The appellant sought to deduct legal fees spent resisting collection attempts against him by three professionals who had worked for a start-up airline that the appellant ran with three others through two corporations.
The Court rejected the appellant’s claim in part because:
“[25] Even if the airline activities were to constitute a source of income for the appellant, that source of income disappeared when Val Air Inc. declared bankruptcy in 2004 and when Les Lignes Aériennes Val Air Inc. was dissolved in 2008. In 2011, the appellant had no source of income coming from the airline’s activities and he was not carrying out any other business but his accounting business. In 2011, there was no nexus between the expenses that the appellant claimed as deductions and the business that he was actually carrying on in 2011, his accounting business. … “
The appellant likely would have lost for other reasons, but is it true that you cannot claim expenses for a business that ceased operating years earlier? The Courts, including the FCA, have taken a different view from that of Justice Favreau here.
David Sherman has a handy summary of these cases in his Practitioner’s Income Tax Act notes to s. 18(1)(a) of the Income Tax Act:
“Wind-down or post-termination costs may be deductible: Selig, 1955 CarswellNat 14 (TAB); Heard, [2001] 4 C.T.C. 2426 (TCC), para. 15; Mikhail, [2002] 2 C.T.C. 2612 (TCC), para. 34; Langille, 2009 TCC 398, paras. 9-12; Génier, 2010 TCC 641, para. 29 (“It is simply incontrovertible that business closing costs are deductible business expenses”); Raegele, [2002] 2 C.T.C. 2955 (TCC), para. 19 (purpose of 18(1)(a) “is met where the cause of the expenses incurred is directly linked to the income producing activity of the business”); Poulin, 1996 CarswellNat 1017 (FCA) (real estate broker who had ceased the business was allowed to deduct damages paid out for a lawsuit in the course of his business. See also VIEWS docs 9707457; 2015-0618981E5 (post-retirement E&O insurance premiums to protect against lawsuits).”
In para. 29 of Genier, Justice Boyle said: “It is simply incontrovertible that the general rule is that business closing costs are deductible business expenses. It would be nonsensical if it were otherwise.” And in Raegele, Justice C. Miller said:
“The purpose required of paragraph 18(1)(a) in a wind-up situation, need not be to produce future income, but it is met where the cause of the expenses incurred is directly linked to the income producing activity of the business. Clearly such expenses must be reasonable and must be incurred prior to the final nail being hammered into the business’ coffin.”