Côté v. R., [1999] 2 CTC 270, 99 DTC 5009

Blais J.:

The plaintiff Claude Côté is appealing from a decision by Tremblay J.T.C., which affirmed the assessment made by the defendant.

At the very start of the hearing the plaintiff Claude Côté admitted that the only point at issue was whether the plaintiff was en employee or an independent contractor, and as such whether the expense of $12,815.19 could be regarded as an expense within the meaning of s. 18( 1 )(rz) of the Income Tax Act, which reads as follows:

18.(1) Dans le calcul du revenu du contribuable, tiré d’une entreprise ou d’un bien, les éléments suivants ne sont pas déductibles:

(a) débours ou une dépense sauf dans la mesure où elle a été faite ou engagée par le contribuable en vue de tirer un revenu des biens ou de l’entreprise ou de faire produire un revenu aux biens ou à l’entreprise;

18.(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

The plaintiff admitted at once that if he cannot be regarded as a contractor the expense is not eligible in view of his income for 1985.

Facts

The plaintiff explained that following his doctoral studies in the U.S. and post-doctoral studies in Europe, he had submitted a research project to several Quebec universities and had indicated his interest in coming to work in Quebec.

After various discussions the Lady Davis Institute for Medical Research of Sir Mortimer B. Davis, an institution attached to the Jewish General Hospital of Montréal, indicated that it was interested and, after various discussions and negotiations, Dr. Claude Côté agreed to join the research team at the Lady Davis Institute.

There are a number of researchers at this institute, each of whom has a research program for which they each receive funds from various Canadian and international research funds.

Each researcher is responsible for his research program and for administering the program, once he has been accepted by the grantor organization.

For 1985 Dr. Claude Côté had filed a grant application with the Medical Research Council of Canada on October 31, 1983.

For the grant application to be admissible it must be made in accordance with the Grants and Awards Guide, issued by the Medical Research Council of Canada.

It is essential for a researcher filing a grant application to show that he is associated with a research centre which can provide him the facilities and equipment necessary to carry out the research program.

For 1985 Dr. Claude Côté filed his grant application supported by Mr. Arche Deskin, executive director, and M.N. Kalant, M.D., both associated with the Lady Davis Institute for Medical Research of Sir Mortimer B. Davis and the Jewish General Hospital.

According to Dr. Côté’s testimony it appears that the institute only consists of researchers who meet from time to time to take decisions on software affecting the management of premises used by the institute.

The institute itself receives a grant of some $4-600,000 from the Quebec Fonds de recherche en santé, and this grant is used to pay the general fees of the institute and among other things the living expenses of one or more researchers who have no other means of support.

Of the other researchers who belong to the institute, some are professors in various universities, others receive grants from other sources to do their research and still others are paid through research contracts.

Dr. Côté received an amount which initially, in early 1980, was around $20,000 as living expenses, and this amount was some $40,000 for 1985.

For administration purposes, the grant [was] allocated to Dr. Côté’s research program, and according to the notice of grant sent to Dr. Claude Côté on June 4, 1984, [TRANSLATION] “this grant will be paid into the joint grant fund of the Council under the control of the treasurer of the institution where you are conducting your work, to cover your expenses as you authorize payments”.

Following the approval of each annual grant the expenses were authorized by Dr. Côté or his assistant at the time, Miss Boulet, who sent the authorizations to the Jewish Hospital purchasing department, and the latter was responsible for making payments in accordance with the authorizations given by Dr. Côté or his assistant, acting as such as trustee for the amounts paid by the Medical Research Council of Canada.

Dr. Côté testified that the research program he had supervised since 1980 was a business in itself, intended to produce intellectual property which could result in a capacity to market the biomedical products developed or generate economic spinoffs from the reputation of the project, presentation of the seminars and so on.

Dr. Côté testified clearly that he could not receive any pay as part of the grant made by the Medical Research Council of Canada for 1985, and his living expenses were paid for from the general funds of the institute, which received money from another source, namely the Quebec Fonds de recherche en santé.

Dr. Côté further testified that he had no hierarchical relationship with the Jewish Hospital and that the latter acted only as a trustee for the amounts paid by the Medical Research Council of Canada, and it was the Jewish Hospital which was responsible for making up cheques and sending them to suppliers for and on behalf of the researcher responsible for the research program.

Counsel for the defendant maintained that everything in the evidence tended to show that Dr. Côté was an employee of the hospital, that he was paid in this way, that s. 8(1)(b) and (2) of the Income Tax Act apply, and that the expense of $12,815.19 constituting the legal fees incurred by the plaintiff in an action for an injunction in the Quebec Superior Court to preserve his contract with the Lady Davis Institute and the Jewish General Hospital could not be allowed as an eligible expenditure within the meaning of s. 18( 1 )(a) of the Income Tax Act.

Law

Sestions 8(1)0) and (2) of the Income Tax Act state:

8(1)(b) Les sommes payées par le contribuable dans l’année à titre de frais judiciaires ou extrajudiciaires engagés par lui en recouvrement du traitement ou salaire qui lui est dû par son employeur ou son ancien employeur;

8(2) En dehors des déductions permises par le présent article, aucune autre déduction ne doit être faite lors du calcul du revenu d’un contribuable tiré, pour une année d’imposition, d’une charge ou d’un emploi.

8( 1 )(/?) 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;

8.(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.

Section 18( l)(n) of the Act for its part, states:

18.(1) Dans le calcul du revenu du contribuable, tiré d’une entreprise ou d’un bien, les éléments suivants ne sont pas déductibles:

(a) débours ou une dépense sauf dans la mesure où elle a été faite ou engagée par le contribuable en vue de tirer un revenu des biens ou de l’entreprise ou de faire produire un revenu aux biens ou à l’entreprise; 18.(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

Dr. Côté maintained that the expense of $12,815.19 incurred in the action for an injunction against the Institute and the Hospital, an action which was in fact successfully prosecuted, is an eligible expense since it ultimately enabled him to go ahead with his research program and proceed efficiently with the organization of his business, first temporarily at the Hôpital Ste-Justice and then at the University of Quebec at Montréal, so he could effectively pursue his research program in subsequent years.

In this sense the $12,815.19 expense is an eligible expense since it was made or incurred by the taxpayer for the purpose of gaining or producing income from a business or property.

It is not unusual for taxpayers to report income for a given taxation year from both money earned as salary and other income earned as business income.

Dr. Côté testified that the greater part of his time, especially in 1985 when problems arose with his associates, was taken up with developing and coordinating his research program.

This was a business although in 1985 the business produced no income for its owner, Dr. Côté.

There is no doubt in my mind that when Dr. Côté took the decision to institute an action for an injunction against the Jewish Hospital and the Lady Davis Institute, he did so in all good faith to ensure the continuity of his research program, namely his business.

As such his expense, which he incurred and which he also put to good use, was incurred if not to produce income from a business then surely to enable the business to earn income in accordance with the provisions of s. 18( 1 )(7z) of the Income Tax Act.

The expenses incurred in a business for the purpose of producing income from the said business are not always effective.

In the case at bar, although Dr. Côté’s business did not produce the expected income in 1985, it is clear that this type of business only expects to produce profits in the long term.

For example, if we look at large businesses in the pharmaceutical sector, research programs may last for more than ten years before a pharmaceutical product can be marketed, and money spent for research purposes throughout those ten years is regarded as expenses incurred by the taxpayer in order to gain or produce income from a business or a property.

For these Reasons:

• I allow the plaintiff’s action;

• I declare that the expense of $12,815.19 is an expense incurred by the taxpayer Claude Côté in order to produce income from his business;

• I direct the defendant to issue a reassessment for 1985 taking this expense into account;

• I order the defendant to pay the plaintiff costs which in the circumstances are set at the amount of $3,000.

Appeal allowed.