Tax Court of Canada Judgments

Docket: 2002-4420(IT)I

BETWEEN:

NICHOLAS ASSURAS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on July 10, 2003 at Toronto, Ontario

By: The Honourable Justice J. M. Woods
Appearances:
Counsel for the Appellant:	Angela Assuras
Counsel for the Respondent:	Joel Oliphant Dwayne Morgan, Student-at-Law

____________________________________________________________________

JUDGMENT

The appeal in respect of the assessment made under the Income Tax Act for the 2000 taxation year is allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that Mr. Assuras is entitled to deduct legal fees of $7,034.24 in computing income pursuant to paragraph 60(o.1) and that the penalty of $398.40 under subsection 163(1) is to be deleted.

Signed at Ottawa, Canada this 5th day of September, 2003.

"J.M. Woods"

J.M. Woods J.

Citation: 2003TCC524

Date: 20030905

Docket: 2002-4420(IT)I

BETWEEN:

NICHOLAS ASSURAS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Woods J.

[1]      Mr. Nicholas Assuras appeals from an assessment for the 2000 taxation year. There are two distinct issues, the deductibility of legal fees paid in respect of a retiring allowance and the imposition of a penalty for failure to report income.

[2]      The appeal was heard under the Court's Informal Procedure.

DEDUCTIBILITY OF LEGAL FEES

Facts

[3]      Mr. Assuras was employed as an investment banker by BLC Valeurs Mobilieres in 1999 and 2000. His employment was terminated in 2000 as a result of a restructuring. Mr. Assuras received a lump sum of $22,000 in 2000 as compensation for the termination and incurred legal fees of $7,034.24 in respect of the matter. It was understood that the payment of $22,000 was to be all inclusive and it that would compensate Mr. Assuras for legal costs. The settlement documentation did not identify portions of the $22,000 as being in respect of legal fees or other amounts.

[4]      In 2000 Mr. Assuras contributed $22,000 to a registered retirement savings plan ("RRSP").

[5]      In his income tax return for the 2000 taxation year, Mr. Assuras did not include the $22,000 received from his former employer in computing income and he claimed a deduction for the $22,000 contribution to the RRSP. The Minister of National Revenue (the "Minister") issued an assessment that included the $22,000 in income as a retiring allowance and allowed the deduction of $22,000 for the RRSP contribution. At the hearing, the parties accepted the Minister's treatment of these two items. However, Mr. Assuras claimed that if the retiring allowance is included in income, he should be entitled to deduct the legal fees of $7,034.24.

Issue

[6]      The question for determination is whether the legal fees of $7,034.24 paid in connection with negotiating a retiring allowance are deductible in computing income. The Crown submits that the legal fees are not deductible and refers to clause 60(o.1)(ii) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the "Act").

Statutory Provision

[7]      The relevant parts of paragraphs 60(o.1) and (j.1) of the Act read at the relevant time:

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

(o.1) 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 Canadian Pension Plan or a provincial pension plan as defined in section 3 of that 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)(i.1) for the year or a preceding 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 or 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;

...

(j.1)      such part of the total of all amounts each of which is an amount paid to the taxpayer by an employer, or under a retirement compensation arrangement to which the employer has contributed, as a retiring allowance and included in computing the taxpayer's income for the year by virtue of subparagraph 56(1)(a)(ii) or paragraph 56(1)(x) as

(i)          is designated by the taxpayer in the taxpayer's return of income under this Part for the year,

(ii)         does not exceed the amount, if any, by which the total of

(A)        $2,000 multiplied by the number of years before 1996 during which the employee or former employee in respect of whom the payment was made (in this paragraph referred to as the "retiree") was employed by the employer or a person related to the employer, ...

Submissions of Parties

[8]      The Crown submits that legal expenses incurred to negotiate a retiring allowance may not be deducted if that same amount has been deducted as an RRSP contribution. Reference was made to the concluding phrase in clause 60(o.1)(ii) that has the effect of reducing the deduction for legal expenses if a deduction is claimed for an RRSP contribution under paragraph 60(j.1). Paragraph 60(j.1) permits a deduction for certain contributions to an RRSP if an employee has received a retiring allowance in the year.

[9]      At the hearing, counsel for Mr. Assuras stated that she was unaware of paragraph 60(o.1) and agreed to provide a written submission in respect of its application.[1] In this submission, she suggested that the RRSP contribution was not pursuant to paragraph 60(j.1) because this provision only applies to a retiring allowance paid in respect of employment prior to 1996. The retiring allowance paid to Mr. Assuras related to employment during the years 1999 and 2000. Accordingly, it was submitted that the deduction for the RRSP contribution must be under some other provision, such as section 146. It was also submitted that the Canada Customs and Revenue Agency (the "CCRA") had confirmed in writing that a contribution of $22,000 could be made to an RRSP.

[10]     Counsel for the Crown responded in writing to this submission in part as follows:

With respect, it appears the Appellant has misstated the function of paragraphs 60(j) through (j.2). The provisions under paragraph (j) generally provide for the taxpayer's entitlement [to] deduct amounts contributed to RRSPs or RPPs. If the provision "do not apply" and "there is no amount that was or could be deducted" then the Appellant's income for the 2000 taxation year ought be adjusted to include the amount of $22,000.00 contributed to his RRSP account. Moreover, reference to the 1996 year in (j.1) is a restriction on the taxpayer's entitlement to contribute to his or her RRSP or RPP, in respect of income earned prior to 1996. The provision does not restrict the application of subsection 60(o.1) to income earned after 1996.

Finally, the method by which the Appellant calculated the entitlement to the deduction at p. 4, paragraph 4 of the Appellant's submissions is incorrect. It appears that the Appellant may have calculated the deductible amount by applying the provisions in the wrong order. In short, paragraph 60(o.1) provides that the amount of the deduction otherwise available in respect of legal fees reimbursed (in this case $7,034.24) is the lesser of the total amount of the legal expenses incurred ($7,034.24) and the amount by which the total legal fees ($7,034.24) exceeds the amount contributed to the taxpayer's RRSP or RPP account ($22,000.00) under paragraph 60(j), (j.01), (j.02), (j.03) or (j.1). As mentioned above, if the Appellant's submission is accurate that "no amount was received under section 60(j.1)" then the Appellant's income for his 2000 taxation year ought be recalculated to include the amount of $22,000.00.

Analysis

[11]     By virtue of paragraph 60(o.1), the legal expenses at issue are deductible provided that the deduction for the RRSP contribution is not made under paragraph 60(j.1).

[12]     I agree with the submission of counsel for Mr. Assuras that the deduction for the RRSP contribution was not made under paragraph 60(j.1). This paragraph has no application if the retiring allowance relates to employment after 1995. In this case, the employment was in 1999 and 2000. Further, paragraph 60(j.1) applies only if a designation has been made in the return of income. There is no indication from the evidence that this designation was made. Finally, Mr. Assuras submits that the RRSP contribution was made under section 146.2 This would mean that the deduction was taken pursuant to paragraph 60(i). I accept this submission. It appears that Mr. Assuras had sufficient deduction room available to make a contribution of $22,000 under paragraph 60(i). In the notice of reassessment for the 2000 taxation year that was attached to the Notice of Appeal, the CCRA has included a 2001 RRSP Deduction Limit Statement. This statement indicated that Mr. Assuras had an RRSP deduction limit for 2000 of $26,515 and that no deduction for RRSP contributions were taken in 2000. It appears that this statement was in error and that in fact $22,000 was deducted as an RRSP contribution in 2000 pursuant to paragraph 60(i).

[13]     As a result, the legal expenses are deductible pursuant to paragraph 60(o.1).

IMPOSITION OF PENALTY

Facts

[14]     In the assessment for the 2000 taxation year, the Minister imposed a penalty of $398.40 pursuant to subsection 163(1) for failure to report income in two taxation years, 1997 and 2000.

[15]     The purported failure to report income in 1997 concerns vacation pay earned by Mr. Assuras in 1997 but not received by him until 2002. During 1997 and 1998, Mr. Assuras was employed as an investment banker by C.M. Oliver Inc. Mr. Assuras' employment was also terminated by this employer as a result of a restructuring. Settlement discussions between Mr. Assuras and the employer were protracted and a lawsuit was instigated that culminated in a settlement payment being received in 2002. The settlement amount included an amount of $1,538 representing vacation pay for the 1997 taxation year.

[16]     C.M. Oliver Inc. offered to pay the vacation pay to Mr. Assuras earlier as it was not in dispute but Mr. Assuras wanted to negotiate the entire settlement before any payments were made. It is not clear when this offer was made but it was likely made after 1997 since the employment was terminated in 1998. The employer issued a T4 slip in respect of this amount for the 1997 taxation year. There was no evidence presented as to whether this amount was assessed as income in 1997.

[17]     There are two alleged failures to report income for the 2000 taxation year. The first relates to an amount of $4,078 received as employment income from the Province of Ontario, by whom Mr. Assuras was employed after the termination by BLC Valeurs Mobilieres. Mr. Assuras stated that the $4,078 was not reported in his income tax return for the 2000 taxation year because he had not received a T4 slip in respect of it. Mr. Assuras stated that he assumed that the T4 slip that he received for that year from BLC Valeurs Mobilieres included all amounts of employment income received in the year. There was also a failure to include the retiring allowance of $22,000 in computing income.

[18]     The Minister assessed a penalty in the 2000 taxation year in the amount of $398.40 pursuant to subsection 163(1) for a failure to report income in both the 1997 and 2000 taxation years.

Statutory Provision

[19]     Subsection 163(1) reads:

163. (1) Every person who

(a) fails to report an amount required to be included in computing the person's income in a return filed under section 150 for a taxation year, and

(b) had failed to report an amount required to be so included in any return filed under section 150 for any of the three preceding taxation years

is liable to a penalty equal to 10% of the amount described in paragraph (a), except where the person is liable to a penalty under subsection (2) in respect of that amount.

Submissions of Parties

[20]     The Crown submits that the vacation pay of $1,538 for 1997 should be included in computing income for the 1997 taxation year even though it was not received until 2002. The Crown also suggested at the hearing that the doctrine of constructive receipt should apply but had not prepared argument on this issue before the hearing. Both parties later submitted written submissions dealing with the doctrine of constructive receipt.

Analysis

[21]     In my view, the Crown's position on the penalty cannot succeed because there was no failure to report income in 1997.

[22]     The Crown submits that the mere entitlement to vacation pay is sufficient to require its inclusion as employment income for a year. There is no merit to this position. Employment income is taxed on a cash rather than an accrual basis.

[23]     The doctrine of constructive receipt, as it was applied in the case of Blenkarn v. MNR, 63 DTC 581 (T.A.B.), requires that funds be readily available to the taxpayer and that the taxpayer in effect turns his back on the receipt. These are not the circumstances here. Mr. Assuras was engaged in protracted negotiations involving a lawsuit with his former employer. It cannot be said that Mr. Assuras turned his back on the vacation pay when it was only one element of the settlement amount. A further reason why the doctrine of constructive receipt does not require the vacation pay to be included in income for the 1997 taxation year is that it is unlikely that the employer's offer to pay the vacation pay was made to Mr. Assuras in 1997 because the employment was not terminated until 1998.

Conclusion

[24]     The appeal in respect of the 2000 taxation year is allowed and the matter is referred back to the Minister for reconsideration and reassessment on the basis that legal fees of $7,034.24 are deductible in computing income pursuant to paragraph 60(o.1) and that the penalty of $398.40 pursuant to subsection 163(1) is to be deleted.

Signed at Ottawa, Canada this 5th day of September, 2003.

"J. M. Woods"

J.M. Woods J.

CITATION:

2003TCC524

COURT FILE NO.:

2002-4420(IT)I

STYLE OF CAUSE:

Nicholas Assuras v. Her Majesty the Queen

PLACE OF HEARING:

Toronto, Ontario

DATE OF HEARING:

July 10, 2003

REASONS FOR JUDGMENT BY:

The Honourable Justice J. M. Woods

DATE OF JUDGMENT:

September 5, 2003

APPEARANCES:

Counsel for the Appellant:

Angela Assuras

Counsel for the Respondent:

Joel Oliphant Dwayne Morgan, Student-at-Law

COUNSEL OF RECORD:

For the Appellant:

Name:

Angela Assuras

Firm:

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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