Doz v. The Queen, 95 DTC 5585, [1995] 2 CTC 312 (FCTD)

Jerome A.C.J.:--This appeal from a decision of the Tax Court of Canada came before me as a trial de novo in Edmonton, Alberta, on May 4, 1995. The plaintiff seeks to have his 1986 income tax return sent back to the Minister of National Revenue for reassessment and reconsideration. At the close of such hearing I took the matter under reserve, indicating that written reasons would follow.

Facts acts

The facts of this case are not in dispute and may be summarized as follows. Mr. Doz was called to the Bar of Alberta in 1961. In 1979 he incorporated the Samuel Doz Professional Corporation, of which he was shareholder, director, and employee, pursuant to the Legal Profession Act, R.S.A. 1970,

c. 203, amended by R.S.A. 1980 s. L-9 and R.S.A. 1990, s. L-9.1. In 1983 he was suspended by the Law Society of Alberta and a lawyer was assigned to act as custodian for the firm and to finish up whatever business there was. No specific reasons were given to explain this disciplinary measure but at the time Mr. Doz had been charged with contempt of court in one incident and with obstructing justice and counselling perjury in another. Mr. Doz challenged the contempt charge all the way to the Supreme Court of Canada where it was dismissed. He served a prison term for obstructing justice and counselling perjury. Mr. Doz incurred legal fees of $24,455.58 in defending his contempt charge. He seeks through this present action to have this amount deducted from his income as a business expense.

Mr. Doz also seeks to deduct $12,000 in legal fees which he spent with respect to two legal actions involving a numbered company, 270149 Alberta Ltd., controlled by himself and his brother, Joseph Doz.

The first action was based on an indemnification agreement entered into with Messrs. Emil Wruk and Cameron MacKay, owners of a company called Dreadnought Holdings Ltd., to secure the purchase of a parcel of land. When Wruk and MacKay originally purchased the land, they entered into a mortgage agreement with Edmonton Savings and Credit Union Ltd., which included a personal guarantee by both gentlemen. When they were negotiating the sale to 270149 Alberta Ltd., they sought an indemnification agreement from the Doz brothers to cover any future liability towards Edmonton Savings and Credit Union Ltd. In 1985, Edmonton Savings and Credit Union Ltd. began proceedings against Dreadnought Holdings Ltd. and Messrs. Wruk and MacKay to recover amounts in default. The Doz brothers became third parties.

The second action was launched by 270149 Alberta Ltd. against Dreadnought Holdings, Messrs. Wruk and MacKay, John Richard Payne, and J.R. Payne and Associates Ltd., claiming that they had misrepresented the quantity of sand and gravel to be extracted from the parcel of land to be purchased. John Richard Payne and J.R. Payne & Associates were included because they were responsible for a feasibility study which asserted that there was a certain quantity and quality of sand and gravel to be removed from the land. The plaintiff asserts that part of the $12,000 which he is claiming in legal fees was spent in preparing this second action, but there is no breakdown as to how much was spent on the first action and how much on the second.

The relevant provision of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act”) for the resolution of both issues is paragraph 18(l)(a) which reads as follows:

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;

In other words, expenses incurred for the regular revenue generating activities of a business are deductible. We are not concerned in this instance with the legal question of what is an allowable deduction but with the factual question of whether there was a business which could benefit from the expenditures.

The first issue concerns the plaintiff’s defense of a charge of contempt of court. Mr. Doz asserted that after his suspension, his professional corporation continued as a business entity and that he performed work in the furtherance of its business objectives. He stated that he briefed the custodian with respect to the law pertaining to some of his outstanding files, attended client meetings, and flew the custodian and witnesses to trials in far-off locales. While he no longer acted as a lawyer, he continued to act under the auspices of the Samuel Doz Professional Corporation. Mr. Doz stated that one of the objectives of this business was his reinstatement with the Law Society of Alberta. He therefore claims that his legal expenses with respect to the contempt charge should be classified as money spent for the purpose of preserving, gaining, or maintaining professional status.

I accept defendant’s submission, however, that these proceedings lack the necessary direct connection to plaintiff’s reinstatement. We cannot say with any certainty that fighting the contempt charge would have any influence on the Law Society. Mr. Doz’ predicament is not analogous to that of a lawyer who had retained counsel to represent him at disciplinary hearings. The question before the court was not whether he should maintain his professional status, but whether he was in contempt of court. In addition, Mr. Doz’ conviction for obstructing justice and counselling perjury may continue to bar him from regaining his status as a member in good standing of the Law Society of Alberta.

The plaintiff’s appeal is therefore dismissed with respect to the legal expenses in the amount of $24,455.58 incurred for the purpose of defending the contempt action.

The second issue concerns legal fees spent with respect to 270149 Alberta Ltd. The plaintiff seeks to have $12,000 in legal fees considered as a single deduction rather than be divided between the defense of the indemnifica tion agreement and the suit for misrepresentation.

With respect to legal expenses incurred by the plaintiff after he was brought in as a third party to the suit by Edmonton Savings and Credit Union Ltd. against Dreadnought Holdings Ltd. and Messrs. MacKay and Wruk, it seems clear that the principal purpose of the plaintiff in defending the action regarding the indemnification agreement was to protect his personal assets. Mr. Doz’ testimony and his income tax return for 1986 indicate that he owned several properties which he rented out to various tenants. These properties generated revenue and could be used to satisfy any judgment against Mr. Doz. While his income tax return for 1986 indicates that Mr. Doz suffered overall losses with respect to his rental income, I am satisfied that his activity was "in connection with a business carried on for profit or with a reasonable expectation of profit" and therefore not included in the definition of "personal expenses" found at subsection 248(1) of the Income Tax Act. Accordingly, that portion of the $12,000 which was spent by Mr. Doz in his defense as a third party to the suit launched by Edmonton Savings and Credit Union is deductible against his rental income.

The plaintiff would also like to claim as a business expense that part of the $12,000 spent trying to recover money on the grounds that the sand and gravel pit was not as bountiful as he had been led to believe. This action is properly brought by a party to the contract of sale. [1] Exhibit P-16 is the statement of claim brought by 270149 Alberta Ltd. in the Court of Queen’s Bench for recovery of damages caused by the alleged tort of misrepresentation. Paragraph 2 of the statement of claim states that Dreadnought Holdings Ltd. sold the land in question to 270149 Alberta Ltd. Exhibit D-l is a caveat registered by Joseph Doz stating that 270149 Alberta Ltd. has an interest in the land in question. The evidence indicates that 270149 Alberta Ltd. was a party to the sale, not the plaintiff. It would be inappropriate for him to claim the amount in question as a business expense because it does not concern his business but that of 270149 Alberta Ltd.

For these reasons, Mr. Doz is only entitled to claim as a business expense that portion of the $12,000 which he spent to protect his assets. The plaintiff has not provided evidence to determine the amounts spent on each action. He will have to determine these amounts before the Minister will be able to reconsider this matter.

Finally, the plaintiff raised an argument based on the Canadian Charter of Rights and Freedoms. This argument is moot given that both sides have agreed that Mr. Doz was not an employee at the relevant times.

The plaintiff’s appeal from the decision of the Tax Court of Canada is dismissed with respect to the $24,455.58 spent to defend himself against a charge of contempt of court, and with respect to that portion of the $12,000 spent on the suit for misrepresentation. The plaintiff’s appeal is allowed with respect to that portion of the $12,000 spent with respect to his position as a third party in the suit launched by Edmonton Savings and Credit Union Ltd. against Dreadnought Holdings Ltd., et al. It is hereby ordered that the plaintiff’s 1986 income tax return be returned to the Minister of National Revenue for reassessment and reconsideration with respect to this last amount. No order as to costs.

Appeal allowed in part.