Citation: 2013 TCC 107
Date: 20130527
Docket: 2009-26(IT)I
BETWEEN:
LINDA RUTH KELSO PATRY,
appellant,
and
HER MAJESTY THE QUEEN,
respondent.
REASONS FOR JUDGMENT
Hogan J.
I. INTRODUCTION
[1]
Dr. Linda Ruth Kelso
Patry (the "appellant") has appealed reassessments issued by the
Minister of National Revenue (the "Minister") denying deductions that
she claimed in respect of certain legal expenses incurred in the 2003 and 2004
taxation years. The legal expenses in question arose after she became involved
in a dispute with Barrie Neff, who had formerly acted as an arbitrator in a
tenancy dispute relating to the appellant’s rental activities.
II. FACTUAL BACKGROUND
[2]
The appellant is a
medical doctor (although she has recently given an undertaking to refrain from
practising medicine). During the years in question, she earned business income
from the practice of medicine. In addition, she earned income from her rental
activities.
[3]
Beginning in 1992, the
appellant was involved in a dispute with one of her tenants. She testified that
this dispute related to damage to one of her rental properties. Eventually, the
dispute resulted in arbitration hearings before the Residential Tenancy Branch
of British Columbia. The arbitrator at those hearings was Mr. Neff. He
ruled against the appellant, who was upset by Mr. Neff’s conduct in relation to
those arbitration proceedings.
[4]
A major dispute ensued
between the appellant and Mr. Neff. The appellant applied for judicial review
of Mr. Neff’s decision and, in her application, apparently criticized Mr. Neff
for being biased and unfair. The appellant testified that she also contacted a
member of the Law Society of British Columbia regarding her concerns about Mr.
Neff, who was arrested and detained by the police on the basis of, inter
alia, actions taken by the appellant.
[5]
Mr. Neff sued the
appellant (along with a third party) for, among other things, malicious
prosecution, abuse of process and intentional infliction of mental suffering. This
action resulted in several motions and a trial (together, the "Neff
Lawsuit").
[6]
Mr. Neff was ultimately
awarded damages by the British Columbia Supreme Court in respect of the Neff
Lawsuit, including punitive damages against the appellant. In its reasons
for judgment the Court stated:
153 The
defendant Patry formed an intense dislike of the plaintiff and a desire for
revenge for his finding against her in the Arbitration, which grew and expanded
beyond her properly seeking redress of a legal wrong into a vendetta to strip
him of his job, professional standing, and finally to have him subjected to
criminal prosecution.
[7]
According to the
appellant, Mr. Neff also made various complaints about her to the College of
Physicians & Surgeons of British Columbia (the "College of
Physicians"), which investigated the appellant and stripped her of her
licence to practise medicine for a brief period during the 1990’s. The
appellant testified that Mr. Neff regularly made complaints to the College of Physicians, including during 2003 and 2004.
[8]
In her 2003 and 2004
tax returns, the appellant claimed deductions in respect of legal expenses. The
Minister reassessed the appellant, disallowing the deduction of $11,000 of those
legal expenses for her 2003 taxation year and $10,000 of those expenses for her
2004 taxation year.
[9]
There is some
uncertainty regarding the quantum of the legal expenses that the appellant
actually incurred in 2003 and 2004 in respect of the Neff Lawsuit.
[10]
In general, the
appellant’s testimony was that the legal expenses in issue relate only to the
Neff Lawsuit. However, at other times, she appeared to be testifying that some
of those expenses might relate to her defence against Mr. Neff’s complaints to
the College of Physicians, although she also suggested that part of the expenses
for that defence might have been borne by the Canadian Medical Protective
Association. Her written submissions in the present appeal appears to indicate
that the legal expenses in issue relate only to the Neff Lawsuit. In
addition, letters from each of the lawyers who represented the appellant during
the years in question clearly describe the legal fees as relating only to the
Neff Lawsuit.
III. POSITIONS OF THE PARTIES
A. Appellant’s Position
[11]
The appellant relies on
subsection 8(1) and paragraph 18(1)(a) of the Income Tax Act (Canada) (the "ITA"). She submits that the legal expenses were
[F]or
the purpose of gaining or producing income from her rental properties plus for
the purpose of maintaining her license to practice medicine that grants her the
ability to produce and earn income from the practice of medicine.
[12]
The appellant’s
position is that the Neff Lawsuit resulted from things that she had said at the
arbitration hearings and in the consequential judicial review proceeding that
took place with regard to her rental operations. Accordingly, the appellant
submits that the legal expenses in issue were deductible as having been
incurred in connection with the earning of rental income.
[13]
The appellant also
argues that she was compelled to defend herself against the Neff Lawsuit
because, if she had not done so, the College of Physicians might have made an
adverse finding against her on the basis of those proceedings, and might have
taken away her licence to practise medicine. She submits that her dealings with
Mr. Neff were for the purpose of
. . .
maintaining my license to practice medicine and allowing me to produce and earn
income from the practice of medicine. . . .
In other words, the appellant is arguing that the
legal expenses in issue were deductible as having been incurred in connection with
her practice of medicine.
[14]
The appellant also
cites subparagraph 18(a)(i) of the ITA in support of her claim
for deductions in respect of certain legal expenses that she paid in advance.
[15]
The appellant cites Mercille v.
The Queen, She submits that the facts in her case are
distinguishable from the facts in Leduc v. The Queen and more closely resemble
those in Vango v. Canada
and Mercille. Finally, she cites 65302 British Columbia Ltd. v. Canada for the proposition that
outlays and expenses will be deductible if made or incurred for the purpose of earning
income, unless the ITA itself provides otherwise.
B.
Respondent’s Position
[16]
The respondent submits that the
legal expenses in issue were incurred in respect of the appellant’s personal
actions and are not business expenses but, rather, personal expenses.
[17]
The respondent submits that, to
the extent that the appellant incurred the legal fees in issue in order to
defend her professional reputation, those fees were on account of capital and, pursuant
to paragraph 18(1)(b)
of the ITA are not deductible.
[18]
In the alternative, the
respondent submits that, if the legal expenses in issue are deductible as
current expenses, the quantum of such expenses is only $19,190.94.
IV. ISSUE TO BE DECIDED
[19]
The main issue to be decided in
this appeal is whether the legal expenses in question are deductible as current
business or property expenses. If those legal expenses are deductible, their
quantum is also an issue, along with the question whether they are deductible
on income or capital account.
V. ANALYSIS
[20]
Under subsection 9(1) of the ITA,
a taxpayer’s income from a business or property for a year is “the taxpayer’s
profit from that business or property for the year”. Iacobucci J., in Symes
v. Canada,
explained:
. . . the “profit”
concept in s.9(1) is inherently a net concept which presupposes business
expense deductions. It is now generally accepted that it is s.9(1) which
authorizes the deduction of business expenses. . . .
Thus
the ITA, generally speaking, allows the deduction of expenses
that are incurred in a year for the purpose of earning income from a business
or property.
[21]
However, the ITA contains
provisions that limit the deductibility of certain expenses:
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;
. . .
[22]
When determining the purpose
underlying expenses, the taxpayer’s subjective intention in incurring the
expenses is not determinative. Instead, the Court must examine the objective
manifestations of purpose, taking into account all of the circumstances.
[23]
In her written submissions, the
appellant relied on subsection 8(1) of the ITA, which relates to the
deductibility of certain amounts from a taxpayer’s income from an office or
employment. Her reliance on that provision was clearly an error – her
submissions were generally directed toward the matter of the deductibility of
the legal expenses at issue from her income from a business or property, and
she apparently filed her tax returns on the basis of such deductibility.
Moreover, only certain enumerated classes of expenses are deductible from
employment income (whereas business expenses are, in general, deductible unless
otherwise provided for in the ITA, as discussed above). The appellant is
not assisted by subsection 8(1).
[24]
The appellant also cites paragraph
18(9)(a) of the ITA in relation to certain amounts that she
prepaid to one of her lawyers during the relevant period. Paragraph 18(9)(a)
generally serves to deny the deductibility of certain prepaid amounts that are
otherwise deductible. As a result, paragraph 18(9)(a) is not relevant to
the appellant’s appeal unless the amounts in issue are established to be
otherwise deductible.
[25]
By virtue of subsection 9(1) and
paragraphs 18(1)(a), (b) and (h), the legal expenses in
issue in this appeal are deductible only if they: (1) were incurred by the
appellant for the purpose of gaining or producing income from a business or
property, (ii) were not an outlay of capital, and (iii) were not personal
expenses of the appellant.
[26]
In Leduc, this Court held that the
legal expenses of a lawyer, which were incurred to defend himself against
charges of various sexual offences, were not deductible. The lawyer’s position
was that, if he had been convicted, he might have lost his ability to practise
law. In finding that the expenses were not deductible, Lamarre J. wrote:
21 . . . in
the absence of evidence to the contrary, it would appear that, had he not practiced
law, the appellant would nonetheless still have incurred the legal expenses to
defend himself before the courts against the criminal charges. Therefore, those
expenses are not deductible pursuant to paragraph 18(1)(h) of the ITA. . . .
22 Second,
I am not even convinced that one purpose of incurring these legal expenses was
to earn income. [. . .] Indeed, the appellant testified that during
the period when the legal expenses were incurred his earning capacity from the
law profession was not affected at all. On the contrary, his legal practice has
continued to thrive. There was no need to incur the legal expenses in order to
have an expectation of income, as income was already flowing from the
appellant’s legal practice.
[27]
Lamarre J. went on to describe the
connection that must exist, in such circumstances, between the business and the
legal fees before the fees can be deductible:
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.
[28]
Poulin v. Canada involved a real estate agent whose clients brought
proceedings against him alleging fraud and false representation. These
proceedings resulted in a judgment awarding damages, interest and costs against
the real estate agent. The real estate agent sought to deduct various expenses
relating to the proceedings, including the amount of the award of damages and
his legal fees. The Federal Court of Appeal ruled that the expenses were
non-deductible. Marceau J.A. held that:
8 . . .
In order for such a payment, which in itself, of course, is not made for the
purpose of earning a profit, to be nonetheless considered to meet the
requirement in paragraph 18(1)(a) of the Act, it must be seen as the
unfortunate consequence of a risk that the taxpayer had to take and assume in
order to carry on his trade or profession. And in order for the payment to be
seen as such, it is an essential condition, I believe, that it be directly
related to an act that was necessary in order to carry on the trade or
profession and that it could potentially have been considered to have been
performed improperly.
[29]
In Doiron v. Canada, a lawyer was charged with
criminal offences after allegedly paying bribes to prevent a client from
testifying against another person. After three trials (the first of which
occurred in 2003), the lawyer was convicted of attempted obstruction of justice
and was sentenced to four and a half years in prison. Mr. Doiron’s licence to
practise law was suspended in 2003. In his 2004 and 2005 tax returns, Mr.
Doiron claimed deductions in respect of the legal expenses incurred to defend
himself, together with associated interest expenses. These deductions were
subsequently denied by the Minister. McArthur J. of the Tax Court of Canada
allowed Mr. Doiron’s appeal on the following basis:
19 The
present situation is close to the line. Balancing both well presented arguments
I find in favor of the Appellant giving the taxpayers the benefit of the doubt.
. . . The legal expenses in Doiron arose directly from the
Appellant’s law practise and his acting on behalf of Lefebvre and no doubt
Cormier.
[30]
The Federal Court of Appeal
reversed this decision. Noël J.A. agreed with McArthur J. that the legal
expenses would not have been incurred if not for the fact that the respondent
was practising law. However, he cited Symes for the proposition that
this is not a relevant factor in determining the deductibility of the expenses. Noël J.A. held that:
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.
[31]
In her submissions, the appellant
relies on the Mercille case. That case involved a stockbroker who
claimed deductions from his employment income in respect of certain legal fees
which he had incurred when defending himself in proceedings before the
Montreal Exchange’s Disciplinary Committee, the Montreal Exchange’s Governing
Committee and the Commission des valeurs mobilières du Québec, and in criminal
proceedings before the Court of Quebec. These proceedings all involved certain
acts that the taxpayer had allegedly committed in relation to his employment. The taxpayer testified
that, if he had failed in defending himself in those proceedings, he would have
temporarily or permanently lost his right to carry on his profession.
Ultimately, Judge Archambault held that the legal fees were incurred for the
purpose of earning employment income and allowed their deduction pursuant to
paragraph 8(1)(f) of the ITA.
[32]
The appellant also referred the
Court to Vango. In Vango, the taxpayer was an investment
advisor and stockbroker who had been accused by the Toronto Stock Exchange of
removing shares from a client’s account without having authority to do so. The
taxpayer’s employer informed him that he would lose his job – and the taxpayer
realized that he could lose his licence – unless the wording of the infraction of
which he stood accused could be modified to something less serious. As a result, he incurred
legal expenses to have the wording of the infraction modified. He was
ultimately successful. The Tax Court of Canada, per Judge Bowman (as he then
was), accepted the legal expenses as deductible under paragraph 8(1)(f).
[33]
In Leduc, Lamarre J. distinguished
the facts before her from the facts in Mercille and Vango:
24 This case
is distinguishable from this Court’s decisions in Vango v. Canada.,
[1995] T.C.J. No. 659 (QL) and Mercille v. Canada., [1999] T.C.J. No.
941 (QL), referred to by counsel for the appellant. In those cases, 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.
[34]
In my opinion these decisions are
reconcilable. Mercille and Vango suggest that legal expenses
relating to actions allegedly committed during the course of business
activities can be deductible in certain circumstances. However, the Federal
Court of Appeal’s decision in Poulin suggests that such expenses must
also be “the unfortunate consequence of a risk that the taxpayer had to take
and assume in order to carry on his trade or profession”. Similarly, in Leduc,
the Tax Court suggests that for such legal expenses to be deductible they must
have arisen in the normal course of the taxpayer’s income-earning operations,
and must have been “directly related” to those operations. In Mercille and
Vango the taxpayers succeeded in showing that the expenses were related
to their income-earning activities because the disciplinary actions against
which they defended themselves were directly related to their work.
[35]
Leduc and Doiron both suggest that there must be real
evidence establishing the connection between the relevant legal expenses and
the business. In Leduc, the Court declined to find that the relevant
legal expenses were deductible, in part because the taxpayer’s legal practice
had continued to thrive. In Doiron, the Federal Court of Appeal ruled
that the taxpayer had not established the connection between his legal expenses
and his law practice because, on the evidence before the Court, he could not
have hoped to regain his licence.
[36]
In the present case, the British
Columbia Supreme Court’s decision in Neff v. Patry suggests that the
Neff Lawsuit bore only an incidental relationship to the appellant’s rental
operations. The appellant first encountered Mr. Neff as part of an arbitration
proceeding in relation to her rental operations. However, the Court found that
the dispute had expanded into a personal vendetta. It would be inappropriate
for me to contradict that finding because, in particular, the evidentiary
record before this Court, in relation to the appellant’s dispute with
Mr. Neff is comparatively sparse. Therefore, I am of the opinion that the
appellant has failed to establish that the Neff Lawsuit was directly related to
her rental operations.
[37]
Similarly, I am of the opinion
that the appellant failed to establish that the Neff Lawsuit bore anything more
than an incidental relationship to her medical practice. It is reasonable to
infer that the appellant would have defended herself against the Neff Lawsuit
even if there had been no consequential threat to her ability to practice
medicine. Moreover, the appellant has failed to provide sufficient evidence to
establish that her medical practice was truly threatened as a result of the
Neff Lawsuit. The Neff Lawsuit could not have turned out worse for the
appellant with regard to her ability to continue practising medicine. Yet she
continued to practise. Therefore, following Leduc and Doiron, I
conclude that the legal expenses in issue are not deductible as having been
incurred in connection with her medical practice.
[38]
The appellant argues that her case
resembles the facts in Mercille and Vango more closely than the
facts in Leduc. However, the evidence shows that the appellant did not
become involved in the Neff Lawsuit as a result of actions committed in the normal
course of her medical practice. Mr. Neff was not a patient of the appellant’s.
He sued the appellant because of actions taken against him by her in her
personal capacity.
[39]
In light of the foregoing, the
legal expenses in issue were not incurred by the appellant for the purpose of
gaining or producing income from a business or property. Instead, the evidence
shows that those expenses were personal expenses of the appellant. Therefore,
they are not deductible. For all of these reasons, the appellant’s appeal is dismissed.
Signed at Ottawa, Ontario, this 27th day of May 2013.
“Robert J. Hogan”
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