Citation: 2010 TCC 519
Date: 20101015
Docket: 2008-2292(IT)G
2009-2214(GST)I
BETWEEN:
ÉRIC DOIRON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1]
This is an appeal from
an assessment made by the Minister of National Revenue, who disallowed the
deduction of legal fees in the amount of $21,720 and $42,059 paid by the
Appellant, for the 2004 and 2005 taxation years, as well as input tax credits
for the same years.
[2]
The parties are relying
on section 9 and paragraphs 18(1)(a) and 18(1)(h)
of the Income Tax Act (the Act). The Minister is relying on the
following facts:
[Translation]
The Appellant concludes that the expenses he incurred to defend
himself against criminal charges laid when he was representing a client in a
criminal case are eligible expenses under the Income Tax Act.
[3]
The Appellant was a
criminal lawyer who began his career in 1993. He was hired to represent a
client named Lefebvre. He was arrested on April 30, 2002, at his
office in Moncton. He maintains that he would never have
been charged, had he not been representing Lefebvre.
[Translation]
10. The Appellant alleges that he had to defend himself against
charges of money laundering and attempted obstruction of justice starting on
April 30, 2002, since he could not practice as criminal lawyer if he was not a
member in good standing of his professional association.
12. The Appellant claims that it was because he defended himself
against the charges laid against him that he was able to earn income directly
from his firm until October 17, 2003. On October 17, 2003, the Law
Society of New Brunswick temporarily suspended the Appellant's licence.
[4]
The issue boils down to
whether the expenses incurred by the Appellant were for the purpose of earning
income from his profession as a criminal lawyer. He limited his oral evidence
to the facts that assisted his position sharing very little of his historical
past, present and future plans. I believe his father sat with him during the
hearing. He was introduced to his client Lefebvre through his client Cormier in
2001 and 2002. Lefebvre was charged with arson as was Cormier (I believe). The
charges against the Appellant arose directly from his lawyer client dealings
with Lefebvre and probably Cormier.
[5]
While acting for
Lefebvre, he was arrested and later convicted of obstructing justice and money
laundering. Eventually one of the charges was appealed successfully to the New
Brunswick Court of Appeal but the 2nd charge was upheld (obstruction
of justice) as was a four and a half sentence. He was also suspended from
practicing law by the Law Society of New Brunswick.
[6]
He states categorically
that his defense expenditure was for the purpose of retaining his profession to
earn income (18(1)(a)). The Minister’s counsel states that his defense
motivation and expenditure was personal. Obviously there is a link between
both.
[7]
Placed in evidence at Exhibit
A-1, tab 6
is a decision of the New Brunswick Court of Appeal which I have
read. As stated we have very little personal evidence with respect to the
Appellant. From his tax returns of 2004 and 2005, he indicates he was born in
1966 and was married with three children for whom he claimed daycare expenses.
He has not practiced law since his license was suspended in 2003. In 2006 the
Appellant’s letterhead described himself as “Business Strategist and
Consultant. » Presently he is a supervisor for a construction company.
[8]
Two of several cases
referred to by the Minister are 1) Leduc v. The Queen, and 2) Symer
v. Canada. The Appellant primarily referred to Roland
Paper Co. Ltd. v. Canada (Minister of National Revenue) and Vango v. Canada.
Analysis
[9]
I will commence with
the Minister’s submissions. The Appellant Leduc was an Ontario
solicitor who paid $140,000 to lawyers defending him on sexual exploitation
related charges. Convictions may have led to probably disbarment from his
practice of law in Ontario. Lamarre J. found that he expended the
defense amount to protect his reputation and his right to earn income through
the practice of law.
[10]
Lamarre J. concluded
that the charges did not arise in the cause of his real estate and commercial
law practice. She did not accept his evidence that his legal work for priests
and a Catholic Diocese led to a conspiracy to elicit testimony against him. She
concluded that the legal expenses were not paid to earn income from business
but were of a personal nature which is unlike my findings presently.
[11]
The Appellant directed
me to paragraphs 24 and 26 of the Leduc decision which read as follows:
[24]. . . 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.
[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.
[12]
I accept the
Appellant’s submission that these quotations are of assistance in
distinguishing Leduc from Doiron.
[13]
In Symes, the Supreme Court of Canada at
paragraph 68 stated that the purpose of a particular expenditure is a question
of fact having regard for all the circumstances. The Court added that some
factors to consider include:
1) Whether a deduction is ordinarily
allowed as a business expense by (accountants).
[14]
Presently, the accountant
for Doiron claimed the subject amounts as expenses made for earning income
pursuant to paragraph 18(1)(a) of the ITA. There was no further
evidence in this regard and I find the answer supports the Appellant.
2) It may be relevant to consider whether
the expense is one normally incurred by others in the same business. I answer
this with a no which supports the Minister’s position)
3) Whether the expense would have been
incurred if the taxpayer was not engaged in the pursuit of business. I answer
this in the Appellant’s favour.
[15]
I accept that the
arrest, criminal charges and Law Society suspension, trials and resulting legal
fees would not have incurred had the Appellant not been engaged in the pursuit
of business income.
[16]
The Appellant referred
me to Rolland Paper Co. Ltd. v. Canada (Minister of National Revenue).
In Roland, the corporate Appellant incurred legal expenses
unsuccessfully defending charges of conspiring with other companies to prevent
competition. The Exchequer
Court found that the legal
expenses were deductible stating “that the expenses were incurred in accordance
with sound accounting and commercial practices.”
[17]
In Vango, the
Appellant, a licensed stock broker, was found by the Toronto Stock Exchange
guilty of stock maneuvering. He was fired as an employee of his brokerage firm
and was hired by another firm. To keep this new job he incurred legal fees to
deal with the T.S.E. charges. Bowman J. concluded as follows:
. . . It was an expenditure incurred for the purpose of continuing
to earn income from his employment. The appellant acquired no new right as a
result of the litigation in which he was merely protecting his existing
employment. Accordingly, the expenditures were not incurred on account of
capital. The fines were an administrative penalty imposed on the appellant in
the course of his employment. The Rotary Club fees were expenses incurred for
purely promotional purposes. The appellant’s sole reason for joining was to
meet monthly with potential clients. They were therefore deductible expenses
under section 8(1)(f).
[18]
At paragraph 18 he
quoted “Lord Pearce in B.P. Australia Ltd. v. Commissioner of Taxation of
the Commonwealth of Australia
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 al
the guiding features which must provide the ultimate answer.
This observation was quoted with approval by Fauteux J. in M.N.R. v.
Algoma Central Railway, 68 D.T.C. 5096.
[19]
The present situation
is close to the line. Balancing both well presented arguments I find in favour
of the Appellant giving the taxpayers the benefit of the doubt. While it is
difficult to determine the Appellant’s primary motivation, the evidence weighs
more in favour of the Appellant’s position. Vango distinguishes it from Leduc.
The legal expenses in Doiron arose directly from the Appellant’s law practise
and his acting on behalf of Lefebvre and no doubt Cormier.
[20]
I have read the New
Brunswick Court of Appeal decision at Exhibit A-1, Tab 6. The behavior of
the Appellant as described was to put ill mildly, disappointing although it
should not affect this decision. He was dealt with by the New Brunswick Courts.
We were not informed of any specifics of the Appellant’s history during the
last eight years other than he lost his right to practise law in New Brunswick and received a four and a half year jail sentence and
his leave to appeal to the Supreme Court of Canada was denied. This has no
bearing on my decision other than the connection between his law practise and
the subject expenses.
[21]
The Appellant’s legal
expenses would not “have been incurred if the taxpayer was not engaged in the
pursuit of business income.”
[22]
In Mercille v. The
Queen,
Mr. Mercille was suspended as an investment advisor and stock broker. He
claimed a deduction for legal expenses paid in his attempts to be reinstated.
[23]
At paragraph 88
Archambault J. stated the following:
A number of court decisions have recognized that such legal fees can
be deducted in circumstances similar to those of Mr. Mercille. I note in
particular the following decisions: Lavoie v. M.N.R., 82 DTC 1291 and M.N.R.
v. Eldridge, 64 DTC 5338. In the latter, the Exchequer
Court recognized that the legal fees incurred to carry
on illegal activities could constitute deductible expenses. There are other
decisions, such as St-Germain v. M.N.R., 83 DTC 36, in which the Tax
Review Board allowed the deduction of expenses incurred by a physician to
defend in a proceeding for criminal negligence. In Vango (T.) v. Canada,
[1995] 2 C.T.C. 2757, my colleague Judge Bowman came to the same conclusion
respecting the expenses incurred by a broker employed by a brokerage firm to
defend himself against a charge laid by the Toronto Stock Exchange. See also M.N.R.
v. L.D. Caulk Co. Ltd., 54 DTC 1011 (S.C.C.) and Rolland Paper Co. Ltd.
v. M.N.R., 60 DTC 1095. In this last decision, the Exchequer
Court held that legal fees incurred to defend against
a charge under the Criminal Code were deductible, even though the
company charged was in fact found guilty. (This paragraph applies to the present decision.)
[24]
These principles apply
to the present appeal.
[25]
I am not aware of any
policy that dictates against the deduction of Doiron’s claimed expenses.
[26]
The two appeals are
allowed and the assessments are referred back to the Minister of National
Revenue for reconsideration and reassessment to permit the deduction of $21,720
in 2004 and $42,059 in 2005 and interest in the amount of $3,600 and $3,200 for
the years 2004 and 2005 and the input tax credits in the amount of $2,386.96 in
2004 and $4,500.02 in 2005. The Appellant is entitled a single set of taxed
costs. I infer that the interest was incurred through loans to pay the legal
fees.
Signed at Ottawa, Canada, this 15th day of October 2010.
“C.H. McArthur”
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