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Citation: 2005TCC3
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Date: 20050114
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Docket: 2004-153(GST)I
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BETWEEN:
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STARTEC REFRIGERATION SERVICES LTD.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Teskey, J.
[1] The Appellant appeals from an
assessment of tax made pursuant to the Goods and Services (GST)
provisions of the Excise Tax Act
(the "Act").
Issue
[2] The sole issue is whether an
allowance made by the Appellant to various classes of employees
is a taxable benefit or a reimbursement.
Agreement
[3] It was agreed between the parties
hereto that no matter what decision I find, the assessed benefit
should be reduced by 50%.
Facts
[4] The Appellant employs a number of
mechanics and mechanic apprentices. All employees in these
classes require, as a condition of employment, a set of tools of
the trade.
[5] Prior to the period in question,
if an employee broke a tool, he was reimbursed the cost of
purchasing a new tool. This proved cumbersome and the policy of
giving different classes of employees a monthly allowance was
established.
[6] Prior to the allowance policy
being established, the Appellant's owner,
Joseph C. Cawthorn ("Cawthorn"), who had
started the Appellant in 1976, calculated that the allowance
amounts that he was going to establish would just allow an
employee to maintain and replace his or her tool inventory as
required by the Appellant to maintain the Appellant's
position.
[7] Since it was agreed that one half
of the allowance figures were for safety equipment, I find that
the remaining one half of all the allowances was used by the
individual employee to replace and maintain their personal
required tool inventory.
[8] A first year apprentice would
start out with a modest inventory of tools, which would cost in
the neighbourhood of $10,000. A 10-year mechanic would have
tools that would have cost in the neighbourhood of $60,000.
[9] The Appellant owned the more
expensive tools that employees could use if needed, one such tool
cost $21,000.
Jurisprudence
[10] Linden J.A. of the Federal Court
of Appeal, in Attorney General of Canadav.
Hoefele, 95 DTC 5602, the leading authority on benefit
as opposed to reimbursement, said at page 5604:
According to the Supreme Court of Canada, then, to be taxable
as a "benefit", a receipt must confer an economic
benefit. In other words, a receipt must increase the
recipient's net worth to be taxable. Conversely, a receipt
which does not increase net worth is not a benefit and is not
taxable. Compensation for an expense is not taxable, therefore,
because the recipient's net worth is not increased
thereby.
...
This is merely another way of describing the net gain idea
that a receipt is not taxable if it does not improve the economic
situation of the taxpayer, if it only reimburses for an amount
for which an employee would otherwise be "out of
pocket", it is not a "benefit". He treats
relocation costs in the same way as ordinary travelling expenses.
Reimbursement for out of pocket expenses incurred as a result of
a move, explains Noel, J., cannot be considered a benefit
because it adds nothing of value to the recipient's economic
situation. ...
Linden, J.A. also said at page 5605:
Therefore, the question to be decided in each of these
instances is whether the taxpayer is restored or enriched. Though
any number of terms may be used to express this effect -- for
example, reimbursement, restitution, indemnification,
compensation, make whole, save the pocket -- the underlying
principle remains the same. If, on the whole of a transaction, an
employee's economic position is not improved, that is, if the
transaction is a zero-sum situation when viewed in its entirety,
a receipt is not a benefit and, therefore, is not taxable under
paragraph 6(1)(a). It does not make any difference whether
the expense is incurred to cover costs of doing the job, of
travel associated with work or of a move to a new work location,
as long as the employer is not paying for the ordinary, every day
expenses of the employee.
Position of the Parties
[11] The Appellant argues that there is no
enrichment and therefore this allowance is a reimbursement and
not a benefit.
[12] The Respondent argues that there is an
enrichment in that the employee has not had to pay out of his
pocket the cost of a replacement tool, and that in the
employee's possession is a new tool, which I should find is
more valuable then the one that was replaced.
Analysis
[13] By way of analogy and for the purposes
of these reasons, I assign employee "A" with a
tool called tool "B" that costs $1,000. On a
Monday, he attends at work with his required tools. Some could be
quite old, some could be almost new, some could be almost worn
out.
[14] During the work day,
employee "A" breaks tool "B".
[15] At the end of the day,
employee "A" buys from the Appellant a new
tool "B" for $1,000, which allows him to go to
work on the Tuesday with a full set of tools, being the same
number and variety as employee "A" had when
attending on Monday morning.
[16] Since the legal question is whether
employee "A" was restored or enriched, I find that
in this example, employee "A" is simply restored
to the position he or she was one moment before
tool "B" broke.
[17] I acknowledge the new replacement tool
may perhaps be more valuable, but it is quite conceivable that
the new tool may be made of lighter and cheaper material and not
be as valuable.
[18] I believe the test is was the employee
in a different position on Tuesday morning than on the Monday
morning? I think not. At both times, the employee had the
required number and variety of different tools required to
perform the functions of the employment.
[19] Thus, the way of the allowance was used
herein by the employees of the Appellant in the period in
question. I find that the allowance was a reimbursement and not a
benefit.
[20] The appeal is allowed and the
assessment is referred back to the Minister of National Revenue
for reconsideration and reassessment on the basis that the
employees of the Appellant were not receiving a taxable benefit
and the Appellant was not required to account for tax on the
amount of the allowances given to the employees.
Signed at Vancouver, British Columbia, this 14th day of
January, 2005.
Teskey, J.
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