McNeill v. The Queen, docket 96-2542-IT-G

Date: 19981028

Docket: 96-2542-IT-G

BETWEEN:

ROBERT McNEILL,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Beaubier, J.T.C.C.

[1] This appeal pursuant to the General Procedure was heard at Vancouver, British Columbia on October 8, 1998.

[2] Paragraphs 1 to 3 and 5 to 15 inclusive of the Notice of Appeal were admitted in the Reply. Paragraph 16 of the Notice of Appeal describes the issue. They read:

1. The Appellant Robert McNeill is a chartered accountant who resides at Site 41, RR#2, Gabriola Island, British Columbia, V0R 1X0.

2. In 1988 the Appellant entered into an agreement whereby he sold his accounting practice which he established in the North Vancouver area to another CA firm known as Roe & Company (which subsequently changed its name to Roe, McNeill & Co.).

3. It was also agreed at the time of the sale that the Appellant would provide services as a chartered accountant and as a consultant to Roe McNeill & Co. and to its clients for a period of three years in consideration of a guaranteed minimum fee of $225,000 over the three year term.

...

5. On or about July 3, 1991 Roe McNeill & Co. terminated the management agreement on the basis that the Appellant had failed to provide the services as contemplated by the agreement and had also breached the terms of the restrictive covenant by providing professional accounting services independently of Roe McNeill & Co. to persons located in North Vancouver, West Vancouver, Burnaby and Vancouver.

6. Based on the aforesaid allegations Roe McNeill & Co. commenced legal proceedings for damages against the Appellant under B.C. Supreme Court Action No. C917351. The Appellant opposed the legal proceedings on the basis that his activities were in compliance with the management agreement and that his income earning activities did not contravene the restrictive covenant.

7. On May 30, 1994 the B.C. Supreme Court held that the Appellant had breached his obligations and that he was liable in damages to Roe McNeill & Co. for the sum of $376,619.00 and costs for a total of $465,908.46.

8. As a result of the court decision, the Appellant made an assignment in bankruptcy on September 29, 1994. The assignment was filed with the Official Receiver on the same date. Barnes & Kissak, Inc. were appointed as trustees in bankruptcy.

9. On December 6, 1994 Barnes & Kissak Inc. filed an income tax return on behalf of the Appellant for the period January 1, 1994 to September 29, 1994. The return did not claim any deduction in respect of the damages and costs that the Appellant was required to pay as part of the court decision.

10. On April 3, 1995, Barnes & Kissak wrote to Revenue Canada to advise inter alia that they had incorrectly omitted to claim a business expense of $465,908.46 representing the B.C. Supreme Court judgment and costs.

11. On June 8, 1995 the Minister issued a notice of assessment which accepted the return approximately in the form as filed without reference to the business expense.

12. On October 2, 1995 the Minister replied to Barnes & Kissak's letter of April 3, 1995 to advise that the request to amend the return and allow the business expense was disallowed.

13. On November 10, 1995 by order of the B.C. Supreme Court, Roe Hoops & Wong (formerly Roe McNeill & Co.) was authorized as a creditor in the bankruptcy to undertake an appeal of the Notice of Assessment on behalf of the Appellant.

14. On September 21, 1995, Barnes & Kissak Inc. filed a Notice of Objection in respect of the assessment.

15. By Notice of Decision dated April 10, 1996 the Minister disallowed the Appellant's Notice of Objection.

B. ISSUE TO BE DECIDED

16. The issue to be decided is whether the sum of $465,908.46 awarded against the Appellant as damages and costs in B.C. Supreme Court Act No. C917351 is an expense deductible in computing the Appellant's income for the 1994 taxation year ending September 29, 1994.

[3] No witnesses were called. The parties filed a Statement of Agreed Facts which reads:

STATEMENT OF AGREED FACTS

For the purposes of this proceeding, the parties by their counsel agree to the following facts. Each party is at liberty to adduce additional evidence that is not inconsistent with these facts. Each party also relies on their pleadings, as filed.

1. Between the mid-1970's to 1988 the Appellant operated a successful and substantial practice as a chartered accountant from offices located in West Vancouver, B.C. He principally provided services to clients located in North Vancouver and West Vancouver. In addition, some of his clients were located in Vancouver and Burnaby, B.C. At the relevant time, he carried on his practice through a sole proprietorship.

2. On or about September 6, 1988, the Appellant entered into a Purchase Agreement (the "Agreement") with Roe & Company, to sell his practice as a going concern. A copy of the Agreement is attached as Exhibit 1.

3. The property sold included all equipment, chattels, furnishings, leasehold improvements, client files, software, work in progress and goodwill (see paragraph 1 of the Agreement).

4. The effective date of closing was September 1, 1988 (see paragraph 6 of the Agreement). Roe & Company changed its name to Roe, McNeill and Company.

5. The purchase price was $150,000 which was broken down as follows: goodwill $100,000; equipment $10,000; leasehold improvements $15,000; electronic data files and spreadsheets $25,000. A bonus was also payable if billings to clients of the Appellant in the 3 years following closing exceeded $1,200,000 (see paragraph 2, and Section 7.5 of the Agreement).

6. A company named Lions Gate Management Ltd. ("Lions Gate") was also a party to the Agreement. It was a company controlled by the Appellant and his wife, Christine. Lions Gate was the owner of certain of the assets used by the Appellant in his practice which assets were sold to Roe and Company (see recital C of the Agreement).

7. It was also agreed that the Appellant would provide consulting services and chartered accounting services for a period of three years from the date of purchase. The payments which are set out in Section 7 consisted of the following:

(a) $150,000 payable in amounts of $50,000 on each of closing, July 1, 1989 and June 1, 1990 (Section 7.3(c) of the Agreement);

(b) $75.00 per hour of time billed by the Appellant for the benefit of Roe & Company with a minimum of 1,000 billable hours in each year (Section 7.3(d) of the Agreement).

8. The Purchase Agreement provided that the consulting services would be provided through Lions Gate but the services were to be provided by the Appellant personally and if the Appellant were to fail to perform the consulting services he would be personally liable as though he personally contracted with Roe & Company to provide the services (Section 7.3(a) of the Agreement).

9. The Appellant also agreed that he would:

(a) during the period September 1, 1988 to August 31, 1991 act in utmost good faith to introduce Roe & Company representatives to clients of his practice and to promote Roe & Company to affect a smooth and uninterrupted transition to Roe & Company of the business (Section 7.4(a) of the Agreement);

(b) not, for a period of five years after the consulting period (i.e. September 1, 1991 to August 31, 1996) provide professional accounting services to the public within North Vancouver, West Vancouver, Burnaby and Vancouver (Section 7.7(a) of the Agreement).

10. The first two years of the consulting period pursuant to the Agreement passed smoothly except the Appellant did not adopt any formal process for introducing the clients to Roe, McNeill and Company and its representatives and only a few introductions were effected by the Appellant. (BCSC judgment p. 6 1.19 to p. 7 1.5 Exhibit 2).

11. After two and one half years into the consulting arrangement the Appellant had taken no proactive steps to promote the transition of clients. On February 21, 1991 the Appellant represented to Douglas Roe that he would be entitled under the Agreement to take clients of his former practice to a new practice that he proposed to start at the end of the 3 year consulting period on Gabriola Island (which is located outside the restrictive covenant area (BCSC judgment p. 10 1.13 – p. 11 1.9).

12. Roe, McNeill & Company directed the Appellant how to spend the remaining period of the consultation arrangement, including telling clients that Roe, McNeill & Company had bought the goodwill, but the Appellant refused to follow these directions and treated the directions as a repudiation of the Agreement by Roe, McNeill & Company (BCSC judgment page 14 11.7-10 and Page 13 1.27 to page 14 1.6).

13. On or about July 3, 1991 Roe, McNeill & Company terminated the Agreement on the basis that the Appellant had failed to provide the services contemplated by the Agreement (BCSC judgment page 14 11.7-10).

14. The Appellant set up an accounting practice after the termination of his services with Roe and provided accounting services to, among others in the restrictive covenant area, the client base dealt with in the Agreement.

15. On the basis that the aforesaid activities were in breach of the Agreement, Roe, McNeill & Company commenced legal proceedings for damages against the Appellant under B.C. Supreme Court Action No. C917351. The Appellant opposed the legal proceedings on the basis that his activities were in compliance with the Agreement and that his income earning activities did not contravene the restrictive covenant.

16. Following a 12 day trial in 1994, Madam Justice Boyd of the Supreme Court of British Columbia, found the following breaches by the Appellant of the Agreement:

(i) the Appellant was in breach of his obligation under the Agreement to act in utmost good faith to introduce Roe, McNeill & Company to the clients of the Appellant (BCSC judgment p. 32 line 10 – 12);

(ii) the restrictive covenant was enforceable and providing services to persons inside the restrictive covenant area from a location outside the restrictive covenant area was a breach of the Agreement (BCSC judgment p. 19 1. 29 – p.20 1. 3 and page 20 1. 10 – 22);

(iii) as a result of the breaches of the Agrement, the Appellant was liable to Roe, McNeill & Company for the sum of $465,908.00 calculated as follows:

loss of profits to trial 241,372.00

extraordinary bad debts 1,247.00

unbillable work in progress 15,000.00

loss of goodwill 119,000.00

interest and costs 89,289.00

465,908.00

17. As a result of the court decision, the Appellant made an assignment in bankruptcy on September 29, 1994. The assignment was filed with the official receiver on the same date. Barnes & Kissak Inc. were appointed as trustees of the bankruptcy.

18. On December 6, 1994 Barnes & Kissak Inc. filed an income tax return on behalf of the Appellant for the period January 1, 1994 to September 29, 1994. The return did not claim any deduction in respect of the amount payable by the Appellant as a result of the court decision. A copy of the income tax return is attached as Exhibit 3.

19. On April 3, 1995 Barnes & Kissak Inc., wrote to Revenue Canada to advise, inter alia, that they had incorrectly omitted the business expenses of $465,908.46 represented by the B.C. Supreme Court judgment. A copy of the letter is attached as Exhibit 4.

20. On June 3, 1995 the Minister issued a Notice of Assessment which accepted the return approximately in the form as filed without allowing any deductions for the court award. A copy of the Notice of Assessment is attached as Exhibit 5.

21. On September 21, 1995 Barnes & Kissak Inc. filed a Notice of Objection in respect of the assessment. A copy of the Notice of Objection is attached as Exhibit 6.

22. On October 2, 1995 the Minister replied to Barnes & Kissak Inc. to advise that their request to amend the return and to deduct the court award as a business expense was disallowed. A copy of the letter is attached as Exhibit 7.

23. On November 10, 1995 by Order of the Supreme Court, Roe & Company (which had now changed its name from Roe, McNeill and Company to Roe Hoops & Wong) was authorized as a creditor in bankruptcy to undertake the appeal of the Notice of Assessment on behalf of the Appellant. A copy of the Order is attached as Exhibit 8.

24. By Notification of Confirmation dated April 12, 1996 the Minister disallowed the Appellant's Notice of Objection. A copy of the Notification of Confirmation and the report of the Auditor is attached as Exhibit 9.

25. On February 12, 1998 the British Columbia Court of Appeal upheld the trial judges finding of a breach of contract and also decided that the Appellant was subject to an independent fiduciary duty and was also in breach of this fiduciary duty to Roe, McNeill & Company. The Court of Appeal upheld the aware of damages. A copy of this Judgment is attached as Exhibit 10.

DATED at the City of Vancouver, British Columbia this 8^th day of October, 1998.

[4] The Respondent's argument is summarized in subparagraphs 4(d) to (h) inclusive (the assumptions) and paragraph 5 of the Reply which read:

4. In so assessing the Appellant, the Minister relied on, inter alia, the following assumptions:

...

d) the Agreement also required the Appellant to exercise utmost good faith to promote the interests of Roe which the Appellant did not do and was specifically held by the Supreme Court of British Columbia to have been in breach of this term of the Agreement;

e) the liability of the Appellant for the damages ordered by the Supreme Court of British Columbia on May 30, 1994 was as a direct result of the actions of the Appellant and was not caused by an event either incidental to or part of the normal accounting business of the Appellant;

f) the aforementioned liability of the Appellant was not caused by an event outside the control of the Appellant and if he had abided by the terms of the Agreement the liability for damages and court costs would not have occurred;

g) the Appellant did not incur these costs for the purpose of gaining income from business;

h) the liability for damages and Court costs were not for the purpose of acquiring, protecting, or preserving a capital asset or to create an enduring benefit to the Appellant's business.

B. ISSUES TO BE DECIDED

5. The issue is whether the damages, costs and interests are deductible expenses in the 1994 taxation year.

[5] Paragraph 18(1)(a) of the Income Tax Act reads as follows:

18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) 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;

Thus, the deduction must relate to an expense "made or incurred by the taxpayer" for the purpose of gaining or producing income from a business.

[6] Thorson, P., in Imperial Oil Limited v. M.N.R., 3 DTC 1090 at 1100 found an expenditure deductible with the following words:

... When the nature of the operations is such that the risk of negligence on the part of the taxpayer's servants in the course of their duties or employment is really incidental to such operations, as was the fact in the present case, with its consequential liability to pay damages and costs, then the amount of such damages and costs is properly included as one of the items of the total cost of such operations. It may, therefore, properly be described as a disbursement or expense that is wholly, exclusively and necessarily laid out as part of the process of earning the income from such operations. It cannot be said, under the circumstances, that the payment of such damages and costs is made out of profits. It is no such thing. Being an item of the total cost of the operations it must be deducted, along with the other items of cost, before the amount of the profits from the operations can be ascertained.

[7] Subparagraphs [11](a) to (g) inclusive, (j), and (m) to (o) inclusive of the unanimous judgment of the British Columbia Court of Appeal describe Mr. McNeill's conduct respecting the agreement. They read:

[11] The learned trial judge described the course of events after this agreement was entered into:

(a) The first two years of the consulting period passed smoothly. Contrary to the initial plan, the first 200 of McNeill's billable hours were not devoted to client introductions. Apart from a few perfunctory introductions to McNeill clients in the hallways of the firm and the occasional lunch with a client, no formal process of client introductions was adopted. While neither of the Roe brothers was completely happy with this state of affairs, neither voiced any objection. They recognized that the introduction of a new professional advisor was a delicate process which could not be forced upon a client. In their view, the matter was essentially in McNeill's hands and he was in the best position to dictate the form and timing of the transition process.

(b) At the outset, the list of new clients was reviewed by the Roe brothers and allocated between them so as to accomplish an even allocation of potential billings to each of the brother's notional profit center of clients. While each of the brothers thereafter managed his individual list of clients and ensured that each client's work was performed efficiently and billed appropriately, in most cases McNeill continued to be the front man – greeting clients, taking instructions, delegating work and recommending appropriate billings. With few exceptions, those recommendations were followed. A number of McNeill's clients testified at trial. With very few exceptions, during the relevant period, most of them were entirely unaware of the fact that there had been any sale of McNeill's practice or that they were now, at least on paper, clients of the Roe brothers. So far as they were concerned, apart from an expansion and renovation of the office premises and supporting staff, McNeill remained, as ever, their accountant.

...

(c) In September of 1990, with but one year of the three year consulting period remaining, Douglas Roe approached McNeill and asked him whether he intended to renew or extend the consulting agreement. In his view, McNeill's response would dictate the manner in which the remaining time under the agreement ought to be used. If McNeill intended to leave, then efforts had to immediately be made to effect a transition of clients, particularly during the upcoming tax season when the majority of clients would be attending in the office. Double team introductions and meetings could be arranged while the tax season was underway. If McNeill intended to stay, the transition issue was less pressing.

(d) McNeill reassured Roe that he anticipated there would be no problem involved in eventually extending the consulting period. However, he preferred not to address the matter until the busy tax season was behind them. Roe would not accept any deferral of the matter and kept pressing McNeill through late 1990 and into early 1991. Discussions began in early 1991. It became clear that McNeill intended to sell his West Vancouver home and move to Gabriola Island where he had already purchased some acreage and built a home. He wished to establish some form of satellite Roe, McNeill office in that location and made various proposals to purchase back $150,000 worth of billings from his original client base plus extend the consulting period for a period of approximately 3-5 years.

...

(e) Matters came to a head on February 21, 1991, during the course of a telephone conversation in which Roe and McNeill once again discussed McNeill's intentions. At one point Roe stated that he would not sell clients to McNeill, to which McNeill replied words to these effect: "Who said anything about selling? Gary Wong (McNeill's solicitor) says I can have (take) them for nothing anyway." At trial McNeill attempted to retreat from this language, suggesting that his actual statement was closer to "Gary Wong told me that as long as I didn't solicit clients, they were free to follow me and me to accept them." I reject McNeill's evidence on this issue and accept Douglas Roe's evidence concerning the language used during that critical telephone conversation. I note, in any event, that Douglas Roe's version of the statement was that which McNeill adopted as true on examination for discovery and again at trial, on cross-examination.

(f) What McNeill was prepared to admit quite openly at trial was that in February 1991, he felt no legal obligation whatsoever to compensate Roe, McNeill for the loss of any client base. He said that at most he felt he had a "moral obligation" to do so. "But mostly", he testified, "I wanted the files. I wanted to buy peace."

(g) Douglas Roe was both stunned and enraged by McNeill's statement. The verbalization of this statement was a critical turning point in his relationship with McNeill. Thereafter, Roe placed no trust whatsoever in McNeill, a fact which McNeill accepted as quite understandable at trial. In Roe's view, McNeill was acting in an unprofessional fashion, contrary to the terms of the Agreement. In his view, the implications of his statement and the obvious threat posed to the client base could not be ignored.

...

...

...

(j) Douglas Roe was unaware of the fact that on approximately May 5, 1991, McNeill applied for a practice certificate and professional liability insurance, so as to practise from a new firm on Gabriola Island. Both applications described the practice as having been established on May 1, 1991. Nevertheless, during this period, negotiations continued and McNeill continued to meet with and communicate with clients.

...

(m) Through May and June 1991, McNeill held a number of meetings with various clients. As he put it at trial, "I was just trying to keep it together" as indeed he was. The evidence overwhelmingly supports the conclusion that rather than acting in Roe, McNeill's best interests, McNeill was doing everything he could (short of actively soliciting the clients) to "keep together" what he perceived to be his practice.

(n) While McNeill did not actively seek out clients or solicit their business, it probably came as no surprise to him that many of the clients were upset and unhappy with the developments at Roe, McNeill during the course of the tax season. Some of them sought him out and after an insistence on their part that they intended to leave Roe, McNeill in any event, he agreed to act on their behalf. Other former clients never reached him and had no idea about the general state of affairs at Roe, McNeill. In either case, all of his clients received a letter from him sometime in June or July of 1991. The letter was dated June 19, 1991 and was addressed to McNeill himself. The letter reads:

"Dear Mr. McNeill,

It is my desire to have you continue as my accountant. I am aware that in September 1988 you sold your West Vancouver accounting practice to Robert and Douglas Roe and you have been working with them under a contractual arrangement.

You have advised me that you were required under that contract not to provide professional accounting services to the public, for a period of five years, in West and North Vancouver, Vancouver and Burnaby. I understand that you were required to act in good faith to introduce me to the Roe brothers as your clients and to promote them to effect a smooth transition of your clients to them and you have encouraged me to remain a client of Roe, McNeill & Company.

Notwithstanding the advice you have given me to your contractual obligations to the Roe brothers and your move to the Island, it is nevertheless my desire to continue to have you act as my accountant. I do not wish to remain a client of Roe, McNeill & Company and in any event I will be leaving that firm. I confirm that this request that you act for me is made freely and voluntarily by me without any suggestion, comment, influence, inducement or any other communication from you suggesting that our accounting work be competed by you in preference to Douglas Roe.

It is my wish that all my files presently with Roe, McNeill & Company be transferred to your island office.

Yours truly,"

(o) A number of McNeill's former clients testified at trial. While they all confirmed receipt of the letter and swore that the contents of the letter were true, they also admitted that they had little or no understanding of the terms of the Agreement in dispute. They very much wanted McNeill to continue to act on their behalf and, in my view, they simply obliged him by signing and returning the letter. The letter is an obviously self-serving document designed to minimize any exposure to liability, flowing from the course of action underway. In my view, McNeill's actions constitute repeated and continual breaches of the utmost good faith clause.

[8] Paragraphs [20] to [26] of the British Columbia Court of Appeal's judgment described Mr. McNeill's continuous activities which only culminated with the breakup in 1991. Paragraph [20] actually summarizes this finding of both the trial judge and the Court of Appeal. It reads:

[20] The exchange on 21 February, 1991, seen in the context of the preceding two and a half years, could only be construed by the Roe brothers as the verbal expression of McNeill's continuing intention to ignore his duty to "act in the utmost good faith" to introduce the Roe brothers to clients, and "to promote the purchaser in all ways possible to effect a smooth and uninterrupted transfer".

[9] Moreover, the evidence as a whole and the unanimous findings of both Courts indicate that Mr. McNeill set out upon the course of actions that resulted in the damages from the first moment of the agreement. It was the way he conducted himself from the beginning. His object was to receive the remuneration from the agreement and, at the same time, to keep the clients and their business. Mr. McNeill's transactions with the Roe brothers and his subsequent acts constituted one entire transaction from beginning to end. Mr. McNeill chose to have his cake and eat it too. The surprising thing is that the Roe brothers allowed it to continue for as long as they did.

[10] All of Mr. McNeill's dealings with Roe & Company were intentional. The risk of liability from this course of action as the result of the judgments exhibited was not merely incidental, it was foreseeable, as was the risk of incurring each heading of damages and interest and costs. Correspondingly, Mr. McNeill also took the risk (and contracted with them) that Roe & Company might acquire all or most of his practice and clients.

[11] In the English version, Marceau, J., speaking for the entire panel of the Federal Court of Appeal, stated in paragraphs 8 to 12 inclusive of Jean-Camille Poulin v. Canada [1996] F.C.J. No. 960:

8 On the second point, however, and with respect, I would dispute the judge's position. In my view, the restrictive character of paragraph 18(1)(a) of the Act would be completely distorted if it could be argued that the wrongful prejudicial act for which an individual must pay damages need only have been committed in the course of carrying on a trade or profession in order for the payment to be deductible from the income gained from carrying on that trade or profession. In order for such a payment, which in itself, of course, is not made for the purpose of earning a profit, to be nonetheless considered to meet the requirement in paragraph 18(1)(a) of the Act, it must be seen as the unfortunate consequence of a risk that the taxpayer had to take and assume in order to carry on his trade or profession. And in order for the payment to be seen as such, it is an essential condition, I believe, that it be directly related to an act that was necessary in order to carry on the trade or profession and that it could potentially have been considered to have been performed improperly.

9 I have no problem in acknowledging that the question of the deductibility of the payment of damages cannot be made to depend on how serious the contractual fault was which resulted in liability. I do not believe that we can introduce moral concerns of this sort into the application of fiscal rules, and in any event we have no scale against which we can classify faults in terms of their gravity, since the civil liability that arises therefrom operates in the same manner in all cases. Nor do I believe that in order to distinguish between cases in which the paragraph 18(1)(a) condition is met and other cases we need to refer to any concept of public order [ordre public]. It seems to me that there is no more room for subjective concepts of social policy or public order in taxation matters than there is for moral concerns. Lastly, I do not consider it to be helpful, or even justified, to establish a set of factors, as has been suggested, such as the relationship between the event from which the liability arose and ordinary operations, the impossibility of avoiding the event, the protective measures taken to avert the consequences of the event, for example insurance, and the frequency with which similar events occurred, in order to determine whether we are really dealing with a risk that is sufficiently inherent in the carrying on of the trade or profession. The circumstances in which civil liability attaches have become so broad in present-day Canadian law, both in the law of Quebec and in the common law of the other provinces, that no one can completely protect himself or herself against the risk that his or her activities, whatever they be, will be found to have given rise to liability. In my view, the risk of having to pay damages for wrongful professional activities, in the private law sense, is inherent in carrying on any trade and any profession.

10 However, while it must be admitted that the commission of an involuntary fault in performing an act that is necessary for carrying on a trade or profession is inevitable, and accordingly that the obligation to pay compensation is a risk inherent in that activity, we cannot extend the idea to the commission of a delict in the civil law sense, to the commission of a reprehensible act committed deliberately with the aim of causing damage. The delictual act cannot in that case be considered as being necessary for carrying on the trade or profession. It was committed while carrying on the trade or profession, but it is completely foreign to it. There is therefore no ground for arguing that, in this case, the payment of an award of damages meets the requirement in paragraph 18(1)(a) of the Act.

(underlining supplied)

11 To return to the facts of this case, it appears that the appellant [sic], who had the burden of proving that he was entitled to the deduction, based his argument that the expense was connected with his profession solely on the judgment awarding damages. It is clear from reading that judgment that the appellant was found to be liable because he was a party to the false and fraudulent representations that had caused damage. The following recapitulation in that judgment is unequivocal on this point.

[TRANSLATION]

For all these reasons, the Court concludes that the plaintiffs would never have signed the offer Exhibit P-1 and would never have completed the transaction on December 7, 1977 without the false and fraudulent representations, positive, implicit and by omission, by the defendant Gestion (through its president, the defendant Lemaire) and the defendant Poulin, particularly as regards the solvency of the building's owner, André Gosselin, the revenues from the building, the expenses, the number of vacant apartments, etc. The plaintiffs are therefore entitled to demand damages in full and complete compensation for their loss. ...

12 Accordingly, what we have in this case is payment in satisfaction of a judgment awarding damages for a delict, an intentional unlawful act, a deliberate act committed with the aim of causing damage. For the reasons which I have attempted to explain, I am of the opinion that such a payment does not meet the condition in paragraph 18(1)(a) in order for the respondent to be able to deduct it from his income as an expense associated with carrying on his profession as a real estate broker, because it does not correspond to a risk that it was necessary for him to assume in order to carry on business as a real estate broker.

[12] Mr. McNeill's actions were not fraudulent. Thus, the question is whether they were reprehensible. The British Columbia Court of Appeal found that he had a duty to act in the utmost good faith both in the words of his contract and at law. Historically this duty was described in common law as one of uberrimae fidei. The British Columbia Court of Appeal found unanimously that Mr. McNeill failed in that duty. Thus, the question is whether that failure constitutes reprehensible conduct.

[13] Reprehensible conduct consists of a failure to come before the court with "clean hands" in the equitable sense of conduct. Such a failure must have an immediate and necessary relationship to Mr. McNeill's claim before this Court. In Miller and Miller v. F. Mendel Holdings Limited and Mitchell [1984] 2 W.W.R. 683 at 696, Wimmer, J. of the Saskatchewan Court of Queen's Bench expressed it this way:

... Under the "clean hands" doctrine, equity will refuse relief to any party who, in the matter of his claim, is himself tainted with fraud, misrepresentation, illegality or impropriety by reason of which his opponent has suffered a detriment of a kind rendering it unjust that the order sought should be made. ...

[14] In Mr. McNeill's case, he was found liable in damages for breach of contract which paid Lions Gate taxable income for services and which paid him the price of the sale of his practice as a chartered accountant. In addition, the British Columbia Court of Appeal found him liable for the same amounts for failing to act in the utmost good faith.

[15] Mr. McNeill now seeks to deduct these damages from his income as expenses incurred for the purposes of gaining or producing income from business. But to obtain that income (and possibly capital) he made misrepresentations and acted improperly towards the people he contracted with and, if he reported the funds he received in accordance with his activities, he also made misrepresentations and acted improperly towards Revenue Canada. To paraphrase paragraph [10] of the judgment of Marceau, J., Mr. McNeill was ordered to pay damages to Roe, McNeill & Company for the commission of reprehensible acts committed deliberately with the aim of causing damage to them; that is, not to transfer to them what they paid him for. That was found to be the case by two courts in British Columbia which awarded the damages against him which he now seeks to deduct. The acts were foreign to the conduct of a practice of the profession of chartered accountancy. Rather, they related to a breach of a contract to transfer his chartered accountancy practice.

[16] For these reasons the appeal is dismissed. The Respondent is awarded party and party costs.

Signed at Kamloops, British Columbia this 28^th day of October 1998.

"D.W. Beaubier"

J.T.C.C.