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Citation: 2003TCC524
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Date: 20030905
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Docket: 2002-4420(IT)I
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BETWEEN:
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NICHOLAS ASSURAS,
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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] Mr. Nicholas Assuras appeals from
an assessment for the 2000 taxation year. There are two distinct
issues, the deductibility of legal fees paid in respect of a
retiring allowance and the imposition of a penalty for failure to
report income.
[2] The appeal was heard under the
Court's Informal Procedure.
DEDUCTIBILITY OF LEGAL FEES
Facts
[3] Mr. Assuras was employed as an
investment banker by BLC Valeurs Mobilieres in 1999 and 2000. His
employment was terminated in 2000 as a result of a restructuring.
Mr. Assuras received a lump sum of $22,000 in 2000 as
compensation for the termination and incurred legal fees of
$7,034.24 in respect of the matter. It was understood that the
payment of $22,000 was to be all inclusive and it that would
compensate Mr. Assuras for legal costs. The settlement
documentation did not identify portions of the $22,000 as being
in respect of legal fees or other amounts.
[4] In 2000 Mr. Assuras contributed
$22,000 to a registered retirement savings plan
("RRSP").
[5] In his income tax return for the
2000 taxation year, Mr. Assuras did not include the $22,000
received from his former employer in computing income and he
claimed a deduction for the $22,000 contribution to the RRSP. The
Minister of National Revenue (the "Minister")
issued an assessment that included the $22,000 in income as a
retiring allowance and allowed the deduction of $22,000 for the
RRSP contribution. At the hearing, the parties accepted the
Minister's treatment of these two items. However, Mr. Assuras
claimed that if the retiring allowance is included in income, he
should be entitled to deduct the legal fees of $7,034.24.
Issue
[6] The question for determination is
whether the legal fees of $7,034.24 paid in connection with
negotiating a retiring allowance are deductible in computing
income. The Crown submits that the legal fees are not deductible
and refers to clause 60(o.1)(ii) of the Income Tax Act,
R.S.C. 1985 (5th Supp.), c. 1 (the "Act").
Statutory Provision
[7] The relevant parts of paragraphs
60(o.1) and (j.1) of the Act read at the relevant
time:
60. There may be deducted in computing a taxpayer's income
for a taxation year such of the following amounts as are
applicable:
(o.1) the amount, if any, by which the lesser of
(i) the total of all legal expenses (other than those relating
to a division or settlement of property arising out of, or on a
breakdown of, a marriage paid by the taxpayer in the year or in
any of the 7 preceding taxation years to collect or establish a
right to an amount of
(A) a benefit under a pension fund or plan (other than a
benefit under the Canadian Pension Plan or a provincial
pension plan as defined in section 3 of that Act) in respect of
the employment of the taxpayer or a deceased individual of whom
the taxpayer was a dependant, relation or legal representative,
or
(B) a retiring allowance of the taxpayer or a deceased
individual of whom the taxpayer was a dependant, relation or
legal representative, and
(ii) the amount, if any, by which the total of all amounts
each of which is
(A) an amount described in clause (i)(A) or (B)
(I) that is received after 1985,
(II) in respect of which legal expenses described in
subparagraph (i) were paid, and
(III) that is included in computing the income of the taxpayer
for the year or a preceding taxation year, or
(B) an amount included in computing the income of the taxpayer
under paragraph 56(1)(i.1) for the year or a preceding year,
exceeds the total of all amounts each of which is an amount
deducted under paragraph (j), (j.01), (j.1) or (j.2) in computing
the income of the taxpayer for the year or a preceding taxation
year, to the extent that the amount may reasonably be considered
to have been deductible as a consequence of the receipt or an
amount referred to in clause (A),
exceeds
(iii) the portion of the total described in subparagraph (i)
in respect of the taxpayer that may reasonably be considered to
have been deductible under this paragraph in computing the income
of the taxpayer for a preceding taxation year;
...
(j.1) such part of the total of all
amounts each of which is an amount paid to the taxpayer by an
employer, or under a retirement compensation arrangement to which
the employer has contributed, as a retiring allowance and
included in computing the taxpayer's income for the year by
virtue of subparagraph 56(1)(a)(ii) or paragraph
56(1)(x) as
(i) is
designated by the taxpayer in the taxpayer's return of income
under this Part for the year,
(ii) does not exceed
the amount, if any, by which the total of
(A) $2,000 multiplied by
the number of years before 1996 during which the employee or
former employee in respect of whom the payment was made (in this
paragraph referred to as the "retiree") was employed by
the employer or a person related to the employer, ...
Submissions of Parties
[8] The Crown submits that legal
expenses incurred to negotiate a retiring allowance may not be
deducted if that same amount has been deducted as an RRSP
contribution. Reference was made to the concluding phrase in
clause 60(o.1)(ii) that has the effect of reducing the deduction
for legal expenses if a deduction is claimed for an RRSP
contribution under paragraph 60(j.1). Paragraph 60(j.1) permits a
deduction for certain contributions to an RRSP if an employee has
received a retiring allowance in the year.
[9] At the hearing, counsel for Mr.
Assuras stated that she was unaware of paragraph 60(o.1) and
agreed to provide a written submission in respect of its
application.[1] In
this submission, she suggested that the RRSP contribution was not
pursuant to paragraph 60(j.1) because this provision only applies
to a retiring allowance paid in respect of employment prior to
1996. The retiring allowance paid to Mr. Assuras related to
employment during the years 1999 and 2000. Accordingly, it was
submitted that the deduction for the RRSP contribution must be
under some other provision, such as section 146. It was also
submitted that the Canada Customs and Revenue Agency (the
"CCRA") had confirmed in writing that a contribution of
$22,000 could be made to an RRSP.
[10] Counsel for the Crown responded in
writing to this submission in part as follows:
With respect, it appears the Appellant has misstated the
function of paragraphs 60(j) through (j.2). The provisions under
paragraph (j) generally provide for the taxpayer's
entitlement [to] deduct amounts contributed to RRSPs or RPPs. If
the provision "do not apply" and "there is no
amount that was or could be deducted" then the
Appellant's income for the 2000 taxation year ought be
adjusted to include the amount of $22,000.00 contributed to his
RRSP account. Moreover, reference to the 1996 year in (j.1) is a
restriction on the taxpayer's entitlement to contribute to
his or her RRSP or RPP, in respect of income earned prior to
1996. The provision does not restrict the application of
subsection 60(o.1) to income earned after 1996.
Finally, the method by which the Appellant calculated the
entitlement to the deduction at p. 4, paragraph 4 of the
Appellant's submissions is incorrect. It appears that the
Appellant may have calculated the deductible amount by applying
the provisions in the wrong order. In short, paragraph 60(o.1)
provides that the amount of the deduction otherwise available in
respect of legal fees reimbursed (in this case $7,034.24) is the
lesser of the total amount of the legal expenses incurred
($7,034.24) and the amount by which the total legal fees
($7,034.24) exceeds the amount contributed to the taxpayer's
RRSP or RPP account ($22,000.00) under paragraph
60(j), (j.01), (j.02), (j.03) or (j.1). As mentioned above, if
the Appellant's submission is accurate that "no amount
was received under section 60(j.1)" then the Appellant's
income for his 2000 taxation year ought be recalculated to
include the amount of $22,000.00.
Analysis
[11] By virtue of paragraph 60(o.1), the
legal expenses at issue are deductible provided that the
deduction for the RRSP contribution is not made under paragraph
60(j.1).
[12] I agree with the submission of counsel
for Mr. Assuras that the deduction for the RRSP contribution was
not made under paragraph 60(j.1). This paragraph has no
application if the retiring allowance relates to employment after
1995. In this case, the employment was in 1999 and 2000. Further,
paragraph 60(j.1) applies only if a designation has been made in
the return of income. There is no indication from the evidence
that this designation was made. Finally, Mr. Assuras submits that
the RRSP contribution was made under section 146.2 This would mean that the deduction
was taken pursuant to paragraph 60(i). I accept this submission.
It appears that Mr. Assuras had sufficient deduction room
available to make a contribution of $22,000 under paragraph
60(i). In the notice of reassessment for the 2000 taxation year
that was attached to the Notice of Appeal, the CCRA has included
a 2001 RRSP Deduction Limit Statement. This statement indicated
that Mr. Assuras had an RRSP deduction limit for 2000 of $26,515
and that no deduction for RRSP contributions were taken in 2000.
It appears that this statement was in error and that in fact
$22,000 was deducted as an RRSP contribution in 2000 pursuant to
paragraph 60(i).
[13] As a result, the legal expenses are
deductible pursuant to paragraph 60(o.1).
IMPOSITION OF PENALTY
Facts
[14] In the assessment for the 2000 taxation
year, the Minister imposed a penalty of $398.40 pursuant to
subsection 163(1) for failure to report income in two taxation
years, 1997 and 2000.
[15] The purported failure to report income
in 1997 concerns vacation pay earned by Mr. Assuras in 1997 but
not received by him until 2002. During 1997 and 1998, Mr. Assuras
was employed as an investment banker by C.M. Oliver Inc. Mr.
Assuras' employment was also terminated by this employer as a
result of a restructuring. Settlement discussions between Mr.
Assuras and the employer were protracted and a lawsuit was
instigated that culminated in a settlement payment being received
in 2002. The settlement amount included an amount of $1,538
representing vacation pay for the 1997 taxation year.
[16] C.M. Oliver Inc. offered to pay the
vacation pay to Mr. Assuras earlier as it was not in dispute but
Mr. Assuras wanted to negotiate the entire settlement before any
payments were made. It is not clear when this offer was made but
it was likely made after 1997 since the employment was terminated
in 1998. The employer issued a T4 slip in respect of this amount
for the 1997 taxation year. There was no evidence presented as to
whether this amount was assessed as income in 1997.
[17] There are two alleged failures to
report income for the 2000 taxation year. The first relates to an
amount of $4,078 received as employment income from the Province
of Ontario, by whom Mr. Assuras was employed after the
termination by BLC Valeurs Mobilieres. Mr. Assuras stated that
the $4,078 was not reported in his income tax return for the 2000
taxation year because he had not received a T4 slip in respect of
it. Mr. Assuras stated that he assumed that the T4 slip that he
received for that year from BLC Valeurs Mobilieres included all
amounts of employment income received in the year. There was also
a failure to include the retiring allowance of $22,000 in
computing income.
[18] The Minister assessed a penalty in the
2000 taxation year in the amount of $398.40 pursuant to
subsection 163(1) for a failure to report income in both the 1997
and 2000 taxation years.
Statutory Provision
[19] Subsection 163(1) reads:
163. (1) Every person who
(a) fails to report an amount required to be included
in computing the person's income in a return filed under
section 150 for a taxation year, and
(b) had failed to report an amount required to be so
included in any return filed under section 150 for any of the
three preceding taxation years
is liable to a penalty equal to 10% of the amount described in
paragraph (a), except where the person is liable to a penalty
under subsection (2) in respect of that amount.
Submissions of Parties
[20] The Crown submits that the vacation pay
of $1,538 for 1997 should be included in computing income for the
1997 taxation year even though it was not received until 2002.
The Crown also suggested at the hearing that the doctrine of
constructive receipt should apply but had not prepared argument
on this issue before the hearing. Both parties later submitted
written submissions dealing with the doctrine of constructive
receipt.
Analysis
[21] In my view, the Crown's position on
the penalty cannot succeed because there was no failure to report
income in 1997.
[22] The Crown submits that the mere
entitlement to vacation pay is sufficient to require its
inclusion as employment income for a year. There is no merit to
this position. Employment income is taxed on a cash rather than
an accrual basis.
[23] The doctrine of constructive receipt,
as it was applied in the case of Blenkarn v. MNR, 63 DTC
581 (T.A.B.), requires that funds be readily available to the
taxpayer and that the taxpayer in effect turns his back on the
receipt. These are not the circumstances here. Mr. Assuras was
engaged in protracted negotiations involving a lawsuit with his
former employer. It cannot be said that Mr. Assuras turned his
back on the vacation pay when it was only one element of the
settlement amount. A further reason why the doctrine of
constructive receipt does not require the vacation pay to be
included in income for the 1997 taxation year is that it is
unlikely that the employer's offer to pay the vacation pay
was made to Mr. Assuras in 1997 because the employment was not
terminated until 1998.
Conclusion
[24] The appeal in respect of the 2000
taxation year is allowed and the matter is referred back to the
Minister for reconsideration and reassessment on the basis that
legal fees of $7,034.24 are deductible in computing income
pursuant to paragraph 60(o.1) and that the penalty of $398.40
pursuant to subsection 163(1) is to be deleted.
Signed at Ottawa, Canada this 5th day of September, 2003.
J.M. Woods J.
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