REASONS FOR JUDGMENT
Ezri J.
[1] This case raises the question of whether a taxpayer can deduct expenses incurred to dispute another taxpayer’s tax assessment under subparagraph 60(o)(i) of the Income Tax Act (ITA).
Ms. Kruivitsky pays for her niece’s husband’s tax dispute
[2] Kathryn Kruivitsky is a Chartered Accountant. She worked as a manager for taxation at KPMG until 1995 before becoming a financial advisor and portfolio manager. By 2017 she was semi-retired. She did some financial planning but had stepped away from taxation completely. She did, however, assist family members in preparing their tax returns. This latter activity was done out of affection for her family and was unpaid.
[3] Ms. Kruivitsky had a niece who married a paramedic, Brandon Dombroski. Mr. Dombroski and his colleagues had ongoing disputes with their employer, the County of Renfrew, regarding the employer’s initial resistance, and finally refusal, to issue T2200 forms for car and cell phone expenses.
[4] Mr. Dombroski claimed these expenses in 2017 but was assessed to deny the expenses because no T2200 had been issued to him.
[5] Ms. Kruivitsky represented Mr. Dombroski at objections with the CRA and later as his agent in the Tax Court of Canada in Court file 2020-1140 (IT)I. She did this voluntarily and was not paid. She was interested in the appeals because Mr. Dombroski was part of her family, but she had no pecuniary or other stake in the outcome of the appeal.
[6] Mr. Dombroski’s appeal was dismissed by the Tax Court.
[7] Ms. Kruivitsky and Mr. Dombroski then retained Susan Tataryn, an experienced Ottawa tax counsel, to advise on next steps. An appeal to the Federal Court of Appeal was filed.
[8] Ms. Kruivitsky paid approximately $6,000 in fees and disbursements for Mr. Dombroski’s appeal of the Tax Court decision to the Federal Court of Appeal.
[9] Mr. Dombroski’s appeal was discontinued before it was heard. However, the efforts of Mr. Dombroski and Ms. Kruivitsky were not wholly unsuccessful. Shortly after the appeal was discontinued, a new collective agreement negotiated between Renfrew County and its paramedics, included provisions to issue T2200s for some of the expenses that had been in issue in Mr. Dombroski’s appeal.
[10] Ms. Kruivitsky deducted the $6,211 incurred in Mr. Dombroski’s Federal Court of Appeal case, in computing her 2022 income.
CRA Reassessment
[11] The CRA reassessed to deny the claimed expenses by a notice of reassessment dated January 11, 2024. Ms. Kruivitsky objected. She was told that she could not claim the expenses for various and not altogether consistent reasons. The reassessment was confirmed. It is that reassessment that is at issue in this appeal.
[12] The above facts are summarized from a partial agreed statement of facts as well as from Ms. Kruivitsky’s testimony which was not challenged.
[13] I also note that this case could have been conducted under this Court’s Informal Procedure, but Ms. Kruivitsky felt that the issue of the deductibility of tax dispute expenses of another person has been somewhat uncertain for many years and should be clearly addressed under this Court’s General Procedure.
Issue
[14] The issue is straightforward. Can Ms. Kruivitsky deduct the costs that she incurred to contest Mr. Dombroski’s tax assessment? This question is to be decided based on subparagraph 60(o)(i) of the ITA and on the decided case law.
The Principles of Statutory Interpretation
[15] This case is basically an exercise in statutory interpretation. There is no real dispute as to the interpretive principles that are to be applied, and I summarize them as found primarily in Canada Trustco.
[16] Canada Trustco requires that provisions of any statute be interpreted by looking at the text, context and purpose of the provision (TCP).
[17] To that basic requirement I note the following additional propositions:
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The ITA remains an instrument dominated by explicit provisions dictating specific consequences, inviting a largely textual interpretation;
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Where the words of a provision are precise and unequivocal, the ordinary meaning of the words play a dominant role in the interpretive process.Where the words can support more than one reasonable meaning, the ordinary meaning of the words plays a lesser role;
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No statutory interpretation exercise is complete without looking at both the English and French language versions of the statute and treating both as equally authoritative;
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Despite the emphasis on textual analysis in tax cases, “Even where the meaning of a provision may not appear to be ambiguous at first glance, statutory context and purpose may reveal or resolve latent ambiguities.”
[18] Particularly in tax cases, there is tension between the emphasis on text, and the need to also consider context and purpose even in the face of apparently clear legislation. Professor Sullivan acknowledges as much, writing in her seminal book on statutory interpretation and referring to her illustrious predecessor Elmer Driedger:
For many years after the initial edition of Driedger’s Construction of Statutes, Canadian courts struggled with the relationship between the modern principle and the plain meaning rule. In cases involving the Income Tax Act, the modern principle was often understood to be consistent with, or even synonymous with, the plain meaning rule.[2]
[19] However, even tax judges cannot abdicate the requirements of text, context and purpose in favour of a return to a pure plain meaning rule. The plain meaning rule gave way to a broader search for meaning precisely because it so often failed at the margins of statutory interpretation, when what was ‘clear’ was also absurd if read and applied algorithmically. The Supreme Court in Canada Trustco did not overturn its decision in Stubart that all legislation, including tax statutes, are not to receive a literal interpretation, but are to be read in their entire context having regard to their legislative purpose and scheme.
[20] One way to reconcile the plain meaning rule with the Modern Approach is to keep in mind the requirements of the Interpretation Act which provides that:
12 Every enactment is deemed remedial, and shall be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects.
[21] As a matter of law, I must give legislation an interpretation that, within the limits of text, context and purpose, ensures the attainment of the legislative objects.
Residual Presumption
[22] During the hearing, counsel for the appellant raised the Notre-Dame case as a reminder that doubts about the meaning of legislation should be resolved in favour of the taxpayer. I did not really accept that principle, and I would only add that I am not strongly disposed to accept the complement to that principle either. The complement is that tax exemptions are to be construed strictly. I do note however, that the Court in Placer Dome did restate the principle that a residual presumption can be relied on in favour of a taxpayer, if the doubt about legislative intent is reasonable and the ordinary principles of statutory interpretation have not resolved the issue. In this case, I don’t think that recourse to a residual presumption will be required.
[23] Against that background I now apply the principles of statutory interpretation. I will then review the two cases that have considered subparagraph 60(o)(i) of the ITA.
Text of Paragraph 60(o) is not ambiguous
[24] There seems to be little disagreement between the parties that subparagraph 60(o)(i) is not a particularly difficult or ambiguous legislative provision. The text reads as follows:
60 There may be deducted in computing a taxpayer’s income for a taxation year such of the following amounts as are applicable
(o) amounts paid by the taxpayer in the year in respect of fees or expenses incurred in preparing, instituting or in relation to,
(i) an assessment of tax, interest or penalties under this Act or an Act of a province that imposes a tax similar to the tax imposed under this Act,
(ii) a decision of the Canada Employment Insurance Commission under the Employment Insurance Act or to an appeal of such a decision to the Social Security Tribunal or the Employment Insurance Board of Appeal under the Department of Employment and Social Development Act,
(iii) an assessment of any income tax deductible by the taxpayer under section 126 or any interest or penalty with respect thereto, or
(iv) an assessment or a decision made under the Canada Pension Plan or a provincial pension plan as defined in section 3 of that Act;
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60 Peuvent être déduites dans le calcul du revenu d’un contribuable pour une année d’imposition les sommes suivantes qui sont appropriées :
o) les sommes payées au cours de l’année par le contribuable au titre des honoraires ou frais engagés pour préparer, présenter ou poursuivre une opposition ou préparer, interjeter ou poursuivre un appel au sujet :
(i) d’une cotisation à l’égard de l’impôt, des intérêts ou des pénalités en vertu de la présente loi ou d’une loi provinciale imposant un impôt semblable à celui qui est imposé par la présente loi,
(ii) d’une décision de la Commission de l’assurance-emploi du Canada en vertu de la Loi sur l’assurance-emploi ou de l’appel d’une telle décision auprès du Tribunal de la sécurité sociale ou auprès du Conseil d’appel en assurance-emploi en vertu de la Loi sur le ministère de l’Emploi et du Développement social,
(iii) d’une cotisation de tout impôt sur le revenu qu’il peut déduire en vertu de l’article 126 ou de toute peine ou de tout intérêt y afférent,
(iv) d’une cotisation ou d’une décision rendue en vertu du Régime de pensions du Canada ou d’un régime provincial de pensions au sens de l’article 3 de cette loi;
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[25] It is not so much what is in the text that is contentious as what is missing from the text. The opening words of paragraph (o) apply to amounts paid by the taxpayer, here Ms. Kruivitsky, in respect of fees and expenses. Subparagraph (i) refers to assessments of tax but does not stipulate that the tax assessments must be Ms. Kruivitsky’s own tax assessments. On a plain reading, Ms. Kruivitsky, as a taxpayer in 2022, can deduct the fees she paid in relation to an assessment of her tax, to an assessment of Mr. Dombroski’s tax or to an assessment of anyone else’s tax.
[26] There is no real dispute that the French text of the provision reads in much the same way as the English text. It too contains no restriction limiting the deduction to the taxpayer whose assessment is contested.
[27] Under a plain meaning rule, Ms. Kruivitsky’s appeal should succeed.
[28] However, under a TCP approach, we must consider the context and purpose of the legislation to ascertain if there are ambiguities and if so, to resolve them.
Context
[29] Subparagraph 60(o)(i) can be compared with subparagraph 60(o)(iii). That subparagraph does contain a restriction on who can claim the deduction. A taxpayer can deduct the costs of contesting an assessment of tax deductible, “by the taxpayer”
under s. 126 of the ITA.
[30] Nor is this the only provision in s. 60 that more specifically restricts or extends the right to a deduction. Paragraph 60(a) provides that in computing a taxpayer’s income for the year there may be deducted the capital element of each annuity payment included under paragraph 56(1)(d) in computing the taxpayer’s income. Paragraph (b) allows a taxpayer to deduct spousal support amounts paid by the taxpayer. Subparagraph 60(l)(i) is more expansive. It permits a taxpayer to deduct amounts paid by or on behalf of the taxpayer as premiums under an RRSP.
[31] So, Parliament does seem to turn its mind to questions about who should get the deduction and occasionally it allows someone who incurred an amount on behalf of another person to take the deduction.
[32] But context has to extend beyond looking at s. 60 and a broader legislative review uncovers problems.
Sections 60 and 56 don’t work together on a plain reading of 60(o)(i)
ITA often allows claiming expenses related to other taxpayers expressly
[33] The ITA tends to restrict taxpayers’ right to deduct amounts related to other taxpayers’ affairs. In fact, when Parliament wants to allow such deductions, it tends to do so expressly.
[34] Long ago, in the Mitchell case, a taxpayer sought to deduct tuition fees paid on behalf of the taxpayer’s daughter. At the time the ITA provided that in computing income of a taxpayer for a tax year, there could be deducted:
“Where a taxpayer was…a student…the amount of any fees for his tuition”
The Exchequer Court held that the provision clearly could only be read as referring to the student and not to the parent who paid the tuition
.
[35] Parliament eventually responded by enacting provisions that allow students to transfer unused tuition tax credits to their spouses, parents or grandparents.
[36] Parliament also permits spouses to claim charitable donation credits regardless of which spouse actually made the donation.
[37] It is even possible to invoke the ‘implied exclusion’ rule in support of the principle that taxpayers cannot deduct outlays related to other taxpayers. The implied exclusion rule exists when an express reference is expected but absent. Where Parliament wants to permit a taxpayer to deduct an outlay made for another taxpayer it tends to do so expressly. Here, the fact that subparagraph 60(o)(i) does not explicitly limit deductibility to the taxpayer whose assessment is disputed, is not by itself a strong enough indicator of a legislative intent to allow someone other than that taxpayer to claim the deduction. Parliament did not take the next step and expressly extend the 60(o)(i) deduction to anyone other than the taxpayer whose assessment is in issue
[38] I give the ‘implied exclusion’ rule some weight, but not too much. The implied exclusion maxim is regarded as one of the most difficult to apply reliably, and must be considered only as an element in a statutory interpretation exercise. There is, however, another contextual indicator which points quite strongly away from allowing someone other than the taxpayer whose assessment is in issue to claim the deduction.
Appellant’s reading of 60(o)(i) yields inconsistent reporting of income/expenses
[39] Subparagraph 60(o)(i) is one of a series of deductions permitted under section 60 of the ITA. Section 60 however must be read together with its companion provision, s. 56 which contains a list of statutory inclusions to income. The relevant statutory inclusion in this case is paragraph 56(1)(l) which provides as follows:
56 (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,
(l) amounts received by the taxpayer in the year as
(i) legal costs awarded to the taxpayer by a court on an appeal in relation to an assessment of any tax, interest or penalties referred to in paragraph 60(o),
(ii) reimbursement of costs incurred in relation to a decision of the Canada Employment Insurance Commission under the Employment Insurance Act or to an appeal of such a decision to the Social Security Tribunal or the Employment Insurance Board of Appeal under the Department of Employment and Social Development Act,
(iii) reimbursement of costs incurred in relation to an assessment or a decision under the Canada Pension Plan or a provincial pension plan as defined in section 3 of that Act,
if with respect to that assessment or decision, as the case may be, an amount has been deducted or may be deductible under paragraph 60(o) in computing the taxpayer’s income;
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56 (1) Sans préjudice de la portée générale de l’article 3, sont à inclure dans le calcul du revenu d’un contribuable pour une année d’imposition :
l) les sommes reçues au cours de l’année par le contribuable :
(i) soit au titre des frais et dépens qui lui ont été alloués par un tribunal à l’occasion d’un appel relatif à une cotisation à l’égard de tout impôt ou intérêt, ou de toutes pénalités, visés à l’alinéa 60(o),
(ii) soit à titre de remboursement de frais engagés relativement à une décision de la Commission de l’assurance-emploi du Canada en vertu de la Loi sur l’assurance-emploi ou à l’appel d’une telle décision auprès du Tribunal de la sécurité sociale ou auprès du Conseil d’appel en assurance-emploi en vertu de la Loi sur le ministère de l’Emploi et du Développement social,
(iii) soit à titre de remboursement de frais engagés à l’occasion d’une cotisation établie ou d’une décision rendue en vertu du Régime de pensions du Canada ou d’un régime provincial de pensions au sens de l’article 3 de cette loi,
si en ce qui concerne cette cotisation ou décision, une somme a été déduite ou peut être déduite dans le calcul de son revenu en vertu de l’alinéa 60o);
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[40] If we strip the provision down to its essentials it reads this way:
56 (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,
(l) amounts received by the taxpayer in the year as
(i) legal costs awarded to the taxpayer by a court on an appeal in relation to an assessment of any tax, interest or penalties referred to in paragraph 60(o),
if with respect to that assessment…, an amount has been deducted or may be deductible under paragraph 60(o) in computing the taxpayer’s income.
[41] Let us assume for argument’s sake that Mr. Dombroski’s appeal had gone forward and that he had succeeded and received an order awarding him costs of $1,000. We can then consider how s. 56 and 60 would apply first from Mr. Dombroski’s perspective and then from Ms. Kruivitsky’s perspective.
[42] For Mr. Dombroski, we start by assuming that there is nothing deductible for him under paragraph 60(o). That is because the opening words of paragraph 60(o) limit the deduction to “amounts paid by the taxpayer”
. Here, Mr. Dombroski paid nothing so he had no deduction nor any amount that may be deductible. Per the closing words of paragraph 56(1)(l) since no amount is deducted or may be deductible by him, there is no inclusion in Mr. Dombroski’s income of the $1,000 costs award.
[43] We then turn to Ms. Kruivitsky. If the appeal to the FCA had been successful, any costs would not have been awarded to her, but to Mr. Dombroski. As a result, neither the words “amounts received by the taxpayer in the year”
nor the words “legal costs awarded to the taxpayer by a court”
would be satisfied. Ms. Kruivitsky would therefore have no income inclusion under paragraph 56(1)(l). She would however, under the appellant’s view of subparagraph 60(o)(i), still be entitled to a tax deduction.
[44] So, in this scenario, no one reports the $1000 costs award contemplated under paragraph 56(1)(l) but Ms. Kruivitsky can obtain a deduction under subparagraph 60(o)(i). There is a mismatch between the reporting of income under section 56 and the claiming of deductions under section 60 with the result that no income is reported by anyone.
[45] There are many variations on the above scenario, but perhaps only one more example is needed to drive home the mismatch problem. Suppose that Mr. Dombroski had paid the $50 filing fee in the Federal Court of Appeal to issue his notice of appeal. Suppose he had also spent $100 on gas to go to Ottawa for the hearing of the appeal and to return therefrom. Those could be expenses related to the hearing for the purposes of subparagraph 60(o)(i). Now the closing words of paragraph 56(1)(l) are satisfied because amounts may be deductible in computing Mr. Dombroski’s income. As a result, Mr. Dombroski would have an income inclusion of the $1,000 costs award in his income because he had deductible expenses of $150. Ms. Kruivitsky still reports none of that $1,000 in income and still has a $6,200 tax deduction. The income and deductions are not flowing to the same taxpayers. This does not seem to be what Parliament intended.
[46] At this point, the contextual analysis starts to bleed into a consideration of the purpose of subparagraph 60(o)(i) and paragraph 56(1)(l), two provisions which were first enacted together in 1964.
Purpose of 60(o)(i) and 56(l)(l)
Deduction of tax dispute expenses: an origin story
[47] Prior to the 1960s, taxpayers basically had no entitlement to deduct the costs of disputing tax assessments. That is because Canadian courts applied a UK decision, Smith’s Potato Estates which had held that tax disputes related to events that occurred after the income earning process was complete, hence the outlays were not related to earning the income and were not deductible.
[48] In Premium Iron Ores, the taxpayer sought to deduct the cost of litigating an American tax dispute. The Tax Appeal Board applying UK law said no.
[49] Five years later, an appeal was heard by the Exchequer Court. The result was the same, however by a fascinating coincidence, the judgment of the Court was released on June 19, 1964, just three months after the forerunners to paragraph 56(1)(l) and subparagraph 60(o)(i) were announced and one day after those provisions were enacted.
[50] The new legislation added paragraph (q) to subsection 6(1) of the ITA, now s. 56 and paragraph (w) to subsection 11(1) of the ITA, now s. 60:
6(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year
(q) amounts received by the taxpayer in the year as legal costs awarded to him by a court on an appeal in relation to an assessment of tax, interest or penalties under this Act, if with respect to that assessment an amount has been deducted or may be deductible under paragraph (w) of subsection (1) of section 11 in computing his income.
11(1) Notwithstanding paragraphs (a) (b) and (h) of subsection 1 of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year:
(w) amounts paid by the taxpayer in the year in respect of fees or expenses incurred in preparing, instituting or prosecuting an objection to, or an appeal in relation to, an assessment of tax, interest or penalties under this Act.
[51] Income tax legislation is not like other legislation. The formal bill to amend the ITA was preceded by a resolution laid before the House of Commons sitting as the Ways and Means Committee. The resolution which was tabled with the budget speech read as follows:
7. That for the 1964 and subsequent taxation years, a taxpayer may deduct in computing income amounts expended by him in relation to an objection to an assessment an appeal from an assessment and shall include in computing income and costs recovered in respect thereof.
[52] The resolution is not legislation, but it does provide some indication that the deduction of tax dispute expenses was part of a package under which the same taxpayer claiming a deduction had to include any costs recovered.
[53] In the text of the budget speech itself the Minister of Finance stated that:
Another proposal of general interest is that taxpayers be allowed to deduct expenditures they incur in preparing a notice of objection to an income tax assessment or in appealing an assessment.
[54] It is possible to read the budget speech as granting taxpayers a broad right to deduct expenses in respect of a notice of objection or appeal, but read in context, the speech simply seems to say that taxpayers can deduct the cost of objecting to or appealing from their assessments.
[55] During debates on the budget, the Minister of Finance said the following in response to a question:
The purpose of allowing expenses in connection with appeals or objections is essentially to give the smaller taxpayers the same break that most large taxpayers have anyway. In the case of many large taxpayers the fees that they pay to…and other tax lawyers… and other tax accountants are not always broken down and itemized according to each individual service that is performed. Frequently the annual fees that my hon. Friend receives as auditor for a company may include an amount which covers all services of this kind and they are allowed as a deduction for tax purposes. Similarly, my legal friends frequently receive retainers which cover a variety of things and for the most part they are allowed as deduction and do not have to be itemized in detail. But if smaller taxpayers and sometime a large one, feel that they have not been treated fairly by the income tax authorities and want to appeal they may be in a position where they are afraid it will cost them a lot of money in the form of fees to carry through an appeal, and that the expenses in the form of the fees they incur will
not be allowed as a deduction against their income.
[20]
[56] I reproduced this quote at length because it strikes me as speaking directly to the issues raised by the Premium Iron Ores saga. Larger taxpayers appear to have been circumventing the prohibition on deducting tax dispute costs by burying the fees in annual audit fees or general legal retainer fees. Smaller taxpayers and sometimes other taxpayers e.g. Premium Iron Ores litigating a US tax dispute, had no such option and were unwilling to risk litigation which might cost more than what might be recoverable, and that there would not even be a tax deduction available.
[57] The legislation was not intended, as suggested by the appellant, to provide some broad-based access-to-justice type relief for taxpayers who could call on other persons to fund their tax disputes. It narrowly targeted taxpayers were having difficulty deducting the expenses of litigating their own tax disputes.
[58] The legislation came too late to help Premium Iron Ores, but it didn’t matter. In 1966 the Supreme Court in a 3-2 split held that the cost of fighting the IRS was incurred for the purpose of earning income and could be deducted in the same way that other legal and accounting expenses had long been held to be deductible.
[59] The result of the new legislation and the Supreme Court holding in Premium was that there were now at least two routes to deductibility of tax dispute expenses:
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Persons earning income from business or property could deduct the costs in computing income in the usual way, pursuant to Premium Iron Ores; and
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Employees and everyone else who did not have a source of income to which the tax dispute related, could avail themselves of the predecessor to subparagraph 60(o)(i) to claim the deduction, which deduction may be subject to some limitations such as not being available to carry forward.
Evolution of the provisions
[60] Section 6 of the ITA was split into sections 12 and 56 as part of the overhaul of the ITA in 1972. Similarly, section 11 of the ITA was split into sections 20 and 60. Sections 12 and 20 were now dedicated to enumerating inclusions and deductions in computing income from business or property. Sections 56 and 60 dealt with other income inclusions and deductions that might not necessarily relate to business or property. The tax dispute deductibility provision along with other provisions, such as tuition deductions, became part of new s. 60. Some of those provisions, tuition for example, were moved again in 1988 when those deductions were converted into non-refundable tax credits.
[61] In 1981, paragraph 60(o) was modified. It was split into subparagraphs and subparagraph (iii) was added. As we have already seen, new subparagraph (iii) limited the available deduction for foreign tax disputes to amounts referred to in s. 126 of the ITA, i.e. amounts for which a foreign tax credit was available. Subparagraph (iii) used the words “deductible by him”
, but I think that this just represents a different drafting style, rather than signifying an intent that subparagraph (iii) be narrower than subparagraph (i) with respect to who was eligible to deduct the outlay.
Conclusion on Origin and Purpose of paragraph 60(o)
[62] I find that paragraph 60(o) was originally enacted as paragraph 11(1)(w) to allow taxpayers to deduct the costs of litigating their own tax disputes at a time when the law prohibited such deductions. Any court cost awards were to be added to that same taxpayer’s income under paragraph 6(1)(q). Later, these provisions became part of sections 60 and 56 respectively, and served as a means to allow taxpayers to deduct tax dispute costs where there might not be a business or property source to ground such a deduction while including court cost awards in income of the same taxpayer.
[63] There was never any intent in the enactment of paragraph 11(1)(w) or subparagraph 60(o)(i) to allow taxpayers to deduct the cost of disputing the assessments of other taxpayers. That was not the problem at which the provisions were addressed and that reading of the provisions undermines the coordination of subparagraph 60(o)(i) with paragraph 56(1)(l) by potentially allocating the deduction and the associated income between different taxpayers, or by simply not brining into income costs awards in some cases. This is contrary to what was envisioned in 1964.
[64] We arrive then at a review of caselaw on the issue.
The Caselaw
[65] There were only two decided cases put to me that are directly on point.
[66] In Sherman, the trustee of a trust sought to deduct the expenses of disputing a corporate tax assessment against the revenues of the trust. The costs included the cost of sponsoring a private bill to revive the corporation. The trust had owned all of the shares of the corporation before its dissolution. On dissolution, the trust had received the remaining corporate assets and apparently, under the law at that time, it was liable for the amount of the corporate assessment.
[67] The Tax Review Board held that the trust was the only legal entity with an interest in the tax assessment and was entitled to the deduction. The Court’s reasons emphasized a substance over form analysis holding that:
6…“Looking through the ‘corporate veil’ they were the company.”;
7,…“…the Minister said that these fees had [sic] not been incurred for the purpose of lodging an objection against an assessment of an entirely different legal entity, the company. I cannot say that this line of thought or this assessing practice impressed me as reasonable or fair. One should, in such cases of this nature, apply a fair amount of realism in evaluating the juridical relationships which caused the confusion”; and
8,…“If there were at any time a reason to look through the corporate veil, then it was at this time. In reality only the façade had changed”.
[68] Sherman was applied in Flood. The appellant in that case was a lawyer who was also the executor and trustee of his mother’s estate. The estate was alleged to have underreported the fair market value of certain property leading to criminal charges against Mr. Flood which were dismissed, and a civil assessment of the estate which was contested. Mr. Flood sought to deduct the relevant legal fees and expenses, which deductions were denied, except for those related to the criminal charges.
[69] This Court in Flood followed Sherman, holding that the wording of subparagraph 60(o)(i) allows a deduction of costs to contest an assessment of tax, but without limiting the assessment to an assessment of tax, ‘of the taxpayer’. Someone with a pecuniary or other interest that is, “not too remote”
should be able to deduct the expense. The Court went on to note that, given Mr. Flood’s line of work, the expenses were in any case deductible as ordinary business expenses. The Court also noted that legal fees may be allowable as deductions in computing income from business or property under generally accepted accounting principles.
[70] Flood is an informal procedure case that follows Sherman. Sherman is a problematic case in that it engages in the kind of form over substance analysis that has been discouraged in a post Shell Canada world.
[71] At best, both cases can be viewed as instances where a court saw no distinction between a taxpayer and someone who was the personal representative or alter ego of the taxpayer such that the latter could stand in the shoes of the former. I note that the definition of taxpayer, “includes any person whether or not liable to pay tax”
. In turn, a person is defined inclusively as follows:
person, or any word or expression descriptive of a person, includes any corporation, and any entity exempt, because of subsection 149(1), from tax under Part I on all or part of the entity’s taxable income and the heirs, executors, liquidators of a succession, administrators or other legal representatives of such a person, according to the law of that part of Canada to which the context extends
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personne Sont comprises parmi les personnes tant les sociétés que les entités exonérées de l’impôt prévu à la partie I sur tout ou partie de leur revenu imposable par l’effet du paragraphe 149(1), ainsi que les héritiers, liquidateurs de succession, exécuteurs testamentaires, administrateurs ou autres représentants légaux d’une personne, selon la loi de la partie du Canada visée par le contexte. La notion est visée dans des formulations générales, impersonnelles ou comportant des pronoms ou adjectifs indéfinis.
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[72] I include both language versions of that definition because the English version might possibly be read as referring to the heirs, executors etc. of only a s. 149 entity, but it is clear from the French version that the definition includes section 149 entities, ainsi que (as well as) héritiers…exécuteurs…ou autres représentants légaux d’une personne (of a person). So, taxpayers include persons and persons include their heirs and executors.
[73] I don’t need to decide whether subparagraph 60(o)(i) does extend to heirs and executors since that issue is not before me, but I do think that Sherman and Flood if they are to be considered at all, are best read narrowly as limiting the deduction to taxpayers and their heirs, executors and successors. Even then, it is not clear that Sherman is correctly decided, but Flood is perhaps defensible.
[74] But this raises a question: why have any proximity limit at all? The Court in Flood notes that there is no restriction in the text of subparagraph 60(o)(i) on who can take the deduction but goes on to hold that “it would be unreasonable to permit a stranger or volunteer who had no pecuniary interest to deduct the fees of contesting someone else’s assessment”
.
[75] The appellant argues that concerns about maintenance and champerty may have animated the insistence on maintaining a proximity test in Flood.
[76] It was explained to me that ‘maintenance’
is officious meddling where the maintainer has no interest in the case and the assistance rendered lacks justification or excuse. ‘Champerty’
is maintenance but with the additional element of the maintainer profiting from the litigation.
[77] However, Parliament did not have champerty and maintenance on their minds as implicit limits when they enacted paragraph 11(w) of the Income Tax Act. For reasons already stated the limit that they had in mind was that the person paying the expense would get the deduction and would also include in income any cost recoveries.
[78] If one is going to follow Flood to its logical conclusion, then the floodgates are open. There is no restriction in subparagraph 60(o)(i) as to who can pay the expense and then claim the deduction. I see no reason to substitute the unexpressed limitation that only persons with an appropriate connection to the case can claim the deduction, in place of the equally unexpressed limitation that only the taxpayer whose assessment is disputed can claim the deduction.
[79] During argument, the appellant was at pains to point out that she was not a stranger to the Dombroski appeal, albeit she lacked any pecuniary interest in its outcome. She seemed hesitant to abandon her argument that she had a sufficient interest in Mr. Dombroski’s case, in favour of simply embracing the logical conclusion of her argument: She paid the expenses of a tax dispute; she gets the deduction.
[80] If I am wrong in my view about the scope of subparagraph 60(o)(i), I think that the appellant would be entitled to succeed in her claim. I don’t think that there is a proximity test required under the provision and the appellant has met all the other pre-conditions in the subparagraph.
Conclusion
[81] I conclude that a textual, contextual and purposive analysis of subparagraph 60(o)(i) reveals and resolves a latent ambiguity. The text of the provision does not limit the deduction of tax dispute expenses to the taxpayer whose assessment is disputed. However, the context of the provision points away from a right of anyone else to claim a deduction. Where Parliament wants someone other than the person who paid the expense, to get the deduction, it tends to say so expressly.
[82] Further, a broad reading of the provision creates a conflict with paragraph 56(1)(l) of the ITA. A taxpayer may get the deduction even though neither they, nor anyone else, reports any corresponding cost award amount. Alternatively, a taxpayer may be obliged to report a cost award amount of indeterminate magnitude where they have paid only a minimal amount of the costs of the dispute, with all those other costs being deductible by the taxpayer who did pay the costs of the dispute while reporting no cost recovery. Neither result was contemplated by Parliament when it first enacted these provisions.
[83] Parliament enacted the predecessor provisions to subparagraph 60(o)(i) and paragraph 56(1)(l) to provide a right to deduct the cost of tax disputes at a time when no such right was recognized by the courts. The courts did in time recognize that tax dispute costs were deductible in computing business or property income, but the statutory deduction continues to have an important role to play where the taxpayer was an employee or someone whose tax dispute was not related to income from a business or property.
[84] The relevant caselaw has only extended the deduction to taxpayers who have paid the expenses and who are essentially the successors to, or the alter ego, of the person with the tax dispute.
[85] There seems to be no principled basis to substitute a proximity-based test for deductibility in place of a requirement that only the person with the tax dispute can claim the expense. If I am wrong in thinking that only the taxpayer with the dispute can claim the expense, I see no reason to impose any other restriction on the provision. It would be up to Parliament to decide what if any restriction should apply.
Costs
[86] If this case had been brought in the Informal Procedure, it would be dismissed without costs. Given the modest amount in dispute, the reasons for wanting the case in the General Procedure and the skill and efficiency with which counsel for the appellant presented the case, I exercise my discretion to not order costs against the appellant. Each party shall bear its own costs.
Signed this 29th day of July 2026.
“Michael Ezri”
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