Frappier v. R., 98 DTC 1521, [1998] 2 C.T.C. 2658 (TCC)

Bowman T.C.J.:

1 These appeals are from assessments for the 1990, 1991 and 1992 taxation years. Counsel agreed that the 1990 taxation year was representative of all three years and that the appeals for 1991 and 1992 would abide the result for 1990.

2 Mrs. Frappier is a financial advisor. The issue is the deductibility of the amounts of $153,327, $64,123 and $71,201 paid by her in 1990, 1991 and 1992 respectively to reimburse clients who lost money on securities that she bought on their behalf.

3 Mrs. Frappier's claim is made under paragraph 8(1)(f) of the Income Tax Act, which reads:

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:

• (f) — where the taxpayer was employed in the year in connection with the selling of property or negotiating of contracts for the taxpayer's employer, and

  (i) under the contract of employment was required to pay the taxpayer's own expenses,

  (ii) was ordinarily required to carry on the duties of the employment away from the employer's place of business,

  (iii) was remunerated in whole or part by commissions or other similar amounts fixed by reference to the volume of the sales made or the contracts negotiated, and

  (iv) was not in receipt of an allowance for travel expenses in respect of the taxation year that was, by virtue of subparagraph 6(1)(b)(v), not included in computing the taxpayer's income,

  amounts expended by the taxpayer in the year for the purpose of earning the income from the employment (not exceeding the commissions or other similar amounts referred to in subparagraph (iii) and received by the taxpayer in the year) to the extent that such amounts were not

  (v) outlays, losses or replacements of capital or payments on account of capital, except as described in paragraph (j),

  (vi) outlays or expenses that would, by virtue of paragraph 18(1)(l), not be deductible in computing the taxpayer's income for the year if the employment were a business carried on by the taxpayer, or

  (vii) amounts the payment of which reduced the amount that would otherwise be included in computing the taxpayer's income for the year because of paragraph 6(1)(e).

4 Although the considerations that underlie the determination that must be made here are the same whether her income is from a business (section 9) or from employment (section 8) it was agreed that the case should proceed on the basis that she was employed by a brokerage firm and that it was therefore unnecessary to consider whether her income was from a business. Her commission income in the years in question was far in excess of the amounts claimed as deductions. Accordingly, the limitation contained in the words in parentheses in paragraph 8(1)(f):

...(not exceeding the commissions or other similar amounts referred to in subparagraph (iii) and received by the taxpayer in the year)...

5 Mrs. Frappier has been a licensed representative in the securities industry since 1958. She has a large and, according to the evidence, loyal clientele that she has built up over many years, a number of whom are neighbours, friends and family members. Throughout this period, she had approximately 275 clients and she managed assets having a total value of about $17,000,000.

6 During the years in question, Mrs. Frappier was registered with Dean Witter Reynolds until the end of August 1990 and with Midland Walwyn Capital Inc. thereafter. Both of these companies are security brokerage firms. The appellant maintained an office in her home where it appears that much of the business was transacted. The appellant also employed her husband, who had formerly been employed as a securities dealer.

7 The appellant's commission income in the years in question was substantial. Her income in 1990 was $382,121, of which $281,654 was from commissions and the balance was a bonus. In 1991, her income was $189,310 of which $184,434 was from commissions. In 1992, her commission income was $202,252.

8 The appellant testified that she charged her friends and relatives the same commissions as anyone else and, essentially, treated them the same. I accept her testimony. Indeed, most of her clients would become friends over the years.

9 Virtually all of the clients whose investments she managed gave her full discretion to purchase, dispose of or change investments without prior consultation.

10 Mrs. Frappier's business was largely built on referrals and she testified that for this reason it was important that her reputation be maintained.

11 In 1990, the year chosen by counsel as representative, Mrs. Frappier made the following payments:

Wendy Simpson	$21,000.00
337 Amberwood Drive
Waterloo, Ont.
N2T 2G1
Henry Broad	$10,310.00
109 Harwood Gate
Beaconsfield, Que.
H9W 3A5
Raymond Hatrick	$47,000.00	(now deceased)
150 Lake Rd.
North Hatley, Que.
J0B 2C0
Jacques Frappier	$15,000.00
1281 Chemin Lac Connelly
St. Hippolyte, Que.
J0R 1P0
Gabrielle Jussaume	$2,140.00
21 Laurier Court
Beaconsfield, Que.
H9W 4S7
Wm. Phillips	$1,316.03
1142 Alvin
Westland, Michigan
48185
Paul Heger	$2,270.57
65 Harbour Square
Apt. 3608
Toronto, Ont.
M5J 2L4
Therese Mallozzi	33,208.00
11807 James Morrice
Montreal, Que.
H3M 2G4
Jim Little	$100.00
1 Cedar St.
Pointe Claire, Que.
Elsita Brand	$10,000.00
780 Lakeshore Drive
Apt. 604
Dorval, Que.
H9S 2C4
Martin Claude Lepage and Louise Roy Lepage	$4,682.00
154 du Bearn
St. Lambert, Que.
J4S 1K7
Barbara Howey	$6,300.00
21 Second St.
Elmira, Ont.
N3B 1H3
$153,326.60

12 There are several observations that should be made. Of this group, Jacques Frappier was the appellant's brother-in-law and Barbara Howey was her sister. Theresa Mallozzi lost upwards of $100,000 on securities that she bought not through Mrs. Frappier but through Mrs. Frappier's husband. Elsita Brand was a former employee. The amount paid to Paul Heger was pursuant to a settlement made in a lawsuit against the appellant, her husband and one Gerald Frappier, based, it would appear, substantially upon the alleged negligence of the appellant's husband.

13 The amounts paid to Martin Claude Lepage were paid to reimburse him for a fee that he had to pay on early withdrawal from an investment in his registered retirement savings plan, even though he had been informed when he invested in this fund that such fees were exigible upon early withdrawal from a particular fund.

14 Two further observations should be made. The amounts paid to each person do not necessarily represent the full amount of the loss that they sustained in a particular year. The amounts appear to have been negotiated and, it would seem, took into account other factors including gains realized in other years or on other transactions. Moreover, not everyone who sustained losses was reimbursed. No explanation of this was elicited in chief or on cross-examination. It may have been a case of the more vociferous or aggressive clients having more success in getting paid.

15 I find a few of these factors somewhat troubling - such as the fact that two of the clients were family members, some were neighbours and in two cases payments were made to persons who arguably lost money because of Mrs. Frappier's husband.

16 These considerations are not irrelevant, but they must be put in perspective and view in light of the broader picture of a highly successful and aggressive business person whose principal stock-in-trade is her reputation, her expertise and her relationship with her clientele, some of whom were friends and family. It was important that her clients, who were the source of referrals, be kept happy and that she be perceived as standing behind her advice and the investments she made on their behalf with the discretionary power she had over their investment portfolio. Her reputation in the industry was important to her ongoing business, and this included protecting it against any damage that would be done if her husband were sued. There may well have been, as counsel for the respondent contends, an element of compassion involved, and of loyalty to friends, neighbours and relatives, but the overall picture that emerges is one of a rather tough, hard-headed business person who was not inclined to part with her money without seeing some commercial advantage to her doing so.

17 The case is quite similar to Mrs. Frappier's earlier appeal before Walsh J. and any distinctions with that case are not sufficiently significant to justify my not following it.

18 Counsel for the respondent argued that the payments were essentially personal, were not laid out to earn the commission income and were in any event on capital account. He referred to a number of earlier decisions of the Tax Appeal Board and the Tax Review Board. Some of them were premised on the view that there was no legal obligation to make the payments, others that the payments were on capital account. The law has moved ahead appreciably in the last twenty years and I think it is stated in two or three leading cases.

19 In Hallstrom's Propriety Ltd. v. Federal Commissioner of Taxation (1946), 72 C.L.R. 634 (Australia H.C.), Dixon J. (as he then was) stated that the answer to the question whether a payment was on revenue or capital account at page 648:

...depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights if any, secured, employed or exhausted in the process.

20 Similarly, the Chief Justice of Canada in Minister of National Revenue v. Algoma Central Railway (1968), 68 D.T.C. 5096 (S.C.C.)quoted with approval from B.P. Australia Ltd. v. Commissioner of Taxation of Australia (1965), [1966] A.C. 224 (Australia P.C.)at page 264:

The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer.

21 See also Johns-Manville Canada Inc. v. R. (1985), 85 D.T.C. 5373 (S.C.C.).

22 Counsel for the appellant referred to a number of other authorities, but it is clear that these payments were made for sound business reasons to secure a commercial advantage and they were not on capital account.

23 The appeals are allowed, with costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment to allow the deductions of the amounts claimed of $153,327, $64,123 and $71,201 paid with respect to the 1990, 1991 and 1992 taxation years.