Date: 19971030
Docket: 96-34-IT-I
BETWEEN:
HERBERT B. NOBLE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Sobier, J.T.C.C.
[1] The Appellant appeals from the assessments by the Minister
of National Revenue (the “Minister”) for his 1991 and
1993 taxation years whereby the Minister added the amounts of
$2,902 in 1991 and $24,164 in 1993, and denied deductions in like
amounts for those years on account of legal fees paid by the
Appellant.
[2] Originally, the deductions were denied under
paragraph 60(o) of the Income Tax Act (the
“Act”) as not having been incurred for the
purpose of defending an assessment of income taxes, as well as
not having been incurred for the purpose of gaining or producing
income within the meaning of paragraph 18(1)(a) of
the Act. At the hearing of the appeal, the issue
concerning paragraph 60(o) was not pursued.
[3] In the alternative, the Minister claimed that the
expenditures were made on account of capital, within the meaning
of paragraph 18(1)(b) of the Act.
[4] The Appellant is a lawyer practicing in Ontario. He is on
an annual retainer as international counsel with his sole client
being generally known as the Tridel Group of Companies
(“Tridel”). Tridel is a group of companies controlled
or under the management of three brothers, Angelo, Leo and
Elvio Del Zotto and include Tridel Corporation and
Tridel Enterprises Inc. It was Mr. Noble’s evidence
that Angelo Del Zotto was the chairman, chief executive
officer and creative and driving force behind Tridel.
[5] In providing legal services to Tridel, he advised the
officers, directors, agents and employees of Tridel and its
subsidiaries and affiliated companies.
[6] Mr. Noble invoices Tridel, on a monthly basis,
through a paymaster company known as Glen Nova Construction
Limited, for 1/12 of the annual retainer and is paid
accordingly.
[7] According to Mr. Noble, he became aware prior to 1991
that Revenue Canada was investigating Tridel. This he learned
through discussions with Elvio Del Zotto,
William Christie and Robert Lindsay, a tax lawyer with
the firm Osler, Hoskin & Harcourt, who was retained in
connection with the investigation. In 1990, Revenue Canada
auditors moved into the Tridel offices and remain there today.
The first formal indication of Revenue Canada’s interest in
the Appellant came about in a letter from Revenue Canada to the
Appellant dated May 3, 1990, requesting information and
documentation concerning his relationship with a Cayman Island
corporation known as Supra Investments Inc.
(“Supra”), including his possible direct or indirect
ownership of Supra. This letter was marked with a carbon copy to
Mr. Lindsay at his firm.
[8] Prior to that date, no inquiries had been made of
Mr. Noble by Revenue Canada concerning Supra. By referring
to Supra and copying Mr. Lindsay, he believed that Tridel
was involved. Mr. Noble stated that he felt this request for
information put him in a conflict position between a desire to
continue earning fees from Tridel and his duty to Tridel.
Mr. Noble took the letter to
Mr. Elvio Del Zotto, who advised him to seek
independent legal advice and informed him he would be reimbursed
by Tridel for any fees he was invoiced by counsel. He finally
retained Mr. Alan Gold of the firm Gold & Fuerst.
Mr. Gold replied to the May 3, 1990 letter by a letter
dated May 23, 1990. In this letter, Mr. Gold stated
that Mr. Noble had “... no direct or indirect
ownership relationship to Supra Investments Inc.” and that
he had “no books or records for that company nor legal
status to assist you (Revenue Canada) in obtaining such access
thereto”.
[9] By a letter from Revenue Canada to Mr. Noble dated
May 15, 1991, Mr. Noble was requested to produce full
particulars concerning his business relationship with
Angelo Del Zotto, Tridel Corporation and Supra
Invesments Inc. He was again requested to provide information as
to the ownership of shares of Supra, as well as information as to
the ownership of shares of other corporations by Supra.
[10] Mr. Gold replied to this letter on behalf of
Mr. Noble by a letter dated July 23, 1991.
[11] Mr. Gold billed Mr. Noble for these services in
1991 and the invoices were paid. Mr. Noble then submitted
them to Tridel for reimbursement, which was done.
[12] These accounts are the ones in dispute in his appeal for
the 1991 taxation year.
[13] The amounts reimbursed were not included as income or
taken as deductions in Mr. Noble’s 1991 tax
return.
[14] On October 9, 1992, an inquiry (the
“Inquiry”) was established by Revenue Canada pursuant
to subsection 231.4(2) of the Act, to look into the
financial affairs of Angelo Del Zotto.
[15] A subpoena dated April 21, 1993, issued under the
authority of the Inquiry, was served upon Mr. Noble
requiring him to deliver all documents or other things in his
possession, control or power relating to the financial affairs of
Angelo Del Zotto for the taxation year 1979 to 1985
inclusive, including but not restricted to documents, etc.
relating to Supra, 272930 B.C. Ltd., Auburg Ventures Inc.,
Night Hawk Resources Ltd. and Delbancor Industries Inc., formerly
known as Saxton Industries Ltd.
[16] Although the subpoena was directed to matters concerning
Angelo Del Zotto, the Appellant believed that this was
a continuation of the ongoing investigation of Tridel, which he
claims related back to 1990 and to the request for information
contained in the Revenue Canada letter to him of May 15,
1991. Also according to the Appellant, by mentioning Supra, he
again assumed that Tridel was involved. Again, he felt there was
a conflict between protecting his source of income and protecting
his client, in that he would be required to be a witness against
his client. However, there was no evidence that
Mr. Del Zotto was himself a client of
Mr. Noble.
[17] Mr. Noble again talked with
Mr. Elvio Del Zotto and was told to keep his
retainer with Mr. Gold and Tridel would pay his legal
expenses. He then took the subpoena to Mr. Gold.
[18] There followed many legal proceedings concerning the
Inquiry, the subpoena and other matters. These proceedings
involved Mr. Angelo Del Zotto as well as
Mr. Noble. Throughout the proceedings, Mr. Gold and
members of his firm acted on Mr. Noble’s behalf, with
the effect that as of the present time, section 231.4 of the
Act and the subpeonas issued under it have been declared
to be of no force and effect under subsection 52(1) of the
Constitution Act, 1982 by the Federal Court of Appeal.
Leave to appeal the decision of the Federal Court of Appeal has
been made to the Supreme Court of Canada, but the application for
leave has not been heard.
[19] Mr. Gold invoiced Mr. Noble for the services
rendered in 1993 concerning the Inquiry and subpoena, and the
accounts were handled in the same manner as the 1991 accounts.[1] These accounts are
the ones in dispute for his 1993 taxation year.
[20] Mr. Noble claims that throughout these years, he
continued to provide legal services to Tridel and wished to
continue to provide such services. By seeking legal counsel at
the request of Tridel, Mr. Noble claims that he was in
continuance of his retainer to provide such services. Without
retaining counsel, he could not provide these services, since he
would be in a conflict between his earning capacity and his
client.
[21] To succeed, he must demonstrate that the moneys paid by
way of fees charged by Mr. Gold’s law firm, were paid
by Mr. Noble for the purpose of gaining of producing income
from his law practice. He must establish the connection between
the expenditures and the purpose of such expenditures.
[22] The beginning of the investigation in 1990 and the
physical presence of Revenue Canada auditors on Tridel’s
premises pointed to Tridel being under scrutiny. The second
request letter from Revenue Canada referred specifically to
Tridel, although the first request letter and the subpoena did
not. In his evidence concerning the subpoena, there was mention
of Supra, which in his mind related to Tridel, even though it was
not mentioned. The evidence of Mr. Noble leads me to find
that his relationship with the constituent members of the Tridel
group, as well as their personnel, was such as to make them as
one in his mind. Angelo Del Zotto, Tridel and the
Appellant’s source of income are so connected that in the
Appellant’s eyes, they became indistinguishable. Having
found that, one must then weigh this against the other fact that
whatever the relationship between Mr. Noble and
Angelo Del Zotto was, that relationship was not one of
solicitor and client.
[23] It was apparent to the Appellant that the entire Tridel
enterprise was under observation not just parts. Accordingly,
when he retained counsel to advise him, in order not to appear to
be or in fact to be in conflict with his source of income, he did
so in order to continue to earn income from Tridel. To this end,
the advice he sought was to allow the continuation of his
income.
[24] It has been recognized by the courts that there is no
need to show that an expenditure of money results in specific
income being earned.[2] Taken in the context of his entire law practice, the
expenditure of legal fees for counsel were necessary in order to
permit him to continue to earn income. It has long been held that
the deduction of legal fees are allowable when they are incurred
in connection with the ongoing business of the Appellant, which
is the case in this appeal.
[25] As to the argument whether or not the expenditures were
of capital nature, they were not. They were on account of income,
and arose out of the day-to-day operations of the
Appellant’s law practice. By retaining counsel and paying
the fees, he was allowed to continue advising his client. It was
his perception that should he not retain counsel, he would be in
a conflict position, which would render him incapable of
performing his services and thus earning income.
[26] For the above reasons, the appeal is allowed with costs
and the matter referred back to the Minister of National Revenue
for reconsideration and reassessment on the basis that the legal
fees in question are deductible.
"Ronald E. Sobier"
J.T.C.C.
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