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Citation: 2003TCC198
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Date: 20030404
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Docket: 2002-1406(IT)I
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BETWEEN:
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JOHN M. LOO,
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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
Little, J.
A. FACTS:
[1] The Appellant is employed as a
lawyer in the Vancouver Regional Office of the Department of
Justice ("Justice").
[2] The Appellant and approximately 55
lawyers employed at the Vancouver Regional Office of Justice
commenced a court action in the Supreme Court of British Columbia
against the Attorney General of Canada (the "Court
Action").
[3] In the Court Action the Appellant
and the other 55 lawyers at the Vancouver Regional Office of
Justice maintain that they are entitled to receive salary or
wages from the Federal Government at the same level as Justice
pays the lawyers employed at the Toronto Regional Office of
Justice.
[4] The Statement of Claim filed by
the Appellant and his associates also claims damages, interest
and costs.
[5] The trial of the Court Action is
scheduled to commence on March 15, 2004. (Four weeks have
been reserved for the trial.)
[6] The Appellant and his associates
retained the services of lawyers Jim Aldridge and Richard
Sugden to represent them in the Court Action.
[7] In the 1999 and 2000 taxation
years the Appellant paid his share of the legal fees in
connection with the Court Action. The Appellant paid legal fees
as follows:
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1999
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$3,140.00
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2000
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$1,104.00
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[8] In determining his income for the
1999 and 2000 taxation years the Appellant deducted the amounts
of $3,140.00 and $1,104.00 respectively.
[9] By a Notice of Reassessment issued
on the 19th day of March 2001 the Minister of National Revenue
(the "Minister") reassessed the Appellant's
1999 taxation year and legal fees of $3,140.00 were
disallowed.
[10] By a Notice of Reassessment issued on
the 3rd day of January 2002 the Minister reassessed the
Appellant's 2000 taxation year and legal fees of $1,104.00
were disallowed.
B. ISSUE
[11] The issue is whether the Appellant is
entitled to deduct the legal fees of $3,140.00 and $1,104.00.
C. ANALYSIS
[12] Paragraph 8(1)(b) of the Income Tax
Act (the "Act") reads 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) Legal expenses of
employee -- 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;
[13] Paragraph 8(1)(b) of the Act was
amended by 1990, c. 39, s.2, applicable to amounts paid after
1989. Paragraph 8(1)(b) formerly read:
(b) amounts paid by the taxpayer in the year as or on account
of legal expenses incurred by him in collecting salary or wages
owed to him by his employer or former employer.
When this provision existed prior to the amendment introduced
in 1990, legal expenses were considered deductible only if
the taxpayer had successfully completed litigation against his
employer. (emphasis added)
[14] The Tax Court has evolved in its
interpretation of the current provision. Several recent court
decisions which deal with the current wording of
paragraph 8(1)(b) can be contrasted in order to illustrate
the evolving interpretation of this paragraph.
[15] The first two decisions that are
relevant are Turner-Lienaux v. Canada, 97 DTC 5294
and Basque v. Canada, [1998] T.C.J. No. 898 (T.C.C.).
[16] In Turner-Lienaux, the Federal
Court of Appeal decided that Judge Margeson of the Tax Court
did not err in stating that a taxpayer cannot be "owed"
wages when he has not performed the services. In
Turner-Lienaux v. The Queen, 97 DTC 261, at the Tax Court
level Margeson, J. said at page 264:
This Court has some difficulty in concluding that a person is
"owed" a salary or "wages" if he did not do
the work or occupy the position that required the salary or wages
to be paid.
[17] In Basque, Judge Tardif of the
Tax Court decided that when the taxpayer has not yet resolved
contentious issues with regards to the litigation against his
employer, no deduction is available under paragraph 8(1)(b).
[18] The second line of cases on this point
are Fortin v. Canada, [2001] T.C.J. No. 420 (T.C.C.), and
Ananthan v. Canada, [2001] 2. C.T.C. 2658 (T.C.C.). In
Fortin, Judge Dussault of the Tax Court carried out a
detailed analysis of paragraph 8(1)(b) and its interpretation in
Interpretation Bulletin IT-99R5, and in Turner-Lienaux and
Basque. Judge Dussault stated at paragraphs 21 and 22:
[21] It seems quite clear to me
that a person who brings an action to collect salary or wages
owed by an employer or former employer must first show that the
services in respect of which he or she claims to be entitled to
the salary or wages have been rendered. If they have, it is clear
that paragraph 8(1)(b), in the version applicable after
1989, is no longer limited to legal expenses incurred to collect
amounts owed as salary or wages by an employer or former
employer. The words "or [to] establish a right to" that
now appear in paragraph 8(1)(b) of the Act deserve
some comment. The preposition "to" in front of an
infinitive means "in order to" or "for the purpose
of". Although I do not have to decide the issue for the
purposes of this case, in my opinion, the words "to ...
establish" do not mean that a taxpayer must establish or
succeed in having established a right to salary or wages in order
to be entitled to a deduction under
paragraph 8(1)(b). This is contrary to what is
indicated in paragraph 23 of Interpretation Bulletin IT-99R5,
"Legal and accounting Fees", December 11, 1998, which
reads as follows:
If the taxpayer is not successful in court or otherwise fails
to establish that some amount is owed, no deduction for expenses
is allowed. However, failure to collect an amount established as
owed to the taxpayer does not preclude a deduction under this
paragraph.
[22] I would simply add that the
actual wording of paragraph 8(1)(b) does not appear
to contain the condition stated in the first sentence of
paragraph 23. Moreover, paragraph 8(1)(b) does not
limit the deduction of legal expenses to the amount of salary or
wages included in income for the year. This is in contrast to
paragraph 60(o.1).
In Sheila Ananthan v. The Queen, Judge Teskey of the
Tax Court stated at page 2659:
...for the Minister to take the position that she has to wait
until who knows when, and whether she is successful or not, it
does not matter, she will get it then, I think is totally wrong.
I think the Interpretation Bulletin is wrong.
Judge Teskey allowed the Appellant's appeal in
Ananthan.
[19] Given that the second line of cases
referred to above are recent and that Judge Dussault in
Fortin carefully examines the first line of cases, the
trend within the Tax Court is that paragraph 8(1)(b) of
the Act should be interpreted as meaning that litigation
does not have to be successfully completed in order for the
taxpayer to be entitled to a deduction of the legal fees.
[20] As is noted above, the Appellant and
his associates are still in the midst of litigation against their
employer. The analysis of the Court decisions referred to above
indicate that the pending status of the Appellant's
litigation should not be a bar to obtaining a deduction under
paragraph 8(1)(b) of the Act. However, I believe that it
is still necessary to examine the nature of the lawsuit against
the employer to establish whether or not the Order sought by the
Appellant and his associates is for "salary or wages
owed" to the taxpayer by the employer.
[21] Examples of what was considered owed
and not owed may provide guidance. In cases involving a
promotion, where the taxpayer sues his employer because he feels
he should not have been denied a promotion, the Courts have said
that wages are not owed because services for the new position
have never been rendered. This can be contrasted with wrongful
dismissal cases, where the taxpayer is seeking back pay and
reinstatement. In wrongful dismissal cases, the taxpayer is owed
wages because he should have been allowed to work and collect
pay, but was wrongfully prevented by the employer from doing so.
In addition, a taxpayer seeking to be paid for overtime worked is
also owed that wage.
[22] I believe that this appeal is distinct
from the above line of cases. In this situation the Appellant and
his associates maintain that they are owed a salary equivalent to
that of a lawyer in the Toronto Regional Office of Justice.
[23] In my opinion, the wages that the
Appellant seeks by the Court Action could not be said to be
"owed" to him. Although the Appellant performs the same
type of work as a Justice lawyer in Toronto, the Appellant is not
"owed" the wages in question because the lawyers in the
Vancouver Regional Office of Justice have negotiated a yearly
salary and have been paid according to their contract. A raise is
not "owed" to one group of people just because another
group of people have received an increase in their salary. The
fact that other lawyers received an increase in their salary may
be a factor in negotiating a raise.
[24] In reaching my conclusion I have also
referred to Jazairi v. Canada, 2001 DTC 5163
(F.C.A.). In Jazairi the Federal Court of Appeal decided
that the Appellant was not owed a higher wage even though he did
the same work as that of a professor because the higher wage was
based on rank, not duties performed. Applying the Jazairi
decision to this appeal, the Appellant and his associates may
believe that they deserve the same salary as Justice lawyers in
Toronto because they perform the same kind or type of duties.
However the increase in salary that is paid to Toronto lawyers
may have been given to the Justice lawyers in Toronto for a
variety of reasons other than duties that they performed. For
example, in 1990, Toronto may have had a higher cost of living or
the caseload for lawyers in Toronto may have been much greater.
In addition, it may have been impossible for Justice to recruit
competent lawyers in Toronto without an increase in salary.
[25] The appeal is dismissed, without
costs.
Signed at Vancouver, British Columbia, this 4th day of April
2003
J.T.C.C.
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