The Queen v. Mina and Jacobi, 88 DTC 6245, [1988] 1 CTC 380 (FCTD)

The Associate Chief Justice: —The plaintiff appeals a decision of the Tax Court of Canada rendered March 21, 1985 by which the appeals of the two taxpayers from reassessments for the years 1979 to 1981 were allowed (Jacobi et al. v. M.N.R., unreported, Appeals No. 83-487 (IT) & 84-330 (IT), dated March 21, 1985). The question at issue is whether the taxpayers, who are psycho-educational consultants employed by the North York Board of Education, were entitled to deduct their travelling expenses from reported income in those years. The matter came on for hearing before me at Toronto, Ontario on October 13, 1987.

The plaintiff reassessed Mr. Jacobi for the 1979 and 1980 taxation years and Mr. Mina for the 1981 taxation year. During those periods both taxpayers were employed as psychological consultants by the North York Board of Education. In the course of their employment they were required to make frequent daily trips between five schools and their office location for the purpose of testing students and providing career and educational counselling. Their employment duties required them to transport a considerable quantity of equipment and supplies between these locations. The taxpayers contend that, under their contract of employment, they were required to have access to an automobile for this purpose and to have that automobile available for use throughout each working day. The plaintiff maintains that the collective agreement which applied to the taxpayers did not require them to provide an automobile for use in their employment. Both sides agree, however, that the taxpayers received, in the relevant taxation year, an allowance from the Board of Education computed on the basis of mileage driven in the course of employment.

Due to the proximity of the schools the taxpayers service, the mileage allowance is relatively small. In the relevant years both taxpayers incurred considerably more expense in maintaining and operating their automobiles than was reimbursed by the mileage allowance. The taxpayers attempted to deduct a portion of the difference as travelling expenses under paragraph 8(1)(h) of the Income Tax Act. The plaintiff reassessed the taxpayers, denying, in part, the deductions under this head. After objection and further reassessment or confirmation, the plaintiff's decisions were appealed to the Tax Court of Canada.

The statutory provisions at issue on the appeal were paragraphs 8(1)(h) and (j) of the Income Tax Act:

8 (1)(h) 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:

(h) where the taxpayer, in the year,

(i) was ordinarily required to carry on the duties of his employment away from his employer's place of business or in different places,

(ii) under the contract of employment was required to pay the travelling expenses incurred by him in the performance of the duties of his office or employment, and

(iii) was not in receipt of an allowance for travelling expenses that was, by virtue of subparagraph 6(1)(b)(v), (vi) or (vii), not included in computing his income and did not claim any deduction for the year under paragraph (e),

(f) or (g),

amounts expended by him in the year for travelling in the course of his employment.

(j) where a deduction may be made under paragraph (f) or (h) in computing

the taxpayer's income from an office or employment for a taxation year,

(i) any interest paid by him in the year on borrowed money used for the purpose of acquiring

(A) an automobile that is used, or

(B) an aircraft that is required for use in the performance of the duties of his office or employment, and

(ii) such part, if any, of the capital cost to him of

(A) an automobile that is used, or

(B) an aircraft that is required for use in the performance of the duties of his office or employment as is allowed by regulation.

With respect to paragraph 8(1)(h), only subparagraph (ii) was in dispute before the Tax Court judge. The Minister was willing to concede that the taxpayers were ordinarily required to carry out their employment in different places and that they had not been in receipt of a travelling allowance described in subparagraph (iii). The remaining questions were: first, whether the taxpayers were required, under their contracts of employment, to pay their travelling expenses and second, what portion of those expenses could reasonably be deducted under paragraphs 8(1)(h) and (j).

On the first issue, Tremblay, T.C.J. made the following findings at pages 6-8:

Let us look at the facts in the instant case. The collective agreement, Exhibit R-1, applies in favour of psychologists, psychoeducational consultants, attendance counsellors, multicultural community workers, and speech therapists. This is Article 2.01. Concerning the travelling expenses, Article 17.01 states that if an employee is instructed by management to use his car for Board of Education business he shall receive the same mileage allowance as is received by other Board of Education employees. Exhibit A-1 shows the different mileage allowances paid by the board for 1979 to 1985. From Exhibit A-2, which is a staff application form, one can read the following questions: Have you a driver's license and use of an automobile during working hours? I understand that all employees under the collective agreement were not required to use a car; however, it seems that the number of employees so involved was great enough so that a specific clause, Article 17.01 above, be part of the collective agreement. If the North York Board of Education objected to paying mileage allowance, I think that the appellants would have had the right to invoke Article 17.01 of the collective agreement. . . . Moreover, Article 17.01 reads that if an employee is instructed by management to use his car . . . . To instruct means to command according to the Random House Dictionary. From the evidence given by Mrs. Fickert and Dr. Goodman, a car was necessary in the performance of the work of the appellants, and from Dr. Perkins a car was required of the appellants. . . .

The first conclusion of the Court on that point is that pursuant to the collective agreement the appellants had to use their car in the performance of their duties when instructed by management. . . . Is this sufficient to say that the appellants, pursuant to 8(1)(h)(ii) of the Income Tax Act, under the contract of employment were required to pay the travelling expenses incurred by them in the performance of their duties? At first glance the answer must be the affirmative. The appellants paid the expenses on the car and as soon as they are obligated to pay a part of the expenses they satisfy the condition of subparagraph (ii) of 8(1)(h).

The plaintiff argues that this decision is in error because the taxpayers were not, under their contract of employment, required to pay the travelling expenses they incurred. The first fact cited to support this proposition is that, under the collective agreement referred to by the Tax Court judge, the taxpayers were entitled to and were paid an allowance which was intended to cover the entire cost of using their cars in the performance of their duties. One of the Board of Education personnel testified that the figures used to calculate the mileage allowance were obtained from the Ontario Motor League and were designed to cover both the fixed and variable cost of running an automobile. The plaintiff concludes from this that the Board, as employer, intended to pay all relevant costs of the taxpayer's transportation. Therefore, it was not intended that the taxpayers would have any responsibility to pay their own expenses.

Secondly, also in reference to the oral testimony, the plaintiff argues that the taxpayers were not absolutely required to have a car or use it for their employment. The Board's chief psychologist, when asked if someone in the taxpayer's position could use a taxi, stated it would not be "as satisfactory” but if the job could be properly carried out, such an arrangement would be acceptable. The witness went on to discuss one employee who, when he started at the Board had a car and drove it, but subsequently lost his sight. He was an extremely valuable employee, and rather than let him go, exceptional adjustments were made to his schedule and duties which allowed him to continue in his position without the use of the car. Those exceptions could never be made for more than one person on the Board's psychological Staff.

The plaintiff argues that this evidence does not place the need for a car on as high a level as that found by the Tax Court judge. It was clear from the testimony that lack of a car would not immediately lead to termination, although if the employee's job function was impaired as a result, termination could follow. It is submitted that the necessary question is whether an employee would be fired if he no longer wished to use his car.

The plaintiff finds support for this proposition in the case of The Queen v. Cival, [1983] C.T.C. 153; 83 D.T.C. 5168 (F.C.A.). In that case, the taxpayer was a payroll auditor employed by the federal government. At the request of his employer he used his own car to carry out his duties. As here, the employer reimbursed the taxpayer for his expenses with a mileage allowance, however, the expenses exceeded the allowance received. The Minister would not allow the taxpayer to deduct the difference as a travelling expense. The Tax Review Board dismissed the appeal, the Federal Court, Trial Division allowed it and [was] overturned by the Court of Appeal. The latter Court held that, to bring himself within paragraph 8(1)(h), Mr. Cival would have to establish that the arrangement about using his car was an employment contract under which he was required to pay the expenses. They found that the arrangement was at most a unilateral contract. Cival was not contractually bound to use the car and pay the expenses and would not be liable to be sued if he refused. The plaintiff takes from this case that unless the taxpayer can be fired for not using his car, the requirements of paragraph 8(1)(h) are not fulfilled.

The defendants, of course, seek to distinguish the Cival decision. They claim that in this case the use of a car was unquestionably a condition of employment. It was understood as such by both the taxpayers and their employers. In addition to the provisions of the collective agreement, referred to by the Tax Court judge, the defendants rely on the fact that they could not satisfactorily carry out the responsibilities of their employment except by use of an automobile. They were therefore required to drive their cars and to bear any expenses for which they were not reimbursed. These factors, it is said, distinguish this case from that of Cival.

The defendants also point to a series of cases which were decided after the Cival decision: Rozen v. The Queen, [1986] 1 C.T.C. 50; 85 D.T.C. 5611 (F.C.T.D.); Hoedel v. The Queen, [1986] 2 C.T.C. 419; 86 D.T.C. 6535 (F.C.A.); Moore v. The Queen, [1987] 1 C.T.C. 319; 87 D.T.C. 5217 (F.C.T.D.); and Betz v. The Queen, [1987] 1 C.T.C. 329; 87 D.T.C. 5223 (F.C.T.D.). These cases, it is argued, set out the following criteria for satisfying subparagraph 8(1)(h)(ii): First, the taxpayer must be required as part of his employment to travel from place to place, but that need not be a written, contractual requirement — it may be an implied term of the employment. Secondly, the taxpayer's failure to comply with this requirement need not subject him to dismissal but merely to adverse consequences, such as an unfavourable performance appraisal. Thirdly, the reimbursement by the employer must be less than the total and exact amount of the expenses incurred.

The first of the defendants' cases seems particularly relevant to the situation at bar. In Rozen v. The Queen, the taxpayer was employed first as a student and later as a senior accountant by a firm of chartered accountants. He was required to perform many of his duties on the clients' premises. The firm paid him a mileage allowance for all out-of-town travel, but nothing for travel within the City of Vancouver. There was an expectation by the employer that employees would use their own cars to visit clients' offices. In light of their professional status, it was considered the most practical and appropriate way to get themselves and their documents to the clients’ offices. Lack of a car would probably result in dismissal.

The Court held that Mr. Rozen was entitled to deduct his expenses for travel. Mr. Justice Strayer found that it was an implied term of the contract that the taxpayer was required to use his car in the performance of his duties and to pay the costs of using it. He concluded as follows at page 52 (D.T.C. 5613):

The fact that there was some reimbursement, based on a mileage rate fixed by the employer, with respect to out-of-town use does not prevent the taxpayer's automobile expenses from being within subparagraph 8(1)(h)(ii): See Faubert v. M.N.R., [1979] C.T.C. 2723; 79 D.T.C. 641 (T.R.B.); Cival v. The Queen, [1981] C.T.C. 392 at 399; 81 D.T.C. 5311 at 5316-17 (F.C.T.D.) (reversed on other grounds by the Federal Court of Appeal [1983] C.T.C. 153; 83 D.T.C. 5168). I believe this situation can be distinguished from that in Cival, supra, where the Federal Court of Appeal held that the taxpayer was not obliged to use his own automobile in his work as a payroll auditor for the Department of National Revenue. The Court there held that nothing in the contract of employment obliged him to use his car even though provision was made for mileage allowance where he did use it. It was held that this was at most a “unilateral contract": that is, he did not have to use his car but if he did use it then he was entitled to be paid mileage. /n the present case the employee did not have the option if he was to do his job properly.

I believe also that subparagraph 8(1)(h)(ii) can be interpreted somewhat more broadly. Even if the plaintiff were not specifically required to use his car, he was required to pay his travelling expenses incurred by him in the performance of his duties and this would also bring him within the subparagraph. The evidence was clear that to do his job the plaintiff had to go to the offices of a variety of clients. No provision was made for reimbursement for transportation for getting to those offices except with respect to those outside of Vancouver where at least car mileage was allowed. If an employee is obliged to travel to do his work and his employer is not prepared to pay the exact and total cost of transportation, then he must come within the requirements of subparagraph 8(1)(h)(ii). This question was not under consideration before the Federal Court of Appeal in Cival. On this basis, it is not really very important whether the plaintiff here was obliged to use his car or not; he was obliged to get himself and his papers to the firm's clients and there was no arrangement, at least in the circumstances relevant to this case, whereby the employer undertook to pay the total transportation costs.

[Emphasis added.]

The defendants also bring to my attention a more recent decision of the Federal Court of Appeal. In Hoedel, the taxpayer was a member of the Canine Division of the Regina City Police Department. He was required by his employment to take his dog with him when off-duty and he attempted to deduct the costs of transporting the dog to and from his home. He was paid an allowance by the Department for expenses connected with looking after the dog, but this did not cover his transportation costs. The Court allowed the deduction, although they found that non-compliance with the condition of keeping the dog with him at all times would not necessarily lead to disciplinary action. The fact that it would result in an unfavourable work performance evaluation was enough to make it a duty of his employment, so expenses of transporting the dog were found to be covered by paragraph 8(1)(h).

These two cases were applied by Mr. Justice Collier in Moore and Betz to situations involving school principals using their cars in the performance of their duties. However, as the principals were not reimbursed for any of their expenses, I find the cases less helpful here than those of Rozen and Hoedel.

I agree with the Tax Court judge that the Cival decision does not require that the deductions claimed here be disallowed. He distinguished Cival on the same basis as Strayer, J. in Rozen: that in this case there was sufficient evidence that the use of the car was an implied term of the employment contract. Unlike the payroll auditor, it is clear that these taxpayers could not do their job properly without the use of their cars. In light of the provisions of the collective agreement referred to, it could not be said that this contract was merely a unilateral one. The taxpayers were bound to use their cars in the performance of their duties. The jurisprudence presented supports this assessment and I see no reason to disturb it.

Nor do I think that the mileage allowance provided in this case distinguishes it from Rozen and Hoedel. If the mileage allowance turns out to be woefully inadequate, as alleged, it would be manifestly unjust to limit these taxpayers, who were required to use their cars, from deducting the balance of their reasonable expenses. I endorse Mr. Justice Strayer's remarks in Rozen that where an employee is obliged to travel to do his work, if his employer is not prepared to pay the exact and total costs of transportation, then he must come within the requirements of subparagraph 8(1)(h)(ii). It remains to be seen whether the reasonable costs in this situation were covered by the mileage allowance. If not, they are properly deductible under paragraph 8(1)(h).

I must therefore turn to consider the reasonableness of the deductions claimed in this case. The parties are agreed on the amount of total expenses incurred by these taxpayers with respect to their automobiles in the relevant taxation years. They differ on the heads and proportion which may be deducted as employment travel expenses.

Mr. Jacobi initially deducted 50 per cent of his expenses for 1979 and 40 per cent for 1980. These figures far exceed the percentage of mileage driven for employment purposes, as the schools to which he travels are all in fairly close proximity to one another. He used the larger percentage, however, as reflecting the total time during which the car had to be available for those purposes, which was the whole of every working day. Mr. Mina deducted only 25 per cent of his costs as he uses his car in another business as well.

The Tax Court judge noted that no logical methods of computation were used by the taxpayers to arrive at these figures. The Minister, he found, has suggested a more reasonable system for calculating the deduction. The expenses are divided into operating costs and ownership costs. The percentage of miles driven in employment is applied to operating costs and a combined percentage, reflecting both mileage and time used for employment, is applied to ownership costs.

Using this system, the Tax Court judge made the following calculations. For Mr. Jacobi, the mileage percentage was 6.6 per cent for 1979 and 7.6 per cent for 1980. The “time” percentage used by the Minister was 60.27 per cent based on the number of days worked in the year. The judge took into account the fact that the taxpayer only worked eight hours per day, but concluded that any personal use of the car on a working day would be minimal. With these facts in mind, he arrived at 50 per cent as a reasonable percentage to be used for ownership costs. A similar calculation produced the figure of 25 per cent for Mr. Mina’s ownership expenses.

He then determined which items should be included under each head of costs. Operating expenses were found to include gas, oil, repairs and car washes. Ownership costs included not only capital cost allowance and interest, but also licence and insurance, which do not vary with the number of miles driven. The mileage percentages were applied to the operating total for each year and the "combined" percentages to the ownership totals. The resulting figures were added together, and the mileage allowance each taxpayer received was subtracted to arrive at the allowable deduction. For Mr. Jacobi that amount was $1,191.75 for 1979 and $880.23 for 1980. For Mr. Mina it was $471.40.

Each of the parties has some difficulty with the Tax Court judge's calculations. The plaintiff agrees with the Tax Court judge's approach, as outlined above, but believes he arrived at the wrong percentages to be applied to ownership costs. The plaintiff advocates straight averaging of the percentages of time used for employment and miles driven in employment, which, for Mr. Jacobi, would produce a result of about 33 per cent for 1979 and 34 per cent for 1980. To support this position, the plaintiff cites the decisions in Prowse v. M.N.R., [1971] C.T.C. 736; 71 D.T.C. 5443 and Cumming v. M.N.R., [1967] C.T.C. 462; 67 D.T.C. 5312. In the latter case at pages 477-78 (D.T.C. 5321), Thurlow, J. (as he then was) provided the following analysis of the approach to be used in apportioning ownership costs:

On the basis of mileage alone, the use made by the taxpayer of the Chevrolet for the purposes of his practice appears to me to have been no more than 25 per cent of the total use and if this were the only thing to be considered as being "use" of an automobile the basis for calculation of the appellant's capital cost allowance would, it seems, necessarily be limited by Section 20(6)(e) to 25 per cent of the total capital cost of the automobile. The appellant on the other hand, and his accountant, considered that 90 per cent of the use of the car was use for the purposes of the practice and this I think was derived by considering its use from the point of view of the time involved in keeping it available for operation in the practice. Thus on a day when the appellant drove the car to the hospital, drove it again to return home and perhaps made several more trips with it to the hospital and back in the course of the day and at no time had any occasion to drive it for any purpose not associated with the practice, the car might well be considered as having been used throughout that day solely for the purposes of the practice. It was urged as well, and it is I think notorious, that an automobile depreciates both from operating it and by becoming obsolete and that the loss in capital value over a year through the latter might well be greater than through the former. I have no difficulty in accepting the evidence that the car was used (in the time sense) a great deal more for the purposes of the practice than it was used for other purposes but I think that an estimate of the proportion of the use to be attributed to the practice must have some regard both to the extent of wear and tear through driving it for the purposes of the practice as compared with the driving done for other purposes and to the extent of the time in which it was in use for the purposes of the practice as compared with the time it was in use for other purposes. On this basis I would fix the proportion of the use made of the car for the purposes of the practice at 50 per cent and the capital cost for the purposes of Section 11(1)(a) and the Regulations at 50 per cent of its capital cost. The appellant is entitled to deductions in each year for capital cost allowance calculated on that basis.

There are two things to be noticed about this analysis. First, Thurlow, J. was interpreting paragraph 20(6)(e) of the Act, not paragraph 8(1)(h). Second, while he advocated blending the two factors of mileage and time, he did not use a strict averaging of the two. Clearly, with the two factors in mind, he reached a figure he would consider reasonable in the circumstances.

I do not see that the Tax Court judge did anything different here. He was obviously conscious that, in this case, the mileage factor should be given less weight than the time factor. The real burden on these taxpayers was having their cars available for use every working day. The low mileage figure, reflecting the proximity of the schools between which they travelled, does not, on the particular facts of this case, provide a fair estimate of the cost of that travel to the taxpayers. Therefore, he chose a figure closer to the percentage of time the cars were available. In light of the facts as presented, that approach seems to me entirely appropriate.

The plaintiff protests that the total travelling expenses claimed by Mr. Jacobi are not reasonable. It is said they average in excess of $1.70 per mile, as opposed to the .24¢ or .29¢ per mile allowed by the Board of Education to cover both fixed and variable costs. The reaction is not surprising, and deserves comment.

First, any formula for reimbursement of expenses on a per mile basis must, of necessity, be in contemplation of an average situation in which the employee is anticipated to drive a certain approximate number of miles during the year. In this case, the figures used by the Board of Education to estimate the costs of operating their employees' cars were taken from a table provided by the Ontario Motor League, which was filed in evidence. That table reveals that the estimated fixed and variable costs per mile vary considerably with the number of miles driven. For 1979 to 1981 the table looks, in part, like this:

Fixed and Variable Costs

Cents Per

Kilometre

	1979 1980		1981
16,000 ks.	.164	.185	.212
18,000 ks.	.150	.170	.195
24,000 ks.	.124	.136	.158
North York	.140	.180 ~— .230

The last line, labelled "North York" was what was paid to these taxpayers per kilometre. It will be seen that, at a rate of .14# per kilometre (or .24# per mile), the Motor League was anticipating that the employee would be driving between 18,000 and 24,000 kilometres in the year (or between 11,000 and 15,000 miles). These taxpayers drove between 1,100 and 1,300 miles in the relevant years.

The results are obvious. Let us assume that .15# of the .24# suggested by the Motor League is directed toward operating costs and the remaining .09¢ toward capital costs. A driver will only be perfectly reimbursed for both categories if he drives the number of miles for which those estimates have been calculated. For the purposes of this case, the effect on a motorist who drives a larger number of miles is unimportant. Those who drive relatively few miles should receive adequate compensation for operating costs but will never be fairly reimbursed for the fixed or ownership expenses. When the necessary adjustment is made, re-expressing it in a per mile allowance may appear disproportionate, but that does not detract from the correctness of it.

Secondly, despite his protests, plaintiff's counsel was unable to identify any component of the expenses claimed which is, in itself, unreasonable. It is not alleged that the taxpayers used more expensive automobiles or maintained them more expensively than circumstances required. I have already found the Tax Court judge’s method of calculation to be appropriate. I will therefore repeat what I said at the hearing: if each of the components is reasonable, then the total which results must also be reasonable.

The defendants agree with the Tax Court judge's characterization of the expenses, with one exception. It is argued that the cost of parking Mr. Jacobi's automobile at his home should have been included in his fixed expenses for 1979 and 1980. Mr. Jacobi lived in an apartment building at that time, and in order to park his car there at night he had to pay an extra fee. The amount paid in 1979 was $270 and in 1980, $261. The Tax Court judge disallowed these amounts, saying they had been admitted to be personal expenses. Counsel argues that in order to have the car available for work the taxpayer had to have somewhere to park it at night. The parking fee should therefore be considered a fixed and unavoidable cost of ownership. Clearly, the defendants are no longer admitting it to be a personal expense.

I am not prepared to overturn this part of the Tax Court's decision. Insufficient evidence was presented to me to establish the choices available to the taxpayer for parking his car. If free parking was really unavailable, that should have been established on his behalf. In the absence of such evidence, I have no basis to disagree with the Tax Court judge and cannot find this to be a reasonable, employment-related expense.

In the result, therefore, both parties' challenges to the Tax Court's decision fail. For the reasons given, the appeal is dismissed with costs.

Appeal dismissed.