Date: 19981207
Docket: 97-2049-GST-I
BETWEEN:
THE CORPORATION OF THE CITY OF BRANTFORD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rip, J.T.C.C.
[1] The Corporation of the City of Brantford
("City") appeals from an assessment issued under Part
IX of the Excise Tax Act (“Act”) in
which the Minister of National Revenue (“Minister”)
disallowed a rebate of Goods and Services Tax (“GST”)
claimed by the appellant pursuant to section 259 of the
Act in respect of allowances paid by the City to members
of its Council, the Public Utilities Commission and the Board of
Commissioners of Police for the period January 1, 1994 to
February 29, 1996.
[2] Eligibility for the rebate is determined by Section 174 of
the Act:[1]
To be eligible for the rebate the City must pay the
allowance to its employee for supplies all or
substantially all of which are taxable supplies (other than
zero-rated supplies) of property or services acquired in
Canada. The Minister says that the City did not provide any
evidence on how the allowance paid to its officers was to be used
and that the allowance was not necessarily for supplies all or
substantially all of which are taxable supplies. The Minister
also questioned whether the allowance was reasonable.
[3] The evidence at trial consisted of the testimony of Mr.
Gregory Beal, the Accounting Manager for the City and Mr. Michael
Hancock, a City councillor during the relevant period and at
trial, as well as the following facts agreed to by the
parties:
1. The Appellant is an incorporated municipality governed by
the Municipal Act, R.S.O. 1990, c.M. 45, as amended (the
“Municipal Act”).
2. The Appellant is registered for GST under Part IX of
the Act.
3. The Appellant is a “public service body” within
the meaning ascribed under subsection 123(1) of the Act
and is a “selected public service body” as that term
is defined under subsection 259(1) of the Act.
4. The Appellant, in addition to carrying on commercial
activities, also makes tax-exempt supplies. The Appellant is
generally entitled to claim rebates in respect of GST it pays or
is deemed to pay for goods and services acquired or deemed to be
acquired for use in making tax-exempt supplies.
5. The amount in dispute in this appeal is $10,429.14, plus
related penalty and interest, which represents the total amount
of GST rebates claimed by the Appellant in respect of
non-accountable allowances paid to municipal officers (the
“Municipal Allowance”) in its returns for the
reporting periods ended April 30,1995, August 31, 1995
and December 31, 1995. The Appellant claimed the rebates
under sections 174 and 259 of the Act.
6. The Appellant filed its return for the reporting period
ending April 30, 1995 on June 5, 1995. In this return,
the Appellant claimed, for the first time, a total GST rebate of
$9,021.35 in respect of the Municipal Allowances paid during the
period from April 1, 1991 to April 30, 1995 inclusive.
The Appellant had not claimed a rebate in respect of the
Municipal Allowances in any of its previously filed GST
returns.
7. In its return for the reporting period ending
August 31, 1995, which was filed on September 28, 1995,
the Appellant claimed a rebate of $702.52 in respect of the
Municipal Allowances paid from May 1 to August 26,
1995.
8. In its return for the reporting period ending
December 31, 1995, which was filed on January 30, 1996,
the Appellant claimed a rebate of $705.26 in respect of the
Municipal Allowances paid from September 1 to
December 31, 1995.
9. The Appellant’s rebate claims in respect of the
Municipal Allowances were disallowed by the Minister of National
Revenue (the “Minister”) by Notice of Assessment
dated May 30, 1996 and bearing the number 08GP0102780 (the
“Assessment”).
10. The Appellant objected to the Assessment.
11. The Assessment was confirmed by the Minister.
12. During the period under appeal, the Appellant’s
By-Law 223-88 was in force and provided for an
annual honorarium to be paid to each member of City Council, the
Public Utilities Commission and the Board of Commissioners of
Police, one-third of which honorarium was stated in the
by-law to be deemed to be for expenses incident to the
discharge of their respective duties.
13. The Municipal Allowances equal one-third of the
honorariums referred to in paragraph 12, above.
14. The Municipal Allowances were limited and predetermined
amounts in that they were equal to one-third of the
honorariums referred to in paragraph 12, above.
15. The Municipal Allowances were at the complete disposition
of the recipient with no requirement for the recipient to provide
documentation or receipts in relation to the spending
thereof.
16. The recipients of the Municipal Allowances are employees
within the meaning of the Act.
17. The Municipal Allowances are allowances for
“expenses incident to the discharge of the
[officers’] duties ... as [officers]”
within subsection 81(3) of the Income Tax Act, R.S.C.
1985, c.1 (5th Supplement), as amended, and thus were
properly excluded in calculating the recipient’s income for
the purposes of that [statute].
18. The Appellant maintained documentation evidencing the
recipients of the Municipal Allowances, the amount of the
Municipal Allowances paid to each recipient, the total GST the
Appellant claimed to be deemed by section 174 of the Act
to have been paid in respect of the Municipal Allowances and the
reporting period in which the Municipal Allowances were paid.
[4] Mr. Gregory Beal is responsible for the City’s
payroll, accounting, and filing of GST returns, amongst other
things. He is knowledgeable about how the City makes payment of
honoraria to its officials. According to Mr. Beal, the City
records an honorarium payment in each councillor’s payroll
as to one-third as an allowance and two-thirds as
salary. Revenue Canada T4 form, a Statement of Remuneration Paid,
distributed to employees at the end of the taxation year, sets
forth the taxpayer's taxable income in box 14. A note at
the bottom of Mr. Hancock's T4 form for 1994, issued by
the City, states that a municipal officer's expense allowance
of $3,666.69 is not included in box 14.
Mr. Hancock's taxable employment income (in box 14) is
$7,331.31. The non -taxable allowance represents
one-third of the total honorarium. Any pay cheque sent to the
elected officers includes both the taxable and non-taxable
portions of the honorarium less source deductions.
[5] Mr. Beal testified that when an elected officer
incurs expenses for specific events outside the City, the person
is reimbursed by the municipality “over and above”
the honorarium. The amount of the reimbursement is supported by
receipts.
[6] Mr. Beal estimated that 14 positions in the City are
eligible for the non-taxable allowance. Receipts are not
required for payment of the allowance. Mr. Beal stated, and Mr.
Hancock confirmed, that the recipients of the allowance are not
accountable to Council for how the money is used, nor are they
directed as to its use.
[7] Michael Hancock is a councillor with the City. He is also
self-employed in his own business. As councillor,
Mr. Hancock is chair of several committees and sits on other
committees. He has been reelected councillor in several elections
since 1988. He also has been a member of the Police
Commission.
[8] Mr. Hancock described his duties as a councillor as
legislative, constituent and community development. A councillor
typically incurs expenses. He must pay for office space. There
are only two offices at City Hall for its ten councillors. He is
called upon to interview people and he requires an office for
that purpose. Therefore, he has converted a bedroom at his home
to an office. Also, he says, he requires a telephone answering
machine, cabinets, desk, chair, computer, pager and a cellular
telephone. He paid for this equipment with the funds from the
non-taxable allowance. He incurs long distance calls since
he is consistently working outside of the City. He incurs car
expenses, including gasoline and parking, plus “nickels and
dimes all over the place”. Mr. Hancock is often called upon
to make donations, attend functions and fund-raising activities
in the municipality and part of the allowance is used to pay his
way at these functions. As Police Commissioner, he incurs similar
expenses. Mr. Hancock testified that the Police Commissioner
or a member of the Police Commission is not entitled to expenses
in addition to those he or she may receive as a councillor.
Submissions
[9] The respondent submits several reasons the appeal should
be dismissed. Firstly, the City failed to keep records containing
information to determine the amount of rebate to which the City
may be entitled, contrary to subsection 286(1) of the Act.
Persons claiming a rebate must meet the same stringent criteria
as registrants who wish to obtain an input tax credit pursuant to
sections 169 and 170 of the Act.[2]
[10] The respondent submits that section 174 is a deeming
provision that has the effect of enabling an employer to claim an
input tax credit under section 169 of the Act or a rebate
under section 259 in respect of allowance paid for certain
expenses, to the same extent as would have been the case had the
employer incurred the expense directly.[3] Section 174 ensures parity of
treatment between an employer who pays GST in respect of taxable
supplies acquired directly and an employer who pays an allowance
to an employee, who uses the allowance to acquire taxable
supplies in relation to his employer's activities and to pay
GST when he acquires the taxable supplies. In either case, the
employer effectively paid GST in respect of the acquisition of
the supplies.[4]
[11] Respondent's counsel concedes that an employee is not
required to produce invoices or receipts to an employer to
substantiate he or she has actually spent the amount of the
allowance. The non-taxable portion of the honorarium is a true
allowance. In The Queen v. Pascoe, 75 DTC 5427 at 5428,
Pratte J., speaking for the Federal Court of Appeal, held
that
...[a]n allowance is a limited predetermined sum of money
paid to enable the recipient to provide for certain kinds of
expense, its amount is predetermined in advance and, once paid,
it is at the complete disposition of the recipient who is not
required to account for it.
[12] Section 174 of the Act, respondent's counsel
says, requires the employer to establish the nature and intent,
or purpose, of the allowance; that is, that the allowance was for
the acquisition by the employee of taxable supplies in relation
to activities engaged in by the employer.
[13] A general statement in the City's by-law 223-88 to
the effect that one-third of the employee's salary
"shall be deemed to be for expenses incident to the
discharge" of the officer's duties is insufficient for
the purposes of demonstrating compliance with subparagraph
174(a)(iv) [or paragraph 174(b)] of the Act,
counsel insists, and is not a record within the meaning of
subsection 286(1) of the Act.The declared purpose of the
allowance is too open-ended, the respondent suggests.
[14] In the respondent's view, in order for the employer
to demonstrate compliance with subparagraph 174(a)(iv)
[and paragraph 174(b)], it would be appropriate for the
employer's books and records to provide evidence of the type
of anticipated expense that the allowance was intended to cover
when the employer set the allowance (i.e., the type of supply the
employer intended the employee to acquire with the allowance),
the tax status of that supply (i.e., taxable, zero-rated or
exempt), and the method by which the amount of the allowance was
determined or calculated by the employer.
[15] Respondent's counsel stated that it would be
appropriate for the employer's books and records to reflect
the fact that this information was communicated to the employee
prior to, or at least at the time of, the actual payment of the
allowance to the employee.
[16] By way of example, counsel suggests, an employer might
have a written job description detailing an employee's duties
of employment and a written policy in place pertaining to the
calculation and payment of an allowance to the employee to enable
the employee to carry out particular duties of employment (e.g.
per diem meal allowance, travel allowance based on kilometres
driven, taxi allowance based on estimated number and duration of
trips, etc.). This would ensure that the allowance to the officer
would be for supplies all or substantially all of which are
taxable supplies (other than zero-valued supplies) of property
acquired in Canada by the officer in relation to the City's
activities; subparagraph 174(a)(iv).
[17] Respondent's position is that an allowance can be
intended for a particular purpose, and further, that an employer
may determine the amount of the allowance with reference to
projected or average expenses or costs. This, counsel says, is
recognized by the Courts in cases such as Pascoe,
supra; Byers v. M.N.R., 85 DTC 129 (T.C.C.) at 131;
A.G. Canada v. MacDonald, 94 DTC 6262 (F.C.A.) at 6264;
North Waterloo Publishing Ltd. v. The Queen, 1998
CanRepNat 167 (F.C.A.) at p.2 para.1.
[18] Counsel says she finds support for this proposition since
subsection 243(3) of the Ontario Municipal Act
specifically permits the council of a municipality to pass a
by-law providing for the payment of a specified amount or amounts
"calculated according to a specified rate" in lieu of
the amount of actual expenses incurred "in respect of items
of expenditure specified in the by-law where the
specified amounts or rates, in the opinion of council,
reasonably reflect the actual expenses that would be
incurred."
[19] Respondent also claims that the amounts of the allowances
would not be deductible if the appellant were a taxpayer under
the Income Tax Act and the activity was a business since
the amount of the allowance is not reasonable in the
circumstances and therefore the deduction of the amount of the
allowance would be prohibited: section 67 of the Income Tax
Act.
[20] Respondent submits the allowances at issue were not
reasonable because: a) there was no predetermined type of expense
for which the allowances were paid; b) the amount of the
allowances was not determined or calculated in reference to
projected or estimated costs or expenses of any kind; and c) the
allowance was arbitrarily set at one-third of what would
otherwise be salary for every municipal officer, rather than
being determined on an individual basis for each particular
officer in contemplation of his or her particular circumstances.
Therefore, assuming the appellant were a taxpayer for purposes of
the Income Tax Act, the appellant would not be entitled to
a deduction in respect of the allowances in computing income for
the purposes of that Act. Accordingly, the appellant has
also not met the requirements of paragraph 174(b) of the
Act.
[21] Subsection 81(3) of the Income Tax Act provides
that an elected officer of a municipality, a utilities board or
similar body or a member of a particular school board
("public body") who is paid by that public body an
allowance for "expenses incident to the discharge of the
person's duties as such an officer or member" shall not
include the amount of the allowance as income if the amount does
not exceed one-half of the salary or other remuneration the
person received
from the public body,[5] that is, one-third of the aggregate of the amount of
the allowance and salary and other remuneration.
[22] One must bear in mind that an elected officer of a
municipal council or of a municipal commission, or an elected
member of a public or separate school board is not a typical
employee.[6] Their
employer as a public body and their relationship with that
employer is not one of master and servant. These people are
elected for a fixed term to represent the public. During their
term of office, nobody supervises the work of these officers or
tells them how their work ought to be performed.[7] Each such officer has his or her
own way of representing constituents and of discharging the
duties for which he or she has been elected.
The employer is not dealing with employees whom it can hire,
supervise and fire in the normal course. An elected officer of
the employer is not one to whom the employer gives a job
description and a written policy pertaining to a statutory
allowance to enable the employee to carry on that employee's
duties of office. To put it in the words of the vernacular of
today's youth: Revenue Canada should get real. An elected
officer of a municipality or municipal commission or a member of
a school board is a "person vested with some portion of the
functions of government, to be exercised for the benefit of the
public".[8]
One must, in these circumstances, reasonably assume that the
officers will observe the purpose of the allowance stated in the
provincial statute authorizing the allowance and, in the appeal
at bar, the City's by-law granting the allowance. These
people must have discretion in their use of the allowance in
order to discharge the duties of their
office to the best of their ability. This is not to say the
municipal council or other public body cannot by by-law or
resolution place further reasonable limits on
how the allowance may be spent so long as the elected officer
spends the allowance in the discharge of his or her duties as
such officer or member. In the case at bar, restrictions imposed
by the Municipal Act, that the allowance is for expenses
incident to the discharge of the officer's duties as an
officer, is sufficient for the purpose of section 174 of the
Act. There is no reason to suspect that in the normal
course the allowance will not be spent for taxable supplies in
Canada.
[23] The Income Tax Act provides, at subsection 81(3),
that the allowance is "for expenses incident to the
discharge of the person's duties as such an officer or
member". Respondent's counsel referred me to subsection
243(3) of the Municipal Act for the proposition that a
municipal council may pass a by-law providing for the payment of
a specified amount or amounts calculated according to a specified
rate in lieu of the actual amounts of expenses incurred. Counsel
took comfort in subsection 243(3): the City's by-law 223-88
could have, and should have, followed the statutory provision.
However, section 255[9] of the
Municipal Act provides that where an elected member of
a municipal council or local board, by virtue of a by-law or
resolution of council or the board, is paid a salary or other
remuneration, one-third of the remuneration is "deemed to be
for expenses incident to the discharge of [the elected
officer's] duties as a member of the council
or...board,” wording not dissimilar to subsection 81(3) of
the Income Tax Act. Section 243 of the Municipal
Act applies to all employees of a municipality regulated by
that statute, both elected employees and those hired under a
traditional master and servant relationship. Section 255 of the
Municipal Act applies only to elected employees.
[24] The amount of this allowance was predetermined to enable
the elected recipient to provide for expenses of discharging his
or her duties, and it is at his or her discretion to spend it for
the purpose intended: Pascoe, supra. For Revenue Canada to
insist on more is an extra legal requirement. There is nothing
open-ended in its provincial legislature authorizing the
allowance.
[25] Both the Municipal Act and the City's by-law
223-88 provided that the allowance is for the elected
officer's expenses incident to the discharge of his or her
duties of office. This, in my view, is sufficient, in the
particular nature of the true relationship between the employer
and elected employee at bar, to satisfy a reasonable person that
the allowance was for supplies all or substantially all of which
are taxable supplies (other than zero-rated supplies) of property
or service acquired in Canada by the officer in relation to the
employer's activities. To any extent that any of the
allowance was for the use of a motor vehicle, it is clear the use
of the motor vehicle was in Canada and was related to the
City's activities.
[26] I cannot find the amount of the allowance was not
reasonable. The portion of the allowance to the total
remuneration paid is authorized by the Municipal Act and
is sanctioned by the Income Tax Act. Parliament and the
Ontario legislature obviously were of the view that the allowance
is proper and reasonable. The allowance depends on an elected
officer's total remuneration from the municipality or other
public body. Where Parliament and the provincial legislature both
approve and exempt from tax a precise portion of an amount of
remuneration paid to such an employee, the courts should be most
reluctant to find that such amount may be an unreasonable expense
to the employer.
[27] The appeal is allowed with costs.
Signed at Ottawa, Canada, this 7th day of December 1998.
"Gerald J. Rip"
J.T.C.C.
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