Claude Coté v. Minister of National Revenue, [1989] 2 CTC 2218, 89 DTC 512

Tremblay, T.C.J.:—This appeal was heard in Montréal, Quebec on April 19, 1988.

1. Point at Issue

According to the originating proceedings, namely the notice of appeal and the reply to the notice of appeal, the question is whether in computing his income for the 1985 taxation year the appellant was correct in deducting the sum of $12,815.19 as legal and extrajudicial expenses incurred in connection with an urgent and interlocutory injunction.

According to the appellant, this injunction was instituted [sic] in March 1985 to prevent the Lady Davis Institute for Medical Research of Sir Mortimer B. Davis, Jewish General Hospital (hereinafter referred to as "the Institute") from unilaterally terminating a contract concluded between the Institute, the Jewish General Hospital (hereinafter referred to as "the Hospital”) and the appellant. This contract was concluded on October 30, 1983 and was to terminate on June 30, 1986. The appellant won his injunction. The subject matter of the contract was research.

In the submission of the respondent, who disallowed the expense, the appellant was an employee of the Hospital. The only legal fees an employee is allowed are those incurred in collecting salary or wages owed by his employer or former employer.

2. Burden of Proof

2.01 The appellant has the burden of showing that the respondent's assessments are incorrect. This burden of proof results from several judicial decisions, including a judgment of the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; 3 D.T.C. 1182; [1948] C.T.C. 195.

2.02 In the same judgment, the court held that the facts presumed by the respondent in support of assessments or reassessments are also assumed to be true until the contrary is shown. In the instant case the facts assumed by the respondent are described in paragraph 3(a) to (c) of the respondent's reply to the notice of appeal. This paragraph reads as follows:

[TRANSLATION]

3. In assessing the appellant for his 1985 taxation year the respondent Minister of National Revenue assumed, inter alia, the following facts:

(a) in his tax return for the 1985 taxation year, the appellant sought to deduct the sum of $12,815.19 as legal fees and disbursements; [admitted by the appellant]

(b) the appellant attached to his tax return for the 1985 taxation year a T-4 slip indicating he was employed by the Sir M.B. Davis Jewish General Hospital; [denied he was employed]

(c) The appellant did not establish that the amount of $12,815.19 was money paid in the year as legal and extrajudicial expenses incurred by him in collecting salary or wages owed to him by his employer or former employer . . . [denied by the appellant]

3. Facts

In the instant appeal, the material facts are not at issue.

3.01 Since September 1979, the appellant has been a doctor of biology. He works as a research director on grants made by the Medical Research Council of Canada, grants that are renewed every two or three years. The appellant works under the direction of the Institute which is the research centre forming part of the Jewish General Hospital in Montréal.

3.02 The facts stated in his notice of objection, which is also his notice of appeal, fully summarize part of the facts presented in evidence. They read as follows:

[TRANSLATION]

On October 30, 1983, a tripartite contract was signed legally binding the management of the Lady Davis Research Institute, the Jewish General Hospital and myself: the date of expiry of the said contract was June 30, 1986.

On May 1, 1984, the management of the Lady Davis Institute notified me of its intention to unilaterally break this contract as of January 1, 1985. In November 1984, the management of the Lady Davis Institute informed me that this deadline had been postponed to March 31, 1985. In March 1985, the management of the Lady Davis Institute prepared to close my research laboratory and to terminate my salary and that of my associates who were paid from my research grants.

On March 27, the Quebec Superior Court rendered judgment in my favour granting an emergency injunction; on June 5, the interlocutory injunction was obtained. This protected all the rights secured by the contract of association up to June 30, 1986 (the date on which the contract terminated).

Accordingly, in order to protect my 1985 income and that of the people associated with my research program, I had to initiate very costly proceedings in the courts.

3.03 As a consequence of the proceedings for an interlocutory injunction instituted by the appellant, Jacques Dugas, J. of the Quebec Superior Court rendered judgment in the appellant's favour on May 31, 1985.

As a consequence of this judgment an out-of-court agreement was made between the parties, the Institute agreeing to the appellant's request that his work terminate June 30, 1986.

3.04 The appellant maintained that he was not an employee of the Hospital, even though it issued him a T-4 form as employer for the 1985 taxation year, giving a statement of the remuneration paid, namely $40,630.97 as income before deductions. The latter were for Quebec pension contributions ($379.80), unemployment insurance premiums ($562.12), registered retirement pension contributions ($2,270.84), income tax ($4,536.78) and unemployment insurance insurable earnings ($23,920). The appellant had employee number 55,220.

The appellant further contended that no service was offered either at the Hospital or at the Institute. No income was generated by his work for the Hospital or for the Institute. He submitted no bills. The money he received came from the grant.

3.05 According to the appellant, the premises and laboratory were provided by the Hospital (with all its instruments) though they were sometimes purchased with the grant. The appellant himself did not see how he could be regarded as an independent contractor, simply because his work generated no income.

3.06 He also explained that he had to institute the proceedings for an injunction. The principal reason is given essentially in the judgment of Dugas J. (Exhibit A-1), which cites at page 8 the paragraphs of an affidavit by Dr. Eugène Rasio, a member of the Medical Research Council and of the Council executive. Paragraph 47(a) reads as follows:

Under the rules established in the Grants and Awards Guide of the Medical Research Council of Canada for 1984, if a researcher leaves the establishment where the grant was initially made, the researcher loses his grant.

It was thus important for the appellant to institute the proper proceeding in order to enforce the contract that was to end on June 30, 1986.

4. Act-Case Law-Analysis

4.01 Act

The main provisions of the Income Tax Act that apply in the instant case are paragraph 8(1)(b) and (2). They read 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 followng amounts as may reasonably be regarded as applicable thereto:

(b) amounts paid by the taxpayer in the year as or on account of legal expenses incurred by him in collecting salary or wages owed to him by his employer or former employer;

(2) Except as permitted by this section, no deductions shall be made in computing a taxpayer's income for a taxation year from an office or employment. 4.02 Case law

The parties referred to the following case law:

1. Patry v. M.N.R., 82 D.T.C. 1349; [1982] C.T.C. 2368 (T.R.B.);

2. Maruscak v. M.N.R., 85 D.T.C. 426; [1985] 2 C.T.C. 2048 (T.C.C.);

3. University of Ottawa v. M.N.R. and Louise Sylvestre, 85-508(UI), judgment rendered on March 2, 1985 by A. Labelle D.J.T.C.

4.03 Analysis

4.03.1 One of the main facts in dispute in this appeal is whether the appellant was an employee or an independent contractor.

The appellant testified that the facts appear to him to be rather unclear. On the one hand, he said he was not an employee since he provided no services to the Institute. However, as the Institute is a research centre and he was director of research, it seems to me this means he provided a service to the Institute.

4.03.2 Counsel for the respondent referred on this point to University of Ottawa (para. 4.02(3)).

In that case, the Court had to decide whether Louise Sylvestre, a researcher, was an employee of the University of Ottawa. Miss Sylvestre received a scholarship of $4,800 from the Natural Sciences and Engineering Research Council of Canada, but on condition that the University of Ottawa was responsible for supervising her work and administering the scholarship, paying the recipient the amounts due in accordance with regulations. As in the instant appeal, this scholarship was not granted for study purposes but for work and research.

The facts are essentially similar to those of the instant case. All the tools were supplied by the University of Ottawa.

The Court found that Louise Sylvestre was an employee. The fact that the problem involved the Unemployment Insurance Act and not the Income Tax Act does not in my opinion affect the final outcome, since the fundamental principles for deciding whether a person is an employee are the same.

4.03.3 As the appellant is an employee, the question is as to how paragraph 8(1)(b) and subsection (2) is to be applied. So far as the Income Tax Act is concerned, it is worth citing here a passage from the judgment in Patry (para. 4.03(1)) at page 2370-71 (D.T.C. 1350-51):

Before applying the Income Tax Act to the facts proven before the Board, it is useful to recall certain principles of interpretation which are binding on the Board, as they are on the Federal Court and even on the Supreme Court of Canada.

As the Income Tax Act is a public law statute, it has to be strictly interpreted. This strict interpretation, which consists in giving words their ordinary meaning (unless the word itself has been defined by the Act) operates in favour of the taxpayer when a section imposing a tax is ambiguous and has to be interpreted. In that case, the taxation does not apply. The principle derives from Roman law, which provided that any obligation imposed on citizens by the legislator was void if the obligation was not clearly defined. This principle is in turn based on the fundamental principle of the freedom of the individual. That freedom cannot be restrained by a legislative body unless the duty imposed is clearly stated.

Once the duty or fiscal burden has been clearly stated, however, the following rule applies: "Taxation is the rule and exemption the exception.”

It follows that when an exempting section has to be interpreted, if this exemption has not been clearly stated, the interpretation must this time operate in favour of the Department, of the taxing authority, so that a court must allow the least possible exemption or none at all.

It must now be considered how these principles of interpretation should be applied to the sections in question and also how the said sections are to be applied in light of the evidence presented to the Board.

4.03.4 In the instant case, were the appellant's legal and extrajudicial expenses “incurred by him in collecting salary or wages owed to him by his employer or former employer", according to the wording of paragraph 8(1)(b)?

It is worth citing a further extract from Patry, at page 2371 (D.T.C. 1351):

First, it is beyond question that paragraph 8(1)(b), regarding court costs is a so- called exempting provision, because it authorizes an exemption in computing an employee's income. This is the provision which applies to the appellant, since she is an employee. The provision applies when the recovery of salary or wages owed by the employer or former employer is in question. In the Income Tax Act (subsection 248(1)) “salary or wages" means:

“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;

According to the Petit Larousse Illustré, 1979 edition, “traitement” [wages] means (p. 1033): "employee remuneration"; and “salaire” [salary] means (p. 919): “remuneration for work done by an individual for another pursuant to a contract of employment or a paid commission”.

4.03.5 In the instant appeal, while on the one hand there is no question that the appellant was receiving a salary from the Institute and the Hospital, on the other hand the proceedings instituted against these two parties were not to recover salary owed. As the appellant himself explained, the purpose was instead to prevent a breach of contract (para. 3.07) in order to protect his employment income.

In fact, paragraph 8(1)(b) does not say that the legal expenses paid were paid to protect employment income, but to collect salary owed.

4.03.6 It is clear that under subsection 8(2), cited above, the only expenses allowed in computing employment income are those mentioned in section 8. There is no other provision in the section dealing with legal expenses.

4.03.7 In these circumstances, therefore, I must affirm the assessment made by the respondent.

5. Conclusion

The appeal is dismissed for the foregoing reasons for judgment.

Appeal dismissed.