John H. Gracey v. Minister of National Revenue, [1988] 2 CTC 2199, 88 DTC 1544

Brulé, T.C.J.: —These appeals involve the appellant's taxation years of 1980, 1981, 1982, 1983 and 1984. The issue was whether or not the appellant suffered a non-capital loss in 1983 that could be deductible in computing his taxable income for the 1980, 1981, 1982 and 1984 taxation years.

Facts

For the period from 1971 to 1981 the appellant worked for two companies known as Carroll-Hatch and Associates Ltd. and Carroll Hatch (International) Ltd. There was some question whether or not the appellant was a full- time employee of these companies or, as he maintained, was only a part- time employee and consultant. In any event he was an important part of the organizations in his various functions which at times had him acting in the capacity of director and signing officer.

In early 1981 the appellant was fired and an action by the companies resulted in a court order that he pay to the companies the sum of $141,457.13, pre-judgment interest of $72,238.70 for a total of $213,695.83 plus transfer percentages of certain real estate interests in three condominiums. In addition to these amounts the appellant incurred legal fees of $46,984.72. With the exception of certain percentages from the sale of two condominiums, the legal fees, and a $3,000 garnishee no amounts were paid to the companies pursuant to the court order in 1983.

The appellant claimed a professional loss in his 1983 income tax return in the amount of $259,574.81 and as a result of this, requested that non-capital losses from this year be carried back to prior years of 1980, 1981 and 1982. In April of 1985 the Minister reassessed the appellant's 1983 taxation year dis- allowing certain amounts previously claimed as a professional loss with the result in that there was no loss in 1983 and therefore no carry back to previous years. The Minister reassessed the 1980,1981 and 1982 taxation years to delete previous non-capital loss applications.

In his return of income for the 1984 taxation year the appellant claimed a non-capital loss of other years in the amount of $8,923.48, which was disallowed on initial assessment as there were no non-capital losses available for 1984.

Appellant's Position

The taxpayer based his appeal on the fact that he had an oral agreement with Mr. Carroll to be paid certain amounts. When trouble arose the appellant was unsuccessful in having the agreement reduced to writing. In supervising the accounting system of the companies, the appellant had his personal account charged with payments made to acquire real estate and payment of income taxes. Also the appellant set up a fee to himself for his work. The amounts involved were set up on an accrual basis on which he paid income taxes. These were at the rate of $25,000 per year. After the court action in 1983 the appellant was ordered to pay back certain sums as set out above. This was so because he could not prove that he had authority to set up the accounts for himself, nor could he substantiate the oral agreement.

His claim was that he received funds that had to be accrued and that his legal expenses were incurred in defending his income position. After the court order the appellant had a liability for judgment, interest and legal services. He claimed these as a refund and applied carry back provisions involving the 1980, 1981 and 1982 taxation years when filing his 1983 income tax return. In 1984 he claimed a non-capital loss.

Minister's Position

Counsel for the Minister maintained that the appellant received the income involved by reason of his employment and as such there is no section in the Income Tax Act which permits a deduction such as this, and further if there were a permissible deduction it would only be in the year of payment. This was an attempt to maintain title to personal property and income earned in the past and was a matter only between the litigants in the court action. It followed that legal expenses were not incurred to earn income and therefore are not deductible. The result of this, the Minister’s counsel said was that the appellant is not entitled to the relief he seeks in this appeal.

Analysis

The income of the appellant for 1983 was determined in accordance with the provisions of sections 3, 4, 5, 6(1)(a) and 9(1) of the Income Tax Act thereby determining that there was no non-capital loss for the 1983 taxation year that was deductible in computing the taxation income of the appellant for the 1980, 1981, 1982 and 1984 taxation years in accordance with the provisions of paragraphs 111(1 )(a) and 111(8)(b) of the Income Tax Act.

The Ontario Court of Appeal case of The Queen v. Fred E. Poynton, [1972] C.T.C. 411; 72 D.T.C. 6329 held that moneys converted by a trustee to his own use were subject to repayment and still were to be taxed. While in that case there was found to be fraud, and not so here, the principle remains.

The Poynton case was cited with approval by the Supreme Court of Canada in The Queen v. Elizabeth Joan Savage, [1983] C.T.C. 393; 83 D.T.C. 5409.

There are many recorded cases in which the court has held that to deduct legal expenses such must be attributed to matters dealing with the earning of income. A most recent decision setting this out is found in the Federal Court of Appeal case of The Queen v. [1988] Jager Homes Ltd., [1988] 1 C.T.C. 215; 88 D.T.C. 6119.

There was no evidence submitted as to the connection between moneys obtained by the appellant over many years that could incur a business loss in 1983. The Court award against the appellant included an amount of interest and he sought to have this deducted.

While paragraph 20(1)(c) of the Income Tax Act permits the deduction of interest in certain situations such is not the situation here. The purpose of this provision is discussed in The Queen v. Phyllis Barbara Bronfman Trust, [1987] 1 C.T.C. 117; 87 D.T.C. 5059 and certainly the appellant in this present case cannot deduct the amount of interest against him in the court case with the companies in his 1983 income tax return.

For all these reasons the appellants is not permitted to claim a loss in 1983 with the result that this appeal is dismissed.

Appeal dismissed.