Tax Court of Canada Judgments

Docket: 2003-1869(IT)I

BETWEEN:

JOHN P. GUENETTE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on October 23, 2003, at Ottawa, Ontario

Before: The Honourable Justice Lucie Lamarre
Appearances:
For the Appellant:	The Appellant himself
Counsel for the Respondent:	Justine Malone

____________________________________________________________________

JUDGMENT

          The appeal from the assessment made under the Income Tax Act for the 2000 taxation year is dismissed.

Signed at Ottawa, Canada, this 12th day of February 2004.

"Lucie Lamarre"

Lamarre, J.

Citation: 2004TCC111

Date: 20040212

Docket: 2003-1869(IT)I

BETWEEN:

JOHN P. GUENETTE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Lamarre, J.

[1]      This is an appeal under the informal procedure from an assessment made by the Minister of National Revenue ("Minister") under the Income Tax Act ("Act") for the appellant's 2000 taxation year. In computing his income for that year, the appellant claimed as a deduction legal fees in the amount of $33,352. In disallowing the deduction, the Minister relied on the following facts stated in paragraph 7 of the Reply to the Notice of Appeal ("Reply"):

a)      during the 1996 taxation year, the Appellant was a civil servant employed by the Government of Canada (the "Employer"); admitted

b)      in 1996, the Appellant initiated a request to the Public Service Commission concerning alleged misconduct on the part of [the] Employer and other concerns of the Appellant; admitted

c)      in 1998, the Appellant and Joanna Gualtieri (the "Co-plaintiffs") commenced a lawsuit against the Employer; admitted

d)      the lawsuit referred to in subparagraph 7(c) herein asked for an award for damages including past and present salary and lost pension benefits as a result of, among other things, misconduct, harassment and abuse of authority on the part of the Employer; admitted

e)      in late 1999, the Appellant commenced to receive "Employment Insurance Benefits" from "Sun Life Assurance Company of Canada" (the "Insurer") and received gross amounts of $12,298.00 in 1999 and $89,894.00 in 2000; admitted

f)       the Co-plaintiffs engaged counsel with respect to the legal proceedings brought against the Employer as stated in the attached Schedule "A";

g)      the Appellant has not demonstrated that he has been successful in court in establishing that an amount of salary or wages was owed to him by the Employer;

h)      the amount of "Employment Insurance Benefits" as referred to in paragraph 6(e) herein was paid to the Appellant by the Insurer and not the Employer; and

i)       the Appellant has not shown that he incurred legal expenses of $33,352.00 as claimed by him in computing income for the 2000 taxation year.

[2]      Schedule A filed with the Reply and referred to in subparagraph 7f) above is not reproduced herein because it states the amount of legal expenses incurred by the appellant in 2000 and counsel for the respondent conceded during her cross-examination of him at trial that the appellant did in fact establish that he paid an amount of $33,352 in legal fees in 2000, contrary to what is stated in subparagraph 7i) of the Reply (see page 53 of the transcript).

[3]      With respect to subparagraph 7g) above, the appellant testified that the claim filed before the Ontario Superior Court of Justice has not yet been heard on the merits. Counsel for the respondent concedes, however, that as long as the appellant shows that his claim is for the purpose of collecting, or establishing a right to, salary or wages owed to him by the employer, he does not need to be successful in his litigation in order for him to be able to deduct legal fees pursuant to paragraph 8(1)(b) of the Act. In that regard, counsel for the respondent accepts the decisions in Loo v. R., 2003 CarswellNat 887 (T.C.C.), and Fortin v. R., 2001 CarswellNat 3309 (T.C.C.) (see page 90 of the transcript).

[4]      The respondent contends, however, that the legal fees in question were incurred to establish a right to damages, and thus are not deductible under either paragraph 8(1)(b) or paragraph 60(o.1) of the Act, which are provisions dealing with the deduction of legal fees. Those provisions read as follows for the taxation year at issue:

Section 8: Deductions allowed.

(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:

. . .

48(1)(b)3

(b)         Legal expenses of employee - 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.

Section 60: Other deductions.

            There may be deducted in computing a taxpayer's income for a taxation year such of the following amounts as are applicable:

. . .

460(o.1)3

60(o.1) - Legal expenses - the amount, if any, by which the lesser of

(i)          the total of all legal expenses (other than those relating to a division or settlement of property arising out of, or on a breakdown of, a marriage) paid by the taxpayer in the year or in any of the 7 preceding taxation years to collect or establish a right to an amount of

            (A) a benefit under a pension fund or plan (other than a benefit under the Canada Pension Plan or a provincial pension plan as defined in section 3 of the Act) in respect of the employment of the taxpayer or a deceased individual of whom the taxpayer was a dependant, relation or legal representative, or

            (B) a retiring allowance of the taxpayer or a deceased individual of whom the taxpayer was a dependant, relation or legal representative, and

(ii)         the amount, if any, by which the total of all amounts each of which is

            (A) an amount described in clause (i)(A) or (B)

            (I)         that is received after 1985,

(II)        in respect of which legal expenses described in subparagraph (i) were paid. and

(III)       that is included in computing the income of the taxpayer for the year or a preceding taxation year, or

(B) an amount included in computing the income of the taxpayer under paragraph 56(1)(l.1) for the year or a preceding taxation year,

exceeds the total of all amounts each of which is an amount deducted under paragraph (j), (j.01), (j.1) or (j.2) in computing the income of the taxpayer for the year or a preceding taxation year, to the extent that the amount may reasonably be considered to have been deductible as a consequence of the receipt of an amount referred to in clause (A),

exceeds

(iii)        the portion of the total described in subparagraph (i) in respect of the taxpayer that may reasonably be considered to have been deductible under this paragraph in computing the income of the taxpayer for a preceding taxation year.

[5]      The expression "retiring allowance" is defined in subsection 248(1) as follows:

"retiring allowance" means an amount (other than a superannuation or pension benefit, an amount received as a consequence of the death of an employee or a benefit described in subparagraph 6(1)(a)(iv)) received

(a)         on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service, or

(b)         in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal,

by the taxpayer or, after the taxpayer's death, by a dependant or a relation of the taxpayer or by the legal representative of the taxpayer.

Issue

[6]      The issue is whether the legal fees claimed by the appellant were incurred to collect, or establish a right to, salary or wages owed to him by the employer, or to collect, or establish a right to, a benefit under a pension fund or plan in respect of his employment, or to collect, or establish a right to, a retiring allowance.

Facts

[7]      According to the appellant's testimony and the reasons for judgment delivered by the Ontario Superior Court of Justice and the Court of Appeal for Ontario on a motion for summary judgment (Exhibit R-4), the appellant's background can be summarized as follows. The appellant is an employee of the Department of Foreign Affairs and International Trade. He commenced his employment with that Department's Bureau of Physical Resources in 1982. He occupied various positions from that time until April of 1998 when he was granted leave pursuant to a Treasury Board directive. In early 1996, the appellant had filed with the Investigations Directorate of the Public Service Commission ("PSC") a complaint of harassment and abuse of authority against two of his supervisors. The PSC investigation resulted in a finding that the complaints against one supervisor were not substantiated while those against the other supervisor were substantiated in part. Thereafter, in June 1998, the appellant and Joanna Gualtieri (also a member of the federal public service and an employee of the Department of Foreign Affairs and International Trade) commenced an action in the Ontario Court (General Division) against the Attorney General of Canada, the Minister of Foreign Affairs and eight senior managers in the government, claiming general damages of $3 million each and loss of pension earnings. They also sought jointly an award of $30 million as punitive, exemplary and aggravated damages, to be used to establish a non-profit advocacy organization with a mandate to represent and protect the rights of all government employees, particularly with regard to issues of abuse of power and harassment and principles of integrity (see Exhibits R-2 and R-3). The plaintiffs alleged that their superiors had taken punitive steps against them when they complained about what they perceived to be mismanagement and waste of taxpayers' money. The plaintiffs were met with a motion by the defendants for summary judgment on the basis that the courts had no jurisdiction in the matter. The defendants argued that the two employees could not initiate a civil action against the Government, the Minister of Foreign Affairs and the senior managers as they were required to pursue the grievance procedure established by the Public Service Staff Relations Act ("PSSRA") and by the collective agreement between the Treasury Board and their union, the Public Service Alliance of Canada ("PSAC"). The Ontario Superior Court of Justice granted the motion on September 22, 2000 and dismissed the action against all the defendants.

[8]      The plaintiffs appealed that judgment and, on August 8, 2002, their appeal was allowed by the Court of Appeal for Ontario, which concluded that the courts did in fact have jurisdiction to hear and decide the plaintiffs' action. Their claim has not yet been heard on the merits. The plaintiffs were awarded their costs of the motion for summary judgment, which were fixed at $25,000 plus disbursements and GST, and their costs of the appeal, which were fixed at $25,000 inclusive of disbursements and GST (see reasons for judgment of the Court of Appeal for Ontario, Exhibit R-4).

[9]      The appellant testified that the first $25,000 was paid directly to his counsel (that amount not being included in the amount of $33,352, which is at issue here). The second $25,000 has been deposited in the appellant's counsel's trust account pending the resolution of the dispute between the appellant and the other complainant, Ms. Gualtieri, concerning the division of that sum between them. Apparently, there is disagreement on the amount that each paid with respect to the claim. As a result, the appellant has not yet been reimbursed for that portion of his legal expenses.

[10]     The appellant was paid his full salary up until the month of June 1998 when he stopped working, having been granted paid medical leave by his employer. The appellant, who suffered a physical and mental breakdown and whose career with the Public Service has, according to him, effectively been ruined, was thereafter entitled to disability benefits under a group contract of insurance issued by the Sun Life Assurance Company of Canada ("Sun Life") to the employer. Indeed, he received gross amounts of $12,298 in late 1999 and $89,894 in 2000.[1]

[11]     On November 30, 2000, the appellant was asked by Sun Life to execute a Subrogation Acknowledgement form whereby the appellant agreed to pay back to Sun Life 75 per cent of any amount recovered by him from his employer (including general damages and damages for loss of income) less his legal costs incurred for such recovery, to a maximum of the amounts paid to him under the insurance policy (Exhibit A-2).

[12]     The appellant explained that he was not aware of Sun Life's subrogation rights when he filed his Statement of Claim in June 1998. At the time, he was advised by his lawyer to claim general damages that would cover everything, as damages would not be taxable. The appellant testified that when he filed the claim, he was not much concerned with identifying particular damages. At trial, he said that he was suing the employer for loss of salary from the time he had to stop working by reason of disability, for loss of future salary, and for loss of potential earning capacity as a result of being mentally injured by his superiors at work. He however recognized that it would not be in his interest to obtain an award of $3 million for lost salary rather than a like award in damages, as the former would result in taxable income while the latter would most probably not.

Analysis

[13]     The question is whether the legal fees paid by the appellant in the year 2000 in relation to the lawsuit before the Ontario Superior Court of Justice are deductible under the Act.

[14]     The appellant was and - although he stopped working in June 1998 - still is an employee of the Government of Canada, and is entitled to disability benefits. Therefore, subsection 8(2) of the Act is applicable; it limits deductions from income from an office or employment to those specifically provided for in section 8. Under paragraph 8(1)(b), there may be deducted only legal expenses incurred by the taxpayer to collect, or establish a right to, salary or wages owed to the taxpayer by the employer. In the Statement of Claim in his lawsuit, the appellant claims general damages, punitive damages and loss of pension earnings. There is no mention of a claim to establish a right to salary or wages owed to him by his employer. In his testimony, the appellant acknowledged that his lawyer had advised him to claim general damages because, if he was successful, such damages would not be taxable.

[15]     The appellant also recognized that the employer had paid him his full salary up until the date he ceased working. No salary was owed to the appellant for services rendered.

[16]     The appellant testified that he claimed damages to compensate for the loss of his potential earning capacity following his physical and mental breakdown caused, according to the Statement of Claim in his lawsuit, by the actions of his employer. The damages claimed are not for loss of employment, as he is still an employee of the Government of Canada. The damages claimed are more in the nature of compensation for the loss of a career. The claim is for his not being able to continue to earn income from employment as he did when exercising his functions with the Department of Foreign Affairs and International Trade. It is not a claim for salary owing and cannot result in the collection of any salary or wages that he was owed by his employer. The action is to recover damages for loss of future income and as such is not covered by paragraph 8(1)(b) of the Act (see Blagdon v. The Queen, 2002 CarswellNat 260 (T.C.C.), confirmed by 2003 F.C.A. 269).

[17]      The appellant further submitted that if he is successful with his claim, he will have to pay back to the insurance company a portion of the disability benefits he received after he ceased working. He therefore argued that the damages claimed from his employer are in fact to compensate him for the disability benefits and that the legal expenses incurred in that regard should be deductible pursuant to paragraph 8(1)(b).

[18]      In the first place, disability benefits received by an employee from an insurance company while off work are not salary or wages owed by an employer, as the employee has not rendered any services to the employer during that period (see Fortin, supra, and Loo, supra), and are not in my view covered by paragraph 8(1)(b) of the Act as it read for the 2000 taxation year.

[19]      In the second place, the appellant did not have to incur any legal expenses in order to receive disability benefits. He was covered by an insurance plan entered into by his employer. If the appellant has chosen to sue his employer, it is not because he is claiming a right to receive disability benefits. He is already in receipt of such benefits. Regardless of whether or not he pursued his legal claim for general damages, he would not have incurred legal fees in order to obtain the disability benefits. Therefore, even though the appellant will have to reimburse the insurance company if successful in his lawsuit, the legal expenses were in fact incurred to claim damages, and such expenses are not covered by paragraph 8(1)(b) of the Act. In that sense, this case can be distinguished from O'Donovan v. Canada, [2001] T.C.J. No. 137 (Q.L.), referred to by the appellant. In O'Donovan, the taxpayer paid legal fees to collect income pursuant to his employer's wage replacement plan, with respect to which the taxpayer had paid part of the premiums. The Court concluded that the amount claimed was not income from an office or employment under subsection 8(2) of the Act; nor was the legal expense incurred to collect, or establish a right to, salary or wages owed to the taxpayer by his employer, within the meaning of paragraph 8(1)(b). The Court found that the legal expenses were incurred to obtain payment of income to which the taxpayer was entitled and, relying on the decision of the Supreme Court of Canada in Gladys Evans v. M.N.R., 60 DTC 1047, held that those expenses were properly deductible. However, this is clearly not the case here, as the claim for damages filed by the appellant is not a claim to obtain payment of an amount that was owed to him by his employer.

[20]      Finally, is it possible to say that the legal expenses incurred by the appellant are deductible pursuant to paragraph 60(o.1) of the Act? For them to be deductible under that provision, the appellant must demonstrate that they were incurred to collect, or establish a right to, a retiring allowance or a benefit under a pension fund. A retiring allowance is defined as an amount received in respect of a loss of an office or employment. Here, the appellant is still an employee; he has not lost his employment. Furthermore, in Ahmad v. R., 2002 CarswellNat 2429 (T.C.C.), it was decided that damages claimed by a person as compensation for the wrong done to him in stripping him of the ability to work in his field of expertise are not a retiring allowance.

[21]      The appellant's Statement of Claim, however, refers not only to damages but also to a claim for loss of pension earnings. If the appellant is successful on that item before the Ontario Superior Court of Justice, he might be able to deduct the legal expenses applicable to that part of the claim in the year the award for pension earnings is included in income, provided that it is so included within a seven-year period after the legal expenses are paid. Indeed, in that case, the legal expenses would be deductible pursuant to clause 60(o.1)(i)(A) and subparagraph 60(o.1)(ii), which dispositions limit the deduction of legal expenses to the amount of the benefit under a pension fund or plan included in income for the year, and the taxpayer would be allowed to carry forward for the next seven years the deduction of legal expenses paid in a given year (see also Fortin, supra). But, for 2000, the legal expenses are definitely not deductible pursuant to paragraph 60(o.1) of the Act.

[22]      For these reasons, the appeal is dismissed.

Signed at Ottawa, Canada, this 12th day of February 2004.

"Lucie Lamarre"

Lamarre, J.

CITATION:

2004TCC111

COURT FILE NO.:

2003-1869(IT)I

STYLE OF CAUSE:

John P. Guenette v. The Queen

PLACE OF HEARING:

Ottawa, Ontario

DATE OF HEARING:

October 23, 2003

REASONS FOR JUDGMENT BY:

The Honourable Justice Lucie Lamarre

DATE OF JUDGMENT:

February 12, 2004

APPEARANCES:

For the Appellant:

The Appellant himself

Counsel for the Respondent:

Justine Malone

COUNSEL OF RECORD:

For the Appellant:

Name:

                                     

Firm:

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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