Citation: 2004TCC125
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Date: 20040205
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Docket: 2003-842(IT)I
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BETWEEN:
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ESTATE OF DAVID CURRIE,
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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
Sarchuk J.
[1] The administrator of the Estate of
David Currie, Rob Salmon, filed a T3 Trust Return for the
Appellant in March 2001. In computing income for the 2000
taxation year, it claimed outlays and expenses totalling
$23,877.18 as follows:
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On the disposition of land (the "Land
Costs")
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$18,367.06
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On the rental statement (the "Rental
Costs")
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5,510.12
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Total Outlays and Expenses
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$23,877.18
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By means of a Notice of Reassessment dated June 20, 2002, the
Minister of National Revenue disallowed the Appellant's
claims for Land Costs and Rental Costs in the 2000 taxation
year.
[2] Rob Salmon, was the sole witness
on behalf of the Appellant. The facts are somewhat unusual with
the commencement point occurring in 1955 when David Currie
died in Toronto. At the time of his death, Currie was a farmer in
Orangeville, Ontario. His estate was left to his two cousins,
Douglas Craw and Faith Challacombe. It was gathered up and
distributed to the beneficiaries but his executor was unaware of
the fact that a quarter section of land located in Saskatchewan
was owned by Currie and as a result, it was not conveyed to his
beneficiaries. Faith Challacombe passed away on December 30,
1977. Her estate was left equally to her husband and three
children. In 1992, Douglas Craw died and his entire estate was
left to his wife, Barbara Craw.
[3] Lexxor Energy Inc. held a
petroleum and natural gas lease on the Currie property in
Saskatchewan. In 1997, when Lexxor decided to drill on the land,
a title search disclosed his ownership but efforts to locate him
failed. Information was obtained that an individual named Honeker
had been looking after the Currie farm for many years. Upon
contacting him, Lexxor learned that the Honaker family had a
lease agreement with Currie and that the latter was now believed
to have passed away. Notwithstanding that fact, Honeker had
continued to pay the municipal taxes and farm the land. The issue
was discussed by Lexxor with the Saskatchewan Surface Rights
Arbitration Board which suggested that Lexxor contact T.D. Howes
in Toronto who carried on a genealogy and probate business. Howes
was able to determine that Currie died in 1955 and left his
estate to two cousins who in turn had died and left their estates
to family members. In 1997, Howes located Barbara Craw and the
Challacombe family. He communicated with Salmon on September 17,
1997 and subsequently, Barbara Craw entered into an
agreement with Howes[1] which provided as follows:
In consideration of the fact that Howes has, at its own risk and
expense, undertaken the research to locate these assets and has
located me, and
In consideration of the fact that Howes will inform me of the
exact nature, extent and whereabouts of these assets and will
make every reasonable effort to have these assets transferred to
me, I wish to make an Irrevocable Assignment to Howes of 1/3 plus
GST of the net value of the assets if and when I collect
them.
You, the Holder, are to pay Howes' 1/3 fee plus GST
directly to it, as instructed, when the 2/3 (less GST) is
distributed to me and not before.
I understand that the Holder of these assets has not been able
to communicate with me. Further, that the subject assets are not
any to which I have ever exercised any rights of ownership.
I will assist Howes in obtaining proof of my identity and will
execute the necessary affidavits concerning same. All expenses of
proving my entitlement and of collecting my share of these assets
are to be advanced and paid by Howes. If I receive nothing, I owe
nothing and I will be under no obligation to Howes for any
expense that it has incurred or for any obligation that it has
assumed or for any service that it has rendered. My only
obligation will be the payment of Howes' 1/3 fee plus GST
from the net proceeds.
This agreement and every covenant, provision and term herein
contained shall be binding upon the parties and each of the
parties respective heirs, executors and administrators.
This agreement was executed on March 7, 1998 by Barbara
Craw.[2] According
to Salmon, two further steps were taken at this time. First,
Howes retained Craig Lothian, a Regina solicitor, to
establish the Craw's and Challacombes' title to the
property. Second, Barbara Craw passed away on August 18, 1998 and
her estate was left to her son and daughter. Salmon was named
executor of her estate. Subsequent to that, the Challacombes and
Howes agreed that Salmon also be appointed administrator of the
David Currie Estate and that he was to enter a surface lease
agreement with Lexxor and seek a purchaser for the land. In
March 2000, Letters of Administration were received and
title to the land in issue was transferred to Salmon. As
administrator, he executed the surface lease agreement with
Lexxor and the latter made lease payments to the Estate totalling
$12,000 that were deposited in a trust account. He paid all
property taxes on the land, sought a purchaser for the property
and ultimately, negotiated its sale for $40,000 which transaction
was completed on September 28, 2000.
[4] In computing income for the 2000
taxation year, the Appellant claimed outlays and expenses
totalling $23,877.18 as follows:[3]
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On the disposition of the land (the "Land
Costs")
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$18,367.06
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On the rental statement (the "Rental
Costs")
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5,510.12
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Total Outlays and Expenses
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$23,877.18
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It is not disputed that as administrator of the Currie Estate,
Salmon allocated the management and administration fees on an
arbitrary basis. To assist the Court, he prepared and filed a
document setting out the calculations he made.[4] The relevant portions of this
document are:
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Land Sale
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Surface Lease
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Total
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Receipts
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40,402.60
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12,000.00
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52,402.60
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Less reimbursement of property taxes
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-402.60
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-402.60
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40,000.00
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12,000.00
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52,000.00
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Less fees related to receipt of lease income and the
sale of land
Legal Fees
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Gerrand Rath Johnson
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2,620.91
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Gerrand Rath Johnson
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573.30
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Gerrand Rath Johnson
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458.00
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McDougall, Ready
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1,663.56
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Administrator's fees
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4,500.00
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Total
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9,815.77
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Allocation to Land Sale
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$9,815.77 x $40,000/$52,000
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-7,550.59
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-7,550.59
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-7,550.59
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Allocation to Surface Lease
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$9,815.77 x $12,000/$52,000
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-2,265.18
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-2,265.18
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2,265.18
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-9,815.77
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Net receipts before payment to Howes
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32,449.41
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9,734.82
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42,184.23
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Payment to TD Howes
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$42,184.23 x 1/3
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14,061.41
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Allocation to Land Sale
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$14,061.44 x $40,000/$52,000
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10,816.47
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-10,816.47
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------10,816.47
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Allocation to Surface Lease
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$14,061.44 x $12,000/$52,000
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3,244.94
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-3,244.94
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-3,244.94
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14,061.41
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Net Receipts
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21,632.94
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6,489.88
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28,122.82
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Appellant's Position
[5] Mr. Salmon argued that the return
for the Estate as filed was correct in that the legal and
accounting fees were deductible to the extent that they were
incurred for the purpose of gaining or producing income from a
business or property (i.e. the rental of the property) and
second, that legal expenses, the finder's fee and
administrative costs were incurred for the purpose of bringing a
capital property into existence or for preserving and protecting
capital property or are expenditures on account of capital. He
went on to say:
... that the facts support our contention that 100 per
cent of the fees incurred relating to either the gaining or
producing income from the surface rental agreement, in which the
fees are 100 per cent deductible; or secondly, that the fees were
incurred to acquire and dispose of capital property, in which
case they should be added to the cost base of the land.
Respondent's Position
[6] The Respondent's position was
set out by counsel as follows:
(a) The payment of $14,061.41 to
Howes is not deductible since the liability for that expense was
not incurred by the Appellant.
(b) With respect to the "surface
lease administration" costs
(i) the account of Gerrand Rath
Johnson in the amount of $573.30 was adequately supported and is
not disputed; and
(ii) based on the formula used
by the Appellant, administration fees of $1,038.46 should be
allowed.
(c) With respect to the balance of the
legal and administrative fees counsel argued that there was
insufficient evidence to permit their deduction. The only
information presented described the costs as relating to
"interim estate account, land matters, final account and
final estate account". The Respondent's position is that
costs related to "land matters" were properly
established but no evidence has been placed before the Court to
suggest that the remainder of the costs had anything to do with
matters other than estate administration.
Conclusion
[7] I propose to first deal with the
finder's fee of $14,061.41 paid to T.D. Howes. Salmon
argued that had this expense not been incurred, the beneficiaries
would never have earned the lease income and would never have had
the capital gain. He argued it was "normal commercial
practice to deduct finder's fees to the extent that they
relate to the earning of income, or alternatively --- that they
should be added to the cost base of the property for which they
are paid in respect of". That may be so but this submission
has little relevance in the particular circumstances of this
case. Here, the parties to the contract were Howes and Barbara
Craw. In Howes' letter to Salmon dated September 17, 1997,[5] he wrote:
I wish to propose an Agreement whereby our company will
perform all work necessary to enable Barbara Craw to claim her
portion of the asset in question. We will do the research and
provide the documentation necessary to prove that she is an heir
to the asset. There will be absolutely no costs incurred by her.
If she is unable to claim the asset, nothing is owed to our
company. We only receive payment at the time which the asset is
received by the beneficiary. I have enclosed a copy of our
standard Agreement for you and Mrs. Craw to consider. I will be
pleased to discuss it with you or your lawyer. If you and Mrs.
Craw are satisfied with the terms of the Agreement, please have
her sign it and send it back to our office in the enclosed
envelope.
This document and the agreement executed by Howes and Craw
clearly established that the Estate of David Currie was not a
party to this arrangement and, therefore, was not liable for the
payment of the fee. Accordingly, the amount of $14,061.41 is not
deductible as an expense of the Appellant.
[8] With respect to the costs
allocated by the Appellant to the "surface lease", the
Respondent conceded that the account for legal fees by Gerrand
Rath Johnson in the amount of $573.30 and administration fees of
$1,038.46 should be allowed. The balance of the amount claimed
being $653.42 was, according to the Respondent, inadequately
documented. While that may be so, it is not difficult to conclude
that of the remaining approximately $4,700 in legal fees, at
least a portion thereof was incurred in the management of the
surface lease. Thus, notwithstanding the absence of detail, it
would not be inappropriate to permit the deduction of an
additional $653.42 to bring the full amount under this head to
$2,265.18 as claimed.
[9] The remaining issue is whether
legal fees in the amounts of $2,620.91, $458, and $1,633.56 as
well as the balance of the administrator's fees have been
properly established as expenses incurred on the disposition of
the land. The provisions of subsection 40(1) provide that any
outlay or expense, including items such as legal or accounting
fees, incurred for the purpose of making the disposition of a
property may be added to the adjusted cost base of the property
in calculating the amount of the capital gain, capital loss,
terminal loss or business investment loss, as the case may be,
arising from the disposition. Counsel for the Minister quite
properly noted that the circumstances in this case necessitated
that a second administration of David Currie's estate had to
be undertaken and that was the reason why Salmon was appointed
administrator and a portion of the legal fees must have been
incurred in this context. There is no evidence before the Court
from which one could reasonably determine the extent to which the
expenses related to the acquisition and the taking possession of
the property of David Currie, the obtaining of letters of
administration, the distribution of the assets to the legal
heirs, etc. While some of the expenditures incurred might
properly come within the purview of subsection 40(1) of the
Act, the evidence before the Court falls far short of
providing the information necessary to enable the Court to
determine which expenses or a portion thereof fall within the
context of that subsection. Absent such evidence, the
Appellant's claim with respect to these expenses must be
dismissed.
[10] The appeal is allowed and the Appellant
is entitled to deduct the amount of $2,265.18 as management fees.
The Appellant is not entitled to any further relief.
Signed at Ottawa, Canada, this 5th day of February, 2004.
Sarchuk J.
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