Citation: 2007TCC311
Date: 20070530
Docket: 2006-2272(IT)I
BETWEEN:
KEN PAES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
O'Connor, J.
[1] The issue in this
appeal is whether in the 2003 taxation year the Appellant, a commissioned
salesman employed by Superpages or Yellow Pages specializing in the business of
advertising, is entitled to deduct certain expenses.
[2] The principle data and
the expenses denied by the Minister are set forth in Schedule A of the Reply to
the Notice of Appeal, which reads as follows:
Schedule A
Taxation Year 2003
|
|
As filed
|
Allowed
|
Reassessed
|
|
Employment income
|
|
|
|
|
Base salary
|
52,817
|
0
|
|
|
Commissions
|
42,314
|
0
|
|
|
Total employment income
|
$95,131
|
0
|
|
|
|
|
|
|
|
Employment expenses
|
$27,404
|
$13,547
|
$13,857
|
|
|
|
|
|
|
|
|
|
|
|
Items under objection and appeal
|
As filed
|
Disallowed
|
|
|
|
|
|
|
|
A. Office expenses
|
|
|
|
|
Cabinet
|
115
|
115
|
|
|
Printer
|
549
|
549
|
|
|
Phone
|
34
|
34
|
|
|
Phone connector
|
57
|
57
|
|
|
Presentation equipment
|
1,418
|
1,418
|
|
|
Total office expenses
|
$2,173
|
$2,173
|
|
|
|
|
|
|
|
|
As filed
|
Disallowed
|
|
|
B. Seminar and training
|
|
|
|
|
|
|
|
|
|
Seminar on real estate sales
|
2294
|
2294
|
|
|
Seminar on sales
|
35
|
35
|
|
|
Motivational lecture
|
214
|
214
|
|
|
Basic HTML course
|
400
|
400
|
|
|
Total seminar and training expenses
|
$2,943
|
$2,943
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount under appeal
|
$5,116
|
|
|
Position of the Minister:
[3] The position of the
Minister is that the office expenses are capital in nature and the deduction of
same is not permitted to the Appellant.
[4] With respect to
seminar and training, the Minister’s Reply states as follows:
…
c) Seminar and
training:
- seminar and
training expenses were not incurred for business purposes;
- the Appellant
was not required to attend seminars and motivational lectures;
…
13. He further
submits that the Minister has correctly determined that the Appellant is not
entitled to claim additional personal expenses as per Schedule A in the amount
of $2,943.00 pursuant to subparagraph 8(1)(i)(iii) of the Act in
computing income for the 2003 taxation year.
…
Position of the Appellant:
[5] The position of the
Appellant is set forth in the following paragraphs of the Notice of Appeal:
In order to earn income as salesperson he
needed to use Table, chairs, cabinet, computer, printer, telephone among other
equipment.
He used his home as his office. He
attended seminar in real estate sales and in motivational lecture.
…
The taxpayer would respectfully submit to
the court that the taxpayer needed to use a computer and internet to find sales
leads, establish contacts by telephone and letters to the prospective clients
and needed telephone and printer, among other office equipment, for that
purpose. He needed the presentation equipment to present the background
information of his employer and convince thr [sic] the prospective
clients the benefit of advertising through “Superpages”.
In 2003 more than half of his income was
from commission. The taxpayer was one of the top salesman of the company in
that year. The taxpayer was highly motivated to succeed in his career as
salesperson.
He attended a motivational seminar and a
real estate sales seminar. He learnt sales technique and sold advertising
to real estate agents. Furthermore his training in those seminars has
directly helped the taxpayer in his present position as salesperson of
Goldbook, a company specialising in the same line of business as yellow page. …
It is taxpayer’s opinion that ITA sec.
8(1)f, although not very clear, does not explicitly rejects [sic] notion
of legitimate expenses arising out of capital outlay provided it directly
contributes to taxpayer’s income. In many instances it drew a parallel to
commissioned salesman’s deductible expenses and business expenses. One example
would be motor vehicle expense. In both cases i.e. commissioned salesman &
business, capital outlay on motor vehicle is not deductible from income, but
the capital cost allowance is deductible as expense from income.
The taxpayer fails to see any rational
why there is discrepancy in the treatment of deductibility between motor
vehicle expenses and office equipment expenses. Both are critical elements in
earning income.
[6] It will be seen
later that capital cost allowance is only allowed with respect to autos and
airplanes. Thus, an employee such as the Appellant can not claim capital cost
allowance on the office expenditures.
Analysis:
[7] The following are
extracts from the most relevant provisions of the Income Tax Act:
8. (1) Deductions allowed -- 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) sales
expenses [of commission employee] -- 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 such amounts were not
(v)
outlays, losses or replacements of capital or payments on account of capital,
except as described in paragraph (j),
…
(2) General limitation -- Except as
permitted by this section, no deductions shall be made in computing a taxpayer's income for
a taxation year from an office or employment.
[8] In Gifford v. R.,
[2004] 1 S.C.R. 411 the Supreme Court of Canada discussed certain factors to
consider in relation to deduction of expenses. Major J., stated as
follows:
V. Analysis
11 Before
turning to the specific issues raised by this appeal, it is useful to review
the general scheme for allowing deductions under the Act. The appellant
taxpayer here earned income from employment and under the Act could only make
deductions, as a result of s. 8(2), if the deduction was expressly allowed
under s. 8.
12 If an
employee meets the requirements of s. 8(1)(f)(i) to (iv), he is then allowed to
deduct any expense made for the purpose of "earning the income from the
employment". If the expense is a payment "on account of
capital", s. 8(1)(f)(v) removes it from the scope of
expenses that can be deducted.
13 When the
source of income is a business or property as opposed to employment, the scope
of available deductions is much broader because s. 9 states that the taxpayer's
income will be the profit from the business or property. In calculating the
profit from a business or property a taxpayer can make deductions in accordance
with generally accepted accounting principles unless precluded by some other
section of the Act. Sections 18(1)(a) and (b) are similar to the portions of s.
8(1)(f) that act as general limits on what can be deducted. Section 18(1)(a)
states that only those expenses incurred for the purpose of gaining or
producing income from a business or property can be deducted, and s. 18(1)(b)
uses similar language as s. 8(1)(f)(v) to, among other things,
preclude deductions of payments "on account of capital".
14 While the
general rules are similar, the exceptions create differences in the ability of
taxpayers who earn their income from employment as opposed to from business or
property to claim deductions in what appear to be similar circumstances.
15 If an
employee otherwise meets the requirements of s. 8(1)(f) but is prohibited
from making a deduction because the expense is a payment "on account of
capital" within s. 8(1)(f)(v), the only exception provided
by the Act is s. 8(1)(j). This section allows for the deduction of payments on
account of capital where the item purchased is either a motor vehicle or an
aircraft in a manner similar to the capital cost allowance deduction under s.
20(1)(a) discussed below. The employee taxpayer is also allowed to deduct the
interest paid on money borrowed to purchase either of these items.
16 In
contrast, a taxpayer earning income from business or property may be able to
deduct expenses that fall within s. 8(1)(b) pursuant to a number of
exceptions in the Act. Two of the more common exceptions are in ss. 20(1)(a)
and (b). Section 20(1)(a) allows a portion of the capital cost of certain
property to be deducted from this income, if the regulations provide for a
capital cost allowance in relation to that type of property. Section 20(1)(b)
provides a similar deduction for expenditures to purchase certain intangible
capital assets, such as goodwill. Section 20(1)(c) is a specific provision that
allows interest to be deducted when it is paid on money borrowed for certain
purposes.
17 That
employees are treated differently than taxpayers earning income from business
or property under the Act is not novel nor readily seen as fair. It has
resulted in significant litigation when taxpayers attempted, with limited
success, to cast themselves as independent business owners as opposed to
employees to attempt to get the advantage of the more favourable deductions.
18 If the
payment to Bentley or the interest payment are payments "on account of
capital", the appellant, as an employee, will not be able to make any
deductions from his income for these expenses. Conversely, if the appellant was
earning income from a business and not from employment, he would likely be able
to deduct both these payments in calculating his profit for the year. This
seemingly inequitable result for the appellant is the result of the structure
of the Act but cannot alter the characterization of these payments.
[9] As to training
expenses, reference is made to the case of Neville v. The Minister of
National Revenue, 88 DTC 1546. Taylor, T.C.J., stated as follows:
…
(b) that, while the amount at issue would
very likely be deductible if this appellant was in business, under the
circumstances where Mrs. Neville was an employee, it was not deductible. For
this view counsel relied upon a quotation from Chapter 6 Taxation of Employees
(supra):
. . .Unlike
taxpayers carrying on a business, whose ability to deduct expenses and outlays
is relatively unfettered by paragraph 18(1)(a), employees are expressly
restricted by subsection 8(2) to the deductions specified in that provision.
and a comment from IT
Bulletin 357R (supra):
There is
no provision in the Income Tax Act for an employee to deduct training expenses
(other than tuition fees) in calculating income from employment.
The Court will refer to
this point later.
…
So whether termed 'training fees' or
something else the deductions claimed here is for registration, enrolment and
attendance at a course recommended and designed to upgrade this taxpayer's
skills as a real estate salesperson who was remunerated on a commission basis
-- an employee, but nevertheless a special kind of employee -- virtually a
hybrid between a straight salaried employee and an independent contractor. The
deduction, if any is to be allowed, must come under paragraph 8(1)(f) of the
Act. I have said at other occasions that a commission remunerated employee, who
qualifies under paragraph 8(1)(f), for deductions, need not seek support for
deductions under any other subparagraph of section 8 -- because paragraph
8(1)(f) of the Act provides all the latitude required and available if properly
interpreted. Mrs. Neville's properly filed statement of income and expenses
covered a wide range of expenses -- a total of $4,668.97 out of commission
income of $16,576.87, no problem there. But Mrs. Neville also used line 213 of
the income tax return, entitled 'Tuition Fees' and deducted the $525.00 at
issue, including as support the receipt for it. Since line 213 indicates the
caution 'claimable by student only', and since Mrs. Neville considered herself
a 'student' for the courses she was taking attempting to deduct, the amount
there was understandable. I am quite satisfied it would have been equally
proper -- perhaps more so, to have included it in the regular statement of
expenses, at least to highlight the question of its deductibility.
I have long held that the only unusual
restriction on deductions for expenses of commission sales persons who qualify
under paragraph 8(1)(f) of the Act is that C.C.A. is only (4) allowed on an
automobile or an aircraft (not on office equipment, etc.) -- See Quesnel v.
M.N.R., 77 DTC 92.
Other than that, for the purpose of deductions from income, it is difficult to
see that the phrase 'expended by him in the year for the purpose of earning
income from the employment', paragraph 8(1)(f) can be read as a materially
different restriction than the similar phrase in paragraph 18(1)(a) ' . . .made
or incurred by the taxpayer for the purpose of gaining or producing income from
the business or property.' I fail to see that the Minister's second argument
above noted as (b) can be taken seriously. If a deduction could be made under
section 18 of the Act for the amount at issue here (and counsel agreed that
according to IT Bulletin 357R it was very probably deductible) then I would not
bar a similar deduction for this taxpayer.
…
Turning to argument (c) above, IT
Bulletin 357R quite properly recognizes the difficulty facing the Minister in
allowing or disallowing a deduction like the one at issue here -- and indeed I
accept that there is probably a wide range of courses, seminars, 'week-ends',
etc., to which the term 'training expenses' could be applied. I would suggest
that all 'training courses' might contain some elements of acquisition of
skills as well as upgrading of skills, but generally speaking I can think of no
more apt distinction between 'capital' and 'current' than that made in the
Bulletin for the guidance of taxpayers, and I quote:
. . .Thus, the
expenses in connection with any course which gives a credit towards a degree,
diploma, professional qualification or similar certificate may not be deducted.
On the other hand reasonable expenses in connection with a course which, for
example enables a professional to learn the latest methods of carrying on his
profession are allowable.
[10] Furthermore, the
following are extracts from the Interpretation Bulletin IT‑357R2 –
Expenses of Training:
…
Self-employed Individuals
2. Where a training or educational course
results in a lasting benefit to the taxpayer, the costs incurred in connection
with the course are considered to be capital in nature. The deduction of these
capital expenditures as current expenses is disallowed by paragraph 18(1)(b);
however, where these expenditures were incurred in respect of a business of the
taxpayer, they would qualify as "eligible capital expenditures" (see
the current versions of IT-123 and IT-143). A lasting benefit to the taxpayer
is considered to occur where a new skill or qualification for a business is
acquired. Thus, training costs incurred by the taxpayer in connection with a
course which he or she takes to obtain a credit for a degree, diploma,
professional qualification or similar certificate would be considered capital
in nature. Where, on the other hand, the taxpayer takes a training course
merely to maintain, update or upgrade an already existing skill or
qualification with respect to his or her business or profession, expenses
incurred in connection with such a course are not considered to be capital in
nature and their deduction as current expenses is not disallowed by paragraph
18(1)(b). Thus, for example, costs incurred in connection with a course taken
to enable a professional to learn the latest methods of carrying on his or her
profession may be allowable, even if the course relates to an area of the
profession in which the professional was not previously involved actively
though qualified to be so involved.
…
8. Although a tax credit in respect of
tuition fees paid to certain educational institutions is available to taxpayers
(see the current version of IT-516) including those who are employees, the
Income Tax Act generally does not provide for an employee to deduct training
expenses. However, an exception to this general rule can occur under paragraph
8(1)(f). That is, a taxpayer who is employed in connection with the selling of
property or negotiating of contracts for his or her employer and who is
remunerated in whole or part by commissions or other similar amounts may be
entitled to deduct training expenses under paragraph 8(1)(f), as was found by
the Tax Court of Canada in the case of Doris J. Neville v. M.N.R., 88 D.T.C.
1546, [1988] 2 C.T.C. 2201. In order to deduct training expenses under
paragraph 8(1)(f), all the requirements thereof must be satisfied. …
Conclusion:
[11] In my opinion the expenses claimed and denied by the
Minister as indicated on said Schedule A are capital in nature and have been
properly disallowed by the Minister. Consequently, the appeal is dismissed.
Signed at Ottawa, Canada this 30th day of May, 2007.
"T. O'Connor"
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