Filion, 2017 FCA 67: legal expenses paid more than seven years before a retiring allowance is received are not deductible under paragraph 60(o.1)

2017 FCA 67 · Federal Court of Appeal

Author: Sas Tullo

This is an income tax appeal about the timing rule in paragraph 60(o.1) of the Income Tax Act, the provision that lets a taxpayer deduct legal fees spent to collect a retiring allowance or pension benefit. Jean Filion paid his lawyers between 1999 and 2003, but the allowance he was fighting for did not arrive until 2013, ten years after the last payment. The Tax Court refused the deduction because the fees fell outside the seven-year window in the provision, and the Federal Court of Appeal agreed. The case matters to anyone whose claim to severance or a pension drags on for years: the clock in paragraph 60(o.1) does not stop while the litigation is stayed, and a constitutional challenge raised for the first time on appeal is unlikely to be heard.

Facts

The appellant paid $35,813.78 in legal expenses between 1999 and 2003 to defend himself against a criminal prosecution for breach of trust and fraud brought by the Quebec government (para 4). In 2001 he also started a civil action against the National Assembly to recover a transition allowance; that action was stayed until 2009 pending the outcome of the criminal case (para 4). After a hearing in 2012, the Superior Court awarded him a partial allowance of $29,699.08 plus $5,317.36 in interest, a total of $35,016.44, in 2013 (para 4). He claimed the legal expenses as a deduction against the allowance received in 2013 under paragraph 60(o.1) (para 1).

The Tax Court of Canada (Ouimet J.) dismissed his appeal under the informal procedure on January 14, 2016, holding that the expenses had not been paid within the seven-year period set out in paragraph 60(o.1), and found it unnecessary to decide whether the expenses had in fact been incurred to establish a right to a retiring allowance (para 5).

Issues

The Court framed a single issue: whether the Tax Court judge erred in finding that the appellant could not benefit from the deduction in paragraph 60(o.1) of the Act (para 2). Within that issue the appellant raised three arguments: that the seven-year period should be read as interrupted while his civil action was stayed (para 6); alternatively, that the time limit in paragraph 60(o.1) is unconstitutional because it offends judicial independence and section 15 of the Canadian Charter of Rights and Freedoms (para 7); and that the fees paid in the criminal proceeding preserved evidence essential to his civil claim (para 8).

Holding

The appeal was dismissed without costs (para 15). The Court held that the appellant did not meet the criteria of paragraph 60(o.1) because he received no retiring allowance or pension benefit within the seven taxation years following the payment of the legal expenses, and that this failure was fatal (para 11). The provision is clear and admits of no interruption of the seven-year count (para 12). The Court declined to rule on the constitutional question because it had not been raised before the Tax Court and, in any event, appeared to be without merit (paras 13-14).

The court’s reasoning

Scott J.A., writing for a unanimous panel, applied the standards of review in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 (para 9). The reasons are brief and turn on the text of the provision. Paragraph 60(o.1) permits a deduction, in computing income for a taxation year, of legal expenses paid to collect a retiring allowance or pension benefit to which the taxpayer was entitled, up to the amount received, but only where the expenses were paid in the taxation year or in any of the seven preceding taxation years (para 10). Because the appellant collected no such amount within the seven taxation years following the years in which he paid his lawyers, he fell outside the provision (para 11).

The Court rejected the invitation to read the seven-year period as suspended during the stay of the civil action. In its words, “The criteria set out in the provision are clear,” and a purposive construction “confirms that it does not contain any ambiguity that would make it possible to take into account an interruption in the computing of the seven taxation years” (para 12).

On the constitutional argument, the Court noted that the notice of constitutional question was served and filed only on appeal and that the argument had not been made before the trial judge (para 13). Relying on Guindon v. Canada, 2015 SCC 41, [2015] 3 S.C.R. 3 at paragraphs 32 to 35, the Court accepted that an appellate court retains a discretion to entertain a new constitutional question, but held that there must be a good reason to exercise it and that none had been shown (para 14). Two further considerations weighed against hearing the point: courts are reluctant to assess the validity of a provision without a factual record on which the section 1 justification could be measured, and the appellant had failed to show even prima facie that paragraph 60(o.1) draws a distinction on an enumerated or analogous ground under section 15 (para 14).

Practical implications

The decision is a short confirmation of what the text of paragraph 60(o.1) already says, but it is useful on two points. First, the seven-year window runs by taxation year from the payment of the fees, and nothing in the provision tolls it for delays in the underlying litigation, however blameless the taxpayer. In my view, a dismissed employee or pensioner whose claim is stayed or prolonged should treat the deduction as a statutory concession with hard edges rather than a general relief for the costs of recovering employment income, and should plan the timing of legal billing where that is possible. I also note that, as of this writing, the current text of paragraph 60(o.1) on the Department of Justice site still refers to expenses “paid by the taxpayer in the year or in any of the 7 preceding taxation years”; the provision has not been amended in the respect that mattered to Mr. Filion.

Second, the Court’s treatment of the Charter argument is a reminder, consistent with Guindon, that a constitutional challenge to a tax provision must be built at trial, with an evidentiary record; a notice of constitutional question filed for the first time on appeal invites refusal even where the court has a discretion to hear it. The Court’s brief observation that the time limit in paragraph 60(o.1) engages no enumerated or analogous ground under section 15 will be a difficult obstacle for similar equality arguments against neutral timing rules in the Act.

Whether an appeal was taken is not verified here.

For a reader whose severance or pension dispute has run long, the lesson is simple: the deduction for legal fees in paragraph 60(o.1) is available only if the money is received within seven taxation years after the fees are paid, and the courts will not stretch that period because the litigation was delayed. Anyone who wishes to challenge a provision of the Act on constitutional grounds should raise it in the Tax Court with proper evidence, not for the first time on appeal.

This comment is general information, not legal advice. The law may have changed since the decision; check the current text in the tax wiki.

Citation and links

Filion v. Canada, 2017 FCA 67 (English translation of the French reasons), decided March 31, 2017. Gauthier, Scott, and de Montigny JJ.A.; reasons for judgment by Scott J.A. Reasons on the Federal Court of Appeal’s site. Also on CanLII. Decision under appeal: judgment of the Tax Court of Canada (Ouimet J.) dated January 14, 2016, docket 2015-3504(IT)I.