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Citation: 2004TCC191
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Date: 20040309
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Docket: 2003-2137(IT)I
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BETWEEN:
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ELKE CHURCHMAN,
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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
Beaubier, J.
[1] This appeal pursuant to the
Informal Procedure was heard at Saskatoon, Saskatchewan on
February 25, 2004. The Appellant was the only witness.
[2] The matters in dispute between the
parties are partially set out in paragraphs 5 to 14 inclusive of
the Reply to the Notice of Appeal. They read:
5. In
computing income for the 1999 and 2000 taxation years, the
Appellant reported employment income, gross business income and
net business income and claimed business expenses as follows:
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1999
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2000
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Employment Income
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nil
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$1,412.00
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Gross Business Income
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$14,000.00
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$14,990.00
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Less: Business Expenses
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6,965.00
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0.00
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Net Business Income
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$7,035.00
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$14,990.00
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6. The
Appellant requested an adjustment to her 1999 income tax return
to revise the business expenses of $6,965.00 to $21,281.83 (the
"Expenses") resulting in a net business loss of
$7,281.83 calculated as follows:
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Gross
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Business Income
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$14,000.00
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Less:
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Expenses
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Business Tax
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$500.00
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Office Expenses
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200.00
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Legal & Accounting
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16,158.51
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Telephone & Utilities
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1,400.00
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21,281.83
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Net Business Loss
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(7,281.83)
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7. In response
to the request for an adjustment to the 1999 taxation year, the
Minister of National Revenue (the "Minister")
reassessed the Appellant for the 1999 and 2000 taxation years
to:
(a) include
employment income of $14,000.00 and $14,990.00, respectively, in
the 1999 and 2000 taxation years;
(b) delete gross
business income of $14,000.00 and $14,990.00, respectively, in
the 1999 and 2000 taxation years;
(c) disallow
business expenses of $6,965.00 claimed in the 1999 taxation year;
and
(d) to deny the
request to revise the business expenses to $21,281.83;
The Notices of Reassessment were dated February 22, 2002.
8. The
Appellant filed a Notice of Objection to those reassessments,
dated April 29, 2002.
9. The
Minister confirmed the reassessments by means of a Notice of
Confirmation dated March 10, 2003.
10. In so confirming the
reassessments of the Appellant for the 1999 and 2000 taxation
years, the Minister made the following assumptions of fact:
(a) the Appellant
provided services to HRDC as a Board of Referees' Chairperson
during the 1999 and 2000 taxation years;
(b) the Appellant
was to perform services for HRDC from February 24, 1998 to
February 23, 2004;
(c) the Appellant
lost her license to practice law in March, 1998;
(d) the
Appellant's license to practice law was reinstated on January
1, 2000;
(e) the Appellant
was required to work with another lawyer for 6 months after being
reinstated;
(f) the
Appellant began to practice law on her own in April, 2001;
(g) during the 1999
and 2000 taxation years, the Appellant did not operate a
business;
(h) during the 1999
and 2000 taxation years, the Appellant did not earn income from
business or property;
(i) the
Appellant was required to pay a $500.00 fee to the Law Society of
Saskatchewan in respect of her application for reinstatement;
(j) during the
1999 taxation year the Appellant incurred legal fees of
$13,875.27 as detailed in Schedule A attached to and forming part
of the Reply to the Notice of Appeal;
(k) during the 1999
taxation year the Appellant paid $4,435.29 of the legal fees
incurred;
(l) the
Expenses were not incurred for the purpose of gaining or
producing income from a business or property, but were personal
or living expenses of the Appellant;
(m) the Appellant's
duties were to sit on a Board of Referees in matters relating to
Employment Insurance;
(n) the hearings for
the Board of Referees took place on HRDC premises;
(o) the Appellant
was considered "in tenure of an office" while
performing services for HRDC;
(p) the Appellant is
deemed to be in receipt of pensionable income pursuant to
subsection 2(1) of the Canada Pension Plan;
(q) the Appellant
received a per diem amount of $330.00 for the days of the
hearings of the Board of Referees;
(r) the Appellant
received income from office with the HRDC of $14,000.00 and
$14,990.00, respectively, in the 1999 and 2000 taxation
years;
(s) the Appellant
did not require a law degree to perform her duties for the Board
of Referees;
(t) HRDC did
not require the Appellant to rent an office away from their place
of business or use a portion of her home;
(u) the Appellant
was not required to pay for expenses incurred in the performance
of her duties for HRDC;
(v) the Appellant
was not required to incur cell phone or other telephone charges
in the performance of her duties for HRDC.
B.
ISSUES TO BE DECIDED
11. The issues are:
(a) whether the
Expenses were incurred by the Appellant for the purpose of
gaining or producing income from a business or property; and
(b) whether the
Appellant is entitled to claim office in the home expenses
pursuant to subsection 18(12) of the Income Tax Act.
C.
STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF
SOUGHT
12. He relies on sections
3 and 9, subsection 18(12) and 248(1) and paragraphs 18(1)(a) and
18(1)(h) of the Income Tax Act, R.S.C., 1985 c. 1 (5th
Supp) (the "Act") as amended for the 1999 and
2000 taxation years.
13. He submits that the
Expenses were not incurred for the purpose of gaining or
producing income from a business or property within the meaning
of paragraph 18(1)(a) of the Act but were personal or
living expenses of the Appellant within the meaning of paragraph
18(1)(h) of the Act.
14. He submits that as
Appellant's office in home was not:
(a) the
Appellant's principal place of business; or
(b) used exclusively
for the purpose of earning income from business and used on a
regular and continuous basis for meeting clients in respect of
the business;
the Appellant is not entitled to claim business in the home
expenses pursuant to subsection 18(12) of the Act.
[3] At the opening of the hearing
Appellant's counsel brought the following to the Court's
attention:
1. The Appellant has
retained a solicitor who is ordered to be, henceforth, the
address for service of the Appellant:
Kurt Wintermute
MacPherson, Leslie & Tyerman LLP
1500-410, 22nd Street East
Saskatoon, Saskatchewan
S7K 5T6
phone (306) 975-7100
fax (306) 975-7145
2. For 2000:
(1) The Appellant claims $6,869.03 as
deductible expenses.
(2) The $500 fee paid to The Law
Society of Saskatchewan is a separate claim between the
parties.
3. For 1999:
(1) The Appellant is not pursuing her
claim to deduct the following expenses:
motor vehicle
$1,102.19
interest
$1,921.13
(2) The legal and accounting fees
claimed for deduction are corrected to be $13,875.27.
4. In the Appellant's
view, the issues are the following:
The primary issues to be determined in the within Appeal are
as follows:
(a) Whether the
Appellant is entitled to deduct certain legal expenses relating
to the reinstatement of the Appellant's licence to practice
law and whether such expenses are restricted pursuant to
paragraphs 18(1)(b) or 18(1)(h) of the Income Tax Act (the
"Act").
(b) Whether the
income received by the Appellant from Human Resources Development
Canada ("HRDC") was income from an office pursuant to
subsection 5(1) of the Act or income from a business pursuant to
subsection 9(1) of the Act.
(i) If the
income from HRDC was income from a business, whether the expenses
claimed by the Appellant are deductible in computing income from
the business pursuant to subsection 9(1) of the Act and not
restricted pursuant to subsection 18(1) of the Act.
(ii) If the income
from HRDC is income from an office pursuant to subsection 5(1) of
the Act, whether the expenses are deductible pursuant to
subsection 8(1) of the Act.
[4] Assumptions 10(a), (d), (e), (f),
(i), (j), (k), (n) and (s) were not refuted. Respecting the
remaining assumptions, by subparagraph, the Court finds:
(b) This consisted of two 3 year
contracts. To date she has not received a third contract.
(c) Is wrong. And the distinction is
important. The Appellant was ill and, as she had when she was
pregnant, she applied to the Law Society of Saskatchewan for a
non-practice certificate so that she would not have to pay the
active practice fees. The Law Society granted her that status in
March, 1998.
(d) Is subject to qualification. The
Appellant applied to be reinstated into active practice as a
member of the Law Society of Saskatchewan in December, 1998. She
retained a lawyer for this purpose (unnecessarily, but, in the
Court's view, in part because she appears to be a very
ethical person). This lawyer did not proceed on the file and, in
the spring of 1999, she retained a second lawyer who did proceed
with the file. The Appellant was reinstated effective January 1,
2000 on the condition that she practice with another lawyer for
six months and file regular reports with the Law Society. On this
basis, she commenced employment for another lawyer in Saskatoon
on July 10, 2000 and remained so employed until April 1, 2001.
She estimated her workload during that employment to be 3/4 as an
employed lawyer and 1/4 in business under her contract with HRDC,
in accord with her agreement with her lawyer-employer.
(g) and (h) Are a major source of dispute. The Appellant
states that she was in business in 1999 and 2000. She has two
bases for this:
(1) That she was not the holder of an
"office" under her contract with HRDC to act as
Chairperson of a Board of Referees, as that is defined in the
Income Tax Act (the "Act"). Rather, it
was a business contract to act as an "independent
consultant".
(2) That, although she held a
non-practice certificate as a lawyer, she nonetheless remained in
business while she was ill.
(l) This is denied. The expenses
that remain in dispute were paid to the Appellant's lawyer on
account of her application for an active practice certificate and
were paid to maintain and operate her office in her home which
was used for the purpose of storing her clients' legal files,
maintaining her office facilities, answering her phone calls from
legal clients (with the purpose of referring them and maintaining
their files and retaining their business for when she returned to
active practice) and answering the phone for her HRDC Chairperson
appeals work, arranging hearing dates, working on her HRDC
appeals files preparing for hearings and, as Chairperson,
drafting and writing decisions for those hearings. She could
refuse hearings but HRDC wanted her to chair more than one or two
each year. There were three functions respecting her appointment
to conduct a day's hearing: (1) A hearing had to be
necessary; (2) the Clerk had to offer her the hearing itself (3)
she had to want the hearing. There were two other Chairpersons
available for appointment.
(m) Is false. Her duties and activities were
those described in (l) above, in addition to sitting as
Chairperson on the Board of Referees to hear Employment Insurance
appeals. It was the Chairperson's duty to write the
Referees' decisions.
(o) This is disputed and its meaning
under the Act will be dealt with as a substantive part of
this decision. The Appellant described her position to be an
"independent consultant" insofar as the word
"office" is defined in the Income Tax Act.
(q) At times the Appellant was paid a
per diem of $300 and at other times $330. The per diem was only
paid for days sat. She was not paid for agreeing to sitting days,
receiving the files by courier at her home, reviewing them in her
office at home (since there were no other suitable facilities
provided to her), pre-drafting elements of decisions so that they
could be finished by the assistant at the hearing, and delivered
at the hearing or no more than a week later (as per her
instructions on appointment) and supplying her disk of those
drafts to the assistant at the hearing. As Chairperson she signed
the finished decisions. If hearings were adjourned without
sitting, she wasn't paid.
(r) The word "office" is
disputed.
(t) The Appellant disputes this
and the Court agrees with her. HRDC supplied the use of a board
room for hearings. If other hearings occurred (there were two
other similar panels of Referees using it) or if HRDC was using
it, the Appellant couldn't use it. In the Court's view
the Appellant's statements that she could not go all the way
to HRDC to use it and find she couldn't is correct. HRDC
itself contradicted its staff view of this possibility when it
always couriered the hearing files to the Appellant at her home
office prior to each hearing.
(u) and (v) Are wrong. The Appellant had to
prepare for hearings as stated, had to answer HRDC phone calls on
her cell phone to arrange hearing dates and to settle any
reserved decisions. All of these required her to pay for the
associated expenses including her home office (which were not
subject to personal use) and 50 percent of her cell phone in 1999
and 66 2/3 percent of her cell phone in 2000.
[5] The Appellant's first issue is
described in subparagraph [3] 4.(a), namely:
(a) Whether the
Appellant is entitled to deduct certain legal expenses relating
to the reinstatement of the Appellant's licence to practice
law and whether such expenses are restricted pursuant to
paragraphs 18(1)(b) or 18(1)(h) of the Income Tax Act (the
"Act").
[6] These fees were incurred when the
Appellant applied to the Law Society to be reinstated from
inactive membership (wherein she had all the rights and duties of
membership except that she was not permitted to practice law) so
as to receive a practicing certificate as an active member.
[7] The question is whether the
Appellant paid for a right to income or for a right to earn
income. She had retained client files in her office from which
she could receive income. There were many things she could do
with them which did not require a practicing certificate from the
Law Society. For instance, she could draw up probate for an
executor and file for probate and do the estate work in the
executor's name, or she could do real estate transactions and
receive fees from these activities. A Law Society might take
umbrage or action but, legal or illegal she could bill and earn
fees from those files without the certificate and it would be
taxable income. The certificate likely would allow her to receive
a greater fee. The certificate would allow her to personally
appear in Courts for clients and to file for probate in her own
name as a lawyer. Moreover, merely retaining the files assured a
clientele for her return to active practice. A number of her
clients were waiting to retain her legal services until that
date.
[8] The Appellant paid for a right to
income and the legal fees and disbursements under this heading
and the $500 application fee are all deductible from her income
as a business deduction for the following reasons:
1. She kept the files in
her office and maintained her office.
2. She dealt with her
clients, referred them to other lawyers on the understanding that
the clients would be returned to her when she was well and spoke
with other clients and assured them that she would serve them
again when she was well. It was on this understanding that they
left their files with her.
3. This leave from active
practice was no different than a pregnancy leave or a sabbatical
leave. Any of these might happen repeatedly and a lawyer or
another person would retain their job or their business and would
hold themselves out as such whether temporarily inactive or
not.
[9] In other words, the Appellant
intended to make a profit from the practice of law, continued to
maintain an office and telephone at her expense, kept the files
and dealt with clients actively on a limited basis. To the Court,
she may not have been directly active as a lawyer, but she was
directly active in her business with the intention to profit from
it. In this day and age when sabbaticals, pregnancies, holidays,
sickness and similar leaves are common, such an occurrence does
not mean that one does not continue in business. These payments
were not made to secure an actual or enduring asset. Rather they
were made to enable her to continue to carry on the same type and
quality of business. For this reason the appeal is granted on the
first issue.
[10] The Appellant's second issue is
described in subparagraph [3] 4.(b), namely:
(b) Whether the
income received by the Appellant from Human Resources Development
Canada ("HRDC") was income from an office pursuant to
subsection 5(1) of the Act or income from a business pursuant to
subsection 9(1) of the Act.
[11] The word "office" is defined
in subsection 248(1) of the Act as follows:
"office" means the position of an individual entitling the
individual to a fixed or ascertainable stipend or remuneration
and includes a judicial office, the office of a minister of the
Crown, the office of a member of the Senate or House of Commons
of Canada, a member of a legislative assembly or a member of a
legislative or executive council and any other office, the
incumbent of which is elected by popular vote or is elected or
appointed in a representative capacity and also includes the
position of a corporation director, and "officer" means a person
holding such an office;
[12] Appellant's counsel focussed on the
question of whether the Appellant's per diem was a
"fixed or ascertainable stipend or remuneration". If it
was not, then it was not an "office" within the meaning
of the Act. It was not "fixed". Rather it was a
per diem for hearing days only.
[13] To determine if the per diem was
ascertainable, the Court adopts the reasoning of Dussault, J. in
Payette v. M.N.R., 2002 Carswell Nat. 4668 in
circumstances and a definition of "office" comparable
to this case. In the English translation Dussault, J. stated at
paragraphs 24 and 26:
[24] However, in commenting on
the decision in Guérin (supra), Reed J. appears to
assume that in that case the remuneration was not ascertainable
mainly because of the expenses the appellant was obliged to
incur. The Court does not agree with that position. The words
"stipend" and "remuneration" mean gross
income, not income net of expenses. This is clear from the
wording of subsection 5(1) of the Income Tax Act. As well,
the Court considers that the descriptor "ascertainable"
must refer to something that can be ascertained a priori;
otherwise it would have no meaning since everything can be
ascertained a posteriori. Thus if the "stipend" or
"remuneration" is not fixed, it must still be
ascertainable in advance with at least some degree of accuracy by
using some formula or by referring to certain set factors. The
Court considers that this is the meaning of the decisions in
Guérin and MacKeen (supra).
...
[26] It is not very difficult for the Court to find that the
appellants, the members of the review committee, hold an office.
The review committee is a permanent entity of the Commission des
services juridiques. Being appointed as a member for a one-year
term of office and having other professional occupations
elsewhere in no way suggests that one cannot occupy a position
for a set term on a part-time basis. One can at the same time
practice law and be a director of one or more share corporations.
The Court does not see any incompatibility in that situation. It
cannot be said that a person does not occupy a position because
that person's main professional activity is exercised
elsewhere than with the Commission. That said, it is not enough
to occupy a position: the position must entitle the person to a
"fixed or ascertainable stipend or remuneration",
according to the definition set out in subsection 2(1) of the
Canada Pension Plan. In the present case, it is clear that
the position does not entitle a person to a fixed remuneration or
stipend. The Court also considers it impossible to conclude that
the remuneration is ascertainable since in this regard the facts
set out in the Notice of Appeal, the truth of which the
respondent has admitted, are insufficient. It is not known how
many times each member is called upon to sit on the review
committee or how many days or hours are spent on this activity in
a given year. The information about the number of review
committee sittings held and the number of review applications
heard each year does not provide a reliable factor for individual
members. The Court has no idea of the "stipend" or the
"remuneration" that the members of the review committee
were likely to receive for rendering their services; nor has any
such information been adduced, except that the members are paid
on a fee basis at a rate of $50 per hour. The Court considers
that merely indicating the hourly rate set by the Commission des
services juridiques is insufficient to establish that the
position itself makes a member eligible for a "fixed or
ascertainable stipend or remuneration". The Court therefore
considers that the respondent, who simply admitted the truth of
the facts set out in the Notice of Appeal, has in no way
discharged the burden on him of establishing that the appellants,
the members of the review committee of the Commission des
services juridiques, held an office as defined in subsection 2(1)
of the Canada Pension Plan. Thus subparagraph 6(f)(iii) of the
Regulations cannot be applied to this case to include the
position occupied by the appellants in insurable employment.
[14] For this reason and based on the facts
described respecting the Appellant's contract as Chairperson
of the Board of Referees, the Court finds that in fact she was
engaged in business as an independent consultant and the expenses
claimed by her on that basis are deductible. She controlled the
time she spent and the hearings she chose; she supplied all of
the tools, equipment and premises she used except the Boardroom;
she had a risk of loss or profit depending on the amount of time
she spent on the work and the costs she incurred for her tools,
equipment and office and the availability of other work such as
her employment or other contracts she might acquire; and she was
not integrated into HRDC.
[15] The appeal is allowed in its entirety.
The Appellant is awarded her taxable party and party costs.
Signed at Regina, Saskatchewan this 9th day of March,
2004.
Beaubier, J.
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