Khushroo F. Vatcha v. Minister of National Revenue, 91 DTC 653, [1991] 1 CTC 2413 (TCC)

Dussault, T.C.J. [Orally]:—This is an appeal against assessments by the respondent for the appellant's 1982, 1983, 1984 and 1985 taxation years disallowing certain tuition fees in 1983 as well as expenses incurred to acquire investment publications in all the years in question.

At the beginning of trial, the respondent entered a consent to judgment in favour of the appellant with regard to the disallowed amount of tuition fees in 1983. The only question for this Court to determine then concerns the disallowed deduction with respect to expenses to acquire investment publications.

In essence, the appellant stated that the investment publications subscribed to, namely "Money Reporter" (Marpep), “GPS” Publishing, "Investment Reporter” (Marpep) and "Northern Miner" were acquired essentially to earn income from property, (as he already admitted he was not in the investment business) and consequently that he should be allowed a deduction for the costs thereof according to paragraph 18(1)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act"). He insisted on the fact that he was seeking a superior yield on his various investments mainly by way of dividends albeit sometimes in the form of capital gains. In essence, the appellant argued that the information contained in the publications was used to monitor his investment program in order to increase his income and hence that the cost of subscribing to the publications should not be viewed as incurred on capital account. Accordingly, it was argued that paragraph 18(1)(b) of the Act should not be applicable in the circumstances.

Alternatively, the appellant argued that by subscribing to the investment publications he was in fact paying fees to a person for advice as to the advisability of purchasing or selling securities, that advising others was that person's principal business and consequently that the deduction of subscription fees should qualify under paragraph 20(1)(bb) of the Act.

As to the application of paragraph 18(1)(a) of the Act, I fail to see any distinction between the situation of the appellant and those of the taxpayers in the cases of Canada v. Leonard A. Young, [1989] 1 C.T.C. 421; 89 D.T.C. 5234 (F.C.A.), Patricia Goodhall-Gunn v. M.N.R., [1985] 2 C.T.C. 2378; 85 D.T.C. 663 (T.C.C.) and F. Davida Beadle v. M.N.R., [1979] C.T.C. 2917; 79 D.T.C. 775 (T.R.B.).

In Canada v. Young, supra, the Federal Court of Appeal made it clear that paragraph 18(1)(b) of the Act prohibits a deduction for subscription fees to investment publications in such circumstances because they are considered on capital account.

Moreover, I would like to quote here Taylor, J. of the Tax Court of Canada when he said the following in the Goodhall-Gunn case, supra, (at pages 2379-80 (D.T.C. 664)) concerning some of the very same publications:

The testimony of the appellant made it clear that the services were used for the purpose of buying and selling investments (stocks, bonds, etc.) with a view to holding in the portfolio those which would produce the greatest returns. It was logical to her that the cost of such "advice" should be deductible from the income results obtained. It was quickly established that the appellant was not in "business", and therefore any deduction claimed must find its roots in its relation to "property" (section 18(1) (a) of the Income Tax Act, S.C. 1970-71-72 c. 63, as amended). In addition the claim was not for a payment to a” person. . . for advice" and that section 20(1)(bb) was of no assistance to the appellant. Counsel for the Minister argued that the payments made ($230) were in direct relation to the acquisition of the property itself—the stocks and bonds bought, sold, held, and exchanged, by the appellant, rather than in relation to the interest income itself. That is, the $230 at issue was an additional capital expense—an increase in the total cost of the appellants investment portfolio, and therefore really any investment income earned should be related to the larger “ capital base”, not merely to the precise cost of acquiring the assets themselves.

I am in agreement with the opinion of counsel for the Minister. The income is not earned from the investment program (that is the reviewing, handling, exchanging, buying, selling, and holding of various investments). The income is earned from the investments themselves—quite different. Clearly that income may be beneficially or adversely affected by decisions made in managing the investment portfolio (synonymous with the investment program), but once a certain bond or stock is purchased, providing it is held to dividend or interest date, the income therefrom is automatic and completely beyond the control or impact of the taxpayer. It is not and cannot be affected by further manipulation of the income stream—the investment portfolio held by Mrs. Goodhall-Gunn. All that can be done with already owned stocks or bonds, is to hold them securely in a safety deposit box, as evidence of entitlement to dividend or interest when the correct time arrives. As far as I am aware provision is made on schedule 4 of the Income Tax Return (Schedule of Investment Income) to permit a deduction for "safe keeping”. Such matters as conversations with bankers or investment dealers, examination of financial statements and periodicals, review of advice, etc. (in general that which was the activity related to the investment portfolio of this appellant), are part of the efforts to maintain and improve the capital base (the property) from which the interest and dividend income arises. As an example—if the capital asset base of a different taxpayer happened to be that he owned several apartment buildings, then publications (or other costs) such as those referenced in this appeal—directly related to buying selling or exchanging apartment buildings, should not be an operating expense, but it would be a capital expense. Conversely, such periodicals and other items which directly related to reducing or controlling operating cost of the apartment buildings, or of procedures for increasing the rents therefrom would be in all likelihood appropriately considered as costs on operating account.

I think those remarks are equally applicable in the present case.

I will now deal with paragraph 20(1 )(bb) of the Act. Section 20 of the Act is an exception of paragraphs 18(1)(a), (b) and (h) of the Act and permits the deduction of expenses which would otherwise have been prohibited by those paragraphs, some of which are rightly considered expenses on account of capital. The pertinent portion of paragraph 20(1)(bb) of the Act reads:

20. (1) Notwithstanding paragraphs 18(1)(u), (b) and (h), in computing a taxpayer's income for the taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(bb) Fees paid to investment counsel.—an amount other than a commission paid by the taxpayer in the year to a person

(i) for advice as to the advisability of purchasing or selling a specific share or security of the taxpayer, . . .

if that person's principal business

(iii) is advising others as to the advisability of purchasing or selling specific shares or securities, . . .

General subscription fees for an investment publication listing and analyzing hundreds and thousands of corporations and securities is not, in my view paying "an amount to a person for advice as to the advisability of purchasing or selling a specific share or security of the taxpayer". In my opinion, what Parliament contemplated in enacting such a provision is a person-to-person relationship between a client seeking an advice with respect to specific share or security and the " advisor”. Moreover, to be deductible the amount must be paid for the advice itself and not as a subscription fee for a publication. The only possible conclusion is that those specific requirements, as I see them on a plain reading of the words of the provision are not satisfied here.

For these reasons, the appeal with respect to the 1983 taxation year is allowed and the assessment is referred back to the Minister for reconsideration and reassessment. For the 1982, 1984 and 1985 taxation years the appeal is dismissed. No special order is made as to costs.

Appeals allowed in part.