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Citation: 2005TCC267
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Date:20050413
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Docket: 2004-3109(IT)I
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BETWEEN:
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MICHAEL HEWLETT,
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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
Bell, J.
ISSUES
[1] The issues are:
1. Whether the Appellant
is entitled, for his 2001 taxation year, to deduct legal fees in
the amount of $25,839.53.
2. Whether the Appellant
is entitled, for his 2002 taxation year, to deduct:
(a) legal fees in the amount of
$2,859.77 in his 2002 taxation year; and
(b) the sum of $10,000, being payments
on account of an amount agreed upon in Minutes of Settlement of a
legal action.
FACTS
[2] The following facts are
allegations in the Notice of Appeal which have
been agreed to by the Respondent:
1. At all relevant times the
appellant was employed as a commission based salesman engaged in
the sale and lease of commercial real property. He has also been
involved in real estate developments as an investor.
2. In 1989 the appellant
invested $89,500 in Rosedale Place Limited Partnership a property
development in Edmonton, Alberta.
3. The appellants' investment in
this development was funded by two loans advanced to him by
Counsel Trust Company (subsequently Sun Life Trust Company) both
maturing on January 1, 1995.
4. The appellant defaulted on
the loans.
5. The property, Rosedale Place,
was sold in 1996 and after crediting the proceeds of the sale
there was a substantial balance outstanding due to the Sun Life
Trust Co., the successor to Counsel Trust. Sun Life commenced a
civil action against the appellant in December 2000 to recover
the debt due. The action against the appellant was settled in
2002 and the appellant was required to remit payments to Sun Life
as follows.
2002
$10000
2003
$10000
2004
$10000
2005
$ 7500
6. In defending the action
against Sun Life the appellant, Hewlett, incurred legal fees of
$25839.53 in and $2859.77 in 2002.
[3] The Appellant testified that he
acquired an interest in the Rosedale Place Limited Partnership in
1989 for a subscription price of $89,500 and agreed to pay same
in the following manner:
(a) Nil by way of down
payment.
(b) $61,250 on closing from the
proceeds of a loan obtained as arranged by the Limited
Partnership.
(c) $17,625 on closing from the
proceeds of a loan obtained from lenders as arranged by the
Limited Partnership.
(d) $10,625 by means of a promissory
note in favour of the Limited Partnership.
He also had interests in Gateway Square, a partnership with
three separate units, a unit in Oxford Village, a "murb" in
Oshawa, Ontario and a duplex in Toronto. The Appellant said he
bought the interest in the Rosedale Partnership because Edmonton
had the lowest vacancy rate in Canada and that the Province of
Alberta was putting money into the pulp and paper industry and
that the oil and gas industry was rebounding from the National
Energy Policy.
[4] The Appellant was not clear on how
he held an interest in a unit of the Rosedale Partnership but
indicated that he owned same. The Rosedale Place Limited
Partnership agreement defines the term "Allocated Unit" to
mean:
... the Ninety six (96) condominium units of the
Condominium Corporation and a proportionate undivided
tenancy-in-common interest in the common elements appurtenant to
the said units, as described in the Condominium Declaration
registered in respect of the Project, including the exclusive
right to use such other parts of the common elements appurtenant
to the units as may be specified in the Condominium
Declaration.
A later section of that agreement entitled "Allocated Units"
provided that:
The interests of the Limited Partners in the Limited
Partnership are divided into and limited to the Interests
pursuant to the Offering. A specific Condominium Unit is hereby
allocated to each Interest, as set forth in Schedule "A" attached
hereto. No additional interests shall be issued.
Although it was not in evidence, paragraph 17 of the
Appellant's Statement of Defence and Counterclaim in respect of
an action commenced by Sun Life Trust Company ("Sun Life") set
out that he had subscribed for and agreed to purchase Limited
Partnership Interest number 56 (condominium unit 405) for a
subscription price of $89,500.
[5] The Appellant stated that he
"forfeited on the notes". What he meant was that he discontinued
making payments thereon. He was referred to a provision of the
Partnership Agreement dealing with forfeiture upon default of
payment of a secured note. That section provides that each
limited Partner agreed that if any of the Partners remedied a
default of another Partner under either of the two secured notes
such Partner would have a charge on the Interest of the
defaulting Partner. That provision continued as follows:
Upon ten (10) days written notice to the defaulting Limited
Partner by any Partner, the Interests of the defaulting Limited
Partner shall, effective January 1 of the following year, be
forever surrendered and forfeited by the defaulting Limited
Partner to the Partners advancing the amount in default
...
[6] The Appellant then testified that
he received a notice from a company who had bought the notes,
demanding payment on same. He stated that that was Sun Life Trust
and that it was demanding the original amount minus proceeds of
sale, the unit allocated to the Appellant having been sold by his
creditor. The ensuing lawsuit against the Appellant by Sun Life
was settled by Minutes of Settlement dated May 17, 2002 under
which the Appellant agreed to pay Sun Life the sum of $37,500,
$10,000 of which was payable in that year. This is the $10,000
referred to in the description of Issues. All legal fees
described in the Issues were incurred and paid in connection with
that law suit.
APPELLANT'S AGENT'S SUBMISSIONS
[7] The Appellant's agent submitted
that the legal fees were incurred in settlement of a dispute
regarding a purchase for rental. He contended that the Appellant
continued to be a member of the Limited Partnership because he
had not been given proper notice under the aforesaid described
provision of the Limited Partnership Agreement requiring ten days
written notice. He submitted that the Appellant still has
entitlement to the income from the Partnership source in that he
still had a right in law to be a member of the Limited
Partnership and indeed was still a member of the Partnership.
[8] The agent's second submission was
that if the payments were not deductible as legal fees they were
"at-risk" amounts within the meaning of Section 96 of the
Income Tax Act ("Act") and were, therefore,
deductible. He submitted that this would apply to any amounts the
Appellant was called upon to pay, namely the legal fees and the
$37,500. The agent then submitted that the Appellant's adjusted
cost base of the Limited Partnership Interest was the total of
the payments he made. When quizzed on that point he said that
that would include all legal fees and the $37,500 settlement
figure.
[9] The agent's third submission was
that the Appellant's participation in the Rosedale Partnership
was an adventure in the nature of trade and that any loss was an
"ordinary business loss" which was deductible.
RESPONDENT'S SUBMISSIONS
[10] Respondent's counsel said that the
condominium unit was sold in 1996, that the deductions sought by
the Appellant were not claimed until 2001 and 2002 and that at
that time the Appellant had no Partnership Interest and
accordingly no business in that regard. He expanded that
submission by saying that the Appellant had no source of income
in respect of which any deduction in those two years could be
made.
[11] With respect to the "at-risk" argument,
Respondent's counsel said that the Appellant was not a Partner in
the years in question and could not succeed with his claim.
[12] Counsel then stated that the legal fees
were not incurred for the purpose of gaining or producing income
but were incurred to reduce his indebtedness obligation and were
not incurred in respect of an income producing activity. Finally,
he said that the payments were on account of capital to protect
or reduce his liability and, were accordingly, not
deductible.
ANALYSIS AND CONCLUSION
[13] No evidence was given as to how the
condominium unit in question was sold in 1996. No evidence was
given respecting the Appellant's interest in that unit. From
reading the Limited Partnership Agreement I determined, as set
out above, that a specific condominium unit was "allocated to
each interest". However, it is not disputed that the unit was
disposed of in some fashion in 1996. The deductions sought by the
Appellant were claimed in the 2001 and 2002 taxation years. There
is absolutely nothing to suggest that the Appellant had an
interest in the Partnership and an interest in a unit in those
two years. It follows, as submitted by Respondent's counsel, that
the Appellant had no business in respect of that unit and had no
source of income in respect of which any deduction in those years
could be made. Although the Appellant's agent submitted that the
Appellant still had a Partnership interest in those years, this
is wholly inconsistent with him having disposed of his interest
and/or the allocated condominium. An action brought by Sun Life
for the payment of the balance of monies owing by the Appellant
was settled. Therefore, the Appellant would have been unable to
succeed in a legal action claiming title to the very property
which had been sold and in respect of which his defaulted
payments gave rise to a lawsuit that had been settled.
[14] With regard to the Appellant's agent's
second submission, the amounts could not be deductible as
"at-risk" amounts within the meaning of Section 96 of the
Act since those amounts were determined some five and six
years before the claim for deduction of same in the taxation
years under examination.
[15] With respect to the agent's submission
that the Appellant's adjusted cost base of the Limited
Partnership Interest was the total of the payments he made,
namely the legal fees and the settled amount in the foregoing
lawsuit, no details were given and no submission was made. There
was, indeed, no argument to which the Respondent's counsel could
logically respond or which this Court could consider. The action
commenced by Sun Life was an action in debt, Sun Life being the
assignee of the creditor. The Appellant, in his "scatter gun"
approach switched, without any substantive argument, from income
to capital concepts. His main premise was that these amounts were
deductible either as business losses or as at-risk amounts or, in
accordance with his final submission, constituted losses in that
the Partnership participation was an adventure in the nature of
trade and that any loss was a deductible "ordinary business
loss". In this regard, no evidence whatsoever was given as to the
nature of the other properties purchased and the motive for
purchase of same. Indeed, the evidence indicated that the
Appellant had purchased the partnership unit for income from the
condominium. Further, the Notice of Appeal stated that the
Appellant had "invested" in the Rosedale Partnership.
[16] I agree with Respondent's counsel's
submissions that the legal fees were not incurred for the purpose
of gaining or producing income but were incurred to reduce the
Appellant's indebtedness obligation and not in respect of an
income producing activity. I agree also with counsel's further
statement that all payments were on account of capital to protect
or reduce his liability and, were accordingly, not
deductible.
[17] For the above reasons, the appeal is
dismissed.
Signed at Ottawa, Canada, this 13th day of April,
2005.
Bell, J.
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