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Docket: 2002-2870(IT)I |
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BETWEEN: |
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LUCIA ZITKO, |
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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 24, 2003, at Ottawa, Ontario
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By: The Honourable Judge Campbell J. Miller |
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Appearances: |
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Agent for the Appellant: |
Jack R. Bowerman |
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Counsel for the Respondent: |
Justine Malone |
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JUDGMENT
The appeal from the assessment of tax made under the Income Tax Act for the 2000 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that in computing income, the Appellant is entitled to deduct legal fees in the amount of $9,019.57.
Signed at Ottawa, Canada, this 25th day of April, 2003.
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"Campbell J. Miller" |
J.T.C.C.
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Citation: 2003TCC290 |
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Date: 20030425 |
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Docket: 2002-2870(IT)I
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BETWEEN:
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LUCIA ZITKO,
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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
Miller J.
[1] Ms. Lucia Zitko appeals by way of informal procedure the assessment of her 2000 taxation year, by the Minister of National Revenue (the Minister), in which the Minister disallowed $32,624.57 of legal and accounting fees against Ms. Zitko's income. It was clear from Ms. Zitko's appeal, though less so from the Respondent's reply, that Ms. Zitko was appealing not just the deductibility of the fees, but the very inclusion of a lump sum settlement amount of $84,253.20 in her income in the first place.
[2] The facts are straightforward.
[3] Until August 1994, Ms. Zitko worked for Consultronics Limited (Consultronics). She was a member of a group disability insurance policy with Imperial Life Assurance Company (Imperial Life). Premiums to the plan were paid by her employer, Consultronics. In August 1994, Ms. Zitko became disabled with fibromyalgia, a chronic pain condition, and upon the recommendation of her doctor, ceased working. She immediately applied for disability benefits, but received none. She never returned to work, despite requests from her employer to do so.
[4] In April 1997, Ms. Zitko commenced an action against Consultronics and Imperial Life. Against Consultronics Ms. Zitko sought damages for breach of contract, negligent termination and wrongful dismissal. In May 1999, she settled her dispute with Consultronics for $10,000 paid to her law firm.
[5] Against Imperial Life, Ms. Zitko sought an amount equivalent to the weekly indemnity benefits payable by Imperial Life to her or the equivalent value in damages, an amount equal to long-term disability benefits to which she was entitled or an equivalent value in damages, damages for breach of contract and a declaration she would be entitled to future indemnity benefits for the period she continued to be totally disabled.
[6] In March 2000, Ms. Zitko settled with Imperial Life on the following terms:
(i) Imperial Life will pay the Plaintiff arrears for weekly indemnity and long term disability benefits in the amount of $76,753.20, subject to statutory withholdings;
(ii) Imperial Life will pay the Plaintiff interest on the arrears in the amount of $7,500 (these first two amounts total $84,253.20);
(iii) Imperial Life will pay to the solicitor for the Plaintiff costs and disbursements in the amount of $22,000;
(iv) After January 1, 2001, but on or before January 15, 2001, Imperial Life will pay to the Plaintiff the sum of $37,910.92 subject to statutory withholdings;
(v) The Plaintiff shall dismiss her proceedings as against Imperial Life; and
(vi) The Plaintiff shall provide Imperial Life with a full and final release.
Ms. Zitko signed a standard release form in accordance with these terms which included the phrase:
I further understand and agree that Imperial Life shall not by the above payment or otherwise admit any liability to me, and any liability is in fact denied.
[7] Ms. Zitko claimed deductible fees in 2000 of $32,624.57 which included an amount of $1,605 for accounting fees. The fees were paid from the $22,000 amount designated for costs received on the settlement, with the balance paid from Ms. Zitko's lawyer's trust account.
[8] The first issue to address is whether the $84,253 paid in 2000 by Imperial Life to Ms. Zitko's law firm is income subject to taxation. It will be such if it is caught by paragraph 6(1)(f) of the Income Tax Act which reads as follows:
6(1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:
...
(f) the total of all amounts received by the taxpayer in the year that were payable to the taxpayer on a periodic basis in respect of the loss of all or any part of the taxpayer's income from an office or employment, pursuant to
(i) a sickness or accident insurance plan,
(ii) a disability insurance plan, or
(iii) an income maintenance insurance plan
to or under which his employer has made a contribution, ...
[9] Two recent Federal Court of Appeal decisions dealt with this very issue (The Queen v. Tsiaprailis, 2003FCA136, and Siftar v. Canada, 2003FCA 137). Ms. Zitko relied on the Trial Division in Tsiaprailis, which unfortunately for her was reversed by the Federal Court of Appeal. The Federal Court of Appeal has made it clear that a lump sum settlement that represents arrears of unpaid periodic payments falls within the scope of paragraph 6(1)(f). That is the current state of the law. While Ms. Zitko's agent ably argued that because she never received any payments from Imperial Life prior to the settlement, the $84,253 cannot be viewed as arrears, the evidence does not support such a finding. Even Ms. Zitko's own lawyers, Tierney, Stauffer, described the amount as "arrears for weekly indemnity and long term disability benefits". Further, an internal memo of the law firm clearly identified arrears. I do not see how that characterization is altered due to no periodic payments having been made. The Federal Court of Appeal keys on whether the lump sum was attributable to amounts which had been payable under the insurance plan, not on whether some periodic payments had ever been made. The answer in Ms. Zitko's case is that yes, the lump sum of $84,253 is clearly so attributable, and is therefore caught by paragraph 6(1)(f) as income.
[10] With respect to the issue of the deductibility of legal fees, the parties agreed that the total amount of fees incurred in 2000 was $32,624. Of that amount, $1,605 relates to accounting fees and there in no provision in the Act for the deduction of such fees from employment income. Also, $22,000 was paid directly pursuant to the terms of the Imperial Life settlement to Ms. Zitko's lawyers. None of the $22,000 was included in Ms. Zitko's income. I am satisfied this amount was to cover legal costs. It is therefore only the deductibility of $9,019.57 which is at issue ($32,824.57 less $1,605 less $22,000 legal costs paid on settlement).
[11] Are legal expenses incurred to acquire income that is taxable under paragraph 6(1)(f) deductible?
[12] Income received pursuant to paragraph 6(1)(f) falls, under the scheme of the Act, as income from employment. As employment income, the deductions available to the taxpayer are limited pursuant to subsection 8(2) to only those deductions found in section 8. The only deduction in section 8 dealing with legal expenses is paragraph 8(1)(b) which reads as follows:
8(1) In computing a taxpayer's income for a taxation year from an office or employment, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:
(a) ...
(b) amounts paid by the taxpayer in the year as or on account of legal expenses incurred by the taxpayer to collect or establish a right to salary or wages owed to the taxpayer by the employer or former employer of the taxpayer;
[13] Were the amounts sought by Ms. Zitko salary or wages owed to her by her employer? Certainly her legal action sought amounts from both the employer and the insurer. Both amounts sought were salary or wages, as the definition of salary or wages reads:
248(1) In this Act
"salary or wages", except in sections 5 and 63 and the definition "death benefit" in this subsection, means the income of a taxpayer from an office or employment as computed under subdivision a of Division B of Part I and includes all fees received for services not rendered in the course of the taxpayer's business but does not include superannuation or pension benefits or retiring allowances;
Amounts brought into employment income under paragraph 6(1)(f) fall squarely within this definition. Amounts received under paragraph 6(1)(f) are, however, necessarily going to be received from the insurer; paragraph 8(1)(b) does not refer to legal expenses incurred for amounts received from the employer - it refers to amounts owed by the employer. If salary or wages, as defined, and as used in paragraph 8(1)(b), includes a paragraph 6(1)(f) receipt then by implication the salary or wages will be paid by the insurer. That does not preclude a finding something was still owed by the employer. The Respondent argues that the phrase "owed to the taxpayer" is limited by the phrase that follows, "by the employer", and implies that because funds were paid by the insurer, they were not owed by the employer. I disagree. Certainly the insurer paid the paragraph 6(1)(f) amounts, but it paid them because the employer contracted with the insurer to pay them. The employer paid the insurer, so that the benefits would be paid. It was part of Ms. Zitko's employment contract that the employer would provide, through a contract with the insurer, disability benefits. While the insurer paid the benefits, it was the employer who owed them in accordance with its employment contract with Ms. Zitko. Just as the Federal Court of Appeal looks behind a lump sum settlement to the underlying contract to determine the lump sum represents periodic payments for the purposes of paragraph 6(1)(f), I have no difficulty in looking behind the insurer's payment to Ms. Zitko at the underlying employment contract to find that the amounts were owed by the employer for purposes of paragraph 8(1)(b). I find the requirements of paragraph 8(1)(b) have therefore been fully met and that $9,019.57 of legal fees are deductible.
[14] The appeal is allowed and the matter referred back to the Minister for reconsideration and reassessment on the basis that Ms. Zitko is entitled to deduct legal fees in the year 2000 in the amount of $9,019.57.
Signed at Ottawa, Canada, this 25th day of April, 2003.
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"Campbell J. Miller" |
J.T.C.C.
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CITATION: |
2003TCC290 |
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COURT FILE NO.: |
2002-2870(IT)I |
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STYLE OF CAUSE: |
Lucia Zitko and Her Majesty the Queen |
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PLACE OF HEARING: |
Ottawa, Ontario |
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DATE OF HEARING: |
January 24, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Judge Campbell J. Miller |
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DATE OF JUDGMENT: |
April 25, 2003 |
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APPEARANCES: |
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Agent for the Appellant: |
Jack R. Bowerman |
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Counsel for the Respondent: |
Justine Malone |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
N/A |
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Firm: |
N/A |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |