Date: 20061026
Docket: A-617-05
Citation: 2006 FCA 348
CORAM: NOËL
J.A.
EVANS
J.A.
MALONE
J.A.
BETWEEN:
NEVIO CIMOLAI
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
NOËL J.A.
[1]
This is an
appeal from a decision of Rip J. of the Tax Court of Canada (as he then was) (the
judgment is reported at [2006] 1 C.T.C. 2410) allowing in part the appellant’s
appeal with respect to his 2001 taxation year. At issue before the Tax Court
Judge was whether legal expenses incurred by the appellant in respect of two
legal proceedings were deductible in computing his income for that year.
[2]
The first
proceeding is directed against the hospital which employed him. In it, the
appellant seeks to quash a decision suspending him from his employment and lost
benefits. The second proceeding is directed against the appellant’s former colleagues
at the hospital whom he sues for defamation.
[3]
On or
about January 26, 2005, the Minister of National Revenue (the “Minister”)
agreed that, subject to the relevant invoices being produced, the appellant could
deduct the amount of $48,319 paid with respect to the proceeding against the hospital
on the basis that this expenditure served to establish his right to a salary
pursuant to paragraph 8(1)(b) of the Income Tax Act (the “Act”).
However, the Minister maintained the view that the appellant could not deduct
the remaining amount spent towards the defamation action ($26,556.53).
[4]
By his
decision, the Tax Court Judge gave effect to the Minister’s concession
concerning the $48,319 and confirmed the reassessment insofar as the remaining
portion of the legal fees is concerned. He held that these amounts could not be
deducted under 8(1)(b) of the Act since the underlying legal action was not
aimed at collecting or establishing a right to a salary.
[5]
While the
Tax Court Judge did not expressly address, in his Reasons, the issue of whether
these amounts could be deducted as a business expense pursuant to paragraph
18(1)(a), he repeatedly stated during the hearing that the expenses directed to
the defamation action were capital in nature and as such, outside the purview
of that provision.
[6]
By way of
a separate decision as to costs rendered January 4, 2006, the Tax Court Judge
held that the appellant was liable to 50 percent of the costs up to January 26,
2005 and all costs thereafter. In reaching this conclusion the Tax Court Judge
found that the appellant was “in no small part” responsible for the delay
leading to the Minister’s concession with respect to the first proceeding and
that this concession had effectively been made on January 26, 2005. The Tax
Court Judge held that from that point on costs would follow the event.
[7]
The
appellant has appealed both the decision denying the deduction of his legal
fees and the decision as to costs.
Decision
[8]
This
appeal cannot succeed. The extended definition of “business” under the Act does
not mean that the practice of profession can be equated to a business at all
times. A professional can render his or her services either as an employee or
as an independent contractor.
[9]
In this
case, the Tax Court Judge found that the appellant’s status at the hospital was
that of an employee (Reasons, para. 13). He explained during the proceedings
that the services rendered by the appellant for the hospital could not, at
once, be said to be rendered as an employee and as an independent contractor
(Appeal Book, p. 142 to 145). As the defamation action was not directed against
the hospital, it could not possibly relate to a salary from the hospital or a
right thereto (Reasons, para. 13). According to the Tax Court Judge, this was
sufficient to dispose of any claim that the legal expenditures were deductible
pursuant to paragraph 8(1)(b).
[10]
The
appellant contends that the Tax Court Judge failed to take into account the
fact that, beyond his work at the hospital, he was also self-employed.
According to the appellant, the legal expenses relating to the defamation
action were also incurred to earn income from these independent activities. As
such they are deductible pursuant to paragraph 18(1)(a).
[11]
The record
with respect to the appellant’s independent activities during the year in issue
is rather scarce. With respect to his professorship at the University of British
Columbia, the
evidence shows that the University transferred funds to the hospital which
accounted for 15 percent of the appellant’s employment earnings. It therefore
does appear as the Tax Court Judge found at paragraph 3 of his Reasons that the
appellant’s lecturing activities were part of his employment.
[12]
With
respect to the appellant’s medical practice, he did testify that he began
working at a medical clinic, as a general practitioner, in December of 2001.
However, while expenses in the amount of $3,923 with respect to his general
practice are claimed in the tax return filed for that year, no income is
declared. In the result, a net loss of $3,923 is reported.
[13]
The other source
of income reflected in his return for the 2001 taxation year is derived from
the authorship of medical text books. The appellant reported income in the
amount of $3,912 from that source but this income was fully offset by the above
noted loss from his medical practice.
[14]
As can be
seen, the income earning activities capable of supporting a deduction under
paragraph 18(1)(a) were very limited.
[15]
However, the
Tax Court Judge did not have to delve into this issue since it is clear from
the evidence that the purpose of the expenditures was to preserve the appellant’s
professional reputation. As the Tax Court Judge explained during the hearing,
legal expenditures made to protect one’s professional reputation and hence one’s
capacity for future earnings are by definition capital in nature. Just as the
damages which could result from this type of proceeding are prima facie
not taxable, the amounts expended to obtain these damages are not deductible
(Appeal Book, pages 98 to 102 and 112, 113).
[16]
I can
detect no error in the decision denying the deduction of legal expenses
incurred in the prosecution of the action of defamation.
[17]
With
respect to costs, the Tax Court Judge concluded that the appellant bears equal
responsibility for the delay leading to the Crown’s concession. In so holding,
he relied on the fact that the appellant refused to provide the particulars
which would have allowed for the earlier resolution of the issue and therefore,
was partially responsible for the delay in settling the matter (Second set of
Reasons, paras. 7 to 14). As there was evidence to support that finding it
cannot be interfered with.
[18]
With
respect to the costs incurred after January 26, 2005, the Tax Court Judge
followed the rule that costs generally follow the event. Again no error can be
said to arise in this regard.
[19]
I would
dismiss the appeal with costs.
“Marc
Noël”
“I agree.
John M. Evans, J.A.”
“I agree.
B. Malone, J.A.”
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-617-05
STYLE OF CAUSE: Nevio
Cimolai v. Her Majesty The Queen
PLACE OF
HEARING: Vancouver, British Columbia
DATE OF
HEARING: October
24, 2006
REASONS FOR
JUDGMENT OF THE COURT: Noël, J.A.
Evans,
J.A.
Malone,
J.A.
REASONS FOR JUDGMENT: Noël,
J.A.
APPEARANCES:
Nevio Cimolai ON
HIS OWN BEHALF
Susan Wong FOR
THE RESPONDENT
SOLICITORS
OF RECORD:
|
John H. Sims,
Q.C
Deputy
Attorney General of Canada
|
FOR THE RESPONDENT
|
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