|
Docket: 2002-2632(IT)G |
|
BETWEEN: |
|
JACQUES LEDUC, |
|
Appellant, |
|
and |
|
|
|
HER MAJESTY THE QUEEN, |
|
Respondent. |
____________________________________________________________________
Appeal heard on June 18, 2004, at Ottawa, Ontario.
|
Before: The Honourable Justice Lucie Lamarre |
|
|
|
|
|
Appearances: |
|
|
|
|
|
Counsel for the Appellant: |
Bernard G. Roach |
|
|
|
|
Counsel for the Respondent: |
Peter Kremer, Q.C. Marlyse Dumel |
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 2000 taxation year is dismissed with costs.
Signed at Ottawa, Canada, this 1st day of February 2005.
|
"Lucie Lamarre" |
Lamarre, J.
|
Citation: 2005TCC96 |
|
Date: 20050201 |
|
Docket: 2002-2632(IT)G |
|
BETWEEN: |
|
JACQUES LEDUC, |
|
Appellant, |
|
and |
|
|
|
HER MAJESTY THE QUEEN, |
|
Respondent. |
REASONS FOR JUDGMENT
Lamarre, J.
[1] This is an appeal against an assessment made by the Minister of National Revenue ("Minister") under the Income Tax Act ("ITA") disallowing the deduction of legal expenses in the amount of $140,000 that were claimed by the appellant as a business expense in computing his income for his 2000 taxation year.
[2] The facts which gave rise to the present appeal are partly summarized in the Admitted Statement of Facts jointly filed by the parties. Those facts read as follows:
1. The Appellant, a lawyer practicing in Cornwall, Ontario filed his 2000 income tax return and claimed $140,000 legal expenses as business expenses.
2. The Appellant paid $40,000 to the law firm of Edelson and Associates and $100,000 to the law firm of Skurka Pringle for defending him at a trial in the Superior Court of Ontario on an indictment charging six counts of sexual exploitation, one count of sexual interference and one count of offering sexual services for consideration. The indictment related to three complainants, one as young as 12 years old when the alleged sexual exploitation began. The charges arose following an O.P.P. [Ontario Provincial Police] criminal investigation of an alleged "pedophile ring" in the Cornwall area.
3. The Minister disallowed the deduction for legal expenses.
4. On July 24, 2003, the Ontario Court of Appeal reversed the Superior Court decision dated March 1, 2001 staying the indictment and ordered a new trial. A copy of the Court of Appeal decision is attached as Appendix "A" [R. v. Leduc, 66 O.R. (3d) 1 (Court of Appeal for Ontario)]. An application for leave to appeal to the Supreme Court of Canada was dismissed without reasons on January 12, 2004. To the extent that they are relevant to this appeal, the parties admit the statement of facts found in the Court of Appeal decision.
[3] In addition, the appellant testified. According to that testimony, he was called to the Ontario Bar in 1978 and is carrying on in the city of Cornwall a general law practice, which includes real estate, estates, and corporate and commercial work. He was charged in June and July 1998 with the above-mentioned criminal offences. In March 1999, the appellant received a letter from the Law Society of Upper Canada ("LSUC") (Exhibit A-1) that stated:
The Law Society has been advised that you have been charged with the criminal offences of sexual assault, sexual interference, invitation to sexual touching, sexual exploitation by touching, sexual exploitation by invitation to touch and attempting to obtain the sexual services of a minor for a consideration.
I understand that a preliminary hearing regarding some of these offences has been scheduled to begin on April 8, 1999 and your first court appearance on the new charges is also scheduled for April 8, 1999.
A file has been opened in the Department of Audit & Investigation and I have been authorized to monitor this matter through the court proceedings.
Would you please advise me if you have retained counsel in order that I may correspond with him or her? In the alternative, please advise me if you would prefer that I communicate directly with you?
In the event that you are convicted of these charges or should there be a finding of guilt, this matter will be brought before a Proceedings Authorization Committee in order to determine whether or not an Application will be issued alleging that you have breached Section 33 of the Law Society Act by engaging in professional misconduct or conduct unbecoming a barrister and solicitor. Should the Law Society determine to pursue disciplinary action against you, I will report this matter to the Discipline Department by way of a counsel brief and document book.
[4] The appellant testified that he understood from this letter that he was put on notice of the possible consequences of a conviction in relation to the criminal charges, as an eventual conviction could affect his standing as a member of the LSUC and his ability to practise law in the province of Ontario.
[5] After receiving the letter from the LSUC, the appellant retained a criminal lawyer to defend himself against the criminal charges. The appellant said that at the time he had two things in mind. First, he wanted to prove that he was not guilty of the conduct alleged, and second, he knew that if he was to be found guilty on these criminal charges, it could terminate his professional life and his ability to earn income as the LSUC could then decide to revoke his licence to practise law.
[6] To date there have been no proceedings started under section 33 of the Law Society Act, R.S.O. 1990, chapter L.8, as amended ("LSA"). As a matter of fact, the appellant's legal practice as a whole has continued to thrive and in 2003 it registered the highest gross income in its history. It should be pointed out, however, that at the time of the present hearing the trial on the merits with respect to the criminal charges had not yet taken place.
[7] After several years of litigation regarding the criminal charges, the appellant has incurred significant legal expenses (the $140,000 at issue in the present appeal) in defending himself in procedural matters before the courts.
[8] The appellant testified that he became the target of allegations related to the Project Truth investigation (of which mention is made in the decision of the Court of Appeal for Ontario referred to in the Admitted Statement of Facts) as a result of being involved as counsel in sexual misconduct cases. He believes that the charges against him arose out of some form of conspiracy.
Appellant's position
[9] The appellant submits that the legal expenses are deductible against his income earned from a business. That position is based on the argument that if he did not defend himself against the charges and was convicted, he would lose his licence to practise law. Although he admits that he was also motivated by an urge to prove his innocence and stay out of jail, he submits that his ancillary intention to preserve his ability to earn income is sufficient for the deduction to be allowed.
Respondent's position
[10] The Minister argues that pursuant to section 18 of the ITA the expenses are not deductible because they were not incurred "for the purpose of gaining or producing income from [a] business" and are personal in nature.
Analysis
[11] The calculation of income from a business is outlined in section 9 of the ITA. Income for a taxation year from a business is the profit from that business for the year. Under section 9, a taxpayer can deduct expenses that are incurred to earn that profit, subject to the limitations set out in the ITA. Paragraph 18(1)(a) contains the general limitation on deductible expenses. An expense is only deductible "to the extent that it was . . . incurred by the taxpayer for the purpose of gaining or producing income from the business". This is further restricted by paragraph 18(1)(h), which disallows the deduction of "personal or living expenses of the taxpayer".
[12] Section 9 and paragraphs 18(1)(a) and 18(1)(h) read as follows:
SECTION 9: Income.
(1) Subject to this Part, a taxpayer's income for a taxation year from a business or property is the taxpayer's profit from that business or property for the year.
SECTION 18: General limitations.
(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
(a) General limitation - 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;
. . .
(h) Personal and living expenses - personal or living expenses of the taxpayer, other than travel expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer's business.
[13] The question here is whether the legal expenses are deductible against the appellant's professional income.
[14] As Thorson P. said in The Royal Trust Co. v. M.N.R., 57 DTC 1055 (Exchequer Court of Canada), which statement was quoted and accepted by Iacobucci J. in Symes v. Canada, [1993] S.C.J. No. 131 (Q.L.), [1993] 4 S.C.R. 695, at paragraph 36:
. . . the first approach to the question whether a particular disbursement or expense was deductible for income tax purpose was to ascertain whether its deduction was consistent with ordinary principles of commercial trading or well accepted principles of business ... practice ... [Emphasis added.]
[15] Iacobucci J. added the following comments at paragraphs 38 and 40 in Symes (supra):
¶ 38 Adopting this approach to deductibility, it becomes immediately apparent that the well accepted principles of business practice encompassed by s. 9(1) would generally operate to prohibit the deduction of expenses which lack an income earning purpose, or which are personal expenses, just as much as ss. 18(1)(a) and (h) operate expressly to prohibit such deductions. For this reason, there is an artificiality apparent in the suggestion that one can first examine s. 9(1) in order to determine whether a deduction is authorized, and can then turn to s. 18(1) where another analysis can be undertaken . . .
. . .
¶ 40 There is no doubt that, in some cases, s. 9(1) will operate in isolation to scrutinize deductions according to well accepted principles of business practice. In this respect, I refer to cases, also noted by the trial judge, in which the real issue was whether a particular method of accounting could be used to escape tax liability: e.g. Associated Investors of Canada Ltd. v. Minister of National Revenue, [1967] 2 Ex. C.R. 96; Canadian General Electric Co. v. Minister of National Revenue, [1962] S.C.R. 3. In other cases, including the present case, however, the real issue may be whether a deduction is prohibited by well accepted principles of business practice for the reason that it is not incurred for the purpose of earning income, or for the reason that it is a personal or living expense. In such cases, any treatment of the issue will necessarily blur s. 9(1) with ss. 18(1)(a) and (h).
[16] Thus, in order to be deductible as business expenses, the expenses in question must have been incurred "for the purpose of gaining or producing income from the business" within the meaning of paragraph 18(1)(a) of the ITA. The purpose of a particular expenditure is ultimately a question of fact to be decided with due regard for all the circumstances (Symes, supra, paragraph 68). Iacobucci J. referred to some factors to consider in answering such a question. Thus, it may be relevant to consider whether a deduction is ordinarily allowed as a business expense by accountants. That could indicate whether a particular kind of expenditure is widely accepted as a business expense (Symes, supra, paragraph 69). Similarly, it may be relevant to consider whether the expense is one normally incurred by others involved in the taxpayer's business (Symes, supra, paragraph 69). It may also be relevant to consider whether a particular expense would have been incurred if the taxpayer was not engaged in the pursuit of business income. If indeed such is the case, there is a strong inference that the expense has a personal purpose (Symes, supra, paragraph 70).
[17] It may also be helpful to resort to a "business need" test. Would the need exist apart from the business? If a need exists even in the absence of business activity, then an expense incurred to meet the need would traditionally be viewed as a personal expense (Symes, supra, paragraph 73).
[18] In this context, it is clear, in my view, that the legal expenses incurred by the appellant to defend himself in the criminal proceedings relating to the sexual assault charges laid against him are personal expenditures. They do not constitute expenses normally incurred by others involved in the appellant's profession. It can also be inferred from the evidence that if the appellant had not been engaged in his professional activities, he would nonetheless have paid the legal fees to defend himself before the courts against the criminal charges. These factors, analyzed in the context of the circumstances of this case, suggest that the legal expenses at issue cannot be classified as business expenses pursuant to section 9 and paragraphs 18(1)(a) and 18(1)(h) of the ITA.
[19] The appellant argues, however, that his ability to carry on the law profession was imperilled by the criminal charges. Indeed, under the LSA, the LSUC has the authority to hold inquiries into such matters and the sanctions that can be imposed include the suspension or revocation of the licence to practise law[1].
[20] In the appellant's view, the legal expenses have a personal element but they were also essential and necessary to allow him to carry on his practice of law in the future. The appellant argues that for an expense to be deductible the intention to generate revenue through the incurring of the expense need not be the only motivation for incurring it. The appellant relied on the Supreme Court of Canada's decision in Ludco Enterprises Ltd. v. Canada, [2001] 2 S.C.R. 1082, in submitting that if one of the appellant's purposes in incurring the legal expenses was to preserve his income-generating capability, this is sufficient for those expenses to be deductible under section 9 of the ITA. In his view, the fact that there is an element of personal motivation in an expense does not result automatically in that expense not being deductible. In Ludco, supra, it was decided that an ancillary purpose to earn income was sufficient to meet the purpose test for interest deductibility.
[21] I cannot accept the appellant's argument. First, we saw earlier that the legal expenses at issue are, in the particular circumstances of this case, personal expenses. Indeed, in the absence of evidence to the contrary, it would appear that, had he not practised law, the appellant would nonetheless still have incurred the legal expenses to defend himself before the courts against the criminal charges. Therefore, those expenses are not deductible pursuant to paragraph 18(1)(h) of the ITA. The purpose test analysed in Ludco, supra, is of no application under paragraph 18(1)(h).
[22] Second, I am not even convinced that one purpose of incurring these legal expenses was to earn income. In Ludco, supra, the Supreme Court of Canada established that the requisite test to determine purpose for interest deductibility under subparagraph 20(1)(c)(i) is whether the taxpayer had a reasonable expectation of income at the time the investment was made. If, as suggested by counsel for the appellant, this test should be applicable in the determination of the purpose of an expenditure, I do not find that the legal expenses at issue meet the test. Indeed, the appellant testified that during the period when the legal expenses were incurred his earning capacity from the law profession was not affected at all. On the contrary, his legal practice has continued to thrive. There was no need to incur the legal expenses in order to have an expectation of income, as income was already flowing from the appellant's legal practice.
[23] Furthermore, the appellant's earning capacity was not, in my view, in jeopardy at the time the legal expenses were incurred. The appellant himself acknowledged that the LSUC had not commenced any investigation. He recognized that there was no certainty as to the implications of an LSUC investigation in the event that he is found guilty in the criminal proceedings. Indeed, according to Exhibit A-1, if he is found guilty, the matter will be brought before a Proceedings Authorization Committee in order to determine whether or not an application will be issued alleging that he has breached section 33 of the LSA. Then, should the LSUC determine to pursue disciplinary action against the appellant, the matter will be reported to the Discipline Department. The sanctions available in the event of disciplinary action are listed in subsection 35(1) of the LSA and do not necessarily entail the revocation of a member's membership in the LSUC or the member's being disbarred and having his name struck off the roll of solicitors. Instead, for example, there could be an order that the member obtain treatment or counselling. There are as well other forms of sanctions which may not affect a member's capacity to earn income from his legal practice. The fact that an eventual conviction could possibly affect the appellant's practice in the future is, in my view, purely hypothetical and speculative at this stage and, in any event, too remote to justify the deduction of the legal expenses in the taxation year at issue pursuant to paragraph 18(1)(a) of the ITA.
[24] This case is distinguishable from this Court's decisions in Vango v. Canada, [1995] T.C.J. No. 659 (Q.L.) and Mercille v. Canada, [1999] T.C.J. No. 941 (Q.L.), referred to by counsel for the appellant. In those cases, the charges faced by the taxpayers were directly related to their work, as an investment advisor in one case and as a stockbroker in the other. The charges with respect to which they incurred the legal fees were directly related to their functions. In Vango, the taxpayer was directly faced with the loss of his licence. It was decided in both cases that the legal fees were deductible as employment expenses pursuant to section 8 of the ITA. In the present case, the criminal offences with which the appellant is charged have nothing to do with his legal practice. The legal expenses paid to defend himself against several sexual offence charges did not arise out of his law practice. The acts regarding which a defence is being mounted do not relate to his business.
[25] As Judge Rip stated in Thiele Drywall Inc. v. Canada, [1996] T.C.J. No. 623 (Q.L.), referred to by counsel for the respondent, at paragraphs 19, 20, 23 and 24:
¶ 19 The question for me to decide, then, is whether the appellant's evasion to comply with the Act was a normal or ordinary incident of carrying on its business. If so, the legal costs of defending the action, whether the appellant was guilty or not, is deductible; if not, then the costs are not deductible. In my view they are not.
¶ 20 Where the courts have allowed appeals to permit the taxpayers to deduct legal expenses, the expenses were incurred in accordance with sound accounting and commercial practices and were incurred to defend the taxpayers' trade practices in the conduct of their businesses and to preserve the systems that helped produce their incomes: Caulk, supra, and Rolland Paper, supra. The legal expenses in Heininger, supra, also related to a taxpayer's way of doing business . . .
. . .
¶ 23 For expenses to be deductible, the Caulk and Rolland Paper cases, supra, require the activities in which expenses were incurred be carried on in the normal course of the taxpayer's income earning operations.
¶ 24 As I wrote in Matthews, supra, at p. 1268:
Where a business carries out activities in the normal course of its operations, and the cost of those activities is deductible in computing the income of the business, any expense incurred to defend those activities is a direct result of the activities themselves and is permitted by paragraph 18(1)(a) to be deducted: vide The Queen v. Phyllis B. Bronfman Trust, (supra). The legal expenses in the case at bar were incurred to defend a prosecution against the appellant which arose directly from the practice of preparing financial statements in the normal course of business.
[26] One may conclude from the above-cited case law that if the activities that led to the charges were carried on in the normal course of the income-earning operations, then an expense incurred to defend those activities is a direct result of the activities themselves, and hence may be deductible under paragraph 18(1)(a) of the ITA. Consequently, it is the activity that resulted in the charges and its connection to the business that determine the deductibility of the legal expenses associated with the defence.
[27] Furthermore, counsel for the appellant relied on another decision of the Supreme Court of Canada, 65302 British Columbia Ltd. v. Canada, [1999] 3 S.C.R. 804, in arguing that public policy considerations should not dictate that a particular expense ought not to be deductible. Indeed, in 65302 British Columbia Ltd. it was held that, absent a specific provision to the contrary, the fines or penalties ought to be deductible if they were incurred for the purpose of generating income.
[28] The present case is not like the situation in 65302 British Columbia Ltd., supra, referred to by the appellant, where the taxpayer wanted to deduct the payment of levies that were incurred as part of its day-to-day operations and where the decision to produce over quota was a business decision made in order to earn income.
[29] In the present case, the charges did not arise in the course of the appellant's business. In his testimony, the appellant suggested that they arose because of his role as the lawyer for several Catholic priests and the local Catholic diocese. In his capacity as a lawyer he helped reach a settlement regarding a priest's "sexual misconduct". Indeed, his name became highly publicized as the lawyer for the Church. The appellant suggested that his role led to a "conspiracy" to elicit testimony against him.
[30] The appellant's allegations at this stage are pure speculation. There is no evidence as such of any conspiracy. The test as outlined in the case law allows the deduction of legal expenses when the activity that led to charges is shown to be a normal part of the production of income. This is clearly not the case here.
[31] I therefore conclude that the legal expenses at issue were not paid in order to produce income from a business. Those expenses were personal in nature and not deductible in the computation of income.
[32] The appeal is dismissed with costs.
Signed at Ottawa, Canada, this 1st day of February 2005.
|
"Lucie Lamarre" |
Lamarre J.
SCHEDULE A
Law Society Act
PART II
CONDUCT
Prohibited conduct
Prohibited conduct: members
33. (1) A member shall not engage in professional misconduct or conduct unbecoming a barrister or solicitor.
. . .
Conduct application
34. (1) With the authorization of the Proceedings Authorization Committee, the Society may apply to the Hearing Panel for a determination of whether a member or student member has contravened section 33.
. . .
Conduct orders
35. (1) Subject to the rules of practice and procedure, if an application is made under section 34 and the Hearing Panel determines that the member or student member has contravened section 33, the Panel shall make one or more of the following orders:
1. An order revoking the member's or student member's membership in the Society and, in the case of a member, disbarring the member as a barrister and striking his or her name off the roll of solicitors.
2. An order permitting the member or student member to resign his or her membership in the Society.
3. An order suspending the rights and privileges of the member or student member,
i. for a definite period,
ii. until terms and conditions specified by the Hearing Panel are met to the satisfaction of the Secretary, or
iii. for a definite period and thereafter until terms and conditions specified by the Hearing Panel are met to the satisfaction of the Secretary.
4. An order imposing a fine on the member or student member of not more than $10,000, payable to the Society.
5. An order that the member or student member obtain or continue treatment or counselling, including testing and treatment for addiction to or excessive use of alcohol or drugs, or participate in other programs to improve his or her health.
6. An order that the member or student member participate in specified programs of legal education or professional training or other programs to improve his or her professional competence.
7. In the case of a member, an order that the member restrict his or her practice to specified areas of law.
8. In the case of a member, an order that the member practise only,
i. as an employee of a member or other person approved by the Secretary,
ii. in partnership with and under the supervision of a member approved by the Secretary, or
iii. under the supervision of a member approved by the Secretary.
9. In the case of a member, an order that the member co-operate in a review of the member's practice under section 42 and implement the recommendations made by the Secretary.
10. In the case of a member, an order that the member maintain a specified type of trust account.
11. In the case of a member, an order that the member accept specified co-signing controls on the operation of his or her trust accounts.
12. In the case of a member, an order that the member not maintain any trust account in connection with his or her practice without leave of the chair or a vice-chair of the standing committee of Convocation responsible for discipline matters.
13. In the case of a member, an order requiring the member to refund to a client all or a portion of the fees and disbursements paid to the member by the client or, in the case of a student member, an order requiring the student member to pay to a person an amount equal to all or a portion of the fees and disbursements paid by the person in respect of work done by the student member.
14. In the case of a member, an order requiring the member to pay to the Society, for the Lawyers Fund for Client Compensation, such amount as the Hearing Panel may fix that does not exceed the total amount of grants made from the Fund as a result of dishonesty on the part of the member.
15. In the case of a member, an order that the member give notice of any order made under this section to such of the following persons as the order may specify:
i. The member's partners or employers.
ii. Other members working for the same firm or employer as the member.
iii. Clients affected by the conduct giving rise to the order.
16. In the case of a student member, an order that the student member give notice of any order made under this section to his or her articling principal.
17. In the case of a student member, an order revoking any credit in the Bar Admission Course to which the student member would otherwise be entitled.
18. An order that the member or student member report on his or her compliance with any order made under this section and authorize others involved with his or her treatment or supervision to report thereon.
19. An order that the member or student member be reprimanded.
20. An order that the member or student member be admonished.
21. Any other order that the Hearing Panel considers appropriate.
. . .
PART III
PROHIBITIONS AND OFFENCES
Prohibition as to practice, etc.
50. (1) Except where otherwise provided by law,
(a) no person, other than a member whose rights and privileges are not suspended, shall act as a barrister or solicitor or hold themself out as or represent themself to be a barrister or solicitor or practise as a barrister or solicitor; and
(b) no temporary member shall act as a barrister or solicitor or practise as a barrister or solicitor except to the extent permitted by subsection 28.1 (3).
|
CITATION: |
2005TCC96 |
|
COURT FILE NO.: |
2002-2632(IT)G |
|
STYLE OF CAUSE: |
Jacques Leduc v. Her Majesty The Queen |
|
PLACE OF HEARING: |
Ottawa, Ontario |
|
DATE OF HEARING: |
June 18, 2004 |
|
REASONS FOR JUDGMENT BY: |
The Honourable Justice Lucie Lamarre |
|
DATE OF JUDGMENT: |
February 1, 2005 |
|
APPEARANCES: |
|
Counsel for the Appellant: |
Bernard G. Roach |
|
Counsel for the Respondent: |
Peter Kremer, Q.C., and Marlyse Dumel |
|
COUNSEL OF RECORD: |
|
For the Appellant: |
|
Name: |
|
|
Firm: |
|
|
For the Respondent: |
John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada |
[1] The relevant portions of subsections 33(1), 34(1) and 35(1) and of section 50 of the LSA are reproduced in Schedule A attached with the present reasons.