Date: 20081126
Docket: A-235-08
Citation: 2008 FCA 370
CORAM: RICHARD C.J.
EVANS
J.A.
SHARLOW J.A.
BETWEEN:
ALLAN FENWICK
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
REASONS FOR JUDGMENT
SHARLOW J.A.
[1]
Mr.
Allan Fenwick is appealing the judgment of Justice Woods of the Tax Court of
Canada dismissing his appeal of an income tax assessment (2008 TCC 243). The issue
is whether Justice Woods erred in concluding that paragraph 8(1)(b) of the Income
Tax Act, R.S.C. 1985, c. 1 (5th Supp.) does not permit a
deduction for legal expenses incurred by Mr. Fenwick to defend a derivative
action for alleged breaches of statutory and fiduciary obligations in which the
central issue was the reasonableness of the remuneration that he caused to be
paid to himself.
[2]
Paragraph
8(1)(b) reads as follows:
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8. (1) In
computing a taxpayer’s income for a taxation year from an office or employment,
there may be deducted such of the following amounts as are wholly applicable
to that source or such part of the following amounts as may reasonably be
regarded as applicable thereto
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8. (1) Sont déductibles dans le calcul du revenu d’un
contribuable tiré, pour une année d’imposition, d’une charge ou d’un emploi
ceux des éléments suivants qui se rapportent entièrement à cette source de
revenus, ou la partie des éléments suivants qu’il est raisonnable de
considérer comme s’y rapportant :
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[…]
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[…]
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(b) amounts paid by
the taxpayer in the year as or on account of legal expenses incurred by the
taxpayer to collect or establish a right to salary or wages owed to the
taxpayer by the employer or former employer of the taxpayer.
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b) les sommes payées par le contribuable au cours de l’année au titre des
frais judiciaires ou extrajudiciaires qu’il a engagés pour recouvrer le
traitement ou salaire qui lui est dû par son employeur ou ancien employeur ou
pour établir un droit à ceux-ci.
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[3]
The
legal expenses in issue were incurred by Mr. Fenwick to defend an application
by his sisters for leave to commence a derivative action against Mr. Fenwick on
behalf 372116 Ontario Limited (also known as Hemispheres International
Manufacturing Company, or “Hemispheres”). The remedies sought in the statement
of claim included an award of damages. Leave was granted and the action was
commenced. Ultimately, the action was settled.
[4]
During
the period relevant to the factual allegations in the statement of claim,
Hemispheres was a corporation of which Mr. Fenwick was the sole director,
president, secretary and chief executive officer, and thus its sole directing
mind. He owned the only voting shares of Hemispheres, while his sisters owned
non-voting shares. From 1982 to 1998, Mr. Fenwick received remuneration of
approximately $38 million from Hemispheres in the form of salary and wages.
[5]
The
statement of claim asserts a number of causes of action and forms of relief, but
for the purposes of this appeal it is sufficient to refer only to the
allegation that Mr. Fenwick, exercising the authority of his various positions
with Hemispheres in breach of his statutory and fiduciary obligations, caused
Hemispheres to pay him remuneration that was excessive. All of the claims
turned in one way or another on that core allegation. The specific purpose of all
or nearly all of the legal expenses in issue was to establish that the
remuneration paid to Mr. Fenwick by Hemispheres was reasonable compensation for
his services.
[6]
It
is argued for Mr. Fenwick that paragraph 8(1)(b) should be interpreted to apply
to the legal expenses he incurred to establish that the amount of salary he
received from Hemispheres was reasonable, because he had to prove that the
remuneration he received was reasonable in order to prove that he was legally
entitled to receive and retain it. As I understand this argument, it raises a
question of the interpretation of paragraph 8(1)(b), which is a question of
law, as well as a question of the characterization of the claims against Mr.
Fenwick and of the application of paragraph 8(1)(b) to that characterization,
which are questions of mixed fact and law. The decision of Justice Woods must
stand unless she misinterpreted paragraph 8(1)(b), or made a palpable and
overriding error in characterizing the claims against Mr. Fenwick or in
applying paragraph 8(1)(b) to the facts.
[7]
Justice
Woods rejected the broad interpretation of paragraph 8(1)(b) proposed on behalf
of Mr. Fenwick. In my view she was correct to do so. Paragraph 8(1)(b) has a
relatively narrow scope. It is intended to apply where an employee incurs legal
expenses in attempting to collect unpaid salary or wages, or in attempting to
resolve a dispute with an employer or former employer as to the amount of
salary to which the employee is entitled (see Loo v. Canada, 2004 FCA
249). In the latter case, it is usually the employee alleging an underpayment.
[8]
It
is an open question whether paragraph 8(1)(b) also applies to legal expenses
incurred by an individual who is being sued by an employer or former employer
for reimbursement of an overpayment of salary or wages. For the purposes of
this appeal, I will assume without deciding that paragraph 8(1)(b) could apply
in those circumstances. However, Justice Woods held, and I agree, that paragraph
8(1)(b) is not intended to permit legal expenses to be deducted when they are
incurred in litigation involving a claim for damages involving disputes other
than those arising from the terms of employment, merely because the defendant’s
entitlement to particular remuneration is an element of the claim.
[9]
Having
in mind that interpretation of paragraph 8(1)(b), Justice Woods determined the
essential nature of the claims asserted against Mr. Fenwick based on the
statement of claim. It was argued for Mr. Fenwick that Justice Woods erred in
failing to consider the evidence of the witnesses for Mr. Fenwick who explained
how and why legal expenses were incurred to establish that Mr. Fenwick’s
remuneration from Hemispheres was reasonable. There is no basis for concluding
that Justice Woods disregarded that evidence, but I assume that she gave it
little or no weight because she did not mention it in her reasons. In my view,
she made no error in that regard. That evidence was not capable of casting
light on the essential nature of the claims against Mr. Fenwick, which were
necessarily derived from the statement of claim alone.
[10]
Justice
Woods construed the statement of claim as raising a dispute between Hemispheres
and Mr. Fenwick in his capacity as the only corporate officer exercising
control over the corporation’s affairs. That understanding of the statement of
claim compelled the conclusion that, even if the allegation of excessive
remuneration was an element of the claim against Mr. Fenwick, and even if Mr. Fenwick
was at risk of being ordered to pay damages quantified in part by reference to
that remuneration, Mr. Fenwick qua employee was not at risk of being
ordered to reimburse any of that remuneration to Hemispheres qua
employer. On that basis, Justice Woods concluded that the legal expenses
incurred by Mr. Fenwick in defending himself from the claims made against him
were not deductible under paragraph 8(1)(b). In my view, it was reasonably open
to Justice Woods to construe the claims against Mr. Fenwick as she did, and to
conclude that paragraph 8(1)(b) did not apply.
[11]
Counsel
for Mr. Fenwick argued that the absence of any reference in Justice Woods’ reasons
to the allegations of unjust enrichment indicate a palpable and overriding factual
error. I do not accept that argument. In my view, the allegations of unjust
enrichment are not capable of transforming what is fundamentally a corporate
claim for damages into an employee/employer dispute about the amount of salary
owed.
[12]
Finally,
it is argued for Mr. Fenwick that Justice Woods erred in basing her decision on
grounds that were different from the basis of the Minister’s assessment, and that
were not pleaded or argued by the Minister, without giving Mr. Fenwick an
opportunity to adduce evidence or advance argument at trial in respect of those
grounds. This argument focuses in the statement of Justice Woods to the effect
that the statement of claim did not put in issue Mr. Fenwick’s right to retain
the remuneration he received from Hemispheres “in his capacity as an employee”.
[13]
It
is true that Justice Woods did not accept the interpretation of paragraph
8(1)(b) submitted by the Minister as the main legal basis of the Minister’s
assessment and argument in the appeal (i.e., that paragraph 8(1)(b) applies
only where there is an allegation that salary or wages are owed but have not
been paid). However, it does not follow that Justice Woods was obliged to adopt
the incorrect interpretation proposed on behalf of Mr. Fenwick. Once she rejected
both positions, she was required to adopt an interpretation of paragraph
8(1)(b) that was not proposed by either party. Having done that correctly, she then
had to apply that interpretation of paragraph 8(1)(b) to the evidence
presented. I see no merit in the argument that Mr. Fenwick was prejudiced by the
inability of his counsel to ask a witness specifically whether the claim against
Mr. Fenwick was in substance a claim against Mr. Fenwick in his capacity as
employee for reimbursement of salary, when the interpretation of paragraph
8(1)(b) that he proposed raised that very notion.
[14]
For
these reasons, I would dismiss this appeal with costs.
“K.
Sharlow”
“I agree
J. Richard C.J.”
“I agree
John M.Evans J.A.”
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-235-08
(APPEAL FROM
THE JUDGMENT OF THE HONOURABLE JUSTICE J. WOODS DATED 25-APR-2008, IN THE TAX
COURT OF CANADA NO. 2005-3862(IT)G.)
STYLE OF CAUSE: ALLAN
FENWICK v.
HER
MAJESTY THE QUEEN
PLACE OF HEARING: TORONTO, ONTARIO
DATE OF HEARING: November 25, 2008
REASONS FOR JUDGMENT BY: SHARLOW J.A.
CONCURRED IN BY: RICHARD C.J.
EVANS J.A.
DATED: November 26, 2008
APPEARANCES:
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Mr. Irving Marks
Mr. Shawn Pulver
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FOR THE APPELLANT
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Ms. Lorraine Edinboro
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FOR THE RESPONDENT
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SOLICITORS
OF RECORD:
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ROBINS, APPLEBY &
TAUB LLP
Toronto, Ontario
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FOR THE
APPELLANT
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JOHN H. SIMS, Q.C.
Deputy
Attorney General of Canada
Toronto, Ontario
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FOR THE RESPONDENT
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