Freda Hoffman as Executrix on Behalf of the Estate of Solomon Hoffman and Freda Hoffman v. Minister of National Revenue, [1992] 2 CTC 2645, 92 DTC 2290

Brulé, T.C.C.J.:—These appeals stem from income tax assessments for the taxation years 1986 and 1987 in respect of the Estate of Solomon Hoffman ("Estate") and 1985 and 1986 in respect of Freda Hoffman ("Freda") personally. The Minister of National Revenue ("Minister") has denied deductions as expenses for legal fees.

At the outset the Court was advised that Freda abandons her appeal for the 1985 taxation year. The appeals then proceeded on the basis of common evidence.

Facts

Briefly the salient facts as set out by the appellants counsel are as follows:

1. Freda is an individual who resides in the city of Hamilton, Ontario;

2. Her husband, Solomon Hoffman died on June 5, 1984 and Freda was named as the sole executrix of her late husband's estate;

3. Freda and the estate owned various capital assets, the ownership of which became the subject matter of a lawsuit instituted in the Supreme Court of Ontario in 1984 by Stephen Edell and Jay Edell as plaintiffs naming Freda in her capacity as executrix of the estate as defendants;

4. Freda and the estate retained counsel to defend the lawsuit and after the resolution of the lawsuit, ownership in the assets in dispute remained with Freda and the estate.

While there were several companies in which the deceased was involved primarily with his two brothers I do not believe it is necessary to go into details of these.

Issue

The sole issue in these appeals is whether or not the legal fees incurred in the defence of the lawsuit were legitimate expenses incurred in the maintenance and preservation of assets and should have been allowed as a deduction or expense in the years in question. The Court was advised at the outset, somewhat different from the Minister's reply to notice of appeal, that in the appeal of Freda the amount was $19,205 in 1986, and for the estate $26,077 in 1986 and $8,535 in 1987.

Appellant's position

Counsel for the appellants maintained that the legal expenses incurred were necessary in repelling challenges to or protecting assets. The results did not add to existing assets and therefore should be deductible.

In support of this claim the following cases were cited to the Court:

Kellogg Co. of Canada v. M.N.R., [1943] S.C.R. 58, [1943] C.T.C. 1, 2 D.T.C.

548;

Evans v. M.N.R., [1960] S.C.R. 391, [1960] C.T.C. 69, 60 D.T.C. 1047;

Canada Starch Co. v. M.N.R., [1968] C.T.C. 466, 68 D.T.C. 5320;

Southern v. Borax Consolidated Ltd., 23 T.C. 597, [1940] 4 All E.R. 412;

Johns-Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46, [1985] 2

C.T.C. 111, 85 D.T.C. 5373.

Reference to these cases and others by the respondent will be made under the heading “Analysis”, infra.

Respondent's position

The main thrust of the respondent's position was that the legal expenses incurred by the appellants were not incurred for the purpose of gaining or producing income from a business or property.

Support for the position of the respondent was said to be found in the following cases:

M.N.R. v. Dominion Natural Gas Co., [1941] S.C.R. 19, [1940-41] C.T.C. 155,1

D.T.C. 499-133;

British Columbia Power Corp. v. M.N.R., [1968] S.C.R. 17, [1967] C.T.C. 406,

67 D.T.C. 5258;

Farmers Mutual Petroleums Ltd. v. M.N.R., [1968] S.C.R. 59, [1967] C.T.C.

406, 67 D.T.C. 5277;

Pappas Estate v. M.N.R., [1990] 2 C.T.C. 2132, 90 D.T.C. 1646 (T.C.C.);

M.N.R. v. Ouellette, [1971] C.T.C. 121, 71 D.T.C. 5094 (Ex. Ct.);

British Columbia Electric Railway Co. v. M.N.R., [1958] S.C.R. 133, [1958]

C.T.C. 21, 58 D.T.C. 1022;

Evans v. M.N.R., [1960] S.C.R. 391, [1960] C.T.C. 69, 60 D.T.C. 1047;

D.J. MacDonald Sales Ltd. v. M.N.R. (1962), 16 Tax A.B.C. 49, 62 D.T.C. 208

(T.A.B.).

Analysis

This matter of determining expenditures and their deductibility has always caused problems as seen from the many cases cited by both counsel. One passage which indicates this is found in the Johns-Manville Canada Inc. case, supra, wherein Estey, J., said at page 56 (C.T.C. 117, D.T.C. 5377):

When one turns to the appropriate principles of law to apply to the determination of the classification of an expenditure as being either expense or capital, an unnerving starting place is the comment of the Master of the Rolls, Sir Wilfred Greene in British Salmson Arrow Engines Ltd. v. Commissioner of Inland Revenue (1938), 22 T.C. 29, at page 43:

. . .. there have been. . . . many cases where this matter of capital or income has been debated. There have been many cases which fall upon the borderline: indeed, in many cases it is almost true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons . . . .

Counsel for the appellants relied heavily on the Evans case, supra. In that case a widow paid legal fees to prove she was entitled to an annual income. At page 398 (C.T.C. 76, D.T.C. 1050) of the judgment, the Supreme Court of Canada Cartwright, J., said in allowing the expenses:

. . . the legal expenses paid by the appellant were expended by her for the purpose of obtaining payment of income; they were expenses of collecting in- come to which she was entitled but the payment of which she could not otherwise obtain.”

The respondent's counsel took issue with the Evans case, supra, as a precedent stating that while Mrs. Evans incurred legal expenses to establish her right to income such was not necessary in the present appeals as the right to income was not in dispute, rather there was a dispute over capital items. Referring to the same case a passage at page 399 (C.T.C. 77, D.T.C. 1051) was indicated to the Court as follows:

It would be a strange result if the question, whether legal expenses incurred in enforcing and preserving a right should be regarded as an outlay on account of capital or on account of income, fell to be determined on a consideration not of the true nature of that right but of the nature of the ill- founded grounds on which it was disputed.

Here, not being a quarrel over the right to income the legal fees should not be allowed according to the respondent.

Again in the Kellogg case, supra, legal fees were expenses laid out to earn income and properly deductible. The Supreme Court of Canada affirmed this decision. This too, counsel for the respondent said, is distinguishable because there was a business difficulty over income.

The Canada Starch case, supra, may be explained on the basis that fees to protect a trade mark which were allowed are quite different from protecting capital assets as in the present appeals. The allowance of the fees was explained by Jackett, P. of the Exchequer Court at page 475 (D.T.C. 5325):

Putting my view another way, it is that, while a trade mark once it becomes a business or commercial reality is a capital asset of the business giving rise to it, just like goodwill, of which it is merely a concrete manifestation, a trade mark is not a capital asset that has been acquired by a payment made for its acquisition, but is a capital asset that arises out of, and can only arise out of, current operations of the business; and registration of a trade mark does not create a trade mark that is such a business or commercial reality, but is merely a statutory device for improving the legal protection for it.

I believe that apart from other cases cited by counsel for the respondent the matter was best set out in Farmers Mutual Petroleums, supra, referring to Dominion Natural Gas, supra, at page 66 (C.T.C. 401, D.T.C. 5281) by Martland, J., of the Supreme Court of Canada:

. . . the Dominion case has established the proposition that legal expense incurred with a view of preserving an asset of advantage for the enduring benefit of the trade is a capital expenditure and is not deductible.

While in these appeals no trade is involved the enduring benefit of Mrs. Hoffman is. As a result then the legal fees cannot be deducted within the meaning 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').

The appeals are dismissed.

Appeals dismissed.