REASONS
FOR JUDGMENT
Favreau
J.
[1]
This is an appeal against a reassessment dated
December 3, 2012 made under the Income Tax Act, R.S.C. 1985 (5th supp.),
c. 1, as amended (the “Act ), by the Minister of National
Revenue (the “Minister”) in respect of the appellant’s 2011 taxation year.
[2]
The issue in this appeal is whether the
appellant is entitled to deduct, in computing his income for the 2011 taxation
year, the amount of $27,078 that he claimed as “Other deductions” and were
disallowed by the Minister.
[3]
In determining the appellant’s tax liability for
the 2011 taxation year, the Minister made the following assumptions of fact:
a)
in 2011, the Appellant
earned:
i)
employment income of
$148,649 from Ally Credit Canada Limited;
ii)
interest income of
$4,446; and
iii)
gross business income
of $3,000 and net business income of $945 from providing accounting, taxation
and assurance services as a Chartered Accountant.
b)
on or around 2001 or
2002, the Appellant and a group of individuals (the “Group”) wanted to
establish/invest in a regional transport company which served Québec and
Ontario;
c)
between 2002 to 2003,
the Group created Val Air Inc. and Lignes aeriennes Val Air Inc.;
d)
Val Air Inc. and/or
Lignes aeriennes Val Air Inc. were established by the Group to provide services
as a regional airline;
e)
in 2002, 2003 and 2004,
the Group retained professionals to provide services in respect of implementing
a regional airline (the “Services”);
f)
the Services that were
provided were never paid by the Group;
g)
the Appellant was a
shareholder of Val Air Inc.;
h)
Val Air Inc. declared bankruptcy
on February 24, 2004, and the holding company, Lignes aeriennes Val Air Inc.,
was dissolved on October 17, 2008;
i)
by Judgment dated
November 18, 2008, the Court of Québec of Québec (sic) found that the
Appellant and his co-defendants were liable to pay damages to the plaintiffs in
Lemieux Nolet c. Lignes aériennes Val Air inc., 2008 QCCQ 10339 (the
“Decision”);
j)
the Appellant and one
other co-defendant appealed the Decision (the “Appeal”);
k)
in 2011, the Court of
Appeal of Québec dismissed the Appeal;
l)
in 2011, the Appellant
paid:
i)
$22,578 in respect of
court-ordered damages (the “Damages”); and
ii)
$4,500 in respect of
litigating the Appeal;
(collectively, the “Payments”)
m)
the Damages paid were
in respect of unpaid professional fees; and
n)
the Payments were not
incurred in the course of the appellant’s business activity.
[4]
The amount of $27,078 that the appellant claimed
as a deduction represents an amount of $4,500 that he paid in 2011 to his
lawyers, Kugler Kandestin L.L.P., in representing him in an appeal against a
judgment dated November 18, 2008 rendered by the Honourable Justice Michel
St-Hilaire of the Court of Québec. The balance of $22,578.30 represents the
amount of legal fees that the appellant paid in 2011 to Beauvais Truchon et
Associés, S.E.N.C. pursuant to the judgment referred to above. The amounts paid
by the appellant are not contested by the respondent.
[5]
Pursuant to the judgment of the Court of Québec
dated November 18, 2008, and amended on November 26, 2008, the appellant was
held jointly and severally liable with Gilles Filiatreault and Victor Wozniak
to pay to :
(a) Hill & Knowlton Ducharme Perron, the sum of $64,329.83 with
interest plus the additional indemnity under article 1619 of the Civil Code of
Québec from April 2, 2004;
(b) Beauvais Truchon et associés, S.E.N.C., the sum of $40,595.71 with
interest plus the additional indemnity under article 1619 of the Civil Code of
Québec, from May 5, 2003. and
(c)
Lemieux Nolet, an accounting firm, the sum of
$45,289.76 with interest plus the additional indemnity under article 1619 of
the Civil Code of Québec, from April 2, 2004.
[6]
The judgment of the Court of Québec was
confirmed by the Court of Appeal of Québec in an unanimous judgment rendered on
March 22, 2011.
[7]
The appellant, Gilles Filiatreault and Victor
Wozniak, as promoters/investors to establish a regional airline company to
serve municipalities in the provinces of Quebec and Ontario, were personally
sued by three professional firms for services rendered mainly in 2001, 2002 and
2003. The services provided by the professional firms were mainly for the
development of business plans, for advice as to how to structure the investment
and for their assistance in finding the required financing from governmental
institutions and other public or private investment firms.
[8]
In pursuing their venture, the promoters/investors
incorporated at the end of 2000 or at the beginning of 2001, a numbered company
in Quebec which has been inactive until the month of February 2002 at which
time, the name of the company was changed to “Les lignes aériennes Val Air
Inc.”. This company has never operated as an airline company. In 2003, “Les
lignes aériennes Val Air Inc.” became a holding company when the promoters/investors
with some other investors from Ontario formed another company, Val Air Inc., to
carry out the airline transportation activities. Val Air Inc. started its
operations in the month of December 2003 and declared bankruptcy on February
24, 2004. “Les lignes aériennes Val Air Inc.” ceased its operations in 2004 and
was dissolved on October 17, 2008.
[9]
The appellant was a shareholder and a director
of both “Les lignes aériennes Val Air Inc.” and “Val Air Inc.”.
[10]
The appellant testified at the hearing. He is an
accountant who worked for KPMG from December 2002 until 2008. No information
concerning the activities that he carried from 2008 to 2011 were provided. His
tax return for the 2011 taxation year has been filed as an exhibit. In that
year, the appellant earned employment income in the amount of 148 649.94 $ as
an employee of Ally Credit Canada Limited and reported a gross business income
of $3,000 and a net business income of $945 generated by his accounting,
taxation and assurance services. The amount of $27,078.30 which is the subject
of this appeal was claimed by the appellant on line 232 as “Other deductions”.
The appellant explained at the hearing that he carries on his business as a sole
practitioner.
Position of
the Parties
A. The Appellant’s
Position
[11]
The appellant stated that he claimed a deduction
for the amounts that he paid after the Court of Appeal of Quebec made a final
determination that he was liable for the payment of the unpaid bills for
professional services.
[12]
The appellant alleged that the unpaid bills were
for professional services rendered while Val Air Inc. was in business.
[13]
The appellant sustained that since he was held
personally liable for a portion of the unpaid bills, he should be considered as
having incurred the expenses himself and as having himself carried on the
airline activities with a view to earn income from a business.
[14]
The appellant relied on Interpretation Bulletin
IT-467R2 which refers to the Supreme Court of Canada’s decision in 65302
British Columbia Ltd. v. The Queen, [1999] 3 S.C.R. 804 and to the Federal
Court of Appeal’s decision in Robert McNeill v. The Queen, 2000 D.T.C.
6211.
B. The
Respondent’s Position
[15]
The respondent stated that the appellant did not
carry any airline transportation activities in 2011 and, consequently, he had
no source of income in 2011. The amount claimed in 2011 as “Other deductions”
was not claimed as business expenses and was not related to the appellant’s
accounting activities. Accordingly, the expenses claimed by the appellant were
personal in nature.
[16]
The respondent also alleged that there is no
nexus or link between the professional fees paid by the appellant and the
business carried on by him or by Val Air Inc.
[17]
At the time of payment of the professional fees
by the appellant, the company “Les lignes aériennes Val Air Inc.” was dissolved
and the company “Val Air Inc.” had declared bankruptcy. Consequently, the
appellant made the payments with no reasonable expectation of income therefrom.
The Law
[18]
The provisions of the Act that are
applicable in this instance are the following: paragraphs 3(a), 4(1)(a),
subsections 9(1) and (2), paragraphs 18(1)(a) and 18(1)(h) and
section 248 (the definition of “personal and living expenses”). They read as
follows:
Income for taxation year
3 The income of a taxpayer for a taxation year for the purposes of
this Part is the taxpayer's income for the year determined by the following
rules:
(a) determine the total of all amounts each of which is the taxpayer's
income for the year (other than a taxable capital from a source inside or
outside Canada, including, without restricting the generality of the foregoing,
the taxpayer's income for the year from each office, employment, business and
property,
. . .
Income or loss
from a source or from sources in a place
4(1) For the purposes of this Act
(a) a taxpayer’s income or loss for a taxation year from an office,
employment, business, property or other source, or from sources in a particular
place, is the taxpayer's income or loss, as the case may be, computed in
accordance with this Act on the assumption that the taxpayer had during the taxation
year no income or loss except from that source or no income or loss except
from those sources, as the case may be, and was allowed no deductions in
computing the taxpayer's income for the taxation year except such deductions as
may reasonably be regarded as wholly applicable to that source or to those
sources, as the case may be, and except such part of any other deductions as
may reasonably be regarded as applicable thereto; and
. . .
Income
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.
Loss
(2) Subject to section 31, a taxpayer's loss for a taxation year from a
business or property is the amount of the taxpayer's loss, if any, for the
taxation year from that source computed by applying the provisions of this Act
respecting computation of income from that source with such modifications as
the circumstances require.
General limitations
18(1) In computing the income of a taxpayer from a business
or property no deduction shall be made in respect of
General
limitation
(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;
Personal and
living expenses
(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;
Definitions
248(1) in this
Act,
“personal or
living expenses” – “personal or living expenses” includes
(a) the expenses of properties maintained by any person for the use or
benefit of the taxpayer or any person connected with the taxpayer by blood
relationship, marriage or common-law partnership or adoption, and not maintained
in connection with a business carried on for profit or with a reasonable
expectation of profit,
(b) the expenses, premiums or other costs of a policy of insurance,
annuity contract or other like contract if the proceeds of the policy or
contract are payable to or for the benefit of the taxpayer or a person
connected with the taxpayer by blood relationship, marriage or common-law
partnership or adoption, and
(c) expenses of properties maintained by an estate or trust for the
benefit of the taxpayer as one of the beneficiaries;
Analysis
[19]
The appellant claimed a deduction of legal
expenses and damages totaling $27,078 in his 2011 income tax return. The claim
relates to an award to creditors by the Court of Appeal of Quebec against the
appellant and the other promoters/investors relating to unpaid invoices for
services rendered to a business venture to establish a regional airline
company. The legal fees claimed by the appellant relates to legal fees incurred
in defending the appellant’s case in court.
[20]
The promoters/investors of the venture were
Gilles Filiatreault, Heralall Nandlal, Victor Wozniuk and Benoît Tanguay. Mr.
Filiatreault was the head of the group and was the one who required the
services of the three professional firms. The professionals were responsible
for the preparation of the business plans, for the search of the financing
required and for the starting up of the airline’s operations.
[21]
Two corporations were established for the
purpose of operating the airline. Les lignes aériennes Val Air Inc.’s only
purpose was to hold the shares of Val Air Inc. which operated the airline from
November 2003 to February 24, 2004.
[22]
Les lignes aériennes Val Air Inc. was named as
defendant in the proceedings made by Lemieux Nolet and by Hill &
Knowlton/Ducharme Perron in May 2004 but it was not held liable for the unpaid
invoices since it was dissolved on October 17, 2008 shortly before the hearing
of the case on October 28 and 29, 2008.
[23]
In his testimony, the appellant stated that he
has invested $75,000 in a lump sum payment in 2002 in Val Air Inc. but no
evidence of this investment has been presented in court. However, Justice
Michel St-Hilaire of the Court of Québec indirectly confirmed the investment by
the appellant when he said at paragraph 90 of his decision that three of the
four promoters invested $246 000 in Valair Inc.
[24]
It is clear from the evidence that the appellant
never had the intention to carry out personally or as a member of a group of promoters/investors,
the regional airline activities and, in fact, he never did so. Two corporate
entities were created to carry out such activities and one of the entities did
effectively operate the regional airline for a short period of time. The
activities carried out by the appellant in 2001 and 2002 in connection with the
airline venture did not constitute a source of income for him.
[25]
Even if the airline activities were to
constitute a source of income for the appellant, that source of income
disappeared when Val Air Inc. declared bankruptcy in 2004 and when Les Lignes
Aériennes Val Air Inc. was dissolved in 2008. In 2011, the appellant had no
source of income coming from the airline’s activities and he was not carrying
out any other business but his accounting business. In 2011, there was no nexus
between the expenses that the appellant claimed as deductions and the business
that he was actually carrying on in 2011, his accounting business. This lack of
nexus between the expenses claimed by the appellant and his accounting business
appears to be the reason why the appellant claimed the expenses in his tax
return under “other deduction” and not as expenses incurred in carrying out a
business.
[26]
The Supreme Court of Canada’s decision in 65302
British Columbia Ltd., cited above, confirmed the deductibility of fines
and penalties incurred for the purpose of gaining or producing income under
paragraph 18(1)(a) of the Act. In Robert McNeill, cited
above, the Federal Court of Appeal allowed a similar deduction in respect of
court-imposed damages for breach of contract.
[27]
In the appeal at bar, the issue is not the
deductibility of fines or penalties or the deduction of a court-ordered award
of damages for breach of contract. What we have here is essentially a Court
judgment ordering the appellant to pay his share of the professional fees
charged for services rendered and the legal fees incurred by the appellant in
appealing the Court of Québec’s decision to the Court of Appeal of Quebec. The
amount of additional indemnity allowed under article 1619 of the Civil Code of
Québec and paid by the appellant was not specified by the appellant during
the court hearing.
[28]
In the present circumstances, 65302 British
Columbia Ltd. and the McNeill cases do not help the appellant
because the expenses made in 2011 when the appellant was ordered to make the
payments, were not made for the purpose of gaining or producing income as
required by paragraph 18(1)(a) of the Act.
[29]
Consequently the appeal is dismissed.
Signed at Ottawa, Canada, this 30th day of August 2017.
“Réal Favreau”
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