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Citation: 2004TCC102
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Date: 20040224
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Docket: 2003-1948(IT)I
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BETWEEN:
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VINCENT ESPOSITO,
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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
Woods J.
[1] Vincent Esposito is a police
officer with the Peel Regional Police Services. In October, 2000
he was charged with assaulting a prisoner and, after a lengthy
trial, he was acquitted and cleared of all charges. The question
in this case is whether legal fees of $4,600 paid by Mr. Esposito
to his defence lawyer in the 2001 taxation year are deductible in
computing income from employment.
[2] In October, 2000, Mr. Esposito and
his partner were charged under the Criminal Code with
assault causing bodily harm to one of the prisoners while they
were station duty officers in control of prisoners coming in and
out of cells. At the time of their arrest, the officers were
temporarily suspended. In November, 2000 they were reinstated and
assigned to different duties. In April or May, 2003, Mr. Esposito
was acquitted of the criminal charges following an 11-day trial
and is still employed by the Peel Regional Police Services.
[3] In addition to the criminal
charges, Mr. Esposito was also charged under the Police
Services Act. Rather than face further legal battles, Mr.
Esposito pled guilty to these charges. He was sentenced to
working 20 days without pay. He also received a one-year demotion
from first class constable to second class, which had an
attendant reduction in salary. The demotion became effective in
about June, 2003.
[4] If the criminal charges were not
successfully defended, Mr. Esposito would have been dismissed and
unable to work a police officer. Under police procedures Mr.
Esposito was instructed to retain legal counsel to defend himself
on these charges. The legal fees incurred were approximately
$72,000, of which $40,000 were reimbursed by the police union.
This left Mr. Esposito approximately $32,000 out-of-pocket. Mr.
Esposito incurred $4,600 of these expenses in the 2001 taxation
year. It is the deduction of this amount that is the subject of
this appeal. The quantum is not in dispute and neither is the
fact that the legal fees were incurred for the defence of the
criminal charges.
Analysis
[5] Mr. Esposito's representative
submits that the legal fees were incurred to enable Mr. Esposito
to work as a police officer and therefore are deductible pursuant
to paragraph 8(1)(b) of the Income Tax Act because
they relate to income-earning activities.
[6] Paragraph 8(1)(b) provides
a deduction for legal fees incurred to collect salary that is
owed to a taxpayer. It reads:
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;
(emphasis added)
[7] At the hearing Mr. Esposito did
not suggest that the legal fees were incurred to collect salary
or wages that were owed to him and this is fatal to his claim for
a deduction under paragraph 8(1)(b). The language of
paragraph 8(1)(b) clearly requires this (in passage
underlined) and courts have consistently denied a deduction under
this provision unless this requirement is satisfied:
Turner-Lienaux v. R., [1997] 2 C.T.C. 344 (F.C.A.) and
Wilson v. The Queen, 91 DTC 5407 (F.C.A.). Based on the
evidence presented at the hearing, the legal fees incurred in
defence of the criminal charges were incurred to protect a future
source of income. They were not incurred to collect salary that
was owed.
[8] Mr. Esposito's representative
suggests that the deduction under paragraph 8(1)(b) is
supported by paragraph three of Interpretation Bulletin 99R5
(Consolidated), Legal and Accounting Fees, dated December 14,
2000. This bulletin is of no assistance. Paragraph three suggests
that legal fees may be deductible if they are incurred for the
purpose of earning income from a business or property. The legal
expenses incurred by Mr. Esposito relate to employment and not a
business or property.
[9] During argument, Mr.
Esposito's representative suggested that there might be other
sections of the Act that would support the deduction. In a
written submission received after the hearing, the representative
suggests that a deduction is allowed under paragraph
8(1)(i). It is submitted that this paragraph allows a
deduction for any expenses incurred by a taxpayer in earning
income from employment.
[10] Paragraph 8(1)(i) is not nearly
as broad as Mr. Esposito's representative suggests. It allows
a deduction for specified expenses, such as membership dues, the
cost of supplies, office rent, and the salary of an assistant.
The specified expenses do not include legal fees, and therefore
paragraph 8(1)(i) is of no assistance in this case.
[11] The written submission also suggests a
further argument based on paragraph 8(1)(b). It suggests
that, during the year to which the legal fees relate, 2001, Mr.
Esposito was reduced in rank and compensation for the incidents
in question. There was no evidence presented at the hearing
concerning a reduction of rank and compensation in 2001. The
following is an excerpt from the transcript of the testimony of
Mr. Esposito relating to the temporary suspension at the time of
the arrest:
... We were formally arrested and charged with that
offence. We were fingerprinted, photographed and put on a
temporary suspension at that time. ... I was put on
full-capacity duty at the Courthouse in a different function, but
in a full capacity as a police officer in November of 2000.
The following excerpt from the same testimony relates to the
charges under the Police Services Act:
I also received a demotion from first class constable to
second class constable, which is approximately $7,000.00 to
$8,000.00 in pay, and that's for a year, and that was from, I
believe, June of 2003.
[12] According to this testimony, Mr.
Esposito was assigned to other duties shortly after his arrest in
October, 2000 but there is no evidence of a reduction of rank and
compensation until 2003. Accordingly, there is no evidence
properly before me to support a deduction under paragraph
8(1)(b) on the basis that the legal expenses incurred in
2001 were incurred to collect or establish a right to salary
owed.
[13] Mr. Esposito's representative also
suggests that the deduction of this type of expense should be
allowed as being within the spirit of the Act. I am unable
to agree with this suggestion. Under subsection 8(2) of the
Act, the deduction of expenses allowed in computing income
from employment is limited to deductions specifically permitted
by section 8. Subsection 8(2) provides:
(2) Except as permitted by this section, no deductions shall
be made in computing a taxpayer's income for a taxation year
from an office or employment.
In addition to section 8, section 60 of the Act also
provides a deduction for certain legal expenses. For example,
subsection 60(o.1) allows a deduction, within limits, for legal
expenses incurred to collect or establish a right to a retiring
allowance, as defined in subsection 248(1). Mr. Esposito's
representative did not suggest that this section applies and it
appears that it would not apply based on the facts presented at
the hearing.
[14] The appeal is dismissed.
Signed at Ottawa, Canada this 24th day of February, 2004.
J.M. Woods J.
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