the legal fees, Mr. Laliberte also recommended that the claim be denied. He concluded that all of the legal fees incurred up to August of 1995 were for "the purpose of securing the rights or entitlement of support payments and are therefore not deductible". With regard to the legal fees incurred after August 1995, he found that they were incurred for the purpose of obtaining security for payments after the death of the applicant's former common-law spouse. Since the security for payment requirement was part of the decision establishing entitlement and not for the purpose of enforcing a pre-existing right, he recommended that the deduction of these fees also be denied.
[13] Mr. Laliberte's report together with a draft letter addressed to the applicant incorporating his recommendations were forwarded to the Minister's delegate, Mr. Sixsmith, for his consideration. By letter dated April 4, 2001, Mr. Sixsmith informed the applicant that all of her requests were denied. In this letter, he states that the request regarding the business expenses is disallowed since "a review of returns for 1989 and 1990 indicates that business expenses greater than your request have already been allowed as deductions on your return. With respect to the legal fees, he states that in order for legal fees to be deductible they must be incurred to enforce the collection of an existing right. Since the fees were incurred to determine a right and to establish related security they were not deductible.
[14] In his affidavit filed in this proceeding, Mr. Sixsmith states that he based his decision on a review of the CCRA file, correspondence between the applicant and CCRA, the second level review report, departmental guidelines, and interpretation bulletins. As well, he states that in reaching his decision he considered the following factors:
- the applicant was unable to substantiate the amounts of the total business expenses claimed for 1989 and 1990;
- many of the business expenses and legal fees were paid by the applicant's company Saskia and were not deductible by the applicant;
- since the legal fees were paid to establish a right to maintenance or to determine related security and not to enforce the collection of an existing right they were not deductible; and
- the applicant did not provide a valid explanation for the failure to claim the expenses when her income tax returns were originally filed.
Issue
[15] Did the Minister properly exercised his discretion in deciding not to re-open statute-barred taxation years to make adjustments to the assessments for those years as requested by the applicant?
Submissions of the Parties
[16] The respondent submits that in exercising his discretion under subsection 152(4.2) of the Act the Minister must not only be satisfied that the taxpayer's circumstances warrant a re-opening of a statute-barred year but, as well, the Minister must be satisfied that the taxpayer would have been entitled to an adjustment if the taxation year at issue had not been statute-barred. The Minister may not exercise his discretion unless the taxpayer's claim is otherwise valid in fact and in law.
[17] The respondent submits that the Minister's delegate exercised his discretion in a fair and reasonable manner. In reaching his decision, the Minister's delegate relied on relevant factors including the nature of the applicant's request, the information provided and the submissions made by the applicant, the CCRA guidelines, the materials in the CCRA file, and the absence of any information or documentation to verify the applicant's claim. The respondent maintains that there was no factual or legal basis that would allow the applicant to deduct the unclaimed business expenses for the 1989 and 1990 taxation years and the legal fees claimed for the 1989-1997 taxation years.
[18] Finally, the respondent argues that the fairness legislation is not intended to supplement the statutory appeal processes available to taxpayers. In the present case, the applicant failed to avail herself of the statutory processes to deal with the assessments for the taxation years at issue.
[19] The applicant submits that none of the business expenses at issue in this proceeding were included in the deductions she claimed when she filed her income tax returns. She states that she provided detailed documentation to CCRA concerning her business expenses including invoices and receipts. The applicant acknowledges that in error she paid the business expenses by cheques on Saskia's account, however, she maintains that all of the expenses were incurred to produce the taxable income reported on her personal returns.
[20] Regarding the legal fees, the applicant argues that the Minister's delegate failed to have regard to the reasons of the Court of Appeal in reaching his decision. The applicant argues that in overturning the lower court decision, the Court of Appeal clearly stated that she was entitled to maintenance and that the only issue to be determined was with respect to the amount of maintenance.
[21] The applicant also raised additional matters in her Application Record. At the hearing of the judicial review, I explained to the applicant that these additional matters were beyond the scope of this judicial review. Accordingly, they will not be considered in these reasons.
The Standard of Review
[22] In Barron v. Minister of National Revenue, [1997] 2 C.T.C. 198 at page200, Pratte J.A. articulated the standard of review of a decision made pursuant to subsection 152(4.2) of the Act as follows:
Before saying why we think that these findings are wrong, it may be useful to recall that subsection 152(4.2) of the Income Tax Act confers a discretion on the Minister and that, when an application for judicial review is directed against a decision made in the exercise of a discretion, the reviewing court is not called upon to exercise the discretion conferred on the person who made the decision. The court may intervene and set aside the discretionary decision under review only if that decision was made in bad faith, if its author clearly ignored some relevant facts or took into consideration irrelevant facts or if the decision is contrary to law.
Analysis - Legal Fees
[23] In my opinion, the Minister's delegate erred in law in concluding that the legal fees were not deductible "as they were not incurred to enforce the collection of an existing right but were paid to establish a legal right to maintenance, or to determine the related security as identified in the Court decisions, and therefore they were personal expenses".
[24] Interpretation Bulletin IT 99-R5 explains that, generally, legal fees are allowable deductions "to the extent that they are incurred for the purpose of gaining or producing income from a business or property, and are not outlays of a capital nature." At paragraphs 17 and 18 of IT 99-R5, further guidance is provided regarding the deductibility of legal expenses incurred for the purpose of obtaining support payments. Paragraphs 17 and 18 state:
Legal costs incurred in establishing the right to support amounts, such as the costs of obtaining a divorce, a support order under the Divorce Act or a separation agreement, are not deductible as these costs are on account of capital or are personal and living expenses. Similarly, legal costs of seeking to obtain an increase in such amounts are also non-deductible.
Legal costs incurred to enforce pre-existing rights to either interim or permanent support amounts are deductible. A pre-existing right to a support amount can arise from a written agreement, a court order or legislation such as Part III of the Family Law Act of Ontario, and enforcing such a right does not create or establish a new right; see The Queen v. Burgess, [1981] CTC 258, 81 DTC 5192 (F.C.T.D.). ...
[25] Although he did not provide any analysis for his determination, it is evident that the Minster's delegate was guided by paragraph 17 of the Interpretation Bulletin. However, having regard to the reasons of the trial judge and the Court of Appeal, it is clear that the applicant claimed and was ultimately awarded maintenance pursuant to section 57 of the Family Relations Act (now section 89 of the same Act).
[26] Section 57 provided:
(1) A spouse is responsible and liable for the support and maintenance of the other spouse having regard to the following:
(a) the role of each spouse in their family;
(b) an express or implied agreement between the spouses that one has the responsibility to support and maintain the other;
(c) custodial obligations respecting a child;
(d) the ability and capacity of, and the reasonable efforts made by, either or both spouses to support themselves;
(e) economic circumstances.
[27] This provision establishes the right to maintenance as does the similar provision found in Part III of the Ontario legislation referred to in the guidelines. Accordingly, the legal fees incurred by the applicant were not incurred to establish the right to maintenance, instead, they were incurred to enforce the statutory right to maintenance. Following the granting of the maintenance order, the applicant was engaged in lengthy negotiations and further recourse to the Court of Appeal to obtain the security as required by the initial order. In part, the applicant 's concern was that her former spouse was arranging his financial affairs in a manner that would have precluded the enforcement of the maintenance order after his death. In my view, these legal fees were incurred for the purpose of enforcing an integral part of the maintenance order and to ensure the enforceability of the order upon the death of the former spouse. For these reasons, I conclude that the determination regarding the legal fees was based on an error of law.
Business Expenses
[28] At the hearing, the respondent acknowledged that Mr. Laliberte was in error regarding two facts: 1) the applicant was claiming that business expenses in 1989 had been disallowed and was now claiming business expenses of $39,113; 2) the was applicant claiming that she failed to claim business expenses in 1990 and was now claiming business expenses of $7,235.
[29] The respondent also acknowledged that Mr. Sixsmith erred in stating that the applicant had not provided an explanation for the failure to claim the expenses at the time the income tax returns were originally filed. The respondent conceded that the applicant's personal circumstances fall within the types of circumstances contemplated by the fairness legislation.
[30] The respondent submits, however, that these errors do not warrant the Court's intervention. The respondent argues that the Minister's delegate based his decision on two key factors. First, the applicant was unable to substantiate the amounts of the total business expenses claimed for 1989 and 1990. Second, since many of the business expenses were paid by Saskia, they were not properly deductible by the applicant. For these reasons, the Minister's delegate was not satisfied that the applicant's claims were valid in fact and in law.
[31] With respect to the first factor, the respondent maintains that since the applicant only provided CCRA with the supporting documents for the unclaimed business expenses and the applicant's expenses were originally allowed without an audit, there was no way to determine if the requested deductions had been included in the original deductions.
[32] In my view, the evidentiary record does not support the respondent's factual assertion. In May 1997, CCRA wrote to the applicant requesting that she provide copies of her original 1989 and 1990 income tax returns including statements of commission/business income and expenses and T4 A information slips. As well, CCRA requested "original receipts and/or vouchers in support of ALL commission/business expenses claimed in 1989 and 1990". In her affidavit, the applicant states that she personally delivered receipts for all commissions and business expenses to CCRA in August 1997.
[33] In August 2000, Mr. Laliberte asked the applicant to provide "documents detailing your real estate income, evidence supporting the amounts deposited to your business account, along with the relevant bank statements". He notes that copies of the T2200 Declaration of Conditions of Employment forms, T777 Statement of Employment Expenses, together with all supporting documents and receipts are required to process the claim. The applicant states in her affidavit that she provided all of the requested documents to CCRA at the end of August 2000.
[34] I note, as well, there is no evidence indicating that the only documents available for review were those in support of the unclaimed amounts. Further, it would appear from the Fairness Package Report, that at least in relation to the 1990 expenses, documents in support of the total expenses for 1990 were available for review.
[35] The respondent also submits that since the documents submitted by the applicant consisted primarily of cancelled cheques and credit card statements, the Minister's delegate could not be satisfied that the claimed expenses were proper business expenses.
[36] I accept that if the decision was based on this assertion, then the error regarding underlying basis for the applicant's request in relation to the 1989 expenses would not be a material error. However, according to the Fairness Package Report, the finding that the expenses of $39,113 being claimed by the applicant were included in the deductions of $44,999 previously allowed was not based on the insufficiency of the documentation. Instead, it was based on the mistaken belief that the applicant was attempting to claim expenses that had previously been disallowed. This mistaken belief coupled with the fact that the applicant had claimed and was allowed an amount greater than the amount for which she was requesting an adjustment led to the conclusion that the applicant was claiming expenses that had already been allowed.
[37] This error had an additional consequence. Although there are comments in the Fairness Package Report regarding a review of some of the 1990 expenses and an auditor's review of the 1990 expenses is included in the list of attachments to the report, there are no comments nor is there any listing of an auditor's review of the 1989 expenses that would indicate the documents submitted by the applicant for the 1989 expenses were examined as part of the second level review process.
[38] I can only infer that having reached the conclusion that the expenses being claimed by the applicant had been already allowed, Mr. Laliberte saw no need to conduct a review of the applicant's materials.
[39] In my opinion, the error of fact regarding the underlying basis for the applicant's claim was central to the determination regarding the 1989 expenses. This error of fact together with the failure of the decision maker to have regard to the materials submitted by the applicant renders the decision in relation to the 1989 expenses patently unreasonable.
[40] With respect to the 1990 expenses, I accept the respondent's argument that the misapprehension of the fact underlying the request was not material to the decision. Although Mr. Laliberte's statement of the factors on which he relied in making his recommendation are somewhat difficult to understand, I interpret them to mean the following. Since acceptable supporting documents were submitted for expenses totalling $1,240 and an amount greater than this amount was allowed at the time the applicant filed her income tax return, the applicant had failed to demonstrate that she was entitled to any further deductions.
[41] With regard to the second factor, the respondent initially took the position that even if acceptable supporting documents had been submitted by the applicant and the Minister's delegate was satisfied that the expenses had not been included in the original claim, the expenses would still have been disallowed because they were paid by Saskia. However, the issue as to whether an individual may personally deduct business expenses incurred for the purpose of earning income when those expenses were paid on behalf of the individual by a separate legal entity was not specifically addressed by the respondent in its written submissions. In oral argument, counsel for the respondent took the position that in the circumstances just described the expenses may be deductible personally, however, in the absence of corporate records detailing the nature of the financial transaction between the individual and the company this question could not be resolved. Given the absence of any information in the Court record other than the applicant's statement in her affidavit that all of the expenses were incurred to produce the income she reported personally, and having regard to the position taken by the respondent, the Court is not in a position to assess the respondent's initial submission on this point.
[42] Finally, the respondent also argues that subsection 152(4.2) of the Act was enacted to provide the Minister with some degree of flexibility and discretion in dealings with taxpayers who are unable to meet the statutory deadlines. However, it was not intended to be a supplement to the statutory appeal processes available to taxpayers. In the respondent's view, the applicant should have appealed to the Tax Court of Canada if she wished to object to an assessment for any of the years at issue. In my opinion, having regard to the facts in the present case, this argument is misplaced. The applicant did not take issue with any of the assessments. She was attempting to claim expenses she had overlooked because of health problems. Under the Act, the only option available to the applicant was a request to re-open the statute barred years.
Conclusion
[43] For these reasons, the application for judicial review is allowed and the matter is remitted for reconsideration by a person authorized by the Act to perform the duties of the Minister with respect to subsection 152(4.2) of the Act.
ORDER
THIS COURT ORDERS that the application for judicial review is allowed and the matter is remitted for reconsideration by a person authorized by the Act to perform the duties of the Minister with respect to subsection 152(4.2) of the Act.
"Dolores M. Hansen"
J.F.C.C.
FEDERAL COURT
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-799-01
STYLE OF CAUSE: Jana Karolina Plattig v. Attorney General of Canada
PLACE OF HEARING: Vancouver, B.C.
DATE OF HEARING: June 24, 2002
REASONS FOR Order : The Honourable Madam Justice Hansen
DATED: September 17, 2003
APPEARANCES:
Jana Karolina Plattig FOR PLAINTIFF / APPLICANT
Karen Truscott FOR DEFENDANT/ RESPONDENT
SOLICITORS OF RECORD:
Jana Karolina Plattig FOR PLAINTIFF/APPLICANT
Deputy Attorney General of Canada FOR DEFENDANT/ RESPONDENT