Doré v. R., [1999] 2 CTC 2701

Tardif T.C.J.:

The appellant has appealed under the informal procedure from the assessment made by the Minister of National Revenue (the “Minister”) for the 1993 taxation year.

The issue is whether the appellant was entitled to deduct $11,780, corresponding to the amount he was required to pay to the Commission des normes du travail, and $2,553.93 paid as professional fees; these expenses were incurred in order to respond to proceedings initiated by the Commission des normes du travail and to cover his share of the vacation pay claimed by employees of the company “Les Chaussures Faber Inc.” of which he was a director.

The statutory provisions on which the respondent relied in support of the assessment being appealed are sections 3 and 38, subsections 39(3), 39(12), SO(1) and 248(1) and paragraphs 18(1)(a), 18(1)(b), 18( 1 )(/t), 39(1)(c) and 40(2)(g) of the Income Tax Act (the “Act”), as amended and applicable for the 1993 taxation year.

Facts

The appellant was a director of the company “Les Chaussures Faber Inc.”. When the company went bankrupt on May 30, 1991, he held one per cent of the company’s shares. At the time of the bankruptcy, the company owed its employees a significant amount in unpaid vacation pay.

As it was authorized to do under the Act, the Commission des normes du travail initiated legal action on behalf of the employees against the company’s directors, including the appellant.

Asa result of the legal action, an out-of-court settlement was reached; it was agreed that the directors of “Les Chaussures Faber Inc.” would pay a total of $58,900 in the form of individual contributions of $11,780 by each director, including the appellant. In addition to this amount, the appellant had to pay $2,553.93 in legal fees.

The following question arises from these facts: was the appellant entitled to deduct these two expenses ($11,780, representing his share of the settlement, and $2,553.93 in legal fees) from his income for the 1993 taxation year?

In order to answer this question, the nature and definition of these expenses must be determined; were they expenses made and incurred for the purpose of gaining or producing income from a business or property?

The expenses which the appellant wanted to deduct from his income for the 1993 taxation year are not in any way related to an operation the purpose of which is to gain income from a property or business. These expenses arose essentially from the fact that he was a director.

These expenses were imposed on the appellant; he had no discretion or freedom to incur them. They were required as a result of the application of a legislative provision with respect to the liability or obligation of the directors of a company to its employees. I do not see how these expenses could be related to any activity likely to generate potential income.

In this instance, although the appellant held one per cent of the shares in the company “Les Chaussures Faber Inc.”, I do not believe that it is necessary to consider the payment in terms of his status as a shareholder, for the good and simple reason that he would not have been required to pay anything if he had been only a shareholder.

The payment was essentially an obligation arising from his office as a director of the company. As a director, the appellant should have known that he could be held liable for certain debts in the event of the company’s failure. Under subsection 248(1) of the Income Tax Act (the “Act”), the position of director is an office. Therefore, the payment made to the employees of “Les Chaussures Faber Inc.” is not among the deductions allowed in computing income from an office under section 8 of the Act. Accordingly, the payment is not deductible. As to the legal fees, these are related and incidental expenses, the nature of which must depend on the nature of the main expense.

His role and liability as a director of the company “Les Chaussures Faber Inc.” were not part of a business or commercial activity likely to generate income. As a result, the appellant was not entitled to deduct from his income the expenses resulting from compliance with the statutory obligations arising from his liability as a director.

For these reasons, the appeal must be dismissed.

Appeal dismissed.