Date: 20010312
Docket: 2000-754-IT-I
BETWEEN:
JOHN O'DONOVAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] This appeal pursuant to the Informal Procedure was heard at London, Ontario on March 8, 2001. The Appellant was the only witness.
[2] Paragraphs 6 to 12 inclusive of the Reply to the Notice of Appeal read:
6. In computing income for the 1998 taxation year, the Appellant reported other income in the amount of $15,465.48 from The Standard Life Insurance Company.
7. The Minister of National Revenue (the "Minister") assessed the Appellant for the 1998 taxation year, as filed, by Notice of Assessment thereof, dated on May 25, 1999.
8. Subsequently, the Minister reassessed the Appellant for the 1998 taxation year, Notice of Reassessment thereof dated July 12, 1999, allowing the amount of $3,030.00 as legal fees (the "Expense"). The Minister further reassessed the Appellant to disallowed the amount of the Expense, Notice of Reassessment dated July 26, 1999.
9. In so reassessing the Appellant, the Minister made the following assumptions of fact:
a) the facts hereinbefore admitted or stated;
b) the legal expense incurred by the Appellant was with respect to obtain benefits under a "wage replacement plan", to secure Appellant's right to an amount receivable from the insurer;
c) the Expense was not incurred for the purpose of gaining or producing income from a business or property, but was personal or living expenses of the Appellant.
B. ISSUES TO BE DECIDED
10. The issue is whether the Expense is deductible to collect benefits under a wage loss replacement plan.
C. STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF SOUGHT
11. He relies on section 248(1), subsection 8(2) and paragraphs 8(1)(b) and 6(1)(f) of the Act as amended for the 1998 taxation year.
12. He submits that the disallowed Expense was not incurred to collect or establish a right to salary or wages your employer or former employer owed you with the meaning of paragraph 8(1)(b) and subsection 8(2) of the Act.
[3] Mr. O'Donovan testified that the payor in question was "Standard Life" which had a contract with the employer Carleton Cards Limited ("CCL").
[4] Mr. O'Donovan was an employee of CCL which had an insurance contract with Standard Life. CCL took a contribution to that contract from Mr. O'Donovan's remuneration. Mr. O'Donovan suffered a heart attack and was off work for six years. Standard Life, pursuant to its contract with CCL, was required to pay Mr. O'Donovan 75% of his CCL wages. CCL reported a lower wage rate to CCL. After long correspondence Mr. O'Donovan sued CCL for the 75%. The amount of $15,465.40 was paid by Standard Life to Mr. O'Donovan to settle the suit after CCL corrected its report to Standard Life. Mr. O'Donovan's deduction of legal expenses of $3,030.35 was denied. He appealed.
[5] Exhibit R-1, the T4A from Standard Life to Mr. O'Donovan respecting the $15,465.48 describes the payment as an "income benefit". Thus, the evidence is that Mr. O'Donovan sued CCL to determine the correct amount for payment, and payment of the correct amount resulted. But the payment was made by Standard Life to Mr. O'Donovan.
[6] Thus the amount paid was not income from an office or employment as set forth in subsection 8(2). Nor was the legal expense incurred to collect or establish a right to salary or wages owed to Mr. O'Donovan by CCL within paragraph 8(1)(b).
[7] Rather, Mr. O'Donovan paid the legal fees in question to collect income pursuant to a claim to income which he had pursuant to his employer's insurance program for which Mr. O'Donovan had paid at least part of the premium.
[8] The same principle was dealt with by the Supreme Court in Gladys Evans v. Minister of National Revenue, 60 DTC 1047. There Cartwright, J. speaking for the Majority stated:
Origin of right to income
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. Andersen, as to whether it should pay to the appellant the income to which he was entitled and it would not pay anything until the matter had been passed upon by the Court.
Purpose of legal expenses
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 computing the appellant's taxable income. This, in my opinion is the right view of the matter and is not altered by the circumstance that it was mistakenly claimed by Mrs. Anderson that the appellant was not entitled to any income at all. ...
In my opinion, in the circumstances of this case there are two relevant questions both of which must, on the admitted facts, be answered in the affirmative; (i) was the appellant's claim in regard to which the expenses were incurred a claim to income to which she was entitled? (ii) were the legal expenses properly incurred in order to obtain payment of that income? ...
[9] Cartwright, J.'s questions are answerable in the affirmative in Mr. O'Donovan's case as well.
[10] For these reasons, the appeal is allowed.
[11] The Appellant had to come from Stratford to London to prosecute his appeal. He is awarded costs of $100.00 for the reimbursement of his out-of-pocket expenses for postage, copying and other miscellaneous amounts incurred.
Signed at Ottawa, Canada, this 12th day of March, 2001.
"D. W. Beaubier"
J.T.C.C.