Date: 20120307
Dockets:
A-437-10
A-438-10
Citation:
2012 FCA 71
CORAM: NOËL J.A.
PELLETIER J.A.
GAUTHIER J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
ÉRIC DOIRON
Respondent
REASONS FOR JUDGMENT
NOËL
J.A.
[1]
These are two appeals
brought against decisions of Justice McArthur of the Tax Court of Canada
(the TCC judge) allowing, on the basis of a single set of reasons, the appeal
of Éric Doiron (the respondent or Mr. Doiron) from two assessments, one
made under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the
ITA) in A-437-10, and the other under the Excise Tax Act, R.S.C. 1985,
c. E-15 (the ETA) in A-438-10.
[2]
The two appeals were
consolidated by an order of Justice Mainville dated January 31, 2011, with
the appeal in A-437-10 being designated as the lead file. In accordance with
that order, these reasons will be placed in the lead file, and a copy hereof will
be filed in A-438-10 to stand as the reasons in that case.
[3]
At issue here are the
legal fees and associated interest incurred by the respondent in the 2004 and
2005 taxation years, respectively totalling $25,320 and $45,259, and more
specifically the treatment of these expenses for the purposes of the ITA and
the ETA. The analysis of this issue requires a brief review of the events that
led the respondent to incur these expenses. The relevant statutory provisions
are reproduced in an appendix to these reasons.
BACKGROUND
[4]
The respondent was a
lawyer who had been a member in good standing of the Law Society of New
Brunswick since 1993. On April 30, 2002, he was arrested and charged with
attempting to obstruct the course of justice and with possession and use of
proceeds of crime, both of which are indictable offences. After years of legal
proceedings, he was found guilty of obstruction of justice and sentenced to
four and a half years in prison.
[5]
The respondent was
suspended by the Law Society of New Brunswick, effective October 17, 2003,
and has not practised law since then (respondent’s testimony, Appeal Book, at
pages 200 and 208). It appears that he was permanently struck off the Roll
in 2010. At the time of the hearing before the TCC, he was working as a manager
for a construction company.
[6]
The facts that led to
the respondent’s conviction are described in the judgment of the Court of
Appeal of New Brunswick in R. v. Doiron (2007 NBCA 41, [2007] N.B.J.
No. 189) [R. v. Doiron] upholding the decision of
Justice Rideout of the Court of Queen’s Bench (2005 NBQB 147, [2005]
N.B.J. No. 160). Mr. Dorion’s defences are laid out and disposed of in
three decisions by Justice Rideout (2004 NBBR 219, [2004] N.B.J.
No. 208; 2005 NBBR 89, [2005] N.B.J. No. 71; 2005 NBBR 39, [2005]
N.B.J. No. 29).
[7]
The facts alleged
against Mr. Doiron arose in the context of his relationship with a certain
Éric Lefebvre. After a fire destroyed a Moncton pub owned in part by a certain Jeff Cormier, Mr. Lefebvre was
arrested and eventually pleaded guilty to a charge of arson. Mr. Cormier
and Mr. Doiron agreed to have Mr. Doiron represent Mr. Lefebvre
(see 2005 NBQB 147, at paragraph 7).
[8]
Mr. Doiron and
Mr. Lefebvre met on numerous occasions at the Moncton jail.
Mr. Lefebvre later revealed to police that Mr. Doiron had offered him
a $35,000 bribe in exchange for not testifying against Mr. Cormier.
Conversations intercepted by wiretapping confirmed these allegations.
[9]
At the end of the first
trial, in October 2003, Mr. Doiron was found guilty of attempted
obstruction of justice and sentenced to three years in prison. Mr. Doiron
appealed against that decision, and the Court of Appeal of New Brunswick ordered
a new trial because of an irregularity in the jury selection process.
[10]
Mr. Doiron was subsequently
acquitted of the charge of possession and use of proceeds of crime, in a
separate trial. At the second trial on the charge of attempted obstruction of
justice, in April 2005, the jury found Mr. Doiron guilty, and
Justice Rideout sentenced him to four and a half years in prison. To
justify this severe sentence, Justice Rideout emphasized the fact that
Mr. Doiron was a lawyer and therefore held a position of trust in the legal
system.
[11]
Mr. Doiron
appealed against the conviction and the sentence in the Court of Appeal of New
Brunswick, arguing among other things that certain pieces of evidence were
inadmissible. The Court of Appeal of New Brunswick dismissed the appeal. The Supreme
Court of Canada dismissed the application for leave to appeal in
December 2008 ([2007] S.C.C.A. No. 413).
[12]
In his tax returns for
the 2004 and 2005 taxation years, the respondent claimed deductions for the
legal fees he paid to defend himself against the criminal charges laid against
him and for the interest incurred to finance the payment of these fees. This
reduced the respondent’s reported income for the 2004 taxation year to a net
amount of $23,202 and created a loss of $38,908 for the year 2005, which loss
was then deferred (Appeal Book, at pages 43 and 76).
[13]
Although the gross
incomes underlying these returns ($58,505 and $8,614 respectively) were
identified as [translation] “professional income” in the tax returns (idem,
at pages 43, 53, 76 and 81), the respondent confirmed that none of it came
from the practice of law, since his licence to practise had been suspended. The
testimony he gave on this question is as follows (respondent’s testimony,
Appeal Book, at pages 199 and 200):
[translation]
Now on counsel’s comments on the income stream in 2004 and 2005,
this is uniquely not ongoing files, but what we call in English “referral fees”
which were paid to me for referring clients to a lawyer.
So this wasn’t income that I could have earned from practising law
because at that time I hadn’t been practising law since October 17, 2003.
[14]
This testimony shows
that, from the time of his suspension, the respondent ceased practising as a
lawyer and that the income he earned thereafter came from “referral fees”, that
is, from commissions for brokering clients.
[15]
For the purposes of
computing the excise tax for the periods ending December 31, 2004, and
December 31, 2005, the respondent also claimed input tax credits in the
amounts of $2,386.96 and $4,500.02. The evidence provides no details as to the
nature of these credits other than that they relate to legal fees paid by the
respondent and claimed in his two tax returns (Appellant’s Memorandum, at
paragraph 20). I deduce from this that the credits claimed are linked to
the cost of services offered by the lawyers who represented the respondent in
the criminal proceedings.
[16]
The Minister of
National Revenue (the Minister) disallowed the deductions claimed under the ITA
as well as the credits claimed under the ETA and made the assessments at issue
here in accordance with those two statutes. In making these assessments, the
Minister relied on the assumption that the expenses had not been incurred for
the purpose of producing income within the meaning of subsection 9(1) and
paragraph 18(1)(a) of the ITA and that, furthermore, these were
personal expenses that cannot be deducted under paragraph 18(1)(h).
Regarding the disallowance of the input tax credits, the Minister took the
position that the services relating to the credits claimed had not been
supplied in the course of a commercial activity within the meaning of
subsection 169(1) of the ETA.
[17]
An appeal was brought
before the TCC judge. The respondent argued at the hearing that the criminal
acts of which he was convicted were related to his activities as a lawyer
(respondent’s testimony, Appeal Book, at page 198) and that he had to be a
member of the Law Society of New Brunswick to practise his profession, such
that he had to defend himself if he ever wanted to earn income as a lawyer
again (idem, at pages 198 to 200).
TCC DECISION
[18]
The TCC judge agreed
with the respondent’s arguments and held that the expenses claimed had been
incurred to earn income during the two years at issue. The reasons for judgment
do not address the respondent’s position to the effect that the expenses in
question had been for the purpose of protecting his source of income, that is,
his licence to practise.
[19]
The TCC judge commented
on several judgements that the parties had submitted to him, among others, Symes
v. Canada, [1993] 4 S.C.R. 695 [Symes]. Drawing on the test set out
in that case, the TCC judge held that the respondent’s legal fees “would not
have [been] incurred had the [respondent] not been engaged in the pursuit of
business income” (Reasons, at paragraphs 14 and 15).
[20]
The TCC judge also
cites Rolland Paper Company Limited v. Minister of National Revenue, 60
DTC 1095, Vango v. Canada, [1995] C.T.C. No. 659 and Mercille v.
Canada, [1999] C.T.C. No. 941. Deeming this case to be “close to the
line”, he found in favour of the respondent, taking the view that taxpayers
must be given the benefit of the doubt (idem, at paragraph 19).
[21]
The TCC judge also
held, without giving any additional explanations, that the respondent was
entitled to input tax credits under the ETA and allowed both appeals with a
single set of costs to be paid in the ITA file (idem, at
paragraph 26).
POSITIONS OF THE PARTIES
[22]
In support of her
appeal, the appellant argues that there is no connection between the charge
that was laid against the respondent and the activities he engaged in for the
purpose of gaining income (Appellant’s Memorandum, at paragraph 29). The
appellant also criticizes the TCC judge for failing to recognize that the
claimed expenses did not meet the requirements of paragraph 18(1)(a)
(idem, at paragraph 30).
[23]
Furthermore, the TCC
judge allegedly made a palpable and overriding error in holding that the
respondent’s actions [translation] “are consistent with well-accepted
principles of business practice, as required by section 9 of the ITA, or
were taken for the purpose of gaining income, in accordance with
paragraph 18(1)(a) of the ITA” (idem, at paragraph 31).
[24]
The appellant adds that
by the respondent’s own admission, the expenses were intended to preserve a [translation] “key
asset” of the respondent’s business and therefore were not an expenditure of a
current nature. Surprisingly, the appellant is raising a new argument in this
Court, to the effect that the expenses are a capital outlay and therefore
subject to the limit provided at paragraph 18(1)(b) of the ITA (idem,
at paragraph 33).
[25]
Finally, the appellant
submits that the expenses stem from an offence so [translation] “repulsive” that they cannot be justified
as having been incurred to gain income. On this point, the appellant relies on
the obiter of Justice Iacobucci in 65302 British Columbia Ltd.
v. Canada, [1999] 3 S.C.R. 804, at paragraph 69, which states that it
is conceivable that a deduction could be disallowed for such a reason (idem,
at paragraph 32).
[26]
The respondent, on the
other hand, relies on the reasons of the TCC judge and submits that the TCC
judge did not make any errors in law in applying sections 9 and 18 of the
ITA (Respondent’s Memorandum, at paragraph 2(a)). He adds that
characterizing the offence as being [translation] “repulsive” is not the applicable test
for determining whether an expense may be deducted under the relevant
provisions of the ITA (idem, at paragraph 2 b)).
[27]
The respondent argues
that the appellant has not identified any palpable and overriding error in the
TCC judge’s assessment of the evidence before him (idem, at
paragraphs 2(c) and (d)). The respondent adds that the TCC judge did not
have to consider whether the claimed expenses were capital expenditures and
therefore subject to paragraph 18(1)(b) since this provision was
not raised before him (idem, at paragraph 2(e)). Moreover, raising
this provision at this stage of the proceedings would cause the respondent harm
(idem, at paragraphs 58 to 61).
[28]
At any rate, the
respondent submits that the expenses did not concern an enduring asset and
therefore were not a capital expenditure (idem, at paragraphs 62 to
66).
ANALYSIS AND DECISION
[29]
Since this is an appeal
from a judgment of the TCC, the applicable standard of review is the one set out
in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235: questions of
law are reviewable on the correctness standard, and this Court must defer to
the judgment of the TCC on questions of fact and on questions of mixed fact and
law unless it is shown that there was a palpable and overriding error.
[30]
Bearing these standards
of review in mind, I am of the opinion that the judgment of the TCC judge must
be set aside because it was rendered on the basis of an inconclusive test and
disregards the evidence before him in several respects.
[31]
According to the TCC
judge, the respondent is entitled to deduct the claimed amounts if he can
establish that the expenses would not have been incurred had he not been
engaged in the business (Reasons, at paragraph 15):
. . . the arrest, criminal charges and Law Society
suspension, trials and resulting legal fees would not have incurred had the
[respondent] not been engaged in the pursuit of business income.
(See to the same effect paragraph 19 in fine, as well as
paragraph 21.)
[32]
It would indeed appear
that none of this would have happened if not for the fact that the respondent
was practising law, but as the Supreme Court explains in Symes, this is
not one of the factors that may be relevant to consider (Symes, at
paragraphs 68 and 70). The fundamental issue remains the following: “did
[Mr. Doiron] incur [legal] expenses for the purpose of gaining or
producing income from a business?” (idem, at paragraph 67). It is
undeniable that Mr. Doiron did not practise law during the relevant period
and that the expenses therefore did not serve to earn income for the business
in either of the years at issue.
[33]
Mr. Doiron
nevertheless argues, as he did before the TCC judge, that the expenses were for
the purpose of gaining income from his law practice for the two years at issue,
because if he had obtained the desired verdict and the Law Society of New
Brunswick had lifted his suspension at that time, he would have been able to
generate income from this business for each of those years.
[34]
This argument fails for
several reasons. First of all, the deductions allowed under
subsection 9(1) and paragraph 18(1)(a) are for expenses
incurred for the purpose of gaining income for the year in which they are
claimed. The mere fact that the expenses incurred by the respondent could earn
him income outside the years at issue does not disallow them, since the only
requirement is that they be incurred for the purpose of gaining income in the
years in which they are claimed. However, the ITA sets a limit where an expense
is aimed at acquiring or preserving what may be referred to as an enduring
asset. Such an expense, described at paragraph 18(1)(b) using the
term “capital outlay”, may not be deducted except to the extent provided in
Part I.
[35]
In the present case,
the claimed expenses were, by the respondent’s own admission, incurred for the
purpose of allowing him to regain his licence to practise. This type of
benefit, had the respondent succeeded in obtaining it, would have lasted for
all the years that he could have potentially practised law, which would
therefore make this benefit an enduring asset subject to the limit provided at
paragraph 18(1)(b).
[36]
The respondent
submitted that this Court cannot consider the appellant’s new argument according
to which that this sort of expense is a capital expense and may not be deducted
under paragraph 18(1)(b). He points out that this provision was not
raised when the assessments were made or before the TCC judge.
[37]
I cannot agree with this
position. First of all, the respondent’s position to the effect that the
expenses were incurred to allow him to regain his licence to practise is
inconsistent with the TCC judge’s conclusion that the claimed expenses are
current expenses and therefore deductible under subsection 9(1) and
paragraph 18(1)(a) of the ITA. Considering the respondent’s
position, the TCC judge had to take the limit set by paragraph 18(1)(b)
into account, his role being to determine on the basis of the facts before him
whether the assessments are valid (see to this effect Hammill v. Canada,
2005 FCA 252, at paragraph 31).
[38]
At any rate,
paragraph 18(1)(b) has now been raised, and the respondent
acknowledged at the appeal hearing that any evidence that could be adduced on
this issue is before us. I would add that raising this provision now does not
in any way alter the amounts assessed. In my view, this is a new argument that
may be advanced at this late stage under paragraph 152(9) of the ITA.
[39]
In answer to the
appellant raising paragraph 18(1)(b), the respondent, citing the
Supreme Court’s judgment in Evans v. Minister of National Revenue,
[1960] S.C.R. 391 [Evans], argued that an expense incurred to protect a
source of income is a current expense and therefore deductible in that year (Evans,
at page 395). As I read
it, this judgment does not have the effect that the respondent ascribes to it.
In that case, the issue was whether expenses incurred by Ms. Evans for the
purpose of gaining income owed to her by a testamentary trust could be deducted
in computing her income. Under the terms of the will, Ms. Evans was
bequeathed a share of the trust income for life. Ms. Evans ran into
difficulty when the trustee, refusing to pay her share of the income, disputed
her right to that income under the terms of the will, which led the trial judge
to conclude that the expenses had been incurred to preserve the source of
income the testamentary trust represented (idem, at page 395).
[40]
A majority of the
judges of the Supreme Court concluded that the expenses were incurred to
collect the income to which Ms. Evans was entitled and thus could be
deducted in computing her income for the year in which she finally won her case
against the trustee (idem, at page 398). The majority noted that
the fact that the trustee had, on ill-founded grounds, disputed
Ms. Evans’ right to the trust income could not transform an expense for
collecting the income to which she was entitled into a capital outlay (idem,
at page 399). According to this line of reasoning, it is clear that if
Ms. Evans had lost her case against the trust on the grounds argued by the
trustee, the Court would have arrived at the opposite conclusion.
[41]
The respondent also
referred us to the decision of the Tax Review Board in Pierre J. Ferguson v.
MNR, 63 DTC 997-40 [Ferguson], but that decision does not support
his position either. In fact, it has precisely the opposite effect (Ferguson,
at page 998).
[42]
There can be no doubt
that a licence to practise a profession governed by a professional body is an
asset (see in this regard the definition of the word “property” at
paragraph 248(1) of the ITA, which includes “a right of any kind
whatever”), and that this asset is of an enduring nature since it carries on
over the years and must be kept in good standing in order for the holder to
continue exercising the profession concerned. Consequently, the respondent was
not entitled to the deductions claimed, having regard to the limit set at
paragraph 18(1)(b).
[43]
Even if we ignored the
fact that the expenses were incurred for the purpose of regaining an enduring
asset and are therefore capital outlays, the deduction of which is prohibited
by paragraph 18(1)(b), the onus was on the respondent to show the
connection between the expenses and his business. The TCC judge failed to
consider the underlying evidence when he agreed with respondent’s assertion
that the expenses had been incurred to allow him to regain his licence to
practise.
[44]
On this point, the
evidence had to show at the very least that the respondent had a plausible
defence against the criminal charges and that, should he win his case, he was
likely to regain his licence to practise.
[45]
The evidence before us
regarding the criminal trial is limited to the facts I related at
paragraphs 4 to 10 of these reasons, from the four decisions of
Judge Rideout and from the New Brunswick Court of Appeal’s decision (R.
v. Doiron). In his testimony before the TCC judge, the respondent simply
denied the facts relied on by the Court of Appeal in dismissing his appeal. He
explained that, having chosen not to testify at the criminal trial, he did not
have to testify on the circumstances surrounding the charges or the defence he
raised (respondent’s testimony, Appeal Book, at pages 211 to 214). The
respondent adopted this position despite the fact that the criminal case had
been closed by the time he testified in the TCC.
[46]
Since the burden of
proof was on him, the respondent had to expand on his grounds for arguing that
he had not committed the act of which he was convicted and, in particular,
explain how he could hope to regain his licence to practice, given the wiretapping
evidence adduced against him. Because the respondent was not more forthcoming,
the judicial decisions that eventually confirmed his guilt are the only source
of information available to us.
[47]
Clearly, a verdict of
not guilty would not have prevented the Law Society of New Brunswick from
concluding that, on a balance of probabilities, the respondent had attempted to
bribe and had therefore committed an act inconsistent with the practice of his
profession. This is especially likely when we consider the impact of the wiretapping
evidence “without [which] there [could not have been a]
conviction” (R. v. Doiron,
at paragraph 112) and the arguments used by Mr. Doiron to counter
this evidence, which were limited to proposing a scenario with which the
contents of the intercepted conversations “simply do not fit” (idem, at
paragraph 127) and seeking to have that evidence excluded on Charter
grounds. On this point, it is useful to bear in mind that a decision to exclude
evidence in a criminal context is not binding on a decision maker who is
considering a related issue in a civil context (see on this point the judgment
of the Court of Appeal for Ontario in D.P. v. Wagg, [2004] O.J. No.
2053, 71 O.R. (3d) 329, at paragraph 77).
[48]
Given the extremely
serious nature of the impugned act from the perspective of someone who was
acting as an officer of the court, the intercepted conversations adduced in
evidence against the respondent, and the arguments he used to counter this
evidence, Mr. Doiron has not shown how he could hope to regain his licence
to practice even if he had succeeded in having that evidence excluded so that
“the . . . case would fall apart and [he] would be acquitted of a most serious
offence” (R. v. Doiron, at paragraph 112). In my humble opinion, if
the TCC judge had considered the evidence from the criminal proceedings, he
would have had no choice but to conclude that the respondent had not discharged
his burden of proving the connection between the legal fees and his business.
[49]
As for the excise tax
aspect of the case, the TCC judge had to determine whether the inputs in the
form of legal services rendered in defending him in the criminal proceedings
were “in the course of” (“dans le cadre de”) the respondent’s “commercial
activity”. Again, the burden of proving this was on the respondent.
[50]
To answer this
question, the TCC judge first had to identify the “commercial activity” in the
course of which the legal services had been rendered. Under the ETA, a
“commercial activity” may be carried on by a “business”, and a “business”
includes a “profession” or an “activity engaged in on a regular or continuous
basis” (see section 123 of the ETA).
[51]
According to his testimony,
the respondent was not practising law during the periods covered by the input
tax credit claim. The only activity he engaged in during those periods was [translation]
“referring clients to a lawyer” in consideration of “referral fees”. The
respondent did not specify if the clients in question were clients of his own
firm or persons he referred in another context.
[52]
In the latter case, the
“commercial activity” would be limited to the act of referring clients to a
lawyer in return for monetary consideration, and I fail to see how the
respondent could even claim that the legal services rendered in connection with
the criminal case could have been rendered in the course of this activity.
[53]
However, if the clients
he referred were clients of his own firm, that activity could be seen as being
incidental to the exercise of his profession, in which case the question would
be whether the legal services at issue were rendered in the course of the
“commercial activity”, namely, his law practice.
[54]
The answer to this
question is determined by the preceding analysis. Indeed, to establish the
necessary connection, the respondent had to show that he had a plausible
defence and that, should he win his criminal case, he could hope to regain his
licence to practice. For the reasons I have already laid out, the respondent
has not shown this.
[55]
I would therefore allow
the appeals with a single set of costs and, rendering the decisions that the
TCC judge should have rendered, I would dismiss Mr. Doiron’s appeals with
costs in the file concerning the ITA and without costs in the file concerning
the ETA.
“Marc Noël”
“I agree.
J.D. Denis Pelletier J.A.”
“I agree.
Johanne Gauthier J.A.”
Certified true
translation
Michael Palles
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