97-933(IT)I
BETWEEN:
MICHAEL LAWRENCE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on January 6, 1998 at Toronto,
Ontario, by
the Honourable Judge T.P. O'Connor
Appearances
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Nancy Arnold
JUDGMENT
The
appeals from the assessments made under the Income Tax Act
for the 1994 and 1995 taxation years are allowed and the
assessments are referred back to the Minister of National
Revenue for reconsideration and reassessment on the basis that
the Appellant shall be entitled to deductions for legal fees of
$13,845.78 for 1994 and $5,170.19 for 1995.
Signed at Ottawa, Canada, this 16th day of January 1998.
J.T.C.C.
Date: 19970116
Docket: 97-933(IT)I
BETWEEN:
MICHAEL LAWRENCE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
O'Connor, J.T.C.C.
[1] The Minister of National Revenue
("Minister") denied deductions claimed by the Appellant
for legal fees of $13,845.78 in 1994 and $31,170.19 in 1995 and
the issue is whether the Minister was correct in so doing.
[2] The basic facts are as follows.
Prior to February 1991 the Appellant was a licensed real estate
agent in the employ of Homelife Solaris Realty Inc.
("Homelife").
[3] In February of 1991, the Appellant
and eight other individuals left Homelife. Three of the nine,
including the Appellant, formed a new company, Four Seasons Real
Estate Inc. ("Four Seasons"). The said three persons
beneficially owned Four Seasons equally through the intermediary
of an Ontario numbered company.
[4] By statement of claim dated June
19, 1992 Homelife sued, inter alia, Four Seasons
and the said nine individuals, including the Appellant, for $1
million damages alleging, inter alia, stealing of
listings, files, plans, keys and clients from Homelife. Although
the statement of claim does not specifically say so it was a
joint and several claim.
[5] By a judgment of the Ontario Court
of Justice - General Division dated February 8, 1995, Four
Seasons and six of the said individuals (including the Appellant)
were condemned jointly and severely to pay Homelife $70,000
(three other defendants had declared bankruptcy). This judgment
gave effect to a settlement arrived at by counsel for the
respective parties. Homelife ceased carrying on business in 1994
but there is no evidence that it ceased to exist legally.
[6] The Appellant paid his share of
the legal fees to defend and ultimately settle the statement of
claim. As mentioned the amount for 1994 was $13,845.78. For 1995
the amount was $31,170.14 but this included an amount of $26,000
which the Appellant sent to his lawyers to pay the Appellant's
share of the agreed settlement figure of $70,000.
Submissions
[7] The Minister submits that since
the Appellant was a former employee of Homelife then because of
subsections 8(1) and 8(2) of the Income Tax Act
("Act") he is not entitled to deduct the fees
because they did not represent legal expenses incurred to collect
or establish a right to salary or wages nor to collect or
establish a right to a retiring allowance and they were not paid
for the purpose of gaining or producing income from business or
property.
[8] The Appellant points to
Interpretation Bulletin 99R4 and in particular to the first
sentence of paragraph 4 thereof which reads as follows:
4. Legal costs to
prosecute and to defend most tort, contract and other civil
claims arising in the ordinary course of business will generally
be deductible.
[9] The Appellant also contends that
he was forced to settle because of financial considerations. If
he did not settle he would have had to face much higher legal
fees to proceed with the estimated six week trial if the case was
to go forward. Moreover, Homelife was out of business and had no
assets and even if the Appellant was successful in his defense no
contribution to costs could be recovered from Homelife. The
Appellant further argues that the amount of $26,000, although
representing his share of the agreed settlement, should
nevertheless be deductible. He points out that he paid it to his
lawyer and Homelife was no longer in business in 1995.
Analysis
[10] In my opinion paragraph 4 of
Interpretation Bulletin 99R4 is not applicable because the claim
did not arise in the ordinary course of business. On the other
hand, in my view, subsections 8(1) and 8(2) of the Act
also do not apply. The Appellant had left Homelife and was no
longer an employee. Moreover, he was a real estate agent whose
earnings were based mainly on commission income. He did not
simply receive a salary. For example, the Appellant's income tax
return for 1994 and the T4 slip of his employer in that year
indicates his income being as "employment income" as well as
being "employment commissions".
[11] Moreover the statement of claim had
nothing to do with an ongoing or former relationship of employee
and employer. It was a claim by the former employer for damages
for breach by the former employee of a non-competition
agreement.
[12] The legal fees were incurred by Four
Seasons and the group of individuals to defend the statement of
claim. It was not in the context of the former contract of
employment but rather in the context of the new real estate
business being carried on by Four Seasons and the individuals.
Moreover, the claim was joint and several, which could have
resulted in the Appellant being entirely responsible for the
total amount claimed. This, in my view, clearly takes the
situation out of one of an employer/employee relationship.
[13] The foregoing conclusions are weakened
slightly by the fact that the Four Seasons operation closed
down in September of 1992. However, the statement of claim was
filed in June of 1992 and that triggered the need for the
Appellant and the others to retain a lawyer and pay the legal
fees required to defend the statement of claim and ultimately
settle it.
[14] Consequently, in my opinion the
Appellant is entitled to his deduction of $13,845.78 for 1994.
With respect to 1995, however, in my opinion, he is only entitled
to a deduction of $5,170.19, that is to say the amount claimed of
$31,170.19 less the $26,000.00 which represented the Appellant's
share of the agreed upon settlement figure. In other words, the
$26,000.00 was not legal fees. It represented the Appellant's
share of the settlement. Its nature is one of damages paid.
[15] There is considerable jurisprudence on
the question of whether a damage payment is of a capital nature
(non-deductible) or income/expense nature (deductible) and each
case must be decided on its own facts.
[16] In the present case from the
Appellant's point of view I do not see how the $26,000.00 could
be considered as one of an income or expense nature. It had
nothing to do with producing income from a business or
property.
[17] In conclusion the appeals are allowed
on the following basis. The Appellant shall be entitled to
deductions for legal fees of $13,845.78 in 1994 and $5,170.19 in
1995. The matters are referred back to the Minister for
reconsideration and reassessment on this basis.
Signed at Ottawa, Canada, this 16th day of January 1998.
J.T.C.C.
COURT FILE
NO.:
97-933(IT)I
STYLE OF
CAUSE:
Michael Lawrence and
Her Majesty the Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
January 6, 1998
REASONS FOR JUDGMENT BY: the Honourable T.P.
O'Connor
DATE OF
JUDGMENT:
January 16, 1998
APPEARANCES:
For the
Appellant:
the Appellant himself
Counsel for the Respondent: Nancy
Arnold
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the
Respondent:
George Thomson
Deputy Attorney General of Canada
Ottawa, Canada
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