Citation: 2011 TCC 268
Date: 20110525
Docket: 2009‑1197(IT)G
BETWEEN:
CLAUDE CHAGNON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Boyle J.
[1]
This case arises out of
the well‑publicized sale in 2000 of Le Groupe Vidéotron ltée (“Vidéotron”)
to Quebecor Média Inc. (“QMI”) by the Chagnon family and the unsuccessful rival
Vidéotron bid by Rogers Communications Inc.
[2]
The principal issues to
be decided in this case involve the scope and application of the
paragraph 8(1)(b) of the Income Tax Act deduction available to
employees for salary‑related legal expenses.
I. Facts
[3]
The facts are
relatively straightforward. The parties filed a partial agreed statement of
facts, a copy of which is appended to these reasons. No witnesses were called.
The 11 exhibits entered are described in the partial agreed statement of
facts.
[4]
In January 2000, Mr. Claude Chagnon
was appointed president and chief executive officer (CEO) of Vidéotron. As part
of his remuneration package he was granted options (in addition to those he
already held) to purchase shares of Vidéotron in accordance with the company’s
1991 stock option plan. The total number of additional options, both base and
performance‑related, was 1,223,033. The exercise price was set at $26 per
share based upon the trading price of Vidéotron shares. The parties agreed that
the shares were related to Mr. Chagnon’s employment and specifically to
his appointment at that time as president and CEO. The salary and benefits,
including the options, were set by an independent member of the board relying
upon outside advice.
[5]
In October 2000,
the Vidéotron stock option plan was amended to provide that, “au moment de la
levée d’une option” ([TRANSLATION] “on exercising an option”), an employee
could instead choose to receive additional salary equal to the difference
between the fair market value of the share and the exercise price of the option,
in which case the option would become “caduque” ([TRANSLATION] “null”).
[6]
Following the
acquisition of Vidéotron by QMI, Claude Chagnon chose to receive
additional salary from Vidéotron in accordance with the amended stock option
plan. He received $19 for each of the 1,223,033 options, that being the
difference between the $45 share value and the $26 exercise price. This
totalled $23,237,627 for the options in question, which amount was paid to
Mr. Chagnon net of tax withholdings. A T4 slip including that amount was
issued to Mr. Chagnon by Vidéotron, and Mr. Chagnon reported it as employment
income for tax purposes.
[7]
The legal expenses in
question relate to Mr. Chagnon’s defence of an unsuccessful action brought
against him two years later by Vidéotron and QMI in the Superior Court of
Quebec reclaiming $23,237,627 on the basis that Mr. Chagnon had inside
information relating to Rogers’ interest in Vidéotron when the options were
granted and that he had breached a duty of loyalty to Vidéotron. In 2009, the Superior
Court of Quebec dismissed the claim against Mr. Chagnon with costs. In his
reasons for judgment, Mr. Justice Riordan found that the terms of Mr. Chagnon’s
compensation package, including the options, were those proposed by an
independent director acting upon expert advice and were simply accepted by
Mr. Chagnon without any negotiation. The Court found that Mr. Chagnon
had done nothing wrong.
[8]
This appeal involves
Mr. Chagnon’s 2005 taxation year, in respect of which he incurred $383,005
in legal expenses relating to the action against him by Vidéotron and QMI.
II. Law
[Income Tax
Act]
|
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:
|
8(1) Éléments déductibles — 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 :
|
|
. . .
|
[…]
|
|
(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;
|
b) Frais judiciaires d’un
employé — 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;
|
[9]
The issues to be
decided are:
(1)
whether
paragraph 8(1)(b) extends to legal fees incurred by an employee
defending himself in an action by an employer, or a member of a related
employer group, seeking to reclaim an amount of salary received by the
employee; and
(2)
if paragraph 8(1)(b)
is of such a scope, does it apply to the particular facts of this case?
[10]
The question of the
scope of paragraph 8(1)(b), properly interpreted, was considered by Woods J. in Fenwick v. The Queen, 2008 TCC 243, 2008 DTC 3523. Fenwick involved legal expenses incurred
to defend the taxpayer in litigation by his two sibling shareholders and in a
derivative action by them on behalf of the private corporation of which he was
president. The taxpayer was not the only named defendant. There were a large
number of claims, one of which alleged that the taxpayer had been paid
excessive remuneration. The statement of claim sought a declaration of trust
and a tracing order along with $100,000,000 in damages.
[11]
In Fenwick,
Woods J. described the first issue we face in this case as follows:
[21] The elements of the section that are particularly relevant
in this appeal are: (1) that the deduction is for the purpose of computing
income from an office or employment; (2) that the expenses must be incurred by
an employee (including an officer); and (3) that the expenses must be incurred
for the purpose of either collecting or establishing salary or wages owed.
[22] I would first comment about the word “owed” in s. 8(1)(b).
The respondent submits that the use of this word suggests that Parliament had
in mind legal disputes concerning unpaid remuneration. If this interpretation
is correct, it would be fatal to this appeal because the Hemispheres’ lawsuit
had nothing to do with unpaid remuneration.
[23] In support of this position, the respondent referred to
the decision of the Federal Court of Appeal in Loo v. The Queen, 2004
D.T.C. 6540. According to Loo, it is suggested, the taxpayer must
satisfy two conditions in order to qualify for the deduction in s. 8(1)(b).
These are referred [to] in Loo as “branches” of the section and they are
described in paragraphs 7 and 8 of the decision as follows:
[7] Paragraph 8(1)(b) has two branches. The first
branch permits a deduction for legal expenses incurred in an action to collect
salary or wages owed. It contemplates litigation resulting from the failure of
an employer to pay the salary or wages due to an employee. In such a case,
there may be no dispute as to the amount of salary or wages that the employee
is entitled to be paid for the services the employee has performed, but there
may be a factual dispute as to how much of the salary or wages remains unpaid.
[8] The second branch of paragraph 8(1)(b)
contemplates a situation in which the matter in controversy is the legal
entitlement to the salary claimed. The second branch applies if, for example,
an individual incurs legal expenses in litigating a factual dispute as to
whether he or she has actually performed the services required by the contract
of employment, or a dispute as to the rate of salary payable for services
performed. That would include, for example, a dispute as to the term and
conditions of employment.
[24] I would comment briefly that I do not interpret Loo
as suggested by the respondent that both branches must be satisfied in order to
qualify for the deduction. Such an interpretation would be contrary to the
words of the statutory provision, which clearly permits a deduction for two
different situations – legal expenses to “collect” and legal expenses to
“establish a right.”
[25] I have trouble with the limited interpretation of the word
“owed” suggested by the respondent because it is difficult to see why
Parliament would want to make a distinction based on whether the remuneration
has been paid or not. It seems to make more sense in this context to interpret
the word “owed” as equivalent to “earned.”
[26] It is not necessary that I reach a conclusion on this,
however, because in my opinion the expenses incurred by the appellant do not
qualify for the deduction for other reasons.
[27] The essential question to be decided in this case is
whether the appellant incurred legal fees to establish a right to salary or
wages. I have concluded that this was not the case, essentially because there
is no evidence that the threatened lawsuit would impact the appellant’s right
to salary or wages paid to him by Hemispheres or Fenwix.
[12]
The Court’s suggestion,
by equating “owed” or “dû” with “earned”, that paragraph 8(1)(b),
properly interpreted, could apply to legal costs for defending one’s right not
to have to repay salary paid was obiter dictum. The Court went on to
decide that the taxpayer could not succeed because he had not been able to establish
on the evidence that the lawsuit would have an impact on his right to the
salary paid to him.
[13]
This Court’s decision
was upheld by the Federal Court of Appeal in Fenwick v. Canada, 2008 FCA 370,
2009 DTC 5013. Of relevance to this appeal are the following remarks
by Sharlow J.A.:
[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.
[14]
The Federal Court of
Appeal also agreed, in the circumstances, with the trial judge’s decision to
determine the essential nature of the claim against the taxpayer based upon a
review of the statement of claim.
[15]
I agree with the obiter comments of Woods J. in Fenwick that paragraph 8(1)(b)
is capable of being interpreted, and should be interpreted, as extending to
legal expenses incurred by an employee in order to retain salary already paid
when that employee is faced with litigation seeking to reclaim such amount. In
such a case the point in controversy remains the employee’s legal entitlement
to the salary, and the employee is seeking to establish his right to the
salary.
[16]
That issue was not
before the Federal Court of Appeal in Loo v. Canada, 2004 FCA 249,
2004 DTC 6540, which predated the Federal Court of Appeal’s decision
in Fenwick. Further, the issue in this case is materially different from
those in the cases referred to by the Federal Court of Appeal in Loo,
which involved proceedings to establish a right to a promotion that would have
made it possible to earn future higher income, proceedings to maintain a
professional qualification in order to earn future income, and a claim against
an employer for damages for wrongdoing in the course of employment.
[17]
The remaining question
is whether the action against Mr. Chagnon sought to reclaim compensation
paid to him as an employee, or whether his situation was as described in Fenwick,
namely one involving a significantly broader claim brought against the taxpayer
that relates to alleged wrongdoing by him while he was an employee.
[18]
I am of the opinion
that, on the particular facts of this case, Mr. Chagnon should succeed.
The claim against him related to the very issuance of the options to him upon
his appointment as president and CEO. My conclusion on this point might have
been otherwise had the claim related to alleged inside information used in the
course of disposing of options already received. The amount claimed in the “Déclaration
précisée” ([TRANSLATION] “Detailed Statement of Claim”) filed in the Superior
Court of Quebec is the precise amount of the additional salary reported in
respect of the options at issue. That is the sole relief requested in that statement
of claim. The Superior Court of Quebec found Mr. Chagnon to have done
nothing wrong; specifically, it found him not to have been involved in setting
the terms of the grant of the options, and dismissed the action. This contrasts
with Fenwick, in which there was a large number of allegations and a
confidential settlement.
[19]
It is true that, in
support of their attempt to reclaim the amount of option‑related employment
compensation at issue, Vidéotron and QMI relied upon the insider trading
prohibition in the Securities Act and the employment loyalty provisions
of the Civil Code of Quebec. That these were the means that they felt
could best support their attempt to reclaim the amount does not change the
important fact that they sought solely to reclaim the very amount of
compensation paid to Mr. Chagnon. There is no suggestion by the Respondent
that the section 67.6 (Income Tax Act) restriction on the deduction
of fines and penalties applies.
[20]
For these reasons I
hold that the taxpayer’s appeal should be allowed on the basis that the legal
expenses were incurred by him to establish his right to salary earned by him.
[21]
With respect to the
amount of Mr. Chagnon’s deduction of legal expenses for 2005, the $383,005
amount of such expenses incurred by him must be reduced by the amount of costs
awarded him by the Superior Court of Quebec that relates to 2005.
[22]
The taxpayer has raised
two alternative arguments, which I do not have to rule upon. First, the
taxpayer maintains that the legal expenses should be deductible as an expense
incurred to earn income from property, namely the options, and thus should give
rise to a corresponding property loss for 2005. Second, the taxpayer maintains
that the legal expenses give rise to a capital loss. I would observe that, since
section 7 of the Income Tax Act deems employment stock option
revenues to be employment income, I have considerable difficulty understanding
how options such as these, that is, options in respect of which all amounts are
included in employment income, can also be a source of property income or be
capital property. Similarly, given that the options became null in 2000, it is
not clear how they could have given rise to a property loss in 2005.
[23]
The appeal is allowed
with costs.
Signed at Ottawa, Canada, this 25th day of May 2011.
"Patrick Boyle"
Translation certified true
On this 31st day of May 2011
Erich Klein, Revisor
APPENDIX
2009‑1197(IT)G
COUR CANADIENNE DE L’IMPÔT
ENTRE :
CLAUDE CHAGNON
Appelant
-et-
SA MAJESTÉ LA REINE
Intimée
EXPOSÉ PARTIEL ET CONJOINT DES FAITS
1.
Avant le
19 janvier 2000, l’appelant détenait 426 467 options d’achat
d’actions de Le Groupe Vidéotron Limitée (GVL) dont le prix d’exercice variait
entre 6,225 $ et 24,10 $.
2.
Le 19 janvier 2000,
l’appelant est devenu le président et chef de direction de GVL et s’est vu à ce
titre octroyer et a accepté 1 223 033 options d’achat d’actions de
GVL au prix unitaire de 26 $.
Pièce 1 : Copie du procès‑verbal
de la réunion du comité de régie d’entreprise et des ressources humaines de Le
Groupe Vidéotron Ltée du 18 janvier 2000.
Pièce 2 : Copie du procès‑verbal
de l’assemblée du conseil d’administration de Le Groupe Vidéotron Ltée du
19 janvier 2000.
Pièce 3 : Convention
d’octroi d’options d’achat d’actions du 19 janvier 2000.
3.
Le
16 octobre 2000, le régime d’options d’achat d’actions de GVL fut
modifié pour permettre aux participants de recevoir de GVL un montant
correspondant à la différence entre la valeur des actions de GVL pour
lesquelles ils détiennent des options et le prix d’exercice de leurs options.
Pièce 4 : Copie de
l’extrait du procès‑verbal de la réunion du conseil d’administration de
Le Groupe Vidéotron Ltée du 16 octobre 2000 approuvant cette
modification au régime d’options d’achat d’actions.
4.
Suite à une
acquisition de GVL par Quebecor Média Inc. (QMI), le 23 octobre 2000,
l’appelant s’est prévalu des modifications apportées au régime d’options d’achat
d’actions concernant les 1 649 500 options d’achat d’actions qu’il
détenait dans GVL.
5.
Le prix d’exercice de
ces options s’élevait à 37 544 583,50 $, dont 23 237 627 $ équivalent à la
différence entre la valeur des actions de GVL résultant de la levée des
1 223 033 options acceptées le 19 janvier (soit 45 $) et le
prix d’exercice des ces options (26 $).
6.
De ce montant de
37 544 583,50 $, GVL a retenu à la source une somme de
19 023 840 $ et a versé à l’appelant la somme de
18 520 743 $.
7.
L’appelant a inclus
cette somme dans son revenu d’emploi tel que requis par l’alinéa 7(1)(b) de la Loi
de l’impôt sur le revenu (la « Loi ») pour l’année d’imposition
2000.
Pièce 5 : Copie de T4 de
Claude Chagnon pour l’année 2000.
8.
GVL et QMI ont par
ailleurs intenté une poursuite en 2002 réclamant à l’appelant la somme de
23 237 627 $, soit une somme équivalente à la différence entre
la valeur des actions de GVL résultant de la levée des 1 223 033
options acceptées le 19 janvier et le prix d’exercice de ces options, sous
prétexte que l’acceptation des 1 223 033 options d’achat de GVL le 19 janvier 2000
et l’exercice des droits relatifs à ces options d’achat d’actions
représentaient dans les circonstances un délit d’initié aux termes de la Loi
sur les valeurs mobilières.
GVL et QMI invoquaient également que monsieur Chagnon avait manqué à son
obligation de loyauté à titre d’administrateur et de dirigeant de GVL en
contravention des articles 322 et 323 du Code civil du Québec et à son
obligation précontractuelle de renseignement en contravention des articles 6, 7
et 1375 du Code civil du Québec.
Pièce 6 : Déclaration
précisée du Groupe Vidéotron Ltée et Quebecor Média inc. dans le dossier Le
Groupe Vidéotron Ltée et Quebecor Média inc. c. Monsieur Claude Chagnon de
la Cour supérieure portant le numéro 500-05-074208-024, datée du
15 novembre 2002.
Pièce 7 : Défense et
demande reconventionnelle précisée de monsieur Claude Chagnon dans le
dossier Le Groupe Vidéotron Ltée et Quebecor Média inc. c. Monsieur Claude
Chagnon de la Cour supérieure portant le numéro 500-05-074208-024, datée du
23 janvier 2004.
9.
Le 27 mai 2009,
la Cour supérieure a rejeté la poursuite de GVL et QMI contre Claude Chagnon
mentionnée dans le paragraphe ci-haut.
Pièce 8 : Copie du jugement
de Le Groupe Vidéotron Ltée et Quebecor Média Inc. c. Monsieur Claude
Chagnon de la Cour supérieure portant le numéro 500-05-074208-024, daté du
27 mai 2009.
10.
Dans le cadre de cette
poursuite, l’appelant a engagé et déduit de son revenu pour les années
d’imposition 2005 à 2009 les montants suivants à titre de frais judiciaires et
d’expert en vertu de l’alinéa 8(1)(b) de la Loi :
|
Année fiscale
|
Montant des frais
judiciaires
|
|
2005
|
383 005,00
|
|
2006
|
678 846,63
|
|
2007
|
276 323,64
|
|
2008
|
237 982,67
|
|
2009
|
930 074,71
|
|
Total
|
2 506 232,65
|
11.
Par avis de cotisation
daté du 21 août 2006, la Division de la vérification de l’Agence a
refusé la déduction de 383 005,00 $ pour l’année fiscale 2005.
Pièce 9 : Copie de l’avis
de cotisation, daté du 21 août 2006, refusant la déduction des frais
judiciaires pour l’année d’imposition 2005.
12.
Le ou vers le 20
novembre 2006, l’appelant s’est opposé à l’avis de cotisation établi par
l’intimée le 21 août 2006 pour l’année d’imposition 2005.
Pièce 10 : Copie de l’avis
d’opposition, daté du 20 novembre 2006, contre l’avis de cotisation
daté du 21 août 2006.
13.
Le ou vers le
19 janvier 2009, l’Agence du revenu du Canada a confirmé l’avis de
cotisation daté du 21 août 2006.
Pièce 11 : Copie de la lettre
de l’Agence du revenu du Canada datée du 19 janvier 2009.
14.
Seule la cotisation
relative à l’année d’imposition 2005 est en litige devant cette Cour.
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