Citation: 2013 TCC 339
Date: 20131025
Docket: 2009-2421(IT)G
BETWEEN:
GORDON IRONSIDE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Campbell J.
[1]
The Appellant, in these
appeals, incurred legal and professional fees (the “Fees”) to defend himself
against allegations of committing improper disclosures after being charged in
June of 2001 by the Alberta Securities Commission (the “Commission”).
[2]
In computing income for
the 2003 and 2004 taxation years, the Appellant deducted the amounts of $22,883
and $463,181 in Fees respectively from his professional income pursuant to
paragraph 18(1)(a) of the Income Tax Act (the “Act”). As a
result of the 2004 deduction of Fees, he determined that he now had a non‑capital
loss of $241,762 in respect to the 2004 taxation year, which he carried back to
2001 and 2002. In 2006, the Appellant carried forward a non-capital loss
claimed in 2005, unrelated to the Fees. The Minister of National Revenue (the
“Minister”) refused to apply the 2005 non-capital losses to the 2006 taxation
year because the 2004 non-capital losses had been denied in a reassessment in
April, 2007. This denial resulted in the Minister reversing the 2004 losses of
$40,765 to the 2002 taxation year and, instead, using the 2005 non-capital losses
to offset the amounts that the Appellant had carried back to 2001 from 2004,
thereby reducing the deduction to be applied in the 2006 taxation year to an
amount of $2,547.
[3]
Consequently, the
taxation years before me in these appeals are 2001, 2003, 2004 and 2006.
[4]
The parties filed an
Agreed Partial Statement of Facts which outlined the Appellant’s work history
in detail. It also contained schedules specifying the particulars relating to
the amount of the Fees, as well as a schedule detailing the various sources and
amounts of the Appellant’s income, including business, employment and
professional sources, between 1988 and 2007. I have attached the most relevant
portions of the Agreed Partial Statement of Facts relating to the Appellant’s
work history as Schedule “A” to my Reasons. However, the following is a summary
of the evidence which was before me.
Facts
[5]
In September, 1979, the
Appellant became a chartered accountant within the Province of Alberta. Between 1979 and 1985, he worked with the accounting firm of Coopers & Lybrand
Chartered Accountants. During this period, he became involved in separate
business opportunities with a number of companies engaged in the oil and gas
industry. In May, 1985, he became the Chief Financial Officer of Blue Range Resources
Ltd. and, in August, 1987, he became a director of and was employed by Blue
Range Resource Corporation (“BRRC”) as its Chief Financial Officer.
[6]
Between April 1, 1994
and December 12, 1998, the Appellant held the office of President of BRRC and
was remunerated in the form of salary, bonuses, stock options and the purchase
of corporate shares by way of private placements. Through the company’s
associations with others within the industry, the Appellant had opportunities
presented to him to invest in other oil and gas related endeavours.
[7]
On November 12, 1998,
Big Bear Exploration Ltd. (“Big Bear”) initiated a hostile takeover bid for all
of the issued and outstanding securities of BRRC. It was successfully completed
on December 12, 1998 and the Appellant was forced to resign as an officer and
director of BRRC.
[8]
On March 2, 1999, after
ascertaining the financial condition of BRRC, Big Bear sought court protection
under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36.
[9]
On March 8, 1999, the Commission
ordered an investigation pertaining to the disclosure of material facts and
financial information.
[10]
On June 26, 2001, the
Commission issued a Notice of Hearing to the Appellant and one other individual
from BRRC to determine if they acted contrary to the Alberta securities
legislation, if it was in the public interest to remove them from the Alberta capital market and if administrative penalties should be applied.
[11]
The five main issues
that were explored by investigators for the Commission were:
(a) failure to classify
certain facilities leases as capital leases for accounting purposes (with the
result that long-term debt was materially accumulated);
(b) failure to disclose reporting of raw
gas production and reserves;
(c) failure to disclose
that BRRC had sold forward more gas than it was producing, pursuant to fixed-price
contracts or contracts with imbedded long-term transportation obligations;
(d) failure to disclose
that production estimates for the fiscal year 1999, disclosed in the Corporation’s
annual report to shareholders in July, 1998, had been materially reduced by
management; and
(e) failure to disclose liquidity pressures
and banking accounts.
(Joint Book of Documents, Exhibit A-1, Tab 29)
[12]
The Appellant retained
Carscallen Lockwood LLP to defend him in the proceedings before the Commission.
[13]
The Appellant’s Fees
were covered pursuant to a Director and Officer’s liability insurance policy with
Chubb Insurance. For a variety of reasons, some Fees were not covered by Chubb
Insurance, such as consultant and expert witness fees, and the Appellant paid
those personally. The insurance policy contained a $5 million limit and, by
2004, this amount had been dispersed for defence fees (Transcript, Examination-in-Chief
of the Appellant, page 64). The Appellant testified that, by 2008, professional
costs incurred exceeded $6.5 million and that he paid the excess fees. It is
these amounts as well as others that the Appellant is seeking to deduct as
expenses.
[14]
The Commission hearing
was conducted in two parts: the merits segment, which focussed on the public
disclosures made by the Appellant and, subsequently, the sanctions and costs
segment. The merits segment lasted 120 days and, on December 21, 2006, the
Commission concluded that the Appellant had contravened the Alberta security
laws and acted contrary to the public interest (Exhibit A-1, Tab 30). The
sanctions and costs decision was rendered in November, 2007. The Appellant was
banned from trading in securities, assuming the role of director or officer of
a company, fined an administrative penalty and directed to pay significant
costs. The Appellant appealed the Commission’s decisions to the Alberta Court
of Appeal, which dismissed that appeal on April 9, 2009.
[15]
On June 2, 2005, the
Appellant received a written legal opinion from his solicitors which reflected
legal advice he received in 1999. In all likelihood, this was provided to the
Appellant in response to his request a number of years after he initially
received the legal advice. The opinion outlined the implications of the
Commission hearing and noted that a negative finding by the Commission could
result in the Appellant being prohibited from acting as a director or officer
of any public company. The legal opinion also advised that an adverse finding
could result in a complaint being filed with the Institute of Chartered
Accountants of Alberta, which could affect his ability to retain his chartered
accountant designation, his future ability to work in that profession and his
future ability to earn business and professional income (Exhibit A-1, Tab 19).
[16]
On December 22, 2006, the
day after the Merits decision was released by the Commission, the Appellant
received correspondence from the Institute of Chartered Accountants advising
that the findings of the Commission were going to be treated as a complaint
under section 67(3) of the Regulated Accounting Profession Act, R.S.A.
2000, c. R-12 (“RAPA”) (Exhibit A-1, Tab 20). The Appellant replied, on
February 12, 2007, requesting particulars of the Institute’s complaint against
him. This was followed by a similar request from the Appellant’s legal counsel
in May, 2007 (Exhibit A-1, Tabs 21 and 22).
[17]
On June 15, 2007, the Complaints
Inquiry Committee of the Institute sent a letter to the Appellant’s legal
counsel advising that, among other things, the Merits decision of the
Commission raised the issue of questionable conduct on the part of the
Appellant but, at that time, the Commission had made no allegations against the
Appellant of unprofessional conduct (Exhibit A-1, Tab 23).
[18]
On November 30, 2009,
the Institute of Chartered Accountants advised the Appellant that they were in
receipt of the decision of the Alberta Court of Appeal and that they would be
proceeding with an investigation and potential disciplinary action. The
Appellant was further advised that, pursuant to Rule 201.2 of the RAPA, the Appellant’s conviction before the Commission created a “rebuttable” presumption
that he did not maintain the good reputation of the profession and did not
serve the public interest (Exhibit A-1, Tab 28). A disciplinary hearing
was eventually held several years later and, on January 12, 2012, the
Discipline Tribunal of the Alberta Institute of Chartered Accountants cancelled
the Appellant’s registration as a chartered accountant (Agreed Partial Statement
of Facts, paragraph 18).
Issue
[19]
The issue in these
appeals is whether the legal and professional Fees paid by the Appellant are
deductible as business expenses under paragraph 18(1)(a) of the Act.
More specifically, I must determine:
(a) whether the Fees which
the Appellant paid in defending allegations before the Commission were incurred
to gain or produce income from a business or property within the meaning of
paragraph 18(1)(a) of the Act or whether the Fees were personal
expenses within the meaning of paragraph 18(1)(h) of the Act; and
(b) if the Fees fall within
the meaning of paragraph 18(1)(a) of the Act, the second issue
that must be determined is whether the Fees were capital outlays within the
meaning of paragraph 18(1)(b) of the Act.
The merit of the deductibility in respect to
employment expenses under section 8 of the Act was not before me in
these appeals.
The Appellant’s Position
[20]
The Appellant wants to
deduct the Fees as business expenses from his professional income because he
argued that he paid them to maintain his designation and reputation and,
therefore, his ability to gain or produce income from that source.
[21]
The Appellant also
submitted that it was his designation and experience as a chartered accountant
that had provided him the opportunity to eventually become President of BRRC
and that this position with BRRC also opened the door to income earning
possibilities with other corporations. He argued, therefore, that there was a link
between the impugned acts while employed at BRRC that led to the Commission
hearing and his chartered accounting business. He submitted that, although his
various sources of income, whether employment, business or professional, were
all intertwined, he had been presented with those income opportunities initially
because of his designation as a chartered accountant. His position is that he
would never have encountered the Commission’s allegations or incurred the Fees
to defend himself but for his designation as a chartered accountant, for
without that base of experience and knowledge, he would never have become
President of BRRC.
[22]
The Appellant further
argued that the expenses were necessarily incurred in respect to future
business income because an adverse finding by the Commission would trigger the
removal of his designation as a chartered accountant which, in turn, would
negatively impact his ability to earn business income as well as professional
and employment income.
[23]
Finally, with respect
to paragraph 18(1)(b) of the Act, the Appellant argued that, if
the Fees are deductible, then they were current expenses as opposed to capital
outlays because, at the time of the hearing before the Commission, he had not
yet lost his designation as a chartered accountant. The Fees, therefore, were
not incurred to acquire anything he did not already possess, as he was
attempting to “maintain” his right to earn business income rather than seeking
to “regain” the right.
The Respondent’s Position
[24]
The Respondent argued
that the Fees were properly denied, as they were not incurred to gain or
produce income. Instead, the Appellant had to deal with the Commission’s
allegations because of his position and work as President and officer of BRRC
and not because of his accounting activities. “…[H]is need to defend himself
arose from circumstances entirely divorced from any business he was running as
a chartered accountant.” (Respondent’s Oral Submissions, Transcript, page 156).
Therefore, the connection is too remote, the Respondent submitted, between the
incurred Fees and the professional source of income.
[25]
The Respondent also
argued that the Fees were not deductible under paragraph 18(1)(h) of the
Act, as they were personal in nature and incurred to defend his personal
reputation rather than to gain or produce business income.
[26]
Lastly, the Respondent
argued that, since the Fees were incurred to protect the Appellant’s reputation
and marketability, which is an enduring asset, they were not deductible under
paragraph 18(1)(b) because they were capital outlays.
Analysis
[27]
Section 9 of the Act
outlines the calculation of income from a business in a taxation year as
the profit from that business in that year. In earning that profit, a taxpayer
can deduct business expenses that are incurred to earn that profit, unless
otherwise limited in the Act.
[28]
Section 18 of the Act
limits the deductibility of business expenses that are otherwise deductible
pursuant to section 9. The general limitation on the deductibility of business
expenses is contained at paragraph 18(1)(a), which states that an
expense is only deductible “… to the extent that it was … incurred by the
taxpayer for the purpose of gaining or producing income from the business …”
There are further restrictions contained at paragraph 18(1)(b), which
denies the deduction of capital outlays and also paragraph 18(1)(h),
which disallows the deduction of personal and living expenses.
[29]
The definition of
“business” is contained in section 248 of the Act. It is defined to
include, among other things, a “profession.” The same section defines
“Professional Corporation” as:
“professional
corporation” – “professional corporation” means a corporation that carries
on the professional practice of an accountant, dentist, lawyer, medical doctor,
veterinarian or chiropractor;
[30]
The appeals before me
deal with the issue of deductibility of business expenses as those relate to
the Appellant’s “professional income,” which was comprised of his chartered
accounting and consulting work from both arm’s length and non-arm’s length
entities (Agreed Partial Statement of Facts, para 23). The question is whether
he can deduct those legal and professional expenses against his professional
income.
[31]
The Supreme Court of
Canada in Symes v The Queen, 1993 CarswellNat 1178, [1993] 4 S.C.R. 695, after examining several potential
legal tests in respect to determining whether an expense would be deductible
under paragraph 18(1)(a), concluded, at paragraph 73, as follows:
… no test has been proposed which improves upon or which
substantially modifies a test derived directly from the language of s. 18(1)(a).
The analytical trail leads back to its source, and I simply ask the following:
did the appellant incur child care expenses for the purpose of gaining or
producing income from a business?
[32]
Whether or not the
purpose of an expenditure is to produce income will be a question of fact
involving an examination of all of the surrounding circumstances in order to
determine the “objective manifestation” of the purpose (Symes, at
para 74). Although Iacobucci J., in writing for the majority in Symes,
did not establish an exhaustive list of those factors to examine in such an issue,
he did set out a number of relevant factors to consider in deciding if a
business expense will be deductible:
(i) “… [I]t may be
relevant to consider whether the expense is one normally incurred by others
involved in the taxpayer’s business. If it is, there may be an increased
likelihood that the expense is a business expense.” (Symes, at
para 75).
(ii) “It may be relevant
in a particular case to consider whether a deduction is ordinarily allowed as a
business expense by accountants.” (Symes, at para 75).
(iii) “It may also be
relevant to consider whether a particular expense would have been incurred if
the taxpayer was not engaged in the pursuit of business income. …” (Symes,
at para 76). In this regard, the Court in Symes, at paragraph 79,
outlined a “business need” or “but for” test:
…
In particular, it may be helpful to resort to a “but for” test applied not to
the expense but to the need which the expense meets. Would the need exist apart
from the business? If a need exists even in the absence of business activity,
and irrespective of whether the need was or might have been satisfied by an
expenditure to a third party or by the opportunity cost of personal labour,
then an expense to meet the need would traditionally be viewed as a personal
expense. …
[33]
The caselaw in this
area, while numerous, illustrates the difficulty noted by Iacobucci J. in Symes
of establishing an exhaustive list of factors upon which deductibility of
business expenses can be assessed and determined by a court. The decisions
centre around the issue of “connectivity” between the need which the expense
meets and the business itself. In this respect, Hogan J. in Patry v The
Queen, 2013 TCC 107, 2013 DTC 1142, at paragraph 34, summarized several of
the leading cases dealing with “connectivity”:
[34] … 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.
[34]
Lamarre J. in Leduc
v The Queen, 2005 TCC 96, 2005 DTC 250, where the Appellant in that appeal,
a lawyer, sought to deduct legal fees for defending against several counts of
sexual exploitation charges, summarized at paragraph 26, the nexus that must
exist between the actions that initiated the charges and the business itself:
[26] …
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.
[35]
The Court concluded
that the connection between eventual conviction in the criminal proceedings and
the risk of losing his license to practice law was, at that stage, too
hypothetical and speculative and, therefore, too remote to justify the
deduction of the legal expenses (Leduc, at para 23).
[36]
In Cimolai v The
Queen, 2005 TCC 767, 2005 DTC 1800, Rip A.C.J. (as he was then) discussed
the important distinction between current income and future income. He found
that the legal expenses incurred by a medical professional, who sought damages
from other professionals employed at the hospital, were not deductible as
employment expenses because they were not paid to establish a right of salary
from the hospital. There was no connection between the Appellant’s former
associates and the hospital, which was not named as a party to the proceedings,
despite his argument that prosecuting these professionals would defend his
professional reputation and likely preserve his ability to earn income. This
decision compares the cases of Noble v The Queen, [1998] 1 CTC 2797, and
Leduc, at paragraph 31, as follows:
[31] In Noble, legal expenses were incurred by
the appellant lawyer in retaining independent counsel to advise him in relation
to providing information about a client to the tax authorities. Sobier J. held
that the legal expenses were deductible since they were necessary to prevent a
conflict of interest position, which would render the appellant incapable of
performing his legal services and thus prevent him from earning business
income. …
[37]
These two decisions
were reconciled, at paragraph 36 of Cimolai, in the following manner:
[36] These cases are reconcilable since the legal
expenses in Noble were clearly linked to the appellant's ability to earn
income from his current client, whereas the expenses in Leduc were said
to preserve a future right to practice law. …
[38]
In Vango v The Queen,
[1995] TCJ No. 659, Bowman J. found that legal fees were deductible because, if
the taxpayer had not expended money on these fees to have the wording of
charges laid by the Toronto Stock Exchange modified, in respect to his former
employment with Richardson Greenshields, then he could have been dismissed as
an employee from his present employer, Nesbitt Thomson.
[39]
The decisions in Noble
and Vango are comparable because legal fees were incurred in order to
earn income from the current client in Noble and the current employer in
Vango. The connection between the expense and the income was both direct
and immediate. In contrast, Leduc dealt with the taxpayer’s ability to
earn future income from his legal practice and the criminal offences had little
to do with his law practice.
[40]
In The Queen v
Doiron, 2012 FCA 71, 2012 DTC 5103, the Federal Court of Appeal held that
legal fees paid by a lawyer, to defend against criminal charges related to
obstruction of justice that led to his eventual imprisonment, were not
deductible since he was not practicing law during the taxation years in
question. Therefore, the expenses were not incurred to produce income. The
appellant argued that the expenses were necessary to have future income in that
he could have preserved his license to practice law if he had successfully
defended the criminal charges. The Court ultimately found that the expenses
were capital outlays under paragraph 18(1)(b), but even if the expenses
had not been on capital account, the Court, at paragraph 48, explained
that the appellant did not prove a connection between the fees incurred and his
licence to practice law:
48 …
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” …
[41]
At paragraph 54, Noël
J. went on to state:
54 …
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. …
[42]
Noël J., in Doiron,
addressed the same timing consideration that was observed in the reasons in Cimolai.
Doiron appears to suggest that, in those cases dealing with future
rather than immediate income, the connectivity analysis is twofold. Not only
must taxpayers adduce evidence of a direct relationship between the “need that
the expense meets” and the business, but they must also establish a connection
between the expense and the ability of the taxpayer to earn future income from
that business. This adds another dimension to the thread of the connectivity
requirement that runs throughout the caselaw.
[43]
In the context of the
caselaw, which I have outlined, it is clear that the need which the expense
meets and the business itself must be directly related and that the expense
must either be incapable of being severed from the income earning operations or
be the consequence of a necessary risk to earn income in that regard. Ancillary
expenses may be deductible, and may provide the required connection between the
expenses and the business, so long as they are essential and necessary to the
business activities.
[44]
The Appellant cited BJ
Services Co. v The Queen, 2003 TCC 900, [2003] TCJ No. 706, in its
submissions, but while this decision provides a more holistic interpretation of
the connectivity requirement, such a broader interpretation does not extend to
encompass the facts in the present appeals. Ancillary expenses may be
deductible where they are shown to be so integral to the activities of the business
that they cannot be divided from the entirety of the operation. However, the
facts do not support such a conclusion in these appeals.
[45]
Applying the principles
from the jurisprudence to the evidence that was before me, I must conclude that
the legal and professional fees, that the Appellant paid in defending himself
against allegations before the Alberta Securities Commission, were not incurred
to gain or produce income from his chartered accounting business. Instead, the
expenses were a direct resulting consequence of his position that he held as an
officer and employee of BRRC. The expenses were incurred to protect his
reputation within the oil and gas industry where he focussed his business
activities. As such, they were personal in nature and were not incurred to
protect the income earning potential associated with his professional
accounting business.
[46]
A review of the factors
enunciated by the Supreme Court of Canada in Symes supports my
conclusion in this regard.
(i) Whether the
expense is one normally incurred by others involved in the taxpayer’s business?
[47]
The parties agreed that
this factor was not particularly relevant in these appeals. Chartered
accountants are not, as a rule, engaged in defending themselves against charges
relating to infringements of provincial securities legislation and, therefore,
such fees would not generally be considered a usual and accepted business
expense associated with the provision of professional accounting services.
(ii) Whether a
particular expense would have been incurred if the taxpayer was not engaged in
the pursuit of that business income?
[48]
It is clear to me that,
based on the facts, the Appellant’s necessity to defend himself against the
Commission proceedings arose separate and apart from his business activities as
a chartered accountant. The charges and the subsequent hearing were the direct
result of his conduct and activities as President, CEO and a director of BRRC.
This is supported by both the evidence and the Agreed Partial Statement of
Facts submitted by the parties. It is further supported by the fact that a
portion of the Fees incurred by the Appellant was covered by Chubb Insurance, a
policy that BRRC provided for the benefit of its corporate directors and
officers. The connection, between the proceedings before the Commission and the
Appellant’s accounting business, is absent in these appeals and it is that
missing element which was crucial to the Appellant’s success in these appeals.
The connection, if indeed there is one at all, is simply too remote to allow
the deduction of those Fees. This case can be distinguished from the Vango
decision, where the taxpayer was granted the deductions, because the Vango expenses
were clearly and directly correlated to his income earning activities as an
investment advisor and stockbroker and also to his future income. In the appeals
before me, the Appellant’s Fees arose due to his conduct and actions in the
capacity of President and director of BRRC. They were not incurred as a result
of his business activities as an accountant.
[49]
While I can appreciate
the Appellant’s argument that his professional accounting designation,
reputation and background opened the door to his eventual employment with BRRC,
together with its resulting opportunities within the oil and gas industry,
there is no direct or apparent relationship, established in the facts of this
case, between the acts that created the “need” and the Appellant’s accounting
business.
[50]
It is also worth noting
that the Appellant’s professional consulting services were broader than
activities arising solely from his designation of chartered accountant. In
addition, some of the consulting activities were provided to related companies.
[51]
By 2002 and as late as
2004, the Appellant’s reputation and credibility within the oil and gas
industry had been severely affected, but not his chartered accountant
designation. In this respect, these appeals are similar to Leduc, where
it was held that allegations did not arise in the course of the Appellant’s law
practice. The Court, in Leduc, noted that the taxpayer’s earning
capacity from his activities as a lawyer were not in jeopardy when the expenses
were incurred, as there was no certainty of an investigation into his conduct
by the Law Society. Whether an eventual conviction in Leduc could
possibly affect his law practice in the future was hypothetical, speculative
and simply too remote. This mirrors the facts before me where, at the time the
legal and other fees were incurred, there existed only a “potential” for an
investigation and disciplinary action by the Complaints Inquiry Committee of
the Institute of Chartered Accountants of Alberta. By email dated November 30,
2009 from the Institute, the Appellant was advised that, as a consequence of
the Commission’s findings, they were commencing a disciplinary investigation,
but reminded him that a conviction pursuant to the securities legislation would
create only a “rebuttable” presumption that he failed to maintain the
reputation of the profession. As such, there was no certainty, even as late as November,
2009, respecting the eventual outcome of this subsequent investigation.
(iii) Would the need exist apart from the business?
[52]
Based on the decision
in Doiron, the Appellant is required to prove the existence of a nexus
between the Fees he incurred and a hope to retain his chartered accountant
designation. At paragraph 12 of the Notice of Appeal:
12. The likelihood of the Taxpayer’s designation as a
Chartered Accountant being removed following negative findings being made
against the Taxpayer by the ASC is strong and therefore the Taxpayer had no
choice than to fully defend himself from all the allegations in order to allow
himself to maintain and increase his business and professional income.
[53]
The evidence established
that the Commission’s proceedings against the Appellant and the actions taken
eventually by the Institute of Chartered Accountants were not entirely divorced
from each other. The Commission’s Merits decision was the vehicle that
propelled the Institute to initiate a disciplinary investigation. The Appellant
testified that he received legal advice to this effect before he incurred the Fees
and he knew that the Institute could use the Commission’s decision as a basis
for a complaint if the hearing went unfavourably from his perspective. However,
the evidence before me illustrates that the Appellant’s chartered accountant
designation was not definitively and conclusively at risk when those Fees were
incurred. In fact, the Appellant received correspondence dated June 15, 2007
indicating that, despite the fact the Commission’s decision was treated as a
complaint, a decision by the Institute had not yet been made as to whether the
complaint would be investigated or dismissed. Only on November 30, 2009 did the
Institute communicate its decision to the Appellant to move forward with its
own investigation. Ultimately, the Institute did not cancel the Appellant’s
designation until January 12, 2012, almost nine years after he incurred the Fees.
Again, this scenario is comparable to the facts in Leduc, where the
taxpayer in that case was informed by the Law Society that a negative finding
by the criminal court would result in him being summoned to determine if he
breached the Law Society Act and whether disciplinary action would result.
In that case, Lamarre J. concluded that this connection was not sufficient and would
be too remote to justify the deduction.
[54]
In both Leduc
and in the appeals before me, the professional licenses were in no immediate
risk at the time the expenses were incurred, despite a possibility that failure
to defend the allegations could lead to future disciplinary action that had the
potential of removing the professional designations. By contrast, the decisions
in both Noble and Vango allowed deductibility of legal fees
because they were found to be incurred in order to earn income from current
client/employment situations, making the connection between the expense and the
income both direct and immediate. The appeals before me differ from Noble and
Vango in that they deal with the ability to earn future income, but in
circumstances where the nexus, between the acts taken to preserve a
professional license itself, and the future income from that profession, is simply
too remote.
[55]
By incurring the Fees,
what risk was the Appellant trying to avert? According to the evidence, it was
the risk of losing the opportunities to make lucrative private placements
within the oil and gas industry. The Fees, therefore, were incurred to avoid,
or at least reduce, the negative impact that the Commission proceedings could
have on those profitable income sources, the most lucrative being taxable
capital gains, employment income and taxable dividends during the period 1988
to 2007. By comparison, income, from his profession as a chartered accountant
in the years preceding 2004, was minimal (Schedule A, attached to the Agreed
Partial Statement of Facts). Once the Appellant’s eligibility for these
lucrative placements was precluded by the Commission’s findings, he shifted,
quite likely out of necessity, to earning his living through activities as a
chartered accountant. This shift in income source is apparent in his tax
returns for the taxation years, 2003 to 2006, where there is an increase in
earnings in the professional income category (Exhibit A-1, Tabs 35, 36, 37 and
38). The Commission’s proceedings not only extinguished the dividend and
employment income sources, but actually contributed to the shift of focus and
increase to the business and professional income sources. Prior to 2002, most
of the revenues resulted from the dividend and employment sources, but it was
precisely these two sources that were negatively affected by the proceedings,
which effectively reduced those sources to zero or negligible amounts. By
comparison, it is interesting to note that, until the point in time when the Commission
proceedings commenced, the Appellant’s professional source income was comprised
of insignificant amounts. This further supports and strengthens the connection,
of the Fees incurred, to the Appellant’s employment sources from which the
Commission’s proceedings arose, rather than to the professional income source.
All of this leads to the inevitable conclusion that the Fees would have been
incurred in any event, even in the absence of the Appellant’s professional
source income and designation.
[56]
The Respondent argued
that the Fees were incurred to defend the Appellant’s reputation and
credibility, but that this was unrelated to his ability to earn income from his
professional accounting source or at least too remote from the source. The
Appellant, on the other hand, argued that his designation of and reputation as
an accountant provided the stepping stone for the placement opportunities that
were presented to him and that his designation and reputation were the basis of
his ability to produce professional income from this source. At first glance,
it would be logical to conclude that the Appellant’s status would have required
that he defend his designation and reputation as a chartered accountant in
order to earn business and professional income. However, the evidence
illustrates that, as his reputation declined, his professional gross income
increased. Consequently, it is apparent that the Appellant’s title and
reputation were important, as well as connected, to his ability to produce
employment and dividend income, but it was not connected to his professional
source income at the time the Fees were incurred. This again supports my
conclusion respecting the lack of connection between those Fees and the
professional source income related to his chartered accountant activities.
[57]
The Appellant also
contends that he intended to produce business income from a Dissenting
Shareholder’s Action Agreement. The Appellant entered into this contingency
agreement in April, 2008 in which he agreed to provide a group of shareholders
of BRRC with crucial information that he received from his participation in the
Commission proceedings. If the action had resulted in a finding that their
shares were worth more than $3 per share, then the Appellant would receive 20
percent of the excess value. However, the evidence does not support the
Appellant’s argument because the Agreement was signed two full years after the
Commission’s decision. Although the Appellant testified that he had been
working with those shareholders prior to signing the Agreement in 2008, no
further evidence was adduced in this respect. In any event, I view the
potential to earn income from this Agreement as simply an opportunity that
presented itself in the course of these events, but it was not the reason or
one of the reasons upon which the Appellant defended the Commission’s
allegations.
[58]
In summary, until the
Commission commenced its proceedings against the Appellant, his main sources of
income were derived from employment and dividend sources within the oil and gas
industry. During this same period, his revenues from professional income were
negligible. The Commission proceedings garnered adverse publicity which, in
turn, severely affected the Appellant’s reputation and resulted in the near
elimination of both his employment and dividend income sources. The Fees were
expended in an attempt by the Appellant to avoid personal financial failure in
this respect, regardless of the existence of his professional activities as an
accountant. When he was unsuccessful in defending the Commission’s allegations
against him, he turned to his professional accounting activities for income and,
for the first time in many years of the Appellant’s work history, those
activities became profitable. This bars the Appellant from successfully
claiming that the Fees he incurred were to produce such professional income.
The Appellant has failed to establish, and the facts do not support, the
requisite connection or nexus between those expenses and his ability to keep
his designation as an accountant and to produce future income from that
designation. Rather, the evidence before me supports the lack of connection
between the expenses and the professional source. Therefore, the Fees, which
are at issue, are personal in nature and cannot be deducted in the computation
of the Appellant’s income.
[59]
The appeals are
dismissed, with costs to the Respondent.
Signed at Ottawa, Canada, this 25th day of October 2013.
“Diane Campbell”
SCHEDULE “A”
AGREED PARTIAL STATEMENT OF FACTS
For the purposes of this appeal, the parties
admit the following facts and agree that their admission of facts shall have
the same effect as if the facts had been proved formally and accepted by the
Court as true. The parties further agree that the documents contained in the
Joint Book of Documents are accurate copies of authentic documents.
[…]
Appellant’s work history
1. The appellant
obtained his designation as a chartered accountant in the Province of Alberta with the Institute of Chartered Accountants of Alberta in September of 1979.
2. From September 1979
to May 1985, the appellant was employed as a chartered accountant by Coopers
& Lybrand Chartered Accountants in the position of tax supervisor,
elevating to senior tax manager. During this same period the appellant was also
involved in a number of separate business opportunities, consisting of Ironside
Energy Ltd., Ironside Enterprises Ltd., Blue Range Resources Ltd. and Schuler
Royalty Limited Partnership.
3. In May 1985 the
appellant became the chief financial officer of Blue Range Resources Ltd., a
privately held corporation. He continued to be involved in a number of separate
business opportunities, participating directly and indirectly in oil and gas
drilling opportunities. The involvement included the structuring, financing and
ownership of natural gas processing facilities, oil and gas exploration,
development and production companies and oil and gas service companies.
4. In August 1987 the
appellant became the chief financial officer and a director of Blue Range
Energy Corporation, later Blue Range Resource Corporation, a publicly traded
oil and gas company. Blue Range Resource Corporation was a reporting issuer on
the Alberta Stock Exchange, having been listed in August 1987 and on the
Toronto Stock Exchange since 1991. One of the appellant’s main roles was
raising capital from public and private sources and interacting with persons
involved in the capital markets.
5. In the period April
1, 1994, to December 12, 1998, the appellant was the President, Chief Executive
Officer and a director for Blue Range Resource Corporation.
6. As the President and
Chief Executive Officer of Blue Range Resource Corporation, the appellant had
responsibility for seventy (70) to eighty (80) employees and contractors that
were involved in the Divisions of the corporation’s business, including
Exploration (15-18 employees), Land (10-12 employees), Engineering and Field
Operations (12-14 employees), Corporate (8-10 employees) and Finance and
Accounting (20-25 employees).
7. Remuneration for his
role with Blue Range Resource Corporation included a salary, bonuses, and stock
options and the purchase of company shares by way of private placement. Also,
through the company’s business associations with third parties, the appellant
was able to invest in other oil and gas related opportunities, some involving
direct ownership while others involved indirect ownership.
8. On November 12, 1998,
Big Bear Exploration Ltd., a public corporation, announced its intention to
make a takeover bid for all of Blue Range Resource Corporation’s issued and
outstanding securities on the basis of an exchange of one Blue Range Resource
Corporation share for eleven Big Bear shares. On November 13, 1998, Big
Bear issued a take-over bid circular. The transaction was characterized as a
hostile bid. The transaction was successfully concluded by December 12, 1998.
9. The appellant ceased
to be an officer and director of Blue Range Resource Corporation on December
12, 1998.
10. On March 2, 1999,
after Blue Range Resource Corporation’s new management ascertained its
financial condition, it obtained court protection under the Companies’
Creditors Arrangement Act, R.C.S. 1985 c. c-16.
Blue Range
Resource Corporation – Alberta Securities Commission (“the Commission”)
proceedings
11. On March 8, 1999, the
Executive Director of the Commission ordered an investigation into all matters
“relating to trading in the securities of Big Bear and Blue Range and into the
disclosure of material changes, material fact and financial information
pertaining to Big Bear and Blue Range by their officers, directors, employees
and agents” under section 41 of the Securities Act, S.A. 1981, c. S-6.1
(now R.S.A. 200, c. S-4).
12. On June 26, 2001, the
Executive Director of the Commission issued a notice of hearing respecting a
number of allegations against the appellant and one other (the “respondents”).
The purpose of the hearing was for the Commission to consider whether,
a. the respondents acted
in a manner contrary to the Alberta securities legislation and the public
interest;
b. it was in the public
interest to make orders that would remove them from the Alberta capital market
in a certain manner and require them to pay an administrative penalty; and
c. it was appropriate
to make orders for costs of the investigation and hearing against the
respondents.
13. The Commission hearing
was held in two parts. The first part considered the merits of the allegations,
which focused on the nature and quality of public disclosure made by the
respondents in respect of Blue Range Resource Corporation in the period April
1, 1997, to December 12, 1998.
14. The Commission hearing
ran for in excess of 120 days in the period between October 31, 2002, and June
25, 2004, with written argument delivered by the parties in February 2005. The
merits segment concluded with the Commissions’ decision on December 21, 2006,
wherein it found that the appellant had contravened Alberta securities laws and
acted contrary to the public interest.
15. After the conclusion
of the merits segment, the Commission dealt with the second segment of the
hearing; this related to sanction and costs. The Commission released its
decision in this regard in November 2007. The Commission ordered that,
a. all of the exemptions
contained in the Alberta securities laws do not apply to the appellant
permanently, except that this order will not preclude him from trading in or
purchasing securities over an exchange as principal through accounts maintained
with a registrant who have first been provided with a copy of the Commission’s
decision;
b. the appellant is to
resign any position he holds as a director or officer of any issuer and he is
prohibited permanently from becoming or acting as a director or officer or both
of any issuer;
c. the appellant is to
pay an administrative penalty of $180,000; and
d. the appellant is to
pay $675,000 toward of the costs of the investigation and hearing of this
matter.
16. The appellant’s appeal
to the Alberta Court of Appeal of the order of the Commission was heard on
December 2, 2008. It was dismissed on April 9, 2009.
17. In a letter dated
December 22, 2006, the Institute of Chartered Accountants of Alberta informed the
appellant that, pursuant to paragraph 101(1) of the Regulated Professions
Act (“RAPA”), they considered the Alberta Securities Commission Merits
Decision to constitute a complaint under RAPA.
18. Subsequent to the
decision of the Alberta Court of Appeal in respect of the appellant’s appeal of
the Commission matter, the Alberta Institute of Chartered Accountants held a
disciplinary hearing in respect of the appellant. On January 12, 2012, the
Discipline Tribunal of the Institute of Chartered Accountants cancelled the
appellant’s registration.
19. Pursuant to a policy
between Blue Range Resource Corporation and Chubb Insurance, the appellant had
coverage with Chubb Insurance under the Executive Protection Policy related to
his position with Blue Range Resource Corporation. Pursuant to that policy,
Chubb Insurance paid Carscallen Lockwood and other third parties for part of
the appellant’s defence costs in the Commission proceedings. Notwithstanding
the payments made by Chubb Insurance, the appellant retained Carscallen
Lockwood and other third parties and was legally responsible for paying the
invoices rendered. The appellant was responsible for the amounts not covered by
Chubb Insurance, and it is these amounts as well as some other amounts, that
the appellant is claiming as expenses.
20. Under the Policy,
insured persons were “any person who has been, or now is, or shall become a
duly elected or appointed Director or duly elected or appointed officer of the
insured organization.
21. Under the Policy, Chubb
Insurance agreed to “… pay on behalf of the insured persons all loss for which
the insured person is not indemnified by the insured organization and which the
insured person becomes legally obligated to pay on account of any claim first
made against him, individually or otherwise, during the policy period or, if
exercised, during the extended reporting period, for a wrongful act committed,
attempted, or allegedly attempted by such insured person before or during the
policy period.”
Income Tax Returns and Reassessments
22. The appellant filed
income tax returns claiming income in the years, amounts and from sources as
set out in Schedule A. For clarity,
a. the column title
“Other Income” refers to income from interest and income from oil and gas royalty
trusts and other income received from Fair West Energy Corporation;
b. the column title
“Business Income” refers to income from direct investment in oil and gas
assets; and
c. the column title
“Professional Income” refers to income from the appellant’s consulting business
and/or as a chartered accountant.
23. As to the source of
the income from the appellant’s consulting business, this was from both arm’s
length entities (Jag Petroleums, Blue Range Development Corporation) and
non-arm’s length entities (Ironside Energy Ltd. and Ironside Enterprises Ltd.).
24. The expenses at issue
were deducted by the appellant from the Professional Income category.
[…]
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