Citation: 2010 TCC 342
Date: 20100622
Docket: 2009-3430(IT)I
BETWEEN:
CLARENCE BONSMA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bédard J.
[1]
This appeal under the informal
procedure was heard at Edmonton, Alberta, on May 19, 2010. The
Appellant was the only witness.
Context
[2]
The Appellant commenced
his employment with Tesco Corporation (“Tesco”) on August 25, 2000 as a
top‑drive technician. In January 2004, the Appellant claimed statutory vacation
pay owing to him by Tesco. Tesco refused to pay the outstanding statutory vacation
pay and the Appellant proceeded through the Alberta Labour Department to
enforce payment. He received the initial payment of statutory vacation pay sometime
around July 2004 and the final payment on or about October 28, 2004.
[3]
The Appellant testified
that Tesco restricted the work assigned to him after he enforced payment of the
statutory vacation pay. He also said that he did not receive standby pay
between jobs while working for Tesco. He stated that Tesco used its ability to
restrict his work assignments as a mean of punishing him for claiming the
outstanding statutory vacation pay and that between July 2004 and the
termination of his employment on November 18, 2004 his only income from
Tesco was for 32 hours of training at $20 per hour. He explained that he
had to terminate his employment with Tesco on November 18, 2004 since he
was unable to survive without income.
[4]
Finally, on
August 4, 2005, the Appellant filed in the Court of Queen’s Bench of Alberta a statement of claim against Tesco for its alleged
wrongful actions (“Statement of Claim”).
[5]
In the Statement of
Claim (see Exhibit A‑1, Tab 1), the Appellant claimed that he had
suffered loss and damages as follows:
a.
Pecuniary damages for loss of employment income
prior to termination of employment;
b.
Pecuniary damages for loss of employment income
after termination of employment;
c.
Pecuniary damages for the loss of benefits and
advantages of his employment;
d.
Non pecuniary damages for bad faith treatment
e.
Such further and other benefits as may be proven
at the time of trial.
[6]
The Appellant accordingly
sought damages as follows:
a.
General damages in the sum of $100,000.00;
b.
Aggravated damages in the sum of $50,000.00;
c.
Punitive damages in the sum of $50,000.00;
d.
Special damages in the sum of $10,000.00.
[7]
The Appellant did not
receive from Tesco, as a result of his legal action against that company, a
retiring allowance, including any damages or settlement for wrongful dismissal,
in the 2005, 2006 or 2007 taxation years. Neither did he include in his income
for the 2005, 2006 and 2007 taxation years any amount from Tesco in respect of
a retiring allowance, including any damages or settlement for wrongful
dismissal.
[8]
In computing his income
for the 2005, 2006 and 2007 taxation years, the Appellant claimed deductions of
the following amounts for legal fees:
(a) $8,044.00 for 2005;
(b) $8,206.00 for 2006; and
(c) $14,924.00 for 2007.
[9]
In reassessing the
Appellant for the 2005 and 2006 taxation years on August 10, 2009 and for
the 2007 taxation year on December 8, 2008, the Minister of National
Revenue (the “Minister”) disallowed the deduction for legal fees for each of
those years.
[10]
The Appellant objected
to the reassessments for the 2005, 2006 and 2007 taxation years by Notices of
Objection dated September 11, 2009 for the 2005 and 2006 taxation years
and by a Notice of Objection dated January 8, 2009 for the 2007 taxation
year.
[11]
The Minister confirmed
the reassessments for the 2005, 2006 and 2007 taxation years by Notification of
Confirmation dated September 18, 2009 for the 2005 and 2006 taxation years
and by Notification of Confirmation dated August 4, 2009 for the 2007
taxation year.
[12]
The Appellant’s Notice
of Appeal was filed with the Tax Court on October 30, 2009.
[13]
In determining the
Appellant’s income tax liability for the 2005, 2006 and 2007 taxation years,
the Minister relied on the following assumptions of fact:
(a) on August 4, 2005, the Appellant
filed, in the Court of Queen’s Bench of Alberta, a statement of claim against Tesco
(the “Statement of Claim”);
(b) in the Statement of Claim, the Appellant
claimed that he suffered losses and damages including:
(i) pecuniary damages for the loss of
employment income;
(ii) pecuniary damages for the loss of
benefits and advantages of his employment; and
(iii) non pecuniary damages for bad faith
treatment;
(c)
in the Statement of Claim, the Appellant sought
damages as follows:
(i)
general damages in the sum of $100,000.00;
(ii)
aggravated damages in the sum of $50,000.00;
(iii)
punitive damages in the sum of $50,000.00; and
(iv)
special damages in the sum of $10,000.00;
(d)
the Appellant did not receive a retiring
allowance, including any damages or settlement for wrongful dismissal, from
Tesco in the 2005, 2006 or 2007 taxation years as a result of his legal action
against Tesco;
(e)
the Appellant did not include into [sic]
income for the 2005, 2006 and 2007 taxation years any amounts from Tesco in
respect of a retiring allowance, including any damages or settlement for
wrongful dismissal; and
(f)
the Appellant paid legal fees of no more than
$13,723.91 in 2007.
Issue to be decided
[14]
The issue to be decided
is whether the Minister properly disallowed the Appellant’s claim for deductions
in the following amounts for legal fees:
(a) $8,044.00 for 2005;
(b) $8,206.00 for 2006; and
(c) $14,924.00 for 2007.
Respondent’s position
[15]
The Respondent submits
that the legal fees paid by the Appellant in the 2005, 2006 and 2007 taxation
years were incurred for the purpose of establishing a right to damages from
Tesco for the loss of employment and not for the purpose of collecting or
establishing a right to salary or wages owed to the Appellant by Tesco. The
Respondent submits that, accordingly, the legal fees were incurred for the
purpose of establishing a right to a retiring allowance within the meaning of
subsection 248(1) of the Income Tax Act (the “Act”). The Respondent
also submits that the Minister of National Revenue (the “Minister”) properly
disallowed the Appellant’s claims for the deduction of legal fees in that the
deduction of legal fees paid to collect or to establish a right to a retiring
allowance is limited to the amount of the retiring allowance received and
included in income in the year. Accordingly, as the Appellant did not receive
and include in income any amount on account of a retiring allowance from Tesco
in the 2005, 2006 and 2007 taxation years, the Appellant is prohibited from
deducting his legal fees by virtue or paragraph 60(o.1) of the Act.
Finally, the Respondent submits that should the Court find that the Appellant is
entitled to the deduction of legal fees, the Appellant’s claim should be
limited to the amount of legal fees actually paid. In this regard, the Respondent
alleges that the Appellant paid legal fees of no more than $7,839.80 in 2005
and no more than $13,723.91 in 2007.
Appellant’s position
[16]
Essentially, the
Appellant submits that the legal fees claimed were not paid for the purpose of
attempting to establish a right to a retiring allowance but for the purpose of
recovering from Tesco lost employment earnings and related damages.
Analysis and conclusion
[17]
The relevant provisions
of the Act in this case read as follows:
8(1) Deductions allowed -- 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:
. . .
(b) Legal expenses of employee --
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;
. . .
60.(o) Legal [or other] expenses [of
objection or appeal] -- amounts paid by the
taxpayer in the year in respect of fees or expenses incurred in preparing,
instituting or prosecuting an objection to, or an appeal in relation to,
. . .
(o.1) Legal expenses [re job loss or pension
benefit] -- the amount, if any, by which the lesser
of
(i) the total of all legal expenses (other than those
relating to a division or settlement of property arising out of, or on a
breakdown of, a marriage or common-law partnership) paid by the taxpayer in the
year or in any of the 7 preceding taxation years to collect or establish a
right to an amount of
. . .
(B) a retiring allowance of the taxpayer or a deceased
individual of whom the taxpayer was a dependant, relation or legal
representative, and
. . .
248(1) . . .
. . .
“retiring allowance” means an amount (other than a
superannuation or pension benefit, an amount received as a consequence of the
death of an employee or a benefit described in subparagraph 6(1)(a)(iv))
received
(a) on or after retirement of a taxpayer from an office or
employment in recognition of the taxpayer's long service, or
(b) in respect of a loss of an office or employment of a
taxpayer, whether or not received as, on account or in lieu of payment of,
damages or pursuant to an order or judgment of a competent tribunal,
by the taxpayer or, after the taxpayer's death, by a dependant or a
relation of the taxpayer or by the legal representative of the taxpayer;
. . .
“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 allowance.
[18]
Paragraph 8(1)(b) of
the Act essentially permits in the computation of income from an office or from
employment a deduction for legal expenses paid by a taxpayer in the year in
order to collect or to establish a right to salary or wages owed by an
employer. Salary and wages include amounts owing to a person for services
already rendered in circumstances where the employer has failed to pay such
salary and wages. In the present case, the evidence clearly revealed that none
of the amounts claimed in the Statement of Claim were related to services
already rendered by the Appellant to Tesco. Consequently, I am of the opinion
that by virtue of paragraph 8(1)(b) of the Act the Appellant cannot
deduct the legal expenses that he paid in the years at issue.
[19]
A retiring allowance includes an
amount received “in respect of” a loss of an office or employment. In this
context, the words “in respect of” imply a connection between the loss of
employment and the subsequent payment, whose primary purpose was compensation
for the loss of employment. The two questions to be answered in order to determine
whether such a connection exists for the purposes of establishing the existence
of a retiring allowance are as follows:
1. But for the loss of employment
would the amount have been received?
2. Was the purpose of the payment
to compensate a loss of employment?
Only
if the answer to the first question is “no” and the answer to the second
question is “yes” will the amount received be considered a retiring allowance.
Accordingly, when an individual receives compensation on account of damages
suffered as a result of a loss of employment, the amount received will
generally be taxed as a retiring allowance. This also applies to special damages,
such as those received for lost (unearned) wages or employee benefits. It
applies as well to general damages received for the loss of self‑respect,
for humiliation, for mental anguish, for hurt feelings, etc. I would point out,
however, that general damages relating to human rights violations can be
considered as being unrelated to a loss of employment.
[20]
Here, the evidence revealed the
following:
i.
The Appellant lost his employment;
ii.
But for the loss of his
employment, the amount of damages claimed in his Statement of Claim would never
be received; and
iii.
The purpose of any amount that he received
would clearly be to compensate him for his loss of employment and not to pay
salary or wages owed him by Tesco.
Consequently,
I am of the opinion that the Appellant’s legal fees were incurred to establish
a right to a retiring allowance.
[21]
Since the Appellant did not
receive and include in income any amount on account of a retiring allowance paid
by Tesco in the 2005, 2006 and 2007 taxation years, he is prohibited from
deducting his legal fees by virtue of paragraph 60(o.1) of the Act,
which limits the deduction of legal fees to the amount of the retiring
allowance received and included in income in a taxation year.
[22]
As I have concluded that the
Appellant is prohibited from deducting his legal fees, I do not see the
necessity of determining what part of those fees qualified as legal fees.
[23]
For these reasons, the appeal is
dismissed.
Signed at Ottawa, Canada, this 22nd day of June 2010.
“Paul Bédard”
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