Young v. R., [1997] 1 CTC 2634 (Informal Procedure)

Somers D.J.T.C.C.: — This appeal was heard on October 29, 30 and 31, 1996 at Sudbury, Ontario.

The Appellant in his Notice of Appeal claims that the notice of assessment for the 1993 taxation year is wrong as the T4 income of $27,325.65 is not income from an office or employment for the purpose of section 3 and subsection 5(1) of the Income Tax Act (the “Act”), as no services were rendered by him for the employer for the period in question and therefore cannot be regarded as having been received pursuant to paragraphs 6(3)(c), (3)(d) or 6(3)(e) of the Act.

Furthermore, the Appellant claims that the notice of assessment for the 1993 taxation year is wrong as the legal fees expenditure of $1,153.26 is a lawful deduction to establish a right to collect owed salary or wages under paragraph 8(1 )(b) of the Act and under paragraph 60(0.1) of the Act to establish a right to a pension benefit.

In assessing the Appellant, the Minister of National Revenue (the “Minister”) made the following assumptions of facts, which the Appellant admitted or denied at the hearing:

9(a) the Appellant was employed by Revenue Canada Taxation (the “Employer”) in the 1992 and 1993 years;

(b) the Appellant received income from employment with the Employer in the amount of $51,388.41 in the 1993 taxation year;

(c) in the 1993 taxation year the Appellant received from the Employer, as part of the said amount of $51,388.41, an amount of $27,325.65 in respect of wages owing for the period July 23, 1992 to April 21, 1993;

(d) in the 1993 taxation year the Appellant received from the Employer, as part of the said amount of $51,388.41, an amount of $24,062.76 in respect of wages for the period April 22, 1993 to December 31, 1993;

(e) the amounts of $27,325.65 and $24,062.76 totalling $51,388.41 referred to in subparagraphs 9(c) and 9(d) herein are income from employment of the Appellant in the 1993 taxation year;

(f) in the 1993 year the Appellant incurred legal expenses of $1,153.26 (amended to legal expenses finalized);

(g) the said legal expenses were incurred in respect of the Appellant’s defense against charges laid against him under the Criminal Code;

(h) the expenses referred to in subparagraph 9(f) above were not incurred by the Appellant to collect or establish a right to salary or wages owed to the Appellant by the Employer;

(i) the expenses referred to in subparagraph 9(f) above are not allowable legal expenses within the meaning of paragraphs 60(o) and (60(0.1) of the Act;

(j) the Appellant did not incur expenses of employment in the 1993 taxation year within the meaning of section 8 of the Act.

The pertinent sections of the Act applicable in this appeal are the following:

SECTION 5: Income from office or employment.

(1) Subject to this Part, a taxpayer’s income for a taxation year from arw office or employment is the salary, wages and other remuneration, including gratuities, received by him in the year.

SECTION 8: Deductions allowed.

(l)(b) Legal expenses of employee - amounts paid by the taxpayer in th year as or on account of legal expenses incurred by the taxpayer to collec or establish a right to salary or wages owed to the taxpayer by the employer or former employer of the taxpayer;...

At the beginning of the hearing, the Appellant admitted he incurred legal expenses, as a result of an indictable offence under paragraph 246(1 )(a) of the Criminal Code, for uttering a death threat. He received the bill in June 1993 in the amount of $1,153.26 which he paid in 1993.

I must say that paragraph 60(o) of the Act does not apply in this appeal. Paragraph 8(1 )(b) does not allow legal expenses incurred while defending oneself on criminal charges. Legal expenses cannot be considered as expenses incurred for the purpose of collecting a salary or wages. The Appellant fails in his appeal pertaining to the legal fees expenditure.

The Appellant admitted having received in 1993 from Revenue Canada, the former employer, the sum of $27,325.65 and the sum of $24,062.76 for a total amount of $51,388.41. However, he denied having received the amount of $27,325.65 as income. He alleges having received this amount as a result of defamation by the employer. He said he thinks it is for defamation, but could not produce any evidence that the employer admitted that the payment of $27,325.65 was for defamation.

The Appellant stated that he was suspended without pay by the employer and, as such, the sum of $27,325.65 cannot be considered as salary. A letter dated November 10, 1992 from the Director of the Sudbury Taxation Centre, was produced as evidence by the Appellant. The letter informed the Appellant that given the seriousness of the allegations of uttering threats he was suspended indefinitely without pay pending the results of the investigation.

As a result of the suspension, various negotiations were undertaken by the Appellant and his union pertaining to a “buy-out”. This is recognized by the Appellant in a letter dated February 13, 1993 which he produced as evidence (Exhibit A-36) in which he directs the union of taxation employees as follows: “Please put the “buy-out” deal on hold if no news by Tuesday”. In Exhibit A-37, produced by the Appellant, the Union responded by way of fax dated February 18, 1993, as such: “You will note also that the issue of retroactivity has not been included in the memorandum of settlement.”

In the memorandum of settlement, produced by the Appellant as Exhibit A-6, and signed on February 21, 1993 by the Appellant, representatives of the employer and the union, it was agreed that the Appellant would resign from Revenue Canada, Taxation, effective July 22, 1994, with certain conditions. As a result of this memorandum of settlement, the Appellant was paid the sum of $24,062.76.

As mentioned above, retroactive pay was not included in the memorandum of settlement signed by the Appellant on February 21, 1993.

In a letter dated February 17, 1993, the Assistant Deputy Minister of Revenue Canada, Taxation, to the Head office staff relations, directed that the Appellant receive a retroactive payment from July 23, 1992 up to February 26, 1993.

A letter dated October 28, 1994 from an official of Revenue Canada, produced by the Appellant as Exhibit A-26, states the following:

The amount of $27,325.65 shown on your T4 information return represents your salary for the period of July 23, 1992 to April 21, 1993. This amount was paid to you as part of the negotiations that lead to the signing of the Memorandum of Settlement referred to in your letter. Although the settlement itself did not cover that period during which you were absent from work without pay, the retroactive payment of your salary for that period was part of the conditions that you and your union representative had attached to the signing of the settlement.

The Appellant acknowledged, at the hearing, having received the amounts of $24,062.76 and $27,325.65 for a total amount of $51,388.41. He testified that he was negotiating for a lump sum representing two and one half years of salary.

The Appellant maintains that the payment of the sum of $27,325.65 did not represent salary, but was for defamation. Documentary evidence produced by the Appellant indicates that this sum was for retroactive pay. The only purported evidence that the payment was for defamation was his statement “I think it was for defamation”.

Documentary evidence such as a copy of the Privacy Act, copies of reports of the Auditor General, newsletter clippings, request form for access to information, letters from lawyers, was produced as exhibits by the Appellant, with no objection from the Crown, in order to expedite the hearing. Some of the exhibits were irrelevant for the purposes of this appeal.

I must conclude that the sum of $27,325.65 received by the Appellant was for income from employment in the 1993 taxation year pursuant to subsection 5(1) of the Act.

I must conclude as well that the Appellant is not entitled to deduct an amount of $1,153.26 in the 1993 taxation year in respect of legal expenses of a taxpayer pursuant to paragraph 8(1 )(b) of the Act.

Therefore, the appeal is dismissed.

Appeal dismissed.