Basque v. R., [1999] 4 CTC 2525

Tardif T.C.J.:

This is an appeal for the 1995 taxation year. On July 2, 1981 the appellant was dismissed from his employment with the Alcan company. Following negotiations and proceedings pursuant to the Act respecting Labour Standards, he obtained through an arbitration award severance pay [TRANSLATION] “equivalent to nine months’ salary”. Alcan complied with the said arbitration award of June 30, 1982, ordering it to pay the appellant $26,146.42.

Alcan accordingly issued a cheque to the appellant in the amount of $16,995.18, after deducting $9,151.24 for taxes, namely $3,921.96 federal and $5,229.28 provincial.

Consequently, in 1982 the appellant was assessed on the amount of $26,146.42. The appellant did not accept the settlement and continued with legal action seeking reinstatement in his position.

He began by obtaining a writ of evocation following the arbitration award. The writ of evocation having been issued, however, the appellant failed on the merits before Robert Lafrenière J. of the Superior Court (case No. 150-05-000991-820, judicial district of Chicoutimi. The appellant decided to appeal that judgment and, in a judgment dated April 25, 1995, signed by Gendron, Brossard and Moisan JJ.A., the Court of Appeal refused to intervene.

Following all these legal proceedings, and after exhausting all possible reasonable remedies, the appellant had to fall back on the arbitration award. As a result of all these proceedings, he was billed and had to pay $6,000 in lawyer’s fees.

In his tax return for the 1995 taxation year he mistakenly claimed an amount of $3,435 as a deduction for this item, on the basis that it was an outlay made in order to earn income. After discovering the mistake, the appellant filed an amended return claiming $6,000, the amount he had in fact had to expend for his solicitors’ professional fees.

The respondent refused to allow the appellant either the deduction originally claimed or the corrected deduction of $6,000.

The respondent set out the reasons for her refusal in the Reply to the Notice of Appeal as follows:

[TRANSLATION]

7(a) in filing his return for the 1995 taxation year the appellant claimed as a deduction legal expenses of $3,435.41;

(b) the Minister disallowed the deduction by the appellant of the $3,435.41 in legal expenses as they were not justified.

8. At the objection stage the Minister obtained the following additional facts:

(a) for the 1982 taxation year the appellant reported an amount of $26,146 as other income:

(b) this amount represented severance pay received from the Alcan company in the 1982 taxation year;

(c) in a telephone conversation on October 9, 1996 the appellant asked the Minister to correct to $6,000 the amount of the legal expenses claimed as a deduction for the 1995 taxation year;

(d) on October 18, 1996 the appellant’s agent, Angèle Poulin, C.A., submitted to the Minister a copy of a letter from attorney Sylvain Lepage dated October 3, 1996, confirming that the appellant paid $6,000 in professional fees in 1995 for the purpose of obtaining the payment of severance pay by Alcan;

(e) the appellant did not prove that any amount in addition to the $26,146 in severance pay received from Alcan in 1982 was owed to him by Alcan, or that he was entitled to salary.

The appellant, for his part, argued that essentially the lawyer’s fees were paid ultimately in order to get his job back, and consequently with a view to obtaining a significant improvement in his financial situation.

If the expense must be classified and evaluated in terms of the result obtained, it is true that that expense did not produce or generate any concrete effect or benefit for the appellant. Is this the proper and only way of assessing the nature of the expenditure in question?

It would be appropriate to begin by reproducing s. 8(1 )(b) of the Act: 8. (1) In computing a taxpayer’s income for a taxation year from an office or employment, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(b) amounts paid by the taxpayer in the year as or on account of legal expenses incurred by the taxpayer to collect or establish a right to salary or wages owed to the taxpayer by the employer or former employer of the taxpayer.

The case law consulted, in particular the decision of the Chief Judge of the Tax Court of Canada in Macdonald v. Minister of National Revenue (1990), 90 D.T.C. 1751 (T.C.C.), describes the scope of the applicable provisions as follows:

The amount that was awarded to the Appellant by the Court was in the nature of damages for breach of a contractual obligation on the part of his former employer. In arriving at the quantum of the award, the Court took into account the salary of the Appellant and applied it to a notional period of employment which it considered should have been given to the Appellant prior to the termination of his employment. That exercise, however, did not translate an amount of damages into salary or wages.

The amount in question in my opinion was in respect of loss of his employment received as, on account or in lieu of payment of, damages pursuant to a judg-

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ment of a competent tribunal as provided in paragraph 248(1) and was therefore a retiring allowance within the meaning of this definition. In addition, the word “salary” as defined by the dictionary does not include an amount of the type received by the Appellant. The Concise Oxford Dictionary defines “salary”: n. fixed payment made by employer at regular intervals, usu. monthly or quarterly, to person doing other than manual or mechanical work.

In my opinion, by his action against his former employer, the Appellant was seeking the right to damages for wrongful dismissal and not salary or wages as he had never performed any services for his former employer to be entitled to a salary or wages.

What paragraph 8(1)(b) contemplates in my opinion is the situation whereby a taxpayer having performed the duties of his employment his employer has refused to pay him his salary for whatever reasons he may invoke. In other words, the employee has earned the salary or wages in question, but his employer has not paid him and he had to incur legal expenses to collect what was owing to him.

According to that decision, only the fees paid for the purpose of recovering money earned and due are eligible. Consequently, fees paid in order to recover an undefined and indeterminate possible debt are not deductible.

In the instant case the appellant’s debt giving rise to the proceedings was, first, uncertain, and second, imprecise as to the quantum, which depended on the assessment of a number of factors.

More recently, there was another decision which has in fact been upheld by the Federal Court of Appeal. It is a decision by Judge Margeson of this Court in Turner-Lienaux v. R. (95-4024(IT)I, 95-1978(IT)I), [1996] 3 C.T.C. 2810 (T.C.C.).

In that decision Judge Margeson said the following:

This Court has some difficulty in concluding that a person is “owed” a salary or “wages” if he did not do the work or occupy the position that required the salary or wages to be paid. Further it has difficulty in concluding that a person could be found to have incurred legal expenses to establish a right to salary or wages when two Courts of competent jurisdiction actually found that the Appellant did not have the “right” that she was seeking to enforce by the legal action.

There can be no doubt that the Appellant was not seeking to collect wages owed.

This is not to say that there is in effect no difference between the amended version and the pre-amended version of paragraph 8(1)(b). This Court can foresee a case where a person might not be successful in a legal action because of improper evidence, insufficient proof of damages or some other reason and yet may have incurred the expenses to establish “a right to salary or wages”.

However, in the case at bar the result of the action was to declare that no such right existed, not that such right had not been established and consequently the action dismissed.

This Court cannot conclude that any belief, no matter how absurd it is, or how remote the chances of success are, would entitle the taxpayer to deduct the legal xpen so long as the taxpayer believed that the right existed. That could lead to absurd abuse of the paragraph in question. [My emphasis.]

The Court is not satisfied that the legal expenses were incurred by the taxpayer “to collect or establish a right to salary or wages owed to the taxpayer by the employer or former employer during the years in question.” Therefore, the expenses are not deductible in those years against other income.

In the instant case the evidence was that the appellant was claiming from his former employer, Alcan, compensation higher than that which was awarded to him by the arbitrator and, ideally, reinstatement in his position. In either case the outcome was hypothetical and uncertain, whatever the appellant may have thought. The first stage involved defining whether, in the first place, the appellant had a right, so that in the second stage it could be decided how that right should be reflected, whether by means of a compensation award or by means of reinstatement, or possibly both. Here again, the question was a very contentious one.

The legal proceedings brought by the appellant may not have been frivolous and futile: he believed deeply in his chances of obtaining a settlement much more financially rewarding than the one he was given by the arbitration award. According to the case law, with which I concur, this was not sufficient in itself.

The appellant was determined and tenacious in pursuing his efforts to obtain what he believed was owed him. Despite all these facts, which arouse sympathy, it is nonetheless true that the legal proceedings initiated by him did not claim a debt due and payable. It was essentially a contentious debt or a contentious right, with respect to which the outcome depended on various facts and conditions which were open to dispute.

In the circumstances, in view of the evidence as to the nature of the expenditures and the state of the relevant case law on the point, I cannot allow the appeal.

For these reasons, I must dismiss the appeal.

Appeal dismissed.