Citation: 2013 TCC 414
Date: 20131220
Docket: 2009-3370(IT)G
BETWEEN:
PATRICK A. GOUVEIA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Favreau J.
[1]
The appellant appeals
from the assessments for the 2003, 2004, 2005 and 2006 taxation years initially
issued on June 10, 2004, May 19, 2005, April 27, 2007 and September 20, 2007
respectively (the “assessments”) and from the reassessment for the 2007
taxation year issued by a notice of reassessment dated September 22, 2008 (the
“reassessment”).
[2]
By way of the
assessments and the reassessment, the Minister of National Revenue (the
“Minister”) disallowed the following legal expenses claimed by the appellant in
connection with his defence against two legal proceedings: the charges brought
by the Ontario Securities Commission (the “OSC proceedings") and the
charges in a class action lawsuit (the “Class Action”):
|
Year
|
Amount Claimed
|
|
2003
|
$446,030.79
|
|
2004
|
$710,607.72
|
|
2005
|
$335,982.59
|
|
2006
|
$1,184,612.87
|
|
2007
|
$711,860.40
|
[3]
The appeal with respect
to the 2003 taxation year is quashed because it is not properly before the
Court. The Notice of Objection for the 2003 taxation year was not filed within
the limitation set under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.),
as amended (the “Act”).
The Issue
[4]
The issue is whether
the Minister properly disallowed the legal fees claimed by the appellant in his
2004, 2005, 2006 and 2007 taxation years.
[5]
The appellant's
position is that the legal fees were incurred to gain, produce or protect income
from business and are deductible under the general concept of
"profit" pursuant to subsection 9(1) of the Act, and not
prohibited under paragraph 18(1)(a) of the Act.
[6]
Although the Minister
agrees that the appellant incurred certain legal fees, the Minister's view is
that the fees were not incurred to gain or produce income from business or
property and, therefore, are not deductible pursuant to paragraph 18(1)(a)
and subsection 9(1) of the Act.
[7]
The parties filed a
Statement of Agreed Facts at the hearing. The specific transactions that were
carried out and the events that took place are described in paragraphs 5
to 52, which are reproduced here:
Atlas
and the Trust
5. On
May 14, 1997, the Associated Freezers Income Trust ("AFIT") made an
initial public offering on the Toronto Stock Exchange.
6. AFIT was an open-ended, limited purpose trust established
under the laws of the Province of Ontario, which was created to invest in
common shares, preferred shares and notes of Associated Freezers Ltd.
("AFL").
7. On August 10, 2000, AFL merged with Atlas Cold Storage
Holdings Limited. The merged entity was called the ACS Freezers Income Trust
("ACSFIT").
8. ACSFIT changed its name to Atlas Cold Storage Income
Trust (the "Trust") on June 25, 2001.
9. The Trust was an open-ended, limited purpose trust
established under the laws of the Province of Ontario. Its head office was in Toronto.
10. The Trust, through its wholly owned subsidiary, Atlas Cold
Storage Holdings Inc. ("Atlas" or "ACSHI"), and through the
wholly-owned subsidiaries of ACSHI, operated a Canadian and US based network of
public refrigerated warehouse facilities, a transportation business, and a
retail management business.
11. The earnings of Atlas and its subsidiaries flowed to the
Trust and the Trust paid cash distributions to unit holders quarterly, as
approved by the trustees of the Trust on the advice of the Directors of Atlas.
12. Pursuant to Ontario securities law, the Trust, ACSFIT and
AFIT were obliged to file audited financial statements, and various other
reporting documents, with the Ontario Securities Commission (the "OSC”).
13. On October 30, 2006, Eimskip Atlas Canada Inc.
("Eimskip") acquired all of the issued and outstanding units of the
Trust and on November 3, 2006, the trustees of the Trust resigned.
14. On November 3, 2006, the Trust units ceased trading on the
Toronto Stock Exchange as a consequence of the Eimskip purchase.
The appellant
15. In or about November of 2003, the appellant, through
1177325 Ontario Ltd., held approximately 8.1% of the units of the Trust.
16. The appellant was a director, the president and the chief
executive officer of Atlas commencing August 11, 2000.
17. The appellant had a contract of employment dated August
11, 2000 with Associated Freezers Ltd. ("AFL") [the "Employment
Agreement"]. Under the Employment Agreement, the appellant received a base
salary of $ 400,000 and was entitled to receive a bonus in each calendar year
of no less than $100,000, payable in quarterly instalments.
18. Pursuant to the Employment Agreement, the appellant was
appointed the Chief Executive Officer of Atlas. His employment as Chief
Executive Officer was for an indefinite term commencing August 11, 2000 and
subject to termination not later than the appellant reaching the retirement age
of 65, or earlier at the appellant's sole discretion in accordance with Atlas'
early retirement policies.
19. The appellant was also entitled to participate in the
Trust Unit Option Plan of AFIT. Under the terms of the Employment Agreement,
the appellant received an initial grant of options to purchase units in AFIT,
the underlying units having a market value of $2,000,000. At the discretion of
the Board of Directors, the appellant was entitled to additional grants of
options to purchase units in AFIT. The additional grants were to have an
approximate market value of $1,000,000.
20. AFL also had a Restricted Phantom Unit ("RPU")
Plan, in which the appellant was entitled to participate. The appellant
received an initial grant of RPUs with an approximate market value of $150,000
at the effective date of the Employment Agreement. Pursuant to the terms of the
Employment Agreement, the appellant was entitled to a payment in the amount of
$1,014,081 in respect of the RPU Plan.
21. The RPU Plan provided that the appellant would be entitled
to receive additional payments within three years. The payments were to be
determined by reference to the average of the closing prices of the units in
AFIT on the Toronto Stock Exchange at the relevant time and no later than
December 31 of the year that was three years from the date of the grant.
22. The RPU Plan provided that the RPUs vested three years
after the date of granting and could be redeemed for cash, calculated at the
aggregate of the then market value of the AFIT units plus the cash distribution
paid over the intervening years.
23. The RPU Plan was a bonus plan, wherein the amount of the
appellant's bonus was calculated on a formula that included share value and
distributions that were paid on the trust units. The grant of RPUs was
notional.
24. The appellant never received a transfer of RPUs nor any
cash payments under the RPU Plan.
25. After the second quarter of 2003, no executives, officers,
or employees of Atlas received a notional grant of RPUs under the RPU plan.
26. The appellant was entitled to a termination payment under
the terms of the Employment Agreement.
27. Under the terms of the Employment Agreement, there is a
difference between payments to the appellant if he was terminated for cause and
if employment was terminated without cause.
28. If termination was for cause, the appellant was entitled
to any amounts owing to him up to and including the date of termination of his
employment income together with any accrued vacation pay.
29. If, however, the appellant was terminated without cause,
he would be entitled to accelerate all of his granted but unvested unit options
that he held and that would have vested within a term of two years from the
date of termination. Further, in the latter case, the appellant could also
accelerate the issue of the units in respect of the RPUs. The accelerated
options would be dealt with according to the terms and conditions of the
applicable stock option plans.
30. The Employment Agreement also provided for termination
payments in the event of a change of control of the company.
31. On August 29, 2003, the Trust announced that it would be
restating the results for the 2001 and 2002 fiscal years. Amended and Restated
Consolidated Financial Statements for the years ended December 31, 2001 and
2002 were issued thereafter, as were Financial Statements for the year ended
December 31, 2003.
Termination of employment with Atlas
32. The appellant resigned from Atlas on November 21, 2003.
33. The appellant made a wrongful dismissal claim against
Atlas and its successors. It was an arbitration proceeding. The wrongful
dismissal proceeding was settled in November 2010 without admission of
liability on the part of any party.
1177325 Ontario Limited
34. At all material times, the appellant held the majority of
the shares in 1177325 Ontario Limited.
35. Since the appellant's resignation of November 21, 2003,
the appellant has provided consulting work exclusively for 1177325 Ontario
Limited, through Spire Group Limited, a related company.
36. Prior to his resignation from Atlas, the appellant
performed the same work for 1177325 Ontario Ltd., through Spire Group Limited,
a related company, as he performed after his resignation.
Patrick Gouveia Consulting
37. Since 2002, the appellant has reported income from a sole
proprietorship known as Patrick Gouveia Consulting ("PGC').
38. PGC is a management consultancy business. Its purpose is
to manage the business of 1177325 Ontario Ltd., through Spire Group Limited, a
related company, and to solicit business in the public refrigerated warehousing
industry.
39. From 2002 onwards, the
appellant reported income in the form of management fees from PGC, paid to PGC
by Spire Group Limited, a related company to 1177325 Ontario Ltd., as follows:
a) 2002: $230,000
b) 2003: $230,000
c) 2004: $250,000
d) 2005: $0
e) 2006: $0
f) 2007: $583,000
40. The appellant continues to carry on business through PGC.
OSC Proceedings
41. On or about June 2, 2004, the OSC brought charges against
the appellant in the Ontario Court of Justice with respect to the filing of the
Trust's annual financial statements for the years ending 2001 and 2002, and the
first and second reporting periods for the Trust's 2003 financial year.
42. The OSC alleged that senior employees of Atlas, including
the appellant, engaged in a course of conduct that was intended to present an
improperly improved picture of the financial performance of the Trust for the
period including the financial years 2001, 2002, and the first two reporting
periods of 2003.
43. The OSC alleged that this conduct included the
inappropriate capitalization of expenses, not matching expenses to revenue,
improperly accounting for a refund under an asset purchase agreement as a
reduction of expenses, and the funding of a subsidiary in breach of a covenant
in a lending agreement.
44. The OSC sought an order reprimanding the appellant and
prohibiting him from trading in securities or serving as a director or officer
of a reporting issuer.
45. On February 27, 2007, counsel for the OSC advised the
Ontario Court of Justice as follows: "Given the new information that has come
to our attention over the last several weeks, and the comprehensive review that
we [i.e., the OSC] have conducted in light of it, we have determined that the
prosecution no longer has a reasonable prospect of conviction" and
requested that the charges against the appellant be dismissed. The Ontario
Court of Justice then dismissed all charges against the appellant.
The Class Action
46. On or about February 4, 2004, a lawsuit was commenced
against Atlas, the appellant, certain other directors and officers of Atlas,
certain trustees of the Trust, the auditors for Atlas and the Trust (Ernst
& Young, LLP), and the lead underwriter for the Trust unit offerings (the
"Class Action").
47. A multitude of causes were alleged against the various
defendants, including the appellant, and the Plaintiffs sought various orders,
declarations and damages in excess of $400 million. Among the relief sought was
a declaration that the appellant account to the Plaintiffs for all proceeds
received from trading in trust units.
48. In 2008, the parties to the Class Action reached a
settlement. The settlement resolved the Class Action without prejudice or
admission of liability.
Legal Fees
49. The appellant retained legal counsel to represent him
regarding the OSC proceedings and the Class Action.
50. The appellant incurred legal fees in the following amounts
with respect to the OSC proceedings and the Class Action, which the appellant
says are deductible and the Minister says are not deductible:
|
Year
|
OSC
Proceedings
|
Class Action
|
Class Action
& OSC
|
Total for Year
|
|
2004
|
$0.00
|
$0.00
|
$70,123.18
|
$70,123.18
|
|
2005
|
$363,832.11
|
$0.00
|
|
$363,832.11
|
|
2006
|
$1,154,593.49
|
$13,359.92
|
|
$1,167,953.41
|
|
2007
|
$587,488.81
|
$52,323.76
|
|
$639,812.57
|
|
TOTAL:
|
$2,105,914.41
|
$65,683.68
|
$70,123.18
|
$2,241,721.27
|
51. No further amounts are in dispute between the parties to
this appeal.
52. All
of the legal fees at issue in this appeal relate to post-employment charges.
None of the legal fees at issue in this appeal were incurred with respect to
the appellant's employment income.
[8]
At the hearing, the
parties filed a joint Brief of Documents and the respondent filed the following
exhibits:
- the arbitration agreement
made effective as of January 27, 2006 (R-1);
- the notice to arbitrate dated
September 12, 2008 (R-2);
- the statement of arbitration claim
dated February 17, 2009 (R-3);
- an addendum to
arbitration agreement made effective as of October 19, 2006 (R-4);
- the statement of
arbitration defence and counterclaim of Versacold Logistics Canada Inc. dated
March 16, 2009 (R-5);
- the settlement agreement dated
November 18, 2010 (R-6); and
- the full and final mutual release
dated November 29, 2010 (R-7).
[9]
The facts referred to in
the above-mentioned exhibits complete the Statement of Agreed Facts.
[10]
Before the hearing, the
parties had come to an agreement with respect to the quantum of legal fees which
was being contested. The appellant confirmed that he was not pursuing anymore the
issue of whether the legal fees were incurred for the purpose of gaining,
producing and protecting income from property.
The Appellant’s Position
[11]
The appellant submitted
that he is entitled to deduct his legal fees incurred to gain or produce income
from his consulting business pursuant to subsection 9(1) of the Act
and that the OSC proceedings and the Class Action threatened his ability to
generate income from his consulting business.
[12]
Concerning the
determination of net income under section 9 and paragraph 18(1)a)
of the Act, the appellant submitted that:
(a) the legal fees
incurred to gain or protect income from business and property are deductible as
expenses under the general concept of “profit” under section 9 of the Act;
(b) the determination of
profit under subsection 9(1) is a question of law, not fact. The essential
test is under subsection 9(1) and not under paragraphs 18(1)a)
and h);
(c) the Minister cannot
simply assume as a fact what must be determined as a question of law.
[13]
Concerning the
deductibility of legal fees incurred to protect the appellant’s ability to gain
or produce income from his consulting business, the appellant submitted the
following:
(a) it is not necessary
for an expense to lead directly to the production of income, or for a taxpayer
to prove a causative relationship between a particular expense and a particular
receipt to claim the deduction. The question to ask is “were the expenses
incurred for the purpose of gaining or producing income from a business?” This
is ultimately a question of fact to be decided with due regard in all circumstances;
(b) the connection between
the legal expenses and the consulting income was direct and not too remote.
Conviction would have destroyed his income from business;
(c) the legal fees incurred
by the appellant directly facilitated his ability to earn income from his
consulting business;
(d) the legal fees
incurred by the appellant to defend himself against false criminal charges in
respect of his business practices are deductible; all the more so, where the
charges are withdrawn and the taxpayer is presumed innocent;
(e) the ultimate finding
of guilt or innocence is immaterial to the deductibility of legal fees;
(f) the mere fact that an
expense has a personal aspect is not enough to conclude that it is not
deductible.
The Respondent’s Position
[14]
The respondent’s
submissions are:
(a) the legal fees were
not incurred to gain or produce income from business in that:
(i) the legal fees
did not constitute expenses “normally incurred by others” involved in the
business activity;
(ii) the legal proceedings
were not a normal and ordinary risk and incidental to the appellant’s consulting
business activity;
(iii) the onus is on
the appellant to show the connection between the expenses and the business;
(iv) the legal fees
with respect to the OSC proceedings and the Class Action would have been
incurred regardless of whether the appellant was engaged in consulting activities
as Patrick Gouveia Consulting;
(v) the OSC
proceedings and the Class Action arose directly as a result of the appellant’s
employment with AFL and could only indirectly and potentially impact the
appellant’s consulting activities;
(b) any connection between
the legal fees incurred by the appellant and his consulting activities is too
remote to enable the appellant to deduct the legal fees; it is the activities
that resulted in the charges and its connection to the business that determine
the deductibility of the legal expenses associated with the defence;
(c) the legal fees were
incurred to preserve the appellant’s reputation and his capacity to earn future
earnings, which are outlays in respect of capital;
(d) in the alternative,
the amounts claimed are not reasonable and should be restricted pursuant to
section 67 of the Act. The legal fees far outweigh the average income reported
by the appellant with respect to the consulting activities carried on between
2002 and 2007. No income from his consulting activities was reported in his
2005 and 2006 taxation years.
Analysis
[15]
The relevant provisions
of the Act governing the deductibility of expenses for the determination
of business income are subsection 9(1) and paragraphs 18(1)a) and 18(1)h).
They read as follows:
9. (1) Subject to this Part, a
taxpayer’s income for a taxation year from a business or property is the
taxpayer’s profit from that business or property for the year.
18. (1) In computing the income
of a taxpayer from a business or property no deduction shall be made in respect
of
(a) an
outlay or expense except to the extent that it was made or incurred by the taxpayer
for the purpose of gaining or producing income from the business or property;
. . .
(h) personal
or living expenses of the taxpayer, other than travel expenses incurred by the
taxpayer while away from home in the course of carrying on the taxpayer’s
business;
[16]
The concept of profit
found in subsection 9(1) is inherently a net concept and the deductions of
business expenses are allowed to the extent that they are consistent with
"well accepted principles of business (or accounting) practice" or
"well accepted principles of commercial trading" as referred to by
Iacobucci, J., at paragraph 43 in the decision of Symes v. The Queen,
1993 CarswellNat 1178, [1993] 4 S.C.R. 695.
[17]
Section 18 of the Act
provides a number of prescribed statutory limitations of expense deductions.
Paragraph 18(1)a) sets out a general prohibition denying a deduction
unless the amount is paid or incurred for the purpose of gaining or producing
income while paragraph 18(1)h) prohibits the deductibility of personal
and living expenses.
[18]
The leading case which
considered the deductibility of business expenses under paragraph 18(1)a)
is Symes, supra. That case involved a partner of a law firm who employed
a nanny to care for her children and deducted the wages she paid to the nanny
as a business expense. At paragraph 73, the Supreme Court of Canada stated that
the determination of whether an expense is deductible under
paragraph 18(1)a) simply depends if it is incurred for the purpose
of gaining or producing income from a business. At paragraph 74, Iacobucci J.,
in writing for the majority, made the following comment concerning the
determination of the purpose of an expenditure:
. .
. Courts will, instead, look for objective manifestations of purpose, and
purpose is ultimately a question of fact to be decided with due regard for all
of the circumstances. For these reasons, it is not possible to set forth a
fixed list of circumstances which will tend to prove objectively an income
gaining or producing purpose.
[19]
Despite the lack of an
exhaustive list of factors to determine whether or not the purpose of an
expenditure is to produce income from a business, Iacobucci J. did set out
a number of relevant factors to consider in deciding if a business expense is deductible:
(a)
whether the expense is
one normally incurred by others involved in the taxpayer's business and whether
the deduction is ordinarily allowed as a business expense by accountants
(paragraph 75);
(b)
whether a particular
expense would have been incurred if the taxpayer was not engaged in the pursuit
of business income (paragraph 76);
(c)
whether a particular
expense would have met a "business need" or a "but for" test
that was outlined by the Court, at paragraph 79, in the following terms:
.
. . In particular, it may be helpful to resort to a "but for" test
applied not to the expense but to the need which the expense meets. Would the
need exist apart from the business? If a need exists even in the absence of
business activity, and irrespective of whether the need was or might have been
satisfied by an expenditure to a third party or by the opportunity cost of
personal labour, then an expense to meet the need would traditionally be viewed
as a personal expense. . . .
[20]
In Gordon Ironside
v. The Queen, 2013 TCC 339, Campbell J. reviewed the caselaw concerning the
issue of "connectivity" between the need which the expense met and
the business itself, in the context of legal and professional fees paid by the
appellant to defend himself against allegations of committing improper
disclosures after being charged by the Alberta Securities Commission. Campbell J. summarized her review, at paragraph 43, as follows:
In
the context of the caselaw, which I have outlined, it is clear that the need
which the expense meets and the business itself must be directly related and
that the expense must either be incapable of being severed from the income
earning operations or be the consequence of a necessary risk to earn income in
that regard. Ancillary expenses may be deductible, and may provide the required
connection between the expenses and the business, so long as they are essential
and necessary to the business activities.
[21]
Campbell J. applied the
principles from the jurisprudence to the evidence that was before her and
concluded at paragraph 45, that:
. .
. the legal and professional fees, that the Appellant paid in defending
himself against allegations before the Alberta Securities Commission, were not
incurred to gain or produce income from his chartered accounting business.
Instead, the expenses were a direct resulting consequence of his position that
he held as an officer and employee of BRRC. The expenses were incurred to
protect his reputation within the oil and gas industry where he focussed his
business activities. As such, they were personal in nature and were not
incurred to protect the income earning potential associated with his
professional accounting business.
[22]
The facts in the Gordon
Ironside's appeals are very similar to the facts in this case and the same
conclusion is drawn from them. In this case, the appellant incurred legal fees
in defending himself against allegations in the OSC proceedings and in the Class
Action. The legal fees were not incurred to gain or produce income from his
consulting business as they were a direct result of the position that he held
as director, president and executive officer of Atlas. The expenses were
incurred to protect his reputation within the cold storage industry where he
focussed his consulting business activities. As such, the legal expenses were personal
in nature and were not incurred to protect the income earning potential
associated with his consulting business.
[23]
A review of the factors
enunciated by the Supreme Court of Canada in Symes, support my
conclusion as it did in the Gordon Ironside's appeals.
Whether the expense is one normally incurred by others
involved in the taxpayer's business and whether a deduction is ordinarily
allowed as a business expense by accountants?
[24]
The legal expenses
engaged by the appellant in defending himself against charges relating to
infringements of provincial securities legislation are not generally considered
a usual and accepted business expense associated with consulting services.
Whether a particular expense would have been incurred
if the taxpayer was not engaged in the pursuit of business income?
[25]
The answer is yes. The
appellant would have have to defend himself whether or not he was engaged in
the pursuit of his consulting business. The charges laid against him were a
direct result of his conduct and activities as President, Chief Executive
Officer and Director of Atlas and as a result of his holding and trading in
units of the Trust. This conclusion is supported by both the evidence and the
Agreed Statement of Facts submitted by the parties.
[26]
The fact that a portion
of the legal fees incurred by the appellant was covered by the insurance policy
that Atlas provided for the benefit of its corporate directors and officers,
also suggests the conclusion that the charges laid against the appellant were
as a direct result of his position as a director and officer of Atlas. The fact
that the $50 million settlement reached in the Class Action was paid by the
insurer of Atlas in the amount of $40 million and by Atlas itself in the amount
of $10 million, supports also that conclusion.
[27]
While the appellant was
defending the OSC proceedings and the Class Action, the appellant was also
engaged in wrongful dismissal proceedings with Atlas. The appellant's
employment and the legal proceedings were closely linked together during the
taxation years in issue. Clearly, the need of the appellant to defend himself
against the OSC proceedings and the Class Action was separate from his
consulting business and would have existed apart from it.
The "business need" or "but for"
test
[28]
As mentioned in the
preceding paragraph, the need for the appellant to defend himself against the
OSC proceedings and the Class Action was separate from his consulting business.
The potential consequences from a conviction in the OSC proceedings or a finding
of liability in the Class Action would have directly impacted the appellant's
employment but indirectly impacted his consulting activities.
[29]
There is no evidence in
this case to suggest that the charges and allegations that formed the basis of
the OSC proceedings and the Class Action suit have impacted the appellant's
consulting business. In fact, it appears that these charges and allegations did
not have any material impact.
[30]
The appellant resigned
from Atlas on November 21, 2003 and he made a wrongful dismissal claim against
Atlas and its successors on January 27, 2006. The wrongful dismissal suit was
settled on November 18, 2010. The Class Action was commenced on or about
February 4, 2004 and was settled in 2008. The OSC proceedings began on or about
June 2, 2004 and were abandoned on February 27, 2007. All these legal
proceedings took place from the end of 2003 to the end of 2010, over a
seven-year period. During that period, the appellant received management fees
from Patrick Gouveia Consulting in the amounts of $230,000 in 2003, $250,000 in
2004, nothing in 2005 and 2006 and $583,000 ($550,000 excluding GST) in 2007.
The invoice for 2007 is dated January 31, 2007 and is for consulting and
professional services rendered for the period from February 1, 2006 to January
31, 2007. Most of it is attributable to services rendered in 2006. Considering
the fact that the amount of the invoice represents the double of what was
charged annually, it is conceivable that the amount charged in 2007 also
included the services rendered in 2005. In any event, the appellant seems to
have earned approximately the same amount in consulting or management fees
throughout the period despite the various legal litigations. The management fees
charged by the appellant seem to be fixed and regular from year to year. It
does not appear to fluctuate in proportion to the business income earned by
1177325 Ontario Ltd., a company controlled by the appellant.
[31]
The appellant testified
at the hearing that he continued to provide consulting services to 1177325
Ontario Ltd. throughout the period and that the absence of fees in 2005 and
2006 was attributable to the fact that the closings of some transactions were
delayed. The appellant admitted that because of the no-competition clause in his
employment agreement, he was not allowed to carry on business in the United States of America, Canada and Western Europe. While he was working on his various
defences, the appellant tried to re-emerge his consulting business in Eastern
Europe and he did succeed in making joint ventures in Ukraine, Georgia, and India. While I can appreciate the appellant's argument that it took him years
to reinstate his credibility with financiers around the world even after the
charges were dropped, there was no direct or apparent relationship established
in this case between the acts that created the "need" and the
appellant's consulting business. Connection was not sufficient and too remote
to justify the deduction.
[32]
The Federal Court of
Appeal stated in R. v. Doiron, 2012 FCA 71 (FCA) at paragraph 43, that
the onus is on the taxpayer to show the connection between the expenses and the
business. In 412237 Ontario Ltd. v. R., 1993 CarswellNat 1241 (TCC) at
paragraph 19, the Tax Court of Canada described the threshold as being
"some nexus or other connection between the earning of income and the
payment of the fees".
[33]
As stated by the Tax
Court of Canada in Leduc v. R., 2005 CarswellNat 227, at paragraph 26:
. .
. it is the activity that resulted in the charges and its connection to the
business that determines the deductibility of the legal expenses associated
with the defence.
[34]
In Cimolai v. R.,
2006 CarswellNat 3558 (FCA), the Federal Court of Appeal agreed with the Tax
Court of Canada that the taxpayer could not deduct as business expenses, legal
fees incurred in prosecution of action of defamation to preserve the taxpayer's
professional reputation because they were incurred with respect to legal
proceedings that resulted from his employment activities. The Federal Court of
Appeal identified the taxpayer's business activities (self-employed) and
concluded at paragraph 14 that ". . . income earning activities capable
of supporting a deduction under paragraph 18(1)(a) were very limited".
[35]
By incurring the legal
fees, what risk was the appellant trying to avert? According to the appellant,
it was the risk of losing the opportunities to make lucrative transactions such
as joint ventures in the cold storage industry. The appellant incurred the
legal fees to defend the OSC proceedings and the Class Action to protect his
ability to earn business income through Patrick Gouveia Consulting which
depends on the appellant's unblemished record of business experience, acumen
and service.
[36]
By way of the OSC
proceedings, what was sought was an order reprimanding the appellant and
prohibiting him from trading in securities or serving as a director or officer
of a reporting issuer. This, in and by itself, would not deprive the appellant
of his ability to earn business income through Patrick Gouveia Consulting in
countries not covered by the non-competition clause of the appellant's
employment agreement.
[37]
With respect to the
Class Action, among the relief sought was a declaration that the appellant
accounts to the plaintiffs for all proceeds received from trading in trust
units. The appellant's motivation for defending the Class Action and the
consequences that may have resulted from the Class Action do not appear to have
any relationship to the consulting activities of the appellant.
[38]
The consequences that
the appellant was facing from a conviction in the OSC proceedings or from a
finding of liability in the Class Action would impact more directly his future employment
prospects than his current and future consulting activities. In my opinion, the
connection between the legal expenses incurred and the consulting activities is
too remote to enable the appellant to deduct them.
The preservation of the appellant's reputation and
capacity to earn future income
[39]
Preserving the
appellant's reputation and his capacity to earn future income was central to
his decision to defend himself at the OSC proceedings and the Class Action. The
appellant's unblemished record of business experience, acumen and service was
under attack by the OSC proceedings and the Class Action (paragraph 12 of
Section G of the Notice of Appeal).
[40]
In Cimolai, supra,
at paragraph 15, the Federal Court of Appeal confirmed that "legal
expenditures made to protect one's professional reputation and hence one's
capacity for future earnings are by definition capital in nature".
[41]
Deduction of legal fees
incurred to preserve the appellant's reputation and capacity to earn future
income is prohibited by paragraph 18(1)(b) of the Act and is
considered to be capital in nature.
[42]
The appeals from the
assessments for the 2003, 2004, 2005 and 2006 taxation years are dismissed and
the appeal from the reassessment for the 2007 taxation year is allowed solely
to give effect to the concession made by the Minister to reduce the business
income of the appellant for that year by an amount of $33,000; the reassessment
is referred back to the Minister for reconsideration and reassessment on the
basis that the business income of the appellant for the 2007 taxation year
shall be reduced by an amount of $33,000.
[43]
The whole with costs to
the Respondent.
Signed at Ottawa, Canada, this 20th day of December 2013.
"Réal Favreau"
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