Pitzel v. The Queen, docket 2001-2929(IT)I (Informal Procedure)

Date: 20020306

Docket: 2001-2929-IT-I

BETWEEN:

ROBERT PITZEL,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Angers, J.T.C.C.

[1]            This matter was heard in Moncton, New Brunswick, on January 15, 2002. The appellant is appealing by way of the informal procedure his 1997 and 1998 assessments dated March 20, 2000, whereby the Minister of National Revenue ("Minister") disallowed deduction of employment expenses for each of those years.

[2]            The appellant is a resident of Moncton, New Brunswick, and has been an employee of Midland Transport Ltd. (hereinafter referred to as Midland) since May of 1990. He is director of pricing for Midland and his compensation consists of a salary and bonus. The bonus depends on Midland's ability to achieve what is described as the "bottom line plan". Midland has certain objectives and, if they are met, that triggers a bonus for the appellant. The bonus is therefore calculated on Midland's achievement and not the appellant's.

[3]            As director of pricing, the appellant has the responsibility of negotiating the sale of Midland's services as a carrier to potential customers as well as negotiating what are described as supplier contracts, that is, contracts with the carriers Midland needs in order to provide the services it offers. The impact of the contracts on Midland's achieving its "bottom line plan" is twofold. If Midland can obtain suppliers at the best possible cost, it then can sell its services at a better price to its own customers, thus increasing business and revenues. If the appellant is unable to obtain favourable contracts, Midland's bottom line will be affected and so will the bonuses. As regards the contracts, the appellant's personal contribution thereto represents 25 to 30 percent of the total dollar amount involved.

[4]            In addition to his salary, and bonus when applicable, the appellant received from Midland a fixed allowance in the amount of $5,880 as compensation for motor vehicle expenses for each of the taxation years in question. This allowance was properly included in the appellant's income and, as a consequence, the appellant could claim motor vehicle expenses against employment income for both taxation years.

[5]            During the course of those two taxation years, the appellant submitted to Midland receipts for the expenses he had incurred while on that company's business. In the 1997 taxation year, he submitted receipts for $9,017.34 for meals, entertainment, parking, car rentals, cellular telephone, accommodations, stationery and other things. He submitted receipts for $5,045.40 for the 1998 taxation year. The above expenses were fully reimbursed by Midland. They were not included in the appellant's income as they constituted a reasonable allowance for those expenses.

[6]            In addition to the above expenses, the appellant incurred other expenses which he did not submit to Midland for reimbursement. They constitute the
subject matter of this appeal. In 1997, these additional expenses totalled $4,487, and in 1998 they amounted to $4,136. The breakdown of these expenses is as follows:

Expenses Claimed	1997	1998
Accounting/Legal	$172.50	$250.00
Entertainment	2,705.00	3,009.87
Lodging	356.35	256.86
Parking	77.60	0.00
Supplies	1,034.06	367.23
Other (phone)	170.88	287.02
Other (taxi)	0.00	45.50
Total Claimed (rounded)	$4,517.00	$4,217.00
Additional Motor Vehicle allowed		($81.14)
Transposition Error	($30.00)
Total Reassessed (rounded)	$4,487.00	$4,136.00

[7]            Minor adjustments were later made and both parties agree that the total for 1997 is $4,487, and for 1998, $4,136.

[8]            The explanation given by the appellant for not submitting these expenses to Midland is Midland's moral guidelines as dictated by its parent company, J. D. Irving Ltd. As an example, alcohol is considered unnecessary for doing business and is seldom considered a reimbursable expense. According to the appellant, if one does not want to jeopardize one's job, one must follow the guidelines. The appellant recounted the story of one employee being dismissed for failure to do so. He therefore complies with the guidelines and submits his expense accounts accordingly.

[9]            Under the management guidelines that were introduced in evidence (Exhibit R-7), expenditures for alcoholic beverages are not reimbursable. The guidelines do provide for exceptions in that regard for employees who are required to entertain customers, but the expense must be approved by the division manager.

[10]          In general, the guidelines provide for the reimbursement of reasonable expenditures for transportation, accommodations and meals in the course of travel on company business.

[11]          The appellant admits he has been through many audits of his travel expenses by his employer and avoids submitting alcoholic beverages as an expense because it attracts attention. He also admits that excessive expenses are frowned upon by his employer. Without going through all the expenses incurred by the appellant but not submitted to Midland, it is important to note that many of them were incurred in the Moncton area where the appellant resides. Midland is also based in the Moncton area. Other such expenses -- for accommodations -- were explained by the appellant as relating, for example, to staying over an extra day to play golf with a client. Although his business with the client had been completed, he felt he had to stay on to help further his dealings with that client. Still other expenses incurred but not submitted were described as professional memberships not required by the appellant's position and incidental expenses that the appellant felt necessary although they were not required by Midland.

[12]          Patricia Harknett is Vice-President of Human Resources for Midland. She testified that the appellant is compensated through a base salary with a car allowance and a bonus based on Midland's performance and not just the appellant's. Other employees affect the bottom line. She confirmed that the appellant is also reimbursed for all travel expenses in accordance with Midland's guidelines. The expenses are submitted to a senior manager and then sent to accounting. Ms. Harknett prepared and signed the T2200 forms that accompanied the appellant's tax returns for 1997 and 1998. According to the information contained in those forms, the appellant was not paid wholly or partly by commissions or similar amounts according to the volume of sales made or contracts negotiated. The forms also show the amount of car allowance received and indicate that travel expenses were repaid.

[13]          The issue is whether the appellant is allowed to deduct $4,487 and $4,136 in expenses not submitted to, or reimbursed by, Midland as employment expenses in 1997 and 1998. Subsection 8(2) of the Income Tax Act (hereinafter, the "Act") makes it clear that no amounts other than those specifically described in section 8 may be deducted in computing income from an office or employment.

[14]          The appellant therefore submits that the expenses in question are legitimate entertainment expenses and should be considered business expenses under paragraph 8(1)(f) of the Act.

[15]          The respondent submits that not all the conditions of paragraph 8(1)(f) of the Act have been met and that, even if they have been, the expenses claimed were not incurred in order to produce income. According to the respondent, the evidence indicates that the appellant was fully reimbursed by his employer, and accounting fees and extra days on the golf course are not business expenses.

[16]          Paragraph 8(1)(f) reads as follows:

SECTION 8: Deductions allowed.

(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:

                                                                8(1)(f)

(f) Sales expenses — 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 . . .

[17]          An employee seeking to claim a deduction under paragraph 8(1)(f) must meet each of the conditions outlined therein.

[18]          On the evidence, this Court is satisfied that the appellant was employed by Midland in connection with the negotiation of contracts. Under the terms of his employment, he was required to pay his own expenses (the car allowance being an exception in this regard). The evidence also disclosed that the appellant was reimbursed for all such expenses in accordance with certain guidelines that he had accepted.

[19]          Any additional expenses claimed would need to meet the condition that his employment contract required him to pay those expenses himself. The evidence did not disclose that such was the case. On the contrary, the evidence indicated that he was reimbursed for his expenses. The additional expenses he incurred were not required by his employer nor were they necessary, and the appellant simply did not claim reimbursement for them out of fear of reprisals if he did. None of this brings the expenses within the ambit of paragraph 8(1)(f).

[20]          Under subparagraph (ii) of paragraph 8(1)(f) the taxpayer must be required to carry on the duties of the employment away from the employer's place of business. The evidence disclosed that the appellant was conducting business in Quebec, Ontario and Nova Scotia, but a review of the expenses submitted, in particular under the entertainment heading, indicates that all but a few were incurred in the Moncton area.

[21]          Under subparagraph (iii), the taxpayer must be remunerated in whole or in part by commissions or other similar amounts fixed by reference to the volume of the contracts negotiated. There was no evidence presented before this Court to show that any commissions were paid based on contracts negotiated by the appellant. In fact, the evidence disclosed that the appellant was paid a base salary and a bonus that depended on Midland's ability to achieve a bottom-line result through its employees. The bonus therefore had nothing to do with the volume of contracts negotiated by the appellant.

[22]          In light of the above conclusions, it is not necessary to look at the remaining condition. The present fact situation does not allow the appellant to deduct the expenses in question either under the provisions of paragraph 8(1)(f) or under paragraph 8(1)(h) of the Act.

[23]          The appeals are therefore dismissed.

Signed at Ottawa, Canada, this 6th day of March 2002.

"François Angers"

J.T.C.C.

COURT FILE NO.:                                                 2001-2929(IT)I

STYLE OF CAUSE:                                               ROBERT PITZEL

                                                                                                and Her Majesty the Queen

PLACE OF HEARING:                                         Moncton, New Brunswick

DATE OF HEARING:                                           January 15, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge François Angers

DATE OF JUDGMENT:                                       March 6th, 2002

APPEARANCES:

Agent for the Appellant:                     James E. Sellars

Counsel for the Respondent:              Christa MacKennon

COUNSEL OF RECORD:

For the Appellant:                

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2001-2929(IT)I

BETWEEN:

ROBERT PITZEL,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on January 15, 2002 at Moncton, New Brunswick by

the Honourable Judge François Angers

Appearances

Agent for the Appellant:                                          James E. Sellars

Counsel for the Respondent:                                   Christa MacKennon

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for 1997 and 1998 taxation years are dismissed in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 6th day of March 2002.

"François Angers"

J.T.C.C.