|
Citation: 2004TCC706
|
|
Date: 20041021
|
|
Docket: 2002-3511(IT)G
|
|
BETWEEN:
|
|
TOM WILLIAMS,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
REASONS FOR JUDGMENT
Miller, J.
[1] Mr. Tom Williams received advances
on commission income of $141,500 and $165,960 in 1997 and 1998,
respectively. He contends that he is entitled to certain
employment expenses for those years of $76,864 and $75,029,
respectively. The position of the Minister of National Revenue
(the Minister) is that these employment expenses do not qualify
for deduction pursuant to paragraphs 8(1)(i) or
8(1)(h) of the Income Tax Act as the monies were
not expended by Mr. Williams but by Mr. Williams' employer.
The Parties considered, in the alternative, the application of
paragraph 8(1)(f), but for the reasons that follow it
will be unnecessary for me to address that provision. I find the
employment expenses do qualify for deduction.
[2] No oral evidence was given, as the
Parties relied upon the following brief Statement of Agreed
Facts:
The Appellant and the Respondent, through their respective
counsel, each admit the following facts for all purposes of this
appeal:
1. At all
material times during the years 1997 and 1998 the Appellant,
Tom Williams, was employed by the securities brokerage firm
Whalen, Beliveau as a senior technology analyst. There was no
written employment agreement between the Appellant and Whalen,
Beliveau.
2. The
Appellant was employed by Whalen, Beliveau in their Vancouver,
British Columbia office to perform due diligence, and help put
together, broker and sell large scale high-tech securities
offerings.
3. In
performing these duties, the Appellant was ordinarily and
regularly required to travel extensively, primarily in eastern
Canada, California and the eastern United States of America.
4. Whalen,
Beliveau and the Appellant agreed that he would be remunerated on
a commission basis for the services which he provided to them.
Whalen, Beliveau agreed that the Appellant would earn
one-quarter of any gross commissions received by Whalen,
Beliveau on any sales of securities for which the Appellant was
responsible or directly involved.
5. Whalen,
Beliveau also agreed to provide the Appellant with regular
monthly monetary draws and other amounts requested by the
Appellant from time to time as advances against the commissions
to be earned by the Appellant. All such draws and other advances
were treated by Whalen, Beliveau as employment income paid to the
Appellant and the Appellant was provided with T-4 Statements of
Employment Income in respect of such amounts by Whalen,
Beliveau.
6. The
Appellant was responsible for his own travel expenses and any
other employment expenses which he incurred in performing his
duties to earn the commissions including remuneration paid to his
sales assistant. All of these expenses (the "Employment
Expenses") were necessary for the Appellant to arrange and
negotiate transactions for Whalen, Beliveau. The Appellant was
not specifically required by the terms of his contract of
employment to employ a sales assistant, but as a practical
matter, it was not possible for the Appellant to perform the
duties of his employment without a sales assistant.
7. The
Appellant did not receive an allowance and was not reimbursed or
entitled to be reimbursed for any of the Employment Expenses by
Whalen, Beliveau.
8. Whalen,
Beliveau paid the Employment Expenses on the Appellant's
behalf and the moneys it paid for the Employment Expenses were
treated as a debt owing to it by the Appellant. Whalen, Beliveau
expected to recoup these moneys from future commissions earned by
the Appellant.
9. The
Appellant left the employ of Whalen, Beliveau in 1998. None of
the transactions with which the Appellant was involved were ever
completed. Consequently no commissions were ever earned by
Whalen, Beliveau from the Appellant's services and no
commissions or other amounts ever became payable to the Appellant
other than the monthly draws and other advances previously paid
to him by Whalen, Beliveau as advances against commissions to be
earned by him.
10. Whalen, Beliveau
demanded that the Appellant repay the moneys advanced to him to
pay the Employment Expenses when he left their employ.
Notwithstanding such demand, the Appellant has not repaid any
amount in respect of these moneys to Whalen, Beliveau.
11. The Appellant and the
Respondent agree that the statutory conditions stipulated by
paragraphs 8(1)(f) and 8(1)(h) of the Income Tax
Act for deductibility of the Employment Expenses have been
met, except that the Respondent says that:
a) The
Appellant did not pay or expend the Employment Expenses in the
year or that the Appellant was reimbursed or entitled to be
reimbursed for the payments by his employer, Whalen, Beliveau,
because the Appellant has never repaid to Whalen, Beliveau the
moneys advanced to pay the Employment Expenses; and
b) The
Appellant is also not entitled to deduct the Employment Expenses
under paragraph 8(1)(f) because he never actually received
any commissions in the relevant years, but only advances on
account of future commissions.
12. The Appellant claimed
the Employment Expenses paid in 1997 and 1998 as deductions from
income when he filed his returns of income for those taxation
years.
13. The Minister of
National Revenue reassessed the Appellant to tax in respect of
his 1997 taxation year by Notice of Reassessment dated September
5, 2001 and assessed the Appellant to tax in respect of his 1998
taxation year by Notice of Assessment dated August 8, 2001. The
1997 reassessment and the 1998 assessment denied the deduction of
the Employment Expenses.
14. The amounts of the
Employment Expenses at issue in this appeal and to which the
Appellant will be entitled if this appeal is allowed are:
|
Year
|
Travel Expenses
|
Sales Assistant Salary
|
Total
|
|
1997
|
$64,864
|
$12,000
|
$76,864
|
|
1998
|
$70,529
|
$4,500
|
$75,029
|
15. None of the Employment
Expenses at issue in this appeal have been reported by the
Appellant as income or otherwise included in his income.
[3] The T-4 slips for the 1997 and
1998 taxation years were the only other evidence. On these slips
the $141,500 and $165,960 amounts were recorded as commission
income.
[4] The relevant provisions of the
Income Tax Act read as follows:
8(1) In computing a
taxpayer's income for a taxation year from an office or
employment, there may be deducted such of the following amounts
as are wholly applicable to that source or such part of the
following amounts as may reasonably be regarded as applicable
thereto:
...
(f) where the
taxpayer was employed in the year in connection with the selling
of property or negotiating of contracts for the taxpayer's
employer, and
(i) under the
contract of employment was required to pay the taxpayer's own
expenses,
(ii) was ordinarily
required to carry on the duties of the employment away from the
employer's place of business,
(iii) was remunerated in
whole or part by commissions or other similar amounts fixed by
reference to the volume of the sales made or the contracts
negotiated, and
(iv) was not in receipt of
an allowance for travel expenses in respect of the taxation year
that was, by virtue of subparagraph 6(1)(b)(v), not
included in computing the taxpayer's income,
amounts expended by the taxpayer in the year for the purpose
of earning the income from the employment (not exceeding the
commissions or other similar amounts referred to in subparagraph
(iii) and received by the taxpayer in the year) to the extent
that those amounts were not
(v) outlays, losses
or replacements of capital or payments on account of capital,
except as described in paragraph (j),
(vi) outlays or expenses
that would, by virtue of paragraph 18(1)(l), not be
deductible in computing the taxpayer's income for the year if
the employment were a business carried on by the taxpayer, or
(vii) amounts the payment of
which reduced the amount that would otherwise be included in
computing the taxpayer's income for the year because of
paragraph 6(1)(e);
...
(h) where the
taxpayer, in the year,
(i) was
ordinarily required to carry on the duties of the office or
employment away from the employer's place of business or in
different places, and
(ii) was required
under the contract of employment to pay the travel expenses
incurred by the taxpayer in the performance of the duties of the
office or employment,
amounts expended by the taxpayer in the year (other
than motor vehicle expenses) for travelling in the course of the
office or employment, except where the taxpayer
(iii) received an
allowance for travel expenses that was, because of subparagraph
6(1)(b)(v), (vi) or (vii), not included in computing the
taxpayer's income for the year, or
(iv) claims a deduction
for the year under paragraph (e), (f) or
(g);
(Emphasis added)
...
(i)
amounts paid by the taxpayer in the year as
(i)
...
(ii) office rent, or
salary to an assistant or substitute, the payment of which by the
officer or employee was required by the contract of
employment,
[5] Mr. Williams cannot rely on
paragraph 8(1)(h) if he relies on
paragraph 8(1)(f). For this reason, the
Appellant's counsel, Mr. Hansen, presented his argument
firstly relying on paragraphs 8(1)(h) and 8(1)(i),
and only in the alternative turning to paragraph
8(1)(f).
[6] Dealing first with paragraph
8(1)(h), the only issue is whether the travel expenses
were "amounts expended by" Mr. Williams.
[7] Both Parties addressed the
definition of "expended", relying upon both Canadian
and British cases[1] and upon Black's Law Dictionary. I found
the Respondent's reference to the following comment from the
case of Oram of particular interest:
It is perhaps a matter of first impression based on the
impression that the word 'expenditure' makes on one, but
I think that the whole group of words, 'expenditure',
'expended', 'expenses' and so on and so forth, in
a revenue context, mean primarily money expenditure and,
secondly, expenditure in money's worth, something which
diminishes the total assets of the person making the expenditure,
...
[8] The Respondent maintains that Mr.
Williams has yet to diminish his own assets - he has not paid
anything out. All he has done has been to "incur" an
obligation, an obligation to his employer; but it was his
employer who actually paid out the money.
[9] The Appellant's position is
that there is no question monies were expended in 1997 and 1998,
and further that it was Mr. Williams who expended them. It is
immaterial where Mr. Williams got the money to do so; from
family, from a bank or from his employer. The fact is there was a
cash outlay for travel expenses of $64,864 in 1997 and $70,529 in
1998. The Appellant argues there is no issue of accrued but
unpaid expenses. The question is whose money was expended?
[10] The Respondent relies on Ryan v.
Canada,[2] a
decision of Justice Mogan. In Ryan, the taxpayer relied on
the Ontario Legal Aid Plan to cover legal expenses. She attempted
to deduct the legal expenses paid by OLAP. Mogan J. said the
following:
9
... It was paid by the Ontario Legal Aid Plan
("OLAP"). The Appellant states, however, that under the
terms of her arrangement with OLAP, although her legal costs were
paid by the plan, there is a provision that if a person obtains
legal aid and owns property in Ontario, then OLAP can put a lien
on the property for the amount that it expends on behalf of the
person. Apparently, the amount paid out by OLAP becomes
recoverable from that person if the property is sold or if the
mortgage on the property is refinanced. The Appellant said that
there is a lien on her property in favour of OLAP, and that she
expects to continue to own her home but that the mortgage comes
up for renewal in the year 2000. She expects that she will have
to pay the plan sometime this year when she refinances her
mortgage.
...
16 The Appellant
admits that she did not pay the legal costs of $9,534. Her legal
costs were paid by OLAP. She clearly has not paid any amount
within the meaning of paragraph 18(1)(a). The question is
whether she has incurred a liability? The Appellant's access
to the Ontario Legal Aid Plan is part of what Canadians sometimes
call "the social net". The lien placed on the
Appellant's home by OLAP may not be evidence of an absolute
liability. It may be evidence of only a conditional claim
dependent upon the value of the home at the time of its sale.
17 I think the
situation does differ significantly from that which would prevail
if the Appellant had borrowed money from a bank to pay her legal
costs. She would have a very real and immediate liability to the
bank.
[11] Mr. Caux, counsel for the Respondent,
quite properly referred me also to Nissim v. The Queen,[3] a decision of
Associate Chief Justice Bowman, also dealing with the
deductibility of legal expenses arising from payments by OLAP.
Associate Chief Justice Bowman stated:
22 Based on the
appellant's obvious credibility I am satisfied that the
amounts claimed were incurred and were in fact paid. A
substantial part of the amounts claimed in 1994 and 1995 were
paid by The Ontario Legal Aid Plan and she owes the amounts to
the plan which has put a lien on her house for that
indebtedness.
23 It was argued
that she did not pay the amounts. I am unable to accept this
contention. She became liable for the legal fees. The Ontario
Legal Aid Plan paid them on her behalf and continues to demand
payment from her. The situation does not differ significantly
from that which would prevail had she borrowed the money to pay
the fees from the bank.
[12] Certainly Associate Chief Justice
Bowman saw the similar situation more in the nature of a bank
loan. Did Mr. Williams have a real and immediate liability, to
use Justice Mogan's expression? The facts surrounding Mr.
Williams' indebtedness, though not elaborate, are clear in a
number of respects:
(i) he was responsible for his
own travel expenses;
(ii) he did not receive an
allowance for travel expenses;
(iii) he was not reimbursed or
entitled to reimbursement;
(iv) Whalen, Beliveau paid the
expenses on behalf of Mr. Williams;
(v) Whalen, Beliveau and Mr. Williams
treated such monies as a debt owing by Mr.Williams to Whalen,
Beliveau;
(vi) Whalen, Beliveau expected to
recoup the monies from future commissions; and
(vii) Whalen, Beliveau demanded payment from
Mr. Williams when he left their employ.
These facts support a finding of an immediate and absolute
liability of Mr. Williams to Whalen, Beliveau every time
monies were expended on travel expenses, in effect a finding that
it was Mr. Williams' money being spent.
[13] Mr. Williams had agreed with Whalen,
Beliveau that because they had control over monies which they
both expected would be owed to Mr. Williams, Mr. Williams was
authorizing them to pre-spend his money. But it goes further: if
Whalen, Beliveau is not in a position of owing Mr. Williams
money, it is open to them to simply demand that Mr. Williams pay,
which is just what they did when he left their employ. I find
this was not a contingent liability, but a liability payable on
demand.
[14] It is not the exchange of physical cash
or whose credit card was used to pay that determines who expended
the money, but it is the legal relationships that are in play
which must be examined. I will use an example of the purchase of
an airline ticket to help clarify the legal relationships. Say
Mr. Williams places an order with Air Canada for a $1,000 airline
ticket. He advises Whalen, Beliveau of his order and Whalen,
Beliveau either provides Mr. Williams with a credit card number
to pay Air Canada, or contacts Air Canada directly to pay them.
Air Canada receives payment and issues Mr. Williams a ticket. In
accordance with its arrangement that travel costs are Mr.
Williams' responsibility, Whalen, Beliveau records this
$1,000 as a receivable from Mr. Williams. Mr. Williams
acknowledges he is indebted to Whalen, Beliveau. Whalen, Beliveau
demands payment.
[15] What are the legal relationships? Was
the purchase of the ticket a contract between Mr. Williams and
Air Canada or between Whalen, Beliveau and Air Canada? Was Air
Canada paid at Mr. Williams' direction or was Mr. Williams
issued the ticket at Whalen, Beliveau's directions? Who
indeed entered the contract with Air Canada? Regrettably, I have
little detailed evidence as to how these contracts came about,
though I do know travel costs were to be Mr. Williams'
responsibility. I also know Mr. Williams was the beneficiary of
the travel arrangements. I find on balance that it was Mr.
Williams who contracted with Air Canada: he would be the one
obliged to make payment under that contract, and indeed payment
was made.
[16] What is the legal relationship between
Mr. Williams and Whalen, Beliveau: employer-employee certainly.
But also, vis-à-vis the travel costs, there existed the
relationship of debtor and creditor. Mr. Williams was obliged to
reimburse Whalen, Beliveau on a demand basis for the costs of the
Air Canada ticket. This is more than simply an employee advance
only to be recouped from subsequent earnings. It was more in the
nature of a demand loan. Because the funds or credit did not pass
through Mr. Williams' hands on the way to Air Canada,
does not negate the nature of this relationship. I find that
Mr. Williams effectively made these payments.
[17] The Respondent is concerned that this
interpretation somehow makes mockery of the cash versus accrual
nature fundamental to the deduction of employment expenses. I
disagree. It is the timing of the payment of the expenses that is
critical. The employment expenses were paid in the pertinent
year: there is no accrual. Otherwise, the situation is that the
expenditures are deductible if Mr. Williams paid his debt on
December 31 in the year, but not if he paid his debt on January 1
of the next year. That puts the timing issue on the inappropriate
payment, the debt payment, as opposed to the expense payment.
[18] Mr. Williams has not yet paid his debt.
That situation is addressed by the legislation, particularly
subsection 6(15) of the Income Tax Act. This section
provides that if Mr. Williams' debt is forgiven, such amount
is a taxable employee benefit.
[19] I conclude that because Whalen,
Beliveau, on Mr. Williams' behalf, paid the expenses which
were Mr. Williams' responsibility and were incurred by
Mr. Williams, with an immediate and real obligation of Mr.
Williams to pay Whalen, Beliveau, that the amounts were expended
by Mr. Williams for purposes of qualifying for the paragraph
8(1)(h) deduction. They were his expenses which he, in
effect, borrowed funds to pay.
[20] I turn now to paragraph 8(1)(i),
dealing with salary paid to an assistant. For similar reasoning
as above, I find the payment was made by Mr. Williams. The only
issue then is whether he was required to do so by his contract of
employment. The Respondent relied on comments in the 1985
decision of Justice Sarchuk in Slawson v. M.N.R.[4] where he
indicated:
Dealing firstly with section 8(1)(f)(i), (and I will
paraphrase), certain expenses are deductible (by the taxpayer)
where they are incurred in connection with the selling of
property for his employer and where under the contract of
employment the employee was required to pay his own expenses.
Careful consideration of the evidence leads me to conclude that
it does not establish that the appellant was required by the
contract of employment to pay certain expenses he incurred. That
applies to both the extra or excess expenses relating to the
institutional clients and to expenses incurred with respect to
the retail clients. While the appellant may have been expected to
do many of the things which led to his incurring these expenses,
I cannot find on the evidence before me that he was required by
his contract of employment to do so. It was suggested that
failure to perform these functions and to bear the costs
incidental thereto could have led to termination of his
employment by either of the employers. The evidence, in my view,
falls short of establishing this assertion. I cannot equate the
expectations of the employer as described by both the appellant
and by Mr. Morgan to a contractual requirement imposed upon the
appellant, breach of which would have given a cause of action to
the employer against him.
Subsequent to the Slawson case, both the Federal
Court-Trial Division and the Federal Court of Appeal have
addressed this issue. The following summary of Justice
Joyal's in Gilling v. The Queen[5] sets out their
positions:
The Verrier appeal was heard on February 20, 1990 and
judgment reversing the trial judgment rendered on March 2, 1990
(A-1040-88) [90 DTC 6202]. Mahoney J.A., on behalf of the court,
concluded that the trial judge had erred in law in his
construction of section 8(1)(f). His Lordship relied on
the case of Hoedel v. The Queen (1986),86 DTC 6535, where
his brother Heald J.A. had found that an employer's failure
to carry out a task which can result in an unfavourable
assessment by his employer is pretty much evidence that the test
in issue is a duty of employment. Similarly, Mahoney J.A. could
find that the car salesman's failure to sell enough cars
might result in his discharge was pretty much evidence that
getting out of the showroom and hitting the road was a condition
of employment.
The Court of Appeal in the two cases cited has also recognized
that a specific requirement for an employee to pay his own
expenses or to carry out duties outside of his normal place of
business need not be patently expressed in a contract of
employment. A Court, upon studying the experience of the
relationship and all surrounding circumstances may well apply
common sense and conclude that these are implied terms.
[21] The Parties agreed it was not possible
for Mr. Williams to perform duties of employment without a sales
assistant, and that Mr. Williams was responsible for remunerating
a sales assistant. This may be sufficient to find that
the provision of an assistant was an implied term of the
contract. Yet, paragraph 8(1)(i) does not stipulate
that an assistant must be "required by the contract of
employment", but that the payment of salary to an assistant
was required by the contract of employment. I find, based on the
wording of the agreed Statement of Facts that Mr. Williams was
responsible for this expenditure, and based on the fact that
Whalen, Beliveau effectively loaned funds to Mr. Williams to
cover this expense, that the contract of employment did require
Mr. Williams to pay any assistant he employed. He therefore
qualifies for the paragraph 8(1)(i) deduction.
[22] For these reasons, I allow the appeals
and refer the matter back to the Minister of National Revenue for
reassessment on the basis that Mr. Williams is entitled to
deductions pursuant to paragraph 8(1)(h) of $64,864 and
$70,529 in 1997 and 1998, respectively, and to deductions
pursuant to paragraph 8(1)(i) of $12,000 and $4,500 in
1997 and 1998, respectively. Costs to the Appellant.
Signed at Ottawa, Canada, this 21st day of October, 2004.
Miller J.
Email this Content