Citation: 2013 TCC 312
Date: 20131002
Dockets:
2009-3623(IT)I; 2012-1678(IT)I;
2012-1683(IT)I;
2012-1684(IT)I
BETWEEN:
JEAN-ROBERT
LACROIX,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
REASONS
FOR JUDGMENT
Bédard J.
[1]
These
appeals heard on common evidence involve the judicial and extrajudicial fees
(the fees) claimed by the appellant in preparing his income tax returns for the
taxation years 2007, 2008, 2009 and 2010, claims that were rejected by the
Minister of National Revenue (the Minister).
[2]
The
parties produced a partial agreement as to the facts, which reads as follows:
[translation]
Invoices
at issue
- In
filing his tax returns for the 2007, 2008, 2009 and 2010 taxation years,
Mr. Lacroix claimed the amounts of $20,816, $19,447, $11,240 and
$22,936 in extrajudicial fees;
- By
Notices of Reassessment dated August 25, 2008, November 30,
2009, December 8, 2010, and November 8, 2010, the Minister of
National Revenue denied Mr. Lacroix’s claims for the years at issue,
except with respect to legal fees incurred in preparing, instituting or prosecuting
objections to the Minister’s assessments of tax;
- The
legal fees claimed by Mr. Lacroix were incurred in three separate
disputes;
- The
first dispute involved Mr. Lacroix in his capacity as shareholder and
creditor of Canadevim Ltée against trustee Verdier in a challenge of the
bankruptcy of Canadevim Ltée, that company having contested its forced
bankruptcy until the Court of Appeal rendered a judgment confirming it;
- The
second dispute involved Mr. Lacroix in his capacity as representative
of Canadevim Ltée under subsection 38(1) of the Bankruptcy and
Insolvency Act against Her Majesty the Queen in the context of an
appeal against a GST/QST assessment made in respect of Canadevim Ltée for
the period from May 1, 1998, to October 31, 2001;
- The
third dispute involved Mr. Lacroix and Her Majesty the Queen in the
context of an appeal of a tax assessment made in respect of
Mr. Lacroix for the 2007 taxation year;
- With
respect to the 2007 taxation year, the legal fees claimed for the purposes
of this dispute are in the amount of $19,305.66, which can be broken down
as follows:
- $1,224.96
for the appeal of the GST/QST assessment made in respect of Canadevim
Ltée;
- $8,422.37
and $9,658.83 for the challenge of
the bankruptcy of Canadevim Ltée. More specifically, these fees were
incurred in connection with a motion to dismiss appeal, a provisional
execution order, various appeals to the Court of Appeal and a challenge
of the bankruptcy (see paras. 96-104 of this agreement for more details);
- With
respect to the 2008 taxation year, the legal fees claimed for the purposes
of this dispute are in the amount of $15,312.27, which can be broken down
as follows:
- $2,333.41
for the appeal of the GST/QST assessment made in respect of Canadevim
Ltée;
- $12,464.01
for the challenge of the bankruptcy of Canadevim Ltée (see
paras. 107-110 of this agreement for more details);
- $514.85
for the objection to the Notice of Assessment of tax made in respect of
Mr. Lacroix for the 2007 taxation year. This claim is not
challenged by the respondent;
- With
respect to the 2009 taxation year, the legal fees claimed for the purposes
of this dispute are in the amount of $11,966.05, which can be broken down
as follows:
- $9,615.05
and $1,625.40 for the appeal of
the GST/QST assessment made in respect of Canadevim Ltée;
- $255.29 and $470.31 for the objection to
the Notice of Assessment of tax made in respect of Mr. Lacroix for
the 2007 taxation year. This claim is not challenged by the respondent;
- With
respect to the 2010 taxation year, the legal fees claimed for the purposes
of this dispute are in the amount of $28,126.65, which can be broken down
as follows:
- $17,097.53, $4,512.03 and $1,327.01 for the appeal of
the GST/QST assessment made in respect of Canadevim Ltée;
- $5,190.08 for the challenge of
the bankruptcy of Canadevim Ltée (see para. 111 of this agreement);
Background
of Canadevim Ltée
- Canadevim
Ltée was incorporated in 1987. Its operations were in the fields of
residential development and infrastructure;
- Originally,
the company had six shareholders, including Jean-Robert Lacroix, who held
24% of the shares, and Yoland LaCasse, who held 23%;
- From
1987 to 1997, Canadevim Ltée was involved in several real estate
development projects in Aylmer, including the “Domaine Seigneurie” and the
“Carrefour Champlain”;
- In
1997, Messrs. Lacroix and LaCasse were the company’s only remaining
shareholders after Canadevim’s four other shareholders transferred their
shares to them;
- The
company’s last project was the “Projet Royal”, the development of an 18-hole
golf course, around which residential and commercial lots were to be
developed and sold;
- A
notary by profession, Mr. LaCasse pursued a notarial practice in Aylmer until 1996-1997;
- Mr. Lacroix
is a heavy equipment operator. He was a client of Mr. LaCasse’s, who
became his partner and friend over the course of their long professional
and personal relationship;
- “Projet
Royal” began in 1989 with the purchase by Mr. LaCasse of Lot 2016‑1 for the price of $525,000.00, financed by the Royal Bank. Since 1985,
he had been taking courses in the United States on real estate development
involving golf courses;
- In
order to finance the project, Mr. LaCasse then obtained a $300,000.00
loan from the Caisse St-Joseph in Hull. This funding was increased to
$750,000.00 two years later, in the form of a personal loan granted to
Mr. LaCasse and Yoland LaCasse “in trust”, but with hypothecary
security on Lot 2016‑1 and bonds posted by the following
parties: Canadevim Ltée; 139529 Canada inc., a company with three shareholders,
including Mr. LaCasse and Mr. Lacroix; and, finally, the company
137646 Canada inc., whose shares are distributed among 13 other people;
- This
$750,000.00 loan was used to repay the Royal Bank, which had financed
Mr. LaCasse’s initial purchase of Lot 2016‑1; the Caisse
St-Joseph now held a first-ranking hypothec on Lot 2016‑1;
- The
project was to be developed in part over Aylmer’s former dump. The amounts
required for the purchase of the dump in question came from investments
from Canadevim Ltée ($75,000.00), a group formed by Messrs. LaCasse
and Lacroix and a third individual ($75,000.00) and the [translation] “group of 13”
($75,000.00);
- Mr. LaCasse
partnered with Harry Adams, the owner of the adjacent lot on which 6 of
the 18 holes were to be developed;
- As a
co-owner of the golf course, Mr. Adams was to contribute 1/3 of the
investments. His eventual withdrawal from the project for health reasons
created serious financial difficulties;
- Development
of the golf course began in 1996, after the architect’s plans and the
municipal permit were obtained;
- Although
this was not formalized in a written contract, Canadevim was responsible
for the landscaping of the golf course. According to the agreement, the
work carried out by Canadevim Ltée was to be billed to a yet-to-be-created
company, but that company never did materialize;
- Mr. Adams
was diagnosed with cancer and no longer wanted to be involved in the
partnership. He transferred his land to related persons on April 20,
1998. The parties engaged in legal proceedings;
- There
was a shortage of funds. When Mr. Adams withdrew from the project, he
ceased covering 1/3 of the golf course development expenses, creating an
excess financial burden on the remaining partners, and because they had to
buy out his share, the partners had to pay him $245,000.00;
- These
unforeseen additional expenses jeopardized the project;
- On April 29,
1998, the Caisse St-Joseph had published with respect to Lot 2016‑1 a prior notice to exercise a hypothecary right. The balance of the
loan, in capital and interest, was then $628,976.85;
- In June
1998, a new company was created called Le Club de Golf Les Vieux
Moulins inc., with new investors as shareholders;
- Concerned
that the land would be resold by the Adams family, which could negatively
affect his investments to date, both personally and through Canadevim,
Mr. LaCasse decided to register a notice of legal hypothec on the
golf course;
- Mr. LaCasse
had a discussion with Mr. Lacroix and made a quick estimate that the
work to date had cost $1.2 million. The work was approximately 55%
complete at the time;
- Canadevim
Ltée had published, on July 10, 1998, on the lots owned by
Mr. Adams and Mr. LaCasse and by Yoland LaCasse “in trust”, a
notice of legal hypothec in the amount of $1,200,000.00;
- On December 4,
1998, there was a cession of rank between Canadevim Ltée and the
Caisse St-Joseph in favour of the latter;
- On February 1,
1999, Canadevim Ltée instituted against Messrs. LaCasse and Adams
proceedings in forced surrender and taking in payment on the basis of the
$1,200,000.00 in work on which there was a legal hypothec;
- The
golf course opened in summer 1999 under difficult conditions, without the
work having been entirely completed;
- On January 20,
2001, an out-of-court settlement was reached between the Adams estate
and Le Club de Golf Les Vieux Moulins inc., Mr. LaCasse and
Mr. Lacroix;
- On May
31, 2001, the out-of-court settlement agreement was homologated in a
judgment by the Honourable Pierre Isabelle, J.S.C.;
Proposal
in bankruptcy and bankruptcy of Mr. LaCasse
- On August 15,
2001, Mr. LaCasse made a proposal in bankruptcy, the refusal of
which resulted in his bankruptcy in late January 2002;
- Mr. LaCasse’s
bankruptcy left Mr. Lacroix as the sole director of Canadevim Ltée;
- On September 25,
2001, Canadevim Ltée filed a proof of claim in Mr. LaCasse’s
bankruptcy in the amount of $1,200,000.00, with Canadevim Ltée estimating
the value of its security at $900,000.00;
- On February 28,
2002, the trustee rejected Canadevim Ltée’s proof of claim;
- On April 26,
2002, the trustee filed a motion to strike Canadevim Ltée’s legal
hypothec from the land register, but the motion was never argued;
- On August 12,
2002, Mr. LaCasse’s trustee in bankruptcy had executed a court-ordered
seizure of all of Mr. LaCasse’s documents, including all of the
documents of Canadevim Ltée;
Objection
to the Notices of Assessment of GST/QST made in respect of Canadevim Ltée
- In April 2002,
auditors from Revenu Québec visited Canadevim Ltée to audit its sales
taxes for the period from May 1, 1998, to October 31, 2001;
- During
this audit, Revenu Québec noticed that no GST/QST had been collected by
Canadevim Ltée on the $1.2 million in work listed in the notice of
hypothec;
- Canadevim
Ltée was given until August 22, 2002, to produce the
documents required for the audit;
- Once
the audit was completed, Revenu Québec issued a final statement of account
for corporate taxes, deductions at source, GST and QST in the amount of
$341,116.51;
- More
specifically, on August 23, 2002, a GST assessment bearing the number
H2002060 covering the period from May 1, 1998, to October 31,
2001, in the amount of $92,023.16 plus interest and penalties for a total
of $135,570.69, was issued by Revenu Québec;
- On September 6,
2002, a QST assessment bearing number 4360011 covering the period from
May 1, 1998, to October 31, 2001, in the amount of $106,033.31
plus interest and penalties for a total of $148,615.91, was issued by
Revenu Québec;
- On November 29,
2002, Canadevim Ltée objected to the assessments from Revenu Québec;
- On May 28,
2003, the assessments bearing numbers H2002060 and 4360011 were
confirmed by a decision on the objections;
- On August 26,
2003, Canadevim Ltée filed a motion in appeal of a decision on the
objection (QST) against Revenu Québec in the Court of Québec in Docket
No. 550-80-000189-031;
- On August 26,
2003, Canadevim Ltée filed a notice of appeal of a decision on the
objection (GST) against Revenu Québec in the Tax Court of Canada in Docket
No. 2003-3159(GST);
- On June 21,
2004, Mr. Lacroix was personally assessed by Revenu Québec in his
capacity as director for the GST and QST claimed from Canadevim Ltée for a
total amount of $304,744.79;
- On October 31,
2004, Mr. Lacroix made a payment of $304,744.79 to Revenu Québec;
- On June 28,
2005, Revenu Québec dismissed Mr. Lacroix’s objection;
- The
assessment made in respect of Mr. Lacroix regarding his liability as
an administrator was annulled by Revenu Québec, and the amount of
$304,744.79 was reimbursed to him;
- In
order to be able to pursue his challenges of the GST and QST assessments
made in respect of Canadevim Ltée, Mr. Lacroix had to challenge the
petition in bankruptcy, challenge the trustee’s refusal to continue the
proceedings, challenge the trustee’s rejection of his proof of claim and
file a motion under section 38 of the Bankruptcy and Insolvency
Act for authorization to continue the proceedings in his own name and
in replacement of the trustee;
- On May 4,
2009, a letter was sent by LeBlanc Doucet McBride to the Canada
Revenue Agency;
- In January 2010,
the Notice of Appeal was heard by the Tax Court of Canada;
- On March 18,
2010, The Honourable Justice Lucie Lamarre rendered a judgment
allowing the appeal of the assessment by the Minister of Revenue of Quebec
bearing number H2002060 and dated August 23, 2002, covering the
period from May 1, 1998, to October 31, 2001, and the assessment
was referred back to the Minister for reconsideration and reassessment on
the basis that Canadevim Ltée was not required to collect $73,027.60 in
GST on the amount of $1.2 million indicated in the notice of legal
hypothec;
- On April 20,
2010, Revenu Québec filed a notice of appeal against the decision of
the Honourable Justice Lucie Lamarre;
- In September 2010,
Mr. Lacroix drafted a memorandum of appeal for the Federal Court of Appeal;
- On March 16,
2011, the Honourable Justice Marc Noël rendered a judgment allowing
the appeal, setting aside the judgment of the Honourable Justice Lamarre
of the Tax Court of Canada and dismissing the appeal of Canadevim Ltée;
- On June 6,
2011, Mr. Lacroix filed for leave to appeal to the Supreme Court
of Canada;
- On February 2,
2012, the Supreme Court dismissed the application for leave to appeal
without costs;
Petition
in bankruptcy by Revenu Québec against Canadevim Ltée
- On August 27,
2002, motions filed by Revenu Québec for the appointment of an interim
receiver to the assets of Canadevim Ltée and for a petition in
bankruptcy;
- On
the same day, order made by the Honourable Johanne Trudel, J.S.C.,
enjoining the trustee to preserve the assets, remedies, rights and
interests of Canadevim Ltée;
- On January 24,
2003, judgment rendered by the Honourable Martin Bédard, J.S.C.,
declaring Canadevim Ltée bankrupt;
- On February 7,
2003, taking in payment and voluntary surrender of Lot 2016‑1
from Mr. LaCasse’s trustee in bankruptcy to Messrs. Neil and Edgar
Elliott, which had the effect of striking from the register all of the
rights and charges affecting the immovable in question, including the
legal hypothec of Canadevim Ltée;
- On May 6,
2004, decision rendered by Quebec Court of Appeal upholding bankruptcy
of Canadevim Ltée;
- At
the time of its bankruptcy, Canadevim Ltée had on its books a debt owing
of $1,200,000.00 for golf course landscaping work performed for the
various landowners, for which the legal hypothec had been registered;
- Mr. Lacroix
argued that he was a primary creditor of Canadevim Ltée, both personally
on account of his cash advances ($250,000.00) and through another
corporation controlled by him (118012 Canada inc. (Robsyl)), for
$262,000.00 in unpaid work;
- Mr. LaCasse,
through his trustee in bankruptcy, was also a creditor of Canadevim Ltée
for $100,000.00 in advances owing to shareholders;
- On June 14,
2004, filing of proofs of claim for Mr. Lacroix in the amount of
$96,796.43 and for the company 118012 Canada inc. (Robsyl);
- On June 15,
2004, first meeting of creditors for bankruptcy of Canadevim Ltée;
- On June 23,
2004, rejection of proofs of claim of 118012 Canada inc. (Robsyl) by
trustee in bankruptcy;
- On July 19,
2004, motion filed by Mr. Lacroix in appeal of trustee’s
decisions with respect to the appointment of inspectors and the refusal to
continue the proceedings against Revenu Québec;
- On
the same day, July 19, 2004, appeal motion filed with respect
to the rejection of the proof of claim of 1108012 Canada inc. (Robsyl):
- On August 9,
2004, motion filed by trustee to have Mr. Donaldson disqualified
as counsel;
- On August 12,
2004, amended proof of claim filed by Mr. Lacroix in the amount
of $427,807.39 following an assessment in respect of him in his personal
capacity as director;
- On August 12,
2004, notice calling a meeting of creditors by Mr. Lacroix and
Margaret Hugues to the trustee;
- On August
17, 2004, rejection by trustee of Mr. Lacroix’s new proof of
claim in the amount of $304,744.79;
- On August 25,
2004, motion filed in revocation of trustee;
- On September 17,
2004, motion filed by Mr. Lacroix to appeal the rejection of his
proof of claim;
- On September 20,
2004, motion filed by Mr. Lacroix in his capacity as a creditor
of Canadevim Ltée for authorization to continue the proceedings in his own
name in replacement of the trustee and at his own risk;
- On June
20, 2005, judgment rendered by the Honourable Louis Lacoursière,
J.S.C., on the amended motion in disqualification rejecting the motion of
the trustee to have Mr. Donaldson disqualified from representing
118012 Canada inc. (Robsyl), a creditor of Canadevim Ltée;
- On June
28, 2005, judgment rendered by the Honourable Martin Bédard, J.S.C.,
dismissing Mr. Lacroix’s motion in subrogation following the payment
by Mr. Lacroix in his capacity as director of the amount of
$304,774.79 in GST and QST claimed from Canadevim Ltée;
- On August 30,
2005, judgment rendered by the Honourable Martin Bédard, J.S.C., on
the amended motion in appeal of the trustee’s rejection of an amended
proof of claim recognizing Mr. Lacroix as a creditor in the
bankruptcy for an amount of $304,744.79 following his payment of GST and
QST on behalf of Canadevim Ltée;
- On April 29,
2005, motion to have Mr. Lacroix subrogated to the rights of
Revenu Québec following payment of $304,744.79;
- On December 7,
2006, judgment rendered by the Honourable Martin Bédard, J.S.C.,
revoking the appointment of the inspectors, allowing the motion to revoke
the trustee as well as the motion to authorize a continuation of the
proceedings under section 38 of the Bankruptcy and Insolvency Act
against Revenu Québec for the GST and QST claimed;
- On December 15,
2006, appeal filed by trustee Verdier against judgment of the
Honourable Justice Bédard, J.S.C., dated December 7, 2006;
- On February 13,
2007, motion to dismiss appeal and for an order of provisional
execution of judgment of December 7, 2006;
- On March 2,
2007, judgment rendered by the Honourable Pierrette Rayle, J.C.A.,
dismissing the motion for an order of provisional execution of the trial
judgment revoking the trustee;
- On April 2,
2007, judgment rendered by the Quebec Court of Appeal dismissing the
appeal by trustee Verdier of the judgment of the Honourable Martin Bédard,
J.S.C., revoking the appointment of the inspectors, and allowing the
motion to revoke the trustee;
- On May
17, 2007, motion for directions filed by new trustee Lemieux;
- On May 18,
2007, challenge of above-mentioned motion for directives brought by
Revenu Québec;
- On May
29, 2007, judgment rendered by Registrar Guy Naud regarding the motion
for directives;
100. On the same day, May
29, 2007, decision and order by Registrar Guy Naud authorizing Revenu
Québec to proceed in its own name and at its own expense with the hearing
scheduled for June 5, 2007;
101. On the same day, May 29,
2007, notice from Revenu Québec under section 38 of the Bankruptcy
and Insolvency Act;
102. On May 30, 2007,
appearance of Revenu Québec at the Quebec Court of Appeal;
103. On June 13,
2007, motion in revocation of judgment filed by Mr. Lacroix enabling
Revenu Québec to proceed with the appeal undertaken by trustee Verdier
challenging Mr. Lacroix’s creditor status;
104. On June 18,
2007, challenge of the motion in revocation of judgment brought by Revenu
Québec;
105. On August 13,
2007, partial and complementary proof of claim filed by Mr. Lacroix in
the bankruptcy of Canadevim Ltée;
106. On the same day, August 13,
2007, partial and complementary proof of claim filed by 118012 Canada inc.
(Robsyl) in the bankruptcy of Canadevim Ltée;
107. On September 13,
2007, appearance by trustee Lemieux in resumption of proceedings;
108. On October 4,
2007, judgment rendered by the Honourable Justice Tessier, J.S.C.,
dismissing Mr. Lacroix’s motion in revocation of judgment;
109. On December 17,
2007, judgment rendered for the Quebec Court of Appeal by the Honourable
André Rochon, J.C.A., allowing the appeal, setting aside the judgment of the
Superior Court dated August 30, 2005, rendered by the Honourable Martin
Bédard, J.S.C., and dismissing the amended motion in appeal of the rejection by
the trustee of an amended proof of claim (res judicata for the
$304,744.79);
110. On January 16,
2008, judgment rendered by Registrar Michel Martin on Mr. Lacroix’s
application for withdrawal of judicial deposit in the amount of $304,744.79;
111. In April 2008,
draft motion filed by Mr. Lacroix under section 37 of the Bankruptcy
and Insolvency Act;
112. On April 8, 2008,
memorandum of judicial and extrajudicial fees from counsel of former trustee;
113. On August 13,
2008, notice from former trustee of a motion for an approval of accounts;
114. On August 29,
2008, prior notice of objection by Mr. Lacroix to application by
former trustee Verdier for taxation of legal fees;
115. On September 10,
2008, pro forma in relation to written contestation by new trustee
Lemieux of statement of receipts and disbursements of former trustee Verdier;
116. On May 11,
2009, intervention by Revenu Québec and contestation of objection of the
current trustee to the taxation of a bill of costs and the accounts of the
former trustee and the motion in revocation of trustee Lemieux;
117. From 2009 to 2012,
the Canadevim Ltée bankruptcy file was put on hold pending a final decision in
the case before the Tax Court of Canada involving Canadevim Ltée and Revenu
Québec;
118. On February 12,
2013, notice from trustee Lemieux calling a meeting of the creditors of
Canadevim Ltée to obtain approval for the fees and disbursements of trustees
and for the decision to continue with the appeal proceedings regarding the
rejection of the proof of claim of Canadevim Ltée in the bankruptcy of
Mr. LaCasse. The meeting is scheduled to continue on June 20, 2013,
at 10:00 a.m.
119. The appeal involving
the rejection of the proof of claim of Canadevim Ltée in the bankruptcy of
Mr. LaCasse has yet to be heard as of today. The contestations of
the fees and disbursements of the trustees and their counsel in the
bankruptcies of Mr. LaCasse and Canadevim Ltée have not been heard.
Facts
relating to business investment loss claim
120. As appears from the
statement of receipts and disbursements of the former trustee, more
than $404,844.58 was collected by the trustee in bankruptcy of Canadevim Ltée
through the recovery of the security deposit, the out-of-court settlement, the
recovery of inputs, interest earned on deposits, the sale of machinery, etc.;
121. Since the beginning
of the contestation of the petition in bankruptcy, Mr. Lacroix’s intention
has remained constant, namely, to receive payment for the $1,200,000.00 in work
performed on the golf course, in order to cover the debts of Canadevim Ltée;
122. Once that amount was
recovered, either in kind or through the taking in payment of the golf course,
a motion to annul the forced bankruptcy of Canadevim Ltée would have been
filed;
123. In the event that
compensation in kind became impossible through the successive sale of the lots
subject to the legal hypothec, Mr. Lacroix’s intention was to have Canadevim
Ltée bring an action in damages against Revenu Québec and/or trustee in
bankruptcy Verdier;
124. It was not until the
Supreme Court of Canada denied leave to appeal from the judgment rendered by
the Honourable Justice Marc Noël of the Federal Court of Appeal that these
possibilities ceased to exist.
[3]
Only
Yoland Lacasse testified at the hearing. From his testimony, I essentially
gather that Canadevim Ltée has not carried on business since its bankruptcy in
2003.
Appellant’s
position
[4]
In
the Notices of Appeal, the appellant essentially claimed that the fees he had
incurred were allowable expenses because they were incurred in connection with
normal contracts incidental and necessary to the earning of income from a
business. I note that, in his Notices of Appeal, the appellant cites sections 2
and 5 of Interpretation Bulletin IT‑99R5 (Consolidated) in support of his
position.
[5]
In
oral argument, the appellant radically changed his position and now submits
that the fees were incurred, not for the purpose of earning income from a
business, but rather for the purpose of earning income from property. In this
respect, the appellant submitted that the fees claimed were incurred in order
to recover a $1.2 million claim, with the ultimate purpose of receiving
dividends from Canadevim Ltée, namely, income from property. The appellant
submitted that, at the time he had incurred the fees, the $1.2 million claim
was recoverable, which could have resulted in a retroactive annulment of the
bankruptcy of Canadevim Ltée. I note from the outset that the appellant has not
explained how the fees (incurred in the course of an appeal from a GST/HST
assessment made in respect of Canadevim Ltée for the period from March 1,
1998, to October 31, 2001) were incurred for the purpose of earning income from
property.
[6]
In
the alternative, the appellant is claiming the fees as a business investment
loss under paragraph 39(1)(c) of the Income Tax Act (the
Act). Essentially, the appellant argues that, on December 7, 2006, the
Superior Court of Quebec, relying on section 38 of the Bankruptcy and
Insolvency Act (the BIA), authorized him to continue his challenge in the
appeal of a GST/HST assessment issued against Canadevim Ltée for the period
from May 1, 1998, to October 31, 2001. The appellant is therefore of
the view that he financed Canadevim Ltée by challenging the assessment on its
behalf, making him a creditor of Candevim Ltée with a claim against it, a claim
that has turned out to be unrecoverable.
Analysis
and conclusion
[7]
The
appellant’s position with respect to the fees incurred in the course of his
challenge of the bankruptcy of Canadevim Ltée is that they are deductible
because they were incurred for the purpose of earning income from property. The
appellant submits that, since the beginning of the challenge of the petition in
bankruptcy, his intention has always been consistent, namely, to obtain payment
for the $1,200,000 in work performed on the golf course, allowing him to cover
the debts of Canadevim Ltée. Once this amount was recovered, either in kind or
by the taking in payment of the golf course, a motion for an annulment of the
bankruptcy would have been presented for the ultimate purpose of earning a
dividend from Canadevim Ltée. In short, the appellant’s ultimate purpose in
incurring such fees was to receive dividends from Canadevim Ltée, namely,
income from property. Counsel for the appellant had the following to say in
this regard:
[translation]
Therefore, Mr. Lacroix, as a
shareholder of Canadavim; his interest in Canadavim’s ability to collect
payment for the work it had performed on the golf course comes right at the end
of the process, with the potential to collect dividends. That is the benefit to
him. That payment will result in a benefit. That is Mr. Lacroix’s interest
in the matter.
So yes, he wants Canadavim to be
paid, because then the creditors can be paid and the bankruptcy can be
annulled. For his part, not only will all of the creditors be paid—and he is
one of them—but he will also be able to collect a dividend from the profits.
[8]
The
relevant sections of the Act are paragraphs 18(1)(a), 18(1)(b)
and 18(1)(h) and subsection 9(1), which read as follows:
18. (1) In computing the income of a taxpayer from a
business or property no deduction shall be made in respect of
(a) 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;
(b) an outlay, loss or
replacement of capital, a payment on account of capital or an allowance in
respect of depreciation, obsolescence or depletion except as expressly
permitted by this Part;
. . .
(h) 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;
9. (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.
[9]
A
reading of paragraph 18(1)(a) of the Act indicates that this
provision does not entitle the taxpayer to deduct expenses; to the contrary, it
sets out a restriction, a general prohibition. Subsection 18(1) of the Act
provides that “no deduction shall be made in respect of” the elements listed in
computing the income of a taxpayer from a business or property. In addition to
paragraph (a), examples include paragraph 18(1)(b),
which lists payments on account of capital, and 18(1)(h), which lists
personal or living expenses. It is not under paragraph 18(1)(a) of
the Act that a taxpayer can deduct fees that he has incurred to earn income
from a business or property. Rather, it is under subsection 9(1), which
provides that the income from a business or property is the taxpayer’s
“profit”. The word “profit” refers to the net profit, or the gross revenues
minus any expenses incurred to earn them.
[10]
It
is clear that for a taxpayer to be able to deduct fees incurred under
subsection 9(1) of the Act, he must first determine whether he has a
source of income, either from a business or from property.
[11]
I
am of the view that the fees incurred by the appellant were not deductible, for
the following reasons:
(i)
First,
I note that the appellant radically changed his position, in that he is now
alleging that the fees were incurred not for the purpose of earning income from
a business (as alleged in the Notices of Appeal), but instead for the purpose
of earning income from property. This change in course, in itself, reveals
something of the lack of seriousness of the appellant’s position, which raised
serious doubts in my mind as to the appellant’s claimed intention, about which,
moreover, no evidence was filed.
(ii)
It
should be noted that in order for the appellant to be able to deduct his
incurred fees under subsection 9(1) of the Act, he must first determine
whether he has a source of income, in this case from property. How can he
claim, in this case, that he had incurred costs for the purpose of earning
income from property when, at the time the fees were incurred, Canadevim (the
supposed source of income from property) was bankrupt? In other words, the
appellant in this case did not have a source of income from property at the
time he incurred the fees because Canadevim was bankrupt at that moment. In any
case, even if he had had a source of income from property, I would be of the
view that the fees could not be deducted because of the prohibition set out at
paragraph 18(1)(b) of the Act. In my opinion, these fees
constituted payments on account of capital. It is clear from the evidence filed
that the fees were incurred in order to preserve an asset, in this case for the
purpose of preventing the bankruptcy of Canadevim Ltée. In other words, the
appellant was fighting for the survival of his source of income. In my view,
the appellant incurred the fees to preserve an enduring benefit.
[12]
I
am also of the view that the fees (incurred in the context of an appeal against
a GST/HST assessment of Canadevim Ltée for the period from March 1, 1998,
to October 31, 2001) are not deductible under paragraph 60(o) of
the Act, given that they were not incurred in prosecuting an appeal in relation
to an assessment under the Act.
[13]
I
find that the decisions relied upon by the appellant (see Kruco Inc. v. The
Queen (T.C.C.), 98 DTC 1568; Evans v. M.N.R., [1960] S.C.R. 391; Automobiles
Jalbert Inc. c. Le Sous-Ministre du Revenu, 2005 CanLII 31513 (QC CQ); Stewart
v. Her Majesty the Queen, [2002] 2 S.C.R. 645; Couillard v. The
Queen, 2004 TCC 805) are not relevant because none involved an entity
(a source of income from a business or property) that was bankrupt. In other
words, those decisions are distinguishable from the facts in this case.
Analysis
of the alternative position
[14]
I
note immediately that the appellant has in no way explained how the fees
incurred to challenge the bankruptcy of Canadevim Ltée could constitute a debt
owing by the latter.
[15]
To
claim a business investment loss in relation to a debt owing, one must be a
creditor. In this case, for the reasons that follow, I am of the view that the
appellant was not owed a debt by Canadevim Ltée for the fees he had incurred:
(i)
I
will start by considering the appellant’s claims in relation to the bad debt
allegedly arising from the fees that he says he incurred on behalf of Canadevim
Ltée following the authorization he received under section 38 of the BIA
to continue opposing the assessment. Section 38 reads as follows:
Proceeding by creditor
when trustee refuses to act
38. (1) Where a creditor
requests the trustee to take any proceeding that in his opinion would be for
the benefit of the estate of a bankrupt and the trustee refuses or neglects to
take the proceeding, the creditor may obtain from the court an order
authorizing him to take the proceeding in his own name and at his own expense
and risk, on notice being given the other creditors of the contemplated
proceeding, and on such other terms and conditions as the court may direct.
Transfer to creditor
(2) On an order under subsection
(1) being made, the trustee shall assign and transfer to the creditor all his
right, title and interest in the chose in action or subject-matter of the
proceeding, including any document in support thereof.
Benefits belong to
creditor
(3) Any benefit derived from a
proceeding taken pursuant to subsection (1), to the extent of his claim and the
costs, belongs exclusively to the creditor instituting the proceeding, and the
surplus, if any, belongs to the estate.
Trustee
may institute proceeding
(4) Where, before an order is
made under subsection (1), the trustee, with the permission of the inspectors,
signifies to the court his readiness to institute the proceeding for the
benefit of the creditors, the order shall fix the time within which he shall do
so, and in that case the benefit derived from the proceeding, if instituted
within the time so fixed, belongs to the estate.
In my
view, section 38 of the BIA simply attributes to the applicant the
necessary interest within the meaning of section 55 of the Code of
Civil Procedure to take legal action. Section 38 does not have the
effect of making the appellant an agent of the trustee. Because it flows from
section 38 of the BIA that the appellant had continued opposing the
assessment in his own name and at his own expense and risk, the appellant,
pursuant to section 38 of the BIA, could not have become a creditor of Canadevim
Ltée by incurring such fees. I believe that the purpose of the appellant’s
opposition to the assessment was to avoid becoming personally liable as a
director of Canadevim Ltée.
(ii)
As
for the fees incurred by the appellant to challenge the bankruptcy, I cannot
see how the appellant could have become a creditor of Canadevim Ltée by virtue
of having incurred such fees. The appellant has failed to demonstrate that the
trustee had accepted or agreed that the fees so incurred by the appellant
somehow constituted advances awarded to Canadevim Ltée.
[16]
In
any event, even if the appellant had obtained, after incurring such fees, the
status of creditor, I am of the view that he would not have been entitled to
claim in relation to this alleged bad debt a business investment loss under
paragraph 39(1)(c) of the Act because he did not advance funds to a
Canadian-controlled private corporation that was a small business corporation.
I note in this respect that the evidence demonstrates that the fees were
incurred between 2007 and 2010 and that Canadevim Ltée had been bankrupt since
2003. Therefore, at the time the advances were allegedly made, Canadevim Ltée was
not a small business corporation.
[17]
For
these reasons,
(i)
the
appeal for the 2007 taxation year is dismissed;
(ii)
the
appeal for the 2008 taxation year is allowed such that the legal fees claimed
are deductible up to $514.85;
(iii)
the
appeal for the 2009 taxation year is allowed such that the legal fees claimed
are deductible up to $725.60; and
(iv)
the
appeal for the 2010 taxation year is dismissed.
Signed
at Ottawa, Canada, this 2nd day of October 2013.
“Paul Bédard”
Translation certified true
on this 8th day of January 2014
Francie Gow, BCL, LLB
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