97-933(IT)I
BETWEEN:
MICHAEL LAWRENCE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on January 6, 1998 at Toronto, Ontario, by
the Honourable Judge T.P. O'Connor
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Nancy Arnold
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1994 and 1995 taxation years are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant shall be entitled to deductions for legal fees of $13,845.78 for 1994 and $5,170.19 for 1995.
Signed at Ottawa, Canada, this 16th day of January 1998.
|
"T.P. O'Connor" |
J.T.C.C.
Date: 19970116
Docket: 97-933(IT)I
BETWEEN:
MICHAEL LAWRENCE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
O'Connor, J.T.C.C.
[1] The Minister of National Revenue ("Minister") denied deductions claimed by the Appellant for legal fees of $13,845.78 in 1994 and $31,170.19 in 1995 and the issue is whether the Minister was correct in so doing.
[2] The basic facts are as follows. Prior to February 1991 the Appellant was a licensed real estate agent in the employ of Homelife Solaris Realty Inc. ("Homelife").
[3] In February of 1991, the Appellant and eight other individuals left Homelife. Three of the nine, including the Appellant, formed a new company, Four Seasons Real Estate Inc. ("Four Seasons"). The said three persons beneficially owned Four Seasons equally through the intermediary of an Ontario numbered company.
[4] By statement of claim dated June 19, 1992 Homelife sued, inter alia, Four Seasons and the said nine individuals, including the Appellant, for $1 million damages alleging, inter alia, stealing of listings, files, plans, keys and clients from Homelife. Although the statement of claim does not specifically say so it was a joint and several claim.
[5] By a judgment of the Ontario Court of Justice - General Division dated February 8, 1995, Four Seasons and six of the said individuals (including the Appellant) were condemned jointly and severely to pay Homelife $70,000 (three other defendants had declared bankruptcy). This judgment gave effect to a settlement arrived at by counsel for the respective parties. Homelife ceased carrying on business in 1994 but there is no evidence that it ceased to exist legally.
[6] The Appellant paid his share of the legal fees to defend and ultimately settle the statement of claim. As mentioned the amount for 1994 was $13,845.78. For 1995 the amount was $31,170.14 but this included an amount of $26,000 which the Appellant sent to his lawyers to pay the Appellant's share of the agreed settlement figure of $70,000.
Submissions
[7] The Minister submits that since the Appellant was a former employee of Homelife then because of subsections 8(1) and 8(2) of the Income Tax Act ("Act") he is not entitled to deduct the fees because they did not represent legal expenses incurred to collect or establish a right to salary or wages nor to collect or establish a right to a retiring allowance and they were not paid for the purpose of gaining or producing income from business or property.
[8] The Appellant points to Interpretation Bulletin 99R4 and in particular to the first sentence of paragraph 4 thereof which reads as follows:
4. Legal costs to prosecute and to defend most tort, contract and other civil claims arising in the ordinary course of business will generally be deductible.
[9] The Appellant also contends that he was forced to settle because of financial considerations. If he did not settle he would have had to face much higher legal fees to proceed with the estimated six week trial if the case was to go forward. Moreover, Homelife was out of business and had no assets and even if the Appellant was successful in his defense no contribution to costs could be recovered from Homelife. The Appellant further argues that the amount of $26,000, although representing his share of the agreed settlement, should nevertheless be deductible. He points out that he paid it to his lawyer and Homelife was no longer in business in 1995.
Analysis
[10] In my opinion paragraph 4 of Interpretation Bulletin 99R4 is not applicable because the claim did not arise in the ordinary course of business. On the other hand, in my view, subsections 8(1) and 8(2) of the Act also do not apply. The Appellant had left Homelife and was no longer an employee. Moreover, he was a real estate agent whose earnings were based mainly on commission income. He did not simply receive a salary. For example, the Appellant's income tax return for 1994 and the T4 slip of his employer in that year indicates his income being as "employment income" as well as being "employment commissions".
[11] Moreover the statement of claim had nothing to do with an ongoing or former relationship of employee and employer. It was a claim by the former employer for damages for breach by the former employee of a non-competition agreement.
[12] The legal fees were incurred by Four Seasons and the group of individuals to defend the statement of claim. It was not in the context of the former contract of employment but rather in the context of the new real estate business being carried on by Four Seasons and the individuals. Moreover, the claim was joint and several, which could have resulted in the Appellant being entirely responsible for the total amount claimed. This, in my view, clearly takes the situation out of one of an employer/employee relationship.
[13] The foregoing conclusions are weakened slightly by the fact that the Four Seasons operation closed down in September of 1992. However, the statement of claim was filed in June of 1992 and that triggered the need for the Appellant and the others to retain a lawyer and pay the legal fees required to defend the statement of claim and ultimately settle it.
[14] Consequently, in my opinion the Appellant is entitled to his deduction of $13,845.78 for 1994. With respect to 1995, however, in my opinion, he is only entitled to a deduction of $5,170.19, that is to say the amount claimed of $31,170.19 less the $26,000.00 which represented the Appellant's share of the agreed upon settlement figure. In other words, the $26,000.00 was not legal fees. It represented the Appellant's share of the settlement. Its nature is one of damages paid.
[15] There is considerable jurisprudence on the question of whether a damage payment is of a capital nature (non-deductible) or income/expense nature (deductible) and each case must be decided on its own facts.
[16] In the present case from the Appellant's point of view I do not see how the $26,000.00 could be considered as one of an income or expense nature. It had nothing to do with producing income from a business or property.
[17] In conclusion the appeals are allowed on the following basis. The Appellant shall be entitled to deductions for legal fees of $13,845.78 in 1994 and $5,170.19 in 1995. The matters are referred back to the Minister for reconsideration and reassessment on this basis.
Signed at Ottawa, Canada, this 16th day of January 1998.
|
"T.P. O'Connor" |
J.T.C.C.
COURT FILE NO.: 97-933(IT)I
STYLE OF CAUSE: Michael Lawrence and
Her Majesty the Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: January 6, 1998
REASONS FOR JUDGMENT BY: the Honourable T.P. O'Connor
DATE OF JUDGMENT: January 16, 1998
APPEARANCES:
For the Appellant: the Appellant himself
Counsel for the Respondent: Nancy Arnold
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: George Thomson
Deputy Attorney General of Canada
Ottawa, Canada