Teskey,
T.C.C.J.:—
The
appellant
appeals
his
assessments
of
income
tax
for
the
years
1986,
1987
and
1988.
Issue
The
sole
issue
before
me
is
the
deductibility
of
legal
fees
in
the
amount
of
$60,000
and
$34,737
in
the
years
1986
and
1987
respectively.
It
was
agreed
that
the
1988
appeal
depends
on
the
outcome
of
the
1986
and
1987
appeals
and
therefore
is
not
in
issue.
Facts
The
facts
herein
are
not
in
dispute.
The
pertinent
ones
being:
(a)
The
appellant,
pursuant
to
two
written
agreements
with
Winpower
Corporation
("Winpower")
of
Iowa,
U.S.A.
dated
November
11,
1976
and
October
3,
1977
became
a
commission
representative
to
sell
electrical
generators,
parts
and
accessories
firstly
for
the
industrial
market
and
secondly
for
the
farm
market
in
the
Province
of
Ontario.
(b)
All
commissions
earned
by
the
appellant
were
paid
to
the
appellant
without
deduction,
who
deposited
the
moneys
into
an
account
with
the
Midland
Bank
in
Buffalo,
New
York.
(c)
At
the
time,
the
appellant
obtained
a
legal
opinion
from
a
solicitor
in
Ontario,
to
the
effect
that
Canadian
income
tax
was
not
payable
on
this
money,
or
on
the
interest
earned
thereon,
until
it
was
transferred
into
Ontario.
(d)
The
two
commission
agreements
were
cancelled
by
Winpower
by
letter
dated
November
21,
1979.
(e)
As
of
November
1979,
the
appellant
no
longer
sold
Winpower
products.
He
did
receive
commission
cheques
in
1980
and
on
into
1981
that
arose
out
of
sales
negotiated
before
November
21,
1979.
(f)
On
or
about
March
1,
1985,
the
appellant
was
charged
with
six
counts
of
making,
participating
in,
assenting
in
or
acquiescing
in
the
making
of
false
or
deceptive
statements
in
filing
his
tax
returns
pursuant
to
the
provisions
of
section
239
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act").
These
all
dealt
with
the
income
earned
by
the
sale
of
Winpower
generators
that
was
held
in
the
Midland
Bank.
(g)
On
February
16,1987,
His
Honour
Judge
M.E.
Charles
dismissed
all
the
charges.
(h)
The
appellant
since
1959
has
also
been
a
full-time
employee
of
Sommers
Motor
Generator
Sales
Ltd.,
a
company
started
by
his
father
in
1936.
The
appellant
received
from
this
company
both
wages
and
commissions.
(i)
The
legal
fees
at
issue
were
those
paid
by
the
appellant
to
his
solicitors
for
legal
services
rendered
arising
out
of
the
defence
of
the
six
charges.
(j)
The
moneys
in
the
Midland
Bank
in
Buffalo
represent
the
profit
and
the
interest
accumulated
thereon
from
the
appellant's
business
of
selling
Winpower
generators.
Analysis
In
order
for
the
appellant
to
be
successful,
the
deductions
sought
must
fall
within
the
purview
of
paragraph
18(1)(a).
Section
18
of
the
Act
is
found
under
the
heading
“Deductions”
and
the
subheading
“general
limitations".
Paragraph
1
reads:
In
computing
the
income
of
a
taxpayer
from
a
business
or
property
no
deduction
shall
be
made
in
respect
of
Subparagraph
(a)
reads:
.
.
«an
Outlay
or
expense
except
to
the
extent
that
it
was
made
or
incurred
by
the
taxpayer
for
the
purpose
of
gaining
or
producing
income
from
the
business
or
property.
Obviously,
if
I
cannot
conclude
that
the
two
expenditures
were
for
the
purpose
of
gaining
or
producing
income
that
is
the
end
of
the
matter.
The
appellant
relies
heavily
on
the
decision
of
my
colleague
Rip,
T.C.C.J.
in
Ben
Matthews
&
Associates
Ltd.
v.
M.N.R.,
[1988]
1
C.T.C.
2372,
88
D.T.C.
1262
(T.C.C.).
The
appellant
therein
was
a
retailer
and
wholesaler
of
lumber.
At
year
end,
it
reduced
its
cost
of
inventory
in
respect
to
damaged,
stained
or
obsolescent
lumber.
The
appellant
was
charged
under
section
239
of
the
Act.
At
issue
was
the
deductibility
of
the
legal
fees
paid
to
defend
those
charges.
Rip,
T.C.C.J.
said
at
page
2380
(D.T.C.
1267):
Legal
expenses
incurred
by
a
taxpayer
in
defending
itself
from
criminal
charges
arising
out
of
its
business
operations,
namely,
to
defend
its
business
practices,
have
been
found
by
the
Court
to
be
deductible:
M.N.R.
v.
L.D.
Caulk
Co.,
[1952]
C.T.C.
1,
52
D.T.C.
1034
(Ex.
Ct.),
aff'd
by
[1954]
S.C.R.
55,
[1954]
C.T.C.
28,
54
D.T.C.
1011
and
Rolland
Paper
Co.
v.
M.N.R.,
[1960]
C.T.C.
158,
60
D.T.C.
1095
(Ex.
Ct.).
And
at
page
2380
(D.T.C.
1268):
Where
a
business
carries
out
activities
in
the
normal
course
of
its
operations,
and
the
cost
of
those
activities
is
deductible
in
computing
the
income
of
the
business,
any
expense
incurred
to
defend
those
activities
is
a
direct
result
of
the
activities
themselves
and
is
permitted
by
paragraph
18(1)(a)
to
be
deducted:
vide
Bronfman
Trust
v.
The
Queen,
[1987]
1S.C.R.
32,
[1987]
1
C.T.C.
117,
87
D.T.C.
5059.
The
legal
expenses
in
the
case
at
bar
were
incurred
to
defend
a
prosecution
against
the
appellant
which
arose
directly
from
the
practice
of
preparing
financial
statements
in
the
normal
course
of
business.
Rip,
T.C.C.J.
allowed
the
appeal.
The
appellant
relies
upon
the
decision
of
my
colleague
Kempo,
T.C.C.J.
in
Cormier
v.
M.N.R.,
[1989]
1
C.T.C.
2092,
89
D.T.C.
44
(T.C.C.).
The
issue
in
Cormier
was
again
the
deduction
of
legal
expenses
in
defending
charges
of
making
false
or
deceptive
statements
which
hid
income
pursuant
to
section
239
of
the
Act.
Kempo,
T.C.J.
said
at
pages
2102
(D.T.C.
51-52):
I
would
concur
with
the
respondent's
counsel’s
submission
that
the
Ben
Matthews
&
Associates
case,
supra,
is
distinguishable
on
its
facts
in
that
the
section
239
charges
alleging
criminal
wilful
evasion
of
the
payment
of
taxes
by
way
of
the
making
of
false
and
deceptive
statements
in
its
financial
statements
arose
out
of
and
were
in
respect
to
reductions
of
inventory
valuations
concerning
damaged,
stained
and
obsolete
goods,
all
of
which
had
been
openly
and
properly
recorded
in
the
proper
and
adequate
records
of
the
company.
Rip,
T.C.C.J.
of
this
Court
found
that
the
legal
expenses
incurred
to
defend
the
prosecution
arose
directly
from
that
taxpayer's
practice
of
preparing
financial
statements
in
the
normal
course
of
its
business
and
the
defence
of
that
practice.
In
the
case
at
bar,
the
appellant
had
been
charged
and
convicted
of
wilfully
failing
to
report
substantial
amounts
of
income
which,
in
the
context
of
this
case,
cannot
be
described
as
a
normal
business
activity
carried
out
in
the
course
of
business
operations
or
which
had
been
carried
out
for
the
purpose
of
gaining
or
producing
income.
The
facts
here
simply
do
not
support
counsel
for
the
appellant's
submission
that
the
legal
expenses
arose
and
occurred
directly
in
defending
the
appellant's
practice
of
paying
assistants
and
employees
in
the
course
of
his
business
and
in
computing
the
income
from
that
business.
Rather,
and
as
noted
earlier
by
counsel
for
the
respondent,
the
false
statements
wilfully
made
concerned
non-reporting
of
over
fifty
per
cent
of
the
appellant's
business
income
for
each
of
the
subject
years.
This
activity
on
these
particular
facts,
lacks
commer-
ciality
and
simply
does
not
fit
within
jurisprudential
phraseology
of
incurring
expenses
to
defend
a
way
of
doing
business
to
preserve
a
system
under
which
a
business
operates.
I
do
not
believe
Sommers’
success
in
having
the
charges
dismissed
is
a
relevant
consideration
herein.
Like
Kempo,
T.C.C.J.,
I
do
not
see
how
Sommers
can
describe
the
expenses
herein
as
moneys
spent
to
defend
a
normal
business
activity
carried
out
in
the
course
of
business
operations
or
which
had
been
carried
out
for
the
purpose
of
gaining
or
producing
income.
The
money
in
the
Midland
Bank
in
Buffalo
was
the
profit
from
the
business.
There
is
no
dispute
as
to
its
calculation
or
as
to
the
amount.
The
decision
to
declare
or
not
to
declare
the
income
when
earned
is
not
a
business
decision,
but
a
personal
one.
The
appellant's
argument
that
he
was
defending
his
way
of
doing
business
is
not
a
valid
argument.
The
charges
against
him
arose
because
he
did
not
report
the
United
States
income.
The
reporting
or
non-reporting
of
this
income
was
not
an
integral
part
of
his
business.
The
legal
expenses
herein
cannot
be
characterized
as
an
outlay
made
for
the
purposes
of
gaining
or
producing
income.
The
income
had
been
gained
or
produced,
it
simply
was
not
reported.
For
these
reasons,
the
appeals
are
dismissed
with
costs.
Appeals
dismissed.