Archive for April, 2007

Tax Deductions by Individuals for Legal Fees

Wednesday, April 25th, 2007

The Toronto Star ran a story yesterday that focused on whether legal fees should be tax deductible. The story is at:

www.thestar.com/Article/206400

To very briefly summarize the article, one tax expert suggests that there should be the ability for individuals to deduct legal costs while another says that this would not be fair. The first tax expert says that deductibility isn’t a pure tax issue but is as much, and likely more, a “socio-economic issue”. The second expert takes the position that tax laws should be neutral and that, therefore, it’s not fair that some people would get, in effect, extra deductions if they litigate as opposed to those who do not litigate.

I take issue with the position of the second expert. Firstly, I question whether, if tax laws are supposed to be neutral, that they are truly being neutral when a business can deduct legal fees but individuals cannot do the same. However, even if one is to assume that it is proper to distinguish businesses from individuals, is it really true that the current laws are neutral? I don’t think so. For example, individuals may be able to deduct legal fees if:

1. They are investing in real estate and the legal fees relate to income generated by the property;

2. They are suing to enforce rights under an employee stock option agreement or an employer-paid disability insurance plan;

3. They are suing for wrongful dismissal or termination or severance pay;

4. They are disputing rulings relating to the Canada Pension Plan or Employment Insurance entitlements;

5. They are disputing income tax assessments;

6. They are litigating for spousal or child support; or

7. In some instances, the legal fees relating to the sale and purchase of a house may be deductible as part of a moving expenses deduction.

(For what it is worth, the situation in Canada is not dissimilar to that in the

U.S. where, again, certain types of legal fees are deductible while many are not.) Why is it that individuals in these instances are permitted to generate legal fees but the other individuals are not? If the tax laws are truly supposed to be neutral, then the deduction should be given across the board instead of only to special classes of people.

Now, the first thing I can hear people complaining about is that this would cost the government far too much in terms of tax losses. The second thing is that there would be complaints that this would foster or increase the number of outrageous lawsuits out there if the current costs regime could be reduced through the deductibility of legal costs. For the first issue, my response is “yes, and … what?” Decisions are made all the time that result in government losing tax revenues. For the second issue, and also the first one I suppose, the answer seems to be simple: only permit the deduction where the person has successfully won his or her case. In that case, only those with truly meritorious claims would be permitted to use the deduction and the outrageous lawsuits would not get to deduct the legal costs. OK, but what about the 90% plus of the cases that settle? Suppose the plaintiff with the outrageous lawsuit gets a settlement from the other side for a nuisance amount (say, $2,000) just to make the lawsuit go away. Wouldn’t that make it so that the outrageous litigant could still claim that he/she “won” and therefore should be able to deduct the legal costs? I suppose. Unless, however, we also make it so that on any settlement the other side agrees that the settlement is valid for tax deductibility purposes. This is not entirely without precedent. Section 60.1 of the Income Tax Act permits the deduction of payments for spousal and child support pursuant to a separation agreement or a settlement agreement relating to support. In that instance, both parties to the litigation can agree on the amounts and they are therefore deductible. Similarly, if the side making the payment on a nuisance claim can be convinced to agree that there should be tax deductibility, then the deduction can be made. How many truly unmeritorious, self-represented people will know enough in negotiating their nuisance settlements to request the agreement to deductibility of legal fees? Probably not a lot, so the risk is relatively minor.

There is also the access to justice issue which is somewhat touched upon in the article. Under the costs regime in effect in

Canada, the “loser” pays at least a part (usually) of the “winner’s” costs. The problem is that courts are very hesitant to grant large costs awards for fear it will scare away people with otherwise valid claims. The result is that the winning party might have to spend $1,000 for a motion, but will only get a cost award of $200 out of an unspoken fear by the court that it does not want to overly punish the losing individual party. If the court knew, however, that the losing party could deduct the cost award from his/her taxes, then there would be less hesitance to make cost awards that are more reflective of the actual amounts spent on legal fees – and the winning party would be permitted to afford the defence of his/her rights more easily.

In the end, it may well be worth giving further consideration to the deductibility of legal fees in

Canada.

CALC

Online Sales / E-Commerce

Sunday, April 22nd, 2007

Statistics Canada released on April 20 its latest report on the state of online sales in

Canada. The report found that online sales had grown by double digits for the fifth year in a row. The total sales to the public and private sectors amounted to a 40% increase in 2006 from 2005. While the majority of sales (68%) were B2B (business to business), retail sales to individuals was one of the fastest growth areas with the value of sales having doubled in 2006 over 2005 levels. The report can be found at Statistics Canada’s web site, at:

http://www.statcan.ca/Daily/English/070420/d070420b.htm

There is little doubt that the days of web sites being only electronic brochures are limited (unless, of course, you are a lawyer – in which case your product is information, so you are, once again, left behind all the cool kids and their new, shiny toys).

However, there remains a perception that internet sales are still very much an unregulated area. While this perception may have been accurate even a few years ago, businesses do not often realize that the legislators have been working hard to address e-commerce issues and realities.

For example,

Ontario has had the Electronic Commerce Act, 2000 for, as the name suggests, the past seven years. (New York has had similar legislation for slightly longer – see the Electronic Signatures and Records Act of 1999, which is Article 3 of the new York State Technology Law.) The legislation provides that electronic acceptance of terms on a web site, for example, can be just as binding as if the customer signed a physical piece of paper. Similarly, the Evidence Act was amended in

Ontario
in 1999 to permit litigants to prove facts through electronic evidence in a more simplified manner. (For

New York
, see Rule 4518 CPLR.) Thus, when the customer fails to honour his/her/its obligation which was accepted by clicking the acceptance button on the web site, the plaintiff business can prove this acceptance by evidence regarding the security of the web site and application software.

In

Ontario, the Consumer Protection Act, 2002 has applied laws previously applicable to door-to-door salespeople to online commerce. For example, section 40 of this Act (and the current regulations) permits parties to change their minds within seven days of entering into any contract over the Internet worth $50 or more and cancel the contract. Similarly, section 38 of the Act (and section 32 of the current regulations) provide minimum disclosure requirements which must be set out in any contract executed over the Internet. (

New York
law has not passed any general rules regarding electronic commerce and instead has opted to apply its General Business Law except in certain instances such as protection of privacy of information over the Internet.)

The

Ontario Consumer Protection Act can be found at:

http://www.e-laws.gov.on.ca/DBLaws/Statutes/English/02c30_e.htm

while the applicable regulations can be found at:

http://www.e-laws.gov.on.ca/DBLaws/Regs/English/050017_e.htm#BK41

Small businesses should consult, at a minimum, these laws to ensure that their agreements and their web sites are in compliance with governmental requirements. As this sector of business activity continues to grow, an ounce of prevention today could be worth more than a pound of cure tomorrow.CALC

Haste Makes Waste

Monday, April 9th, 2007

I was reading the Toronto Star on Saturday and there was an article on the fact that the Canadian Charter of Rights is now 25 years old and, according to the article, is all but inaccessible to the “average” person since the cost of litigation is so high.  For those interested in reading the article, it is online at:

http://www.thestar.com/article/200519

Now, let me put my cards on the table.  I am not a fan of the Charter and I am nowhere near a fan of the possibility that unelected judges are made the arbiters of our rights.  But I don’t want to turn this posting into one regarding the Charter and the whole rights debate.  To be honest, I could rant about this for weeks and Lord alone knows that I spilled more than my fair share of ink on the topic in my Masters of Law thesis a decade ago.

What I really wanted to post about today, though, is how this particular article strikes me as a reflection on society generally and business in particular.  Part of the article complains that, in effect, that the Charter is being neutered by the courts and be government from being the grand “quick fix” for society.

When I was a young child, my grandfather would remind me from time to time that “haste makes waste”.  The same applies in business.  For example, I ordered new envelopes to reflect my new address.  I received them last week.  In its rush to do the job, the printer did not take the time to realize that there was to be printing on two sides of the envelope – my logo on the front and my address on the back.  Instead, in the rush to get the job done (as it was already late), the printer ended up delivering to me envelopes that had the logo AND the address on the front side.  I returned the envelopes and the woman at the counter saw them and said “yes, of course it’s wrong.”  I will get the correct envelopes, now, sometime this week – even later than originally anticipated – thanks to the desire to have the “quick fix” to the problem of my envelopes being late.

The same occurs in litigation when clients want to “go for the jugular” and fail to truly appreciate that litigation is like war – there are many battles along the way and if you don’t win a particular battle, you want to ensure that it does not harm the entire strategic plan for the war.  Yet, in the desire to finish off the other side quickly, positions are taken which, if they are not completely successful, could have adverse future effects.  Of course, my job is to point out these potential ramifications, and I do, but I find that many of my clients focus solely on the “quick fix” and my advice falls on deaf ears.

Again, my business clients tend to want their grand visions put into place immediately.  I now have several clients who have fallen into this trap.  In their situations, they started with a small business, then decided that they were doing well enough and sought to expand quite quickly.  The end result was that their desire for a “quick fix” to grow rapidly was met with staffing problems, or market problems, or some other problems with the result that I am now providing either insolvency or bankruptcy advice to those clients.

There is no question that this desire for a “quick fix” is society-wide.  Why is the printer rushing to get my job to me?  I wasn’t screaming for my stationery.  But you can bet that other customers were screaming for their work and if my job was earlier in time, then it had to be done to get to the other jobs.  Similarly, the desire to knock out the other side in litigation is driven by the view that litigation is a nuisance – rather than a sometimes necessary business expense – and the desire to return one’s focus to expanding the business, rather than focusing on protecting your current position.  This also applies to the business scenario mentioned above. 

It seems to me that we would all do well to take a collective deep breath, think about where we’re going and implement the plan in measured steps.  This is not my left-wing epiphany with its conclusion of “Chill Out, Dude”.  Rather, it is a realization that maybe my grandfather knew a thing or two.

CALC

My Personal Philosophy

Thursday, April 5th, 2007

From time to time I get asked by friends and colleagues how I have built up my legal practice.  They ask, “Where do you get your clients?”  And, of course, my initial response is that I walk the hallways of the hospital emergency wards, the marriage counselor offices and the criminal courts.  Then they realize that I am kidding when they remember that I don’t do personal injury, family or criminal matters and ask me to seriously answer the question.  The truthful answer is a partial “I dunno”.  It’s a mixture that is a small part people inquiring from my web site, but really it is result of referrals from other lawyers or prior clients who know that I do a good job.  This answer then usually leads to the more incisive question: “OK, but how do you decide whether to take someone on as a new client.”  My answer is always one word: Beer.

I have already written about beer and how it was an indicator of great social status to me (or at least the beer fridge).  And here I go again talking about beer.  If you did not know me, you’d start to get the impression that I’m an alcoholic.  Rather, I am a desperate abstainer.  I’d like to be an alcoholic, but with a busy practice and a wife and two young sons, I just can’t seem to find the time to do any serious drinking anymore.  But that still doesn’t keep me from determining key relationships based upon beer.

And how does that work?  Well, the grand philosophical theory is based upon a simple yet all-telling question:  Can I go for a beer with this person?  Now I suppose if I were a different person, I’d change the word “beer” for anything else “round of golf”, “dinner”, etc., etc.  The question really is “do I feel comfortable with this person as a person that I could spend some of my ‘free’ time with him /her?”  I use this question for not only my clients, but also the people that I hire – for example, my accountant, my employees, my personal trainer (and anyone who has seen me other than the photo for my bio on the web site, knows full well that my personal trainer also likes his beer – and clearly isn’t that good of a trainer).  Most importantly, though, I believe that my clients should be asking this same sort of question for me.  The reality is, there’s plenty of lawyers out there and plenty of good lawyers to boot.  I am as good as the next lawyer?  You bet.  Am I better than the next lawyer?  I think so (but, then again, I’m pretty biased in this regard).  Do these things matter?  Sometimes yes, and sometimes no.  The reality is that a lawyer is part of your business’ professional team.  And of course there is the old saying “There is no ‘I’ in ‘team’.”  (Which of course is true, but there is “me” in “team”!  But I digress.)  In order for the team to work properly, the members should trust each other, but even if they cannot do that, they must be comfortable with one another.

Beer anyone?

CALC

Discriminatory Business Practices

Wednesday, April 4th, 2007

Everyone is familiar, at least on a general level, with the requirements of human rights legislation.  I cannot refuse to rent out an apartment or hire a person just because he or she is of a certain race or has a specific religious belief, etc.  But in each of these instances, it is always a “direct” form of discrimination.  However, many small business owners are not aware that they could be found liable for “indirect” discrimination.  Or, even if they are not found liable, they run the risk that they could face litigation in such cases.

For example, suppose Manufacturer A wants to deal with Distributor B.  However, Distributor B knows that Manufacturer A gets parts from Supplier C.  If Distributor B refuses to deal with Manufacturer A, or makes it a condition that it will only do the deal if Manufacturer A dumps Supplier C as a supplier, then this could be a “discriminatory business practice” which is prohibited in Ontario by the not-too-surprisingly named Discriminatory Business Practices Act. 

 

The key issue is whether the reason for the refusal to deal or the condition is because of an “attribute” of, in this example, Supplier C.  An “attribute” is defined in the legislation quite broadly as: “the race, creed, colour, nationality, ancestry, place of origin, sex or geographical location of the person, and includes the race, creed, colour, nationality, ancestry, place of origin, sex or geographical location of a person connected with the person or nationals of a country with the government of which the person conducts, has conducted or may conduct business.” 

Now, in a general sense, this legislation is similar to the restrictions under the human rights legislation.  But, bear in mind that under that legislation the only way you can obtain relief is to make a complaint to the Human Rights Commission.  While there are plans to amend the legislation to permit a complainant the right to sue the wrongdoer directly, these amendments are still pending.  But in the case of discriminatory business practices, the legislation has permitted lawsuits for many years now.  There is still the possibility of making a complaint to a government official who can start an investigation, but the complainant can also sue in the courts.  In addition, either the government or the complainant can bring an application to the courts for an injunction to stop the discriminatory practice. 

It is basic human nature for religious or national groups to have a preference for dealing with others in their same group.  So, to take my ancestry as an example, if I have a choice of buying supplies from a company run by a Maltese person or from a German person, my natural tendency is to go with the Maltese person’s company.  In this instance, there is nothing intended against the German person.  But, the fact that I have not chosen the German person, simply because he has a certain attribute (ie. he is not Maltese), this will be sufficient to potentially expose me to claims under this legislation.  And, again, this would apply if I said to the Maltese person that I will only deal with that person if the others that he/she deal with are also Maltese. 

This legislation has, somewhat surprisingly, received little attention over the years as the focus has been, rather, upon the human rights legislation.  But it is something that can prove very helpful to small business if they should find themselves on the receiving end of a discriminatory practice.  In addition, it is something they should be careful about.  

CALC

Summer Company 2007 Applications

Monday, April 2nd, 2007

The Ontario Ministry of Small Business and Entrepreneurships runs a program each year for students between 15 and 29 years of age who are not in their final year of school.  The program provides “awards” (ie. grants) of up to $3,000 to students to start and run their own business over the Summer.  Up to $1,500 is paid early in the Summer to deal with start up costs and an additional $1,500 maximum is awarded at the end of the Summer following the completion of their business and proof of their return to school.  In addition, students will receive a minimum of 12 hours of business training and the opportunity to receive mentoring assistance from local entrepreneurs.

Applications are taken on a first come, first serve basis and the application process is now open.  If you or someone you know may be interested in running a business over the summer, it might be worth while to check out the Ministry’s web site.  You can go to:

            www.sbe.gov.on.ca/ontcan/sbe/en/youth_summerco_en.jsp

CALC