Citation: 2011 TCC 543
Date: 20111129
Docket: 2011-1174(IT)I
BETWEEN:
David Kent Lester,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre J.
[1]
This is an appeal from
a reassessment by the Minister of National Revenue (Minister) under the Income
Tax Act (ITA) disallowing legal fees, office-in-home expenses and
other office expenses that were claimed by the appellant in computing his
employment income for the 2003 taxation year. As well, the Minister, in
reassessing the appellant, disallowed the goods and services tax rebate (GST
Rebate) that the appellant had claimed for the 2003 calendar year pursuant
to subsection 253(1) of the Excise Tax Act (ETA), in respect of
the legal fees and the motor vehicle expenses claimed. In her Reply to the
Notice of Appeal (paragraph 39), the respondent conceded the GST Rebate
payable to the appellant in respect of motor vehicle expenses in the amount of
$7,200.
[2]
In his 2003 tax return,
the appellant declared only employment income, except for a GST Rebate from a
previous year reported as other income (Exhibit R‑5 and the testimony of
John Ayres, who was the appellant’s accountant and his agent at the hearing).
[3]
The appellant and his
brother are the majority shareholders of a group of six publishing and
marketing corporations in the snowmobile and all-terrain vehicle industries in
Canada and the United States. It was determined that one of the six
corporations, Rustless Manufacturing Inc. (Rustless), would be used as
the payroll corporation for all employees of the group. Rustless invoiced all the
other corporations for work done by the employees (including the appellant) and
paid the employees their salaries. John Ayres explained in court that all employees
had a standard salary and that any surplus funds in the corporations were
distributed among different employees, depending on the work done by each of
them. In the case of the appellant, as he was a majority shareholder, if the
corporations did not earn enough revenues in any particular pay period, his
salary could be lowered or simply reduced to nil for that period. That is why
the appellant considered himself as both a salaried employee and a self-employed
person. However, the evidence did not disclose that he was paid otherwise than
by salary. He did not receive any commission income, as shown by his tax return
(Exhibit R-5) and the T2200 form (Declaration of Conditions of Employment)
filed as Exhibit R-4.
Legal fees
[4]
The revised legal fees
in the amount of $19,556.43 claimed by the appellant include an amount of approximately
$470 paid to the accountant to prepare the appellant’s tax return (Exhibit B of
Exhibit A-1), and the balance was paid to a law firm.
[5]
The legal fees were
incurred after the appellant and his brother discovered that a third significant
shareholder during the 2002 and 2003 taxation years had misused corporate funds.
The appellant and his brother filed a lawsuit in the Superior Court of Justice
of Ontario against that other shareholder, who in
turn filed a counterclaim against them. Those lawsuits eventually led to the
breaking up of the business relationship among the three shareholders. The
lawsuit was resolved by an offer to purchase and sell signed by the parties in
July 2002 and the ultimate final settlement of the legal matters in December
2002. In his notice of appeal, the appellant stated that “the monies spent on
the legal fees ensured that [he] would be able to continue to earn his income
from Rustless”.
[6]
According to the
Argument for Tax Court filed by the appellant, the legal bills amounted to
$68,004.67 and were proportionally split among the appellant, his brother and
Rustless. The actual payment of the total amount was made through Rustless’
bank account. However, the appellant’s portion of the legal fees was treated as
a taxable employment benefit and an amount of $19,177.60 was added to his
payroll account and included on his 2003 T4 slip issued by Rustless (Exhibits
K, L and M of Exhibit A-1). The appellant included that amount in his
employment income but claimed a deduction of the same amount (Exhibit R-5).
[7]
For employees, the only
deduction that can be claimed with respect to legal fees is that which is
specifically permitted by the application of paragraph 8(1)(b) and
subsection 8(2) of the ITA:
Deductions
8(1) Deductions allowed. 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:
. . .
(b) Legal expenses of employee — 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;
8(2) General limitation. Except as
permitted by this section, no deductions shall be made in computing a
taxpayer’s income for a taxation year from an office or employment.
[8]
The appellant and his
accountant tried to explain in court that the purpose of the litigation for
which the legal fees are being claimed was for the appellant and his brother to
take control of the publishing companies and thus ensure that the appellant
would be able to continue to earn his livelihood through those corporations.
The appellant stated that he incurred the legal fees to establish a right to
income from those sources in the future. In a letter sent to the Canada Revenue
Agency (CRA) on September 26, 2007 (Exhibit R-1), John Ayres
wrote the following:
. . . Upon making the decision to split the companies up, Kent and
Mark Lester decided to actively pursue having a Letter of Intent drawn up to buy
out the other shareholder, . . . . The legal invoices enclosed in the amount of
$39,112.87 are the fees which Kent and Mark Lester incurred in order to
facilitate the break up of the companies.
[9]
In a subsequent letter
sent to the CRA on January 14, 2011 (Exhibit R-2), Mr. Ayres indicated
that the upshot of the civil action was that the various corporations were
broken up, resulting in a change of control for those corporations. However, he
stated that the civil action was commenced in order for the appellant to secure
his interest in the corporations and to ensure that he would be able to continue
to generate income from them.
[10]
The appellant filed in
court the offer to purchase and sell (Exhibit C of Exhibit A-1), the affidavits
filed in the Ontario Superior Court of Justice by the accountants of both
parties (Exhibits D and E of Exhibit A-1), letters written by counsel of both
parties regarding the terms of the resolution of the litigation brought before
the Ontario Superior Court of Justice (Exhibits F and G of Exhibit A-1), and the
invoices for legal fees from the appellant’s lawyer detailing the professional
services rendered (Exhibits H, I, and J of Exhibit A-1). All these documents
relate to the sale of shares that resulted in the restructuring of the
corporations. The statement of claim filed by the appellant in the Ontario Superior
Court of Justice was not provided in the course of the hearing of the present
appeal. I am not in a position, therefore, to determine what the essential
nature of the claim was and, thus, whether the intent of the appellant in
filing his lawsuit against the third shareholder was anything other than to buy
him out. The fact that the appellant wanted to ensure that he would be able to
continue generating income from the corporations he now controls with his
brother might have been (and most probably was) something he considered when he
launched his lawsuit. However, the reality is that the appellant was invoiced
for legal fees incurred for the buying out of another shareholder and for the
restructuring of the corporations (which was ultimately admitted by
Mr. Ayres in his testimony).
[11]
It is difficult to
conclude in those circumstances that the legal expenses were incurred to
collect or establish a right to salary or wages owed to the appellant by the
employer, as required by paragraph 8(1)(b) of the ITA.
[12]
Rustless, the employer,
did not owe the appellant a salary, and the appellant did not commence the
lawsuit against his former co‑shareholder in order to establish a right
to salary owed to him by Rustless.
[13]
As Sharlow J.A. of the
Federal Court of Appeal said in Fenwick v. Canada, [2008] F.C.J. No. 1655 (QL), 2008 FCA 370, paragraph 8(1)(b)
of the ITA has a relatively narrow scope. She stated at paragraph 7:
. . . 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.
[14]
In the present case,
the appellant’s right to retain his remuneration in his capacity as an employee
was not at issue. The appellant brought the lawsuit in his capacity as a
shareholder, not as an employee. As was the case in Fenwick, the fact that
the appellant is wearing two hats (being a controlling shareholder and an
employee) does not alter the interpretation to be given to paragraph 8(1)(b).
As Woods J. said in Fenwick v. The Queen, 2008 TCC 243, at paragraph 40,
to do so would lead to an inequitable application of the section to taxpayers
in similar circumstances. This, in my view, also answers the other argument
raised by the appellant here, namely, that he was both self-employed and an
employee. In filing his tax return, the appellant reported employment income
only, and Rustless issued a T4 slip. As a majority shareholder of the group of
corporations, the appellant was aware that he was being treated as an employee,
and he accepted that treatment. He cannot
after the fact change his mind and claim that he was not really an employee. In Shell Canada Ltd v. Canada,
[1999] 3 S.C.R. 622, the Supreme Court of Canada
stated the following at paragraph 39:
39 This Court has repeatedly held that courts must be sensitive
to the economic realities of a particular transaction, rather than being bound
to what first appears to be its legal form: Bronfman Trust, supra,
at pp. 52-53, per Dickson C.J.; Tennant, supra, at para.
26, per Iacobucci J. But there are at least two caveats to this
rule. First, this Court has never held that the economic realities of a
situation can be used to recharacterize a taxpayer's bona fide legal
relationships. To the contrary, we have held that, absent a specific provision
of the Act to the contrary or a finding that they are a sham, the taxpayer's
legal relationships must be respected in tax cases. Recharacterization is only
permissible if the label attached by the taxpayer to the particular transaction
does not properly reflect its actual legal effect: Continental Bank Leasing
Corp. v. Canada, [1998] 2 S.C.R. 298, at para. 21, per Bastarache J.
[15]
The appellant failed to
convince me that his employment status did not represent the bona fide legal
relationship that he himself established with Rustless. Therefore, he is not entitled
to claim that, because he is a majority shareholder, he is in a position to
recharacterize his employee status (giving rise to employment income) as
self-employed status (giving rise to business income), in order to be able to
deduct his legal expenses against his income (which, however, is an issue I do
not have to decide here).
[16]
For the same reason,
the appellant cannot deduct the expenses that he paid to the accountant for the
preparation of his 2003 tax return. That is not a deduction permitted by
section 8 of the ITA.
Office-in-home expenses and office expenses
[17]
The appellant claimed
half of the insurance, property tax, mortgage interest and gas expenses for his
residence in Hamilton on the basis that half of the house was
used for his work. In his notice of appeal, the appellant stated that the
majority of his work was performed from the second floor of his residence. The
square footage of his residence is approximately 2500, with 1000 square feet of
that space being used for his work. As the corporations’ main administrative
and editorial offices are located in Minden, Ontario, the appellant decided to maintain a suite
of offices in his home in order to perform his duties there rather than burdening
the corporations with additional costs for office rent and with related
overhead costs. The appellant’s home address was even provided to the suppliers
of the various corporations for various shipments. As proof that he was working
from home, the appellant filed the telephone bills for his residence that were
sent to the corporations’ headquarters in Minden
(Exhibit P of Exhibit A-1). They show a considerable number of long distance
calls made in 2003 during business hours, of which quite a few were made to the
office in Minden.
[18]
The appellant also
filed Purolator invoices as evidence that quite a few packages were sent to and
from his residence for the corporations (Exhibit Q of Exhibit A-1).
[19]
Sales receipts showing
work done for one of the corporations on a computer located at the home address
of the appellant was also filed (Exhibit R of Exhibit A‑1). An invoice
sent to the appellant’s home address for booth space for one of the corporations
at a trade show was filed as Exhibit S of Exhibit A‑1.
[20]
The four last-mentioned
exhibits were filed by the appellant to support his claim that a lot of work-related
activities were going on at his home.
[21]
The appellant also
claimed expenses paid with regard to a property described as Pt. Lot 4,
Concession 14, Snowdon Township, in Minden,
Ontario, which is another residence that belongs to him. It appears from the
postal address that this place is not where the administrative office of the
corporations in Minden is located. The expenses claimed are the
property taxes as well as hydro, telephone and fuel expenses. Again, 50% of
those expenses for the year were claimed.
[22]
The expenses claimed by
the appellant for the office-in-home at his residence in Hamilton and for the
Minden property were disallowed by the Minister on the basis that they were not
deductible pursuant to paragraph 8(1)(i) of the ITA.
[23]
Further, the respondent
submitted that during the year at issue the appellant did not use any work
space in those two places to principally perform the duties of his employment, nor
did he use any work space there during that year exclusively for the purposes
of his employment, nor did he use any such space on a regular and continuous
basis for meeting customers or other persons in the ordinary course of
performing the duties of his employment.
[24]
Subparagraphs 8(1)(i)(ii)
and (iii) and subsection 8(13) of the ITA are reproduced hereunder:
Deductions
8(1) Deductions allowed. 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.
. . .
(i) Dues and other expenses of performing
duties — amounts paid by the taxpayer in the year
as
. . .
(ii) office rent, or salary to an assistant or
substitute, the payment of which by the officer or employee was required by the
contract of employment,
(iii) the cost of supplies that were consumed
directly in the performance of the duties of the office or employment and that
the officer or employee was required by the contract of employment to supply
and pay for,
. . .
to the extent that the taxpayer has not been reimbursed, and is not
entitled to be reimbursed in respect thereof;
8(13) Work
space in home. Notwithstanding paragraphs 8(1)(f)
and 8(1)(i),
(a) no amount is deductible in computing an
individual’s income for a taxation year from an office or employment in respect
of any part (in this subsection referred to as the “work space”) of a self-contained
domestic establishment in which the individual resides, except to the extent
that the work space is either
(i) the place where the individual principally performs the duties
of the office or employment, or
(ii) used exclusively during the period in respect of which the
amount relates for the purpose of earning income from the office or employment
and used on a regular and continuous basis for meeting customers or other
persons in the ordinary course of performing the duties of the office or employment;
(b) where the conditions set out in
subparagraph 8(13)(a)(i) or 8(13)(a)(ii) are met, the amount in
respect of the work space that is deductible in computing the individual’s
income for the year from the office or employment shall not exceed the
individual’s income for the year from the office or employment, computed
without reference to any deduction in respect of the work space; and
(c) any amount in respect of a work space that
was, solely because of paragraph 8(13)(b), not deductible in computing
the individual’s income for the immediately preceding taxation year from the
office or employment shall be deemed to be an amount in respect of a work space
that is otherwise deductible in computing the individual’s income for the year
from that office or employment and that, subject to paragraph 8(13)(b),
may be deducted in computing the individual’s income for the year from the
office or employment.
[25]
There does not seem to
be any dispute regarding the fact that the appellant was required by his contract
of employment to incur the office-in-home expenses without being reimbursed for
them (see Form T2200, Exhibit R-4). However, the respondent relied on Horbay
v. Canada, [2002] T.C.J. No 684 (QL), Thompson v. M.N.R., [1989]
F.C.J. No 808 (QL) (FCTD), and Felton v. M.N.R., 89 DTC 233, to argue
that interest on money borrowed, insurance premiums and property taxes cannot
be considered as being the equivalent of, or as being, in the nature of, office
rent under subparagraph 8(1)(i)(ii) of the ITA.
[26]
I agree with the
respondent that office rent cannot be extended to include property taxes,
mortgage interest and insurance. Subparagraph 8(1)(i)(ii) permits a
deduction for office rent. There is no ambiguity in the way that provision is
drafted. In Placer Dome Canada Ltd v. Ontario (Minister of Finance), [2006] 1 S.C.R. 715, 2006 SCC 20, the Supreme
Court of Canada stated the following at paragraphs 23 and
24:
23 The interpretive approach is thus informed by the level of
precision and clarity with which a taxing provision is drafted. Where such a
provision admits of no ambiguity in its meaning or in its application to the
facts, it must simply be applied. Reference to the purpose of the provision
"cannot be used to create an unexpressed exception to clear language":
see P. W. Hogg, J. E. Magee and J. Li, Principles of Canadian Income Tax Law
(5th ed. 2005), at p. 569; Shell Canada Ltd. v. Canada, [1999] 3 S.C.R.
622. Where, as in this case, the provision admits of more than one reasonable
interpretation, greater emphasis must be placed on the context, scheme and
purpose of the Act. Thus, legislative purpose may not be used to supplant clear
statutory language, but to arrive at the most plausible interpretation of an
ambiguous statutory provision.
24 Although there is a residual presumption in favour of the
taxpayer, it is residual only and applies in the exceptional case where
application of the ordinary principles of interpretation does not resolve the
issue: Notre-Dame de Bon-Secours, at p. 19. Any doubt about the meaning
of a taxation statute must be reasonable, and no recourse to the presumption
lies unless the usual rules of interpretation have been applied, to no avail,
in an attempt to discern the meaning of the provision at issue. In my view, the
residual presumption does not assist PDC in the present case because the
ambiguity in the Mining Tax Act can be resolved through the application
of the ordinary principles of statutory interpretation. . . .
[27]
Subparagraph 8(1)(i)(ii)
of the ITA contains no ambiguity in its meaning. A deduction for office
rent does not contemplate interest, property tax and insurance expenses. This
has already been decided by this Court, as can be seen from the following
passage in Horbay, supra, at paragraph 7:
7 The Court accepts the interpretation adopted by McNair, J. of
the Federal Court in The Queen v. Thompson, 89 D.T.C. 5439 in which the appeal
was on an identical basis. McNair, J. referred to the judgment of Rip, T.C.J.
in Felton v. M.N.R., 89 D.T.C. 233 (T.C.C.) and stated at pages 5443 and 5444:
The strict ratio of the case is contained in the following passage
from the judgment of Rip T.C.J. at pp. 234-35:
The words "rent" and "loyer" in
subparagraph 8(1)(i)(ii) contemplate a payment by a lessee or tenant to a
lessor or landlord who owns the office property in return for the exclusive
possession of the office, the property leased by the latter to the former.
The payments by Mr. Felton to a money-lender of interest
on money borrowed, to a utility supplier for the utility, to maintenance
personnel for maintenance, to an insurer for insurance and to a municipality in
respect of taxes are not payments of rent by a lessee to a lessor. None of
these payments by Mr. Felton was for the use or occupancy or possession of
property owned by another person.
Obviously, the judges of the Tax Court in both Philips
and Felton applied the plain meaning rule of statutory interpretation in
determining that the home office expenses of an employee were not deductible as
office rent under s. 8(1)(i)(ii), notwithstanding the illogical unfairness of
the section in permitting the selfsame deduction in the case of business or
professional persons.
This modern rule for the interpretation of taxing
statutes was admirably expounded by Estey J. in Stubart Invetments [sic]
Ltd. v. The Queen, [1984] 1 S.C.R. 536, 84 D.T.C. 6305. The learned judge
recalled the strict rule of statutory interpretation invoked for many years,
whereby any ambiguities in the charging provisions of a tax statute were to be
resolved in favour of the taxpayer. He pointed out that the converse was true
where a taxpayer sought to rely on a specific exemption or deduction provided
in the statute. In that case, the strict rule required that the taxpayer's
claim fall clearly within the exempting provisions, and any doubt in that
regard had to be resolved in favour of the Crown. Indeed, he perceived the
introduction of exemptions and allowances as marking "the beginning of the
end of the reign of the strict rule". The learned judge stated the
following conclusion in the S.C.R. report of the case at p. 578 (see D.T.C. at
p. 6323):
Professor Willis, in his article, supra, accurately
forecast the demise of the strict interpretation rule for the construction of
taxing status [sic]. Gradually, the role of the tax statute in the
community changed, as we have seen, and the application of strict construction
to it receded. Courts today apply to this statute the plain meaning rule, but
in a substantive sense so that if a taxpayer is within the spirit of the
charge, he may be held liable. See Whiteman and Wheatcroft, supra, at p. 37.
While not directing his observations exclusively to
taxing statutes, the learned author of Construction of Statutes (2nd ed. 1983),
at p. 87, E.A. [Driedger], put the modern rule succinctly:
"Today there is only one principle or approach, namely, the
words of an Act are to be read in their entire context and in their grammatical
and ordinary sense harmoniously with the scheme of the Act, the object of the
Act, and the intention of Parliament."
...
The question remains: Are the amounts claimed for home
office expenses in the 1980 and 1981 taxation years deductible as "office
rent" under s. 8(1)(i)(ii) of the Income Tax Act? In my view, the plain meaning
of the words of the statutory provision read in context with the scheme of the
Act as a whole precludes any possibility of an affirmative answer to the
question. This was the approach adopted by the judges of the Tax Court of
Canada in Phillips and Felton, with which I fully concur. In the result, I find
that the Minister was correct in his reassessments of the defendant's income
for the 1980 and 1981 taxation years, save only for the amounts claimed for
utilities, heating and hydro in 1980.
[28]
However, hydro and fuel
costs can be deducted as office-in-home expenses pursuant to subparagraph 8(1)(i)(iii).
That this is so has been accepted in Thompson, supra, and in Interpretation
Bulletin IT-352R2 at paragraph 5. Counsel for the respondent does not dispute such
deductions as long as subsection 8(13) does not apply.
[29]
With respect to the Hamilton residential property, I am satisfied on the evidence
before me that it can be said that the appellant principally performed the
duties of his employment there in 2003, so that subsection 8(13) does not
preclude the deduction of the gas expenses. However, no evidence was provided
by the appellant with respect to the Minden property and
the Minister’s assumptions of fact shall stand with regard to that property. I
therefore allow the appeal on the following basis:
1) The appellant is
entitled to deduct half of the gas expenses for his Hamilton residence (50% x $1,439.69 = $720.00).
2) The appellant is
entitled, for his 2003 calendar year, to a GST rebate, pursuant to subsection
253(1) of the ETA, in respect of motor vehicle expenses in the amount of $7,200,
as conceded by the respondent, and in respect of the gas expenses hereinabove
allowed ($720.00).
[30]
The appellant is not
entitled to any other relief.
[31]
There is no award of
costs.
Signed at Montreal, Quebec, this 29th day of November 2011.
“Lucie Lamarre”
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