102751 Canada Inc. v. Agence du revenu du Québec, 2019 QCCQ 7378, aff'd 2021 QCCA 605

The taxpayer (Mobile), which was owned by the Waibel family in Europe, sold its two Toronto properties in 2002 and 2003 for $7.3 million, with $7.258 million of that sum being diverted by one of its directors (Black) without the authorization of the family. After this was discovered in 2004, an action was commenced against Black and the other director (Black’s mother), with the action being settled in 2012 by the payment by Black of a sum plus interest thereon at 5%. The ARQ reassessed to deny the deduction by Mobile of legal and other professional fees incurred by it in investigating the disappearance of the sales proceeds and in relation to the Superior Court action, primarily on the basis that they were capital expenditures.

In finding that the legal expenses were deductible, Cameron JCQ stated (paras. 77, 82, TaxInterpretations translation):

The outcome of the dispute, as far as the Waibel family is concerned, is the confirmation, by a settlement agreement that is as valid as a judgment and that has been implemented, of Mobile's right in the capital, a right that Mobile also had as soon as the funds were misappropriated, and the establishment of an interest rate of 5% on this capital, all secured by real estate guarantees. The result: the receipt of amounts, as interest, that was not a capital transaction, and that was income arising from property, the property being Black's obligation arising from the misappropriation, as confirmed by the legally binding effect of a settlement. …

The analogy with the Kellogg and Evans cases is not perfect, because the former involved a business and the latter involved income from a trust, but it is sufficient to convince us that an expense is not capital in nature simply because the expense is not recurring or extraordinary.

Due to an insufficiency of funds of Mobile, some of the expenses in question were funded by a limited partnership (KG) of the Waibel family, with the KG subsequently reimbursed by Mobile. Cameron JCQ found that this manner of funding the expenses did not detract from expenses in such amount having been incurred by Mobile.

The taxpayer (Mobile) objected to a notice of reassessment (no. 1144) and filed an appeal to the Court of Quebec following an adverse response to the objection by the ARQ. However, 12 days after the filing of this appeal, the ARQ issued a fresh reassessment (no. 1386), which effectively was a consolidation of no. 1144, which denied claimed legal expenses, and another reassessment which allowed the carryforward of losses. Mobile did not object to the second reassessment. However, Mobile and the ARQ subsequently signed a protocol reaffirming the points in contention for all the reassessed years – and subsequently to that, the notice of appeal was amended to reference the second notice of reassessment (no. 1386).

Cameron J noted that although there thus in substance had been no new reassessment denying the legal expenses, the jurisprudence “makes no distinction between a reassessment which consolidates a decision under objection with a new element not heretofore the object of an objection and the simple act of issuing a new notice of reassessment to communicate the decision on the objection, without adding a new element” (para. 23, TaxInterpretations translation). He further stated (at para. 34):

[F]rom the receipt of the notice of reassessment, the taxpayer had 90 days to object to it, not in order to contest something new … but to reiterate his contesting of the subject of the notice no. 1144, being the assessment already under appeal.

In finding that, in light inter alia of the signed protocol, Mobile should be considered to have objected to the second reassessment (no. 1380), Cameron JCQ stated (at para. 44):

The Minister … not only had acknowledged receipt of the written statement of the intention of the taxpayer to object to the assessment in force in 2012, but he agreed with the opposing party and with the Court to bring the debate to an early hearing on its subject matter. It would therefore be difficult for the Minister to argue that he has not received written notice of objection to Notice of Assessment No. 1386 as he has agreed in writing that the contest is about the subject matter of that assessment.

The amendment to Mobile’s notice of appeal was accepted, and the appeal was valid.