Dockets: 2008-2256(IT)I
2008-2260(IT)I
BETWEEN:
AUDREY J. ARCHIBALD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
IAN G. ARCHIBALD,
Appellant,
and
HER MAJESTY THE QUEEN.
Respondent.
____________________________________________________________________
Appeals heard on April 1, 2009 at Edmonton, Alberta
By: The Honourable
Justice Judith Woods
Appearances:
|
For the Appellants:
|
Ian
G. Archibald
|
|
Counsel for the Respondent:
|
Holly A. Peterson
|
____________________________________________________________________
JUDGMENT
The
appeals with respect to assessments made under the Income Tax Act
for the 2004 taxation year are allowed,
and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on
the basis that the legal fees claimed are
deductible in computing a partnership loss.
The
appellants are entitled to their costs, if any.
Signed at Ottawa, Canada this 22nd
day of April 2009.
“J. Woods”
Citation: 2009 TCC 215
Date: 20090422
Dockets: 2008-2256(IT)I
2008-2260(IT)I
BETWEEN:
AUDREY J. ARCHIBALD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
IAN G. ARCHIBALD,
Appellant,
and
HER MAJESTY THE QUEEN.
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1] These are appeals from income tax assessments issued
to Ian and Audrey Archibald for the 2004 taxation year. The issue concerns the
deductibility of legal fees relating to a new business venture.
[2] Mr. Archibald and his wife have carried on business in
partnership for many years, with profits being shared 75 percent to Mr.
Archibald and 25 percent to Mrs. Archibald. Although the evidence as to the activities
of the partnership was not as clear as I would like, it appears that partnership
income was derived from consulting activities carried on by Mr. Archibald.
[3] In their income tax returns for the 2004 taxation
year, the appellants reported aggregate net losses from the partnership in the
amount of $18,372.09. Included in this loss was a deduction for legal fees in
the amount of $14,216.21.
[4] The appellants submit that the legal fees are
deductible as an expense incurred by the partnership to earn income.
[5] The legal fees were billed by a law firm in connection
with advice and preparation of documents in relation to the issuance of
securities to investors in a new corporation. From my understanding, it was
proposed that the funds be used by the new corporation to purchase existing
resort condominiums and market fractional interests in them. A major part of
the legal work was the preparation of an offering memorandum for the sale of
the securities.
[6] Mr.
Archibald testified that it was expected
that the partnership would earn income from the venture in two ways, by earning
commissions on the sale of the securities and by compensation for managing the corporation.
[7] As it
turned out, sufficient investors could
not be found and the venture was abandoned.
[8] The respondent submits that the legal fees are not
deductible in computing income from the partnership because the fees were
incurred by the corporation and not the partnership.
Analysis
[9] Whether
the legal fees were incurred by the partnership or not depends on the legal
nature of the arrangement between the partners and the corporation. This was a
small venture and the arrangement was not documented. Accordingly, the nature
of the arrangement must be determined by implication based on the surrounding
circumstances.
[10] My conclusion is that the appellants have established
on a balance of probabilities that the legal expenses were incurred by the
partnership.
[11] It is clear that Mr. Archibald was legally obligated to
pay the legal fees. The invoices were issued to him and a judgment for unpaid
fees was issued against him. The new corporation, which had just been
incorporated by the law firm, was also listed on one of the invoices and on the
judgment but this does not remove Mr. Archibald’s liability. The evidence also
indicates that the law firm placed a lien on the family home to collect the
debt.
[12] I will
first consider whether Mr. Archibald or the partnership incurred the fees. Counsel for the Minister argued that there was
insufficient evidence linking the partnership to the expense.
[13] At first
blush this argument has merit because none of the documentation is in the name
of the partners or the partnership. Further, Mr. Archibald testified that he likely would have received a salary
from the corporation. From a legal perspective, the notion of “salary” is
inconsistent with business income earned by a partnership.
[14] Despite
these difficulties, I have concluded that
Mr. Archibald did incur the legal fees on behalf of the partnership based on
the evidence as a whole.
[15] According to Mr. Archibald’s testimony, which was not
challenged, all of his varied business activities have been carried on on behalf
of the partnership. There is no reason to think that income in this venture
that was generated from Mr. Archibald’s efforts would be any different.
[16] Mr. Archibald referred in his testimony to potentially
receiving a salary from the new corporation. This is not consistent with the
partnership earning income because salary could only be paid to an individual
as an employee.
[17] My impression from Mr. Archibald’s testimony is that
he was trying to convey that the partnership would earn income from services
provided by him. I do not think that he was using the term “salary” in a legal
sense.
[18] I conclude that the legal fees were not incurred by
Mr. Archibald personally but on behalf of the partnership.
[19] It remains to be considered whether the partnership
incurred the fees on its own behalf or on behalf of the corporation.
[20] From a common sense perspective of the arrangement, I
conclude that the partnership incurred the fees on its own behalf, with a
contingent right to be reimbursed by the corporation if the venture proceeded.
[21] The new
venture was likely a highly risky one from the partnership’s perspective. It appears to have been a new type of venture for Mr.
Archibald, and the legal fees were incurred prior to his knowing whether
sufficient investors would be interested.
[22] The draft
offering memorandum contemplates the payment of legal fees. It is likely that the legal fees would have been reimbursed
by the corporation to the partnership if the venture had proceeded. Unless the
securities’ issue proceeded, however, the partnership was not expecting to be reimbursed.
[23] I conclude, then, that the fees were incurred by the
partnership on its own behalf.
[24] This is sufficient to dispose of the appeals. I would
mention that there were other arguments raised in the reply, but these were not
pursued at the hearing. The arguments were that the fees were not laid out to
earn income and that they were on account of capital. As these arguments were
not pursued, it is not necessary for me to consider them here.
[25] In the result, the appeals will be allowed, and the
assessments will be referred back to the Minister for reassessment on the basis
that the legal fees claimed are deductible in computing the partnership loss.
[26] The appellants are entitled to their costs, if any.
Signed at Ottawa, Canada this 22nd day of April 2009.
“J. Woods”
CITATION: 2009 TCC 215
COURT FILE NOs.: 2008-2256(IT)I
2008-2260(IT)I
STYLES OF CAUSE: AUDREY J. ARCHIBALD v.
HER
MAJESTY THE QUEEN and
IAN
G. ARCHIBALD v.
HER
MAJESTY THE QUEEN
PLACE OF HEARING: Edmonton,
Alberta
DATE OF HEARING: April 1, 2009
REASONS FOR JUDGMENT BY: The
Honourable Justice J. Woods
DATE OF JUDGMENT: April 22, 2009
APPEARANCES:
|
For the
Appellants:
|
Ian G. Archibald
|
|
Counsel for the
Respondent:
|
Holly A. Peterson
|
COUNSEL OF RECORD:
For the Appellant:
Name: n/a
Firm:
For the
Respondent: John H. Sims, Q.C.
Deputy
Attorney General of Canada
Ottawa, Canada
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