Citation: 2008TCC109
Date: 20080221
Docket: 2007-1649(IT)I
BETWEEN:
ESTATE OF GORDON NOIK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Mogan D.J.
[1] The late Gordon Noik died on October 19, 2002
survived by his wife (Klara), a son (Gad) and a daughter (Miriam). Klara is the
second wife of the deceased (“Gordon”), and she is not related to Gad or
Miriam. At the time of death, Gordon owned a one-half interest in a number of
rental properties in North Bay, Ontario; and a one-half interest in the
matrimonial home he shared with Klara. Gordon’s sister Jean owned the other
half interest in the North Bay rental properties.
[2] In his will, Gordon
made the following dispositions: (i) he left to his daughter Miriam his
interest in seven rental properties in North Bay provided that she pay to Klara
$1,300 per month from the rents; and (ii) he left to Klara his interest in their
matrimonial home. Gordon nominated his son, Gad Noik, as the sole executor of
his will.
[3] The first fiscal
period of the Appellant Estate was from October 19, 2002 (date of death) to May
31, 2003. In computing income for that period, the Appellant deducted legal
expenses of $18,770. By Notice of Reassessment, the Minister of National
Revenue disallowed the deduction of $18,770; and the Appellant Estate has
appealed from that reassessment. The only issue in this appeal is whether all
or a portion of the $18,770 is deductible in computing income.
[4] Exhibit R-5 is a group
of legal bills submitted by a Toronto law firm to Gad Noik in his capacity as Executor of the Appellant
Estate. I will summarize certain particulars of the first four legal bills sent
during the first fiscal period of the Appellant Estate.
(i) December 19,
2002
Legal services
mainly for the
probate of
Gordon’s will
Fees,
disbursements and GST $1,459.62
(ii) February 25,
2003
Legal services
mainly for the
probate of
Gordon’s will
Fees,
disbursements and GST $1,276.70
(iii) April 28, 2003
Legal services
for copies of
probate and correspondence
with Klara’s
lawyer.
Fees,
disbursements and GST $1,033.79
(iv) May 28, 2003
Legal services
concerning dispute
with Klara and
subsequent
appearance
in Ontario Court
Fees,
disbursements and GST $15,846.28
[5] The dispute with
Klara (referred to in the fourth legal bill described above) was based on the provision
in paragraph 3(e) of Gordon’s will (Exhibit R-2) which stated:
to pay or transfer to my daughter MIRIAM
ROSEN, of the City of Herzlia, in the State of Israel, my interest in
the following properties which are all situated in the City of North Bay, in
the Province of Ontario:
470 Chippewa
Street West
187 Princess
Street West
389 Kingsway
Street
899 O’Brien Street
363
Landsdown Avenue
229 Victoria
Street West
233 Victoria
Street West
PROVIDED that my said daughter pay to my
wife, KLARA NOIK, $1,300.00 monthly from the rent derived from said properties.
After the daughter (Miriam) sold
the seven rental properties in North Bay, the Estate Trustee (Gad) informed Klara that she was no
longer entitled to the monthly payments of $1,300. Klara brought an action
against the Estate claiming her right to the monthly payments of $1,300 during
her (Klara’s) lifetime. Klara lost before the hearing judge in May 2003 but was
successful in the Ontario Court of Appeal in June 2004.
[6] The legal bill
dated May 28, 2003 (see item (iv) in paragraph 4 above) was based almost
exclusively on services rendered defending the Estate against Klara’s claim
before the hearing judge in May 2003. Gad Noik, as Executor of the Estate,
settled the legal bill of May 28, 2003 by making one lump sum payment of
$15,000. The aggregate legal expenses of $18,770 in dispute in this appeal
comprise the following amounts paid by the Executor of the Estate:
(i) Legal bill
December 19, 2002 $1,459.62
(ii) Legal bill
February 25, 2003 $1,276.70
(iii) Legal bill
April 28, 2003 $1,033.79
(iv) Legal bill May
28, 2003 $15,000.00
Total
$18,770.11
[7] Exhibit R-3 is the
T3 Trust Income Tax Return for the first fiscal period of the Estate from October
19, 2002 to May 31, 2003. Exhibit R-3 shows that the income of the Estate for
that fiscal period was derived from only four sources:
|
Taxable capital gains
|
$15,365
|
|
Investment Income (Interest)
|
2,341
|
|
Net Rental Income
|
5,960
|
|
CPP Death Benefit
|
2,094
|
|
Total Income
|
$25,760
|
[8] There is no
evidence that any part of the aggregate legal fees in dispute ($18,770) was
paid or incurred for the purpose of gaining or producing income from property.
Those legal fees were all paid to a Toronto law firm. Any legal fees paid in connection with
the disposition of the rental properties in North Bay were probably paid to a North Bay lawyer and, in any
event, would have been taken into account in determining the capital gain or
loss realized on the disposition of each property.
[9] There is evidence
that the aggregate legal fees in dispute were paid to obtain probate of Gordon
Noik’s will, and to defend an action brought by his widow (Klara) for monthly
payments of $1,300 under paragraph 3(e) of the will. Legal fees paid for those
purposes are not ordinarily deductible in computing income. In Pappas Estate
v. M.N.R., [1990] T.C.J. 601, Bonner J. considered whether certain legal
fees were deductible in computing estate income and stated:
It is clear that
the costs falling into the first two categories are not deductible. Indeed counsel
for the Appellant conceded that the portion of the fees of the estate
solicitors related to the securing of probate are not properly deductible.
Paragraph 18(1)(a) of the Income Tax Act provides:
18(1) In
computing the income of a taxpayer from a business or 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."
The taking of possession of the property
of the deceased, the obtaining of probate and, where required, supplementary or
foreign probate, the location and payment of creditors and the distribution of
the property of a deceased to persons beneficially entitled are actions quite
unrelated to the earning of income from a business or property. Such operations
are not commercial in nature. They do not involve the generation of fees or
other revenues payable to the estate and therefore are not carried on with a
view to earning a profit. From the standpoint of the estate such activities are
a cost of distributing the worldly possessions of the deceased in accordance
with his wishes.
[10] In my view, the
legal fees in dispute were payments on account of capital because they were
paid to obtain probate of Gordon’s will, and to defend certain property of the
estate. The appeal is dismissed.
Signed at Ottawa, Canada, this 21st day of February, 2008.
“M.A.Mogan”
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