CaseNotes For December, 2019

John A. Barrett v Her Majesty The Queen, 2019 TCC 34- by Cory Chan

Facts

Barrett was involved in three separate legal actions: a matrimonial dispute; a wrongful dismissal suit; and an oppression remedy action instituted by his former spouse against Barrett and two other corporations in which Barrett was a shareholder. Barrett claims that he paid $27,333 in legal fees in respect to the three legal actions. Barrett admitted that he had neither the invoices or documents concerning the legal fees nor the actual amounts that were incurred by him concerning the wrongful dismissal litigation. Barrett estimated the fees he incurred based upon 2 statement of accounts with limited details and for amounts in excess of those charges incurred. CRA's position is that Barrett is not entitled to deduct legal fees claimed pursuant to paragraph 8(1)(b) and/or subsection 60(o.1) of the Income Tax Act 1(the "Act") because: the claimed legal fees were not incurred to collect or establish a right to an amount owed to Barrett as an employee; or for a benefit under a pension fund or plan in respect of the employment of Barrett or a retiring allowance of Barrett. Issue

Is Barrett entitled to deduct legal fees in the amount of $27,333 in respect of his 2015 taxation year?

Decision

The appeal by Barrett was dismissed and it was concluded the legal fees were not deductible in their entirety.

Ratio

"Paragraph 8(1)(ba) of the Act provides that a taxpayer, in computing income from an office or from employment, may deduct legal expenses paid by a taxpayer in order to collect or to establish a right to any amount owed to the taxpayer that, if received by the taxpayer, would be required to be included in computing the taxpayer's income.

Similarly, subsection 60(o.1) of the Act allows for the deduction, in computing a taxpayer's income, of legal expenses paid by a taxpayer to collect a retiring allowance or a pension benefit to which they were entitled, up to the amount received. A retiring allowance is defined in subsection 248(1) of the Act to include an amount received on account of damages received in connection with the loss of employment."

Wrongful Dismissal Suit

Even though the wording of paragraph 8(1)(b) contemplates the deduction of legal expenses for the purposes of asserting a right to claim income from employment, "[t]he jurisprudence is clear that a taxpayer must produce documentary evidence in support of her or his assertion that legal fees were incurred and paid by the taxpayer or at the very least offer a cogent reason as to why the evidence was not available but on balance exists."

Matrimonial Dispute

Amounts paid in respect of a matrimonial litigation are not deductible unless they are incurred for the purposes of recovering a right to taxable income.

Oppression Remedy Action

If legal costs were incurred for the purposes of protecting a business interest, there must be evidence that the taxpayer carried on a business or that the claimed legal expenses were incurred for the purpose of gaining or producing income within the meaning of paragraph 18(1)(a) of the Act.

In addition, if the legal expenses were paid by a taxpayer in defending an action on the basis that the action was brought against a taxpayer as a director and not an employee, the legal expenses would not be deductible.

Takeaways

Barrett v Her Majesty the Queen shows (for the purposes of deducting legal expenses) the importance of evidencing and structuring settlements in respect to a dispute concerning employment status and income. If Barrett was able to put forth the argument and evidence to support that a portion of the legal expenses for all three actions relate to asserting a right to collect or to establish a right to any amount owed to Barrett (that would have been taxable income), then that portion of the fees would have been most likely found to be deductible.

1 The Income Tax Act, RSC 1985, c.1 (5th Supp.), as amended.

Wardlaw, A. v. The Queen, 2019 TCC 199- by Dallas Kleckner

Facts

In 2009, the Taxpayer attended the Mortgage Centre ("MC") to inquire about a mortgage. MC introduced the Taxpayer to Fiscal Arbitrators ("FA"), which he was told were specialists in tax return preparation and would help the Taxpayer obtain a large tax refund for a down payment on a house. The Taxpayer agreed to retain the services of FA. FA's...