The Queen v. Thompson, 89 DTC 5439, [1989] 2 CTC 226 (FCTD)

McNair, J.:—This is an appeal by the plaintiff, pursuant to subsection 172(1) of the Income Tax Act, from a decision of the Tax Court of Canada allowing in part the defendant's appeal from reassessments of his income for the 1980 and 1981 taxation years.

The defendant taxpayer is a sales representative for a tobacco company, RJR-MacDonald Inc., and earns a basic salary plus commissions on sales exceeding a certain quota. The defendant resides in Prince George, British Columbia, from where he services a large sales area. His employer's nearest regional office is located in Richmond, British Columbia, a distance of some 480 miles from Prince George. In his 1980 return of income the defendant reported total earnings of $21,874.10, including commissions of $1,365.64. His 1981 return showed an amount of $24,776.60 for total earnings, but without any specific allocation for commissions. The defendant believes he may have earned commissions of about $300 in that year. He was also paid by his employer during each of the taxation years in question a travelling expense allowance of $500, which was not included in income. The Tax Court of Canada found as a fact that there was commission income of $1,365.64 for 1980 and $300 for 1981, based on the apparent agreement of the Minister. Plaintiff's counsel maintains that there was no such agreement with respect to the commission income figure of $300 for 1981, pointing out that the T4 slips provided by the taxpayer's employer showed no commission income in either of the taxation years. In any event, he contends that there was no commission income earned by the defendant in 1981.

The taxpayer claimed for the 1980 and 1981 taxation years the following expenses for maintaining an office in his residence:

The amounts claimed by the taxpayer as rent were arrived at by taking the base equivalent of the monthly amortized mortgage payment as representing primarily interest and multiplying the same by twelve. The defendant owned two houses during the years 1980 and 1981, having sold one and built another. His wife was co-owner of these homes. A corner of the kitchen and dining room area of the first house was utilized as a working office, which contained a desk and the household phone and some files. One of the three bedrooms was used exclusively as a storage area for cigarette cartons. The defendant entertained customers at home from time to time. He felt that he could legitimately claim 50 per cent of the approximate 1,100 square foot living area of his home as office space. The second home built in 1981 had a portion of the basement renovated for office and storage area comprising approximately 150 square feet as against 1,130 square feet for the total living area. In this case, 25 per cent was said to have been claimed for office expenses. However, the actual arithmetical results obtained by the defendant in his statement of expenses for that year represented 40 per cent.

The Minister disallowed the total deduction of $7,393.60 for 1980 as personal or living expenses and similarly disallowed all but $139 of the 1981 deduction of $2,952. The portion allowed was the prorated amount for hydro and heating expenses according to the square footage of office area in proportion to the total square footage of the house.

In reassessing the defendant for the 1980 and 1981 taxation years, the Minister relied, inter alia, upon paragraph 8(1)(f), and subparagraphs 8(1)(i)(ii) and 8(1 )(i)(iii) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended.

Plaintiff's counsel conceded at the commencement of trial that the defendant was required under his contract of employment to maintain an office in his home. The converse allegation had been pleaded initially. Essentially, the plaintiff's position comes down to this: During his 1980 taxation year the defendant did not maintain a separate area in his home for the purpose of earning income with the result that the total amount claimed as a deduction by the defendant for the home office in 1980 and the amount so claimed in 1981 to the extent it exceeded $139 were personal or living expenses to the defendant and were correctly disallowed by the Minister. Plaintiff's counsel also submits that the defendant is not entitled to any deduction for office rent expenses because he was at all material times the owner of his own home and as such did not incur any rent expense. The further submission is made that in his 1980 and 1981 taxation years the defendant was not entitled to any deduction under paragraph 8(1)(f) of the Act because he received a travelling expense allowance in those years which was not included in computing his income by virtue of subparagraph 6(1)(b)(v) of the Act.

The defendant stresses the fact that he was required by his employer to maintain an office in his home and that he followed the guidelines of Revenue Canada in submitting his claims for home office expenses in the taxation years 1980 and 1981. He points to the inconsistency flowing from the allowance of the prorated costs of heat and hydro for office expenses in 1981 and the disallowance of any expenses in 1980. He presses the point that home office expenses are recognizable under the Act if one is required by his employment to maintain an office at home. He also submits that equating rent with a mortgage payment is not improper in the circumstances, pointing out that if he had leased separate office space it would probably have cost more than using a part of his home. In summary, he puts his case this way:

It would seem rather ludicrous to me that because there's cigarettes piled in one room, I have files and clipboards and binders and that sort of thing stacked up in the kitchen against the wall, that not only are the rooms used for a dual purpose but the main purpose would be not only to provide a home but also to provide a place from which I can operate my business up in the north country.

Paragraph 8(1)(f) and subparagraphs 8(1 )(i)(ii) and 8(1 )(i)(iii) 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 his employer, and

(i) under the contract of employment was required to pay his own expenses,

(ii) was ordinarily required to carry on the duties of his employment away from his employer's place of business,

(iii) Was remunerated in whole or in 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 travelling expenses in respect of the taxation year that was, by virtue of subparagraph 6(1)(b)(v), not included in computing his income,

amounts expended by him in the year for the purpose of earning the income from the employment (not exceeding the commissions or other similar amounts fixed as aforesaid received by him in the year) to the extent that such amounts were not

(v) outlays, losses or replacements of capital or payments on account of capital, except as described in paragraph (j), or

(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 him;

(i) amounts paid by the taxpayer in the year as

(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,

(iii) the cost of supplies that were consumed directly in the performance of the duties of his office or employment and that the officer or employee was required by the contract of employment to supply and pay for,

to the extent that he has not been reimbursed, and is not entitled to be reimbursed in respect thereof;

There are a number of cases dealing with the deductibility of home office expenses under the foregoing and other provisions of the Income Tax Act and it might be useful to review those considered to be most on point in relation to the facts and issues raised by the present case. Deductions claimed for home office expenses as a business expense under former paragraph 12(1)(a) (now paragraph 18(1)(a)) were disallowed as personal or living expenses under former paragraph 12(1 )(h) (now paragraph 18(1 )(h)) in English v. M.N.R. (1956), 15 Tax A.B.C. 87; 56 D.T.C. 267 (T.A.B.); Locke v. M.N.R. (1965), 38 Tax A.B.C. 38; 65 D.T.C. 223 (T.A.B.); Heakes v. M.N.R. (1963) 32 Tax A.B.C. 443; 63 D.T.C. 667 (T.A.B.): and Brooks v. The Queen, [1978] C.T.C. 761; 78 D.T.C. 6505 (F.C.T.D.). In the English case the Board Member, Mr. Fordham, Q.C., stated at page 88 (D.T.C. 268):

Appellant. . . acknowledged that he had not paid rent for the study to anyone. A private individual cannot be the owner of realty and his own tenant thereof at the same time; he cannot pay rent to himself. There was no payment or expense relating to the use of the study that would not have been made or incurred by the appellant in any event and regardless of whether or not a study was available.

In Locke v. M.N.R., supra, the Board followed the Heakes case in disallowing a lawyer's claim for home office expenses on the ground that he had failed to bring himself within the exception contained in paragraph 12(1)(a) by reason that it had not been shown that the office was definitely separate from the living quarters of the house and was an area in which an appreciable amount of business was transacted. In Brooks v. The Queen, supra, Grant D.]. considered the applicability of former paragraph 12(1)(d) (now paragraph 18(1)(d)) and held that the taxpayer could not bring his case within its wording “as he was the owner of the property and not the lessee" at page 763 (D.T.C. 6506).

However, things change with the passage of time and recent case law developments in the Tax Court of Canada represent something of a divergence from the rigidity of the earlier decisions relating to home office expenses. In Merchant v. M.N.R., [1982] C.T.C. 2742; 82 D.T.C. 1764, a lawyer specializing in litigation was allowed the expenses of a home office used extensively for meeting clients, doing dictation and answering phone calls for the purposes of his practice. The Tax Review Board member, Mr. M.J. Bonner, avoided the impact of the Brooks and Locke cases by propounding the following test at page 2743 (D.T.C. 1765):

. . .The question whether the purpose test of paragraph 18(1)(a) of the Act is met or not is essentially one of fact and the cases relied upon by the respondent have little bearing, having regard to what was established in evidence here.

In Roy v. M.N.R. [1985] 1 C.T.C. 2328; 85 D.T.C. 261, the Tax Court of Canada applied the same test in allowing the home office expenses of an investment dealer, whose income was derived exclusively from commissions, at one-half the rent of his apartment premises. The purpose of the office was to gain or produce income from the taxpayer's business and the evidence satisfactorily established that it was used primarily as a business office and only occasionally for personal use.

These were all cases involving claims for the deduction of home office expenses as business expenses under the applicable provisions of the Act and the problem of the deductibility of such expenses by employees was yet to be encountered. It came prominently to light in the case of Drobot v. M.N.R., [1987] 2 C.T.C. 2098; 87 D.T.C. 371 (T.C.C.). Here, the taxpayer, who was required as a term of his employment to maintain an office in his home, claimed 20 per cent of the expenses thereof, including electricity, gas, interest (presumably mortgage), insurance, property taxes and repairs and maintenance. The Minister disallowed the amounts claimed for interest, insurance and taxes, but allowed the others as supplies under subparagraph 8(1)(i)(iii). The deductions were claimed by the taxpayer as office rent. The Court regarded as illogical the allowance of electricity, gas, repairs and maintenance as supplies that were consumed under subparagraph 8(1 )(i)(iii) and the disallowance of the other attendant costs of interest, insurance and taxes, and allowed the deduction of all the home office expenses as office rent. Taylor, T.C.J. proffered the following rationale at page 2100 (D.T.C. 373):

... I would suggest that the interpretation of subparagraph 18(1 )(i)(ii) as it applies to this case, “office rent. . .the payment of which. . .was required by the contract of employment" might well be looked at from the viewpoint of the employer. I am prepared to interpret that clause as simply meaning that the contract of employment must require that the employee maintains an office, and himself, be responsible for any costs associated therewith, or as in this case any additional costs arising out of the provision of this space for purposes of gaining his income. The deduction Mr. Drobot seeks should qualify as office rent for purposes of subparagraph 18(1 )(i)(ii) of the Act.

In Prewer v. M.N.R., [1989] 1 C.T.C. 2337; 89 D.T.C. 171 (T.C.C.), the taxpayer sought to deduct as home office expense under subparagraph 8(1)(i)(ii) one-third of the cost of maintaining a townhouse which she owned with her husband, not including mortgage interest or capital cost allowance. She converted one of three bedrooms to an office for doing administrative and accounting work after hours in order to enable her to carry on sales duties for her employer during the day. Her employer signed a tax form T2200 stating that she was required to maintain an office in her home. One of the Minister's grounds for disallowing the deduction was that the taxpayer owned the premises where she maintained an office and therefore did not incur "office rent". The Court upheld the appeal to the extent of allowing ten per cent of the residence expenses for heat and hydro as "home office” rent. Sherwood, D.J.T.C. applied the principle of Drobot v. M.N.R. in rejecting the Minister's contention regarding office rent. The basis of the decision is contained in the following passage from his judgment at page 172:

In the instant appeal the Appellant could probably have issued cheques payable to her husband or to him and herself and characterized them as "rent" but that seems unnecessary. Why should the costlier expedient of renting a room from a neighbour qualify for a deduction but the cheaper and more convenient one of using part of her own home not qualify for deduction? I conclude that reasonable expenses of using space in one's own home to meet a requirement for office space away from an employer's establishment are deductible under subparagraph 8(1)(i)(ii).

The case under appeal, cited as Thompson v. M.N.R., [1985] 1 C.T.C. 2413; 85 D.T.C. 362 (T.C.C.), seems to have been decided primarily on the point of the Minister’s concession in allowing the deduction of office rent of $139 for the prorated heating and hydro costs in 1981, while rejecting the other deduction sought for office rent. In the result, Taylor, T.C.J. allowed the deduction of the costs claimed for rent and telephone in the sums of $3,688.20 for 1980 and $2,164.80 for 1981.

The converse result was achieved in two recent cases in the Tax Court of Canada, namely, Phillips v. M.N.R. (No. 88-1005(IT)), November 1, 1988, unreported) and Fe/ton v. M.N.R., [1989] 1 C.T.C. 2329; 89 D.T.C. 233 (T.C.C.). In Phillips, the Court rejected the Drobot decision and held that the taxpayer was disentitled to deduct a portion of his mortgage interest, insurance and property taxes as they related to the maintenance of an office in his personal residence on the ground that the plain meaning of the word "rent" could not be expanded to incorporate such an allocation of costs, even though done in accordance with recognised accounting principles.

In Fe/ton v. M.N.R., supra, the issue was whether the appellant taxpayer could properly deduct as office rent under subparagraph 8(1 )(i)(ii) one-sixth of his home expenses, including mortgage interest, property taxes, insurance and the cost of utilities and maintenance for his home. The amounts claimed were not in issue. The appellant was required by his contract of employment to maintain an office in his home, which was used exclusively for purposes of his employment. The respondent reassessed the appellant on the basis that none of these costs was deductible in computing income pursuant to subparagraphs 8(1 )(i)(ii) or (iii). It was not argued on the appeal that some expenses for maintenance of Owned premises, such as fuel, electricity, cleaning materials and minor repairs, might have been deductible as the cost of supplies under subparagraph 8(1 )(i)(iii) of the Act. Consequently, the issue was confined solely to the meaning of the term “office rent" as used in subparagraph 8(1)(i)(ii). The taxpayer's appeal was dismissed on the ground that the words “office rent" in subparagraph 8(1)(i)(ii) connoted only a payment for use of office property arising out of a landlord and tenant relationship, according to the ordinary dictionary and common law meaning of the word "rent". The Court was of the view that some expenses might have been deductible under subparagraph 8(1 )(i)(iii), but that had not been argued.

Rip, T.C.J. considered whether the word "as" in the first line of paragraph 8(1)(i) might connote the inclusion of "the equivalent of or in the nature of office rent". Reading the word in context with the scheme of the Act, he concluded that if Parliament had wanted to extend the class of things introduced by the word "as", it would have used additional words. The strict ratio of the case is contained in the following passage from the judgment of Rip, T.C.J. at pages 234-35:

The words "rent" and "loyer" in subparagraph 8(1 )(i)(ii) contemplate a payment by a lessee or tenant to a lessor or landlord who owns the office property in return for the exclusive possession of the office, the property leased by the latter to the former.

The payments by Mr. Felton to a money-lender of interest on money borrowed, to a utility supplier for the utility, to maintenance personnel for maintenance, to an insurer for insurance and to a municipality in respect of taxes are not payments of rent by a lessee to a lessor. None of these payments by Mr. Felton was for the use or occupancy or possession of property owned by another person.

Obviously, the judges of the Tax Court in both Phillips and Felton applied the plain meaning rule of statutory interpretation in determining that the home office expenses of an employee were not deductible as office rent under subparagraph 8(1 )(i)(ii), notwithstanding the illogical unfairness of the section in permitting the selfsame deduction in the case of business or professional persons.

This modern rule for the interpretation of taxing statutes was admirably expounded by Estey, J. in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 244; 84 D.T.C. 6305. The learned judge recalled the strict rule of statutory interpretation invoked for many years, whereby any ambiguities in the charging provisions of a tax statute were to be resolved in favour of the taxpayer. He pointed out that the converse was true where a taxpayer sought to rely on a specific exemption or deduction provided in the statute. In that case, the strict rule required that the taxpayer's claim fall clearly within the exempting provisions, and any doubt in that regard had to be resolved in favour of the Crown. Indeed, he perceived the introduction of exemptions and allowances as marking "the beginning of the end of the reign of the strict rule”. The learned judge stated the following conclusion in the S.C.R. report of the case at page 316 (D.T.C. 6323):

Professor Willis, in his article, supra, accurately forecast the demise of the strict interpretation rule for the construction of taxing statutes. Gradually, the role of the tax statute in the community changed, as we have seen, and the application of strict construction to it receded. Courts today apply to this statute the plain meaning rule, but in a substantive sense so that if a taxpayer is within the spirit of the charge, he may be held liable. See Whiteman and Wheatcroft, supra, at 37.

While not directing his observations exclusively to taxing statutes, the learned author of Construction of Statutes, 2nd ed, (1983), at 87, E A Dreidger, put the modern rule succinctly:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

I turn now to the question whether the expenses claimed for the taxation years 1980 and 1981 qualify as allowable deductions for salesman's expenses under paragraph 8(1)(f) of the Act. There can be no doubt that the defendant comes within the conditions prescribed by subparagraphs (i) and (ii) of paragraph 8(1)(f).

As to subparagraph (iii) of paragraph 8(1 )(f), the defendant earned commission income of $1,365.64 in 1980 as part of his total salary remuneration. The dispute concerns the matter of commission remuneration in 1981. The defendant recollects that he earned commissions of about $300 in that year. The Crown takes the position that he earned none, based on the fact that nothing was shown in the appropriate space or block of the T4 slips accompanying the defendant's tax returns for those years. A vigorous cross- examination on the point elicited the fact that separate, component amounts for the total commission income of $1,365.64 earned in 1980 were reported in block "K" of the T4 slips for that year as taxable allowances and benefits, rather than in block "L" designated for commissions. I am satisfied on the defendant's evidence that the same method of reporting commission income on the T4 slips was followed in the 1981 taxation year. Considering the evidence in its entirety, I find as a fact that the defendant earned commission income of $1,446.25 in the 1981 taxation year with the result that the condition prescribed by subparagraph (iii) has been met. However, this is of little avail to him in the circumstances. In my opinion, the defendant has failed to comply with the condition prescribed by subparagraph (iv) inasmuch as he received from his employer a reasonable allowance for travelling expenses that was not required to be included in computing his income by virtue of subparagraph 6(1)(b)(v). That being the case, the defendant has failed to bring himself within the deduction provisions of paragraph 8(1)(f) of the Income Tax Act. Under the circumstances, it is unnecessary to decide the point pressed by the Crown, namely, that the amount claimed for the expense of office construction in 1980 and the amounts claimed in both taxation years for rent as being the equivalent of mortgage interest are disallowable as payments on account of capital under subparagraph 8(1 )(f)(v).

The question remains: Are the amounts claimed for home office expenses in the 1980 and 1981 taxation years deductible as “office rent" under subparagraph 8(1)(i)(ii) of the Income Tax Act? In my view, the plain meaning of the words of the statutory provision read in context with the scheme of the Act as a whole precludes any possibility of an affirmative answer to the question. This was the approach adopted by the judges of the Tax Court of Canada in Phillips and Felton, with which I fully concur. In the result, I find that the Minister was correct in his reassessments of the defendant's income for the 1980 and 1981 taxation years, save only for the amounts claimed for utilities, heating and hydro in 1980.

As mentioned, the defendant questioned strenuously the illogicality of allowing a deduction for the prorated cost of these last mentioned items in 1981 and refusing to allow anything for them in 1980. The departmental policy guidelines contained in Interpretation Bulletin IT-352R suggest that an employee be permitted to deduct a reasonable portion of the cost of fuel, electricity, light bulbs, cleaning materials and minor repairs as home office expenses under subparagraph 8(1)(i)(iii) of the Act. Counsel for the plaintiff conceded that one-third of the amounts claimed for utilities, gas and hydro should be allowed to the defendant for the 1980 taxation year. In view of that, the matter is taken beyond the point of quibbling over statutory words. Certainly, I do not feel constrained to refuse the concession by an overly rigorous adherence to the plain meaning rule of statutory interpretation. In the circumstances, I consider that the 1980 reassessment of the defendant's income should be varied by allowing the amounts of $30.60, $45.82 and $37.92 for utilities, gas and hydro respectively.

The plaintiff's appeal is therefore allowed in the main, subject only to varying the 1980 reassessment in respect of the aforementioned amounts allowed for the utilities, gas and hydro expenses of the defendant's home office, and the matter is referred back to the Minister for varying the reassessment accordingly. The plaintiff was not fully successful on the appeal so there will be no order as to costs.

Appeal allowed, in the most part.