[1] The applicant John Loo is appealing a judgment of the Tax Court of Canada that dismissed his appeal from reassessments under the Income Tax Act, R.S.C. 1985, c. 1 (5^th supp.) for 1999 and 2000: Loo v. Canada, [2003] 3 C.T.C. 2376, 2003 D.T.C. 585 (T.C.C.). The reassessments disallowed deductions for certain legal expenses paid by Mr. Loo in those years.

[2] Mr. Loo claims to be entitled to deduct legal expenses pursuant to paragraph 8(1)(b) of the Income Tax Act, which reads as follows:

8. (1) In computing a taxpayer's income for a taxation year from an office or employment, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto: [...]

8. (1) Sont déductibles dans le calcul du revenu d'un contribuable tiré, pour une année d'imposition, d'une charge ou d'un emploi ceux des éléments suivants qui se rapportent entièrement à cette source de revenus, ou la partie des éléments suivants qu'il est raisonnable de considérer comme s'y rapportant : [...]

(b) amounts paid by the taxpayer in the year as or on account of legal expenses incurred by the taxpayer to collect or establish a right to salary or wages owed to the taxpayer by the employer or former employer of the taxpayer [...].

b) les sommes payées par le contribuable au cours de l'année au titre des frais judiciaires ou extrajudiciaires qu'il a engagés pour recouvrer le traitement ou salaire qui lui est dû par son employeur ou ancien employeur ou pour établir un droit à ceux-ci [...].

[3] Mr. Loo is one of fifty-five lawyers employed in British Columbia by the federal Department of Justice who are suing their employer in the British Columbia Supreme Court. The factual allegation underlying their claim is that they are paid a lower salary than other lawyers in at the same classification level who work for the federal Department of Justice in Toronto. They claim, on the basis of a number of legal arguments, that the terms and conditions of their employment give them a legal right to be paid the same salary as the lawyers in Toronto.

[4] In dismissing Mr. Loo's income tax appeal, the Judge held that paragraph 8(1)(b) of the Income Tax Act does not apply because Mr. Loo has received the salary set out in his own contract of employment. I must respectfully disagree with that conclusion because, in my view, it is based on a misinterpretation of paragraph 8(1)(b).

[5] Paragraph 8(1)(b) requires a determination as to the purpose for which legal expenses were incurred. If the legal expenses were incurred in pursuing a claim that falls within the words of paragraph 8(1)(b), the expenses are deductible. It is not necessary or relevant to determine whether the claim is well founded in law, or is likely to succeed.

[6] Central to paragraph 8(1)(b) is the notion of salary or wages "owed". The New Oxford Dictionary of English (1998, Clarendon Press, Oxford) defines "owe" as follows:

... have an obligation to pay or repay (something, especially money) in return for something received.

Generally, an obligation to pay salary or wages is determined by the terms and conditions of a contract of employment. The contract will stipulate the services to be performed and the amount of salary or wages payable for those services. Salary or wages are "owed" to the employee when the services have been performed.

[7] Paragraph 8(1)(b) has two branches. The first branch permits a deduction for legal expenses incurred in an action to collect salary or wages owed. It contemplates litigation resulting from the failure of an employer to pay the salary or wages due to an employee. In such a case, there may be no dispute as to the amount of salary or wages that the employee is entitled to be paid for the services the employee has performed, but there may be a factual dispute as to how much of the salary or wages remains unpaid.

[8] The second branch of paragraph 8(1)(b) contemplates a situation in which the matter in controversy is the legal entitlement to the salary claimed. The second branch applies if, for example, an individual incurs legal expenses in litigating a factual dispute as to whether he or she has actually performed the services required by the contract of employment, or a dispute as to the rate of salary payable for services performed. That would include, for example, a dispute as to the term and conditions of employment.

[9] It is common ground that in this case Mr. Loo has performed services for his employer, and that he has been paid some salary for those services. But he has been paid at the rate that his employer alleges is payable, not at the rate that Mr. Loo alleges is payable. The heart of the litigation is the dispute between Mr. Loo and his employer as to the terms and conditions of Mr. Loo's employment relating to the applicable salary. Mr. Loo's claim may or may not be well founded in law, and it may or may not succeed. But his claim, regardless of its merits, falls squarely within the words of paragraph 8(1)(b) because Mr. Loo is trying to establish by litigation that, for the services he has rendered to his employer, the law requires that he be paid more than he has been paid. It follows that Mr. Loo is entitled to deduct the legal fees he has claimed.

[10] The facts in this case are unlike the facts in Jazairi v. Canada, [2001] 2 C.T.C. 28, 2001 D.T.C. 5163 (F.C.A.). In that case, legal fees were held not to be deductible if they were incurred to establish a right to a promotion which commanded a higher salary. The essence of the claim of the applicant in that case was that he should have been moved to a higher level in his professional hierarchy. Other cases in which the claim was really a claim for a promotion resulted in the disallowance of claims under paragraph 8(1)(b): see, for example, Turner-Lienaux v. Canada, [1997] 2 C.T.C. 344, 97 D.T.C. 5294 (F.C.A.). Mr. Loo is not claiming that he is entitled to be moved to Toronto so that he can earn a higher salary.

[11] A deduction under paragraph 8(1)(b) has also been denied where the legal fees are incurred to fight or reverse a judicial or regulatory decision that adversely affects the claimant's employment or professional status (Blagdon v. Attorney General of Canada, [2003] 4 C.T.C. 107, 2003 D.T.C. 5491 (F.C.A.)), or where the claimant is seeking financial compensation in connection with allegations of unlawful or wrongful acts by an employer (Guenette v. Canada, 2004 D.T.C. 2276, Fortin v. Canada, [2002] 4 C.T.C. 2245). In none of those cases can it be said that the claimant was alleging, as in this case, an underpayment of salary for work done.

[12] I would allow this appeal with costs.

(s) "K. Sharlow"

J.A.

"I agree

Gilles Létourneau J.A."

"I agree

B. Malone J.A."

FEDERAL COURT OF APPEAL

NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET: A-206-03

STYLE OF CAUSE: JOHN LOO and HER MAJESTY THE QUEEN

PLACE OF HEARING: Vancouver, B.C.

DATE OF HEARING: June 22, 2004

REASONS FOR JUDGMENT : SHARLOW J.A.

CONCURRED IN BY: LÉTOURNEAU J.A.

MALONE J.A.

DATED: June 29, 2004

APPEARANCES:

Max Weder FOR THE APPLICANT

R. Scott McDougall FOR THE RESPONDENT

SOLICITORS OF RECORD:

Borden Ladner Gervais LLP FOR THE APPLICANT

Barristers and Solicitors

Vancouver, B.C.

Department of Justice Canada FOR THE RESPONDENT

Edmonton, Alberta

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