Kondor v. The Queen
(October 15, 2014 – 2014 TCC 303) dealt with the taxpayer’s claim to deduct legal expenses of $12,171 in 2011 incurred during a division of property with his wife after their separation in 2010. The taxpayer’s argument was somewhat novel. He argued that the nature of his investments was such that he needed time to raise the money his wife was asking for and the legal fees were effectively incurred to stall his wife’s claim for a period of several years:
 Following Mr. Kondor’s separation, his wife informed him that, in addition to some other assets, she expected to receive $2,100,000 in cash from him as part of the division of property from the marriage. Mr. Kondor’s only significant asset at the time was his shares in DPX. There was no market to sell those shares and his wife was not prepared to accept shares in lieu of cash. Therefore, Mr. Kondor’s only means of obtaining the necessary cash was through DPX.
 DPX borrows money from third parties (generally the friends and family of Mr. Kondor and of the other 50% shareholder of the company) and invests that money in various complex securities. DPX takes steps to hedge its risk in those investments. The investments are highly leveraged. While DPX believes that there is minimal risk involved in its investments, its brokerage does not share that view. Thus, the brokerage regularly reviews DPX’s account to ensure that it is maintaining sufficient margin and, when it believes it is not, requires DPX to either unwind some of its investments or inject additional capital. Just as DPX’s brokerage believes that DPX’s investments are risky, so too do conventional lenders. Thus DPX is not in a position to borrow funds from traditional lenders.
 Mr. Kondor explained that, because of its highly leveraged positions, withdrawing that amount of money from DPX in the short term would have been disastrous for DPX. Similarly, it would have had a disastrous impact on the value of Mr. Kondor’s shares in DPX. He testified that he was in a position to extract the necessary funds from DPX but that he needed a significant amount of time if he wanted to do so without impacting the value of the company.
 Mr. Kondor’s strategy to deal with this problem was to stretch out negotiations with his wife over the division of assets as long as possible. He succeeded in obtaining a delay of approximately three and a half years. Mr. Kondor testified that the legal fees that he incurred were incurred for the purpose of obtaining that delay. Mr. Kondor argues that the fees should therefore be deductible as they were laid out for the purpose of earning income from his shares in DPX.
The court concluded that the payment had in fact been incurred to preserve the value of Mr. Kondor’s DPX shares and were therefore on capital account:
 In Muggli, having found that the appellant had expended funds for the purpose of gaining or producing income, former Chief Justice Bowman had easily concluded that the funds had been expended on capital account since they had been expended to preserve the ownership of a capital asset. That reasoning is equally applicable to Mr. Kondor’s case. Mr. Kondor expended the legal fees in order to preserve the value of his DPX shares.
 Mr. Kondor argued that he had effectively borrowed money from his wife for three and a half years, that the cost of doing so was the legal fees that he expended and thus that those fees should be deductible on income account. I agree that that is the economic reality of what occurred but taxation is based on the actual transactions that occurred, not on the economic reality of the situation (Shell Canada Limited v. The Queen). Mr. Kondor did not settle the division of property and then borrow funds back from his wife. He paid legal fees to delay the division of property and thus maintain the value of his DPX shares. Therefore, his expenditure was not laid out to borrow money but rather to preserve a capital asset. Accordingly it was incurred on capital account.
As a result the appeal was dismissed, but without costs.