REASONS
FOR JUDGMENT
Bocock J.
I. Introduction
[1]
The Appellant, Robert Geick, incurred
$115,996.00 in legal fees between 2007 and 2011. There is no dispute on the
quantum he paid, the period over which the expenses were incurred or their
characterization as legal fees. However, the Minister of National Revenue (the
“Minister”) disallowed the deduction of the legal fees against 2012 employment
income on the basis the fees were exclusively paid to defend criminal charges.
[2]
Mr. Geick appeals and asserts there were three
bases upon which such legal fees are deductible. Succinctly put, his grounds of
appeals are:
(i) any
criminal conviction, which was defended by payment of the legal fees, if proved
against Mr. Geick would have resulted in the loss of his employment income
(“employment loss”);
(ii) a
long and arduous claim process for pension benefits ensued culminating in
payments in 2012 of a commuted lump sum in respect of which certain legal fees
were expended to access the pension funds (“pension impairment”); and
(iii) Mr.
Geick’s loss of employment would have resulted in seizure by creditors of five
rental properties because Mr. Geick’s creditworthiness would have been
destroyed (“property seizure”).
[3]
To the contrary, the Minister says the legal fees
were paid solely to defend criminal charges. The Minister also asserts the
legal fees were not incurred to collect or establish a right to collect an
amount owed as income, as required under sub-section 8(1)(b) of the Income
Tax Act, RSC 1985, c.1, as amended (the “Act”). Further, the
Minister states the legal fees were not paid to collect or establish a right to
collect a pension in respect of employment, as required under sub-section
60(0.1) of the Act. Lastly, the Minister determined there was no
probability of property seizure proximate to any potential job loss.
II. Factual
Background
[4]
Mr. Geick was a police officer from 1990 until
2011. In 2006, as a result of several charges under the Criminal Code relating
to incidents in 2004, he was suspended from active duty with pay. Around the
same time, he was in a car accident which caused him extensive and permanent
injury.
a) Criminal Charges
[5]
Mr. Geick retained legal counsel to defend the
criminal charges. As a result, some were withdrawn. There was at least one conviction
which resulted in a conditional sentence involving a period of house arrest.
[6]
The invoices for legal services were produced at
the hearing. The first invoice related to legal fees commencing on June 8, 2007
and the last consisted of similar services terminating on August 12, 2011.
Where services were described in any detail, they referenced specific criminal
procedures and proceedings: bail hearings, bail review, preliminary inquiries,
pre-trial conferences and motions, severance and charter applications and
meetings with Crown attorneys. Some generic references existed: “meeting with
client”, “interview with client” and “reporting to client”. No references to
other “non-criminal” legal services were contained in such invoices. These
invoices totalled all the legal fees initially deducted.
b) Pension Benefits
[7]
Relevant documents between Mr. Geick and his
pension plan holder were also produced. These spanned a period from May 2011
until May 2012. These documents comprise Mr. Geick’s initial submissions
regarding his claim for monthly pension benefits, then, the ultimate pay-out of
his “locked in” commuted pension benefit in March, 2012. Mr. Geick listed the
sole reason for collecting his pension as permanent disability.
c) Rental Income
[8]
With respect to the rental properties, Mr. Geick
submitted a list of five properties. He testified that he owned each jointly
with another person. Three were owned jointly with his wife, one with his
sister and the final one with his wife and a Mr. Prevost. All interests in the
properties were divided equally among the described owners. Mr. Geick stated
each property was subject to a mortgage, but he could not recall the mortgage
balances or monthly payments.
III. Employment
Loss
(a) The Law
[9]
The relevant excerpted portion of the Act
reads as follows:
Deductions allowed
8(1) In computing
a taxpayer’s income for a taxation year from an office or employment, there may
be deducted…the following amounts…
Legal expenses of
employee
(b) amounts paid by the taxpayer in the year as or on account of
legal expenses incurred by the taxpayer to collect, or to establish a right to,
an amount owed to the taxpayer that, if received by the taxpayer, would be
required by this subdivision to be included in computing the taxpayer’s income;
[10]
A review of the section plainly describes its
purpose: incurring deductible legal fees “to collect, or to establish a right
to, an amount owed to the taxpayer” which income, if received, would be
employment income. The adjective “employment” may be read into the section
because the over-arching relevant statutory portion referred to in the Act
is subdivision “a”. This subdivision relates to income or loss from an office
or employment.
[11]
The question remains: is the expenditure of
legal fees for the “preservation” of a taxpayer’s employment sufficient to constitute
an effort to “collect” or “establish” a right to collect an amount of
employment income owed? For the following reasons it is not sufficient.
[12]
During the hearing, Mr. Geick indicated he was
fully remunerated as a police officer during the currency of defending the
criminal charges. There was no evidence otherwise to suggest moneys were owed
or unpaid to him for such services. When he retired from police service, he
received a monthly disability pension. This began on September 1, 2011. Prior to
that time he received his full salary from employment. There simply was no gap
relating to unpaid, withheld or contested remuneration as employment income.
[13]
On this point, the Tax Court has been repeatedly
clear. Reported cases have also involved police officers. It is logically
accepted that such officers might be subject to termination from employment if
convicted of a criminal offence. This is Mr. Geick’s argument.
[14]
The Court shall leave aside for a moment the
fact Mr. Geick was not subsequently removed from employment after an actual
conviction on at least one charge against him. More to the point, neither the
possibility of such an occurrence nor the actual occurrence after conviction is
sufficient to fall within the wording of sub-section 8(1). The use of the words
“collect or establish a right to collect an amount owed” has considerable
bearing on this.
[15]
Justice Woods, as she then was, dealt with both
these situations. Firstly, she held that unless the legal fees are incurred to
collect amounts (previously described as salary and wages) “owed” from
employment, they are not deductible under paragraph 8(1)(b). The protection or
preservation of a future source of income is not sufficient: Esposito v.
R., 2004 TCC 102 at paragraphs 6 and 7. Secondly, even where termination
follows, legal fees spent to initially defend such termination or seek
reinstatement, are not deductible. In another case before the Court, Justice
Woods also held that damages for wrongful termination are not income from
employment, but rather an award of damages for breach of contract and do not
fall within “salaries or wages”: Blackburn v. R., 2010 TCC 69 at
paragraphs 23 through 27.
[16]
That same appellant had been previously
unsuccessful in separately asserting before the Tax Court that legal fees
expended to defend Police Services Act charges should be deductible
under subsection 8(1). In both those distinct appeals, the Federal Court of
Appeal decision in Blagdon v. R., 2003 DTC 549 was referenced.
That decision enunciates that the sine qua non for the deductibility of
legal fees under subsection 8(1) is the existence of unpaid salary. If none
exists, the deduction is not allowed and the appeal must fail. In Mr. Geick’s
case, there was no salary or wages unpaid or owing. His appeal cannot succeed
on this ground.
IV. Pension
Impairment
(a) The Law
[17]
The relevant excerpted portion of the Act relating
to deductible legal expenses concerning pension benefits is as follows:
Deductions in Computing Income
Other deductions
60 There may be
deducted in computing a taxpayer’s income…
Idem
(0.1)
the amount, if any, by which the lesser of
(i) the
total of all legal expenses…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…in respect of the employment of the
taxpayer…, or
(B) a
retiring allowance of the taxpayer or a deceased individual of…
[18]
A taxpayer is allowed to deduct legal expenses
paid to collect or establish a right to a pension. Mr. Geick received full monthly
disability pension benefits on September 1, 2011. He commenced the process to
collect that pension earlier that year. As stated, he had been on disability
leave for medical reasons related to a motor vehicle accident since 2006. There
were no entries in the legal accounts suggesting legal advice was sought or
given concerning the collection, application or assertion of a right
constituting a pension benefit. His pension claim process occurred concurrently
with the latter period when the criminal charges were defended.
[19]
The remaining argument is that proven criminal
charges per se might generally impair his pension benefits. There simply
was no evidence that Mr. Geick was at risk of losing his pension benefits
because of the criminal charges. Based upon the evidence he produced, his
application to collect his pension proceeded seamlessly, aside from the usual
informational and medical requirements. His pension application itself was
coincident with the final stages of the criminal proceedings. No evidence
suggested possible future termination if convicted of criminal charges. On the
basis of these facts, the Court cannot accept that Mr. Geick would not have
received his entitled pension benefits, as he in fact did, notwithstanding an a
conviction on one of the criminal charges.
[20]
Therefore, there was no collection or establishment
of a right needed to collect pension in the present case requiring the
expenditure of legal fees.
V. Property
Seizure
[21]
Mr. Geick argues that incurring legal fees was necessary
to protect his rental property income. He asserts that the financing related to
these 5 jointly held properties was precarious. His loss of employment as a
police officer would have made mortgage renewal impossible or, at least, highly
unlikely. Such lack of mortgage renewal would have led to demand for the loans
and seizure of the assets, or, although not expressed, sale of the assets on a
forced sale basis at diminished values.
[22]
The Court cannot accept this basis for
deductibility for several reasons:
(i)
there were no references
in any legal accounts during the currency of the charges referencing the rental
properties, the related business or managing the collateral risk related to job
loss;
(ii)
the evidence regarding
these properties before the Court was minimal. It consisted of a list of 5
municipal addresses and a brief description of the property as any of a
triplex, duplex or fourplex etc. There were no legal descriptions, mortgage
amounts, maturity dates, due dates, mortgagees, registered owners and mortgagors,
mortgage terms, property values, net worth statements of co-mortgagors, rent
rolls or cash flow statements provided for any unit;
(iii)
Mr. Geick confirmed that
the partner on each property was either a police officer or nurse and otherwise
gamefully employed; and,
(iv)
all mortgages were in good
standing, and no evidence suggested payments could not be made from the rental
stream or by the other co-owners, none of whom testified.
[23]
In summary, on this evidentiary basis alone, the
existence and extent of any interest by Mr. Geick in the rental properties
cannot be sustained. There is no usual evidence before this Court of his
ownership interest: a parcel register, deed, insurance certificate, co-tenancy
agreement or tax roll.
[24]
Further, even if sufficient evidence of the
rental properties’ existence had been adduced, some form of objective third party
evidence from the mortgagees or similar lender regarding the probable risk of mortgage
renewal was required. Given the other gamefully employed co-owners and the
rental income stream, some objective contrary evidence of lending risk was
needed from a typical lender or even the co-owners. There was none.
[25]
In conclusion, the appeal is dismissed. Mr.
Geick incurred the legal expenses solely to protect his future source of income
as a police officer. His vested pension, which he immediately began collecting upon
retirement which, in turn, followed a conviction on at least one criminal
charge, was never at risk or owing, but unpaid. Further, there was no evidence regarding
his vaguely described interests in rental properties or their risk of seizure
should he have lost his job.
[26]
Costs are awarded to the Respondent in
accordance with the tariff.
Signed at Ottawa,
Canada, this 21st day of June 2017.
“R.S. Bocock”
Email this Content