Jacques St-Germain v. Minister of National Revenue, [1983] CTC 2038, 83 DTC 36

Guy Tremblay [TRANSLATION]:—This case was heard on June 15, 1982 in the city of Montreal, Quebec.

1. Issue

The issue is whether the appellant, a doctor, is entitled to deduct the sum of $12,786 in computing his net income for the 1979 taxation year. This amount represents legal expenses incurred by the appellant in successfully defending himself against a charge of criminal negligence in the practice of his profession. The respondent refused to allow the said expense, maintaining that it was personal.

2. Burden of Proof

2.01 The appellant has the burden of showing that the respondent’s assessments are incorrect. This burden of proof results not from a single section of the Act but from several judicial decisions, including the judgment of the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 The facts presumed by the respondent are set out in subparagraphs 7(a) to (h) of the respondent’s reply to the notice of appeal, which read as follows:

7. In assessing the appellant for the 1979 taxation year, the respondent relied on the following facts, inter alia:

(a) on November 2, 1972 the appellant, who is a doctor, was on duty in the emergency department at Fleury Hospital in Montreal;

(b) During that evening the appellant ordered one of the patients who came in transferred to another hospital;

(c) The patient in question died in the ambulance on the way there;

(d) As a result of these events a charge of criminal negligence was laid against the accused under the Criminal Code;

(e) The appellant incurred legal expenses in defending himself against that charge;

(f) In his 1979 tax return the appellant claimed, inter alia, $12,786 representing

legal expenses he incurred in connection with the above-mentioned matter;

(g) The expenses thus incurred are personal expenses;

(h) After being convicted of the charge of criminal negligence by a judge of the Court of Sessions of the Peace, the appellant was acquitted by the Quebec Court of Appeal (file No 10-000108-744) on the ground that the prosecution had not proved the causal relationship between the negligence and the patient’s death beyond a reasonable doubt.

3. Facts

3.01 Since the appellant could not be present at the hearing an agreement on the facts was reached by the parties. This agreement was made without prejudice to the right of the respondent to file other evidence in the event of an appeal to the Federal Court.

3.02 The facts admitted are substantially those set out in paragraph 7 of the reply to the notice of appeal, reproduced above, except, of course, subparagraph (g), where the respondent characterizes the expenses incurred as “personal expenses”. This was in effect the basis of the assessment.

3.03 For further detail on the facts, the agreement was that allegations 1 to 4 of the notice of appeal were admitted. They read as follows:

1. As a result of an incident that occurred on November 2,1972, while the appellant was practising his profession as a doctor, a private complaint was laid against the appellant for criminal negligence.

2. The appellant incurred legal expenses in defending himself against that charge.

3. In computing his income for the 1979 taxation year, the appellant claimed the sum of $15,150 as a deduction for legal expenses incurred in 1979 in connection with this matter.

4. After the appellant’s return for the 1979 taxation year had been accepted as submitted and the appellant had been assessed accordingly, the Department of Revenue notified him, in a registered letter dated January 21, 1981, that only part of the legal expenses deducted, namely $2,363.95, was accepted as an expense, the balance of $12,786.00 being considered a personal expense that could not be deducted in computing his income.

3.04 The amount at issue in the present case is only $12,786. This sum represents legal expenses incurred exclusively in appealing to the Quebec Court of Appeal the conviction and sentence of one year of imprisonment imposed on the appellant by the Court of Sessions of the Peace. The sum of $2,363.95 allowed by the respondent as expenses represents legal expenses incurred in the proceedings before the College of Physicians.

3.05 The appellant appealed to the Quebec Court of Appeal on the following two grounds, which were “related and could not be distinguished” (TS 6, lines 28 and 29).

The first .. . the sentencing to one year in prison and all the personal problems related thereto, such as criminal record, personal reputation, social life, and so on, the second loss of the right to practise for life or for a very long period as a result of the conviction. (TS page 7, lines 15 to 20)

3.06 Two letters were filed as part of the agreement, both were written by the appellant. One was dated March 29, 1981 and addressed to the Deputy Minister of Revenue, while the other, dated January 6, 1981, was addressed to Mrs Hébert, an employee of the respondent. The two letters were filed as Exhibit AR-1. The third paragraph of the letter of January 6, 1981 reads as follows:

After this matter had made the headlines and the open-line shows, a lawyer filed a complaint of criminal negligence against me. You will appreciate that this charge was related solely to the medical decision I had made . ..

3.07 Exhibit AR-2 filed was the judgment of the Quebec Court of Appeal rendered by Montgomery, Lajoie and Crête JJA acquitting the appellant of the charge against him and thus reversing the conviction of the Court of Sessions of the Peace.

3.08 The legal fees were paid in 1979 and the appellant claimed this expense in computing his income for 1979.

4. Act, Case Law and Analysis

4.01 Act

The principal provisions of the Income Tax Act involved in this case are paragraphs 18(1)(a), 18(1 )(b), 18(1 )(h) and the definition of “personal or living expenses” contained in subsection 248(1).

These provisions read as follows:

SEC 18 General limitations

(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) General limitation — 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;

(b) Capital outlay or loss — an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part;

(h) Personal or living expenses — personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on his business.

SEC 248 Definitions

(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 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 him by blood relationship, marriage or adoption, and

(c) expenses of properties maintained by an estate or trust for the benefit of the taxpayer as one of the beneficiaries;

4.02 Case Law

1. MNR v Dominion Natural Gas Co Ltd, [1940-41] CTC 155; 1 DTC 499- 133;

2. MNR v The Kellogg Company of Canada Ltd, [1943] CTC 1; 2 DTC 601;

3. Albert M Buraglia v MNR, 2 Tax ABC 275; 4 DTC 349;

4. Armand Gagnon v MNR, 26 Tax ABC 364; 61 DTC 307;

5. BP Oil Limited v The Queen, [1979] CTC 174; 79 DTC 5121;

6. BP Oil Limited v The Queen, [1980] CTC 408; 80 DTC 6331;

7. Albert Alexander Butler v MNR, [1970] Tax ABC 1089; 70 DTC 1682;

8. Hudson’s Bay Company v MNR, [1947] CTC 86; 3 DTC 968;

9. LD Caulk Co of Canada Ltd v MNR, [1954] CTC 28; 54 DTC 1011;

10. Rolland Paper Co Ltd v MNR, [1960] CTC 158; 60 DTC 1095;

11. MNR v Olva Diana Eldridge, [1964] CTC 545; 64 DTC 5338;

12. Jager Holdings (Calgary) Ltd and Jager Homes Ltd v MNR, [1980] CTC 2345; 80 DTC 1315.

4.03 Analysis

A. Appellant’s arguments

4.03.1 The facts that gave rise to the private complaint occurred while the appellant was practising his profession, his business.

Following his conviction the appellant could have had his name struck from the order of physicians if the said conviction had not been reversed by the Quebec Court of Appeal. Paragraph 2.01(e) of the Regulation respecting the conditions and formalities for the revocation of registration under the Professional Code, SQ 1973, c 43, reads as follows:

2.01 The registration of a person in the Professional Corporation of Physicians of Quebec may be revoked if that person:

(e) was the object of a final decision of a Canadian court finding him guilty of an indictable offence which is triable only by way of indictment.

The criminal negligence with which the appellant was charged is an indictable offence triable by way of indictment.

If the appellant had not incurred the necessary legal expenses he could not have continued to practise his profession as a doctor, that is, his business. It would not have been able to generate any income for him.

The Regulations under the Professional Code came into force in 1975. The Quebec Court of Appeal rendered its judgment in 1976.

4.03.2 Counsel for the appellant referred to Kellogg Company of Canada Ltd (supra). In that case the Supreme Court of Canada affirmed in 1943 the Exchequer Court’s decision to the effect that legal expenses incurred by the Kellogg company in successfully defending itself against the allegations of a rival cereal maker were expenses incurred for the purpose of producing income. The rival company was alleging that Kellogg had infringed the Trade Marks Act by using the words “Shredded Wheat”.

The Court relied on an earlier judgment it had rendered in 1940, in Dominion Natural Gas Co Ltd (supra). The following principle had been set forth in that case: ordinarily legal expenses are merely current expenses and are therefore deductible.

This principle was also relied on in the Exchequer Court’s decision in Hudson’s Bay Company (supra). That case involved legal expenses incurred in defending an action for use of a reversed name. The Court ruled that such expenses had not been incurred to protect a capital asset, but rather for the operation of the taxpayer’s business, and were therefore a current expense.

4.03.3 The same principles formed the basis for the decision in L D Caulk Co of Canada Ltd (supra). The Supreme Court of Canada held in that case that legal expenses incurred in successfully defending a criminal charge under section 498 of the Criminal Code respecting combines were deductible.

In Holland Paper Co Ltd (supra), the Exchequer Court allowed legal expenses in connection with a criminal prosecution of a similar nature, but where the accused had been convicted. The Court referred to the L K Caulk case (supra).

In Olva Diana Eldridge (supra), the same Court allowed the appeal, the appellant having incurred legal expenses in defending herself and her protégées against the criminal charge of living on the avails of prostitution.

B. Respondent’s argument

4.03.4 Counsel for the respondent cited the Albert M Buraglia decision (supra). That case involved a civil engineer who was acquitted of a charge of impaired driving on the evidence that he was suffering instead from great fatigue, since he had just completed a long work shift following several days of overtime. The legal expenses incurred were held to be personal. Chairman Monet of the former Tax Appeal Board stated the following in his decision:

I cannot think of any expense more personal to a taxpayer than the one made to defend himself against a charge of driving his car while under the influence of liquor.

4.03.5 Referring to the passage from the appellant’s letter cited above (see paragraph 3.06), counsel for the respondent stated the following:

. . . these factors remain strictly personal. (TS page 42, lines 10 and 11)

4.03.6 The Armand Gagnon case (supra) was also referred to by the respondent. Mr Gagnon, a City of Montreal police officer, had been suspended following a conviction on a charge against him. The Quebec Court of Appeal quashed the lower court’s decision and the officer was reinstated in his position and his salary reimbursed to him. The legal expenses claimed were disallowed on the basis that they were personal expenses. Board member Boisvert stated the following in his decision:

In the present case there is no doubt that the appellant had to incur the legal expenses he is claiming as a deduction from the sum he received in order to protect his reputation. However, they are not expenses in connection with an action against his employer related to his contract of employment, as an action for wages would be. These are legal expenses made necessary by a judgment that attacked his integrity, an essential part of a person’s being. It cannot be denied that the expense thus incurred enabled him to have the trial judgment quashed, but it must be regarded as a personal expense whose deduction is prohibited under section 12(1)(h) of the Act.

The respondent maintained that the present case also involves a personal expense, since Mr St-Germain was trying to protect his reputation.

4.03.7 Moreover, the respondent maintained that this was also a capital expense. In defending himself in order to protect his right to practise, the appellant was trying to preserve his livelihood, his source of income. It was the entire tree he was trying to protect, not merely the fruit.

C. Decision of the Board

4.03.8 We should begin by making certain distinctions with respect to the cases cited by the parties. There are those involving companies and those involving individuals. Since the present case involves an individual, we shall examine Gagnon (supra), Buraglia (supra) and Eldridge (supra).

Gagnon (see para 4.03.6) cannot be compared with the present case since the police officer Gagnon was an employee and was not engaged in a business or profession, unlike the appellant in the present case (see paragraph 3.03(1)). As we know, under subsection 248(1) of the Act the word “business” includes a profession. The only legal expenses that can be deducted by Mr Gagnon are those provided for in paragraph 8(1 )(b) of the present Act and paragraph 11 (1 )(ib) of the old Act: expenses incurred in collecting salary or wages owed by his employer or former employer. This was the basic ground relied on by the board member Boisvert. When a business is involved, section 18 of the Act can be invoked.

Buraglia (see para 4.03.4) involved an engineer, a person practising a profession, and therefore a business. The action of the engineer for which he was prosecuted was not action taken in the practice of his profession, or a professional act, but rather a purely personal act: driving a car. It was on this basis that the Chairman of the Board rendered his decision, stating that the expense the taxpayer incurred in defending himself against a charge of driving his car while under the influence of liquor was purely personal. He disallowed the expense.

In the present case the appellant’s action was a professional one: after diagnosis he decided that in view of the patient’s illness he should be transferred to another hospital.

Eldridge (see para 4.03.3 in fine) of course involved a prostitution business. It was held that the expense was a current expense and was deductible. The protégées had been acting in the course of the business. The present section 18(1)(a) (formerly 12(1 )(a) ) of the Act therefore applied.

4.03.9 The other cases (Kellogg (supra), Dominion Natural Gas (supra), Hudson’s Bay Company (supra), L D Caulk Co of Canada (supra) and Holland Paper Co (supra)) (see paragraph 4.03.2) involved companies that were clearly carrying on businesses and that performed acts as businesses. These acts became the subject of criminal charges, some of which were upheld and others of which were not. The legal expenses were allowed because they were incurred in preserving the operations of the businesses.

Section 18 of the present Act applied.

4.03.10 The Board is of the view that where an individual performs an action while carrying out his profession or business (and not only on the occasion of the carrying out of his profession or business, such as an individual driving to meet a client while drunk), as in the present case, and that action leads to court proceedings, the resulting legal expenses are incurred to preserve that individual’s profession or business, whether or not the proceedings are finally successful against him.

It is obvious that proceedings against an individual will always have more or less significant incidental personal consequences (domestic problems, poor reputation, prison, and so on). These various personal factors are secondary in relation to the action in question and the operation of the business. The legal expenses are of the same nature, however, and the Board does not think it should quantify each part, a task that would be nigh impossible in any event. The Board therefore allows the appeal.

5. Conclusion

The appeal is allowed and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed.