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FAMILY LAW
PERILS IN PRACTICE
Tales of TaxTreatment of LawPractitioner'sT1 GeneralsDavid C.
Day, QCLewis, Day
Tax Court Decision'The decision of the Tax' Court of Canada
began unremarkably, if not routinely, with theresult. I The
first paragraph allowed a taxpay-er's appeals' from audit
'assessments of his1990, 1991 and 1992 Tl General income
taxreturns. The assessments were ordered remit-ted to the Minister
of National Revenue ("theMinister") for "reconsideration and
reassess-ment" congruent with reasons for the decision.
Facially inharmonious with the substantiveresult, however, was
the decision's secondparagraph. The Minister was entitled to
re-cover costs of the appeal from the successfulappellant taxpayer.
Moreover, costs were au-thorized on the infrequently-allowed
highersolicitor-and-client scale.
What followed, in the lucid, careful judg-ment of Bowman T.C.J.,
delivered on April14, 1998, recounts a remarkable, rancorousrumble
between a taxpayer, who practisesfamily law, and the Minister.
In determining their differences, the deci-sion (i) affords
insights on income tax law,procedure and practice treatment of tax
returnsof solicitors practising privately in Canada,and (ii) offers
counsel about how taxpayersshould not treat the
Minister.Practitioner Taxpayer
An "indefatigable self-promoter," the tax-payer "is, and, during
the years in question,was a very successful legal practitioner"
inseveral western Canadian provinces; Ita rain-maker - a person who
brought to ... [his] firm!! l£!r~~ rnnTIp.~rgf ~li.~!H~1~nd
~Qmr!byteg
I [1998] T.e.J. (Quicklaw) No. 278: "the decision."
176
significantly to the prosperity" of successivelaw partnerships
of which he was a member.In fact, the Court found that rart of its
diffi-culty in determining the solicitor' s income inthe three
affected years and, thus, decidingsome of the appeal issues,
derived from "thefact that each time a new partner joined him
'inthe practice of law a new partnership wasformed." Over those
three years, the solicitorhad formed five law partnerships and
operateda company with links to the partnerships.
And "[wlhatever confusion may have beenengendered by this
proliferation of businessorganizations was" regretted the Court,
"ex-acerbated by ... [the taxpayer's] stonewallingtactics
vis-a-vis" the Minister, that produced a"somewhat chaotic state of
affairs .... "
Appeal Preliminaries(Including Disclosure and Proof)
Although the decision-producing appealoccupied seven days, the
case "boiled downessentially to a number of factual issues
that,"the Court felt, "could and should nave beenresolved at the
assessments level or the[administrative] appeals level."
Permeatingthe decision was the Court's dismay at re-peated failings
of the taxpayer to responsiblyaccess these extra-judicial
processes.
In an aside about these processes, theCourt wrote that the
"system of assessment,objection and [administrative] appeals from
IIIassessments in Canada ... works very well";provided "good faith
and openness [is exhib-ited] by both sides." In Bowman T.C.J. 's
ex-perience, this system is "one of the best in theworld." (This
view is not universally shared inthe law community. Consider a
series of LawTimes reports which began in the newspaper's05-11
October 1998 edition, headlined "Underoath [:] Revenue Canada
investigators bad-mouth lawyers.")
When the Minister audited the solicitor'sreturns for 1990
through 1992 - which yieldedthe impugned assessments - the
solicitor was"uncooperative" to the extent that the auditorwas
precluded from performing the audit "in amanner that would in all
probability haveresolved many of the issues" ultimately pre-sented
to the Court. The taxpayer havingadministratively appealed from the
audit as-sessmems, by filing notices of objection tothem, "refused
to make any representations tothe [administrative] appeals officer"
on the
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basis he intended to pursue his objections toCourt (by a
judicial appeal from rulings of the[administrative] appeals
officer).
Once the solicitor lodged, in the TaxCourt, his appeals from
rulings of the adminis-trative appeals officer, his behaviour in
(i) pre-appeal hearing document production - docu-ment dumping "on
the court's doorstep at theeleventh hour" - and (ii) examination
for dis-covery were, the Court concluded, "a sham-bles" and "an
exercise in gamesmanship andobfuscation"; largely the product of
the tax-payer's "stonewalling tactics." These tactics,in turn,
precipitated a series of motions by theMinister to obtain
disclosure from the tax-payer. How successful these motions
provedto be is unclear. Indeed, the Court reported,that after
disposition of these motions,"documents were produced [by the
taxpayer]right up to the last minute" before the appealhearing.
Because of the solicitor's reticence aboutdisclosing
information, "the case comes beforethe court without any of the
preliminary fac-tual determinations being made by the Minis-ter
that normally form the basis of the identifi-cation of the issues
... ". The issues, in turn,usually form the starting point of an
appeal tothe Tax Court. Due to being required to firstdetermine the
factual underpinnings that beg atthe appeal issues, the Tax Court
imposed,entirely on the taxpayer, the burden of "es-tablishing all
constituent elements" of factsrequired to justify identification
anti consid-eration of the appeal issues he raised beforethe Court.
In deciding whether the taxpayermet that burden, the Court ruled
that to "theextent ... there is any conflict between the ...[income
tax auditor's] and the ... [taxpayer's]testimony in r~~p~ct Qf the
audit of the taxreturns, I accept ... [the income tax
auditor's]testimony."
And what of the solicitor's notices ofappeal to the Court from
the rulings of theadministrative appeals officer who had re-viewed
the initial audit assessments of thethree income tax returns? In
theory. thesenotices of appeal are supposed to plead theissues for
the judicial appeal hearing. At Bar,however, the Court regarded the
notices ofappeal as being "unhelpful." Moreover, theCourt noted, at
least one of the issues arguedbefore - and determined by - the
Court wasnot even mentioned in the appeal notices.
FAMILY LAW
Appeal RecordMost of the record for the appeal to the
Tax Court involved the lawyer taxpayer'srecords and books.
Subsection 230(2.1) ofthe Income Tax Act2 specifically
identifieslawyers as being obligated to keep records andbooks. The
Act does so in this way. Subsec-tion 230(1) requires, generally,
that "[e]veryperson carrying on business and every personwho is
required, by or pursuant to this Act, topayor collect taxes or
other amounts" keeprecords and books of account at office, home,or
other place the Minister designates. Sub-section 230(2) imposes a
like, general, duty on"[e]very registered charity and
registeredCanadian amateur athletic association." Hereinserted is
subsection 230(2.1) which, "forgreater certainty," mandates,
specifically, thatrecords and books of account "be kept by aperson
carrying on business as a lawyer[defined in subsection 232(1)]
whether bymeans of a partnership or otherwise, includingall
accounting records of the lawyer, includingsupporting vouchers and
cheques."
(Retention periods for such records, andothers, for income tax
purposes (generally: sixyears from when last relied on in filing
areturn), are prescribed, principally, in subsec-tions 230(1), (4)
and the Income Tax Regula-tions, CRC, c. 945, Part LVIII, reg.
5800; andare discussed in Revenue Canada's Informa-tion Circular
78-10R2. Limitation periods(generally: three years from date of
mailing ofa Notice of Assessment in respect of anincome tax return)
governing reassessment ofan income tax return, either at the
request ofthe taxpayer or the Minister, are provided
for,principally, in subsection 152(3), (4); and arediscussed in
Revenue Canada's InterpretationBulletin IT~241and Information
Circulars 75-7R3 and 84-1.)
"Why lawyers are singled out [to retainrecords for income tax
purposes] is uncertain,"remarked Bowman T.C.J. Nonetheless, shedid
not "regard compliance with section 230to be a prerequisite to the
deductibility of ex-penses if they can otherwise be proved.Failure
to keep books and records carries itsown sanction but had
Parliament intendedthat sanction to include non-deductibility
of
2 RSC 1985, c. 1 (5th Supplement). as amended. (the"Act").
177
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FAMILY LAW
expenses it would have been quite capable ofsaying so."
Furthermore, in her view, "there is norequirement in law that
expenses be supportedby receipts or other corroboration if
suchexpenses can be supported by credible vivavoce testimony and
the amounts can be ident! afied with a reasonable degree of
specificity," 3
This, the Court qualified, by suggestingthat lawyers did not
enjoy carte blanche toforego documenting their expenses. At Bar,for
example, the taxpayer and his partnerswere apparently in the h.abit
of receiving ex-pense allowances from their partnerships forwhich
no vouchers or receipts were providedto the partnerships to account
for how theallowances were spent. The Court wrote that"[e]xpenses
incurred on firm business, ifcharged to the firm by partners or
employees,should ideally be backed up by specific sub-stantiation
... [e]ven in a busy law firm .... "
Appeal Hearing"A substantial part of the ... hearing was
devoted to proving small expenditures" in-volving "the laborious
proof of receipts thatshould have been produced at the audit
orobjection level."
This ignited another stream of judicial crit-icism of the
taxpayer, accompanied by a legallecture; a lecture designed for the
taxpayer,although beneficial to litigators at large, notleast
family law practitioners. The Court citedWigmore on Evidence- as
quoted by WakelingJ.A. in Sunnyside Nursing Home v.
BuildersContract Management Ltd. et al.:S
Where a fact could be ascertained only by theinspection of a
large number of documentsmade up of very numerous detailed
state-ments - as. the net balance resulting from ayear's vouchers -
it is obvious that it wouldoften be practically out of the question
to ...[require] production of the entire mass ofdocuments and
entries to be perused by thejury or read aloud to them. The
convenienceof trials demands that other evidence beallowed to be
offered. in the shape of thetestimony of a competent witness who
hasperused the entire mass and will state
3 Weinberger v. MN.R., 64 DT.C. 5060.4 3rd ed., vol. IV, s.
1230.5 (1990),75 Sask. R.I, at 24.
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summarily the net result. Such a practice iswell-established to
be proper.
Argument at the appeal hearing, in somerespects, involved
taxpayer entreaties to theCourt that the Court characterized as
invita-tions "to drive a coach and four" through someIncome Tax Act
provisions.
The Court harboured no reservations aboutresponsibility for
this, in particular, and forshortcomings, generally, in appeal
notices,appeal pre-hearing behaviour, and resultingprolix
proceedings. "I imply no criticism of ...[taxpayer's counsell,"
wrote the Court, Hehas "presented the [taxpayer's] case
skillfullyand professionally. However, he had an im-possible
client."
Rulings on Substantive IssuesWhatever may be said about his
litigation
conduct, the "impossible client" was substan-tially successful
in his appellate challenge toRevenue Canada's treatment of his
three in-come returns under scrutiny. Some of hisissues were
conceded by the Minister on theappeal hearing (including the
Minister's denialof a $1,100 deduction for the taxpayer's
homeoffice and denial of another deduction (naturenot stated) for
$10,838.39). The Court allowedhis appeal on other issues. They
included: (i)part of a $7,860 deduction claimed by the tax-payer
for entertainment expenses of a promo-tional nature - specifically,
$6,379.46 "for agala party [compliments of] "Your
FriendlyNeighborhood Solicitor"; (ii) a portion -$6,587.50 - of
another group of deductions(nature not stated) that totalled
$15,436; and(iii) most - $32,629.85 - of the taxpayer's de-duction
of $33,113.71 for interest and carryingcharges.
Other taxpayer claims on appeal weredisallowed. Four, in
particular, moved theCourt to undelicately reprove the taxpayer.(i)
Omission by the taxpayer, from one of histhree returns in issue, of
$75,592 "plainly tax-able" partnership income "was at least
grosslynegligent, if not deliberate"; therefore warrant-ing the
penalty imposed by the Minister whichthe taxpayer disputed on
appeal. (ii) A deduc-tion for $180 paid by the taxpayer to his
wifefor doing some filing in relation to a board onwhich the
taxpayer sat was rejected as "ridicu-lous". (iii) Responding to the
taxpayer's claimfor a deduction, under the heading of businesstax,
fees, licenses and dues, of $5,059.43, the
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Court wrote: " ... [this included], as ail exam-ple of the
fatuity of the behaviour of ... [thetaxpayer), $8.37 for
dry-cleaning of his [court]vest and gown. To clutter up the record
withthis sort of thing is an insult to the court". (iv)In denying
the legitimacy of the taxpayer'sclaim, over two tax years, of
$111,672 for baddebt expense, the Court held:
[two of the partnerships) deducted a reservefor [a portion of
their] bad debts or doubtfuldebts .... [Taxpayer] then claimed the
balanceof the debts as ... [bad debts or doubtfuldebts on his
personal Tl returns). I mustconfess Ihave seldom seen anything
quite sofar-fetched. The proposition is that one part-ner in a firm
can. after the fum has deducteda bad or doubtful debt allowance,
take theremainder of the firm's debts and personallyclaim a bad or
doubtful debt allowance ....The proposition needs only to be stated
to bedefeated by. its own patent absurdity .... Theconduct is well
within the type contemplatedby [Income Tax Act) subsection
163(2)(which provides for imposition of a penaltyon a taxpayer who,
knowingly or with grossnegligence, makes, participates in. assents
to,or acquiesces in making of, a false statementor omission,
involving a tax return or relateddocument).
CostsIn adjudicating substantive issues raised
on the appeal, Bowman T.C.J. maintained thatshe "ignored," as
being irrelevant, the taxpay-er's "unacceptable behaviour and
focusedsolely on the legal and factual issues." Shenoted, though,
that "it is not inconceivable thathad he behaved less outrageously
at the audit,objection and appeals level [all of which pre-ceded
the appeal] he might have obtainedfurther relief [in those
processes] that I amnot, on the evidence, prepared to give
him."
As for "unacceptable conduct" on the ap-peal, the Judge
concluded, the appropriate re-sponse is to consider whether and
what coststo award. .
At Bar, she wrote, the taxpayer "has beengiven all that he could
reasonably expect inrespect of the substantive issues. Moreover,
hehas been given great leeway in respect of theproduction of
documents and the raising ofissues. He has, however, treated this
court, itsrules, the orders of the court and counsel for
FAMILY LAW
the ... [Minister], who is an officer of thecourt, with
disdain."
A further concern, the judge wrote, wasthat the taxpayer engaged
in "a dangerous andrisky game" in treating the court as a forumfor
a tax audit and foisting that function on ajudge. "[A]s will be
apparent from my awardof costs,". the judge promised, that type
ofgamesmanship will prove "expensive" to thetaxpayer.
Her analysis of legal and factual consid-erations in,
consequently, awarding solicitorand client costs against the
taxpayer speaks foritself:
It is unusual to award costs against a partywho has been
partially successful, and in par-ticular solicitor and client
costs. The matter isdiscussed in Young v. Young, [1993] 4 S.C.R.3.
The general rule is that Ii successful litigantis entitled to party
and party costs. Wheresuccess is divided it is not unusual for
noorder to be made for costs. To depart from theusual rule requires
unusual circumstances.For a successful or partially successful
liti-gant (a) to be deprived of costs, (b) to beordered to pay
party and party costs, [or] (c)to be ordered to pay costs to the
other partyon a solicitor and client ... [basis], requires ameasure
of reprehensibility. To award solici-tor and client costs against a
litigant who hasachieved the degree of success that ...
[thetaxpayer) has [,) requires a high degree ofreprehensible
conduct. There must, to use thewords of McLachlin 1. in Young
(supra) atp. 134, be "reprehensible, scandalous or out-rageous
conduct on the part of one of theparties.
After citing Sarchuk J. in Bruhm v. TheQueen6 on the same issue,
Bowman J. con-eludes, as to principle, that "to award solicitorand
client costs against a partially successfulparty is rare and should
be done only inexceptional circumstances."
She then refers to section 147 of the Gen-eral Procedure Rules
governing appeals to theTax Court of Canada (addressed in detail
inMcMechan & Bourgard, Tax Court Practice(Carswell, looseleaf).
That provision of theRules affords the Court "wide
discretionarypower in respect of the awarding of costs."
694 D.T.C. 1400 (T.C.C.).
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Turning to the appeal at Bar, she con-cludes that this "is a
case for ordering ... [thetaxpayer] to pay the Crown's costs on a
solici-tor and client basis" and to do so on the appealhearing and
on all preceding motions ..
Her reasons:From the outset ... [the taxpayer] has
doneeverything possible to obstruct the Crown inits attempt to put
its case forward in anorderly way. He has produced documents upto
the last minute. He has rendered impossi-ble the conduct of the
diseevery, The abuseof the assessor, who acted properly
through-out, is intolerable. Generally speaking, con-duct prior to
the commencement of the ...[appeal) is not relevant to the award
ofcosts. The rule is not invariable. Here, ... [the
taxpayer] has. deliberately frustrated the auditprocess and the
objection process with a viewto having matters dealt with by the
court thatshould never hav.e had to come before it. Hisconduct
prior to commencement of the appeal[to the administrative officer]
and prior to ...[the .appeal hearing) has had a direct impactupon
the manner in which .. , [this appeal]proceeded. He has caused a
... [hearing) thatshould have lasted no more than one day tolast
seven days. Moreover such success as hehas achieved ... [as a
result of the appealhearing] is fio more thail lie could
haveachieved at the audit, objection or [appeal]discovery level had
he not seen fit to obstructthe orderly process of assessment and
objec-tion laid down in the Income Tax Act and theprocedures set
out in the rules of this court.
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