2831422 Canada Inc. v. The Queen, docket 2001-4201-IT-I (Informal Procedure)

Date: 20021114

Docket: 2001-4201-IT-I

BETWEEN:

2831422 CANADA INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent,

AND

Docket: 2001-4202(IT)I

BETWEEN:

DIKRAN AHARONIAN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Bowman, A.C.J.

[1]            These appeals were heard together and are from assessments for the 1998 and 1999 taxation years. In the case of 2831422 Canada Inc. (the "company") the taxation years are the fiscal periods ending on May 31 of each year.

[2]            In each of these years the company paid its sole shareholder, director and employee a travel allowance of $150 per day whenever he travelled on business away from its place of business in Montréal and stayed overnight. The CCRA disallowed these amounts as business expenses to the company and included them in Mr. Aharonian's income as shareholder's benefits under subsection 15(1) of the Income Tax Act.

[3]            The company's business consisted of interviewing employees of Eatons and preparing employee opinion surveys. This had previously been done in-house by the management of Eatons but was given to Mr. Aharonian's company because the employees were less reluctant to voice their complaints to an outsider who could give them an assurance of anonymity.

[4]            To judge by the financial statements of the company for the years ending May 31, 1997, 1998 and 1999 the business was very successful and Mr. Aharonian testified that by far the greatest part of the income was the consulting fees that the company received from Eatons.

[5]            A large part of Mr. Aharonian's work in interviewing employees required him to travel to Eatons stores outside of Montréal, such as Québec city, Ottawa and southern Ontario, such as Toronto, Hamilton, Kitchener and Guelph. Exhibit A-1 lists his out of town trips from June 1, 1997 to May 31, 1998 and June 1, 1998 to May 31, 1999. In the former period he spent 105 days and in the second period he spent 96 days out of town.[1] Although the exhibit lists Toronto in a number of cases Mr. Aharonian stated that many of the trips to Toronto were in part to other places in southern Ontario such as Hamilton, Burlington, Kitchener, London, Guelph and other places where Eatons had stores.

[6]            He testified that on four or five occasions in each of the two years in question he stayed at his uncle's house in Scarborough. I accept this figure. It would not make sense for him to stay in Scarborough if he were visiting cities within a radius of one or two hundred kilometres of Toronto. I found Mr. Aharonian to be a credible witness. The assessor based the assessments on a conversation she had with the company's accountant from which she formed an impression that whenever Mr. Aharonian went to Toronto he stayed with his family. This basic assumption on which the assessments were based has been shown, on the evidence, to be completely wrong.

[7]            The assessor appears to have been of the view that when a travel allowance is paid, the expenses must still be substantiated with receipts and vouchers. I do not think that this is correct as a matter of law. There are many places in the Income Tax Act where receipts are required but subparagraph 6(1)(b)(vii) is not one of them. That subparagraph reads

(1)            There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

...

(b)            all amounts received by the taxpayer in the year as an allowance for personal or living expenses or as an allowance for any other purpose, except

...

(vii)          reasonable allowances for travel expenses (other than allowances for the use of a motor vehicle) received by an employee (other than an employee employed in connection with the selling of property or the negotiating of contracts for the employer) from the employer for travelling away from

(A)           the municipality where the employer's establishment at which the employee ordinarily worked or to which the employee ordinarily reported was located, and

(B)            the metropolitan area, if there is one, where that establishment was located,

in the performance of the duties of the employee's office or employment.

[8]            That the amount of $150 per day paid to Mr. Aharonian is an allowance is clear enough but it is an allowance that falls within the exception in subparagraph 6(1)(b)(vii) provided that it is reasonable. What is reasonable in any circumstance is a matter of fact, judgement, and common sense. In Words and Phrases Legally Defined there are eight pages of two columns dealing with the words reasonable or reasonably, yet no court of which I am aware has ever had the temerity to try to formulate a comprehensive definition of the word, nor do I. Any attempts to assign a meaning to it usually end up using the word itself. It is said to imply the application of objective criteria but it is a word of such fluidity and elasticity that a judge must resist the temptation to let some element of subjectivity creep into his or her determination. What may seem reasonable to one judge may not to another. Attempts to define the "reasonable person" usually end up deferring to some hypothetical passenger on the Clapham omnibus. One can ask "What would an impartial observer possessing a somewhat (but not excessively) above average intelligence, knowing all the relevant facts, having no preconceived notions, biases or hidden agendas consider to be reasonable?" In short, one draws the line between reasonable and unreasonable where one's good sense tells one to draw it.

[9]            Counsel for the respondent argues that there is no evidence that the $150 allowance per day is a reasonable amount. Obviously a determination of reasonableness must be based upon the facts of the particular case but it is not purely a question of evidence. Here we have the fact that the figure was chosen by an experienced chartered accountant who stated that $150 per day was at the low end of the scale of figures he advises his clients to use. We have Mr. Aharonian's testimony that the $150 per day that the company paid him usually did not cover all of his expenses. As a matter of common sense $150 per day paid as an allowance in 1998 and 1999 for travelling to Québec city and southern Ontario to cover hotels, meals, parking and incidental expenses strikes me as eminently reasonable. Accordingly I find that this allowance falls within subparagraph 6(1)(b)(vii) and is not taxable in Mr. Aharonian's hands. So far as the company is concerned it is an ordinary and reasonable expense of carrying on its business and is deductible in computing its income under section 9 of the Income Tax Act.

[10]          I should mention a number of other points that were raised in argument. Counsel referred to section 230 of the Income Tax Act which imposes a requirement to keep records and argued that the failure to produce vouchers for all of Mr. Aharonian's expenses constituted non compliance with section 230. Even if section 230 imposed such a requirement on the company it does not prohibit the deduction of the expenses. As was said by L'Heureux-Dubé J. in Hickman Motors Limited v. The Queen, 97 DTC 5363 (S.C.C.), at page 5376:

Furthermore, where the ITA does not require supporting documentation, credible oral evidence from a taxpayer is sufficient notwithstanding the absence of records: Weinberger v. M.N.R., 64 DTC 5060 (Ex. Ct.); Naka v. The Queen, 95 DTC 407 (T.C.C.); Page v. The Queen, 95 DTC 373 (T.C.C.).

[11]          In any event the company's records were quite adequate to establish the payment to Mr. Aharonian of the allowance.

[12]          So far as Mr. Aharonian's failure to keep all his receipts is concerned subparagraph 6(1)(b)(vii) requires only that the allowance be reasonable. To require him to produce receipts to justify the non-taxability in his hands of the reasonable allowance would defeat the purpose of the provision. To be non-taxable in the employee's hands it has to meet the conditions in subparagraph (vii). It does. To be deductible by the employer it has to be reasonable, laid out for the purpose of earning income from the company's business and not be capital. It meets all of these criteria.

[13]          Counsel for the respondent referred to Verdun v. The Queen, 98 DTC 6175 (F.C.A.). That case held that certain meal allowances were taxable under paragraph 6(1)(b). It seems apparent from the brief oral reasons of Linden J. that the provisions of subparagraph 6(1)(b)(vii) were not brought to the court's attention.

[14]          Counsel for the respondent also argued that when the accountants initially recorded the payment of the allowances to Mr. Aharonian they showed them as "avances directeur" and that this somehow indelibly stamps them with the character of whatever account in which the accountants chose temporarily to park them. At year end they were put in their proper account, that of travel expenses. As L'Heureux-Dubé J. said in Hickman Motors (supra) at page 5376:

The law is well established that accounting documents or accounting entries serve only to reflect transactions and that it is the reality of the facts that determines the true nature and substance of transactions.

See also Ed Sinclair Construction & Supplies Ltd. et al. v. M.N.R., 92 DTC 1163 (T.C.C.) at 1169; Gresham Life Society Co. Ltd. v. Bishop, [1902] 4 T.C. 464 at 476.

[15]          Clearly the amounts were travel allowances and not shareholder benefits. They were intended to reimburse Mr. Aharonian for travel expenses in the course of his duties away from Montréal. As such they come within subparagraph 6(1)(b)(vii) of the Income Tax Act and are not taxable in Mr. Aharonian's hands. Moreover, they are ordinary business expenses of the company and are deductible in computing its income.

[16]          The appeals are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons.

[17]          The appellants are entitled to their costs on the basis of one counsel fee at trial for both appellants.

Signed at Ottawa, Canada, this 14th day of November 2002.

"D.G.H. Bowman"

A.C.J.COURT FILE NOS.:                                    2001-4201(IT)I and 2001-4202(IT)I

STYLE OF CAUSE:                                               Between 2831422 Canada Inc. and

                                                                                                Her Majesty The Queen AND

                                                                                                Between Dikran Aharonian and

                                                                                                Her Majesty The Queen

PLACE OF HEARING:                                         Montréal, Quebec

DATE OF HEARING:                                           November 6, 2002

REASONS FOR JUDGMENT BY:      The Honourable D.G.H. Bowman

                                                                                                Associate Chief Judge

DATE OF JUDGMENT:                                       November 14, 2002

APPEARANCES:

Counsel for the Appellants:                Louis Tassé, Esq.

Counsel for the Respondent:              Stéphanie Côté

COUNSEL OF RECORD:

For the Appellant:                

Name:                                Louis Tassé, Esq.

Firm:                  Fasken Martineau DuMoulin LLP

                                          Montréal, Quebec

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2001-4201(IT)I

BETWEEN:

2831422 CANADA INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard with the appeals of Dikran Aharonian (2001-4202(IT)I)

at Montréal, Quebec, on November 6, 2002 by

The Honourable D.G.H. Bowman, Associate Chief Judge

Appearances

Counsel for the Appellant: Louis Tassé, Esq.

Counsel for the Respondent:              Stéphanie Côté

JUDGMENT

                It is ordered that the appeals from assessments made under the Income Tax Act for the 1998 and 1999 taxation years be allowed and the assessments be referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the amounts paid to Dikran Aharonian as travel allowances are ordinary business expenses of the appellant and are deductible in computing the appellant's income.

                The appellant is entitled to its costs on the basis of one counsel fee at trial for the appellant and Dikran Aharonian.

Signed at Ottawa, Canada, this 14th day of November 2002.

"D.G.H. Bowman"

A.C.J.

2001-4202(IT)I

BETWEEN:

DIKRAN AHARONIAN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard with the appeals of 2831422 Canada Inc. (2001-4201(IT)I)

at Montréal, Quebec, on November 6, 2002 by

The Honourable D.G.H. Bowman, Associate Chief Judge

Appearances

Counsel for the Appellant: Louis Tassé, Esq.

Counsel for the Respondent:              Stéphanie Côté

JUDGMENT

                It is ordered that the appeals from assessments made under the Income Tax Act for the 1998 and 1999 taxation years be allowed and the assessments be referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the amounts received by the appellant from 2831422 Canada Inc. were travel allowances and not shareholder's benefits and are not to be included in the appellant's income under section 6 of the Income Tax Act by reason of subparagraph 6(1)(b)(vii) of the Income Tax Act.

                The appellant is entitled to his costs on the basis of one counsel fee at trial for the appellant and 2831422 Canada Inc.

Signed at Ottawa, Canada, this 14th day of November 2002.

"D.G.H. Bowman"

A.C.J.