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Citation: 2004TCC411
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Date: 20040622
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Docket: 2000-4979(IT)I
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BETWEEN:
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BUDROW TOZER,
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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
Angers, J.
[1] These are appeals with respect to
the Appellant's 1997 and 1998 taxation years. In computing
the income for the Appellant, the Minister of National Revenue
(the Minister) assessed as income an allowance the Appellant
received from his employer for both taxation years. The Minister
allowed a portion of the expenses claimed for both taxation years
but disallowed others and with which the Appellant disagrees.
[2] For both taxation years, the
Appellant was an employee of the United Association of Journeymen
and Apprentices of the Plumbing and Pipe Fitting Industry of the
United States and Canada (the Union). As such, he was not
operating a business, was not self-employed and did not receive
any business income. He was not paid wholly or partly by
commissions and was not paid any amounts according to the volume
of sales made or contracts negotiated.
[3] In 1997 and 1998, the Appellant
received a fixed allowance from the Union in the amount of US
$750 per week. The allowance was included in the Appellant's
income and was reflected on his T-4 slips from the Union for both
taxation years. The Appellant was not required to submit receipts
to the Union for these expenses. The agreement with the Union
provided, inter alia, the following terms:
(1) The Union provided a fixed
allowance of US $750 per week to help pay expenses and assist the
Appellant in providing the following services:
(a) entertainment and promotion of
the Union's interest;
(b) office facilities and secretarial
services; and
(c) hotels, meals, tolls, ferries and
motor vehicle operating expenses.
(2) The Union paid the following
expenses:
(a) air travel costs; and
(b) office telephone and fax lines.
(3) The allowance was included in the
Appellant's T-4 by the Union on the basis of the
understanding that taxes would have to be paid by the Appellant
on any amount in excess of expenses paid.
(4) The allowance was not meant to be
part of the Appellant's salary; rather it was to be used to
help pay the Appellant's expenses.
[4] The amount of the allowance is
determined every five years. The job requires extensive
travelling which is estimated at about 200 days per year. The
Appellant travels across Canada and parts of the United States.
When he is not travelling, the Appellant works from his home
where he has set up a small office. The Appellant describes
himself as a sort of salesman since he needs to do a lot of
lobbying and must keep good contacts in order to generate
employment. In order to achieve that goal, he incurs expenses
because he often pays for meals when he has guests. Part of the
expenses claimed include costs of meals other than his own.
[5] The appeals raise two issues:
(1) Was the Minister correct in
including the allowance received by the Appellant from the Union
in his income for both taxation years?
(2) Was the Minister correct in
denying a portion of the expenses claimed by the Appellant
against income for both taxation years?
[6] The allowance received by the
Appellant is to be included in computing his income under
paragraph 6(1)(b) unless excepted. The relevant parts of
that paragraph read as follows:
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) ...
(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
...
(v) reasonable
allowances for travel expenses received by an employee from the
employee's employer in respect of a period when the employee
was employed in connection with the selling of property or
negotiating of contracts for the employee's employer,
...
(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
...
and, for the purposes of subparagraphs (v), (vi) and (vii.1),
an allowance received in a taxation year by a taxpayer for the
use of a motor vehicle in connection with or in the course of the
taxpayer's office or employment shall be deemed not to be a
reasonable allowance
(x) where the
measurement of the use of the vehicle for the purpose of the
allowance is not based solely on the number of kilometres for
which the vehicle is used in connection with or in the course of
the office or employment, or
...
[7] The amount received by the
Appellant according to the agreement with the Union falls exactly
within the above provision. It is an allowance put at the
disposal of the Appellant which he needs not account for and
which did not vary on the basis of actual expenses. The notion of
an allowance was discussed by our Court in Bertrand v. The
Queen, [1996] 1 C.T.C. 2992, by
Mr. Justice Archambault and the facts of this case are
very similar. They leave no doubt that the allowance in question
must be added to the Appellant's income for both taxation
years.
[8] In addition, for the allowance not
to be included in the Appellant's income for both taxation
years, it must fall within the exceptions provided for in
subparagraph 6(1)(b)(v), (vii) and (x) since the
amount to which the appellant is entitled would have to meet this
criteria. In our fact situation, although the criteria for
negotiating contracts are met, the allowance is not broken down
into categories, and it therefore makes it impossible to
determine the allowance for travel expenses; furthermore, the
measurement of the use of the vehicle for the purpose of the
allowance is based solely on the number of kilometres for which
the vehicle is used in connection with or in the course of the
employment (see subparagraph 6(1)(b)(x)). It is therefore
deemed not to be a reasonable amount and must therefore be
included in income.
[9] Having concluded that the Minister
was correct in including the allowance for each taxation year in
the Appellant's income, the issue remains as to whether he
was correct in denying a portion of these expenses claimed by the
Appellant against his income? Here is a breakdown of what was
claimed and allowed by the Minister for both taxation years.
SCHEDULE "A"
Other Employment Expenses
1997
Budrow Tozer
Year 1997
Sin: X
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Apr. 3/00
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Oct. 17/00
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Expense Claimed
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Amount
Claimed
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Receipts
Supplied
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Original
Reassess
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Second
Reassess
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Meals & Entertainment
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$ 7,020.00
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$ 5,871.57
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$ 1,467.89
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$ 1,467.89
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Other
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Accounting & Legal
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$ 241.00
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$ 241.00
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Lodging
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$11,631.00
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$10,170.44
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$10,170.44
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$10,170.44
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Supplies
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$ 3,113.00
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$ 3,111.09
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$ 3,111.09
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$ 3,111.09
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Furniture
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$ 4,149.00
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$ 4,149.00
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Wages
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$ 6,050.00
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$ 4,050.00
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Taxis & Tolls
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$ 1,078.65
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$ 1,078.65
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$ 1,078.65
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Liability Insurance
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$ 277.00
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$ 100.00
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$ 138.70
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$ 138.70
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Rent
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$ 1,000.00
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Auto
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Fuel
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$ 3,132.00
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$ 2,663.01
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$ 2,663.01
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$ 2,663.01
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Repairs
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$ 193.77
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$ 193.77
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$ 193.77
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Insurance
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$ 2,320.00
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$ 2,320.00
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$ 2,320.00
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$ 2,320.00
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$ 5,452.00
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$ 5,176.78
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$ 5,176.78
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Total
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$38,933.00
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$21,143.55
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$25,193.55
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Allowance to cover expenses included in T4 $750.US or
Canadian
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$57,720.00
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Total expenses claimed
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$38,933.00
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Total expenses allowed (Oct. 17/00)
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$25,193.55
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Net Expenses Disallowed
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$13,739.45
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SCHEDULE "B"
Other Employment Expenses
1998
Budrow Tozer
Year 1998
Sin: X
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Expense Claimed
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Amount
Claimed
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Receipts
Supplied
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Original
Assess
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Reassess
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Meals & Entertainment
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$ 7,134.00
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$13,685.08
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$ 3,421.27
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$ 3,421.27
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Other
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Accounting & Legal
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$ 138.00
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$ 138.00
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Lodging
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$15,280.47
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$14,936.12
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$14,936.12
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$14,936.12
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Supplies/CellPhone/
Internet
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$ 4,316.39
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$ 3,103.41
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$ 2,318.90
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$ 2,574.48
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Wages
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$15,800.00
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$14,600.00
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Taxis & Tolls
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$ 1,410.00
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$ 1,410.00
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$ 1,410.00
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$ 1,410.00
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Liability Insurance
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$
50.00
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$
50.00
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$
50.00
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Conference registration
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$ 912.50
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$ 912.50
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Rent
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$ 1,000.00
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$38,857.36
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$18,715.02
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$33,570.60
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Auto
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Fuel/car washes
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$ 4,930.14
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$ 4,574.52
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$ 4,930.14
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$ 4,930.14
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Repairs
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$ 619.16
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$ 619.16
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$ 619.16
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Insurance
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$ 2,026.00
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$ 2,026.00
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$ 2,026.00
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$ 2,026.00
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License & registration
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$ 104.00
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$ 104.00
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$ 104.00
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$ 104.00
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Lease
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$ 7,800.00
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$ 7,225.83
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$ 7,225.83
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$14,860.14
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$14,805.13
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$14,905.13
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Total
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$60,851.50
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$37,041.42
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$51,897.00
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Allowance to cover expenses included in T4
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$57,720.00
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Total expenses claimed
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$60,851.50
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Total expenses allowed (Oct. 17/00)
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$51,897.00
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Net Expenses Disallowed
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$ 8,954.50
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[10] The Appellant has not taken issue with
all the items listed above and they shall remain as assessed by
the Minister. I will therefore deal only with the ones in
dispute. I will not comment either on the expenses allowed by the
Minister. Below are the relevant subsections of the Act:
[11] Paragraph 8(1)(h) provides in
part:
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:
(h) where the
taxpayer, in the year,
(i) was
ordinarily required to carry on the duties of the office or
employment away from the employer's place of business or in
different places, and
...
amounts expended by the taxpayer in the year (other than motor
vehicle expenses) for travelling in the course of the office or
employment, except where the taxpayer
(iii) received an
allowance for travel expenses that was, because of subparagraph
6(1)(b)(v), (vi) or (vii), not included in computing the
taxpayer's income for the year, or
...
[12] A general limitation in subsection 8(2)
reads:
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.
[13] The first item that appears in the
above schedules is meals and entertainment expenses incurred
while the Appellant was travelling. In order for these expenses
to be deductible, the Appellant must meet the requirements of
paragraph 8(1)(h) of the Act. The evidence disclosed that
the Appellant was required to carry the duties of his employment
in different places and was required to pay travel expenses he
incurred in the performance of his duties. Since his travel
allowance was included in his income, the appellant is not
precluded from claiming these expenses. The question raised is
whether the Appellant should be allowed to deduct what he refers
to as entertainment expenses which are really meals and beverages
paid for others? Are these incidental expenses allowed to be
deducted under paragraph 8(1)(h)?
[14] In Strong v. The Queen, docket
2003-2843(IT)I, Mr. Justice McArthur was faced with the same
issue in a similar fact situation. Finding in favour of the
Appellant, he concluded that it was common sense to allow an
offsetting deduction with respect to such incidental travelling
expenses given that the Appellant's employer gave him an
allowance for that purpose and it was included in his income. He
writes in part at paragraphs 16 et seq.:
There is some ambiguity as to whether paragraph 8(1)(h)
includes incidental treavelling expenses. Johns-Manville
Canada Inc. v. The Queen,[1] assists in resolving the ambiguity in favour of
the Appellant. The following conclusion of Estey J. of the
Supreme Court of Canada, writing for the majority, applies
equally to the present case:
... the appropriate taxation treatment is to allocate these
expenditures to the revenue account and not to capital. Such a
determination is, furthermore, consistent with another basic
concept in tax law that where the taxing statute is not explicit,
reasonable uncertainty or factual, ambiguity resulting from lack
of explicitness in the statute should be resolved in favour of
the taxpayer. This residual principle must be the more readily
applicable in this appeal where otherwise, annually recurring
expenditures completely connected to the daily business operation
of the taxpayer, afford the taxpayer no credit against tax either
by way of capital cost or depletion allowance with reference to a
capital expenditure, or an expense deduction against revenue.
There is nothing in the wording of paragraph 8(1)(h)
that suggests that only the expenses that relate personally to
the taxpayer should be allowed and the incidental expenses should
not. The incidental expense in question is the $20,000 for meals
and beverages for others.
There is no question that he travelled extensively throughout
North America and Bermuda in 1999. He was away more than he was
home. His work included negotiating union contracts which
required paying for the meals and drinks for his guests. Having
found that the allowance was unreasonable, his only hope for
deduction is pursuant to paragraph 8(1)(h) of the
Act.
I agree with Appellant's counsel in quoting
Johns-Manville to the effect that where there is ambiguity
as to what is included in travelling expenses, it should be
resolved in favour of the taxpayer. Paragraph 8(1)(h) is
to be interpreted on its own if it is not ambiguous. There is
nothing in the section that would lead to a conclusion that
travel expenses, in the course of employment, does not include
paying meals and beverages for business associates while away
from home. These are business expenses for which his employer
gave an allowance. He has to include that allowance in his income
and it is common sense that he should have an offsetting
deduction.
The Minister questioned the quantum of these expenses in
general terms. The Appellant provided a list of incidental
expenses in Exhibit A-6 and the last column, totalled
approximately $40,000, of which $20,000 is claimed after applying
section 67.1 which reduces the cost of food and beverages by 50%.
While this seems like a lot to spend on food and beverages, I
accept the Appellant's evidence that this is how he conducted
business. In other terms, he travelled on business over
200 days a year and the $20,000[2] represents about $100 per day. Surely
the words "travel expenses" are broad enough in the
context of paragraph 8(1)(h) to include the
incidental amounts claimed. I accept that the third person food
and beverage expense does not come under
"entertainment" which is partly defined in paragraph
67.1(4)(b) as amusement and recreation. Entertainment is
more in the category of tickets to a sporting or cultural event,
a fishing trip or a cruise. The incidental to travel the
Appellant is claiming has a more direct connection to his office
or employment. He had business gatherings over a meal and picks
up the bill as he would be expected to.
[15] The amounts claimed by the Appellant
for both taxation years under that heading represent a daily
allowance of $65 for meals for which he had no receipts and the
incidentals for which he had receipts (see Schedules). They total
$7,020 for the 1997 taxation year and $7,134 for the 1998
taxation year. The 50% reduction under section 67.1 has been
applied. Considering the number of days the Appellant was away
from home, which is estimated at about 200 days per year, it is
not unreasonable for him to have claimed the amounts he did. I
would therefore allow the amount claimed by the Appellant for
both taxation years.
Accounting and Legal Fees
[16] Since I have already concluded that the
Appellant is an employee, these expenses are personal living
expenses and are therefore not deductible. The Minister was
therefore correct in disallowing this expense for both taxation
years.
Furniture
[17] The Appellant claimed $4,149 for the
cost of furniture and equipment for his home office in the 1997
taxation year. It is furniture for which he did not claim any
capital cost allowance. The Appellant does not deny the fact that
the home office is to help him function as an employee and it
does not provide more income for himself. As an employee, it is
not a deductible expense under the Act. Therefore, the Minister
was correct in disallowing it.
Rent
[18] The Appellant claimed $1,000 for rent
for the use of his home office in both taxation years. It
occupies 154 square feet of a 1,144 square foot house. The
Appellant arbitrarily determined that figure but did so on a pro
rata basis of his home expenses for electricity, insurance, taxes
and other costs. No receipts were provided to substantiate these
costs. A deduction for the costs of work space at home may be
allowed under subsection 8(13) of the Act which reads:
Work space in home - Notwithstanding paragraphs (1)(f)
and (i),
(a) no amount is deductible in computing an
individual's income for a taxation year from an office or
employment in respect of any part (in this subsection referred to
as the "work space") of a self-contained domestic establishment
in which the individual resides, except to the extent that the
work space is either
(i) the place where the individual principally performs the
duties of the office or employment, or
(ii) used exclusively during the period in respect of which
the amount relates for the purpose of earning income from the
office or employment and used on a regular and continuous basis
for meeting customers or other persons in the ordinary course of
performing the duties of the office or employment;
...
[19] Considering the fact that the Appellant
is away from his home an estimated 200 days a year, I do not
believe he qualifies for such a deduction. The expense is
therefore disallowed.
Supplies
[20] The only issue for the 1998 taxation
year expense under this item is the cost for the use of a
cellular phone and the cost for using the Internet. The Appellant
uses a cellular phone when travelling and working and he may use
it for personal purposes only on rare occasions. He has one at
home for that purpose. As for the Internet, it is used for
research and primarily for e-mailing. The Minister has allowed
this item except for these costs. Although the Appellant did not
provide actual receipts, the amount $529 claimed is reasonable. I
will therefore allow that additional amount.
Conference Registration
[21] The Appellant attended a few
conferences during the 1998 taxation year and the expenses
claimed were the registration fees. It is admitted that his
attendance did not affect his income. They were conferences
organized by local unions and those fees were not reimbursed;
hence the claim for a deduction. I find that these expenses are
not contingent on the Appellant's income and are therefore to
be considered personal expenses. Therefore, the Minister was
correct in disallowing that expense.
[22] 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.
Signed at Edmundston, New Brunswick, this 22nd day
of June 2004.
Angers, J.
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