Date: 20000831
Docket:
98-2826-IT-I
BETWEEN:
JAMES F.
DAVIDSON,
Appellant,
and
HER MAJESTY HE
QUEEN,
Respondent,
AND BETWEEN:
98-2827-IT-I
AGNA
DAVIDSON
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
___________________________________________________________________
For the Appellants: James
F. Davidson
For the Respondent:
François Bordeleau
___________________________________________________________________
Reasonsfor
Judgment
(Delivered orally from the
Bench on May 3, 2000, at Sudbury, Ontario)
Mogan
J.T.C.C.
[1]
The appeals of James and Agna Davidson who are
husband and wife were heard together on common evidence. The
years under appeal for James are 1994, 1995 and 1996 and for Agna
are 1994 and 1995. The claim by Agna relates to certain credits
like the goods and services tax credit, which is dependent upon
either the family income or the income of the two Appellants as
spouses. Therefore, the appeals of Agna will follow the result in
the appeals of James. That was clarified with the parties at the
beginning of the hearing. The Appellants have elected the
informal procedure.
[2]
The story behind these appeals really begins
many years prior to 1994 which is the first year under appeal. In
1987, the Appellants incorporated 704770 Ontario Incorporated
(the "numbered company") to purchase a motel in
Pembroke, Ontario. It operated the motel for approximately two
years. In 1989, the motel was sold and the numbered company took
back a mortgage in the amount of approximately
$190,000.
[3]
Mr. Davidson then found a property in Smiths
Falls, Ontario which looked like a good investment because it
included a gas station, convenience store and car wash. The
leases for those three enterprises appeared to be in good order
and, accordingly, the Appellants caused the numbered company to
purchase this property at 69 Lombard Street, Smiths Falls for a
price of approximately $1,018,000. As Mr. Davidson explained in
evidence, the value of the property was really dependent upon the
leases for the gas station, convenience store and car wash, and
the inherent value of the property was not one million dollars
without those leases.
[4]
The purchase transaction was completed on or
about December 15, 1989 and the principal tenant was Congo Gas
which I assume operated the gas station, convenience store and
car wash. Unbeknownst to the Appellants, the gas station tenant
was in dangerous financial circumstances at the time of the
purchase. By January 1991, just thirteen or fourteen months after
the purchase, the tenant went bankrupt and was unable to operate
the gas station or keep up the lease payments. That event was a
financial catastrophe for the numbered company because it had
purchased the property and was dependent upon the rent from
leases to pay the mortgage on the property.
[5]
The Appellants and the numbered company
attempted to find someone else to operate the gas station but, in
that process, it came to light that there was an environmental
hazard on the property. The details are not precise but I assume
it related to the fact that there were underground tanks which
stored gasoline or other petroleum products. It is a well known
fact that if a tank of that character develops a leak, the
surrounding land can be contaminated resulting in costly clean-up
procedures. Once the Appellants knew about the environmental
problem, it was almost impossible to find any person who would
operate the gas station. I conclude from Mr. Davidson's
evidence that the property was without a tenant from early 1991
right through to the latter part of 1992 with no lease payments
coming in.
[6]
With no lease payments, the numbered company
could not service the mortgage. The mortgagee took proceedings
against the property and, in the latter part of 1992, forced the
sale of the property at a price in the range of $450,000 which of
course caused a very substantial loss to the numbered company.
Also, around 1990, 1991 or 1992, the person who purchased the
Pembroke motel went bankrupt and was unable to continue the
operation of the motel. The company suffered the loss of the
vendor take back mortgage on the motel. And so there was a double
financial catastrophe falling upon the numbered company which I
would call a holding company for the Appellants.
[7]
The Appellants concluded that there was some
kind of professional negligence connected with the purchase of
the Smiths Falls property. A legal action was commenced by the
Appellants and the numbered company against three persons (i)
Daniel Kimmel, who was a lawyer who represented them on the
purchase of the property; (ii) Dennis Girard, a real estate agent
who was connected with and advised them on the purchase of the
property; and (iii) Canada Trust Company. I am not sure in what
capacity Canada Trust was sued but it may have been the broker
who employed Dennis Girard as the real estate agent or it may
have been the listing broker. Also, I am not sure in what
capacity the other parties were sued because there was not
entered into evidence the statement of claim filed in the Ontario
Court against those defendants. I do not know what specific
damages were claimed against them. I note from the oral evidence
of James Davidson that one of the heads of damages was lost
salary in the range of approximately $270,000 representing about
nine years of salary at $30,000 per year because he had not been
paid any salary as the manager of the numbered company at any
time from and after December 1989 when it purchased the Smiths
Falls property.
[8]
I assume there were other claims of damages
like the capital loss suffered on the purchase price when the
numbered company paid about $1,018,000 for the Smiths Falls
property and it was sold for only about $450,000. I do not have a
copy of the statements of defence filed on behalf of the various
defendants and so I do not know what has been said by way of
defence against the claims. This is unfortunate because those two
documents (statement of claim and statement of defence) are
important to the Appellants' appeals. The Appellants ought to
have known that, coming to this Court claiming to deduct legal
expenses connected with this lawsuit and certain ancillary
expenses for the claims they have incurred in connection with the
lawsuit. The lawsuit is the cornerstone of the Appellants'
appeals but I do not have the pleadings and I cannot determine
precisely what has been claimed against the defendants. I found
the Appellant, James Davidson, to be a very believable witness. I
have no doubt that when he was testifying, he was attempting to
recollect and describe what the numbered company's claim was.
He did describe a claim for $270,000 which I determined would
have been at the rate of $30,000 per year for nine years since
apparently the legal action was not commenced until 1997 and
1998, eight or nine years after the original purchase.
[9]
The reason I am disappointed in not having the
pleadings in the case before the Ontario Court is that I have
some general principles of commercial law which most lawyers
carry around as part of their legal equipment after they are
qualified to practice law. I would have thought that a possible
defence against the individual plaintiffs, if Mr. Davidson was
claiming for lost wages or lost salary, was what lawyers would
call no privity of contract between any of the defendants and
James Davidson. None of the defendants was ever going to be
an employer of James Davidson. They had different capacities. Mr.
Kimmel was the lawyer acting for the corporate purchaser, the
numbered company. Dennis Girard was a real estate agent and
perhaps his primary professional connection was with the vendor.
If Canada Trust was the broker, it is possible their client
relationship was with the vendor, if it were the broker for whom
Mr. Girard worked. It appears to me that none of the defendants
was ever going to be an employer of James Davidson. I would think
that if he was claiming damages in the lawsuit, one of the
potential defences would be a lack of privity of contract between
the named defendants and Mr. Davidson. If he has an action for
lost salary or lost wages, it seems to me his only action is
against his own company, the numbered company. That is only
speculation on my part because I do not have the pleadings. While
there is nothing wrong with making a claim for lost wages in an
action like the one that has been described, in the absence of
the pleadings and knowing specifically what was claimed and also,
importantly, what defence is put up, it is difficult for me to
say whether there was a reasonable cause of action or that this
action was an attempt to collect salary or wages
owing.
[10]
I am inclined to the view that from what I
have been told in evidence that the action is primarily for the
loss of the property and the capital loss suffered when the buyer
paid $1,018,000 for a property which may have been grossly
overvalued. It may have been overvalued because of the negligence
of some of the persons advising the buyer at the time, who was
led to believe that everything was in place with respect to the
credit rating of the vendor and the credit rating of the
potential tenant.
[11]
Also absent from evidence are the tax
returns of the individual Appellants. Neither party (Appellants
or Respondent) saw fit to put into evidence the income tax
returns, particularly the returns of Mr. Davidson. I do not know
what his sources of income were in 1994, 1995 and 1996 against
which the expenses are deducted. He did say in response to one of
my own questions that in the years under appeal, his income was
derived mainly from pensions. Pensions as a source of income are
very different from employment; so different that they are
received in most cases after a period of employment. The amounts
are deducted, however, as if they are claims against employment
as a source of income. The Notice of Appeal begins by
saying:
The legal and office expenses were incurred by
myself in order for 704770 Ontario Inc. and myself to file a
joint action to recover losses on the investment and the earned
income of $30,000 per year for myself.
Apparently, that was the purpose of the claim and
employment would be a source of income. Income from employment is
described in section 5 of the Income Tax Act and, under
section 8 of that Act, there is a very limited number of
deductions which one can take and set off against employment
income. The only one which I think relates to the claim made
by the Appellant, James Davidson, is
paragraph 8(1)(b) which states 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)
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;
[12]
The only person (and I use that word in the
legalistic sense) who could be described as an employer, former
employer or potential employer of James Davidson was the
numbered company. That is the person to whom he claims he was
looking to pay him $30,000 per year. Indeed, he went to the
trouble of drafting an employment agreement between himself and
his own company dated January 1, 1994 which is attached to his
Notice of Appeal and which begins as follows:
James F. Davidson of the City of Kingston in the Province of Ontario
accept the position of Manager at the yearly salary
of $30,000 and will comply with the following terms
and conditions.
There are four or five conditions, each two or three
lines long, and attached to that is another page entitled Basic
Function, which is to manage the day-to-day operations and
functions of the company to ensure that the interests of the
company are protected. Then there is a series of duties and
responsibilities. I do not doubt that Mr. Davidson in good faith
drafted and signed this contract but, in a sense, it is based on
an expectation that the litigation against the named defendants
will be successful and that some property will be restored to the
numbered company which could then employ him in some capacity to
manage its affairs. Until that expectation is fulfilled (and I am
not saying that it is not a reasonable expectation) the numbered
company does not and would not have any property. Without any
property, the numbered company would not be in a position to
employ any person because there would be no property for the
person to manage.
[13]
On the evidence before me and in the absence
of the documents I have referred to, I do not see any ground on
which it could be said that James Davidson or his wife has a
cause of action against the named defendants for lost wages.
Clearly, neither of the Appellants were ever going to be employed
by the persons named as defendants in that legal action, Mr.
Kimmel, the lawyer, Dennis Girard, the real estate agent, or
Canada Trust. At most, James Davidson might have been employed by
his company had it acquired a successful commercial property and
had that commercial property produced the kind of profit that
would have permitted a salary to Mr. Davidson. He lost out on
that when the company lost its property. His cause of action, if
any, for lost wages would be an action against the numbered
company, which is like an action against himself because he and
his wife are the only shareholders of the company.
[14]
There is no such action going on. Therefore, I
would hold that the legal fees in connection with the action
against the named defendants, Kimmel, Girard and Canada Trust,
are not deductible by the Appellant and his wife. They are more
likely financing the litigation on behalf of the numbered
company. The real plaintiff is the numbered company as the former
registered owner of the Smiths Falls property but, without
any assets, the numbered company cannot afford to conduct the
litigation as former owner. What is happening here is that the
shareholders of the numbered company are financing its litigation
because, as the purchaser, it was the first party that suffered
the most when the property was lost, particularly if it was lost
as a consequence of actionable conduct by any of the named
defendants. That result will be known only when the Ontario Court
delivers its decision.
[15]
Because the legal fees are not deductible by
the Appellant (James Davidson), I would conclude that the other
expenses identified in Schedule "A" to the Reply to the
Notice of Appeal would also not be deductible because they are in
the same realm. They are what I would call incidental and casual
expenses incurred only in connection with pursuing the litigation
against the named defendants. They are basically all litigation
costs and because the litigation is not structured for the
purpose of gaining and producing income for either of the
Appellants, the amounts that were deducted in computing income
for the years under appeal are not in law deductible. The
assessments under appeal are well founded and ought to be
sustained. I dismiss the appeals for all three years by the
Appellant, James Davidson, and as a collateral matter
dismiss the two years under appeal by his wife, Agna
Davidson.
Signed at Ottawa, Canada, this 31st day of
August, 2000.
"M.A. Mogan"
J.T.C.C.
COURT FILE
NO.:
98-2826(IT)I and 98-2827(IT)I
STYLE OF
CAUSE:
James F. Davidson and Agna Davidson and
Her Majesty the Queen
PLACE OF
HEARING:
Sudbury, Ontario
DATE OF
HEARING:
May 3, 2000
REASONS FOR JUDGMENT
BY: The Honourable Judge M.A.
Mogan
DATE OF
JUDGMENT:
May 9, 2000
APPEARANCES:
For the
Appellants:
James F. Davidson
Counsel for the
Respondent:
François Bordeleau
COUNSEL OF RECORD:
For the
Appellant:
Name:
N/A
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
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