Dockets:
A-191-13
A-193-13
A-194-13
Citation:
2014 FCA 34
CORAM:
BLAIS
C.J.
SHARLOW
J.A.
GAUTHIER
J.A.
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Docket:
A-191-13
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BETWEEN:
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DR. MIKE ORTH INC.
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Appellant
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and
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HER MAJESTY THE QUEEN
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Respondent
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Docket:
A-193-13
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BETWEEN:
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371501 B.C. LTD.
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Appellant
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and
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HER MAJESTY THE QUEEN
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Respondent
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Docket:
A-194-13
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BETWEEN:
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440214 B.C. LTD.
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Appellant
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and
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HER MAJESTY THE QUEEN
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Respondent
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REASONS FOR JUDGMENT OF THE COURT
(Delivered from the
Bench at Calgary, Alberta, on February 5, 2014).
SHARLOW J.A.
[1]
These three appeals were heard together in this
Court and in the Tax Court of Canada (Chief Justice Rip) because they deal with
the same issues and similar facts. The appeals were commenced by 371501 B.C.
Ltd. and 440214 B.C. Ltd. (2013 TCC 124), and Dr. Mike Orth Inc. (2013 TCC
123), from 2003 and 2004 reassessments under the Income Tax Act, R.S.C.
1985, c. 1 (5th Supp.). They were heard under the informal procedure
rules of the Tax Court.
[2]
In the reassessments under appeal, the Minister disallowed
the claims of the appellant taxpayers for deductions for certain legal
expenses. The taxpayers appealed on the basis that all of the claimed amounts
were deductible. Chief Justice Rip allowed the appeal in relation to some of
the expenses, but otherwise dismissed the appeal. The taxpayers now appeal to
this Court. They argue that their claims for deductions should have been
allowed in full.
[3]
In each case, the only issue is the
deductibility of certain legal fees. The Minister accepts that the legal fees
were incurred by the corporations who claimed the deductions. The statutory
test that applies in this case – referred to in these reasons as the “statutory
purpose test” – is whether the legal expenses were incurred for the purpose of
earning income from a business or property, and were not outlays on account of
capital or personal expenses. Whether the statutory purpose test is met in a
particular case is a question of mixed fact and law, for which the standard of
review is palpable and overriding error unless there is an extricable question
of law, which is reviewed on the standard of correctness (Housen v.
Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235).
[4]
In the Tax Court, the taxpayers presented oral
and documentary evidence. The evidence was reviewed comprehensively by Chief
Justice Rip. His reasons explain clearly and in detail why he was satisfied
that some but not all of the legal expenses met the statutory purpose test. His
conclusions must stand absent an error of law or a palpable and overriding
factual error. We have been able to discern no such error, and therefore the
appeals will be dismissed.
[5]
The taxpayers argue that they are entitled to
succeed because Chief Justice Rip held that the Minister's factual assumptions were
demolished. That argument is based on a misapprehension of the legal effect of
demolishing a factual assumption of the Minister. In an income tax appeal, such
a factual assumption is demolished by evidence that establishes, on a prima
facie basis, that the assumption is not true. A factual assumption that is
demolished cannot be relied upon to justify the assessment under appeal.
[6]
In each of these cases, two factual assumptions were
held to be demolished. One of those assumptions was that the amount of legal
expenses claimed was unreasonable (a reference to section 67 of the Income
Tax Act). Once that assumption was held to be demolished, then in the
absence of evidence that the expenses were unreasonable (and there is none),
Chief Justice Rip could not and did not conclude that the legal expenses were
unreasonable in amount.
[7]
The other demolished assumption in each case was
that the purpose of certain corporate reorganizations was estate or tax
planning. Again, once that assumption was held to be demolished, Chief Justice
Rip could not and did not conclude that the purpose of the corporate
reorganizations was estate or tax planning.
[8]
The Minister made no other factual assumptions
as to the purpose of the legal expenses. However, each of the taxpayers alleged,
in the statement of facts in its notice of appeal, that the expenses in issue
were incurred “in respect of the [taxpayer’s] business and investments”. That is
an ambiguous expression that could include an income earning purpose or a
capital purpose. The Minister denied the allegation.
[9]
The pleadings leave no room for doubt that the
purpose of the legal expenses was contested. It is apparent from the Minister’s
pleading under the heading “Statutory Provisions, Grounds Relied on and Relief
Sought” that the Minister took the position from the outset that the
documentary evidence the taxpayers had provided to the Minister was not
sufficient to establish the purpose for which the legal expenses were incurred.
Thus, the Crown plainly raised the critical issue, which was whether the
statutory purpose test was met.
[10]
Chief Justice Rip was required to determine the
relevant facts on the basis of all of the evidence presented, in light of the
legal arguments of the taxpayer and the Crown as set out in their pleadings. If
he had concluded that the evidence proved, on a balance of probabilities, that
the legal expenses were incurred to earn income from a business or property, the
taxpayers would have been entitled to succeed. But he did not do so. Rather, he
concluded that the evidence proved that some of the legal expenses, but not
all, met the statutory test. Therefore the taxpayers succeeded only in part.
[11]
But because Chief Justice Rip’s conclusion did
not rely in any way on section 67 or on a finding that the taxpayers’
corporation reorganizations were undertaken for estate or tax planning, there
is no basis upon which we can conclude that he misapplied the principles relating
to Ministerial assumptions and the onus of proof.
[12]
The taxpayers also argue that they could not disclose
more particulars of their legal expenses without waiving solicitor and client
privilege, which they were not willing to do. They argue that Chief Justice Rip
erred in law in requiring them to waive their privilege to succeed in their
appeals. We do not accept this argument.
[13]
We note that the taxpayers’ claims of solicitor and
client privilege were not challenged in the Tax Court. We assume for the purpose
of these appeals that they are valid claims. However, neither the Minister nor the
Court is obliged to determine a factual dispute in the taxpayer’s favour merely
because the taxpayer asserts and refuses to waive a claim of solicitor and
client privilege with respect to evidence that could resolve the dispute.
[14]
Several arguments were raised to challenge minor
factual findings. We found no palpable and overriding error with respect to
those findings.
[15]
The Crown has informed the Court that, in the
case of 440214 B.C. Ltd., the parties have agreed that further deductions of
$4,631.67 for 2003 and $1,450 for 2004, should be allowed. That agreement will
be reflected in the order disposing of that appeal.
[16]
The appeals of Dr. Mike Orth Inc. and 371501
B.C. Ltd. will be dismissed and the appeal of 440214 B.C. Ltd. will be allowed
in part, only to reflect the agreement of the parties as described in the
preceding paragraph. The Crown will be granted one set of costs for the three
appeals. A copy of these reasons will be placed in A-191-13, A-193-13 and
A-194-13.
"K. Sharlow"
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