Karen L. Turner-Lienaux v. Her Majesty the Queen, [1996] 3 CTC 2810, 97 DTC 261 (Informal Procedure)

Margeson J.T.C.C.: — This is an appeal from the assessments for the taxation years 1991, 1992 and 1993. The Minister disallowed deductions in those years for legal expenses incurred allegedly for the purpose of allowing the Appellant to collect salaries, wages or pension benefits.

Facts

The Appellant is a laboratory technologist and in the years in question was employed by the Province of Nova Scotia working at the Victoria General Hospital in Halifax. In 1989 she participated in a competition whereby she sought a job promotion. If she had been successful, she would have been entitled to a salary of about $100 every two weeks in excess of the salary she received as a result of her reclassification after the competition was concluded and she was not awarded the position.

As a result of not being awarded the position the Appellant challenged the results of the competition by commencing legal proceedings in the Supreme Court of Nova Scotia as there was no grievance procedure available to her at her place of work nor indeed was there any other avenue open to her whereby which she could claim relief.

The case proceeded to both the Trial and Appeals Divisions of the Supreme Court of Nova Scotia and the Appellant was unsuccessful at both levels. As a result of the dismissals of her action, costs were awarded against her. It is these costs that she sought to deduct against her other income in the years in question.

In her cross-examination, the Appellant was asked what she was suing for and she said that she was asking the Court to look at the posting requirements for the competition, decide whether or not her employer had followed the “posting requirements” of the competition and to award her the job along with Court costs.

Argument of the Appellant

In argument, counsel for the Appellant, who was her husband, argued that the position taken by the Minister, as shown in his correspondence with the Appellant (See Tab K of the Appellant’s affidavit) was incorrect. In that letter the Minister indicated that “The legal expenses you incurred were to try and acquire a higher paying position and not to collect monies previously owed to you”, thus they were not deductible under paragraph 8(l)(b) of the Income Tax Act, (the Act).

Counsel argued that after 1989 the wording of the relevant paragraph was changed and during the years in question these expenses need only have been incurred to establish a right to a salary or wages owed to the taxpayer. It was not necessary that the expenses were incurred by the taxpayer in collecting salary or wages owed.

Counsel referred to the case of Femado v. R. (sub nom. Fernando v. Canada), [1993] 2 C.T.C. 173, 93 D.T.C. 5412 (F.C.T.D.), at page 177 in support of his position that if the Appellant had been successful in the litigation she would have established a right to the higher income. She acted reasonably. There was a reasonable chance of success. The section must be interpreted reasonably. If the Court should conclude that she was not acting to establish such a right, then the amendment means nothing. The results of the litigation are not important.

The Appellant raised an issue under section 15(1) of the Canadian Charter of Rights and Freedoms arguing that the Minister’s decision to disallow the deduction because the Appellant was not successful in her litigation was contrary to that section.

It was agreed that the costs involved here were Court costs and not legal fees.

Counsel relied upon the case of St-Germain v. Minister of National Revenue, [1983] C.T.C. 2038, 83 D.T.C. 36 (T.R.B.), at page 2043 in support of his proposition that success in litigation was not a pre-requisite to the right to claim the expenses as a deduction.

If the taxpayer was successful in her litigation and was awarded costs, these costs would be added to the income under paragraph 6(1 )(g) of the Act. The Appellant would only know if she had the right after she took the legal proceedings.

In a supplementary brief filed by consent after the hearing, counsel referred to the Statement of Claim in the action before the Supreme Court of Nova Scotia and filed it as as exhibit.

He argued that the cases cited by the Respondent, L'Écuyer v. R. (sub nom. L'Écuyer v. Canada), [1995] 2 C.T.C 2983, 95 D.T.C. 241 (T.C.C.) and Courville v. Ministre du Revenu national (sub nom. Courville v. Minister of National Revenue), [1992] 1 C.T.C. 2546, 92 D.T.C. 1888 (T.C.C.) are distinguishable from the case at bar as the deductions sought there were for legal fees for opinions and not Court costs.

Counsel argued that in the case before the Supreme Court of Nova Scotia, the Appellant sought damages equivalent to the increased bi-weekly salary and Court costs. The costs were incurred to establish a right to salary owed.

The presumptions of the Minister contained in the replies that the purposes of the actions were not to establish a right to salaries or wages are incorrect in fact and law.

Counsel argued that the appeals should be allowed and the assessments varied to permit the deductions.

Respondent's Position

The Respondent argued that the real question here is not whether the action was successful or not but what the Appellant was suing for. She was not suing to collect or establish a right to salary or wages owed to the taxpayer by the employer.

The case of L’Écuyer, supra, stands for the proposition that where a person sues for future wages or a right to future salary, those deductions are not available under the appropriate sections.

In the case at bar there was no evidence that the Appellant was entitled to “back wages” nor for “money owed”.

The Supreme Court of Nova Scotia decided that the Appellant had no such right as she was seeking and therefore she could not be suing for a right to “salary or wages owed”. The paragraph contemplates the existence of a right and that right does not exist where the Court has so found.

In Lyonde v. Minister of National Revenue, [1988] 2 C.T.C. 2032, 88 D.T.C. 1397 (T.C.C.), the Appellant was suing to establish a right to income. That is not what happened in the case at bar. In this case the Court decided that there was no law that required the defendant employer to do what the Appellant wanted it to do.

This case does not involve salary or wages owed to the Appellant. Counsel cited L'Écuyer, supra, and Courville, supra, in support of his proposition that expenses disbursed for the purpose of establishing future rights to wages or salary are not deductible. At best the Appellant was attempting to establish a right to future wages.

Counsel took the position that there was no evidence that the Appellant was seeking reinstatement in the position and wages for that position. This was not an action for retroactive wages. If it were, there was no breakdown as to what portion of the expenses related to the retroactive wages. That duty was upon the Appellant to prove wages to which the expenses relate and she has not done so.

In summary, the legal action was not to enforce a right to wages or salary but if it was, there was no such right as the Courts of Nova Scotia decided and therefore the expenses were not deductible.

Rebuttal

In rebuttal counsel argued that the Appellant was seeking an order for the position and damages. This was a claim for wages and salary. She need not be successful in this action to be entitled to deduct the expenses.

Immaterial of the reasonableness of her actions, so long as she was of the belief that she was entitled to the position then the Appellant can claim the expenses as a deduction.

Analysis and Decision

The Court does not consider the Appellant’s argument under section 15(1) of the Canadian Charter of Rights and Freedoms as the Appellant has not complied with the provisions of the Federal Court Act.

15. (1) Every individual is equal before and under the law and has the right to the equal protection and equal benefit of the law without discrimination and, in particular, without discrimination based on race, national or ethnic origin, colour, religion, sex, age or mental or physical disability.

(2) Subsection (1) does not preclude any law, program or activity that has as its object the amelioration of conditions of disadvantaged individuals or groups including those that are disadvantaged because of race, national or ethnic origin, colour, religion, sex, age or mental or physical disability.

It is apparent from a review of all of the evidence that the Minister, at some time before and after the disallowance of the deductions in question, was apparently of the belief that the expenses were not deductible unless the Appellant was successful in the legal action. This to some extent was the basis for the appeal. This position was incorrect during the relevant years. See Fernando, supra.

Further, the Court is satisfied that the expenses need not be incurred in collecting salary or wages owed. The letter of the Minister to the Appellant dated August 26, 1994 indicated that the expenses were incurred to try and acquire a higher paying position and not to collect monies previously owed to the Appellant. This may also have been somewhat confusing to the Appellant.

However, there can be no doubt from the Replies that the Minister was considering paragraph 8(1)(b) of the Act as it existed during the relevant years. Paragraph 11(f) of the Replies make it clear that the Minister disallowed the deductions based upon the presumption that the legal expenses were not incurred “to collect or establish a right to salaries or wages owed” which is what the relevant section states.

Counsel referred to the case of Fernando, supra. In that case, Rothstein, J. referred to MacDonald v. Minister of National Revenue, [1990] 2 C.T.C. 2269, 90 D.T.C. 1751 (T.C.C.). In MacDonald, supra, Couture C.J.T.C. states, at page 2271 (D.T.C. 1752):

The amount in question in my opinion was in respect of loss of his employment received as, on account or in lieu of payment of, damages pursuant to a judgment of a competent tribunal as provided in paragraph 248(1) and was therefore a retiring allowance within the meaning of this definition. In addition, the word “salary” as defined by the dictionary does not include an amount of the type received by the Appellant. The concise Oxford Dictionary defines “salary”: n. fixed payment made by employer at regular intervals, usu. monthly or quarterly, to person doing other than manual or mechanical work.

In my opinion, by his action against his former employer, the Appellant was seeking the right to damages for wrongful dismissal and not salary or wages as he had never performed any services for his former employer to be entitled to a salary or wages.

What paragraph 8(1 )(b) contemplates in my opinion is the situation whereby a taxpayer having performed the duties of his employment his employer has refused to pay him his salary for whatever reasons he may invoke. In other words, the employee has earned the salary or wages in question, but his employer has not paid him and he had to incur legal expenses to collect what was owing to him.

Rothstein, J. had difficulties understanding why Parliament would have intended to restrict paragraph 8(1 )(b) in that way. His position was that:

... if an employee had to incur expense to earn income, such expense directly related to the earning of income should be deductible.

He further went on at page 177 to say:

However in the context of wrongful dismissal, I have difficulty understanding why such distinction is relevant. An employee is required to incur legal expenses to obtain salary or wages that was owing to him by virtue of the fact that he was wrongfully dismissed without notice. The amount he receives is salary or salary related amounts such as pension contributions. He must pay tax on the amount he receives. Why should he not be entitled to deduct the legal expenses he incurred to obtain the salary or wages that he would have earned had he not been wrongfully dismissed.

The learned trial judge went on to find that the amount in question before him was wages or salary and that the legal fees were deductible. He did not address the object of the amendment to paragraph 8(1 )(b) except to say that there was now no doubt that legal expenses incurred to collect or establish a right to salary or wages were deductible. Notably there was no discussion of the effect of the word “owed” which is contained in both the amended and pre-amended version of section 8(1)(b).

This Court has some difficulty in concluding that a person is “owed” a salary or “wages” if he did not do the work or occupy the position that required the salary or wages to be paid. Further it has difficulty in concluding that a person could be found to have incurred legal expenses to establish a right to salary or wages when two Courts of competent jurisdiction actually found that the Appellant did not have the “right” that she was seeking to enforce by the legal action.

There can be no doubt that the Appellant was not seeking to collect wages owed.

This is not to say that there is in effect no difference between the amended version and the pre-amended version of paragraph 8(1 )(b). This Court can foresee a case where a person might not be successful in a legal action because of improper evidence, insufficient proof of damages or some other reason and yet may have incurred the expenses to establish “a right to salary or wages”.

However, in the case at bar the result of the action was to declare that no such right existed, not that such right had not been established and consequently the action dismissed.

This Court cannot conclude that any belief, no matter how absurd it 1s, or how remote the chances of success are, would entitle the taxpayer to deduct the legal expenses so long as the taxpayer believed that the right existed. That could lead to absurd abuse of the paragraph in question.

The Court is satisfied that what was involved here as the statement of claim indicates, was an action for a declaration that the Appellant should be entitled to the higher position, that the Court declare the competition flawed and that the Appellant be awarded damages which included the amount of money that she would have received if she had occupied the higher position. This award of damages would be the equivalent of the amount she would have received if she had been successful in the flawed competition, was in lieu of the salary or wages that she would have earned, but was not for salary or wages “owed”.

The Appellant has a further problem in that there was no satisfactory evidence presented as to what portion of the legal expenses would have been related to the relevant wages or salaries sought in each year. Obviously part of the expenses would have been related to future earnings and not earnings existent at the time the action was commenced. Those expenses would not be deductible in the years in question.

The Court is not satisfied that the legal expenses were incurred by the taxpayer “to collect or establish a right to salary or wages owed to the taxpayer by the employer or former employer during the years in question.” Therefore, the expenses are not deductible in those years against other income.

The appeals are dismissed and the Minister’s assessments are confirmed.

Appeal dismissed.