E F Anthony Merchant v. Minister of National Revenue, [1980] CTC 2336, [1980] DTC 1291

M J Bonner:—This is an appeal from an assessment of income tax for the appellant’s 1976 taxation year. During that year the appellant practiced law at the City of Regina. He was also a member of the Saskatchewan Legislative Assembly. In February or March of 1976 the appellant decided to seek the position of leader of the Saskatchewan Liberal Party. In the course of his unsuccessful campaign for that position he incurred expenses exceeding $20,000 of which $10,550 were paid during the year. In his return of income for the year he sought to deduct the latter amount. The Minister disallowed the deduction on the basis that it was prohibited by paragraph 18(1)(a) of the Income Tax Act.

The appeal was fought on the basis that deductibility turned on the question whether the person who leads the Liberal Party of Saskatchewan is, in doing so, carrying on a business within the meaning of the Income Tax Act. The appellant contended that such a person does and the respondent contended that he does not. The respondent did not suggest that if the leader were carrying on a business then outlays incurred in seeking the leadership were outlays on capital account. In argument counsel for the appellant mentioned capital only in passing as follows: “If you find this money was expended for the purpose of acquiring capital interest, then obviously Mr Merchant has sustained a capital loss and therefore, one-half of it would be deductible under the provisions regarding capital losses”.

The only witness called at the hearing was the appellant. No documentary evidence was entered. The appellant’s evidence was that his objective in seeking the leadership was to defeat Mr Blakeney, change the government and improve the lot of the Saskatchewan people. He indicated that in that process he expected that he would have earned some money as leader.

The evidence indicated that the person entitled to vote at a leadership convention fall into two categories. Some are entitled ex officio to vote. The remainder of the voting delegates are themselves chosen by election, presumably as representatives of riding associations. The costs incurred were spent in the process of attempting, by various means, to persuade the voting delegates to elect the appellant as leader.

In entering the contest the appellant felt that he had a good chance of succeeding. In the result, however, he lost the contest, although only by a close margin.

The position of the party leader was described. The party does not pay its leader any fixed or predetermined remuneration. The pattern is that what is paid by the party turns, at least in part, on the success of the leader in attracting public support and contributions to the party.

The leader is not generally regarded as an employee of the party. He does not report to anyone in the party. He forms his own policies. Policies passed in convention do not bind him. He cannot be fired, except folowing a leadership review at a convention, a process which the appellant described as analogous to impeachment. I gather it rarely happens.

The leader is not required to perform any defined duties. He alone determines what he must do. Generally, he is expected to speak out in public and secure public support for the policies of the party. He is also expected to lead the party in the Legislature if he is a member of that body.

On behalf of the appellant it was argued that income must arise from one of four sources: employment, office, property and business.* The position of the leader, it was submitted, is such that no master and servant relationship exists between the party and the leader. It was argued that the position cannot be an office by reason of the definition of “office” to be found in subsection 248(1) of the Act. Thus, the argument proceeded, since obviously the leader’s income is not from property it must be from a business, both by process of elimination and by reason of the definition of the word “business” in subsection 248(1) of the Act.

The respondent’s counsel submitted that the leader does not carry on a business. He suggested that the leader does not hold a position of employment, but rather that the position was an office. He agreed with the ap-

It was assumed that the revenues flowing to the person holding the position of leader were income.

pellant that the leader’s income is not income from property. Finally, he Suggested that the expenses were of a personal nature “related to the enhancement of the appellant’s political viability within the party”. In this respect he seemed to be relying on paragraph 18(1 )(h) of the Act, although he did not plead that provision in the reply to the notice of appeal.

In my view deductibility of the expenses in question in this appeal does not depend on a categorization of the source of the payments made to the leader. The issue in this appeal does not involve the deductibility of the expenses incurred by a leader in the course of earning the payments which are made to him by the party. Rather, it is a question of the deductibility of expenses incurred in seeking the leadership. Assuming, without deciding , that the payments received by the person elected as a leader of the party are income and that the source can properly be regarded as a business, the cost of a campaign for the leadeship cannot, in my view, be regarded as entering into the computation of a non-capital loss from a business. A distinction must be drawn between an attempt to get into a business and the process of operating a business.

The position here is, I think, entirely analogous to that considered by the Exchequer Court in Gordon Kenneth Daley v MNR, 1 Tax ABC 364; 50 DTC 877. There, a solicitor sought to deduct, in computing income from the practice of law, a part of the fee paid by him for admission to the Bar. The deduction was found to have been properly denied. In his reasons for judgment at 880 Thorson, P, stated:

It seems clear that a disbursement or expense such as this which is laid out or expended not in the course of the operations, transactions or services from which the taxpayer earned his income but at a time anterior to their commencement and by way of qualification or preparation for them is not the kind of disbursement or expense that could be properly deducted in the ascertainment or estimation of his “annual net profit or gain”. In my view, no accountant or business man could reasonably so regard it.

The appellant’s unsuccessful campaign did not involve any disposition of property and thus no question of capital losses and their deductibility arise here. The appeal must therefore be dismissed.

Appeal dismissed.