Docket: 2003-842(IT)I

BETWEEN:

ESTATE OF DAVID CURRIE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on July 24, 2003, at Edmonton, Alberta, by

by the Honourable Justice A.A. Sarchuk
Appearances:
Agent for the Appellant:	Rob Salmon
Counsel for the Respondent:	Galina Bining

____________________________________________________________________

JUDGMENT

          The appeal from the assessment of tax made under the Income Tax Act for the 2000 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that in computing income, the Appellant is entitled to deduct the amount of $2,265.18 as management fees.

Signed at Ottawa, Canada, this 5th day of February, 2004.

"A.A. Sarchuk"

Sarchuk J.

Citation: 2004TCC125

Date: 20040205

Docket: 2003-842(IT)I

BETWEEN:

ESTATE OF DAVID CURRIE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Sarchuk J.

[1]      The administrator of the Estate of David Currie, Rob Salmon, filed a T3 Trust Return for the Appellant in March 2001. In computing income for the 2000 taxation year, it claimed outlays and expenses totalling $23,877.18 as follows:

On the disposition of land (the "Land Costs")	$18,367.06
On the rental statement (the "Rental Costs")	5,510.12
Total Outlays and Expenses	$23,877.18

By means of a Notice of Reassessment dated June 20, 2002, the Minister of National Revenue disallowed the Appellant's claims for Land Costs and Rental Costs in the 2000 taxation year.

[2]      Rob Salmon, was the sole witness on behalf of the Appellant. The facts are somewhat unusual with the commencement point occurring in 1955 when David Currie died in Toronto. At the time of his death, Currie was a farmer in Orangeville, Ontario. His estate was left to his two cousins, Douglas Craw and Faith Challacombe. It was gathered up and distributed to the beneficiaries but his executor was unaware of the fact that a quarter section of land located in Saskatchewan was owned by Currie and as a result, it was not conveyed to his beneficiaries. Faith Challacombe passed away on December 30, 1977. Her estate was left equally to her husband and three children. In 1992, Douglas Craw died and his entire estate was left to his wife, Barbara Craw.

[3]      Lexxor Energy Inc. held a petroleum and natural gas lease on the Currie property in Saskatchewan. In 1997, when Lexxor decided to drill on the land, a title search disclosed his ownership but efforts to locate him failed. Information was obtained that an individual named Honeker had been looking after the Currie farm for many years. Upon contacting him, Lexxor learned that the Honaker family had a lease agreement with Currie and that the latter was now believed to have passed away. Notwithstanding that fact, Honeker had continued to pay the municipal taxes and farm the land. The issue was discussed by Lexxor with the Saskatchewan Surface Rights Arbitration Board which suggested that Lexxor contact T.D. Howes in Toronto who carried on a genealogy and probate business. Howes was able to determine that Currie died in 1955 and left his estate to two cousins who in turn had died and left their estates to family members. In 1997, Howes located Barbara Craw and the Challacombe family. He communicated with Salmon on September 17, 1997 and subsequently, Barbara Craw entered into an agreement with Howes[1] which provided as follows:

            In consideration of the fact that Howes has, at its own risk and expense, undertaken the research to locate these assets and has located me, and

In consideration of the fact that Howes will inform me of the exact nature, extent and whereabouts of these assets and will make every reasonable effort to have these assets transferred to me, I wish to make an Irrevocable Assignment to Howes of 1/3 plus GST of the net value of the assets if and when I collect them.

You, the Holder, are to pay Howes' 1/3 fee plus GST directly to it, as instructed, when the 2/3 (less GST) is distributed to me and not before.

I understand that the Holder of these assets has not been able to communicate with me. Further, that the subject assets are not any to which I have ever exercised any rights of ownership.

I will assist Howes in obtaining proof of my identity and will execute the necessary affidavits concerning same. All expenses of proving my entitlement and of collecting my share of these assets are to be advanced and paid by Howes. If I receive nothing, I owe nothing and I will be under no obligation to Howes for any expense that it has incurred or for any obligation that it has assumed or for any service that it has rendered. My only obligation will be the payment of Howes' 1/3 fee plus GST from the net proceeds.

This agreement and every covenant, provision and term herein contained shall be binding upon the parties and each of the parties respective heirs, executors and administrators.

This agreement was executed on March 7, 1998 by Barbara Craw.[2] According to Salmon, two further steps were taken at this time. First, Howes retained Craig Lothian, a Regina solicitor, to establish the Craw's and Challacombes' title to the property. Second, Barbara Craw passed away on August 18, 1998 and her estate was left to her son and daughter. Salmon was named executor of her estate. Subsequent to that, the Challacombes and Howes agreed that Salmon also be appointed administrator of the David Currie Estate and that he was to enter a surface lease agreement with Lexxor and seek a purchaser for the land. In March 2000, Letters of Administration were received and title to the land in issue was transferred to Salmon. As administrator, he executed the surface lease agreement with Lexxor and the latter made lease payments to the Estate totalling $12,000 that were deposited in a trust account. He paid all property taxes on the land, sought a purchaser for the property and ultimately, negotiated its sale for $40,000 which transaction was completed on September 28, 2000.

[4]      In computing income for the 2000 taxation year, the Appellant claimed outlays and expenses totalling $23,877.18 as follows:[3]

On the disposition of the land (the "Land Costs")	$18,367.06
On the rental statement (the "Rental Costs")	5,510.12
Total Outlays and Expenses	$23,877.18

It is not disputed that as administrator of the Currie Estate, Salmon allocated the management and administration fees on an arbitrary basis. To assist the Court, he prepared and filed a document setting out the calculations he made.[4] The relevant portions of this document are:

		Land Sale	Surface Lease	Total
Receipts		40,402.60	12,000.00	52,402.60
Less reimbursement of property taxes		-402.60		-402.60
		40,000.00	12,000.00	52,000.00
Less fees related to receipt of lease income and the sale of land Legal Fees
Gerrand Rath Johnson	2,620.91
Gerrand Rath Johnson	573.30
Gerrand Rath Johnson	458.00
McDougall, Ready	1,663.56
Administrator's fees	4,500.00
Total	9,815.77
Allocation to Land Sale
$9,815.77 x $40,000/$52,000	-7,550.59	-7,550.59		-7,550.59
Allocation to Surface Lease
$9,815.77 x $12,000/$52,000	-2,265.18		-2,265.18	2,265.18
	-9,815.77
Net receipts before payment to Howes		32,449.41	9,734.82	42,184.23
Payment to TD Howes
$42,184.23 x 1/3	14,061.41
Allocation to Land Sale
$14,061.44 x $40,000/$52,000	10,816.47	-10,816.47		------10,816.47
Allocation to Surface Lease
$14,061.44 x $12,000/$52,000	3,244.94		-3,244.94	-3,244.94
	14,061.41
Net Receipts		21,632.94	6,489.88	28,122.82

Appellant's Position

[5]      Mr. Salmon argued that the return for the Estate as filed was correct in that the legal and accounting fees were deductible to the extent that they were incurred for the purpose of gaining or producing income from a business or property (i.e. the rental of the property) and second, that legal expenses, the finder's fee and administrative costs were incurred for the purpose of bringing a capital property into existence or for preserving and protecting capital property or are expenditures on account of capital. He went on to say:

... that the facts support our contention that 100 per cent of the fees incurred relating to either the gaining or producing income from the surface rental agreement, in which the fees are 100 per cent deductible; or secondly, that the fees were incurred to acquire and dispose of capital property, in which case they should be added to the cost base of the land.

Respondent's Position

[6]      The Respondent's position was set out by counsel as follows:

(a)       The payment of $14,061.41 to Howes is not deductible since the liability for that expense was not incurred by the Appellant.

(b)      With respect to the "surface lease administration" costs

(i)       the account of Gerrand Rath Johnson in the amount of $573.30 was adequately supported and is not disputed; and

(ii)       based on the formula used by the Appellant, administration fees of $1,038.46 should be allowed.

(c)      With respect to the balance of the legal and administrative fees counsel argued that there was insufficient evidence to permit their deduction. The only information presented described the costs as relating to "interim estate account, land matters, final account and final estate account". The Respondent's position is that costs related to "land matters" were properly established but no evidence has been placed before the Court to suggest that the remainder of the costs had anything to do with matters other than estate administration.

Conclusion

[7]      I propose to first deal with the finder's fee of $14,061.41 paid to T.D. Howes. Salmon argued that had this expense not been incurred, the beneficiaries would never have earned the lease income and would never have had the capital gain. He argued it was "normal commercial practice to deduct finder's fees to the extent that they relate to the earning of income, or alternatively --- that they should be added to the cost base of the property for which they are paid in respect of". That may be so but this submission has little relevance in the particular circumstances of this case. Here, the parties to the contract were Howes and Barbara Craw. In Howes' letter to Salmon dated September 17, 1997,[5] he wrote:

I wish to propose an Agreement whereby our company will perform all work necessary to enable Barbara Craw to claim her portion of the asset in question. We will do the research and provide the documentation necessary to prove that she is an heir to the asset. There will be absolutely no costs incurred by her. If she is unable to claim the asset, nothing is owed to our company. We only receive payment at the time which the asset is received by the beneficiary. I have enclosed a copy of our standard Agreement for you and Mrs. Craw to consider. I will be pleased to discuss it with you or your lawyer. If you and Mrs. Craw are satisfied with the terms of the Agreement, please have her sign it and send it back to our office in the enclosed envelope.

This document and the agreement executed by Howes and Craw clearly established that the Estate of David Currie was not a party to this arrangement and, therefore, was not liable for the payment of the fee. Accordingly, the amount of $14,061.41 is not deductible as an expense of the Appellant.

[8]      With respect to the costs allocated by the Appellant to the "surface lease", the Respondent conceded that the account for legal fees by Gerrand Rath Johnson in the amount of $573.30 and administration fees of $1,038.46 should be allowed. The balance of the amount claimed being $653.42 was, according to the Respondent, inadequately documented. While that may be so, it is not difficult to conclude that of the remaining approximately $4,700 in legal fees, at least a portion thereof was incurred in the management of the surface lease. Thus, notwithstanding the absence of detail, it would not be inappropriate to permit the deduction of an additional $653.42 to bring the full amount under this head to $2,265.18 as claimed.

[9]      The remaining issue is whether legal fees in the amounts of $2,620.91, $458, and $1,633.56 as well as the balance of the administrator's fees have been properly established as expenses incurred on the disposition of the land. The provisions of subsection 40(1) provide that any outlay or expense, including items such as legal or accounting fees, incurred for the purpose of making the disposition of a property may be added to the adjusted cost base of the property in calculating the amount of the capital gain, capital loss, terminal loss or business investment loss, as the case may be, arising from the disposition. Counsel for the Minister quite properly noted that the circumstances in this case necessitated that a second administration of David Currie's estate had to be undertaken and that was the reason why Salmon was appointed administrator and a portion of the legal fees must have been incurred in this context. There is no evidence before the Court from which one could reasonably determine the extent to which the expenses related to the acquisition and the taking possession of the property of David Currie, the obtaining of letters of administration, the distribution of the assets to the legal heirs, etc. While some of the expenditures incurred might properly come within the purview of subsection 40(1) of the Act, the evidence before the Court falls far short of providing the information necessary to enable the Court to determine which expenses or a portion thereof fall within the context of that subsection. Absent such evidence, the Appellant's claim with respect to these expenses must be dismissed.

[10]     The appeal is allowed and the Appellant is entitled to deduct the amount of $2,265.18 as management fees. The Appellant is not entitled to any further relief.

Signed at Ottawa, Canada, this 5th day of February, 2004.

"A.A. Sarchuk"

Sarchuk J.

CITATION:

2004TCC125

COURT FILE NO.:

2003-842(IT)I

STYLE OF CAUSE:

Estate of David Currie and Her Majesty the Queen

PLACE OF HEARING:

Edmonton, Alberta

DATE OF HEARING:

July 24, 2003

REASONS FOR JUDGMENT BY:

The Honourable Justice A.A. Sarchuk

DATE OF JUDGMENT:

February 5, 2004

APPEARANCES:

Agent for the Appellant:

Rob Salmon

Counsel for the Respondent:

Galina Bining

COUNSEL OF RECORD:

For the Appellant:

Name:

N/A

Firm:

N/A

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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