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Citation: 2006TCC186
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Date: 20060329
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Docket: 2005-446(IT)I
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BETWEEN:
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ROBERT W. FLOOD,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Bowman, C.J.
[1] This appeal is from an assessment made under the Income Tax Act for the appellant's 2002 taxation year. It involves the cost of filing a notice of objection to an assessment of income tax issued against his mother's estate, of which he was the executor and a beneficiary. Mr. Robert Flood is a senior real estate and estates and trusts solicitor in Brockville, Ontario.
[2] The facts and arguments are set out with admirable succinctness and precision in the notice of appeal and the facts alleged are fully supported by Mr. Flood's oral testimony as well as the documentary evidence adduced.
[3] The notice of appeal in its entirety reads as follows:
FACTS:
1. Robert W. Flood is the executor and trustee of the Estate of Irene Flood; Irene Flood (mother of Robert W. Flood) died on July 10, 1998.
2. January 19, 1999: Robert W. Flood, as the Executor and Trustee of the Estate of Irene Flood filed the 1998 T-1 (Final) Income Tax Return for Irene Flood; this Income Tax Return reported a capital gain arising from the deemed disposition) on the death Irene Flood) of real property comprised of approximately 32.4 acres of vacant land. The deemed proceeds were reported as $71,000.00 (arrived at by averaging the value from a letter of opinion provided by a Real Estate Broker and the assessed value of the property).
3. March 15, 1999: Notice of Assessment issued for the above-noted Income Tax Return.
4. October 6, 1999: Robert W. Flood, as executor of the estate of Irene Flood applied for a Clearance Certificate under Section 159 of the Income Tax Act.
5. January 10, 2001: Robert W. Flood telephoned CCRA inquiring as to the status of the Clearance Certificate which had been requested on October 6, 1999; CCRA informed Robert W. Flood that CCRA had obtained an internal appraisal of the real property which placed a value of $500,000.00 on the real property and that the file had been referred to Special Investigations to consider laying a charge of Tax Evasion against Robert W. Flood.
6. January 26, 2001: Robert W. Flood obtained an appraisal of the real property which placed a value of $260,000.00 on the real property.
7. January 31, 2001:Robert W. Flood retained a lawyer (Charles M. Rotenberg of the law firm Rasmussen Starr Ruddy).
8. Commencing January 31, 2001, Charles M. Rotenberg through correspondence, telephone calls and meetings communicated with CCRA on the basis that the tax issue was not one of tax evasion, but one of Fair Market Value (FMV) of the real property to be dealt with as a civil matter by establishing a FMV for the real property which would be acceptable to both CCRA and the taxpayer. If no agreement could be reached as to the FMV, a Notice of Reassessment would be issued and the civil procedure followed to a conclusion as to the FMV. CCRA decided to obtain yet another appraisal, this time from an outside appraiser.
9. January 25, 2002: Outside appraisal obtained by CCRA placing a FMV of $200,000.00 on the real property.
10. March 11, 2002: Outside appraiser who provided appraisal of $200,000.00, after meeting with CCRA, wrote a letter to CCRA saying the FMV might be $260,000.00.
11. (a) April 24, 2002: Rasmussen Starr Ruddy (Charles M. Rotenberg) issued a Statement of Account to the Estate of Irene Flood for professional services rendered between July 30, 2001 and April 17, 2002, in the amount of $3,808.40. This Statement of Account contained the following statement:
"In accordance with subsection 60(o) of the Income Tax Act, these fees are deductible in the year in which they are paid. These fees are deductible by whoever pays the fees, even if that is not the taxpayer whose taxes are under appeal."
(b) The account dated April 24, 2002, was paid by Robert W. Flood.
12. April 29, 2002: Summons issued charging Robert W. Flood with evading Federal Income Tax under paragraph 239(1)(d) of the Income Tax Act by understating the taxable capital gain on the deemed disposition of the real property reported on the 1998 T-1 Income Tax Return of Irene Flood. The criminal charge against Robert W. Flood for Tax Evasion was dismissed on April 8, 2004; CCRA did not appeal the decision. The Criminal Court made no finding as to the FMV of the real property. The Judgement points out that the establishment of the FMV is a matter to be determined by the Civil Process.
13. May 29, 2002: Notice of Reassessment issued for 1998 T-1 Income Tax Return of Irene Flood revising the deemed proceeds upwards to $260,000.00.
14. July 2, 2002: Charles M. Rotenberg filed a Notice of Objection to Reassessment dated May 29, 2002.
15. (a) September 15, 2002: Rasmussen Starr Ruddy (Charles M. Rotenberg) issued a Statement of Account to the Estate of Irene Flood for professional services rendered between April 19, 2002, and August 16, 2002, in the amount of $5,301.36. This Statement of Account contained the following statement:
"In accordance with subsection 60(0) of the Income Tax Act, these fees are deductible in the year in which they are paid. These fees are deductible by whoever pays the fees, even if that is not the taxpayer whose taxes are under appeal."
(b) The account dated September 15, 2002, was paid by Robert W. Flood.
16. April 16, 2003: The 2002 T-1 Income Tax Return of Robert W. Flood was filed, claiming a deduction of $9,109.76 for the legal accounts of Rasmussen Starr Ruddy (Charles M. Rotenberg) dated April 24, 2002 and September 15, 2002. The notice of Assessment for this Income Tax Return is dated May 15, 2003.
17. (a) February 26, 2004: Notice of Reassessment issued for the 2002 T-1 Income Tax Return of Robert W. Flood. The Notice of Reassessment contains the following statement:
"We have made an adjustment according to our recent letter."
(b) A letter from CCRA to Robert W. Flood, dated February 18, 2004 contains the following:
"We have adjusted your claim from $9,109.76 to $0.00 for the following reason(s):
- To disallow your claim for legal fees in the relation to the preparation and institution of an objection to an assessment of income tax. According to subsection 60(o) of the Income Tax Act, legal fees are only deductible if they are incurred for the purpose of gaining or producing income from a business or property and are not outlays of a capital nature. Therefore, legal fees incurred for the purpose of filing an objection to an assessment of income on an estate's return would not be deductible by you. However, the fees may be deductible on the estate's return.
18. April 6, 2004: Robert W. Flood filed a Notice of Objection to the Notice of Reassessment dated February 26, 2004.
19. October 28, 2004: Letter from CCRA to Robert W. Flood containing the following statements:
"With respect to the legal fees paid, it is our position that they are not deductible by you."
"The statement of account received from your lawyer, Mr. Rotenberg, indicates conversations with Mr. O'Neill, Chief of Investigations, Kingston Tax Services Office. I talked to Mr. O'Neill, and he advised the estate had been prosecuted and he had dealings with Mr. Rotenberg in this regard."
"If the estate incurred eligible legal costs to initiate a notice of objection, it is our position these costs would be deductible by the estate and not by you personally."
20. (a) November 22, 2004: Letter from CCRA (Belleville Tax Services Office) to Robert W. Flood stating:
"As a result of our review, we have varied the assessment for the year 2000. We will issue under separate cover the "Notices of Reassessment" that explains our decision."
(b) The reference in the above-noted letter to the year 2000 appears to be an error; it should be 2002.
(c) The reference in the above-noted letter to a variance in the assessment appears to be a reference to an unrelated matter (Foreign Tax Credit) in the Notice of Objection. The claim for a foreign tax credit was allowed and is no longer an issue.
21. November 22, 2004: Notice of Reassessment issued stating:
"We will send you an explanation of this reassessment under separate cover within 10 days from the date of this notice."
22. December 16, 2004: Robert W. Flood telephoned CCRA requesting the explanation referred to in the Notice of Reassessment dated November 22, 2004; CCRA indicated that the explanation should be received in 5 − 10 working days. To date, the only explanation received is:
No change to total income previously assessed.
REASONS FOR APPEALING:
1. (a) The CCRA letter dated February 18, 2004, addressed to Robert W. Flood states that the claim for legal fees paid in relation to the preparation and institution of an objection to an assessment of income tax is disallowed because:
"According to subsection 60(o) of the Income Tax Act, legal fees are only deductible if they are incurred for the purpose of gaining or producing income from a business or property and are not outlays of a capital nature."
(b) There is nothing in Section 60(o) of the Income Tax Act which even remotely resembles the above statement of the provisions of Section 60(o).
2. (a) The CCRA letter dated October 28, 2004, addressed to Robert W. Flood states:
"If the estate incurred eligible legal costs to initiate a notice of objection, it is our position these costs would be deductible by the estate and not by you personally."
(b) Section 60(o)(i) of the Income Tax Act permits a taxpayer to deduct fees and expenses paid for by the taxpayer in relation to an assessment of tax, interest and penalties under the Act. Section 60(o)(i) does not require that the amounts paid for by taxpayer must relate to that taxpayer's assessment. Section 60(o)(i) permits Robert W. Flood to claim the deduction on his tax return even if the fees and expenses relate to the assessment of the tax return of Irene Flood.
3. (a) The CCRA letter dated October 28, 2004, addressed to Robert W. Flood states:
"The statement of account received from your lawyer, Mr. Rotenberg, indicates conversations with Noel O'Neill, Chief of Investigations, Kingston Tax Services Office. I talked to Mr. O'Neill, and he advised the estate had been prosecuted and he had dealings with Mr. Rotenberg in this regard."
(b) The estate was not prosecuted; Robert W. Flood was prosecuted for tax evasion.
(c) If the legal accounts are not deductible by Robert W. Flood, under Section 60(o)(i), they are deductible by Robert W. Flood as expenses laid out to earn income from a business.
(d) Robert W. Flood, Barrister & Solicitor, carries on a law practice (his business) as a sole practitioner. In order to earn income from the practice of law, Robert W. Flood is required to be a member in good standing with the Law Society of Upper Canada. Under the Law Society of Upper Canada Rules of Professional Conduct, the commission of a criminal act, such as tax evasion, would be considered conduct unbecoming a lawyer and could result in Robert W. Flood being disbarred and his membership in the Law Society of Upper Canada revoked. Such disciplinary action would prevent Robert W. Flood from earning income from the practice of law. It was critical that Robert W. Flood defend himself against the criminal charge of tax evasion. The legal expenses incurred in defending against the criminal charge of tax evasion were laid out for the purpose of maintaining the right of Robert W. Flood to continue to earn income from the practice of law.
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Robert W. Flood February 8, 2005
[4] Paragraph 60(o) of the Income Tax Act reads:
(o) legal [or other] expenses [of objection or appeal] - amounts paid by the taxpayer in the year in respect of fees or expenses incurred in preparing, instituting or prosecuting an objection to, or an appeal in relation to,
(i) an assessment of tax, interest or penalties under this Act or an Act of a province that imposes a tax similar to the tax imposed under this Act,
(ii) a decision of the Canada Employment and Immigration Commission, the Canada Employment and Insurance Commission, a board of referees or an umpire under the Unemployment Insurance Act or the Employment Insurance Act,
(iii) an assessment of any income tax deductible by the taxpayer under section 126 or any interest or penalty with respect thereto, or
(iv) an assessment or a decision made under the Canada Pension Plan or a provincial pension plan as defined in section 3 of that Act;
[5] The Crown's position is that the only person who can deduct the costs of objecting to an assessment under paragraph 60(o) is the person against whom the assessment was issued. I think this is an unnecessarily narrow view of the provision.
[6] For one thing, paragraph 60(o) contains no such restriction. I think it would be unreasonable to permit a stranger or volunteer who had no pecuniary interest to deduct the fees of contesting someone else's assessment. However, if someone has a pecuniary or other interest in the outcome that was not too remote, I see no reason for prohibiting such a person from deducting this expense insured by him or her. I note for example the comment in Sherman's edition of the Income Tax Act:
Note also that 60(o)(i) does not say "an assessment of the taxpayer". Therefore, amounts paid by a director or shareholder to contest a corporation's assessment should still be deductible. See Theodore Sherman (Walbi Trust), [1976] C.T.C. 2207 (TRB).
Legal fees may also be deductible from business or property income under generally accepted accounting principles. See Notes to 9(1). For other provisions allowing deduction of (or credit for) specific legal costs, see 8(1)(b), 89(1)(f), 20(1)(e), 20(1)(cc), 60(o.1), 62(3)(f), 118.2(2)(1.1)(i) and 152(1.2). See Interpretation Bulletin IT-99R5.
[7] Quite apart from paragraph 60(o) it is clear that Mr. Flood can deduct these expenses as an ordinary business expense. It is not suggested that they are a capital expenditure. They arise directly out of his work as an estates lawyer. What is attacked under this assessment as well as in the ill-conceived prosecution is not only a valuation practice that he has followed for years but also his standing and integrity as a member of the bar. See St-Germain v. M.N.R., 83 DTC 36. The filing of a notice of objection was an essential part of defending himself against the charge of tax evasion. I note in passing that the legal expenses of retaining criminal counsel were allowed as deductions.
[8] The appeal is allowed with costs and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment to allow the deduction of $9,109.76.
Signed at Ottawa, Canada, this 29th day of March 2006.
Bowman, C.J.
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