Fortin v. The Queen, docket 2000-1995-IT-I (Informal Procedure)

Date: 20010622

Docket: 2000-1995-IT-I

BETWEEN:

GILBERT FORTIN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

P. R. Dussault, J.T.C.C.

[1]            This is an appeal from an assessment for the 1998 taxation year by which the Minister of National Revenue (the "Minister") disallowed the appellant's deduction of an amount of $22,884 that he had claimed as legal expenses in relation to his employment.

[2]            In making and confirming the assessment, the Minister relied on the assumptions of fact set out in subparagraphs (a) through (c) of paragraph 5 of the Reply to the Notice of Appeal. These subparagraphs read as follows:

                [TRANSLATION]

(a)            According to the invoices submitted by the appellant, he incurred the following legal expenses:

                1996                         $7,225.16

                1997                         $8,646.71

                1998                         $7,012.17

                Total             $22,884.04

(b)            The appellant relied on paragraph 8(1)(b) of the Income Tax Act to deduct $22,884.15 in legal expenses on line 229 of his 1998 income tax return.

(c)            No court has established to date that an amount was owed to the appellant by his former employer.

[3]            The point at issue, as set forth in paragraph 6 of the Reply to the Notice of Appeal (the "Reply"), [TRANSLATION] "consists in determining whether paragraph 8(1)(b) of the Income Tax Act (the "Act") authorizes the appellant to deduct the legal expenses he has claimed in his 1998 tax return." The Minister's position is stated as follows in paragraphs 7 and 8 of the Reply:

                [TRANSLATION]

7.              The Minister relies on paragraph 8(1)(b) of the Act, as amended and applicable to the 1996, 1997 and 1998 taxation years, and on Interpretation Bulletin IT-99R5.

8.              The Minister contends that, since the appellant has not established that an amount is owed to him by his former employer, he is not justified in deducting the legal expenses he has claimed.

[4]            Two clarifications are in order here. First, in his testimony, the appellant maintained that he had requested a correction to his returns so as to claim a deduction for each of the 1996, 1997 and 1998 taxation years for expenses paid during each of those years, instead of the deduction for the full amount that he had originally claimed in his return for 1998. No reassessment was made by the Minister as a result of that request.

[5]            Second, at the hearing, it emerged from the appellant's evidence that nearly all of the legal expenses he claimed related to a complaint against his former employer under sections 122 and 128 of the Act respecting Labour Standards (the "Labour Standards Act") (R.S.Q., c. N-1.1) by which the appellant sought reinstatement as well as "an indemnity up to a maximum equivalent to the wage he would normally have earned had he not been dismissed" (s. 128, 2nd paragraph, of the Labour Standards Act). Counsel for the respondent acknowledged that, while the appellant was not seeking to collect wages owed by his former employer per se, he was seeking damages that would be considered a retiring allowance within the meaning given that term in subsection 248 of the Act. Paragraph 60(o.1) provides for a deduction for legal expenses to collect or establish a right to such a retiring allowance. Nevertheless, counsel for the respondent took the same position on this as she had regarding the interpretation of paragraph 8(1)(b), namely that the appellant had not shown that an amount was owed to him for this reason.

[6]            The appellant was the only witness. He is an engineer. According to his testimony and the documents submitted in evidence, the facts of relevance to this dispute may be summarized as follows. On June 9, 1994, he was hired as a civil engineer by the firm Les Consultants BPR (S.E.N.C.) ("BPR"). The duties assigned to him at the time were those of an on-site supervisor for the construction of a bridge at Havre St-Pierre. On August 8, 1994, the appellant was assigned to work as a supervisor at another site, the Abitibi-Price plant in Beaupré. On September 26, 1994, he was promoted to construction superintendent at that site and his working conditions were then modified. However, he claimed payment for overtime he had worked since the beginning of his employment and continued to demand to be paid for overtime relating to the performance of his new duties as construction superintendent. Representatives of the employer told him that he was not entitled to be paid for overtime. The appellant continued to insist on this, inter alia in January 1995, despite having been turned down point-blank by the employer's representatives. In October 1995, he again demanded to be paid for the overtime he had worked since the beginning of his employment with BPR. On December 1, 1995, he was summoned to a meeting with representatives of the employer and was told that he was being laid off because the Abitibi-Price plant project was almost finished and the start-up of another project was being delayed. At that time, he was offered a bonus of $2,500 and the services of a representative of the employer to help guide his career in other directions.

[7]            The appellant essentially maintains that he was not laid off because of lack of work but was instead fired because of his demand to be paid for overtime.

[8]            On January 10, 1996, the appellant filed a complaint under section 122 of the Labour Standards Act and this complaint took a number of turns. As indicated at page 2 of the decision of the labour commissioner, Jean Lalonde, dated January 5, 1999 (Exhibit I-3), there were [TRANSLATION] "two commissioners' decisions and two appeals to the Labour Court" in this case before it was returned to him to decide the complaint. Commissioner Lalonde ultimately held as follows at page 9 of his decision:

                                [TRANSLATION]

It is not the claim for overtime that caused the breakdown of the employment relationship, but the fact that the employer lacked income-producing contracts to which he could assign the complainant. This was not a dismissal but a layoff. In the circumstances, I would have had no choice but to dismiss the complainant's complaint.

[9]            The decision of the labour commissioner, Jean Lalonde, was upheld by Chief Judge Bernard Lesage of the Quebec Labour Court on March 29, 1999 (Exhibit I-5).

[10]          According to the appellant's testimony, the greater part of the expenses claimed were incurred for the services of an industrial relations consultant who represented him for the purposes of the complaint under section 122 of the Labour Standards Act.

[11]          In a separate proceeding, the appellant pursued his claim for what he considered amounts owed for overtime that had never been paid by his former employer. The claim was prosecuted by the Commission des normes du travail under section 98 of the Labour Standards Act, which reads as follows:

Where the employer fails to pay to an employee the wage owing to him, the Commission, on behalf of that employee, may claim the unpaid wage from that employer.

[12]          In the action before the Court of Québec, the Commission des normes du travail was successful in part, as regards the overtime worked by the appellant as on-site supervisor until September 23, 1994, that is, during the period preceding his appointment as construction superintendent. The decision of Judge André Cloutier of the Court of Québec dated December 17, 1997 (Exhibit I-6), was affirmed by the Quebec Court of Appeal on January 11, 2001.

[13]          In his testimony, the appellant said that only a small portion of the legal expenses claimed in 1998 was to pay the fees of the lawyer he had retained to argue the position of the Commission des normes du travail, which had taken up his case in bringing this action in the Court of Québec.

[14]          Among the supporting documents submitted by the appellant with his 1998 tax return (Exhibit I-1), there is only one invoice that refers to services rendered by Jean-Guy Michaud, I.R.C., partially in connection with that action. The invoice total is $534.87, and there is no specific breakdown for all the services covered by the invoice.

[15]          The provisions of the Act that are applicable to the case at bar are paragraph 8(1)(b), subsection 248(1) (definition of "retiring allowance") and paragraph 60(o.1). For the 1998 taxation year, those provisions read as follows:

8. Deductions allowed.

(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 . . . .

248 :        Definitions.

(1) In this Act,

. . .

"retiring allowance" - "retiring allowance" means an amount (other than a superannuation or pension benefit, an amount received as a consequence of the death of an employee or a benefit described in subparagraph 6(1)(a)(iv)) received

(a)            on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service, or

(b)            in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal,

by the taxpayer or, after the taxpayer's death, by a dependant or a relation of the taxpayer or by the legal representative of the taxpayer . . . .

60. Other deductions.

There may be deducted in computing a taxpayer's income for a taxation year such of the following amounts as are applicable:

. . .

(o.1)        Idem - 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 Canada 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)(l.1) for the year or a preceding taxation 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 of 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 . . . .

(Emphasis added.)

[16]          It should be pointed out here that paragraph 8(1)(b) was amended by S.C. 1990, c. 39, s. 2 and that the amendment applies in respect of amounts paid after 1989. This amendment replaced the words "in collecting" in that paragraph with the words "to collect or establish a right to".

[17]          Paragraph 60(o.1) was added by S.C. 1990, c. 39, s. 12 and is applicable to the 1986 and subsequent taxation years.

[18]          To justify the Minister's refusal to allow the appellant the deduction under paragraph 8(1)(b), counsel for the respondent relied on the decisions in Basque v. R., 1998 CarswellNat 3021, and Turner-Lienaux v. Canada, [1996] T.C.J. No. 943. The latter decision was the subject of an application for judicial review under section 28 of the Federal Court Act, which was dismissed by the Federal Court of Appeal [1997] F.C.J. No. 562.

[19]          The decision in Basque, supra, was based, first of all, on the decision of Chief Judge Couture of the Tax Court of Canada in MacDonald v. M.N.R., 90 DTC 1751. However, Basque involved a claim for the deduction of $6,000 for legal expenses in 1995, whereas the claim in MacDonald for a deduction for legal expenses under paragraph 8(1)(b) of the Act was for the 1984 taxation year and the Court found that the expenses had been paid not to collect salary or wages owed by the employer but to obtain a retiring allowance. As indicated above, neither paragraph 8(1)(b), as amended, nor paragraph 60(o.1) could apply to the 1984 taxation year. Naturally enough, if the year at issue had instead been the 1986 taxation year or a subsequent year, paragraph 60(o.1) would then have been applicable to the facts in that case and the taxpayer would have been entitled to a deduction under this provision. With respect, I believe that the reference in Basque to the decision in MacDonald was quite simply inappropriate.

[20]          The decision in Basque was also based on the decision in Turner-Lienaux, supra. In that case, the appellant, under paragraph 8(1)(b) of the Act, claimed legal expenses incurred in 1991, 1992 and 1993 in relation to an action she brought because she had been denied a promotion following a competition in which she had participated. The appellant maintained that the competition was flawed. Her action was dismissed and the decision was upheld on appeal. However, for income tax purposes, the appellant maintained that, had she been successful, she would have been entitled to a salary of about $100 every two weeks in excess of the salary she received as a result of her reclassification after the competition was concluded and she was not awarded the position. Judge Margeson of the Tax Court of Canada disallowed the deduction under paragraph 8(1)(b) because, inter alia, the purpose of the appellant's action was not to establish her right to a salary or wages since she had not performed the work for the position she was seeking. In this regard, paragraphs [36] to [40] of the decision appear to be especially relevant. They read as follows:

[36] 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. Further it has difficulty in concluding that a person could be found to have incurred legal expenses to establish a right to salary or wages when two Courts of competent jurisdiction actually found that the Appellant did not have the "right" that she was seeking to enforce by the legal action.

[37] There can be no doubt that the Appellant was not seeking to collect wages owed.

[38] This is not to say that there is in effect no difference between the amended version and the pre-amended version of paragraph 8(1)(b). This Court can foresee a case where a person might not be successful in a legal action because of improper evidence, insufficient proof of damages or some other reason and yet may have incurred the expenses to establish "a right to salary or wages".

[39] However, in the case at bar the result of the action was to declare that no such right existed, not that such right had not been established and consequently the action dismissed.

[40] This Court cannot conclude that any belief, no matter how absurd it is, or how remote the chances of success are, would entitle the taxpayer to deduct the legal expenses so long as the taxpayer believed that the right existed. That could lead to absurd abuse of the paragraph in question.

[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]          l 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), which limits the deduction of legal expenses to the amount of the retiring allowance included in income for the year, although in that case it is possible to carry the expenses forward for up to seven years. Furthermore, the second sentence of paragraph 23 seems difficult to reconcile with the first. It might be asked whether this sentence does not express the opinion that a deduction that was previously allowed in respect of a year will be disallowed retroactively if the taxpayer is not ultimately successful in having his or her entitlement to the salary or wages he or she is claiming recognized. If so, this opinion seems unsound. There is such a restriction in respect of paragraph 60(o.1) of the Act but not of paragraph 8(1)(b).

[23]          The wording and the context of paragraphs 8(1)(b) and 60(o.1) deserve further comment. The legal expenses that taxpayers may deduct in computing their income from employment under paragraph 8(1)(b) of the Act must correspond to the amounts they have paid during the year. The rule simply expresses the general principle that income from employment is computed according to the cash-based accounting method. A taxpayer may in a year institute proceedings or bring an action to collect or establish a right to salary or wages that the taxpayer believes to be owed by his or her employer or former employer. Although the proceedings or action may not be disposed of in the year, the taxpayer is still entitled to deduct the amounts paid as legal expenses in the year. In my opinion, legal expenses paid by a taxpayer in a year to participate in an action, such as the one brought by the Commission des normes du travail under section 98 of the Labour Standards Act, are covered by paragraph 8(1)(b) of the Act.

[24]          In the case at bar, this means that only the legal expenses paid by the appellant in 1998 to collect or establish his right to the amount owed by his former employer with respect to the overtime he worked in 1994 and 1995 may be deducted for 1998. I further note that the evidence establishes that the appellant was entitled to payment for his overtime, but only while he was an on-site supervisor and not when he was a construction superintendent, that is, only until September 23, 1994. This is what Judge André Cloutier of the Court of Québec found in his decision dated September 17, 1997, which was affirmed by the Quebec Court of Appeal on January 11, 2001. However, the evidence shows that only one invoice from Jean-Guy Michaud, I.R.C., totalling $534.87 and dated February 4, 1998, may be partially attributable to the expenses paid by the appellant in relation to the action brought on his behalf by the Commission des normes du travail. Even though there is no breakdown, I find in light of the appellant's testimony that an amount equal to half of that total, or $267.43, is deductible under paragraph 8(1)(b) of the Act.

[25]          I come now to comments that relate more specifically to paragraph 60(o.1) of the Act. This paragraph provides for the deduction of amounts paid as legal expenses, inter alia, to collect or establish a right to a retiring allowance. However, since the allowable deduction in each year may not exceed the net amount of the retiring allowance included in income for the year in question (that is, after deduction of the amounts transferred as a contribution to or under a registered pension plan or as a premium under a registered retirement savings plan in accordance with paragraph 60(j.1)), the taxpayer is allowed to carry forward to the next seven years the deduction for legal expenses paid in a year that could not be deducted in that year because of this restriction, that is, because no amount was received as a retiring allowance in that year and included in computing income for that year or because an amount so received and included in computing income for that year was insufficient.

[26]          In the case at bar, the purpose of the appellant's complaint under section 122 of the Labour Standards Act was to be reinstated and to be paid, not salary or wages, but an indemnity under section 128 of that Act. As mentioned above, the second paragraph of section 128 provides that a labour commissioner may, if he or she considers that the employee has not been dismissed for good and sufficient cause, "order the employer to pay to the employee an indemnity up to a maximum equivalent to the wage he would normally have earned had he not been dismissed." However, on January 5, 1999, the labour commissioner, Jean Lalonde, decided that the appellant had not been dismissed but had instead been laid off. That decision was upheld by Chief Judge Bernard Lesage of the Labour Court on March 29, 1999. The appellant therefore was not entitled to and did not receive an indemnity that could have been considered a retiring allowance within the meaning of paragraph (b) of the definition of that term in subsection 248(1) of the Act. Having received no retiring allowance in 1998, the appellant cannot, in computing his income for that year, deduct under paragraph 60(o.1) the legal expenses paid by him in 1996, 1997 and 1998 in respect of an unsuccessful action to establish his right to that retiring allowance.

[27]          As a result of the above, the appeal from the assessment made for the 1998 taxation year is allowed and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the appellant is entitled to deduct an amount of $267.43 pursuant to paragraph 8(1)(b) of the Act for the purpose of computing his income from employment for the 1998 taxation year.

Signed at Ottawa, Canada, this 22nd day of June 2001.

"P. R. Dussault"

J.T.C.C.

Translation certified true on this 19th day of June 2002.

[OFFICIAL ENGLISH TRANSLATION]

Stephen Balogh, Revisor

[OFFICIAL ENGLISH TRANSLATION]

2000-1995(IT)I

BETWEEN:

GILBERT FORTIN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on June 13, 2001, at Québec, Quebec, by

the Honourable Judge P. R. Dussault

Appearances

For the Appellant:                                The Appellant himself

Counsel for the Respondent:                Stéphanie Côté

JUDGMENT

The appeal from the assessment made for the 1998 taxation year is allowed and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the appellant is entitled to deduct an amount of $267.43 pursuant to paragraph 8(1)(b) of the Income Tax Act for the purpose of computing his income from employment for the 1998 taxation year in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 22nd day of June 2001.

"P. R. Dussault"

J.T.C.C.

Translation certified true

on this 19th day of June 2002.

Stephen Balogh, Revisor