http://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/66805/index.do
Dr. Mike Orth Inc. et al. v. Canada[1] (February 5, 2014) is an appeal from a decision of the Tax Court:
http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/31149/index.do
The case dealt with the deduction of legal expenses incurred by the appellants. The Tax Court reviewed the evidence and allowed certain of the legal expense, denying the balance. On appeal the appellants essentially made two arguments. The first dealt with onus. The appellants argued that since they had demolished two of the Minister’s assumptions at trial the Tax Court had incorrectly placed the onus on them to justify the expenditures in question:
[5] The taxpayers argue that they are entitled to succeed because Chief Justice Rip held that the Minister’s factual assumptions were demolished. That argument is based on a misapprehension of the legal effect of demolishing a factual assumption of the Minister. In an income tax appeal, such a factual assumption is demolished by evidence that establishes, on a prima facie basis, that the assumption is not true. A factual assumption that is demolished cannot be relied upon to justify the assessment under appeal.
[6] In each of these cases, two factual assumptions were held to be demolished. One of those assumptions was that the amount of legal expenses claimed was unreasonable (a reference to section 67 of the Income Tax Act). Once that assumption was held to be demolished, then in the absence of evidence that the expenses were unreasonable (and there is none), Chief Justice Rip could not and did not conclude that the legal expenses were unreasonable in amount.
[7] The other demolished assumption in each case was that the purpose of certain corporate reorganizations was estate or tax planning. Again, once that assumption was held to be demolished, Chief Justice Rip could not and did not conclude that the purpose of the corporate reorganizations was estate or tax planning.
[8] The Minister made no other factual assumptions as to the purpose of the legal expenses. However, each of the taxpayers alleged, in the statement of facts in its notice of appeal, that the expenses in issue were incurred “in respect of the [taxpayer’s] business and investments”. That is an ambiguous expression that could include an income earning purpose or a capital purpose. The Minister denied the allegation.
[9] The pleadings leave no room for doubt that the purpose of the legal expenses was contested. It is apparent from the Minister’s pleading under the heading “Statutory Provisions, Grounds Relied on and Relief Sought” that the Minister took the position from the outset that the documentary evidence the taxpayers had provided to the Minister was not sufficient to establish the purpose for which the legal expenses were incurred. Thus, the Crown plainly raised the critical issue, which was whether the statutory purpose test was met.
The next point was whether the appellants’ failure to explain the nature of the expenses incurred could be justified on the basis of solicitor-client privilege:
[12] The taxpayers also argue that they could not disclose more particulars of their legal expenses without waiving solicitor and client privilege, which they were not willing to do. They argue that Chief Justice Rip erred in law in requiring them to waive their privilege to succeed in their appeals. We do not accept this argument.
[13] We note that the taxpayers’ claims of solicitor and client privilege were not challenged in the Tax Court. We assume for the purpose of these appeals that they are valid claims. However, neither the Minister nor the Court is obliged to determine a factual dispute in the taxpayer’s favour merely because the taxpayer asserts and refuses to waive a claim of solicitor and client privilege with respect to evidence that could resolve the dispute.
As a result the appeals were dismissed from the bench (apart from some small amounts that were agreed upon by the parties).
Comment: Unfortunately this case does not provide any guidance on how a taxpayer could disclose evidence to justify legal expenses while at the same time maintaining solicitor-client privilege in respect of the underlying advice. One would think that there is ample precedent for limiting the use to which such evidence could be put by a party adverse in interest (such as CRA). The parties do not however seem to have explored this in greater depth before the Tax Court.
[1] 2014 FCA 34.