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Citation: 2004TCC180
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Date: 20040224
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Docket: 2002-2250(IT)I
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BETWEEN:
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MEICHLAND OLIVER BLACKBURN,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Bowie J.
[1] In filing his income tax return
for the year 2000, Mr. Blackburn claimed a deduction from income
under paragraph 8(1)(b) of the Income Tax Act (the
Act) for legal fees that he had paid in connection with a
charge of dangerous driving that had been preferred against him
on October 31, 1997. The Minister of National Revenue (the
Minister) disallowed the claimed deduction, giving rise to this
appeal.
[2] In October 1997, Mr. Blackburn was
a member of the Niagara Regional Police Service (NRP). The
incident that resulted in the charge against him took place while
he was off duty. Nevertheless, he was immediately removed from
patrol duty and assigned to deskwork pending his trial. He well
understood that conviction of such an offence would have a very
serious adverse effect on his career as a police officer, and so
he retained counsel to prepare and present his defence. He
testified that he would not have retained a lawyer but would have
conducted his own defence had it not been for the likelihood of
losing pay, or even his job, in the event of a conviction. I have
no reason to disbelieve this evidence. Indeed, I was very
favourably impressed by Mr. Blackburn as a witness, and I accept
his evidence in its entirety.
[3] For reasons that were not
explained in the evidence, and are not relevant here, Mr.
Blackburn ended the retainer of his first counsel and retained a
different counsel to conduct his trial. In all, he paid $10,000
to these two lawyers for services up to and including the trial.
His trial took place on April 30, 1999, and he was convicted. On
August 11, 1999, Mr. Justice Collins sentenced him to serve
30 days in jail. On the same day, Inspector Damian Parrent
of the NRP suspended the Appellant from duty without pay. This
was a direct and immediate result of the imposition on him of a
term of imprisonment.
[4] Mr. Blackburn then retained a
third counsel to appeal his conviction, and to secure his release
on bail pending that appeal. On July 13, 2000, Mr. Justice McLean
of the Superior Court of Ontario heard that appeal, and allowed
it. On July 19, 2000 the Acting Chief of the NRP signed
Routine Order No. 82-2000.[1] It reads in part:
On July 13, 2000, an appeal of the conviction and sentence ...
was quashed and a new trial ordered. As a result of the court
decision and in accordance with the Police Services Act of
Ontario, effective July 13, 2000, Constable Meichland Blackburn
is suspended from duty with pay.
Although it does not appear in this Routine Order, it is clear
from the balance of the evidence that the period of suspension
that the Appellant had by this time served was converted to a
suspension with pay, rather than without. On October 13,
2000, the Acting Superintendent, Administrative Services of the
NRP wrote to confirm that Mr. Blackburn's net pay for the period
of his suspension between August 11, 1999 and July 13, 2000 would
be deposited to his bank account on November 2, 2000,[2] and that was in fact
done. That payment, on which of course he was required to pay
income tax, was an automatic and immediate result of the success
of his appeal. His gross pay for the period in question was
$51,832.37.
[5] The Appellant now claims that he
is entitled to deduct from his income for 2000 all the legal fees
that he paid, both for the trial and for the appeal. He argued
strenuously before me that his motivation for retaining all three
counsel was to prevent the loss of pay that he knew would
inevitably result from a conviction on a dangerous driving
charge. Counsel for the Respondent takes the position that he is
entitled to no deduction under paragraph 8(1)(b) as no
wages were owed to him at the time he retained counsel, the
litigation was not against his employer, and the purpose for
which he retained counsel and paid their fees was simply to
defend a charge, and later to pursue an appeal from conviction,
not to recover wages owing to him.
[6] The issue that I have to decide is
simply whether, on these facts, it can properly be said that the
payments in question come within the language of the paragraph.
It reads:
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;
I shall deal first with the fees that the Appellant paid to be
represented at the trial before Mr. Justice Collins. At this
point, no one owed the Appellant any salary or wages. His duties
had been changed, but he had not suffered any loss of pay. I
accept that he retained counsel, and paid their fees, to guard
against the possibility (which became reality) that he would be
convicted, and that one result of that would be loss of salary,
but that does not bring his expenditure for legal fees within the
very narrow confines of paragraph 8(1)(b). He was, in
fact, in precisely the same position as the Appellant in
Blagdon v. The Queen.[3] Captain Blagdon retained counsel to represent
him at an inquiry under the Canada Shipping Act,[4] because he
knew that if that inquiry went badly for him he could lose his
Master's papers, future income, and perhaps his career. His claim
to deduct the fees paid to counsel failed, however, because there
was no salary owing to him. The Federal Court of Appeal in that
case affirmed Associate Chief Justice Bowman's decision, and I am
bound to follow it. The claim to deduct the fees paid to trial
counsel must therefore fail. The same considerations lead to the
same result as to the fees that Mr. Blackburn paid to his counsel
at the second trial, which took place following his successful
appeal.
[7] The fees paid to counsel on appeal
are a different matter, however. As soon as he was sentenced, the
Appellant started to lose income as the direct result of that
sentence. His only possible remedy was to have the conviction and
the sentence set aside, which he did. The restoration of his lost
pay followed automatically. There was no hearing, and no need for
a hearing, under the Police Services Act.[5] The quashing of the conviction
was effective to " ... establish a right to salary or wages
owed ..." to him.
[8] It may seem superficially
attractive to consider that the reasoning in Blagdon
applies to fees paid for the appeal as well. No back pay was
"owed to" Mr. Blackburn until he succeeded in his appeal and
his conviction was quashed. However, when the expression
"... to ... establish a right to salary or wages owed
to the taxpayer ..." is read in its entirety, and in its
context, it must be intended to include those situations in which
the salary or wages become owing to the taxpayer as the result of
the litigation (or other legal services) for which the expenses
were incurred. To establish a right is to bring that right into
being; if the wages were owing before the legal services were
rendered then those services could not be said to have brought
the right into being. Grammatically then, the phrase must include
enforcing an existing right to salary and wages owing, and also
establishing (bringing into existence) such a right to salary or
wages, which thereupon become owing to the taxpayer. In the
present case, the appeal did the latter, and so the fees for the
appeal fall within the permissible deduction.
[9] Ms. Dumel argues that the legal
expenses relating to the appeal were, nevertheless, not incurred
for the purpose of giving rise to a right to salary or wages. The
purpose, she says, was to secure a quashing of the conviction. In
my opinion, this is taking rather too narrow a view of the
matter. In Ludco Enterprises Ltd. v. Canada[6]the Supreme Court of
Canada held that in the absence of fraud or other vitiating
circumstances (and there are none of those here):
... a taxpayer's ancillary purpose may be nonetheless a
bona fide, actual real and true objective of his or her
investment, equally capable of providing the requisite purpose
for interest deductibility in comparison with any more important
or significant primary purpose.[7]
[10] The same principle applies to the
deductibility of legal fees where, as here, the evidence is
abundantly clear that there was more than one bona fide,
actual real and true objective in the taxpayer's mind. Happily,
this result is in accordance with (although of course not
dictated by) sound tax policy; the successful appeal did give
rise to income that was taxed in the Appellant's hands.
[11] The Appellant is entitled to a
deduction for the legal fees to the extent, but only to the
extent, that they were paid in order to secure the quashing of
the conviction. Fees paid for the application for bail pending
appeal cannot be brought within the words of paragraph
8(1)(b). In all, five accounts rendered by the firm that
handled the appeal were entered into evidence. They are:
Exhibit
R-2
$1,918.65
R-3
531.92
R-4
4,129.95
R-6
3,507.68
R-7
2,725.00
[12] The first four relate to the appeal,
and the fifth to the second trial. Exhibit R-2 covered
preparing, serving and filing the Notice of Appeal and obtaining
an Order for bail pending appeal. A reasonable apportionment of
the first account would be to attribute $600 to the Notice of
Appeal and the balance to the bail application. The Appellant is
entitled to a deduction of $8,770 under
paragraph 8(1)(b) of the Act. The appeal is
allowed and the assessment is referred back to the Minister for
reconsideration and reassessment on that basis.
Signed at Ottawa, Canada, this 24th day of February, 2004.
Bowie J.
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