Terry Vango v. Her Majesty the Queen (Informal Procedure), [1995] 2 CTC 2757, 96 DTC 3240

Bowman J.T.C.C.:-This appeal is from an assessment for the appellant’s 1993 taxation year. The issue is the deductibility of certain amounts paid by Mr. Vango, specifically, $7,490 in legal fees, $4,200 in fines to The Toronto Stock Exchange and $1,003 paid in relation to his membership in the Rotary club.

Mr. Vango is an investment advisor and is licensed as a stock broker. In 1993 he was employed by Nesbitt Thomson, a brokerage house. Before dealing with the specific amounts claimed, I must first decide whether he was an employee of the brokerage house so that his claim for a deduction must fall within section 8 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act”), or whether his income was from a business, so that his claim for a deduction falls under section 9.

I think the conclusion that is more consistent with the facts adduced in evidence is that he was an employee. Nesbitt Thomson provides him with an office, a telephone and all of the facilities necessary for him to carry on as an investment advisor and stock broker. He is paid a commission on sales made. The cost of such promotional material as newsletters and of reporting to clients is borne by the company. Commissions are paid to the company, and, after keeping two-thirds, the company pays him as remuneration the remaining one-third. Bad debts arising from clients’ failure to pay are absorbed by the salesperson. I have concluded that, taking into account the elements mentioned by the Federal Court of Appeal in Wiebe Door Services Ltd. v. M.N.R., [1986] C.T.C. 200, 87 D.T.C. 5025, the indicia of the appellant’s relationship to Nesbitt Thomson were those of employee-employer and not of those of an independent self-employed person.

In light of that conclusion the deductibility of the expenses claimed must depend upon whether the appellant has been able to bring himself within the provisions of subsection 8(1), and specifically paragraph 8(1 )(f), which provides a deduction, in computing income from an office or employment, of:

8.(1)(f) Where the taxpayer was employed in the year in connection with the selling of property or negotiating of contracts for his employer, and

(i) under the contract of employment was required to pay his own expenses,

(ii) was ordinarily required to carry on the duties of his employment away from his employer’s place of business,

(iii) was remunerated in whole or part by commissions or other similar amounts fixed by reference to the volume of the sales made or the contracts negotiated, and

(iv) was not in receipt of an allowance for travelling expenses in respect of the taxation year that was, by virtue of subparagraph 6(l)(b)(v), not included in computing his income,

amounts expended by him in the year for the purpose of earning the income from the employment (not exceeding the commissions or other similar amounts fixed as aforesaid received by him in the year) to the extent that such amounts were not

(v) outlays, losses or replacements of capital or payments on account of capital, except as described in paragraph (j), or

(vi) outlays or expenses that would, by virtue of paragraph 18(1 )(1), not be deductible in computing the taxpayer’s income for the year if the employment were a business carried on by him.

In his return of income the appellant filed a statement of employment expenses, including advertising and promotion, motor vehicle and entertainment expenses. These were allowed. From this I infer that the Minister accepts that the appellant met the conditions in subparagraphs 8(l)(f)(i) to (iv). The disallowed amounts were claimed as "other deductions". Nothing turns on this. Deductibility does not depend on where an expense is claimed in the return of income.

Until February 1992 the appellant worked for Richardson Greenshields, another brokerage house. In 1991 he became involved in an incident that had unfortunate consequences for him. He was approached by a client, one Tuccitto, who asked him to open an account in which shares of a company, Greenline Business Stores Inc., were deposited, to be disposed of at the direction of Tuccitto. He was also informed that Joseph Cira had the power to direct the disposition of the shares and that he, Cira, had a beneficial interest in the shares. He was not given any document to evidence this latter point but he assumed that Cira was the beneficial owner-an assumption that turned out to be correct.

Tuccitto subsequently instructed Mr. Vango to transfer the shares to another brokerage house. Mr. Vango, suspecting that something was amiss, specifically that Tuccitto was seeking to misappropriate Cira’s shares, removed them from the account and communicated with Cira.

The upshot of all of this was that Tuccitto complained to Richardson Greenshields about what he claimed was an unauthorized removal of the shares from a brokerage account in his name and Mr. Vango lost his job. He was subsequently hired by Nesbitt Thomson. Mr. Vango’s problem appears to have been that he had no document on his file evidencing Cira’s interest in or power over the shares.

In October 1992, Cira obtained judgment against Tuccitto in a court in Utah, declaring the shares to be Cira’s. However, The Toronto Stock Exchange accused the appellant of the serious offence under its rules of removing shares from a client’s account without authority and levied a substantial fine against him. Nesbitt Thomson informed Mr. Vango that unless the wording of the infraction could be modified to something less serious he would lose his job. Mr. Vango recognized that he might lose his licence and could never work in the securities business again. He therefore retained senior counsel, Mr. Reuben A. Rodney, Q.C., who succeeded in having the wording of the charge modified in a manner acceptable to Nesbitt Thomson and the fine was substantially reduced. The amended wording of the charge was not put in evidence, but Mr. Vango stated that in substance the amended charge was that he failed to have a proper power of attorney from Cira on his file.

Mr. Vango claims as a deduction in computing his income the legal fees of $7,490 and the fine of $4,200.

The respondent argues that the legal fees do not fall within paragraph 8(1)(b). I agree. They were not incurred to collect income from Nesbitt Thomson. The question therefore is whether they fall under the broader wording of paragraph 8(1 )(f). That paragraph, which is quoted above, requires that a number of conditions be fulfilled. I shall examine these in light of the evidence. First, the taxpayer must be employed in connection with the selling of property or the negotiation of contracts. This condition is met.

Second, under the contract of employment, the taxpayer must be required to pay his own expenses. I think this condition has been met. Some general office expenses are borne by the employer, but in general advertising, promotion, entertainment and automobile expenses must be paid by the employee. There was no written contract to this effect, but it is an implicit term.

Third, the employee must ordinarily be required to perform the duties of his employment away from the employer’s place of business. He performs his job of selling securities both in the office or anywhere else. He frequently meets clients out of the office and he has an office in his home. The application of this condition depends on the nature of the work that the employee does. I can see no cogent reason for questioning the correctness of the apparent administrative practice of permitting a deduction under paragraph 8(1 )(f) of employment expenses of a securities salesman, merely because he has an office available to him at his employer’s place of business. Indeed, the allowance by the Minister of the deduction of other expenses indicates that the Minister accepts that the appellant meets the criteria in subparagraphs 8( 1 )(f)(i) to (iv).

Fourth, the employee must be remunerated in whole or in part by commissions. Clearly, he was. Fifth, he received no travel allowance.

The basic question is whether the legal fees and fines were:

expended by him in the year for the purpose of earning the income from the employment

and, if so, whether in any event they were outlays of capital.

It should be noted that the range of deductibility of expenses permitted in computing employment income is more restricted than that permitted in computing business income. It is specifically circumscribed by section 8. The principles governing the deductibility of business expenses are more flexible and open ended. As Mr. Justice Abbott observed in B.C. Electric Railway Co. v. M.N.R., [1958] S.C.R. 133, [1958] C.T.C. 21, 58 D.T.C. 1022, since the main purpose of every business undertaking is presumably to make a profit any expenditure made "for the purpose of gaining or producing income" comes within the terms of paragraph 12(l)(a) [18(1)(a)] whether it be classified as an income expense or a capital outlay. Nonetheless, the principles developed in the numerous cases involving the deduction of legal expenses in computing income from a business are instructive. In the present case the evidence is clear that Mr. Vango incurred the legal expenses in order to keep his job with Nesbitt Thomson. The moneys were spent to modify a charge which, had it stood, could have resulted in his being dismissed and might indeed have prevented his working again in the securities business. In my opinion the legal fees were expended for the purpose of earning the appellant’s employment income. This view conforms to the position taken by Mr. Justice Fournier of the Exchequer Court of Canada in Rolland Paper Co. v. M.N.R., [1960] C.T.C. 158, 60 D.T.C. 1095, where the legal expenses of an unsuccessful defence against a charge of illegal trade practices under the Criminal Code were held to be deductible. [1] It should be observed that the case dealt only with paragraph 12(l)(a). The question of capital expenditure was not raised.

Here I must deal with that question. In a broad sense it might be said that a person’s right to earn income is a valuable asset. I do not think, however, that an expenditure that is necessary to keep one’s job can be equated to the costs of preserving an identifiable capital asset as was the case in Farmers Mutual Petroleums Ltd. v. M.N.R., [1968] S.C.R. 59, [1967] C.T.C. 396, 67 D.T.C. 5277, or B.C. Power Corp. v. M.N.R., [1968] S.C.R. 17, [1967] C.T.C. 406, 67 D.T.C. 5258. The situation here is closer to that dealt with by the Supreme Court of Canada in Evans, E. v. M.N.R., [1960] S.C.R. 391, [1960] C.T.C. 69, 60 D.T.C. 1047 where the legal costs of asserting a right to receive income from an estate were held to be deductible. The Evans case was distinguished in The Queen v. Dr. B.A. Burgess, [1981] C.T.C. 258, 81 D.T.C. 5192 (F.C.T.D.) where Cattanach J. held that the cost of asserting a right to maintenance was on capital account as the purpose was to acquire a new right, the right to maintenance. Here, Mr. Vango acquired no new right. He was merely protecting a right to continue working in a job he already had.

As Lord Pearce said in B.P. Australia Ltd. v. Commissioner of Taxation, [1966] A.C. 224, [1965] 3 All E.R. 209 (Aust P.C.) at page 264 (All E.R. 218):

The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer.

This observation was quoted with approval by Fauteux J. in Algoma Central Railway v. M.N.R., [1968] S.C.R. 447, [1968] C.T.C. 161, 68 D.T.C. 5096.

In my opinion the legal fees in question were expended for the purpose of earning the income from the employment and are not on capital account. They are therefore deductible under paragraph 8(1 )(f).

What, then, of the fine itself? The cases are not easily reconciled. In Pooler, E.H. and Co. v. M.N.R., [1962] C.T.C. 527, 62 D.T.C. 1321 (Ex. Ct.) Thurlow J. held that a fine imposed by The Toronto Stock Exchange for conduct of one of its vice-presidents was not an amount that was made or incurred for the purpose of earning income. It seems that the conduct of the vice- president had nothing to do with the earning of the appellant’s income. Here the nexus that was evidently missing in the Pooler case is present. The fine for the relatively innocuous breach of the exchange’s rules arose directly out of the day to day income earning activities of the appellant. In Imperial Oil Ltd. v. M.N.R., [1947] C.T.C. 353, (1947) 3 D.T.C. 1090 (Ex. Ct.), Thorson J. held that damages paid by the taxpayer arising form the negligent ramming and sinking of a freighter were deductible. At pages 1099-1100 he said:

It is no answer to say that an item of expenditure is not deductible on the ground that it was not made primarily to earn the income but primarily to satisfy a legal liability.

In a sense, all disbursements are made primarily to satisfy legal liabilities. The fact that a legal liability was being satisfied has, by itself, no bearing on the matter. It is necessary to look behind the payment and enquire whether the liability which made it necessary-and it makes no difference whether such liability was contractual or delictual-was incurred as part of the operation by which the taxpayer earned his income.

The same principle applies here. It must be recognized that the fine imposed by the stock exchange was essentially an administrative slap on the wrist for a breach of one of its rules. The appellant was penalized for acting in the best interests of the true owner of the shares without having proper documentation to enable him to do so. No principle of public policy militates against the deduction of this fine which arises directly out of the way the appellant earns his living. The same considerations apply here as in Day & Ross Ltd. v. The Queen, [1976] C.T.C. 707, 76 D.T.C. 6433 (F.C.T.D.) and TNT Canada Inc. v. The Queen, [1988] 2 C.T.C. 91, 88 D.T.C. 6334 (F.C.T.D.).

So far as the $1,003 relating to Mr. Vango’s membership in the Rotary club is concerned, counsel argued that they do not fall within subparagraph 8(l)(i)(i). I completely agree, but that does not end the matter. They were purely promotional. The appellant’s only reason for joining the Rotary club and for attending the monthly luncheons was to meet potential clients. However, about one-half of the expenses were incurred in 1992 and are not deductible in 1993. Subject to that qualification, the Rotary club expenses are deductible under paragraph 8(1 )(f).

The appeal is therefore allowed and the assessment referred back to the Minister of National Revenue for reconsideration and reassessment to permit the deduction of $7,490 in legal fees, $4,200 in fines and $500 in respect of the Rotary club.

The appellant is entitled to his costs, if any.

Appeal allowed.