http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/232216/index.do
Danilov v. The Queen (June 20, 2017 – 2017 TCC 114, Jorré J.).
Précis: Mr. Danilov and his wife were involved in protracted litigation (commenced in 2012 and still ongoing at the date of the Tax Court hearing in 2017) about funds they had received from his wife’s parents. He sought to deduct legal fees of $74,566 in computing his business income for the 2014 taxation year. The Court held that the fees were not incurred for the purposes of earning or producing income but rather were personal expenditures. The Court also rejected Mr. Danilov’s argument that his appeal should be allowed because the Crown had filed its Reply a few days late. As a result the appeal was dismissed. There was no order as to costs since this was an informal procedure appeal.
Decision: The decision is marked by the sorry story of the complexity of the Danilov family relationship but at the end boils down to an issue of whether the expenses were personal in character and therefore not deductible:
[35] More importantly, the litigation is not directly linked to the business because the money was not loaned for investment in the business. Having agreed in a private family arrangement to invest the money, the Appellant would have had to defend the action in any event. This is seen most clearly if one imagines a situation where A, who is not in the business of investing other peoples’ money, as a favour to his friend B, agrees to invest a sum on behalf of B without any restriction on the nature of the investment. If subsequently a dispute arises, A’s legal expenses would fail the test in paragraph 18(1)(a); the result does not change because A decides to take the money and invest it in his own new proprietorship to, for example, subdivide and sell land.
[36] Thus, the legal expenses, even to the extent that they relate to the counterclaim insofar as it relates to the Appellant, are not deductible.
[37] The litigation as a whole is in relation to private family arrangements between the Appellant and the Appellant’s spouse, on one hand, and his in-laws, on the other hand and both paragraphs 18(1)(a) and (h) of the Act apply to prevent the deduction.
Similarly, Mr. Danilov was not successful in arguing that the late filing of the Reply should have resulted in his appeal being allowed:
[39] The Appellant sought to have the Minister of National Revenue’s reply struck out because it was late. On examination, it turned out that the reply was filed with the Court within the 60‑day period provided for in subsection 18.16(1) of the Tax Court of Canada Act. However, the reply was not served on the Appellant within the five‑day period provided for in subsection 6(2) of the Tax Court of Canada Rules (Informal Procedure). Apparently, the reply was mailed to the wrong address, seemingly the previous address of the Appellant.
[40] When the reply is not filed on time with the Court, there is a sanction provided for in subsection 18.16(4) of the Tax Court of Canada Act and, unless a time extension is granted to the Minister pursuant to that subsection, “the allegations of fact contained in the notice of appeal are presumed to be true for the purposes of the appeal”.
[41] There is no sanction provided for failing to serve the reply in a timely manner.
[42] I would note that I am satisfied that the Appellant suffered no prejudice from the late receipt.
[43] In these circumstances, there is no consequence that should flow from the Appellant’s late receipt of the reply. Finally, I would note that even if the “allegations of fact contained in the notice of appeal” had been “presumed to be true for the purposes of the appeal” that would have had no practical consequence given that the facts of the case are quite clear from the evidence before the Court.
[Footnotes omitted]
As a result the appeal was dismissed. There was no order as to costs since this was an informal procedure appeal.