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Docket: 2004-3109(IT)I |
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BETWEEN: |
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MICHAEL HEWLETT, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
Appeals heard on February 22, 2005 at Toronto, Ontario
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Before: The Honourable Justice R.D. Bell |
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Appearances: |
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Agent for the Appellant: |
Ken Gratton |
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Counsel for the Respondent: |
Craig Maw |
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 2001 and 2002 taxation years are dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 13th day of April, 2005.
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"R.D. Bell" |
Bell, J.
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Citation: 2005TCC267 |
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Date:20050413 |
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Docket: 2004-3109(IT)I |
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BETWEEN: |
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MICHAEL HEWLETT, |
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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
Bell, J.
ISSUES
[1] The issues are:
1. Whether the Appellant is entitled, for his 2001 taxation year, to deduct legal fees in the amount of $25,839.53.
2. Whether the Appellant is entitled, for his 2002 taxation year, to deduct:
(a) legal fees in the amount of $2,859.77 in his 2002 taxation year; and
(b) the sum of $10,000, being payments on account of an amount agreed upon in Minutes of Settlement of a legal action.
FACTS
[2] The following facts are allegations in the Notice of Appeal which have
been agreed to by the Respondent:
1. At all relevant times the appellant was employed as a commission based salesman engaged in the sale and lease of commercial real property. He has also been involved in real estate developments as an investor.
2. In 1989 the appellant invested $89,500 in Rosedale Place Limited Partnership a property development in Edmonton, Alberta.
3. The appellants' investment in this development was funded by two loans advanced to him by Counsel Trust Company (subsequently Sun Life Trust Company) both maturing on January 1, 1995.
4. The appellant defaulted on the loans.
5. The property, Rosedale Place, was sold in 1996 and after crediting the proceeds of the sale there was a substantial balance outstanding due to the Sun Life Trust Co., the successor to Counsel Trust. Sun Life commenced a civil action against the appellant in December 2000 to recover the debt due. The action against the appellant was settled in 2002 and the appellant was required to remit payments to Sun Life as follows.
2002 $10000
2003 $10000
2004 $10000
2005 $ 7500
6. In defending the action against Sun Life the appellant, Hewlett, incurred legal fees of $25839.53 in and $2859.77 in 2002.
[3] The Appellant testified that he acquired an interest in the Rosedale Place Limited Partnership in 1989 for a subscription price of $89,500 and agreed to pay same in the following manner:
(a) Nil by way of down payment.
(b) $61,250 on closing from the proceeds of a loan obtained as arranged by the Limited Partnership.
(c) $17,625 on closing from the proceeds of a loan obtained from lenders as arranged by the Limited Partnership.
(d) $10,625 by means of a promissory note in favour of the Limited Partnership.
He also had interests in Gateway Square, a partnership with three separate units, a unit in Oxford Village, a "murb" in Oshawa, Ontario and a duplex in Toronto. The Appellant said he bought the interest in the Rosedale Partnership because Edmonton had the lowest vacancy rate in Canada and that the Province of Alberta was putting money into the pulp and paper industry and that the oil and gas industry was rebounding from the National Energy Policy.
[4] The Appellant was not clear on how he held an interest in a unit of the Rosedale Partnership but indicated that he owned same. The Rosedale Place Limited Partnership agreement defines the term "Allocated Unit" to mean:
... the Ninety six (96) condominium units of the Condominium Corporation and a proportionate undivided tenancy-in-common interest in the common elements appurtenant to the said units, as described in the Condominium Declaration registered in respect of the Project, including the exclusive right to use such other parts of the common elements appurtenant to the units as may be specified in the Condominium Declaration.
A later section of that agreement entitled "Allocated Units" provided that:
The interests of the Limited Partners in the Limited Partnership are divided into and limited to the Interests pursuant to the Offering. A specific Condominium Unit is hereby allocated to each Interest, as set forth in Schedule "A" attached hereto. No additional interests shall be issued.
Although it was not in evidence, paragraph 17 of the Appellant's Statement of Defence and Counterclaim in respect of an action commenced by Sun Life Trust Company ("Sun Life") set out that he had subscribed for and agreed to purchase Limited Partnership Interest number 56 (condominium unit 405) for a subscription price of $89,500.
[5] The Appellant stated that he "forfeited on the notes". What he meant was that he discontinued making payments thereon. He was referred to a provision of the Partnership Agreement dealing with forfeiture upon default of payment of a secured note. That section provides that each limited Partner agreed that if any of the Partners remedied a default of another Partner under either of the two secured notes such Partner would have a charge on the Interest of the defaulting Partner. That provision continued as follows:
Upon ten (10) days written notice to the defaulting Limited Partner by any Partner, the Interests of the defaulting Limited Partner shall, effective January 1 of the following year, be forever surrendered and forfeited by the defaulting Limited Partner to the Partners advancing the amount in default ...
[6] The Appellant then testified that he received a notice from a company who had bought the notes, demanding payment on same. He stated that that was Sun Life Trust and that it was demanding the original amount minus proceeds of sale, the unit allocated to the Appellant having been sold by his creditor. The ensuing lawsuit against the Appellant by Sun Life was settled by Minutes of Settlement dated May 17, 2002 under which the Appellant agreed to pay Sun Life the sum of $37,500, $10,000 of which was payable in that year. This is the $10,000 referred to in the description of Issues. All legal fees described in the Issues were incurred and paid in connection with that law suit.
APPELLANT'S AGENT'S SUBMISSIONS
[7] The Appellant's agent submitted that the legal fees were incurred in settlement of a dispute regarding a purchase for rental. He contended that the Appellant continued to be a member of the Limited Partnership because he had not been given proper notice under the aforesaid described provision of the Limited Partnership Agreement requiring ten days written notice. He submitted that the Appellant still has entitlement to the income from the Partnership source in that he still had a right in law to be a member of the Limited Partnership and indeed was still a member of the Partnership.
[8] The agent's second submission was that if the payments were not deductible as legal fees they were "at-risk" amounts within the meaning of Section 96 of the Income Tax Act ("Act") and were, therefore, deductible. He submitted that this would apply to any amounts the Appellant was called upon to pay, namely the legal fees and the $37,500. The agent then submitted that the Appellant's adjusted cost base of the Limited Partnership Interest was the total of the payments he made. When quizzed on that point he said that that would include all legal fees and the $37,500 settlement figure.
[9] The agent's third submission was that the Appellant's participation in the Rosedale Partnership was an adventure in the nature of trade and that any loss was an "ordinary business loss" which was deductible.
RESPONDENT'S SUBMISSIONS
[10] Respondent's counsel said that the condominium unit was sold in 1996, that the deductions sought by the Appellant were not claimed until 2001 and 2002 and that at that time the Appellant had no Partnership Interest and accordingly no business in that regard. He expanded that submission by saying that the Appellant had no source of income in respect of which any deduction in those two years could be made.
[11] With respect to the "at-risk" argument, Respondent's counsel said that the Appellant was not a Partner in the years in question and could not succeed with his claim.
[12] Counsel then stated that the legal fees were not incurred for the purpose of gaining or producing income but were incurred to reduce his indebtedness obligation and were not incurred in respect of an income producing activity. Finally, he said that the payments were on account of capital to protect or reduce his liability and, were accordingly, not deductible.
ANALYSIS AND CONCLUSION
[13] No evidence was given as to how the condominium unit in question was sold in 1996. No evidence was given respecting the Appellant's interest in that unit. From reading the Limited Partnership Agreement I determined, as set out above, that a specific condominium unit was "allocated to each interest". However, it is not disputed that the unit was disposed of in some fashion in 1996. The deductions sought by the Appellant were claimed in the 2001 and 2002 taxation years. There is absolutely nothing to suggest that the Appellant had an interest in the Partnership and an interest in a unit in those two years. It follows, as submitted by Respondent's counsel, that the Appellant had no business in respect of that unit and had no source of income in respect of which any deduction in those years could be made. Although the Appellant's agent submitted that the Appellant still had a Partnership interest in those years, this is wholly inconsistent with him having disposed of his interest and/or the allocated condominium. An action brought by Sun Life for the payment of the balance of monies owing by the Appellant was settled. Therefore, the Appellant would have been unable to succeed in a legal action claiming title to the very property which had been sold and in respect of which his defaulted payments gave rise to a lawsuit that had been settled.
[14] With regard to the Appellant's agent's second submission, the amounts could not be deductible as "at-risk" amounts within the meaning of Section 96 of the Act since those amounts were determined some five and six years before the claim for deduction of same in the taxation years under examination.
[15] With respect to the agent's submission that the Appellant's adjusted cost base of the Limited Partnership Interest was the total of the payments he made, namely the legal fees and the settled amount in the foregoing lawsuit, no details were given and no submission was made. There was, indeed, no argument to which the Respondent's counsel could logically respond or which this Court could consider. The action commenced by Sun Life was an action in debt, Sun Life being the assignee of the creditor. The Appellant, in his "scatter gun" approach switched, without any substantive argument, from income to capital concepts. His main premise was that these amounts were deductible either as business losses or as at-risk amounts or, in accordance with his final submission, constituted losses in that the Partnership participation was an adventure in the nature of trade and that any loss was a deductible "ordinary business loss". In this regard, no evidence whatsoever was given as to the nature of the other properties purchased and the motive for purchase of same. Indeed, the evidence indicated that the Appellant had purchased the partnership unit for income from the condominium. Further, the Notice of Appeal stated that the Appellant had "invested" in the Rosedale Partnership.
[16] I agree with Respondent's counsel's submissions that the legal fees were not incurred for the purpose of gaining or producing income but were incurred to reduce the Appellant's indebtedness obligation and not in respect of an income producing activity. I agree also with counsel's further statement that all payments were on account of capital to protect or reduce his liability and, were accordingly, not deductible.
[17] For the above reasons, the appeal is dismissed.
Signed at Ottawa, Canada, this 13th day of April, 2005.
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"R.D. Bell" |
Bell, J.
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CITATION: |
2005TCC267 |
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COURT FILE NO.: |
2004-3109(IT)I |
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STYLE OF CAUSE: |
Michael Hewlett v. The Queen |
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PLACE OF HEARING: |
Toronto, Ontario |
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DATE OF HEARING: |
February 22, 2005 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice R.D. Bell |
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DATE OF JUDGMENT: |
April 13, 2005 |
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APPEARANCES: |
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Agent for the Appellant: |
Ken Gratton |
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Counsel for the Respondent: |
Craig Maw |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada |