• John A. Barrett v Her Majesty The Queen, 2019 TCC 34- by Cory Chan


    1. Barrett was involved in three separate legal actions:
      • a matrimonial dispute;
      • a wrongful dismissal suit; and
      • an oppression remedy action instituted by his former spouse against Barrett and two other corporations in which Barrett was a shareholder.
    2. Barrett claims that he paid $27,333 in legal fees in respect to the three legal actions.
    3. Barrett admitted that he had neither the invoices or documents concerning the legal fees nor the actual amounts that were incurred by him concerning the wrongful dismissal litigation. Barrett estimated the fees he incurred based upon 2 statement of accounts with limited details and for amounts in excess of those charges incurred.
    4. CRA's position is that Barrett is not entitled to deduct legal fees claimed pursuant to paragraph 8(1)(b) and/or subsection 60(o.1) of the Income Tax Act 1(the "Act") because:
      • the claimed legal fees were not incurred to collect or establish a right to an amount owed to Barrett as an employee; or
      • for a benefit under a pension fund or plan in respect of the employment of Barrett or a retiring allowance of Barrett.


    Is Barrett entitled to deduct legal fees in the amount of $27,333 in respect of his 2015 taxation year?


    The appeal by Barrett was dismissed and it was concluded the legal fees were not deductible in their entirety.


    "Paragraph 8(1)(ba) of the Act provides that a taxpayer, in computing income from an office or from employment, may deduct legal expenses paid by a taxpayer in order to collect or to establish a right to any amount owed to the taxpayer that, if received by the taxpayer, would be required to be included in computing the taxpayer's income.

    Similarly, subsection 60(o.1) of the Act allows for the deduction, in computing a taxpayer's income, of legal expenses paid by a taxpayer to collect a retiring allowance or a pension benefit to which they were entitled, up to the amount received. A retiring allowance is defined in subsection 248(1) of the Act to include an amount received on account of damages received in connection with the loss of employment."

    Wrongful Dismissal Suit

    Even though the wording of paragraph 8(1)(b) contemplates the deduction of legal expenses for the purposes of asserting a right to claim income from employment, "[t]he jurisprudence is clear that a taxpayer must produce documentary evidence in support of her or his assertion that legal fees were incurred and paid by the taxpayer or at the very least offer a cogent reason as to why the evidence was not available but on balance exists."

    Matrimonial Dispute

    Amounts paid in respect of a matrimonial litigation are not deductible unless they are incurred for the purposes of recovering a right to taxable income.

    Oppression Remedy Action

    If legal costs were incurred for the purposes of protecting a business interest, there must be evidence that the taxpayer carried on a business or that the claimed legal expenses were incurred for the purpose of gaining or producing income within the meaning of paragraph 18(1)(a) of the Act.

    In addition, if the legal expenses were paid by a taxpayer in defending an action on the basis that the action was brought against a taxpayer as a director and not an employee, the legal expenses would not be deductible.


    Barrett v Her Majesty the Queen shows (for the purposes of deducting legal expenses) the importance of evidencing and structuring settlements in respect to a dispute concerning employment status and income. If Barrett was able to put forth the argument and evidence to support that a portion of the legal expenses for all three actions relate to asserting a right to collect or to establish a right to any amount owed to Barrett (that would have been taxable income), then that portion of the fees would have been most likely found to be deductible.

    1 The Income Tax Act, RSC 1985, c.1 (5th Supp.), as amended.

  • Wardlaw, A. v. The Queen, 2019 TCC 199- by Dallas Kleckner


    1. In 2009, the Taxpayer attended the Mortgage Centre ("MC") to inquire about a mortgage.
    2. MC introduced the Taxpayer to Fiscal Arbitrators ("FA"), which he was told were specialists in tax return preparation and would help the Taxpayer obtain a large tax refund for a down payment on a house.
    3. The Taxpayer agreed to retain the services of FA.
    4. FA's scheme involved claiming a fictitious business loss of ~$357,000 (the "Loss") and carrying back said Loss over the prior three taxation years, seeking to recover ~$104,000 in taxes paid.
    5. The fee charged by FA was $500 plus 20% of the refund received.
    6. The Taxpayer claims he inquired into the legality of the arrangement with MC and was assured that:
      1. the arrangement was legal, and
      2. in the event that the Minister of National Revenue (the "Minister") disallowed the Loss and the carryback of same, that there would be no other repercussions.
    7. The Minister denied the Loss and assessed the gross negligence penalty pursuant to subsection 163(3) of the
    8. The penalty works out to approximately 70% of the refund claimed.


    Has the Minister proven on a balance of probabilities that the requirements of the gross negligence penalty have been satisfied in respect of the Taxpayer?




    There are two elements that must be established prior to applying the gross negligence penalty:

    (i) the making of a false statement, and

    (ii) that the false statement be made either knowingly or in circumstances amounting to gross negligence.

    As there was no doubt that a false statement was made, the Court focused its attention on whether the false statement was made either "knowingly" or "under circumstances amounting to gross negligence".

    Did the Taxpayer knowingly make a false statement?

    The Court reviewed the relevant case law on the subject, in particular, Wynter v. The Queen, 2017 FCA 195.

    The Court quoted the following excepts with respect to that decision:

    "[44] [...] the word "knowingly" requires a determination of whether the Appellant had subjective knowledge that he was making a false statement in the Return or the Request when he signed those documents.

    [45] [...] subjective knowledge [...] may be proven by [...] establishing that the Appellant was willfully blind as to whether the statements in the Return and Request were false."

    In respect of willful blindness, the Court quoted the following two excerpts from Wynter:

    "[46] A taxpayer is willfully blind in circumstances where the taxpayer becomes aware of the need for inquiry but declines to make the inquiry because the taxpayer does not want to know, or studiously avoids, the truth.

    [47] The subjective knowledge required for a finding of actual knowledge or willful blindness refers to the actual or subjective knowledge of the person committing the prohibited act and not objective or constructive knowledge of a reasonable person."

    Given the subjective nature of whether the Taxpayer knowingly made a false statement, the Court was tasked with considering the personal attributes of Taxpayer. However, prior to doing so, the Court summarized the law as it relates to gross negligence.

    Was a false statement made in circumstances amounting to gross negligence?

    The Court confirmed the standard to which gross negligence is measured is objective (i.e. the reasonable person standard), however, such objectivity is to be considered in light of the particular circumstances placed upon the person whose conduct is being examined. This "modified objective standard" contains but one exception. The Court, in referencing R. v. Roy, 2012 SCC 26, stated that unless there is a question that relates to the "incapacity to appreciate or to avoid the risk", the particular attributes of the individual are not relevant. Therefore, unless a taxpayer (or their advocate) can produce evidence of the taxpayer's incapacity to understand their reporting obligations, the standard to which they will be held is that of a reasonable person (placed in the same circumstances as the taxpayer).

    Subject to any incapacity issues, the Court, at paragraph 55, stated the following:

    The question that must be addressed is this: To what degree, if any, has the conduct of the Appellant deviated from that objective standard?

    In other words, the Court must compare the conduct of the Taxpayer against that of a reasonable person to determine whether said conduct represented a "marked and substantial departure" expected of a reasonable person.

    Taxpayer Willfully Blind

    In consideration of the foregoing, the Court found the Taxpayer willfully blind, establishing that the Taxpayer knowingly made a false statement, and thus satisfying the second requirement for the gross negligence penalty. In respect of the subjective component of willful blindness, the Court noted that the Taxpayer had completed his grade 12 education, and further trained as an automotive technician (i.e. he had subjective knowledge that he was making a false statement). In other words, there was no evidence to suggest the Taxpayer was unaware that what he was participating in was wrong.

    The Court found there were many factors that should have made the Taxpayer suspicious, including:

    (i) substantial business income and losses claimed, notwithstanding the fact that no business existed, and

    (ii) the magnitude of the loss carryback which would suggest financial disaster.

    In addition, besides his then girlfriend, now wife, he made no inquires to anyone independent of the scheme to verify the schemes legitimacy, despite the circumstances that would call for the Taxpayer to be very suspicious and make such inquiries. As a result, the Court found no reason to vary the gross negligence penalty and the appeal was dismissed.

    To summarize, in order to apply the gross negligence penalty, it was necessary for the Court to either find that: (i) a false statement was made, and (ii) that the Taxpayer either: knowingly made a false statement or made a false statement in circumstances amounting to gross negligence. One of the ways to prove that the taxpayer knowingly made a false statement is to consider whether they were willfully blind. In finding that the Taxpayer was willfully blind, the requirements for the gross negligence penalty were made out. As such, the Court said it was not necessary to consider whether the false statement was also made in circumstances amounting to gross negligence.


    1. Deliberate ignorance is not a defense to avoid the harsh application of the gross negligence penalty. In this case, the Taxpayer failed to seek out independent advice regarding the legitimacy of the scheme, despite numerous red flags that the Taxpayer noticed along the way. The Court took issue with same, suggesting a taxpayer may be under a positive obligation to inquire further in such circumstances in order to support a finding against being found willfully blind.
    2. If something is too good to be true, it probably is.
  • Moose Factory Restaurant Properties Ltd. v. The Queen (TCC), 2019 TCC 156- by Jason Lau


    1. Moose Factory Restaurant Properties Ltd. (the "Appellant") was a member of the Sawmill Group of corporations. Other members of the Sawmill Group consisted of Sawmill Franchise Inc. ("SFI"), Sawmill Restaurant Group Ltd. ("SRGL"), and Sawmill Franchise Holding Inc. ("SFHI").
    2. In 2005, SFI entered into a ten-year franchise agreement with 1207330 Alberta Ltd. ("1207330"), a third-party entity, whereby 1207330 was responsible for setting up a restaurant in Edmonton's Capilano Mall.
    3. To finance completion of the restaurant, 1207330 obtained a loan (the "Loan") for $2,950,000 from the Business Development Bank of Canada ("BDC") in June 2009.
    4. The terms of the Loan identified SRGL, the Appellant, 1207330, and SFI as having joint and several obligation.
    5. On June 22, 2009, 1207330 entered into a Security Agreement and Debenture (the "SA&D") with Sawmill Group. The SA&D identified 1207330 as the Debtor and the Sawmill Group entities as the Creditor. The terms of the SA&D specified that 1207330 would agree to pay outstanding Indebtedness to the Creditor. Indebtedness was defined to include "any payments made by the Creditor to Business Development Bank of Canada in partial or full repayment of funds advanced by the Business Development Bank of Canada to the Debtor...".
    6. On November 19, 2009, a bankruptcy order was issued against 1207330.
    7. BDC records indicated that only interest payments have been received from either 1207330 or the Appellant.
    8. The Appellant claimed an allowable business investment loss of $1,475,000 on its T2 corporate income tax return for the year ending July 31, 2010.
    9. The Minister denied the claim on the basis that no debt was owed to the Appellant by 1207330, that the SA&D only functioned to apportion the joint and several liability to BDC amongst the borrowers of the Loan, and that even if such a debt existed it would have had a nil ACB to the Appellant as of July 31, 2010.


    Was the Appellant entitled to claim an ABIL under subsection 50(1) of the Act?


    The court found in favour of the Minister, and the Appellant's claim was dismissed.


    Rich v. R., 2003 FCA 38 established that for a taxpayer to claim an ABIL under subsection 50(1) of the Act, there must first have been a debt owing to the taxpayer. Justice Owen found that Indebtedness, as defined under the SA&D, was contingent on the amount of principal repayments made by the Creditor to BDC (for the benefit of 1207330). Up to the point of 1207330's bankruptcy, the Creditor made no principal repayments in respect of the Loan and as such there was no debt between 1207330 and the Creditor. Without debt owing to the Appellant, there could be no ABIL claim.


    If a certain tax objective is desired, then careful planning and forethought must be given to structuring the arrangement to ensure that the tax result will be as desired. As Justice Owen indicated, the arrangements between 1207330 and the Appellant could have been planned in such a way to allow for an ABIL claim. Unfortunately for the Appellant, the proper structuring did not occur, and the court had no choice but to apply the law to the facts as they were, not as the Appellant intended them.

  • Aquilini (Estate) v. The Queen, 2019 TCC 132- by Sarah Ykema


    1. Elisa Aquilini and her three sons, Francesco, Roberto and Paolo (the "Taxpayers"), underwent a reorganization of the family assets into various trusts and partnerships in 2001. The Limited Partnership Agreement for one of the partnerships (the "Partnership") provided for a manner of income allocation that favoured four family trusts (the "Family Trusts") over the Taxpayers.
    2. The Taxpayers contributed substantial capital to the Partnership and the three sons were actively engaged in the family business.
    3. In 2007, the Partnership realized a substantial capital gain and allocated the capital gain to the Family Trusts, which in turn allocated the gain to a corporate beneficiary which had substantial capital loss carry forwards.
    4. The CRA reassessed the Taxpayers for their respective shares of the Partnership's capital gains under subsections 103(1) and (1.1) of the Act.


    Was the income allocation in the Amended Partnership Agreement reasonable?


    As a Calgary Flames hockey fan, I'm happy to see that the Vancouver Canucks owners lose but as a tax professional, consideration must be given to the "reasonableness" of the situation. In this case, CRA brought a successful application of subsection 103(1) and 103(1.1) of the Act in order to redetermine the income allocation from a partnership to the family members and their trusts.

    Subsection 103(1) is an anti-avoidance provision that allows the CRA to adjust the basis of allocations in the partnership agreement where the principal purpose of the allocations was to reduce or avoid paying taxes. The purpose of subsection 103(1.1) is to ensure that members of a partnership who do not deal at arm's length with each other, such as family members, compute each member's income or loss from a partnership in a way that is reasonable based on the capital invested or the work performed.

    This case included an analysis as to whether the allocations income and loss were "reasonable" in the circumstance. The Taxpayers argued that the non-business and personal factors should be given consideration, such as creditor proofing and passing on future growth for the benefit of lineal descendants. While these were considered "other relevant factors", not all factors need or are given the same weight according The Tax Court. CRA has stated in the past that partnerships should recognize the non-monetary contributions of each partner, not just the capital account1.

    A partnership is a relationship whereby two or persons are carrying on business in common with a view to profit.2 The Tax Court stated in paragraph 104 of the decision that:

    No reasonable business person standing in any of the shoes of the members of the partnerships, excluding the one standing in for Elisa who no doubt would welcome the windfall, considering their capital invested in the partnership would accept such a distorted return on the preferred income allocation of $1 million let alone permit Elisa, who contributed less in capital than any of the brothers or Wevco, to receive 35 percent of such allocation barring consideration of further factors justifying same.

    The Tax Court of Canada concluded that the income and loss allocations made by the Partnership Agreement were unreasonable and would not be acceptable to arm's length businesspeople for the following reasons:

    • Francesco and Roberto testified that the results of the partnership allocations would be "silly" if a stranger held the partnership units and not the family trusts. The allocations were only acceptable because of the non-arm's length arrangements in place;
    • The three brothers were not adequately compensated for their personal risk for the guarantees they signed for vendors of the Partnership, which struck Pizzitelli J. as unreasonable; and
    • Work performed was a neutral factor.

    As a result, the Tax Court found that the partnership allocations were properly subject to reallocation by the CRA and the Taxpayers' appeal was dismissed.


    1. Partnership allocations should be based on something defensible to the CRA, such as capital contributed to the partnership, work performed, or another method that is reasonable in the circumstances. Determining what is reasonable may be difficult in many circumstances.
    2. This requirement to have reasonable allocations is one of the reasons that partnerships may not be the ideal vehicle to achieve the streaming of future growth such as when implementing an estate freeze.


    1 Richard S. Biscaro, Bryan W. Dath, and Mark Symes, "Revenue Canada Round Table," in Report of Proceedings of Forty-Fourth Tax Conference, 1992 Conference Report (Toronto: Canadian Tax Foundation, 1993), 54E:13.

    2 Backman v. R. 2001 SCC 10

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