Frederick W. Lyonde v. Minister of National Revenue, [1988] 2 CTC 2032, 88 DTC 1397

Taylor, T.C.J.:—This is an appeal heard in Toronto, Ontario, on February 23, 1988, against an income tax assessment for the year 1983, in which the Minister of National Revenue disallowed an amount of $4,205.25 claimed as a deduction against income. The notice of appeal sets out the dispute:

The Appellant was employed with Canadian Acceptance Corporation Limited from March 1, 1958 continuously for 24 years until February 15, 1982.

— On or about February 15, 1982 the Appellant's employment with Canadian Acceptance Corporation was unilaterally and wrongfully terminated by his employer.

— Subsequent to the termination of his employment, the Appellant instituted an action in the Supreme Court of Ontario against Canadian Acceptance Corporation Limited for damages for wrongful dismissal.

— By a Judgment of that Court dated the 26th day of October, 1983 the Appellant was awarded damages in the amount of $83,446.00, prejudgment interest in the amount of $5,585.00, and his costs.

— In the course of the said damage action the Appellant incurred legal expenses in the amount of $8,704.45 of which pursuant to the award of costs given by the said Supreme Court of Ontario Judgment the Appellant was reimbursed $4,500 as costs.

— The Appellant states that the said legal expenses were incurred by him to collect damages for wrongful dismissal and thus to earn income from a source.

— The damages awarded by the Supreme Court of Ontario are a retiring allowance as that term is defined by virtue of section 248 of the Income Tax Act and are properly included in the computation of the Appellant's income for the 1983 taxation year not as income from employment but as income from a source by virtue of paragraph 3(a) subparagraph 56(1)(a)(ii) of the Act.

— The Appellant submits that for purposes of calculating the amount of the damage award that is includable in the computation of income by virtue of paragraph 3(a) the appellant is entitled to deduct his costs, being the legal expenses in the amount of $4,204.25 incurred in order to collect the damages.

In the reply to notice of appeal, in response:

— that the legal expenditures referred to . . . were incurred to establish the right to damages for wrongful dismissal.

— The Respondent relies, inter alia, upon sections 3, 56 and 248 of the Income Tax Act. R.S.C. 1952, Chapter 148 as amended (the 'Act").

— The damages awarded by the Supreme Court of Ontario fall within a definition of a retiring allowance by virtue of 248 of the Income Tax Act and by virtue of subparagraph 56(1)(a)(ii) of the said Act are to be included in income. The Act does not provide for deductions to be made from items included in subparagraph 56(1)(a)(ii) of the Act.

— In any event, the legal expenditures were incurred to establish the income and as such are not deductible.

Certain relevant documentation was filed with the Court, but no parol evidence was called. In argument the parties noted a substantial body of both reference material and case law, and the following list gives some indication of the extent and diversity of the efforts made to bring forward to the Court a complete range of confirmation for consideration.

Appellant's Authorities

1. Interpretation Bulletin No. IT-99R3 - Legal and accounting fees.

2. Interpretation Bulletin No. IT-124R5 - Contributions to registered retirement savings plan.

3. No. 349 v. M.N.R. (TAB) 56 D.T.C. 366.

4, Evans v. M.N.R. (SCC) 60 D.T.C. 1047.

5. Steer v. M.N.R. (Exch. Ct.) 65 D.T.C. 5115.

6. Burgess v. M.N.R. (TRB) 79 D.T.C. 347.

7. The Queen v. Burgess (FCTD) 81 D.T.C. 5192.

8. The Queen v. Savage (SCC) 83 D.T.C. 5409.

9, Johns-Manville Canada Inc. v. The Queen (SCC) 85 D.T.C. 5373.

10. Sadavoy v. M.N.R. (TCC) 86 D.T.C. 1411.

*11. The Queen v. Sadavoy (FCTD) 8.

Maruscak v. M.N.R. 85 D.T.C. 427 (TCC).

Canadian Tax Journal — July-August 1986, Vol. 34, No. 4.

Indicates cases also included by respondent's counsel.

Respondent's Authorities

5. Lor-Wes Contracting Ltd. v. The Queen 85 D.T.C. 5310 (F.C.A.)

6. The Queen v. Golden et. al. 86 D.T.C. 6138 (S.C.C.)

7. Bracken v. M.N.R. 84 D.T.C. 1813 (T.C.C.)

8. Construction of Statutes, 2nd ed., E.A. Driedger p. 138-141

9. The Queen v. Stirling 85 D.T.C. 5199 (F.C.A.)

10. Solomon v. M.N.R. 78 D.T.C. 1760 (T.R.B.)

11. The Queen v. Sadavoy 88 D.T.C. 6065 (F.C.T.D.)

12. The Queen v. Atkins 76 D.T.C. 6258 (F.C.A.)

13. Jack Cewe Ltd. v. Jorgenson 80 D.T.C. 6233 (S.C.C.)

14. Pollock v. The Queen 81 D.T.C. 5293 (F.C.T.D.)

15. The Queen v. Pollock 84 D.T.C. 6370 (F.C.A.)

16. Maruscak v. M.N.R.85 D.T.C. 427 (T.C.C.)

17. Canadian Income Taxation, 4th ed. Edwin C. Harris p. 373

18. Evans v. M.N.R. 60 D.T.C. 1047 (S.C.C.)

19. The Queen v. Burgess 81 D.T.C. 5192 (F.C.T.D.)

20. Wilson v. M.N.R. 81 D.T.C. 95 (T.R.B.)

In my view, in this matter, there is only one case which needs review — that of Maruscak v. M.N.R., [1985] 2 C.T.C. 2048; 85 D.T.C. 426, and I shall restrict my reference from the argument to comments made by counsel dealing with it, which have a direct bearing on the outcome of this appeal in relation to Maruscak, supra.

For the Appellant

. . . there is a new era of statutory interpretation starting with Stubart,' [1] ending probably with Golden, [2] mostly all decisions of the Supreme Court of Canada and in particular Mr. Justice Estey, where no longer in interpreting statutes will the Courts use the doctrine of strict construction, but instead, the Courts will use what we will call the doctrine of object and spirit. The job of the Court, frankly, is to ascertain the intention of Parliament and interpret the statute in such a way as to give effect to the intention of Parliament. Some people think that the abandonment of strict construction is a good thing. Certainly it puts the Courts in a more flexible position. Of course, some people would love to return to the old days of strict construction. In any event, underlying is certainly statutory interpretation and what doctrine should be used.

Ultimately, the Appellant appears to be faced with two arguments in this particular case. Let me go back a step. As I understand it, in tax cases, the onus is on the taxpayer to demolish all assumptions of fact made by the Minister in making the assessment. I like to believe that there is an overall onus on the Crown to demonstrate that in fact he can bring the taxpayer within the ambit of the Act to be taxed. Here we do not have a question of fact. We are not attempting to demolish any assumptions of fact. But, in any event, we seem to be faced with two arguments. One appears to be the age old argument of whether the expenses in question, the legal fees incurred to collect the damages for wrongful dismissal are prohibited as a deduction because they are akin to a capital expenditure or are they more akin to an operating expense. I will refer to that later, particularly when I refer to the bulletin.

Then the second argument we seem to be faced with, which I will describe as somewhat of a revolutionary argument, certainly a new argument, and I cannot help but maybe make a dig at my friend from the point of view that I do not think we would have been faced with this argument necessarily if we had gotten a timely Reply, but the law does evolve, and we are now faced with this argument. Quite frankly, it maybe make this case a little more interesting and a little more fun.

The second argument, as I understand it as it appears to be articulated in the pleadings, is that the Crown's position is now that section 56 is a code unto itself. What it does is it includes in income gross amounts and it taxes gross income, as opposed to net income.

Before attempting to meet those . . . I must refer . . . to the one case that would appear initially at first blush to be right on point. I do not think my friend is relying on it. Certainly I do not see that from his pleadings. But, in any event, it is a decision of the Associate Chief Judge, His Honour Judge Christie, called Mar- uscak. I do have it in my authorities. It would appear, as I say, at first blush to be right on point and I think it is worth going through.

In that case, clearly, what was at issue was the deductibility of legal expenses incurred to collect damages for wrongful dismissal. His Honour Judge Christie found in fact that they were not deductible on the basis put forth by the Appellant. I am very careful when I say "on the basis put forth by the Appellant". If one looks at the decision, it would appear that the only argument made before His Honour was that these legal expenses were deductible by virtue of paragraph 8(1)(b), which allows the deduction in computing income being the "amounts paid by the taxpayer in the year as or on account of legal expenses incurred by him in collecting salary or wages owed to him by his employer or former employer". His Honour quite rightly points out that if one goes to section 248(1) and looks at the definition of "salary or wages", it includes certain amounts but specifically excludes retiring allowances. And, if one were only able to look at section 8(1)(b) for the deduction of the legal expenses in question, clearly His Honour's decision is correct.

It does not appear from this judgment that the argument we intend to make was made before His Honour. What would appear from this decision is that His Honour Judge Christie proceeded on the assumption that damages for wrongful dismissal, i.e. the retiring allowance, was income from employment.

I would submit, and I think it is probably accepted by my friend, although perhaps I should not anticipate his argument, that in fact the Act makes it clear that damages for wrongful dismissal, retiring allowances, are not income from employment. That battle was fought and lost with the Pollock and the Atkins decisions.

. . . 50, I do not think that the Maruscak decision stands for the proposition that in fact legal expenses incurred to collect damages for wrongful dismissal are not deductible. I think it stands simply for the proposition that damages for wrongful dismissal are not salary and wages, and therefore, the legal expenses to collect them are not deductible under paragraph 8(1)(b).

I have also included with the authorities a portion of an article from the Canadian Tax Journal, the July-August 1986 edition, volume 34, number 4. The article commences at page 757, but I have only included pages 773 and 774, where in fact the author discusses the Maruscak decision and makes the very points that I have just made, probably much more succinctly than I.

For the respondent:

. . . Lastly, dealing with Maruscak, the issue in that case in terms of the facts are similar to the factual issues here in that the issue was whether a taxpayer was entitled to deduct legal expenses incurred to collect damages for wrongful dismissal. The taxpayer appears to have relied on section 8(1)(b). In addition to section 8(1)(b), the Court was referred to section 5, paragraph 56(1)(a)(ii) the definition of "salary or wages" and "retiring allowance" in section 248. The Court concludes that the legal fees were not deductible.

It is difficult to say exactly what happened in Maruscak in terms of the argument that was made to it. It appears that the taxpayer did rely on section 8(1)(b), but then surely the Court in Maruscak would also have been aware that salary or wages specifically excluded retiring allowance. On the other hand, to be fair, we have the Supreme Court of Canada, as my friend pointed out, in Savage saying that with respect to the item referred to in there it could be an item under employment income. So there is some difficulty with this area of the law in terms of which section it appears to be, although I submit the better view is that it belongs in section 56 with respect to retiring allowance because the specific provisions of the Income Tax Act should overrule the general provisions of the Income Tax Act. That is a rule of construction that is applicable to any statute.

In terms of distinguishing Savage, it did not deal with the retiring allowance aspect.

Analysis

First I should like to deal with the overall proposition contended by counsel for the appellant (above) — that (and I quote):

. . . that there is a new era of statutory interpretation starting with Stubart, ending probably with Golden, mostly all decisions of the Supreme Court of Canada and in particular Mr. Justice Estey, where no longer in interpreting statutes will the Courts use the doctrine of strict construction, but instead, the Courts will use what we will call the doctrine of object and spirit. The job of the Court, frankly, is to ascertain the intention of Parliament and interpret the statute in such a way as to give effect to the intention of Parliament.

If Mr. Justice Estey meant the Stubart, supra, judgment to be so interpreted, he did not make it clear to me in the words of that formidable decision. In response thereto I would make reference to the comment of Mr. Justice Estey to be found at page 123 (D.T.C. 5382) of Johns-Manville Canada Inc., [1985] 2 C.T.C. 111; 85 D.T.C. 5373 which case was decided by the learned Justice subsequent to Stubart, supra:

. . . if the interpretation of a taxation statute is unclear, and one reasonable interpretation leads to a deduction to the credit of a taxpayer and the other leaves the taxpayer with no relief from clearly bona fide expenditures in the course of his business activities, the general rules of interpretation of taxing statutes would direct the tribunal to the former interpretation.

I do not find in that comment any indication that where the words of the Act, and their application to an income tax matter are quite clear that this Court need go searching for some more nebulous “spirit and interest" viewpoint. Counsel for the appellant in this case is quite right when he states :

. . . it is a decision of the Associate Chief Judge, His Honour Judge Christie, called Maruscak. I do have it in my authorities. It would appear, as I say, at first blush to be right on point and I think it is worth going through.

However he is not correct, as I see the distinction when he states:

In that case, clearly, what was at issue was the deductibility of legal expenses incurred to collect damages for wrongful dismissal.

It cannot be asserted from the carefully chosen words of the Associate Chief Judge of this Court in Maruscak, supra, that the legal expenses had any direct relationship to the collection of the amount at issue. While the Associate Chief Judge Christie was not called on to make such a distinction in Maruscak, supra, in fact the Judge used the word "incurred in securing an out of Court settlement . . .” in an earlier part of the judgment, but within the same general context. Counsel is correct in reasoning, supra:

. . . I think it stands simply for the proposition that damages for wrongful dismissal are not salary and wages, and therefore, the legal expenses to collect them are not deductible under paragraph 8(1)(b).

However it remains to be shown (and in this matter by counsel for the appellant) that (a) the amount involved was incurred to “collect” damages, and (b) that if (a) is supported, the amount is deductible and from where under the Act.

Counsel for the appellant made reference to an article from Canada Tax Journal, supra, I shall quote it:

Wrongful Dismissal

In Maruscak v. M.N.R., 85 D.T.C. 426 (TCC), the taxpayer's employment with Black and Decker was terminated in 1982. He began legal action against his former employer and spent approximately $2,400 in legal fees by the time an out-of-court settlement was reached. Under paragraph 8(1)(b) of the Act (which is discussed in greater detail below), a deduction is available for legal expenses incurred by an employee in collecting salary or wages owed to him by his employer or former employer. The question dealt with by the Tax Court of Canada in Maruscak was whether this provision covered legal expenses incurred in obtaining compensation for wrongful dismissal. The Court answered this question in the negative, leaving the taxpayer in the unenviable position of paying tax on the compensation received (as a retiring allowance), without any offsetting deduction for his costs in collecting it. Since the definition of salary and wages in subsection 248(1) expressly excludes retiring allowances and since the compensation received by Mr. Maruscak clearly constituted a retiring allowance under the post-November 12, 1981 definition of that term in subsection 248(1), the Court's finding that paragraph 8(1)(b) did not apply to allow a deduction appears correct.

The more interesting question and the one not addressed by the Court is whether the legal expenses could be deducted under general taxation principles. Underlying the Court's decision was the assumption that the compensation received by Mr. Maruscak constituted employment income and, in the absence of any specific provision in section 8 allowing for a deduction of his legal expenses, no relief was therefore available. The argument can be made, however, that compensation for wrongful dismissal, notwithstanding that it now falls beneath the umbrella of a retiring allowance, which is included in income under subparagraph 56(1)(a)(ii), does not constitute employment income. [35] If this is the case, the legal expenses would not be subject to the restriction in subsection 8(2) and would be deductible from the amount of the retiring allowance on the basis of the general principle of taxation that income for income tax purposes means net income.

What makes the case particularly puzzling is that Revenue Canada, Taxation ("the Department") itself seems to accept this position that general taxation principles apply in determining deductibility. The following comment is found in Interpretation Bulletin IT-99R3 under the heading "Damages for Wrongful Dismissal":

Legal expenses incurred in an attempt to establish a taxpayer's right to receive an amount described as a “retiring allowance” in subsection 248(1), whether the attempt is successful or not, are not deductible; however, expenses incurred to enforce the payment of an amount so established are deductible. [36]

In other words, the Department considers the issue to be simply the familiar old one of whether the expense is on income or capital account. As cases such as Evans indicate, [37] determining whether an expense is incurred to establish a right or to enforce a right requires the drawing of some rather delicate lines of distinction. Be that as it may, this seems to be the question that should have been addressed in Maruscak and was not.

Interestingly, the Department's implicit statement in Interpretation Bulletin IT-99R3 that a retiring allowance is not employment income runs contrary to certain statements made by it elsewhere. [38]

It should be noted that where in connection with a wrongful dismissal action the employer, as part of the settlement, reimburses the employee for his legal expenses, the Department takes the position that income tax should be withheld at source on the reimbursement, as well as on the retiring allowance.

In my view, the article adds little to the discussion regarding Maruscak, supra, other than to indicate a continued desire and deep longing on the part of the author, that any distinction the Courts can see between incurring legal expenses for the purpose of "collecting" an amount, as contrasted with establishing the right to collect” an amount, should be blurred in favour of permitting all such expenditure to be deductible on some rather vague ground that “general taxation principles apply in determining deductibility". The article may be correct in putting forward:

. . . the Department considers the issue to be simply the familiar old one of whether the expense is on income or capital account. As cases such as Evans indicate, determining whether an expense is incurred to establish a right or to enforce a right requires the drawing of some rather delicate lines of distinction.

That is the duty of the Court, to draw such fine lines of distinction where and when possible. I find no difficulty in drawing such a line in the instant case, and I do not find it to be a fine line at all — it is quite evident. Whether legal fees incurred in the collection of damages, could be found deductible, is not a question before this Court — only whether legal fees incurred to establish the right to collect are deductible, and I have been provided with no authority in this hearing for so regarding them.

As noted above, counsel for the respondent did imply that some support might be draw from Savage, supra, to assert that the amount at issue in this appeal could be caught by the phrase “employment income”. I am not impressed by that view, and indeed I do not find that Savage, supra, has any bearing on the outcome of this appeal.

It would be useful to quote from the recent judgment of the Federal Court in Sadavoy v. The Queen, [1988] 1 C.T.C. 178 at 185; 88 D.T.C. at 6065-6070:

Counsel for defendant submits that the family allowance payments is a right to which the defendant is entitled and to enforce that right he may deduct any legal expenses incurred to enforce that right. As authority for this principle, counsel submits the case of Gladys (Geraldine) Evans v. M.N.R., [1960] C.T.C. 69; 60 D.T.C. 1047 (S.C.C.)

With respect to this submission, I do not agree that the facts in the Evans case have any application to the present factual situation.

Evans spent about $12,000 on legal fees in a successful attempt to convince the Courts that she was entitled to an annual income of $25,000 for life from her late father-in-law's estate. The judgment ordered the trustees of her late father-in-law’s estate to pay her $25,000 per year as income from the estate. Gladys Evans' right to the income derived from the will. The legal expenses were incurred to collect the income to which she was entitled and which was being wrongly withheld from her.

In the present case there was no decision by any Court as to the payment of the family allowance. Sadavoy did not incur legal expenses in proceeding against Health and Welfare Canada (Queen) for its failure to pay to him the family allowance to which he claimed to be entitled. The expenses were incurred to obtain custody and to prevent further access.

While there may be other views on the issue, and indeed further enlightenment may arise in the future, to this point I have not encountered on any routine basis the difficulty of distinguishing between the “right to income”, and "the right to establish a right to income". I would point out the judgments in Rita Corbeil-Labelle v. M.N.R., [1978] C.T.C. 3226; 78 D.T.C. 1892 and Robert Peel v. M.N.R., [1987] 1 C.T.C. 2373; 87 D.T.C. 268 as of some assistance in examining the question.

The appeal is dismissed.

Appeal dismissed.