Noble v. R., [1998] 1 CTC 2797

Sobier T.C.J.:

The Appellant appeals from the assessments by the Minister of National Revenue (the “Minister”) for his 1991 and 1993 taxation years whereby the Minister added the amounts of $2,902 in 1991 and $24,164 in 1993, and denied deductions in like amounts for those years on account of legal fees paid by the Appellant.

Originally, the deductions were denied under paragraph 60(<?) of the Income Tax Act (the “Acf ’) as not having been incurred for the purpose of defending an assessment of income taxes, as well as not having been incurred for the purpose of gaining or producing income within the meaning of paragraph 18(1)(a) of the Act. At the hearing of the appeal, the issue concerning paragraph 60(o) was not pursued.

In the alternative, the Minister claimed that the expenditures were made on account of capital, within the meaning of paragraph 18(1)(b) of the Act.

The Appellant is a lawyer practicing in Ontario. He is on an annual retainer as international counsel with his sole client being generally known as the Tridel Group of Companies (“Tridel”). Tridel is a group of companies controlled or under the management of three brothers, Angelo, Leo and Elvio Del Zotto and include Tridel Corporation and Tridel Enterprises Inc. It was Mr. Noble’s evidence that Angelo Del Zotto was the chairman, chief executive officer and creative and driving force behind Tridel.

In providing legal services to Tridel, he advised the officers, directors, agents and employees of Tridel and its subsidiaries and affiliated companies.

Mr. Noble invoices Tridel, on a monthly basis, through a paymaster company known as Glen Nova Construction Limited, for ‘/12 of the annual retainer and is paid accordingly.

According to Mr. Noble, he became aware prior to 1991 that Revenue Canada was investigating Tridel. This he learned through discussions with Elvio Del Zotto, William Christie and Robert Lindsay, a tax lawyer with the firm Osler, Hoskin & Harcourt, who was retained in connection with the investigation. In 1990, Revenue Canada auditors moved into the Tridel offices and remain there today. The first formal indication of Revenue Canada’s interest in the Appellant came about in a letter from Revenue Canada to the Appellant dated May 3, 1990, requesting information and documentation concerning his relationship with a Cayman Island corporation known as Supra Investments Inc. (“Supra”), including his possible direct or indirect ownership of Supra. This letter was marked with a carbon copy to Mr. Lindsay at his firm.

Prior to that date, no inquiries had been made of Mr. Noble by Revenue Canada concerning Supra. By referring to Supra and copying Mr. Lindsay, he believed that Tridel was involved. Mr. Noble stated that he felt this request for information put him in a conflict position between a desire to continue earning fees from Tridel and his duty to Tridel. Mr. Noble took the letter to Mr. Elvio Del Zotto, who advised him to seek independent legal advice and informed him he would be reimbursed by Tridel for any fees he was invoiced by counsel. He finally retained Mr. Alan Gold of the firm Gold & Fuerst. Mr. Gold replied to the May 3, 1990 letter by a letter dated May 23, 1990. In this letter, Mr. Gold stated that Mr. Noble had “no direct or indirect ownership relationship to Supra Investments Inc.” and that he had “no books or records for that company nor legal status to assist you (Revenue Canada) in obtaining such access thereto”.

By a letter from Revenue Canada to Mr. Noble dated May 15, 1991, Mr. Noble was requested to produce full particulars concerning his business relationship with Angelo Del Zotto, Tridel Corporation and Supra Invesments Inc. He was again requested to provide information as to the ownership of shares of Supra, as well as information as to the ownership of shares of other corporations by Supra.

Mr. Gold replied to this letter on behalf of Mr. Noble by a letter dated July 23, 1991.

Mr. Gold billed Mr. Noble for these services in 1991 and the invoices were paid. Mr. Noble then submitted them to Tridel for reimbursement, which was done.

These accounts are the ones in dispute in his appeal for the 1991 taxation year.

The amounts reimbursed were not included as income or taken as deductions in Mr. Noble’s 1991 tax return.

On October 9, 1992, an inquiry (the “Inquiry”) was established by Revenue Canada pursuant to subsection 231.4(2) of the Act, to look into the financial affairs of Angelo Del Zotto.

A subpoena dated April 21, 1993, issued under the authority of the Inquiry, was served upon Mr. Noble requiring him to deliver all documents or other things in his possession, control or power relating to the financial affairs of Angelo Del Zotto for the taxation year 1979 to 1985 inclusive, including but not restricted to documents, etc. relating to Supra, 272930 B.C. Ltd., Auburg Ventures Inc., Night Hawk Resources Ltd. and Delbancor Industries Inc., formerly known as Saxton Industries Ltd.

Although the subpoena was directed to matters concerning Angelo Del Zotto, the Appellant believed that this was a continuation of the ongoing investigation of Tridel, which he claims related back to 1990 and to the request for information contained in the Revenue Canada letter to him of May 15, 1991. Also according to the Appellant, by mentioning Supra, he again assumed that Tridel was involved. Again, he felt there was a conflict between protecting his source of income and protecting his client, in that he would be required to be a witness against his client. However, there was no evidence that Mr. Del Zotto was himself a client of Mr. Noble.

Mr. Noble again talked with Mr. Elvio Del Zotto and was told to keep his retainer with Mr. Gold and Tridel would pay his legal expenses. He then took the subpoena to Mr. Gold.

There followed many legal proceedings concerning the Inquiry, the subpoena and other matters. These proceedings involved Mr. Angelo Del Zotto as well as Mr. Noble. Throughout the proceedings, Mr. Gold and members of his firm acted on Mr. Noble’s behalf, with the effect that as of the present time, section 231.4 of the Act and the subpeonas issued under it have been declared to be of no force and effect under subsection 52(1) of the Constitution Act, 1982 by the Federal Court of Appeal. Leave to appeal the decision of the Federal Court of Appeal has been made to the Supreme Court of Canada, but the application for leave has not been heard.

Mr. Gold invoiced Mr. Noble for the services rendered in 1993 concerning the Inquiry and subpoena, and the accounts were handled in the same manner as the 1991 accounts. [1] These accounts are the ones in dispute for his 1993 taxation year.

Mr. Noble claims that throughout these years, he continued to provide legal services to Tridel and wished to continue to provide such services. By seeking legal counsel at the request of Tridel, Mr. Noble claims that he was in continuance of his retainer to provide such services. Without retaining counsel, he could not provide these services, since he would be in a conflict between his earning capacity and his client.

To succeed, he must demonstrate that the moneys paid by way of fees charged by Mr. Gold’s law firm, were paid by Mr. Noble for the purpose of gaining of producing income from his law practice. He must establish the connection between the expenditures and the purpose of such expenditures.

The beginning of the investigation in 1990 and the physical presence of Revenue Canada auditors on Tridel’s premises pointed to Tridel being under scrutiny. The second request letter from Revenue Canada referred specifically to Tridel, although the first request letter and the subpoena did not. In his evidence concerning the subpoena, there was mention of Supra, which in his mind related to Tridel, even though it was not mentioned. The evidence of Mr. Noble leads me to find that his relationship with the constituent members of the Tridel group, as well as their personnel, was such as to make them as one in his mind. Angelo Del Zotto, Tridel and the Appellant’s source of income are so connected that in the Appellant’s eyes, they became indistinguishable. Having found that, one must then weigh this against the other fact that whatever the relationship between Mr. Noble and Angelo Del Zotto was, that relationship was not one of solicitor and client.

It was apparent to the Appellant that the entire Tridel enterprise was under observation not just parts. Accordingly, when he retained counsel to advise him, in order not to appear to be or in fact to be in conflict with his source of income, he did so in order to continue to earn income from Tridel. To this end, the advice he sought was to allow the continuation of his income.

It has been recognized by the courts that there is no need to show that an expenditure of money results in specific income being earned. [2] Taken in the context of his entire law practice, the expenditure of legal fees for counsel were necessary in order to permit him to continue to earn income. It has long been held that the deduction of legal fees are allowable when they are incurred in connection with the ongoing business of the Appellant, which is the case in this appeal.

As to the argument whether or not the expenditures were of capital nature, they were not. They were on account of income, and arose out of the day-to-day operations of the Appellant’s law practice. By retaining counsel and paying the fees, he was allowed to continue advising his client. It was his perception that should he not retain counsel, he would be in a conflict position, which would render him incapable of performing his services and thus earning income.

For the above reasons, the appeal is allowed with costs and the matter referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the legal fees in question are deductible.

Appeal allowed.