Edward Upenieks v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 2386

Teskey, T.C.C.J.:—The appellant elected to have his appeal against his 1988 assessment for tax heard pursuant to the informal procedure.

Facts

In 1984, the Toronto Star, a daily newspaper published in Toronto with wide circulation, published an article, (Exhibit R-1), a copy of which is attached hereto as Schedule "A" [not reproduced].

After the article was published, he was emotionally upset, appointments were cancelled and he felt that his reputation had been damaged by the article.

He then commenced an action against the newspaper for libel. The action went to trial in 1988 and was dismissed.

The appellant claimed as expenses in 1980 the sum of $38,045, a portion of his legal fees. His total expenses were much higher.

I am satisfied that the average professional earning normal professional income, without other external income, would not launch a libel lawsuit against a giant newspaper, such as the Toronto Star, unless at the time he or she felt that they had been wronged and that their reputation had been damaged by the complained article. Thus, the success or non-success of the action is immaterial.

In this case, the appellant perceived that his reputation in the community had been damaged and that his income was damaged.

It is assumed that a professional on graduation has gained the necessary knowledge to carry out the practice of his profession. Skill is acquired and honed by years of experience in practising the chosen profession. Over and above school knowledge and acquired skill learned from practice, a professional's reputation becomes an integral part of the person. No one can arbitrarily take away the professional's knowledge or skill. On the other hand, a false or libellous or misleading article can damage a person's reputation. The income of a professional is enhanced as the reputation of the professional grows. Damage the professional's reputation and you have damaged the professional. Reputation is a fragile asset and must be defended at all times.

In order for the appellant to be allowed to deduct from income his legal fees for the prosecution of his libel action against the Toronto Star, he must fall within the provision of paragraph 18(1)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") and also not run afoul of paragraph 18(1)(b) of the Act. Section 18, under the heading "General limitations” reads:

18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part;

I am satisfied that all the appellant needed to do to restore any lost reputation or to maintain it was to bring the libel action. The legal fees claimed were for purposes of maintaining and preserving the appellant's reputation. A professional's reputation is an asset upon which professional fees are based and expenses to preserve and protect this asset are for the purposes of preserving a capital asset.

In coming to this conclusion, I am mindful of Cartwright, J.'s words in Evans v. M.N.R., [1960] S.C.R. 391, [1960] C.T.C. 69, 60 D.T.C. 1047 where at page 399 (C.T.C. 77, D.T.C. 1051) he said:

. . .it is my opinion that the outlay of the legal expenses in question was not a payment on account of capital falling within paragraph 12(1)(b) (now 18(1)(b)) but was an expense, falling within paragraph 12(1)(a), (now 18(1)(a)) incurred by the appellant for the purpose of gaining income from property, to which income she was at all relevant times entitled but of which she was unable to obtain payment without incurring these expenses.

However, he had said at page 396 (D.T.C. 1050):

The reasons for judgment in Dominion Natural Gas Co. v. M.N.R., [1941] S.C.R. 19, [1940-41] C.T.C. 155, 1 D.T.C. 499-133, had the effect of adding as an alternative to the words "with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade" in the passage quoted, the words "or with a view to preserving an asset or advantage for the enduring benefit of a trade".

Dubé, J. of the Federal Court-Trial Division in BP Pétroles Ltée v. The Queen, [1979] C.T.C. 174, 79 D.T.C. 5121, held that legal expenses to preserve a capital asset, were capital expenses and were non-deductible capital outlays under paragraph 18(1)(b) of the Act. The Federal Court of Appeal at [1980] C.T.C. 408, 80 D.T.C. 6252 dismissed the taxpayer's appeal.

I am satisfied that the expense herein was wholly, exclusively and necessarily laid out to preserve the appellant's reputation. The reputation however is a capital asset and the expense is not allowed due to paragraph 18(1)(b) of the Act.

I am mindful that a professional should guard and defend a gained reputation at all times. Any and all unfounded attacks against a professional's reputation, whether directly or by innuendo, must be challenged in some manner or that person's reputation will be diminished in the eyes of the community.

Based on the evidence before me, the appeal is dismissed.

Appeal dismissed.