Bell T.C.J.:
1 The issues at the time of filing pleadings were threefold:1. Whether an allowable business investment loss was deductible by the Appellant in her 1990 taxation year,
2. Whether the Minister of National Revenue had properly included in her income for the 1990 taxation year, as employment income, the sum of $39,002.28, and
3. Whether certain legal expenses incurred by the Appellant were deductible in her 1990 taxation year.
Facts:
2 An Agreed Statement of Facts was filed. This was supplemented by the evidence of Peter Stefanyshyn, the Appellant's lawyer.
3 The Appellant was married to Harvey Kornberg (“Harvey”), and separated from him in 1987. She was a shareholder and officer or director of a number of corporations carrying on business in Manitoba, Saskatchewan and Minnesota. She did not exercise day-to-day control over the management of the corporations. Companies owned or controlled by Harvey were responsible for the management, direction and operation of the corporations. The Appellant's concerns about how the companies were being managed led her to take certain steps and commence certain legal proceedings.
Saskatchewan Proceedings:
4 The Appellant owned 50% of a Saskatchewan corporation involved in the development of a condominium project in Regina. She entered into a management contract with a company owned or controlled by Harvey. She became dissatisfied with the management because of failure to provide written quarterly reports, the refusal of Harvey's corporation to sign a form of renewal of an existing line of credit required by the financier, the failure to effect sales of the project in an appropriate manner, and the failure to devote sufficient time and effort to sales and management obligations. She terminated his management and Harvey's corporation commenced proceedings against her respecting breach of contract. She was required to retain counsel in Saskatchewan to defend the action and to have counsel in Winnipeg provide assistance.
Manitoba Proceedings:
5 The Appellant was a major shareholder, officer and director of a Manitoba corporation. It's affairs were managed by the same corporation described above. The Appellant became concerned about the same matters as in Saskatchewan and by special meeting of shareholders on May 8, 1990 Harvey and their son, Murray Kornberg, were removed as directors of the corporation leaving the Appellant as the sole director and officer. She then demanded production of the records. Several legal proceedings followed. Harvey was found in contempt of Court for failure to comply with an Order to produce for inspection and provide photocopies of all records dealing with the corporation's business affairs and financial position.
Minnesota Proceedings:
6 The Appellant and her sons were the shareholders of a Minnesota corporation. The Appellant was also an officer and director. Harvey, also a director and officer of the corporation had complete management control under a management contract dated September 30, 1986. On July 20, 1990 the Appellant instituted action against Harvey and other defendants demanding access to records and documents of the company and alleging Harvey's improper actions in his managerial capacity. She claimed that Harvey was mismanaging the corporation, misapplying or wasting its assets and engaging in conduct as manager which was fraudulent, illegal, negligent or unfairly prejudicial to the interests of the Appellant. She sought appropriate relief in this action.
7 The amount of legal fees in dispute appears to be in excess of $110,000. The court was advised that there were substantial other legal fees dealing with the family lawyer, divorce, maintenance et cetera. The legal fees under examination in this case did not include fees for matrimonial dispute services.
8 Stefanyshyn said that his law firm was of the opinion that the Appellant was entitled to receive money in respect of her shareholdings. The object of the legal actions was to rectify that situation. He stated that the only way to do so was to review the management records, look at the companies, and “get her a monthly income”.
9 Counsel for the Appellant, at the opening of the hearing, raised a procedural matter. He described the Respondent's position as being that even if the legal expenses were on account of income, the Respondent wanted to demonstrate that some amounts had not been paid in 1990 and were therefore not deductible in that year. It appears that the subsequent years in which they may have been paid were statute barred and would not be reassessed by the Respondent to allow any deductions.
10 Counsel submitted that the Respondent had not pleaded this matter and had made no motion to amend the Reply to the Notice of Appeal in this regard and was, therefore, not entitled to raise this matter. Respondent's counsel, who had posed questions on this matter at the Examination for Discovery, stated that he was not going to amend the Reply. I agreed with the Appellant and so ruled. In this regard, the Reply states that the Minister made, inter alia, certain assumptions of fact. One of those is that
...the Legal Expenses were incurred by the Appellant...
The word “incurred” is used in several other places in the Reply, the word “paid” not being found anywhere therein. I am proceeding on the basis that the legal expenses were incurred by the Appellant in 1990 for the purposes of determining whether they were deductible.11 It is noted that the Appellant did not give evidence. This can be dangerous where the onus is wholly on the Appellant to establish that the assessment appealed from is wrong and also because of the adverse inferences that can be drawn from such failure. Obviously, counsel chose to rely upon the brief evidence of her lawyer. Counsel for the Appellant submitted that the Appellant set out to assert her shareholder rights so that she could gain income to which she was entitled, namely, dividends. Accordingly, he said, she sought current financial information and incurred legal expenses in so doing. He set forth the following propositions and authority therefor:1. The tests to be applied in determining the deducibility of legal expenses are the same as those applicable to any other disbursements or expenses.[FN1: <p><em>Siscoe Gold Mines Ltd. v. Minister of National Revenue</em>, [1945] C.T.C. 397 (Can. Ex. Ct.).</p>]
2. What is “single money wholly and exclusively laid out for the purposes of the trade” is a question which must be determined upon the principles of ordinary commercial trading.[FN2: <p><em>Minister of National Revenue v. Dominion Natural Gas Co.</em>, [1940-41] C.T.C. 155quoting the Lord President in<em>Robert Addie & Sons (Collieries) Ltd. v. Inland Revenue Commrs.</em>, [1924] S.C. 231 (Scotland Ct. Sess.)at p. 235.</p>]
3. Were the expenses incurred for the purpose of preserving a capital asset?[FN3: <p><em>Farmers Mutual Petroleums Ltd. v. Minister of National Revenue</em>(1968), [1967] C.T.C. 396 (S.C.C.)and<em>Minister of National Revenuev. Dominion Natural Gas Co.</em>, [1940-1941] C.T.C. 155 (S.C.C.)</p>]
4. If legal expenses were expended for the purposes of obtaining payment of income, they were expenses of collecting income to which a person was entitled but the payment of which could not otherwise be obtained.[FN4: <p><em>Evans v. Minister of National Revenue</em>, [1960] C.T.C. 69 (S.C.C.).</p>]
12 Counsel submitted that the Appellant believed she was entitled to income, that Harvey was taking steps to prevent that and that the litigation was not for the purpose of establishing any new asset or producing any enduring benefit. She simply sought information. He submitted that she was not defending her title to the shares and that she was not winding up the company but was simply trying to obtain information - an incident of ownership. He said that her right to dividends was not a once and for all benefit but was ongoing.
13 Counsel for the Respondent submitted that there was no proof that any allegations of the Appellant against Harvey was made, that the actions established nothing and had as their purpose the resolution of matrimonial problems. He stated that the right to receive a dividend is a contingent right and that a dividend is owed to a shareholder only if a corporation declares one. He referred to authorities respecting payments that were made to preserve capital assets and not to gain income. He also said that the goal of receiving dividends was too remote from the expenditures made.
14 I, in reviewing all circumstances, have concluded that the Appellant should succeed and that the legal expenses incurred in connection with the events described in these Reasons are deductible for her 1990 taxation year. She did not commence actions to preserve the property from which she hoped to receive income, namely the shares of the company. They were already her property. There was no evidence that anyone else had a right to or interest in those shares. The Appellant took the steps outlined to obtain financial information about the corporations with the hope of obtaining income by way of dividends on the shares. The legal expenses under review were not incurred in respect of her matrimonial matters.
15 Subsection 18(1)(a) of the Income Tax Act states that
In computing the income of a taxpayer from a business or property no deduction shall be made in respect of ... 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.
16 In Royal Trust Co. v. Minister of National Revenue (1956), 57 D.T.C. 1055 (Can. Ex. Ct.)the learned President of the Exchequer Court of Canada, in a case discussing the deducibility of social club dues and initiation fees for executive and senior personnel, analyzed the meaning of section 12(1)(a) which was almost identical to the present subsection 18(1)(a). It contained the words
No deduction shall be made in respect of
Although the Court was examining a situation in which business, not property, was involved, the principles are the same. At page 1061, the Court said,It is not necessary that the outlay or expense should have resulted in income. In Consolidated Textiles Limited v. Minister of National Revenue... 3 DTC 958 at 960 I expressed the opinion that it was not a condition of the deducibility of a disbursement or expense that it should result in any particular income or that any income should be traceable to it and that it was never necessary to show a causal connection between an expenditure or a receipt.
At page 1062, the Court said,The essential limitation in the exception expressed in section 12(1)(a) is that the outlay or expense should have been made by the taxpayer “for the purpose of gaining or producing income from the business”. It is the purpose of the outlay or expense that is emphasized but the purpose must be that of gaining or producing income “from the business” in which the taxpayer is engaged. If these conditions are met the fact that there may be no resulting income does not prevent the deducibility of the amount of the outlay or expense. Thus, in a case under the Income Tax Act if an outlay or expense is made or incurred by a taxpayer in accordance with the principles of commercial trading or accepted business practice and it is made or incurred for the purpose of gaining or producing income from his business, its amount is deductible for income tax purposes.
17 In coming to my conclusion I have kept in mind the words of Lord Pearce of the Privy Council, B.P. Australia Ltd. v. Commissioner of Taxation of Australia (1965), [1966] A.C. 224 (Australia P.C.)in referring to the matter of determining whether an expenditure was of a capital or an income nature, namely,
The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the others. One consideration may point so clearly that it dominates other and vaguer indications in a contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer.
18 For the above reasons, the appeal is allowed with costs.
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