http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/234576/index.do
Ken Horn v. The Queen (September 5, 2017 – 2017 TCC 167, D’Arcy J.).
Précis: Mr. Horn through various corporations carried on a business trying to develop First Nations Gaming in Alberta. He obtained financing for his business from two American corporations. As part of the financing he pledged the shares of his main operating company, New Buffalo Gaming Inc. (“New Buffalo”). He sued in Arizona when the American corporations defaulted on the financing. Similarly, he also incurred legal fees in an Alberta action in which the American corporations attempted to enforce their security interest in the New Buffalo shares. He claimed a deduction for the US and Canadian legal fees paid in 2004, 2005 and 2006 as well as a loss carryforward in 2009 arising out of those legal fees. The Tax Court held that neither set of legal fees were not deductible insofar as they were incurred to protect a capital asset, i.e., the New Buffalo shares, which were pledged as part of the financing arrangements. Thus the appeal was dismissed, with costs.
Decision: The Court did not accept the taxpayer’s argument that the legal fees were incurred to earn income from a business:
[52] I will first address the legal fees paid in 2004, 2005 and 2006 in respect of the Arizona Action. This was an action to rescind the Memorandum of Agreement on the basis that Chatelaine/Beau Park and Dr. Holtz had not made the loans contemplated in the agreement. In particular, the Appellant alleged that Chatelaine/Beau Park had not made the contemplated loans to him and his management company and Dr. Horn had not made the contemplated shareholder loans to New Buffalo.
[53] After reviewing the objective evidence before me, the Memorandum of Agreement and the complaint filed by the Appellant in the Arizona Action, I have concluded that the Appellant’s primary purpose in bringing the Arizona Action was to have Chatelaine/Beau Park release its security interest in the Appellant’s New Buffalo stock and release the Appellant from his personal guarantee. As a result, the Legal Fees paid in respect of the Arizona Action were not paid for the purpose of earning income from a business carried on by the Appellant. They were paid to gain “clear” title to a capital asset, namely the Appellant’s New Buffalo shares, and to remove a personal guarantee.
[54] I will now consider the legal fees paid in respect of the Chatelaine/Beau Park Actions. On the basis of the objective evidence before me, i.e., the February 8, 2006 order of the Court of Queen’s Bench of Alberta, I have concluded that the primary purpose of this action was to enforce the security provided by the Appellant under the Memorandum of Agreement. In other words, by defending the action the Appellant was protecting his interest in his New Buffalo shares.
[55] As a result, the Legal Fees paid in respect of the Chatelaine/Beau Park Actions were not paid for the purpose of earning income from a business carried on by the Appellant. They were paid to protect the Appellant’s title to a capital asset, his New Buffalo shares.
…
[71] The objective evidence before me does not support a factual finding that the Appellant carried on a business of rendering consulting or management services to New Buffalo during the relevant period. The Appellant may have carried on a business of providing services during this period, but the evidence before me is that, when the Memorandum of Agreement was signed in 2002, he rendered such services to a management company, which in turn rendered the services to New Buffalo, and that he also worked as an employee of New Buffalo. Beginning in 2006, he rendered such services to 122 Ltd., which in turn rendered the services to New Buffalo.
[72] The Legal Fees were not incurred for the purpose of earning income from services the Appellant provided to his management company. The Appellant incurred the Legal Fees to protect his shareholdings in New Buffalo and in an attempt to be released from his personal guarantee.
As a consequence the appeal was dismissed with costs.