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Citation: 2004TCC111
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Date: 20040212
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Docket: 2003-1869(IT)I
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BETWEEN:
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JOHN P. GUENETTE,
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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
Lamarre, J.
[1] This is an appeal under the
informal procedure from an assessment made by the Minister of
National Revenue ("Minister") under the Income Tax
Act ("Act") for the appellant's 2000
taxation year. In computing his income for that year, the
appellant claimed as a deduction legal fees in the amount of
$33,352. In disallowing the deduction, the Minister relied on the
following facts stated in paragraph 7 of the Reply to the
Notice of Appeal ("Reply"):
a) during the 1996 taxation year, the
Appellant was a civil servant employed by the Government of
Canada (the "Employer"); admitted
b) in 1996, the Appellant initiated a
request to the Public Service Commission concerning alleged
misconduct on the part of [the] Employer and other concerns of
the Appellant; admitted
c) in 1998, the Appellant and Joanna
Gualtieri (the "Co-plaintiffs") commenced a lawsuit
against the Employer; admitted
d) the lawsuit referred to in
subparagraph 7(c) herein asked for an award for damages including
past and present salary and lost pension benefits as a result of,
among other things, misconduct, harassment and abuse of authority
on the part of the Employer; admitted
e) in late 1999, the Appellant
commenced to receive "Employment Insurance Benefits"
from "Sun Life Assurance Company of Canada" (the
"Insurer") and received gross amounts of $12,298.00 in
1999 and $89,894.00 in 2000; admitted
f) the Co-plaintiffs engaged
counsel with respect to the legal proceedings brought against the
Employer as stated in the attached Schedule "A";
g) the Appellant has not demonstrated
that he has been successful in court in establishing that an
amount of salary or wages was owed to him by the Employer;
h) the amount of "Employment
Insurance Benefits" as referred to in paragraph 6(e)
herein was paid to the Appellant by the Insurer and not the
Employer; and
i) the Appellant has not shown
that he incurred legal expenses of $33,352.00 as claimed by him
in computing income for the 2000 taxation year.
[2] Schedule A filed with the Reply
and referred to in subparagraph 7f) above is not reproduced
herein because it states the amount of legal expenses incurred by
the appellant in 2000 and counsel for the respondent conceded
during her cross-examination of him at trial that the
appellant did in fact establish that he paid an amount of $33,352
in legal fees in 2000, contrary to what is stated in
subparagraph 7i) of the Reply (see page 53 of the
transcript).
[3] With respect to subparagraph 7g)
above, the appellant testified that the claim filed before the
Ontario Superior Court of Justice has not yet been heard on the
merits. Counsel for the respondent concedes, however, that as
long as the appellant shows that his claim is for the purpose of
collecting, or establishing a right to, salary or wages owed to
him by the employer, he does not need to be successful in his
litigation in order for him to be able to deduct legal fees
pursuant to paragraph 8(1)(b) of the Act. In that
regard, counsel for the respondent accepts the decisions in
Loo v. R., 2003 CarswellNat 887 (T.C.C.), and Fortin v.
R., 2001 CarswellNat 3309 (T.C.C.) (see page 90 of the
transcript).
[4] The respondent contends, however,
that the legal fees in question were incurred to establish a
right to damages, and thus are not deductible under either
paragraph 8(1)(b) or paragraph 60(o.1) of
the Act, which are provisions dealing with the deduction
of legal fees. Those provisions read as follows for the taxation
year at issue:
Section 8: Deductions allowed.
(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:
. . .
48(1)(b)3
(b) Legal
expenses of employee - 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.
Section 60: Other deductions.
There may be deducted in computing a taxpayer's income for a
taxation year such of the following amounts as are
applicable:
. . .
460(o.1)3
60(o.1) - Legal expenses - the amount, if any,
by which the lesser of
(i) the total
of all legal expenses (other than those relating to a division or
settlement of property arising out of, or on a breakdown of, a
marriage) paid by the taxpayer in the year or in any of the 7
preceding taxation years to collect or establish a right to an
amount of
(A) a benefit under a pension fund or plan (other than a benefit
under the Canada Pension Plan or a provincial pension plan
as defined in section 3 of the Act) in respect of the
employment of the taxpayer or a deceased individual of whom the
taxpayer was a dependant, relation or legal representative,
or
(B) a retiring allowance of the taxpayer or a deceased individual
of whom the taxpayer was a dependant, relation or legal
representative, and
(ii) the amount, if
any, by which the total of all amounts each of which is
(A) an amount described in clause (i)(A) or (B)
(I) that is received
after 1985,
(II) in respect of which
legal expenses described in subparagraph (i) were paid.
and
(III) that is included in
computing the income of the taxpayer for the year or a preceding
taxation year, or
(B) an amount included in computing the income of the taxpayer
under paragraph 56(1)(l.1) for the year or a preceding
taxation year,
exceeds the total of all amounts each of which is an amount
deducted under paragraph (j), (j.01), (j.1)
or (j.2) in computing the income of the taxpayer for the
year or a preceding taxation year, to the extent that the amount
may reasonably be considered to have been deductible as a
consequence of the receipt of an amount referred to in clause
(A),
exceeds
(iii) the portion of the
total described in subparagraph (i) in respect of the taxpayer
that may reasonably be considered to have been deductible under
this paragraph in computing the income of the taxpayer for a
preceding taxation year.
[5] The expression "retiring
allowance" is defined in subsection 248(1) as follows:
"retiring allowance" means an amount (other than a
superannuation or pension benefit, an amount received as a
consequence of the death of an employee or a benefit described in
subparagraph 6(1)(a)(iv)) received
(a) on or
after retirement of a taxpayer from an office or employment in
recognition of the taxpayer's long service, or
(b) in
respect of a loss of an office or employment of a taxpayer,
whether or not received as, on account or in lieu of payment of,
damages or pursuant to an order or judgment of a competent
tribunal,
by the taxpayer or, after the taxpayer's death, by a
dependant or a relation of the taxpayer or by the legal
representative of the taxpayer.
Issue
[6] The issue is whether the legal
fees claimed by the appellant were incurred to collect, or
establish a right to, salary or wages owed to him by the
employer, or to collect, or establish a right to, a benefit under
a pension fund or plan in respect of his employment, or to
collect, or establish a right to, a retiring allowance.
Facts
[7] According to the appellant's
testimony and the reasons for judgment delivered by the Ontario
Superior Court of Justice and the Court of Appeal for Ontario on
a motion for summary judgment (Exhibit R-4), the appellant's
background can be summarized as follows. The appellant is an
employee of the Department of Foreign Affairs and International
Trade. He commenced his employment with that Department's
Bureau of Physical Resources in 1982. He occupied various
positions from that time until April of 1998 when he was granted
leave pursuant to a Treasury Board directive. In early 1996, the
appellant had filed with the Investigations Directorate of the
Public Service Commission ("PSC") a complaint of
harassment and abuse of authority against two of his supervisors.
The PSC investigation resulted in a finding that the complaints
against one supervisor were not substantiated while those against
the other supervisor were substantiated in part. Thereafter, in
June 1998, the appellant and Joanna Gualtieri (also a member of
the federal public service and an employee of the Department of
Foreign Affairs and International Trade) commenced an action in
the Ontario Court (General Division) against the Attorney General
of Canada, the Minister of Foreign Affairs and eight senior
managers in the government, claiming general damages of $3
million each and loss of pension earnings. They also sought
jointly an award of $30 million as punitive, exemplary and
aggravated damages, to be used to establish a non-profit advocacy
organization with a mandate to represent and protect the rights
of all government employees, particularly with regard to issues
of abuse of power and harassment and principles of integrity (see
Exhibits R-2 and R-3). The plaintiffs alleged that
their superiors had taken punitive steps against them when they
complained about what they perceived to be mismanagement and
waste of taxpayers' money. The plaintiffs were met with a
motion by the defendants for summary judgment on the basis that
the courts had no jurisdiction in the matter. The defendants
argued that the two employees could not initiate a civil action
against the Government, the Minister of Foreign Affairs and the
senior managers as they were required to pursue the grievance
procedure established by the Public Service Staff Relations
Act ("PSSRA") and by the collective agreement
between the Treasury Board and their union, the Public Service
Alliance of Canada ("PSAC"). The Ontario Superior Court
of Justice granted the motion on September 22, 2000 and dismissed
the action against all the defendants.
[8] The plaintiffs appealed that
judgment and, on August 8, 2002, their appeal was allowed by the
Court of Appeal for Ontario, which concluded that the courts did
in fact have jurisdiction to hear and decide the plaintiffs'
action. Their claim has not yet been heard on the merits. The
plaintiffs were awarded their costs of the motion for summary
judgment, which were fixed at $25,000 plus disbursements and GST,
and their costs of the appeal, which were fixed at $25,000
inclusive of disbursements and GST (see reasons for judgment of
the Court of Appeal for Ontario, Exhibit R-4).
[9] The appellant testified that the
first $25,000 was paid directly to his counsel (that amount not
being included in the amount of $33,352, which is at issue here).
The second $25,000 has been deposited in the appellant's
counsel's trust account pending the resolution of the dispute
between the appellant and the other complainant,
Ms. Gualtieri, concerning the division of that sum between
them. Apparently, there is disagreement on the amount that each
paid with respect to the claim. As a result, the appellant has
not yet been reimbursed for that portion of his legal
expenses.
[10] The appellant was paid his full salary
up until the month of June 1998 when he stopped working, having
been granted paid medical leave by his employer. The appellant,
who suffered a physical and mental breakdown and whose career
with the Public Service has, according to him, effectively been
ruined, was thereafter entitled to disability benefits under a
group contract of insurance issued by the Sun Life Assurance
Company of Canada ("Sun Life") to the employer.
Indeed, he received gross amounts of $12,298 in late 1999 and
$89,894 in 2000.[1]
[11] On November 30, 2000, the appellant was
asked by Sun Life to execute a Subrogation Acknowledgement
form whereby the appellant agreed to pay back to Sun Life 75
per cent of any amount recovered by him from his employer
(including general damages and damages for loss of income) less
his legal costs incurred for such recovery, to a maximum of the
amounts paid to him under the insurance policy
(Exhibit A-2).
[12] The appellant explained that he was not
aware of Sun Life's subrogation rights when he filed his
Statement of Claim in June 1998. At the time, he was advised
by his lawyer to claim general damages that would cover
everything, as damages would not be taxable. The appellant
testified that when he filed the claim, he was not much concerned
with identifying particular damages. At trial, he said that he
was suing the employer for loss of salary from the time he had to
stop working by reason of disability, for loss of future salary,
and for loss of potential earning capacity as a result of being
mentally injured by his superiors at work. He however recognized
that it would not be in his interest to obtain an award of $3
million for lost salary rather than a like award in damages, as
the former would result in taxable income while the latter would
most probably not.
Analysis
[13] The question is whether the legal fees
paid by the appellant in the year 2000 in relation to the lawsuit
before the Ontario Superior Court of Justice are deductible under
the Act.
[14] The appellant was and - although he
stopped working in June 1998 - still is an employee of the
Government of Canada, and is entitled to disability benefits.
Therefore, subsection 8(2) of the Act is applicable;
it limits deductions from income from an office or employment to
those specifically provided for in section 8. Under
paragraph 8(1)(b), there may be deducted only legal
expenses incurred by the taxpayer to collect, or establish a
right to, salary or wages owed to the taxpayer by the employer.
In the Statement of Claim in his lawsuit, the appellant claims
general damages, punitive damages and loss of pension earnings.
There is no mention of a claim to establish a right to salary or
wages owed to him by his employer. In his testimony, the
appellant acknowledged that his lawyer had advised him to claim
general damages because, if he was successful, such damages would
not be taxable.
[15] The appellant also recognized that the
employer had paid him his full salary up until the date he ceased
working. No salary was owed to the appellant for services
rendered.
[16] The appellant testified that he claimed
damages to compensate for the loss of his potential earning
capacity following his physical and mental breakdown caused,
according to the Statement of Claim in his lawsuit, by the
actions of his employer. The damages claimed are not for loss of
employment, as he is still an employee of the Government of
Canada. The damages claimed are more in the nature of
compensation for the loss of a career. The claim is for his not
being able to continue to earn income from employment as he did
when exercising his functions with the Department of Foreign
Affairs and International Trade. It is not a claim for salary
owing and cannot result in the collection of any salary or wages
that he was owed by his employer. The action is to recover
damages for loss of future income and as such is not covered by
paragraph 8(1)(b) of the Act (see Blagdon
v. The Queen, 2002 CarswellNat 260 (T.C.C.), confirmed by
2003 F.C.A. 269).
[17] The appellant further submitted
that if he is successful with his claim, he will have to pay back
to the insurance company a portion of the disability benefits he
received after he ceased working. He therefore argued that the
damages claimed from his employer are in fact to compensate him
for the disability benefits and that the legal expenses incurred
in that regard should be deductible pursuant to
paragraph 8(1)(b).
[18] In the first place, disability
benefits received by an employee from an insurance company while
off work are not salary or wages owed by an employer, as the
employee has not rendered any services to the employer during
that period (see Fortin, supra, and
Loo, supra), and are not in my view covered by
paragraph 8(1)(b) of the Act as it read for
the 2000 taxation year.
[19] In the second place, the
appellant did not have to incur any legal expenses in order to
receive disability benefits. He was covered by an insurance plan
entered into by his employer. If the appellant has chosen to sue
his employer, it is not because he is claiming a right to receive
disability benefits. He is already in receipt of such benefits.
Regardless of whether or not he pursued his legal claim for
general damages, he would not have incurred legal fees in order
to obtain the disability benefits. Therefore, even though the
appellant will have to reimburse the insurance company if
successful in his lawsuit, the legal expenses were in fact
incurred to claim damages, and such expenses are not covered by
paragraph 8(1)(b) of the Act. In that sense,
this case can be distinguished from O'Donovan v.
Canada, [2001] T.C.J. No. 137 (Q.L.), referred to by the
appellant. In O'Donovan, the taxpayer paid legal fees
to collect income pursuant to his employer's wage replacement
plan, with respect to which the taxpayer had paid part of the
premiums. The Court concluded that the amount claimed was not
income from an office or employment under subsection 8(2) of
the Act; nor was the legal expense incurred to collect, or
establish a right to, salary or wages owed to the taxpayer by his
employer, within the meaning of paragraph 8(1)(b).
The Court found that the legal expenses were incurred to obtain
payment of income to which the taxpayer was entitled and, relying
on the decision of the Supreme Court of Canada in Gladys Evans
v. M.N.R., 60 DTC 1047, held that those expenses were
properly deductible. However, this is clearly not the case here,
as the claim for damages filed by the appellant is not a claim to
obtain payment of an amount that was owed to him by his
employer.
[20] Finally, is it possible to say
that the legal expenses incurred by the appellant are deductible
pursuant to paragraph 60(o.1) of the Act? For them
to be deductible under that provision, the appellant must
demonstrate that they were incurred to collect, or establish a
right to, a retiring allowance or a benefit under a pension fund.
A retiring allowance is defined as an amount received in respect
of a loss of an office or employment. Here, the appellant is
still an employee; he has not lost his employment. Furthermore,
in Ahmad v. R., 2002 CarswellNat 2429 (T.C.C.), it was
decided that damages claimed by a person as compensation for the
wrong done to him in stripping him of the ability to work in his
field of expertise are not a retiring allowance.
[21] The appellant's Statement of
Claim, however, refers not only to damages but also to a claim
for loss of pension earnings. If the appellant is successful on
that item before the Ontario Superior Court of Justice, he might
be able to deduct the legal expenses applicable to that part of
the claim in the year the award for pension earnings is included
in income, provided that it is so included within a seven-year
period after the legal expenses are paid. Indeed, in that case,
the legal expenses would be deductible pursuant to
clause 60(o.1)(i)(A) and
subparagraph 60(o.1)(ii), which dispositions limit
the deduction of legal expenses to the amount of the benefit
under a pension fund or plan included in income for the year, and
the taxpayer would be allowed to carry forward for the next seven
years the deduction of legal expenses paid in a given year (see
also Fortin, supra). But, for 2000, the legal expenses are
definitely not deductible pursuant to paragraph 60(o.1) of
the Act.
[22] For these reasons, the appeal is
dismissed.
Signed at Ottawa, Canada, this 12th day of February 2004.
Lamarre, J.
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