BETWEEN:
and
Heard at Vancouver, British Columbia, on October 24, 2006.
Judgment delivered at Vancouver, British Columbia, on October 26, 2006.
REASONS FOR JUDGMENT BY: NOËL J.A.
CONCURRED IN BY: EVANS. J.A.
MALONE J.A.
Docket: A-617-05
Citation: 2006 FCA 348
CORAM: NOËL J.A.
EVANS J.A.
MALONE J.A.
BETWEEN:
NEVIO CIMOLAI
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
[1] This is an appeal from a decision of Rip J. of the Tax Court of Canada (as he then was) (the judgment is reported at [2006] 1 C.T.C. 2410) allowing in part the appellant’s appeal with respect to his 2001 taxation year. At issue before the Tax Court Judge was whether legal expenses incurred by the appellant in respect of two legal proceedings were deductible in computing his income for that year.
[2] The first proceeding is directed against the hospital which employed him. In it, the appellant seeks to quash a decision suspending him from his employment and lost benefits. The second proceeding is directed against the appellant’s former colleagues at the hospital whom he sues for defamation.
[3] On or about January 26, 2005, the Minister of National Revenue (the “Minister”) agreed that, subject to the relevant invoices being produced, the appellant could deduct the amount of $48,319 paid with respect to the proceeding against the hospital on the basis that this expenditure served to establish his right to a salary pursuant to paragraph 8(1)(b) of the Income Tax Act (the “Act”). However, the Minister maintained the view that the appellant could not deduct the remaining amount spent towards the defamation action ($26,556.53).
[4] By his decision, the Tax Court Judge gave effect to the Minister’s concession concerning the $48,319 and confirmed the reassessment insofar as the remaining portion of the legal fees is concerned. He held that these amounts could not be deducted under 8(1)(b) of the Act since the underlying legal action was not aimed at collecting or establishing a right to a salary.
[5] While the Tax Court Judge did not expressly address, in his Reasons, the issue of whether these amounts could be deducted as a business expense pursuant to paragraph 18(1)(a), he repeatedly stated during the hearing that the expenses directed to the defamation action were capital in nature and as such, outside the purview of that provision.
[6] By way of a separate decision as to costs rendered January 4, 2006, the Tax Court Judge held that the appellant was liable to 50 percent of the costs up to January 26, 2005 and all costs thereafter. In reaching this conclusion the Tax Court Judge found that the appellant was “in no small part” responsible for the delay leading to the Minister’s concession with respect to the first proceeding and that this concession had effectively been made on January 26, 2005. The Tax Court Judge held that from that point on costs would follow the event.
[7] The appellant has appealed both the decision denying the deduction of his legal fees and the decision as to costs.
Decision
[8] This appeal cannot succeed. The extended definition of “business” under the Act does not mean that the practice of profession can be equated to a business at all times. A professional can render his or her services either as an employee or as an independent contractor.
[9] In this case, the Tax Court Judge found that the appellant’s status at the hospital was that of an employee (Reasons, para. 13). He explained during the proceedings that the services rendered by the appellant for the hospital could not, at once, be said to be rendered as an employee and as an independent contractor (Appeal Book, p. 142 to 145). As the defamation action was not directed against the hospital, it could not possibly relate to a salary from the hospital or a right thereto (Reasons, para. 13). According to the Tax Court Judge, this was sufficient to dispose of any claim that the legal expenditures were deductible pursuant to paragraph 8(1)(b).
[10] The appellant contends that the Tax Court Judge failed to take into account the fact that, beyond his work at the hospital, he was also self-employed. According to the appellant, the legal expenses relating to the defamation action were also incurred to earn income from these independent activities. As such they are deductible pursuant to paragraph 18(1)(a).
[11] The record with respect to the appellant’s independent activities during the year in issue is rather scarce. With respect to his professorship at the University of British Columbia, the evidence shows that the University transferred funds to the hospital which accounted for 15 percent of the appellant’s employment earnings. It therefore does appear as the Tax Court Judge found at paragraph 3 of his Reasons that the appellant’s lecturing activities were part of his employment.
[12] With respect to the appellant’s medical practice, he did testify that he began working at a medical clinic, as a general practitioner, in December of 2001. However, while expenses in the amount of $3,923 with respect to his general practice are claimed in the tax return filed for that year, no income is declared. In the result, a net loss of $3,923 is reported.
[13] The other source of income reflected in his return for the 2001 taxation year is derived from the authorship of medical text books. The appellant reported income in the amount of $3,912 from that source but this income was fully offset by the above noted loss from his medical practice.
[14] As can be seen, the income earning activities capable of supporting a deduction under paragraph 18(1)(a) were very limited.
[15] However, the Tax Court Judge did not have to delve into this issue since it is clear from the evidence that the purpose of the expenditures was to preserve the appellant’s professional reputation. As the Tax Court Judge explained during the hearing, legal expenditures made to protect one’s professional reputation and hence one’s capacity for future earnings are by definition capital in nature. Just as the damages which could result from this type of proceeding are prima facie not taxable, the amounts expended to obtain these damages are not deductible (Appeal Book, pages 98 to 102 and 112, 113).
[16] I can detect no error in the decision denying the deduction of legal expenses incurred in the prosecution of the action of defamation.
[17] With respect to costs, the Tax Court Judge concluded that the appellant bears equal responsibility for the delay leading to the Crown’s concession. In so holding, he relied on the fact that the appellant refused to provide the particulars which would have allowed for the earlier resolution of the issue and therefore, was partially responsible for the delay in settling the matter (Second set of Reasons, paras. 7 to 14). As there was evidence to support that finding it cannot be interfered with.
[18] With respect to the costs incurred after January 26, 2005, the Tax Court Judge followed the rule that costs generally follow the event. Again no error can be said to arise in this regard.
[19] I would dismiss the appeal with costs.
“I agree.
John M. Evans, J.A.”
“I agree.
B. Malone, J.A.”
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-617-05
STYLE OF CAUSE: Nevio Cimolai v. Her Majesty The Queen
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: October 24, 2006
REASONS FOR JUDGMENT OF THE COURT: Noël, J.A.
Evans, J.A.
Malone, J.A.
REASONS FOR JUDGMENT: Noël, J.A.
APPEARANCES:
Nevio Cimolai ON HIS OWN BEHALF
Susan Wong FOR THE RESPONDENT
SOLICITORS OF RECORD:
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John H. Sims, Q.C Deputy Attorney General of Canada |