Hoi Chan Tsang v. Minister of National Revenue, [1983] CTC 2129, 83 DTC 107

Guy Tremblay:—This case was heard on September 27,1982, at the City of Ottawa, Ontario.

1. Point at Issue

The point at issue is whether the appellant, a medical practitioner, is correct in claiming an expense of $21,904.53 in the computation of his income for the 1977 taxation year. The said expense was incurred as legal fees to defend himself on criminal charges for falsely filing claims for fees from the Quebec and Ontario Hospital Insurance Commissions.

2. Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment the Court decided that the assumptions of fact on which the respondent based the assessment are also deemed to be correct. In the present case, in paragraph 6(a) to (d) of the reply to the notice of appeal, the respondent described the facts on which he based his assessment:

6. The Minister of National Revenue when making his assessment for the Appellant’s 1977 taxation year based himself, inter alia on the following facts:

(a) during his 1977 taxation year, the Appellant was a medical practitioner in Ottawa;

(b) the Appellant was charged under the Criminal Code for falsely filing claims

for fees from the Quebec and Ontario Hospital Insurance Commissions;

(c) the Appellant to defend himself under these charges incurred during his 1977 taxation year legal fees in the amount of $21,904.53;

(d) the Appellant sought to deduct in computing his income for his 1977 taxation year the said amount of $21,904.53.

3. Facts

3.01 The assumptions of fact alleged by the respondent and quoted above are admitted by the appellant’s agent.

3.02 The taxpayer is a medical practitioner, conducting a general medical practice in the City of Ottawa. From January 1, 1976, to December 31, 1976, he provided general medical services as well as acupuncture treatment. Acupuncture treatment is not an allowable fee under the OHIP medical insurance program. As such, the taxpayer charged his patients directly for the acupuncture treatment and charged OHIP for a general medical assessment for these same patients.

3.03 The taxpayer was charged under the Criminal Code for falsely filing claims for fees from the Quebec and Ontario Hospital Insurance Commissions for the years 1976 and 1977. The fees earned were first declared as income in the years in question.

3.04 The taxpayer was successfully charged by those Commissions and he appealed the decision. The taxpayer was required to repay the income in question as well as penalties under the decision.

3.05 The criminal charges issued against the appellant in 1977 were filed as Exhibit A-1. The certificate of sentence of the Supreme Court of Ontario, Court of Appeal, dated May 22, 1980, was filed as Exhibit A-2. The sentence reads as follows:

60 days intermittent to be served on weekends from 8:00 pm Friday to 8:00 am Monday together with a fine of $25,000.00 and in default of payment 18 months consecutive. Time to pay extended 90 days.

3.06 The decision and reasons for decision of the Discipline Committee of the College of Physicians and Surgeons of Ontario given on July 17, 1981, was filed as Exhibit A-3. The appellant’s licence to practise medicine in Ontario was suspended for a period of three months.

3.07 A letter dated July 6, 1981, written by the “Régie de I’assurance- maladie du Québec” claiming $22,203 from the appellant was filed as Exhibit A-4.

3.08 The quantum of $21,904.53 involved is not in dispute.

4. Law — Cases at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act, SC 1970-71-72, c 63 as amended, involved in the present case are subsection 9(1) and paragraphs (a), (b) and (h) of subsection 18(1 ) and the definition of “personal and living expenses” as defined in subsection 248(1). They read as follows:

9. (1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is his profit therefrom for the year.

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

(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;

(b) 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 his Part;

(h) 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.

248. (1) In this Act,

“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 Cases at Law

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

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

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

4. No 166 v MNR, 10 Tax ABC 285; 54 DTC 220;

5. Edward Carter v MNR, 5 Tax ABC 92; 51 DTC 366;

6. Continental Pharma (Canada) Ltd v MNR, 13 Tax ABC 52; 55 DTC 317;

7. Dr Alfred Gordon v MNR, 40 Tax ABC 105; 66 DTC 68;

8. Ernest A Lavoie v MNR, [1982] CTC 2332; 82 DTC 1291;

9. Day & Ross Limited v The Queen, [1976] CTC 707; 76 DTC 6433;

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

11. CIR v E C Warnes & Co Ltd, 2 TC 227;

12. MNR v L D Caulk Company of Canada Limited and Goldsmith Bros Smelting and Refining Co Limited, [1954] CTC 28; 54 DTC 1011;

13. Ben Arthur Shuckett v MNR, 28 Tax ABC 280; 62 DTC 53;

14. Martin Taiger v MNR, 13 Tax ABC 50; 55 DTC 316;

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

4.03 Analysis

4.03.1 Most of the cases at law referred to above are studied and summarized in the decision of the Tax Review Board in the Jacques St-Germain v MNR judgment dated November 7, 1982 (not yet published).

In the present case, the same principles and the same reasoning as in the Jacques St-Germain case (supra) are involved. Dr St-Germain, a medical doctor, was on duty in the Emergency Department of the Fleury Hospital when, after diagnosing a patient, he ordered that the said patient be transferred to another hospital. The patient died in the ambulance during the transfer. Dr St-Germain was sued under criminal charges and condemned by a criminal court. However, this decision was reversed by the Province of Quebec Court of Appeal. Dr St-Germain had claimed the legal fees as a deduction from his net income. His appeal to the Tax Review Board was allowed on the basis that the appellant, a professional, carried on a business. The diagnosis he gave and the decision he made to transfer the patient were acts made while carrying on his business. Therefore, the legal fees were incurred to preserve and maintain his business according to the principles issued in the Hudson’s Bay Company case (supra). Hence, the expenses were of current nature and deductible.

4.03.2 In the present case, it was part of the appellant’s business to claim fees from the Quebec and Ontario Hospital Insurance Commissions. The income earned by his illegal proceedings was taxed on the basis that the respondent does not consider the morality of the source of income (see the Olva Diana Eldridge case (supra)). To be logical with the taxation of such an income, current expenses incurred for the purpose of producing the said income must be deductible. Are the legal fees paid by the appellant current expenses incurred for the purpose of producing income?

It is the Board’s opinion that since the illegal proceeding was an act (or numerous acts) made by the appellant in carrying on his business, therefore, the legal fees were incurred to preserve and maintain his business, hence, they are current expenses and deductible.

It is useful to point out, as was done in the Jacques St-Germain case (supra), that an act made by a person while carrying on the duties of his profession or business does not include an act made during the course of carrying on his profession or business, ie, a person driving a car in an inebriated state on the way to meet a client.

It is also useful to add that criminal charges against a person always bring personal consequences, more or less important (psychological problems, loss of job, financial problems, bad reputation, jail, etc). Those personal consequences, when considered with the act made and the type of business carried on, are only a secondary consideration. The principal consideration is whether the legal fees were incurred to preserve and maintain the business. The Board believes that the legal fees were so incurred.

5. Conclusion

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

Appeal allowed.