Estate of the Late Ray Akenhead, Estate of the Late Geraldine Holland v. Minister of National Revenue, [1983] CTC 2111, 83 DTC 105

D E Taylor:—These are appeals heard on common evidence on October 20, 1982, in the City of Victoria, British Columbia. The point at issue in each appeal is exactly the same — the disallowance by the Minister of National Revenue of a charge made by the taxpayers for legal fees. The significant comments made in the notices of appeal are:

1. The Appellant and the Respondent are disputing the question of a deductibility of legal fees claimed in the Appellant’s income tax return.

2. The Appellant says the expenses claimed were made or incurred for the purposes of making a disposition within the meaning of subparagraph 40(1)(a)(i) of the Income Tax Act.

In reply, the Minister contended:

(The Appellant) died in 1978 and pursuant to the provisions of Section 70 of the Income Tax Act was deemed to have disposed, immediately before his (her) death, of all capital property owned by him (her).

The outlays and expenses disallowed by the Respondent were incurred after the death of (the appellant) and after the deemed disposition of his (her) capital property.

They said outlays and expenses were not made or incurred by the Appellant for the purpose of making a disposition of any property.

The Respondent relies, inter alia, upon Sections 40(1 )(a)(i) and 70 of the Income Tax Act, SC 1970-71-72, c 63 as amended.

The Respondent submits that he properly disallowed the deduction of the outlays and expenses claimed by the Appellant as such outlays and expenses were incurred subsequent to the deemed disposition of the assets pursuant to the provisions of Section 70 of the Act and were therefore not allowable as a deduction pursuant to Section 40(1 )(a)(i) of the Act.

The argument of counsel for the appellants was summarized:

At the moment there is a deemed disposition — my submission is that there has to be obviously deemed costs . . .

. . . that the obligation to pay legal costs immediately arose on that deemed disposition . . .

There is just no way you can transfer property without some kind of costs being involved.

The respondent’s position was:

. . . that in making (a) deduction from income tax you have to show there is a provision in the Act that allows it . . .

... the provision that the Appellant must rely on is Sec 40(1 )(a)(i):

“(one can deduct) any outlays and expenses to the extent they were made or incurred by him for the purpose of making the (deemed) disposition .. .”

. . . my submission is that the “him” in this phrase is reserved . . . in this case (for) the deceased taxpayer as opposed to the estate.

. . .The Respondent is arguing that this section does not allow legal fees incurred by the estate of the deceased taxpayer after his death, to be deducted from the proceeds which are deemed to be realized by the deceased taxpayer immediately before his death, under Sec 70.

Secondly, I would refer you to both the Federal Court decision in Mastronardi Estate v The Queen which is cited at 76 DTC 6306 for the Trial Division, and at 77 DTC 5217 for the Court of Appeal. . . . I refer you to a passage on page 6308 where they talk about the effect of Section 70 of the deemed disposition under that section. I would point out that, to my knowledge, these are the only cases that have ever dealt with that section and interpreted it. They state . ..

“Some dispositions provided for in the Act are fictional dispositions.

The capital gain . . . is the deemed realization of these shares, which deemed realization is statutorily created by the provisions of section 70(5) of the Income Tax Act.”

And further ... they outline what occurs under that section where they state:

“.. . there is a two step fiction enacted by section 70 subsection (5) of the Act.

The first fiction is that the taxpayer after he dies is deemed to have disposed of the subject property ‘immediately before his death’.

The second fiction is that he is deemed ‘to have received proceeds of disposition therefor equal to the fair market value of the property at that time’.”

. I would submit that no outlays or expenses are necessary to effect that disposition; that it occurs by force of the statute. In fact, it seems almost impossible that there could be expenses incurred to effect such a deemed disposition.

. . . the legal fees in this case were incurred by the deceased’s estate and not by the taxpayer; they were incurred after his death, and I would submit that they were incurred when actual disposition occurred after the deemed disposition.

. . . the legal fees that were incurred to transfer the title to his estate were in respect of this actual disposition, and not an effect of the (deemed) disposition.

Findings

Counsel for the appellants presented as complete an argument as it is possible to make in support of the point at issue, but it cannot be regarded as convincing. In my view, there is no argument for the appellants that could be convincing. Conversely, the Board must adopt the logic and rationale presented by counsel for the respondent. I would agree with counsel for the appellants that if indeed actual title to the property is to be transferred, then there would in all probability be some costs — and the legal costs at issue in these appeals might be included. However, the deemed disposition which brings this matter to the foreground need involve no costs at all. In fact, no physical or actual disposition need ever occur. The “deemed disposition” determined by the provisions of the Income Tax Act is for the purpose of the calculation of income tax only and would be operative for that purpose and only for that purpose in any event. As I see it, the position taken by the appellants in this matter is tantamount to contending that unless an actual physical disposition takes place, the deemed disposition does not occur. Of course, that could not be the intention of the Act.

The appeals are dismissed.

Appeal dismissed.