[OFFICIAL ENGLISH TRANSLATION]
Date:
20030114
Docket:
2001-4189(IT)I
BETWEEN:
LOUIS
GUAY,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Archambault,
J.T.C.C.
[1] Louis Guay has challenged the assessments made by the Minister of
National Revenue (the Minister) with respect to the 1996, 1997 and 1998
taxation years (the relevant period). The Minister included in Mr.
Guay’s income, as a benefit from employment, tuition fee reimbursements of
$1,465 in 1996, $18,917 in 1997 and $21,415 in 1998. Mr. Guay
contends that the reimbursements are not taxable benefits by reason of the
particular circumstances of his employment with a Canadian company, the
Eldorado Gold Corporation (Eldorado).
Facts
[2] From 1993 to 1996, Mr. Guay was the chargé d'affaires at the
Canadian Embassy in the Dominican Republic. At the end of his assignment, Mr.
Guay returned to Canada while awaiting a new posting. After receiving a number
of offers that he did not find satisfactory, Mr. Guay was offered a
position as the Director General of Eldorado in the Dominican Republic. On
August 2, 1996, Mr. Guay obtained unpaid leave for a period of 36 months
from the Department of Foreign Affairs (the Department). On September
6, 1996, he signed a contract of employment, the most important provisions
of which are as follows:
1. EMPLOYMENT
1.1 The Company hereby employs and confirms the
appointment of the Employee as its Director General of the Caribbean Basin,
with the Employee to be located in Santo Domingo, Dominican Republic, or such
other place as agreed upon by the Company and the Employee after September 6,
1997. The Employee agrees to hold such other offices to which he may be
appointed by any subsidiary of the Company. The Employee hereby accepts such
employment and appointment on the terms and conditions set forth in this
Agreement.
2. TERM
2.1 The Employee's term of employment and
appointment shall be for a period of three years, commencing on September 6,
1996. The term of this Agreement shall thereafter continue on a yearly basis on
the same terms as set forth in this Agreement, or on such other terms as agreed
to by the Company and the Employee, unless the Company or the Employee gives
notice to the other that they do not wish to renew this Agreement within 60
days of the expiry of its term.
3. REMUNERATION
3.1 The Company shall pay the Employee an annual
salary of US$75,000 payable semi-monthly in arrears in 12 equal monthly
installments (less applicable source deductions) based upon the employee
devoting 100% of his time to the business and affairs of the Company, provided
however that the Employee may devote up to 25% of his time to the business and
affairs of Energold Mining Ltd.
...
3.3 The Company will reimburse the Employee for
expenses incurred as a result of employment in the Dominican Republic,
including, inter alia, schooling for the Employee's children, storage of
personal effects and property management in Canada, one return trip to Canada
for the Employee and his family once per calendar year, and operating costs for
a motor vehicle used for professional purposes, to a maximum of US$35,000 per
calendar year upon presentation of statements and vouchers by the Employee to
the Company. Such amount will be reviewed by the Company every year and will,
in the discretion of the Chief Executive Officer, be modified to reflect changes
in the rate of inflation in the Dominican Republic as specified by the
International Monetary Fund or other acceptable agency and changes in the
Dominican Republic currency.
[3] Among the important duties that Mr. Guay had to accomplish at
Eldorado was the negotiation to privatize a gold mine belonging to the
government of the Dominican Republic. For the term of his employment contract,
Mr. Guay had to move with his family to the Dominican Republic, and his five
children attended the Lycée français of Santo Domingo, the only educational
institution offering education in French in that country. In accordance with
the contract mentioned above, Eldorado reimbursed the tuition fees paid to the
lycée during the relevant period.
[4] In the course of his cross-examination, Mr. Guay admitted
that he was not required by the terms of his employment contract with Eldorado
to send his children to a French school. He moreover acknowledged that,
regardless of the circumstances of his presence in the Dominican Republic, he
would have sent his children to the French lycée. Lastly, he acknowledged that the terms
and conditions of his employment had been negotiated with his employer,
including those relating to the reimbursement of the tuition fees. When counsel
for the respondent asked him why he had not demanded a higher salary to take
the tuition fees into account, he replied that it was hard to obtain a higher
salary because they wanted people with the same responsibilities to receive the
same compensation. The Court asked him why they had not grossed up the amount
of the reimbursement (which could go as high as $35,000) to take the tax
implications into account, and Mr. Guay replied that he had not thought of
this because he believed that the amount was not taxable.
[5] Mr. Guay submitted that, during the relevant period, he had
not abandoned his residence in Canada and therefore he continued to report his
income in this country.
Position of
the parties
[6] The respondent submits that the reimbursement by Mr. Guay’s
employer for his children’s tuition fees is a taxable benefit under
paragraph 6(1)(a) of the Income Tax Act (the Act).
Since the tuition fees were an expense that had not been required by his
employer for the performance of his duties, their reimbursement represented for
Mr. Guay the reimbursement of a personal expense; the effect of this
reimbursement was to enrich him and, thus, the amount had to be included in his
income as a taxable benefit. In support of her position, counsel for the
respondent cited the following decisions: Dionne v. Canada, [1996]
T.C.J. No. 1691 (QL); affd [1998] F.C.J. No. 1612 (C.A.) (QL); Leduc Estate
v. Canada, [1995] T.C.J. No. 1514 (QL); Canada v. Huffman, [1990]
F.C.J. No. 529 (C.A.) (QL); and Detchon v. Canada, [1995] T.C.J.
No. 1342 (QL).
[7] Mr. Guay, on the other hand, contends that the reimbursement
he obtained for his children’s tuition fees was not related at all to the
services he rendered to Eldorado. According to him, there was no solution other
than to send his children to a French lycée given Canada’s constitutional
values that guarantee him the right to receive instruction in either official
language in Canada.
[8] He also
relied on the decision rendered by the Federal Court of Appeal in Guay v.
Canada, [1997] F.C.J. No. 470 (QL). Mr. Guay was the appellant in
that case. According to the decision, the tuition fees reimbursed by his
employer while he was living in Canada were not a taxable benefit because of
the requirements of his employment with the Department. In paragraph 1 of his
decision, Judge Décary noted: "A rotational employee who begins to work
for the Department is immediately informed that he or she must accept
[TRANSLATION] 'the principle of rotational employment
inherent in such work' and be prepared [TRANSLATION] 'to accept any assignment
that the Department considers useful or necessary, either in Ottawa or at any
of Canada's diplomatic or consular missions abroad.'" The judge below had found that attending
the Lycée Claudel was the only
realistic option for Mr. Guay’s children if the appellant found himself once
again abroad and if he decided that his children were to continue their
education in a French education system. Here is what Judge Décary goes on to say at
paragraph 10 of his decision:
Once the only realistic option available to an
employee, because of the rotational nature of his or her employment, is to
enrol his or her children in the only institution in Ottawa that offers the
French education system recognized throughout the world, it can no longer be
concluded that there is an insufficient relationship between the expenses
incurred by the employee and the employee's employment.
[9] Although Mr. Guay acknowledged that the circumstances
existing during the relevant period were very different from those existing in
1991, the taxation year at issue before the Federal Court of Appeal, he argued
that some of the principles stated in that decision could be applied to the
case at bar. He cited paragraph 1.1 of his employment contract, which he
says stipulates that he had to agree to work in a place other than Santo
Domingo and, accordingly, there was the same element of “permutability” in the
contract with Eldorado as in the contract between him and the Department. Since
there was no solution other than to send his children to the French lycée in
Santo Domingo, this school being the only institution offering instruction in
French in the Dominican Republic, Mr. Guay contends that the conclusions
of the Federal Court of Appeal in Guay should also be applied to the
facts of these appeals.
Analysis
[10] The relevant provision in the case at bar is paragraph 6(1)(a)
of the Act, which states as follows:
Amounts to be included
as income from office or employment.
6(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:
(a) Value of benefits — the value of board,
lodging and other benefits of any kind whatever received or enjoyed by
the taxpayer in the year in respect of, in the course of, or by virtue of an
office or employment, except any benefit
...
[11] As may be noted, this is a provision that casts a very broad net.
It covers "the value of board, lodging and other benefits of any kind
whatever received or enjoyed ...". In the French version, this paragraph covers, inter
alia, "autres avantages quelconques qu'il a reçus ou dont il a joui ...".
[12] First, an analysis must be made of the nature of the expenses that
Eldorado reimbursed to Mr. Guay. It must be noted that the tuition fees paid by
Mr. Guay to the French lycée of Santo Domingo were the ordinary, everyday
expenses of an employee, what are commonly called personal expenses. This is
the conclusion reached by Judge Garon (as he then was) in Guay v. R.,
T.C.C., No. 93-3028(IT)I, May 21, 1996 (1996 CarswellNat 2867), at
paragraph 72, when he wrote that it cannot be denied that tuition fees for
the dependent children of an employee are expenses of a personal nature:
... In paying those expenses,
parents are discharging a personal obligation which, in principle, is incumbent
upon them in their capacity as parents. The reimbursement of those expenses by
an employer at first glance constitutes a benefit within the meaning of paragraph
6(1)(a) of the Income Tax Act.
[13] In Leduc (supra), Judge Dussault reaches the same
conclusion at paragraph 45:
One may consider the simple example of an employer who
decided to pay only part of an employee's remuneration in cash and who undertook
to pay or reimburse certain of his personal expenses such as those for
housing, food, transportation, the children's education and so on. It
is difficult to see how the claim could be made that such employee was not
enriched or did not receive a benefit as a result of the payment or
reimbursement of expenses that have traditionally been considered personal or
living expenses, and thus, essentially consumer expenditures.
[Emphasis added.]
[14] In Dionne (supra), the Federal Court of Appeal dismissed
Mr. Dionne’s appeal, and Judge Décary, writing on behalf of the court, relied
on the decision in Leduc in his reasons for dismissing the appeal. Judge
Décary stated that "the reasons [of Judge
Dussault] for that decision are compelling."
[15] There is also the Detchon (supra) decision where
Judge Rip, referring to tuition fees, stated at paragraph 51: "The
employer was in fact paying for an ordinary personal expense of the appellants
...".
[16] Even if the tuition fees constituted personal or living expenses,
this does not necessarily mean that the reimbursement thereof is a taxable
benefit for the purposes of the Act. For example, one need only refer to
all the exceptions listed in paragraph 6(1)(a) of the Act.
Moreover, there is the decision of the Federal Court of Appeal in Guay,
recognizing that there can be exceptional situations where such reimbursement
will not give rise to an inclusion in income. This is what Judge Décary said in
Dionne (supra), at paragraph 3:
Relying on the recent decision of this
Court in Guay v. The Queen, [1997] 216 N.R. 101 (F.C.A.) the appellant argued that
reimbursing the costs of transporting food was not a taxable benefit within the
meaning of paragraph 6(1)(a) of the Income Tax Act. This decision
is of no assistance in the case at bar. That case involved the extraordinary
expenses which rotational employees of the Department of Foreign Affairs and
International Trade incurred to ensure their children would be educated in
Canada in a manner consistent with the education available during their
overseas posting.
[Emphasis added.]
[17] Similarly, I believe that the Guay decision on which
Mr. Guay has relied in these appeals is of no assistance since the
exceptional situation described in that decision is not present here. First of
all, I do not share Mr. Guay’s point of view that his employment contract with
Eldorado established a system of "permutability" similar to the one
existing in the Department. The Department’s employees had to accept the principle
of "permutability" at the outset of their employment, that is, they
had to be prepared to accept any assignment that the Department might consider
useful or necessary. In the case at bar, Eldorado could not assign Mr. Guay
elsewhere but the specified location in the Dominican Republic, unless he
agreed to it. I refer to the key words of the agreement between Mr. Guay and
Eldorado: "... or such other place as agreed upon by the Company
and the Employee ...".
[18] In my opinion, in their essential elements, the facts of these
appeals cannot be distinguished from those in Leduc and in Dionne.
In those two cases, the taxpayers worked in Canada’s North. Mr. Dionne worked as a teacher
for the Commission scolaire Kativik, while Mr. Leduc was employed by the
Hôpital de l’Ungava. Both received financial assistance for expenses of food
transportation by air. In the case of Mr. Leduc, the hospital paid the
transportation costs, whereas in Mr. Dionne’s case, he was reimbursed for the
transportation expenses.
[19] In my opinion, Messrs. Dionne and Leduc faced a situation similar
to that of Mr. Guay. They really had no choice but to incur higher costs in
order to obtain food of good quality. If they had been employed in the south,
the two taxpayers would not have had to incur such high costs for their food.
It may be concluded, therefore, that the only realistic option available to
them was to incur transportation costs in order to feed themselves adequately.
Obviously, they could have contented themselves with the mediocre food
available in Canada’s North. Fortunately for them, their employer was ready to
help them financially to obtain better quality food.
[20] As for Mr. Guay, he could have contented himself with sending
his children to public schools and they would have been educated in Spanish,
which might have had some advantages. However, he wanted his children to be
educated in French and, accordingly, he decided to incur tuition fees to
achieve his objective. In my opinion, this decision is completely legitimate: it
was up to Mr. Guay to decide on the language of instruction for his children
and also on the criteria—such as the quality of that education—that were to be
given preference.
[21] I believe that it is appropriate to compare—and this, moreover, is the approach I took in Dionne—Mr.
Guay’s situation with that of other persons staying in the same location as he,
that is, in the Dominican Republic. As a point of comparison, one could use the
case of Canadians living in the Dominican Republic who also want their children
to be educated in French but who are not entitled to a reimbursement for
tuition fees. Such persons would then be forced to pay their tuition fees with
after-tax money. If it were to be concluded that Mr. Guay is not required
to include in his income the reimbursement for the tuition fees, he would be
obtaining a benefit that other Canadians living in Santo Domingo do not have.
In my opinion, the reimbursement for the tuition fees enabled him to enrich
himself in comparison with these other Canadians.
[22] Mr. Guay argued that, if the reimbursement for the tuition
fees had to be included in income, the effect would be to discriminate against
employees such as him, who have several children, and it would also result in
depriving these employees of remunerative employment. I do not share this point
of view. In my opinion, Mr. Guay could have adopted the strategy indicated
by Judge Bowman (as he then was) of this Court, whose comments are cited by
Judge Dussault in Leduc at paragraph 53:
I will close by referring to a comment by my colleague
Judge Bowman, also from Pezzelato, supra:
If employers wish to ensure that their
employees do not suffer a tax burden resulting from the conferral of benefits,
they should gross up the benefit by the tax cost, including the tax on the
amount of the gross-up. After all, the employer can deduct it.
[23] If Mr. Guay had received a reimbursement that was grossed up to
$70,000, for example, instead of the $35,000 provided for in his contract, he
could have had, after tax, the money he needed to pay all the tuition fees that
he had to pay. It seems to me that this way of doing things would have complied
with the principle that executives performing the same duties were to receive
the same compensation. It would also have the advantage of not being
discriminatory towards other Canadians who have to pay tuition fees with
after-tax money.
[24] I would add that Mr. Guay’s situation is no different from
that of employees of Canadian corporations who are posted to the big cities of
the world such as New York, London, Paris or Hong Kong, where housing costs are
exorbitant. In those cases, the employers have no choice but to provide housing
to the employees or substantially subsidize the rent that must be paid in order
to compensate their employees who must assume much higher living expenses. According to paragraph 6(1)(a)
of the Act, "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: (a) ... the value of benefits ...
lodging ...".
[25] For all these reasons, the appeals of Mr. Guay are dismissed.
Signed at Drummondville, Quebec, this 14th
day of January 2003.
J.T.C.C.
Translation certified
true
on this 25th day of February 2004.
Sophie Debbané, Revisor
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