Date: 20010523
Docket: 2000-3657-IT-I
BETWEEN:
DONNA BLAIR-LAWTON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Sarchuk J.T.C.C.
[1]
These are appeals by Donna Blair-Lawton from assessments made by
the Minister of National Revenue (the Minister) with respect to
her 1995 and 1996 taxation years by virtue of which she was
denied the deduction of certain employment expenses in excess of
those allowed by the Minister pursuant to subsection 8(2) of the
Income Tax Act (the Act).
[2]
At all relevant times, the Appellant was employed as a registered
nurse and resided in the City of Portage la Prairie, Manitoba. On
March 17, 1994, she entered into an Employment Contract[1] (the Contract) with
Silver Screen Video Ltd. carrying on business as Gone Hollywood
Video (the Employer), of Burnaby, British Columbia, and commenced
employment as the manager of the Gone Hollywood outlet in Portage
la Prairie.
[3]
Throughout the taxation years in issue, the Appellant was
employed as manager of the Portage la Prairie outlet under the
terms of the Contract. More specifically, the business conducted
by her was the negotiating of contracts for movie video rentals
as well as the selling of videos and confectionery items.
Pursuant to the Contract, the Appellant was to receive a salary
of $2,000 per month and was entitled to vacations in accordance
with the applicable legislation. In addition, the Contract also
required her to make an investment of $20,000 in Gone Hollywood
Portage. This investment entitled her to receive a commission of
10% of the net profits of Gone Hollywood Portage as determined at
the end of each calendar month, such net profits to be determined
by its gross receipts less all monthly operating expenses.
[4]
The Appellant claimed the following employment expenses upon
filing her 1995 and 1996 and income tax returns:
|
|
1995
|
1996
|
|
|
|
|
|
Motor vehicle expenses
|
$460
|
$472
|
|
Accounting and legal
|
305
|
|
|
Postage and courier (supplies)
|
1,532
|
1,905
|
|
Computer rental
|
735
|
|
|
Telephone
|
545
|
|
|
Telephone/fax/computer
|
|
1,471
|
|
Labour (assistant wage)
|
2,595
|
12,923
|
|
Interest
|
717
|
|
|
Capital cost allowance
|
78
|
|
|
Unknown
|
419
|
|
|
Travel
|
|
798
|
|
Accommodation
|
|
673
|
|
Meals
|
|
78
|
|
TOTAL
|
$7,386
|
$18,320
|
Of the foregoing expenses, the Minister allowed a deduction
for wages in the amounts of $2,595 and $8,112 in the 1995 and
1996 taxation years respectively to account for wages paid to
arm's length third parties. The Minister did not allow the
Appellant a deduction for wages of $4,800 paid to her 13-year old
daughter and did not allow the deduction of any of the other
employment expenses claimed.
[5]
The Appellant's position is that by virtue of the fact that
she and her husband had made a substantial investment in the
business, she had become a partner/owner of the business and
conducted herself accordingly. Both testified that the Employer
encouraged their interest and initiative in the business. She
conceded that the Employer had declined to reimburse her for some
of the expenditures she incurred but says it knew that these
expenditures were made to promote Gone Hollywood's business
in Portage La Prairie. It is the Appellant's position that
the expenses claimed fall within the scope of the
provisions of paragraphs 8(1)(f),
8(1)(h.1) and 8(1)(i) and in particular,
subparagraphs 8(1)(i)(ii) and 8(1)(i)(iii) of the
Act and should be allowed.
[6]
Relevant Statutory Provisions
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:
...
(f)
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 those amounts were not
(v)
outlays, losses or replacements of capital or payments on account
of capital, except as described in paragraph (j),
(vi)
outlays or expenses that would, by virtue of paragraph
18(1)(l), not be deductible in computing the
taxpayer's income for the year if the employment were a
business carried on by the taxpayer, or
(vii) amounts
the payment of which reduced the amount that would otherwise be
included in computing the taxpayer's income for the year
because of paragraph 6(1)(e);
...
(h.1) 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
(ii)
was required under the contract of employment to pay motor
vehicle expenses incurred in the performance of the duties of the
office or employment,
amounts expended by the taxpayer in the year in respect of
motor vehicle expenses incurred for travelling in the course of
the office or employment, except where the taxpayer
(iii)
received an allowance for motor vehicle expenses that was,
because of paragraph 6(1)(b), not included in computing
the taxpayer's income for the year, or
(iv)
claims a deduction for the year under paragraph (f);
(i)
amounts paid by the taxpayer in the year as
...
(ii)
office rent, or salary to an assistant or substitute, the payment
of which by the officer or employee was required by the contract
of employment,
(iii)
the cost of supplies that were consumed directly in the
performance of the duties of the office or employment and that
the officer or employee was required by the contract of
employment to supply and pay for,
...
to the extent that the taxpayer has not been reimbursed, and
is not entitled to be reimbursed in respect thereof;
Analysis
[7]
Amounts Paid as Salary to an
Assistant: The
Appellant testified that the Gone Hollywood outlet in Portage la
Prairie was to be open seven days a week, generally for 12 to 14
hours per day and for that purpose, the employment Contract
permitted her to hire and dismiss assistants as necessary to
provide appropriate service to the customers. She said that
although the Employer paid a variable number of hours directly to
the assistants each month, she was nonetheless obligated to pay
assistants for any hours she believed were necessary to fulfil
the terms of the Contract. With specific reference to her
daughter, the Appellant said that she was hired for part-time,
after-school work in connection with the operation of the store
and that the services performed by the daughter were similar to
those of other employees.
[8]
In the course of both her testimony and that of her husband, it
became apparent that the Appellant did not have unfettered
authority with respect to the number of employees hired and the
amount of wages thereby payable. First, the Employer specified
the number of hours the Appellant was required to work (as
manager and a salaried employee) and as well, set the specific
number of hours per month that it was prepared to pay with
respect to part-time employees. According to the Appellant, this
varied from 280 to 300 hours per month depending on the
Employer's assessment of the bottom line figures. The
practice with respect to these employees was that the Appellant
faxed information to the Employer who then did the payroll, made
all of the necessary statutory deductions and paid the employees
by cheque. The Appellant agreed that the Employer did not require
her to hire additional assistants over and above those
specifically authorized but says that based on the fact that she
had signed a contract and had invested their own money in the
business, she "felt that we were part owners and so we could
do that".
[9]
The denial of the deduction of these amounts by the Minister is
in accord with the provisions of subparagraphs 8(1)(i)(ii)
and (iii). The Appellant's decision to do so unilaterally
notwithstanding the limitations set by the Employer do not bring
her within the scope of the phrase "was required by the
contract of employment" to pay a salary to an assistant. It
should also be noted that included in the amount disallowed in
taxation year 1996 was the sum of $4,800 allegedly paid to the
Appellant's daughter.[2] There was no T4 nor any documentation with respect to
the hours the daughter is supposed to have worked. On the
evidence before me, no other conclusion can be reached but that
the Minister was correct in disallowing the expenses claimed
under this head.
[10]
Automobile Expenses:
The Appellant contends that it was necessary for her to use an
automobile for business purposes, more specifically for monthly
trips to Winnipeg to select and pick up movies as well as to a
wholesale warehouse to purchase confectioneries, drinks, etc.
Initially the Portage outlet was stocked with some 2,500 videos
which had been supplied by the Employer. The practice was to
rotate the videos on a regular basis but as a result of some
problems, an arrangement was made by the Employer with a
distributor in Winnipeg to provide that service. The Appellant
was not required to pay for these movies since the Employer had
opened the account with the Winnipeg distributor. She said it was
necessary to personally attend at the distributors in that it
saved delays and shipping fees and enabled her to personally
select the movies which she believed would be marketable in
Portage la Prairie. She also contends that significant savings on
other supplies were achieved by purchasing them in Winnipeg and
thus justified the use of the automobile. The automobile was also
needed to permit her to perform banking duties, picking up
cleaning supplies and other general management obligations.
[11] With
respect to the automobile expenses, the Appellant relies on the
provisions of subsections 8(1)(f) and 8(1)(h.1).
Each section requires the taxpayer to establish, inter
alia, that in the year she was ordinarily required to carry
on the duties of her employment away from the Employer's
place of business or in different places. In my view, the
Appellant has not established that fact. Making a monthly trip to
Winnipeg to pick up supplies such as soft drinks, confectionery
and videos (which had they been ordered by telephone would have
been shipped by the distributor to the Appellant the cost of
which would have been borne by the Employer) falls substantially
short of meeting the "ordinarily required to carry on the
duties of her employment away from the Employer's place of
business".
[12] The
Appellant's claim fails for another reason as well. The T2200
certificate for taxation year 1995 (which, I might add, was
completed by the Appellant's husband and was at some later
point of time signed by the Employer) indicates that the
Appellant was not required to work away from her place of
business or in different places. Insofar as taxation year 1996 is
concerned no T2200 was filed. Paragraph 8(10) of the Act
provides that an amount otherwise deductible under paragraphs
8(1)(f), (h) or (h.1) or subparagraphs
8(1)(i), (ii) and (iii) by a taxpayer shall not be deducted
unless a prescribed form signed by the taxpayer's employer
certifying that the conditions set out in that provision were
met. The Appellant has failed to meet these requirements and
accordingly, her claim for expenses under this head were properly
disallowed by the Minister.
[13] Sales
Expenses: The Appellant contends that on the
basis that she was a part owner of the business, she purchased
general office supplies and incurred sales expenses in order to
promote the interests of Gone Hollywood. She testified that a
computer was leased for the specific purpose of designing
promotion posters, notices, etc. and obtained a cellular phone to
ensure she was available for consultation by her assistants at
all times when the store was open to the public. Items such as
T-shirts for promotional advertising purposes were a further cost
incurred by the Appellant. The Appellant takes the position that
she was required to incur the foregoing expenses and was required
to pay the cost of supplies that were consumed directly in the
performance of her duties under the Contract.
[14] The
expenses referred to in the foregoing paragraph do not include
the cost of videos, confectioneries, soft drinks, etc. in respect
of all of which she was reimbursed in full by the Employer.[3] Rather, in 1995
they included amounts paid for accounting and legal services as
well as interest and capital cost allowance all of which are not
in any sense deductible pursuant to the provisions of section 8
of the Act. The remaining amounts reflect the rental cost
of a computer and of a cell phone and telephone service. The
evidence discloses that the Employer had supplied the Portage
outlet with a computer together with a specialized program for
video rentals. Although the Appellant conceded that the computer
kept track of the entire store operation, she argued that it did
not have a word processor and accordingly, the computer that her
husband had leased and which was kept at the residence was a
deductible expense. In a letter written by the Appellant's
accountant it was claimed that both the computer and the cell
phone were used "100% for business". The Appellant,
however, maintains that although both were used for business
purposes, she kept no record whatsoever to permit her to provide
the Court with a reasonable estimate. The Appellant has not
established an entitlement to deduct the cost of these supplies
on the basis that they were consumed directly in the performance
of her duties and that she was required by Contract of Employment
to supply and pay for them.
[15] With
respect to the 1996 income tax return, three further expense
items must be dealt with, specifically travel, accommodation and
meals in the amounts of $798, $673 and $78, respectively. These
expenses were incurred by the Appellant with respect to a trip
taken to Vancouver to meet the president of Gone Hollywood. The
Appellant initially maintained that she did incur these expenses,
however, it became apparent as her testimony unfolded that both
her and her husband's expenses were submitted to the Employer
but she was only reimbursed for her fare. She concedes that her
husband's cost of travel in the amount of $798 ought not to
have been claimed as an employment expense in her return. With
respect to the accommodation item, the Appellant testified that
it related to a conference with the Employer and that the amount
itself was "the cost of us staying. They paid for one night
or two nights, I think, and then we stayed for a couple of other
nights to look around". She does not dispute that she has
been reimbursed for her expenses and that the amounts in issue
were expended to have her husband accompany her. These amounts in
my view were properly disallowed by the Minister.
[16] The
Appellant relied on her accountant Wayne Klippenstein to review
the business's books and to claim the appropriate deductions.
I feel constrained to observe that some of the Appellant's
difficulties in this appeal can clearly be attributed to him.
Motor vehicle expenses claimed were "ball-park"
estimates. The interest expense item claimed was conceded by the
accountant to be "nil" and was "recorded in
error". He also admitted that a T2200 submitted by him to
Revenue Canada on behalf of the Appellant for the taxation year
1997, was a falsified document in that he had taken a xerox copy
of the 1995 T2200 and altered it to make the period of employment
read 1997 and by changing the date of the Employer's
Declaration to March 1998.
[17]
Unfortunately for the Appellant these circumstances do not alter
the fact that the expenses claimed are not deductible. For the
foregoing reasons, the Appellant's appeals are dismissed.
Signed at Ottawa, Canada, this 23rd day of May, 2001.
"A.A. Sarchuk"
J.T.C.C.
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