Ernest a Lavoie v. Minister of National Revenue, [1982] CTC 2332, 82 DTC 1291

M J Bonner:—This is an appeal from an assessment of income tax for the 1977 taxation year. The issue here is whether the appellant is entitled to a deduction under paragraph 8(1 )(f) of the Income Tax Act in respect of legal costs incurred by him as a result of his negligent conduct in the discharge of his duties as an employed real estate salesman.

The following allegations of fact in the Notice of Appeal were admitted by the respondent:

1. The taxpayer was employed as a commission salesman for Kellough Realty Ltd of Edmonton, Alberta.

2. In the course of providing his services as a salesman, Mr Lavoie obtained a listing for a property. Subsequently Mr Lavoie obtained an offer of purchase for the property. This offer was later accepted by the vendor.

3. The vendor later changed their plans and refused to go through with the sale of the property.

4. The purchaser brought a claim against the vendor for specific performance and alternatively damages for the breach of the alleged contract to purchase the property.

5. The purchaser also claimed damages for misrepresentation against Kellough Realty Ltd and Mr Lavoie.

6. The taxpayer engaged a law firm to represent him regardiing the above action and in December of 1977 Mr Lavoie paid legal fees in the amount of $4,600. These fees were claimed as a deduction against his real estate brokerage income.

7. In assessing the taxpayer’s income for the 1977 taxation year, the Minister disallowed the deduction for the legal fees paid.

It is most unlikely that the payment was made in 1977 and not at all clear that the whole of the $4,600 was legal fees. The Reasons for Judgment (Exhibit R-1) finding the appellant and his employer liable to indemnify the vendors were not delivered until January 24, 1978. The appellant’s solicitors’ account (Exhibit A-1) was dated January 25, 1978, and showed legal fees and total disbursements of $2,950.55. The receipt for the $4,600 from the appellant’s solicitors is not clear as to month, but is clearly dated in 1978. Had an issue as to the timing of deductibility been raised it would, on the evidence, have been difficult to find that payment was made in 1977. However, in light of the respondent’s admission of paragraph 6 of the Notice of Appeal, an admission that the respondent did not seek to withdraw, I must approach the case on the basis that the payment was made in the year under appeal.

The respondent’s position was that the $4,600 expended by the appellant was not . . expended . . . for the purpose of earning the income from the employment . . within the meaning of paragraph 8(1 )(f) of the Income Tax Act. The respondent’s counsel submitted that the appellant .. was defending his reputation and defending himself in a personal dispute between the parties involved in a contract”. There was no evidence that the appellant’s defence to the lawsuit was undertaken with his reputation in view and I cannot find that the appellant’s connection with the lawsuit arose in a personal, as opposed to an income-earning, context. Counsel did not contend that the Outlay was one of capital.

The appellant’s representative argued that because the appellant had become liable to the vendors in the course of the income-earning process the cost was a cost of earning income. He submitted that all such costs are deductible under paragraph 8(1 )(f). He referred to only one authority, the decision of the Tax Appeal Board in Daniel DiFrancesco v MNR, 34 Tax ABC 380; 64 DTC 106. In that case the principal issue was whether the appellant was an employee or an independent contractor. Deductibility there turned on a finding that the appellant fell in the latter category. In the present case it was common ground that Mr Lavoie was an employee of Kellough. Gener- aly speaking, the range of deductions permissible in the computation of income from employment is very much narrower that that permissible in the computation of income from a business. Thus, the DiFrancesco decision does not necessarily assist the appellant.

In 1975 and 1977, I assume, in 1976 as well, the appellant was an employee of Kellough. There was, therefore, one master-servant relationship. The obvious purpose of the appellant entering into that relationship and selling real estate thereunder was to earn commission income. It was under that single continuous relationship that the appellant was acting in 1975 when he so misconducted himself as to give rise to the claim successfully asserted against him. The lawsuit was a direct and immediate consequence of that misconduct. So, also, was the defence. The cost of the legal consequences of a course of conduct, at least where it is a question of computing income from a business, is generally regarded as a cost incurred for the same purpose as that which led to the conduct. For example, in Day & Ross Limited v The Queen, [1976] CTC 707; 76 DTC 6433, the Federal Court held fines paid by a trucking company for violations of highway traffic and weight restriction laws met the purpose test imposed by paragraph 12(1)(a) of the former Income Tax Act. If the purpose test is satisfied in the one case, I can see no reason why it is not satisfied in the other.

For the foregoing reasons the appeal will be allowed and the assessment referred back to the respondent for reconsideration and reassessment on the basis that the appellant is entitled to deduct the amount in issue.

Appeal allowed.