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Citation: 2003TCC290
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Date: 20030425
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Docket: 2002-2870(IT)I
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BETWEEN:
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LUCIA ZITKO,
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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
Miller J.
[1] Ms. Lucia Zitko appeals by way of
informal procedure the assessment of her 2000 taxation year, by
the Minister of National Revenue (the Minister), in which the
Minister disallowed $32,624.57 of legal and accounting fees
against Ms. Zitko's income. It was clear from Ms. Zitko's
appeal, though less so from the Respondent's reply, that Ms.
Zitko was appealing not just the deductibility of the fees, but
the very inclusion of a lump sum settlement amount of $84,253.20
in her income in the first place.
[2] The facts are straightforward.
[3] Until August 1994, Ms. Zitko
worked for Consultronics Limited (Consultronics). She was a
member of a group disability insurance policy with Imperial Life
Assurance Company (Imperial Life). Premiums to the plan were paid
by her employer, Consultronics. In August 1994, Ms. Zitko became
disabled with fibromyalgia, a chronic pain condition, and upon
the recommendation of her doctor, ceased working. She immediately
applied for disability benefits, but received none. She never
returned to work, despite requests from her employer to do
so.
[4] In April 1997, Ms. Zitko commenced
an action against Consultronics and Imperial Life. Against
Consultronics Ms. Zitko sought damages for breach of contract,
negligent termination and wrongful dismissal. In May 1999, she
settled her dispute with Consultronics for $10,000 paid to her
law firm.
[5] Against Imperial Life, Ms. Zitko
sought an amount equivalent to the weekly indemnity benefits
payable by Imperial Life to her or the equivalent value in
damages, an amount equal to long-term disability benefits to
which she was entitled or an equivalent value in damages, damages
for breach of contract and a declaration she would be entitled to
future indemnity benefits for the period she continued to be
totally disabled.
[6] In March 2000, Ms. Zitko settled
with Imperial Life on the following terms:
(i) Imperial Life will pay the
Plaintiff arrears for weekly indemnity and long term disability
benefits in the amount of $76,753.20, subject to statutory
withholdings;
(ii) Imperial Life will pay the
Plaintiff interest on the arrears in the amount of $7,500 (these
first two amounts total $84,253.20);
(iii) Imperial Life will pay to the
solicitor for the Plaintiff costs and disbursements in the amount
of $22,000;
(iv) After January 1, 2001, but on or
before January 15, 2001, Imperial Life will pay to the Plaintiff
the sum of $37,910.92 subject to statutory withholdings;
(v) The Plaintiff shall dismiss her
proceedings as against Imperial Life; and
(vi) The Plaintiff shall provide
Imperial Life with a full and final release.
Ms. Zitko signed a standard release form in accordance with
these terms which included the phrase:
I further understand and agree that Imperial Life shall not by
the above payment or otherwise admit any liability to me, and any
liability is in fact denied.
[7] Ms. Zitko claimed deductible fees
in 2000 of $32,624.57 which included an amount of $1,605 for
accounting fees. The fees were paid from the $22,000 amount
designated for costs received on the settlement, with the balance
paid from Ms. Zitko's lawyer's trust account.
[8] The first issue to address is
whether the $84,253 paid in 2000 by Imperial Life to Ms.
Zitko's law firm is income subject to taxation. It will be
such if it is caught by paragraph 6(1)(f) of the Income
Tax Act which reads as follows:
6(1) There shall be included in
computing the income of a taxpayer for a taxation year as income
from an office or employment such of the following amounts as are
applicable:
...
(f) the total
of all amounts received by the taxpayer in the year that were
payable to the taxpayer on a periodic basis in respect of the
loss of all or any part of the taxpayer's income from an
office or employment, pursuant to
(i) a sickness
or accident insurance plan,
(ii) a disability
insurance plan, or
(iii) an income
maintenance insurance plan
to or under which his employer has made a contribution,
...
[9] Two recent Federal Court of Appeal
decisions dealt with this very issue (The Queen v.
Tsiaprailis, 2003FCA136, and Siftar v. Canada,
2003FCA 137). Ms. Zitko relied on the Trial Division in
Tsiaprailis, which unfortunately for her was
reversed by the Federal Court of Appeal. The Federal Court of
Appeal has made it clear that a lump sum settlement that
represents arrears of unpaid periodic payments falls within the
scope of paragraph 6(1)(f). That is the current state of
the law. While Ms. Zitko's agent ably argued that because she
never received any payments from Imperial Life prior to the
settlement, the $84,253 cannot be viewed as arrears, the evidence
does not support such a finding. Even Ms. Zitko's own
lawyers, Tierney, Stauffer, described the amount as "arrears
for weekly indemnity and long term disability benefits".
Further, an internal memo of the law firm clearly identified
arrears. I do not see how that characterization is altered due to
no periodic payments having been made. The Federal Court of
Appeal keys on whether the lump sum was attributable to amounts
which had been payable under the insurance plan, not on whether
some periodic payments had ever been made. The answer in Ms.
Zitko's case is that yes, the lump sum of $84,253 is clearly
so attributable, and is therefore caught by paragraph
6(1)(f) as income.
[10] With respect to the issue of the
deductibility of legal fees, the parties agreed that the total
amount of fees incurred in 2000 was $32,624. Of that amount,
$1,605 relates to accounting fees and there in no provision in
the Act for the deduction of such fees from employment
income. Also, $22,000 was paid directly pursuant to the terms of
the Imperial Life settlement to Ms. Zitko's lawyers. None of
the $22,000 was included in Ms. Zitko's income. I am
satisfied this amount was to cover legal costs. It is therefore
only the deductibility of $9,019.57 which is at issue ($32,824.57
less $1,605 less $22,000 legal costs paid on settlement).
[11] Are legal expenses incurred to acquire
income that is taxable under paragraph 6(1)(f)
deductible?
[12] Income received pursuant to paragraph
6(1)(f) falls, under the scheme of the Act, as
income from employment. As employment income, the deductions
available to the taxpayer are limited pursuant to subsection 8(2)
to only those deductions found in section 8. The only deduction
in section 8 dealing with legal expenses is paragraph
8(1)(b) which reads as follows:
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:
(a) ...
(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;
[13] Were the amounts sought by Ms. Zitko
salary or wages owed to her by her employer? Certainly her legal
action sought amounts from both the employer and the insurer.
Both amounts sought were salary or wages, as the definition of
salary or wages reads:
248(1) In this Act
"salary or wages", except in sections 5 and 63 and the
definition "death benefit" in this subsection, means the income
of a taxpayer from an office or employment as computed under
subdivision a of Division B of Part I and includes all fees
received for services not rendered in the course of the
taxpayer's business but does not include superannuation or
pension benefits or retiring allowances;
Amounts brought into employment income under paragraph
6(1)(f) fall squarely within this definition. Amounts
received under paragraph 6(1)(f) are, however, necessarily
going to be received from the insurer; paragraph 8(1)(b)
does not refer to legal expenses incurred for amounts
received from the employer - it refers to amounts
owed by the employer. If salary or wages, as defined, and
as used in paragraph 8(1)(b), includes a paragraph
6(1)(f) receipt then by implication the salary or wages
will be paid by the insurer. That does not preclude a finding
something was still owed by the employer. The Respondent argues
that the phrase "owed to the taxpayer" is limited by
the phrase that follows, "by the employer", and implies
that because funds were paid by the insurer, they were not owed
by the employer. I disagree. Certainly the insurer paid the
paragraph 6(1)(f) amounts, but it paid them because the
employer contracted with the insurer to pay them. The employer
paid the insurer, so that the benefits would be paid. It was part
of Ms. Zitko's employment contract that the employer would
provide, through a contract with the insurer, disability
benefits. While the insurer paid the benefits, it was the
employer who owed them in accordance with its employment contract
with Ms. Zitko. Just as the Federal Court of Appeal looks behind
a lump sum settlement to the underlying contract to determine the
lump sum represents periodic payments for the purposes of
paragraph 6(1)(f), I have no difficulty in looking behind
the insurer's payment to Ms. Zitko at the underlying
employment contract to find that the amounts were owed by the
employer for purposes of paragraph 8(1)(b). I find the
requirements of paragraph 8(1)(b) have therefore been
fully met and that $9,019.57 of legal fees are deductible.
[14] The appeal is allowed and the matter
referred back to the Minister for reconsideration and
reassessment on the basis that Ms. Zitko is entitled to deduct
legal fees in the year 2000 in the amount of $9,019.57.
Signed at Ottawa, Canada, this 25th day of April, 2003.
J.T.C.C.
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