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Citation: 2005TCC336
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Date: 20050524
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Docket: 2004-3391(IT)I
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BETWEEN:
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CHARLES ROBERT ROGERS,
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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
Hershfield
J.
[1] The
Minister of National Revenue (the "Minister") assessed the
Appellant's 2002 taxation year and denied $37,590.00 of legal expenses claimed.
The assessment was on the basis that such expenses were not incurred for the
purpose of earning income from a business or property.
[2] The
legal fees were incurred in respect of a lawsuit for wrongful dismissal and
wages owed. The Appellant attempted to claim the expenses as they were incurred
and paid, namely, in the years 1998 through 2002 but he was told to wait until
the lawsuit was disposed of. The case was finally disposed of in 2002. The
Appellant lost his suit.
[3] The
Reply to the Notice of Appeal includes the following assumptions relied on by
the Minister in confirming the assessment denying the expenses claimed:
(a) the Appellant did
not establish that his employer or former employer owed the Appellant any
amounts;
(b) the legal fees
claimed were not incurred to collect or establish a right to salary or wages
the Appellant's employer or former employer owed him;
(c) the legal fees
were not incurred for the purpose of gaining or producing income from a
business or property;
(d) the legal fees
were not paid by the Appellant in the year to collect or establish a right to
an amount of a benefit under a pension fund or plan in respect of the
employment of the Appellant; and
(e) the legal fees
were not paid by the Appellant in the year to collect or establish the right to
an amount of a retiring allowance of the Appellant.
[4] One
or both of the first two of these assumptions were apparently meant to suggest
that the burden of proof is on the Appellant to establish that he was in fact
an employee of the union. Regardless that these assumptions do not clearly make
that point, it is clear from Respondent's counsel's argument that he is of the
view that that was the basis for the assessment and that the Respondent can in
any event, rely on paragraph 8(1)(b) of the Income Tax Act (the
"Act") in denying the Appellant's claim if based on the
evidence at the hearing, I find that the Appellant did not perform services in
an employment capacity.
The Respondent also relies on paragraph 60(o.1) of the Act to the extent
necessary to deny the deduction of legal expenses incurred in respect of the
wrongful dismissal aspect of the action. On this point I note that damages for
wrongful dismissal are a "retiring allowance" under the Act and legal fees incurred to establish a
right to a retiring allowance are only deductible under paragraph 60(o.1) to
offset retiring allowance and pension fund receipts. In a failed action for
wrongful dismissal then the deductible amount will be reduced to nil where
there are no such amounts received. Respondent's position that the Appellant
cannot succeed under that paragraph of the Act appears correct as there
is no assertion of any retirement allowance or pension fund receipts.
Accordingly, the appeal hangs on the deduction being allowed under paragraph 8(1)(b)
of the Act.
[5] Paragraph
8(1)(b) of the Act provides as follows:
8. (1) In computing a
taxpayer's income for a taxation year from an office or employment, there may
be deducted such of the following amounts as are wholly applicable to that
source or such part of the following amounts as may reasonably be regarded as
applicable thereto:
. . .
(b) amounts
paid by the taxpayer in the year as or on account of legal expenses incurred by
the taxpayer to collect or establish a right to salary or wages owed to the
taxpayer by the employer or former employer of the taxpayer.
[6] Respondent's
counsel argues that to get the benefit of the foregoing provision an employment
relationship must be established. While at first glance that does appear to be
the requirement in the section, in fact, in the context of the case at bar and
a common sense reading of the provision, such construction is unwarranted in my
view. In the case at bar the Appellant has brought suit claiming wages qua
employee. His claim was dismissed but failure to establish that wage amounts were
owed under the asserted terms of even an alleged contract of employment cannot be
determinative of the deductibility of the legal expenses incurred. The
provision clearly allows for the deduction of legal expenses incurred to
establish a right to amounts owed to the taxpayer by an employer which must,
where the right is dependent on there being an employment relationship, include
legal expenses incurred to establish that relationship where it is in issue.
The question as to a right to an amount owed as wages by an "employer"
is inextricably tied to the question as to whether there is a contract of
employment where that is the basis for the non-payment of the amount being
pursued as wages. Further, and in any event, the Appellant actually was an
employee of the asserted debtor and the civil suit was brought to recognize
that the terms of employment were that the worker be paid as a full-time
employee for a 40-hour week at an agreed rate per hour. He lost that action but
is nonetheless entitled to deduct the expenses claimed as an employee incurring
legal fees seeking to establish his right to the wages claimed.
[7] Counsel
for the Respondent has argued against these findings respecting the application
of paragraph 8(1)(a), but before dealing with his arguments, the
following brief description of the facts leading to the civil dispute will be
helpful in terms of providing the context in which paragraph 8(1)(b) is
being considered.
[8] The
Appellant testified that he had acted in a volunteer capacity as the union
organizer for a union identified at the hearing. At some point during the course
of volunteering, the Appellant was paid as an employee for his services on
rather loose terms but he asserts that he was told that he would be paid, on a
full‑time 40-hour per week basis, a union rate per hour for the work he
was performing if the union received funding. The Appellant believed that the
required funds had been received by the union and that his work was then performed
under a contract of full-time employment for the wage promised. However the
union denied that a contract for full-time employment at the union rate relied
on by the Appellant ever became operative and it never paid the Appellant the
wages due under that contract. The Appellant sued for the unpaid wages for work
performed on the basis of a contract he believed had become operative. Further,
as his services were terminated, he claimed wrongful dismissal on the basis of
wrongful termination of his asserted full-time contract of employment.
[9] Respondent's
counsel argued that the Appellant was never an employee. The basis of the
argument was that the civil suit dismissed the claim for wrongful dismissal which
it is argued should be taken to confirm there was no employment to be
terminated. That is not the suggestion to be drawn from the civil suit. The
civil suit found that there was no full-time employment in respect of which a
claim for wrongful dismissal could be based. Also in the civil suit the judge
clearly acknowledged wage payments had been made by the union for services performed
as an employee even though he sharply criticized same as having been paid as
part of an Employment Insurance scheme. Still, there was an employment relationship
recognized. If that is not sufficient, I have in evidence a copy of a T4 issued
by the union for wages paid by it to, and declared by, the Appellant. The
uncontradicted evidence is that these amounts were paid to the Appellant for
employment services. By issuing a T4 the union acknowledged the Appellant as an
employee. It denied only that such employment was on the terms claimed by the
Appellant. Had the civil action upheld the full-time nature of the employment
at the union rate, the union would have had a substantial unpaid wage debt
owing to the Appellant employee. Legal fees were incurred to establish his
right to such unpaid wages. The failure of the Appellant to succeed in his
action does not adversely affect his right to deduct such fees. This is clearly
established in Loo v. Canada and in Fortin
v. Canada.
[10] Before commenting on those cases, it may be helpful, in deference to
Respondent's counsel's arguments, to consider briefly the Statement of Claim
filed (the Claim) and Reasons for Judgment given by Justice Brooker of the
Alberta Court of Queen's Bench (Justice Brooker's Reasons) in respect of the
Appellant's civil suit.
The Claim asserts that the Appellant performed his duties as a full-time
employee and was not paid the salary owed to him. It asserts as well that the
Appellant was terminated from the employment. The Appellant, based on these
assertions, claimed wages/salary owing in the amount of $52,400.00 and damages
for wrongful dismissal in the amount of $4,366.00. Although the action failed, Justice
Brooker's Reasons do not, as argued by Respondent's counsel, support a finding
that the Judgment was that the Appellant was not an employee.
[11] Respondent's counsel referred me to several portions of Justice
Brooker's Reasons. For example, Respondent's counsel referred me to the
following sentence in the first paragraph of those Reasons: "This is an
action for damages for wrongful dismissal". If Respondent's counsel wants
me to take this statement and the dismissal of the Claim as definitive of there
being no claim for lost wages so as to require me to consider this case only as
involving a retiring allowance, then I am at a loss as it is abundantly clear from
Justice Brooker's Reasons that he made a finding, as he was required to do in
light of the express language in the Claim, that the union was not liable for
unpaid wages as per the asserted terms of the Appellant's employment. To dismiss
that claim (as well as the wrongful dismissal claim), the judgment made a
finding that there was not sufficient proof of a full-time engagement on the
terms asserted so as to warrant allowing the Claim as pleaded. At page 7 of
Justice Brooker's Reasons he states:
However, the issue
before me is relatively simple – did Jones, on behalf of the union local hire
Rogers as its full-time organizer effective May 1st, 1995 at a rate of
journeymen industrial or commercial pay for 40 hours a week? Reluctantly, I
cannot conclude that it did. The plaintiff has the burden of proving the
existence of this contract and its terms. The standard of proof is on a balance
of probabilities. The plaintiff has not so satisfied me.
[12] The closing paragraph of Justice Brooker's Reasons repeats this finding
in very similar terms and concludes "and accordingly I must dismiss the
Plaintiff's action with costs". I am satisfied that this dismissal is not
inconsistent with a finding that the Appellant was an employee who incurred
legal costs in a bona fide action for wages owed.
[13] While the bona fideness of the claim may not be relevant I also
note here that there is no question in my mind based on his testimony at the
hearing and the pursuit of his claim at some considerable cost, that the
Appellant honestly believed he was employed by the union on terms that would
allow his claim for unpaid wages to succeed.
However what is clear from Justice Brooker's Reasons is that there were
contradictions in the Appellant's case as well as some inappropriate dealings
relating to collecting EI benefits promoted by the union and seemingly enjoyed
by the Appellant that did not assist the Appellant in his cause. Aside from
these factors, Justice Brooker accepted the union's version of events which was
(as set out at pages 5 and 6 of his Reasons) that the union recognized the
Appellant's services performed initially as a volunteer and later on the
understanding that the union would pay him as much as it could afford from
time-to-time. This is an acknowledgement of an employment relationship and work
performed in an employment capacity. As to what the union could afford to pay,
the union, as suggested in Justice Brooker's Reasons, seems to have admitted
that a recommendation to pay the Appellant on the asserted terms was
promised on the condition of there being a grant renewal but there was no
admission or evidence that such a renewal occurred. All this is to confirm that
there was a claim being made to establish the Appellant's entitlement, as an
employee having worked for the union in that capacity, to a particular wage
amount owing pursuant to the asserted terms of a contract. Legal costs to
pursue such claim are deductible under paragraph 8(1)(b) of the Act even
if the claim fails as confirmed in Loo v. Canada.
[14] The Appellant can also rely on Fortin in this regard. In that
case Justice Dussault of this Court briefly notes the legislative history
of the subject provision at paragraph 16. I need not repeat the reference except
to say the pre-1990 version of the provision made winning the claim for wages
an issue. This was the basis for the department's administrative position that
the legal expenses could not be expensed until the results of the suit for
wages were known. If the suit was successful the taxpayer would be allowed to
go back to previous years to claim the legal expenses paid in those years.
Since the expense is only deductible in the year paid, the subject provision
would, but for this administrative practice, inevitably deny the very expense
it sought to allow unless payment of legal fees were held off until the wage
claim was disposed of – an option likely not made available by many lawyers
(who would have to consider their own overhead and bad debt issues).
[15] Justice Dussault confirms in his analysis at paragraphs 20 through 22
that, post-1989, the amended provision does not require a successful action for
wages – only a claim to establish a right to wages need be brought to permit a
deduction under the subject provision. While he does envision a limitation
based on this Court being satisfied that work was done in an employment
capacity in respect of which a wage claim could be based, that reservation does
not create a bar in the present case as I am satisfied on the evidence that work
was done in an employment capacity as per the findings of Justice Brooker. Further,
I suggest that the limitation suggested by Justice Dussault was not meant to be
taken as applicable to all situations. It is a
limitation suggested in this Court's decision in Turner-Lienaux v. Canada.
However, that case itself does not stand for such a broad sweeping principle
even as affirmed by the Federal Court of Appeal. In that case no work was
asserted to have been performed. The denial of the deduction of legal expenses
was grounded in the fact that there was no claim that work was done so there
was no claim for wages – the claim was for something else: for breach of
contract to give a promotion or for breach of duty to apply proper standards in
giving promotions but there was no action for wages as required by the section. What principles
might be drawn from that case where there has been an assertion that work was
done in an employment capacity? What principles can be drawn where there has been
an assertion that the terms of employment were to be paid for a worker's availability
as opposed to work done or where the issue was whether work was done qua
volunteer or qua employee? One might assert work was done but fail to
bring proper proof so as to lose the case but still there may well have been an
action brought to establish a right to wages. One might assert wages are owed based
on availability even if work is not done but fail to bring proper proof of the nature
and terms of the engagement so as to lose the case but still there may well
have been an action brought to establish a right to wages. Or, one might assert
an employment relationship carried-out for wages as opposed to a volunteer relationship
but fail to bring proper proof of the nature and terms of the engagement so as
to lose the case but still there may well have been an action brought to
establish a right to wages. In the latter case the action brought may fail on
the basis that there was no employment per se but it is hard to imagine
that the action was not brought to establish a right to wages owing. That would
be the case in the present appeal if Justice Brooker had found the Appellant
not to be an employee at all but rather just a volunteer. Indeed this is what
Respondent's counsel seems to want me to take from Justice Brooker's Reasons
but even if I accepted that as Justice Brooker's finding (which I do not), I do
not see Justice Dussault's reservation (that would limit the legal expense
deduction to situations where work has been performed in an employment capacity)
as applicable to anything other than the situation he was contemplating when he
prescribed that limitation. He cited with approval paragraph 38 in Turner-Lienaux
(T.C.C.) where Justice Margeson envisioned a broader view which is
simply that there may be an action for wages that fails because of improper
evidence or insufficient proof in respect of which legal expenses were incurred
to establish a right to a salary. Similarly, in Loo the Federal Court of Appeal recognizes at
paragraph 8 that one branch of paragraph 8(1)(b) (the second
branch) contemplates a situation in which the matter in controversy is the
legal entitlement to the salary claimed. Examples of this branch given in that paragraph
are clearly not intended to be exhaustive. This second branch as described by
the Court of Appeal is open to consideration of any number of examples
including those I have cited. As well, I note that one example sited by the
Court of Appeal is a dispute as to the terms of employment which is
exactly the case at bar on the facts as I have found them.
[16] Before concluding, two further points need to be addressed. There may
be an issue in this appeal as to an allocation of fees paid for the collection
of wages versus the fees paid for damages for wrongful dismissal although same
was not raised by the Respondent. While that is reason enough not to deal with
it, I note that the amounts sought in the claim reveal that the damages for
wrongful dismissal were nominal relative to the amount claimed for wages so
that an apportionment of legal fees would hardly seem appropriate. The fees for
the action for wages would not have been less had the action for wrongful
dismissal not been added. It was an incidental part of the legal fees and accounting
for it separately is not required in my view in these circumstances.
[17] Lastly, I note that the deduction afforded in paragraph 8(1)(a)
is for a particular year and is limited to fees paid in that year. The year
under appeal is 2002. Amounts paid in earlier years cannot be allowed by me as
they are not years before me. Accordingly, the appeal can only be and is only allowed
for fees paid in 2002. However, counsel for the Respondent, confirmed the Canada
Revenue Agency (CRA) practice of re-opening previous years to allow the
expenses in the years paid. I trust the CRA will do all that is required to do
just that. It would be unconscionable to think that a taxpayer, told as per
acknowledged administrative practices not to claim an expense in a particular
year on the basis that that year would be re-opened as required, would be
denied the expense because the CRA did not do whatever had to be done to permit
the deduction in the appropriate year.
[18] For and in accordance with these Reasons, the appeal is allowed with
costs.
Signed at Ottawa, Canada, this 24th day of May 2005.
Hershfield
J.
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