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Citation: 2004TCC297
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Date: 20040601
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Docket: 2003-2843(IT)I
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BETWEEN:
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MELVIN BRYAN STRONG,
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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
McArthur J.
[1] After
dealing with several preliminary matters, the issue boiled down to whether the
Appellant can deduct $20,000 as
an incidental expense incurred for third party meals and beverages and $3,000
for taxi fares. He was a union representative who travelled primarily in North
America, over two hundred days in the 1999 taxation year.
[2] He
was paid $217,798 annually which included a $58,000 allowance for expenses. His
accountant added this allowance to his employment income because his employer
had issued a T4 for it. The Appellant submits that the allowance should be
excluded from his income because it fell within subparagraph 6(1)(b)(v)
or (vii) of the Income Tax Act being a "reasonable allowance for
travel expenses". He argues that the $58,000 allowance was reasonable
because he incurred the expenses in the course of his employment for which he
was not reimbursed other than the allowance which was intended to cover his
out-of-pocket employment expenses. Alternatively, he submits that the expenses
are deductible pursuant to paragraph 8(1)(h) of the Act.
[3] The Respondent submits that the allowance received from the
Appellant's employer is not excluded from his income under subparagraphs 6(1)(b)(v)
or (vii) of the Act, and therefore, should be included in the
Appellant's income. The
Respondent adds that the Appellant is not entitled to deduct expenses for
meals, lodging, airport tax and taxi expenses, entertainment expenses,
convention expenses and office expenses in excess of the amounts allowed
pursuant to paragraphs 8(1)(h), (h.1), (i) and (j)
and subsections 8(4) and (13) of the Act.
[4] In
the alternative, the Respondent adds that as the Appellant is not remunerated
in whole or in part by commissions or other similar amounts fixed by reference
to the volume of the sales made or the contracts negotiated, the Appellant is
not entitled to claim expenses pursuant to paragraph 8(1)(f).
[5] The
following assumptions of fact are accurate:
18. In so
reassessing the Appellant for the 1999 taxation year, the Minister made the
following assumptions of fact:
(a) during the
1999 taxation year the Appellant was employed by the United Association of
Journeymen and Apprentices of the Plumbing and Pipefitting Industry USA and
Canada (the "Employer");
(b) the Employer
paid the Appellant a weekly allowance of $750 per week for a yearly total of
$39,000 (the "Allowance")(US funds) (C$58,000) ;
(c) the Allowance
was included in the Appellant's employment income on his T4 slip;
(d) the Allowance
was paid to cover all hotels, meals, surface, transportation, entertainment,
auto and other expenses;
(e) during the
1999 taxation year the Appellant's employment income with the Employer was
C$217,798.83 (which included the Allowance);
(f) the
Employer's place of business was North America;
(g) the Appellant
was ordinarily required to carry on the duties of employment away from the
Employer's place of business or in different places;
(h) under the
contract of employment the Appellant was required to pay his own expenses;
(i) …
(j) the
Appellant was required to:
(i) rent an
office away from the Employer's place of business or use a portion of his home;
(ii) pay
for a substitute or assistant; and
(iii) pay for
supplies that the Appellant used directly in his work;
The Appellant conceded issues dealing with his automobiles.
[6] Immediately
prior to trial, I granted leave to counsel for the Appellant to amend the
Notice of Appeal. For the most part, the amendment provided for the inclusion
of subparagraph 6(1)(b)(v) and (vii) of the Income Tax Act to
permit her to argue that an allowance paid to the Appellant was reasonable and
should not have been included in his income. The Respondent was made aware of
the amended Notice of Appeal on the Friday previous to the Monday hearing date.
[7] Because subsection
5(1) of the Informal Rules does not specifically address amended
Replies, I refer to sections 54 and 57 of the General Procedure Rules.
Section 54 reads:
54 A pleading may be amended by
the party filing it, at any time before the close of pleadings, and thereafter
either on filing the consent of all other parties, or with leave of the Court,
and the Court in granting leave may impose such terms as are just.
The
guiding case on allowing an amended Reply is The Queen v. Canderel Limited where Décary J.A. states at
page 5360:
... the general rule is that an amendment should be
allowed at any stage of an action for the purpose of determining the real
questions in controversy between the parties, provided, notably, that the
allowance would not result in an injustice to the other party not capable of
being compensated by an award of costs and that it would serve the interests of
justice.
[8] There
is no injustice or prejudice to the Respondent. It is in the interest of
justice to determine the essential questions in controversy. The Appellant's
main argument is that the allowance should be excluded from his income pursuant
to either subparagraph 6(1)(b)(v) or (vii) of the Act. He
alternatively argued that his incidental expenses are deductible under
paragraph 8(1)(h) of the Act.
[9] The amendment to the Notice of
Appeal was allowed.
[10] The
relevant legislation reads:
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
…
Subsection 8(1)(h)
provides in part:
8(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:
(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,
...
A general limitation in subsection 8(2) reads:
8(2) 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.
[11] If the $58,000 allowance was a "reasonable" amount pursuant
to paragraph 6(1)(b) to reimburse the Appellant for his out-of-pocket
business expenses in 1999, then it is not included in his 1999 taxable income.
This is the finding the Appellant seeks. For reasons that follow, I conclude
that it is not a "reasonable" amount within the meaning of paragraph
6(1)(b) and that the Minister properly included it in the Appellant's
taxable income. The Appellant's counsel then turns to her alternative argument
and asks for a finding that the Appellant be entitled to claim a deduction for
some of his expenses pursuant to paragraph 8(1)(h) which I shall
deal with later.
[12] Subparagraphs 6(1)(b)(v) and (vii)
provide that allowances are to be included in income unless they are
"reasonable allowances" received by the employee for travel expenses
in connection with the selling of property or negotiating of contracts for the
employer. The Appellant established that he was negotiating contracts for his
employer so the criteria is met.
[13] As noted by the Respondent, subparagraph 6(1)(b)(x)
states that an allowance for a motor vehicle is unreasonable if it is 'not
based solely on the number of kilometres for which the vehicle is used ...'.
The Appellant's allowance was paid by the Appellant's employer to cover all
hotels, meals, surface transportation, entertainment, automobile and other expenses.
The Appellant's allowance was not divided into amounts specific for hotels,
meals, surface transportation, entertainment and other expenses and an amount
for the vehicle. The Appellant's automobile allowance was not based solely on
the number of kilometres for which the vehicle was used. The allowance the
Appellant received included automobile expenses lumped together with hotels,
meals, surface transportation, entertainment and other expenses. It is
unfortunate that his automobile portion was not based solely on the number of
kilometres the vehicle was used for his employment. Subparagraph 6(1)(b)(x)
reads:
Subparagraph 6(1)(b)(x)
clearly deems his allowance not to be reasonable. I do not believe the
Appellant's counsel seriously contested this conclusion in that she did not
rebut the Respondent's counsel's "unreasonable" argument. The
intention behind section 6 is to prevent excessive allowances that might amount
to a tax-free and expense-free allowance.
[14] I will now deal with the Appellant's argument to the effect that the
expenses claimed can be deducted under paragraph 8(1)(h). To deduct
expenses under this section, the Appellant must meet certain criteria.
[15] I find that the Appellant meets this criteria. He was ordinarily
required to carry on the duties of employment in different places (subparagraph
8(1)(h)(i)) and he was required to pay travel expenses he incurred in
the performance of his duties (subparagraph 8(1)(h)(ii)). He is not
precluded from claiming these expenses in subparagraph 8(1)(h)(iii)
because he received travel allowance that was included in his income. I find
the "travel expenses" referred to in paragraph 8(1)(h) do not
include "entertainment expenses" which are referred to in paragraph
8(1)(f). Paragraph 8(1)(h) is different from paragraph 8(1)(f)
and is to be applied in isolation.
[16] There is some ambiguity as to whether
paragraph 8(1)(h) includes incidental treavelling expenses. Johns‑Manville
Canada Inc. v. The Queen,
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.
[17] 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.
[18] 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.
[19] 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 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.
[20] The remaining matter
is the Appellant's claim for approximately $3,000 in taxi fares primarily while
he and his wife attended a conference in Bermuda and extended their stay for a
week for personal reasons. The evidence is unclear. I accept the Respondent's
position that the taxi expense be disallowed because there is no way to
determine whether he incurred these expenses while on business or vacation. He
spent two weeks with his wife in Bermuda.
[21] In conclusion, the
appeal is allowed, with costs, only to permit the Appellant to deduct $20,000
in travel expenses for the 1999 taxation year pursuant to paragraph 8(1)(h)
of the Act.
Signed at Ottawa,
Canada, this 1st day of June, 2004.
McArthur
J.
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