Marcellino v. The Queen, docket 1999-1042-IT-I (Informal Procedure)

Date: 20000712

Docket: 1999-1042-IT-I

BETWEEN:

SALVATORE MARCELLINO,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

O'Connor, J.T.C.C.

[1] These appeals were heard at Toronto, Ontario on June 8, 2000.

ISSUE:

[2] The issue in these appeals is whether the Appellant is entitled to deduct employment expenses in the amounts of $15,121 in 1994 and $19,231 in 1995.

FACTS:

[3] In the years in question the Appellant was a commissioned salesman with Plaza Pontiac Buick Limited located near Toronto. In 1994 he reported total income of $69,828 which included commission income of $60,406. In 1995 he reported total income of $83,189 which included commission income of $74,617. He claimed employment expenses of $15,121 in 1994 and $19,231 in 1995.

[4] In reassessing the Appellant for the 1994 and 1995 years, by Notices of Reassessment dated September 8, 1997, the Minister disallowed 100 percent of the expenses. The reason for the total disallowance was that the Appellant was unable to present receipts nor appropriate books and records proving the expenses as required by section 230 of the Income Tax Act ("Act").

[5] The Appellant's explanation as to why he could not produce receipts and books and records was that, from 1992 on and continuing at the very least to 1996, his wife had been very ill suffering from chronic fatigue syndrome and related physical and mental problems and that as a result of her condition she had apparently discarded or lost said receipts and records.

[6] For 1995 the Appellant's Statement of Employment Expenses (see Schedule "A" to the Reply to the Notice of Appeal) read as follows:

EXPENSES

Accounting and legal	450.00
Advertising and promotion 62x100 gift certificates	6,200.00
Allowable motor vehicle expenses (from line 16 below)	3,813.94
Food, beverages and entertainment expenses (see Chapter 2, 3 or 5, as applicable) 13,949.22x50%=	6,974.61
Lodging
Parking	125.00
Supplies (for example, postage, stationary, other supplies)	392.77
Other expenses (please specify) car phone	1,274.83
Musical instrument costs (see "Part 2" in Chapter 6)
Capital cost allowance for musical instruments (see "Part A" on the back of this form)
Artists' employment expenses (see "Part 1" in Chapter 6)
Subtotal	19,231.15
Work space in the home expenses - Enter the lower amount of line 24 or 25 below
TOTAL EXPENSES (enter this amount on line 229 of your income tax return	19,231.15

CALCULATION OF ALLOWABLE MOTOR VEHICLE EXPENSES

Enter the kilometres you drove in the taxation year to earn employment income		29,275
Enter the total kilometres you drove in the taxation year		34,642
Enter the motor vehicle expenses you paid for:
Fuel and oil	1,839.42
Maintenance and repairs	443.64
Insurance	360.00
Licence and registration	90.00
Capital cost allowance (see schedule on back)
Interest (see "Interest expense" in Chapter 7)
Leasing (see "Leasing costs") in Chapter 7)
Other expenses (please specify)	490.00
Add line 5 to 12	3,223.06	13
Employment-use portion      (line 3 29,275) x line13      (line 4 34,642)	3,813.94	3,813.94			14 15
Enter the total of all rebates, allowances and repayments you received that are not included in income. Do not include any repayments you used to calculate your leasing costs at line 11.
Allowable motor vehicle expenses (line 14 minus line 15)		3,813.94
Enter the amount from line 16 on line 1 in the "Expenses" area above.

[7] For 1994 no Statement of Employment Expenses was submitted but it is acknowledged that the amount of the expenses claimed was $15,121.

[8] In each of the years the employer furnished form T-2200 as required by paragraph 8(10) of the Act in connection with a claim for deduction of employment expenses.

SUBMISSIONS OF THE APPELLANT:

[9] The Appellant submitted that the large amounts of the commission income earned by him in 1994 and 1995 demonstrate by themselves that he must have incurred expenses to earn those commissions. In other words, a disallowance of 100 percent is unreasonable. Further, he explained his inability to produce receipts, books and records because of the illness of his wife and her discarding or losing those documents.

SUBMISSIONS OF THE RESPONDENT:

[10] The Respondent submits that the expenses disallowed were not incurred or if incurred were not for the purpose of gaining or producing income from employment. Alternatively, the Respondent contends that the expenses were not reasonable in the circumstances as contemplated in section 67 of the Act. Counsel submits that the Appellant has the burden of proof of showing that the reassessments in question were wrong. Since he has produced no receipts or records, he has not discharged that burden of proof and the appeals should be dismissed.

ANALYSIS AND DECISION:

[11] I am fully aware of section 230 and its requirement that a taxpayer maintain good books and records. Further, I am also aware that in our self-assessing system the taxpayer has the burden of proof to establish that the reassessments in question were wrong. However, for the following reasons, I am not going to decide these appeals simply on the basis that no books, receipts nor records were forthcoming:

1. I accept the credibility of the Appellant, in particular his explanation of the reason why he couldn't produce the books and records and receipts. His wife's condition was severe as is supported by the documentation submitted, including doctors' reports (Exhibit R-1) which describe her condition and the heavy medications she was on.

2. I agree with the Appellant that it is unreasonable to conclude that he had no expenses particularly considering the large amounts of commissions that he earned in 1994 and 1995.

[12] The main provision of the Act in question is paragraph 8(1)(f) which allows for the deductibility of employment expenses provided a number of conditions are met. These conditions are the following:

(1) The taxpayer must be employed in the taxation year in connection with the selling of property or negotiating of contracts for his employer.

(2) The taxpayer must be required under the contract of employment to pay his own expenses.

(3) The taxpayer must be ordinarily required to carry on duties away from the employer's place of business.

(4) The taxpayer must be remunerated in whole or in part by commission or other similar amounts fixed by reference to the volume of sales made or the contracts negotiated.

(5) The amounts claimed may not exceed the commission or other similar amounts received by him in the year.

(6) The taxpayer must not be in receipt of a travelling allowance from his employer in respect of a period when the taxpayer was employed in connection with the selling of property or negotiation of contracts which is excluded from income under subparagraph 6(1)(b)(v).

(7) After 1990, the amount must not present a payment made by the taxpayer that resulted in a reduction in the amount of the standby charge required to be included in computing the taxpayer's income for the year.

[13] I am satisfied on the basis of the evidence that the Appellant does meet the conditions set forth in paragraph 8(1)(f).

[14] I face two difficulties however. Firstly, should the expenses be allowed completely or only partly owing to the lack of receipts and books and records. I refer to three decisions of Guy Tremblay, C.J.A. when acting as a member of the Tax Review Board. In Mathieu v. M.N.R., 78 DTC 1474 the Board was willing to allow 50 percent of the legitimate estimated expenses incurred by the salesman even though he lacked proper documentation. In that particular appeal however, the Court dismissed the appeal because that 50 percent amount coincided with what the Minister had allowed. It remains however that the Board was willing to allow 50 percent of the expenses. In Mercure v. M.N.R., 78 DTC 1165 a salesman had been denied a deduction for various expenses for which he had provided no supporting vouchers. The Board reviewed the matter and in the end allowed 20 percent of the said expenses. In Garneau v. M.N.R., 78 DTC 1314 nearly all of the expenses were allowed even though the taxpayer was unable to produce receipts after his wife had inadvertently thrown them out while moving.

[15] I conclude that it is fair and reasonable to allow 70 percent of the expenses; these expenses however must be adjusted as follows: for 1995 the expense for accounting of $450 is not to be allowed. The reason for this is the Appellant explained that this is what he paid his accountant to assist him with his returns and his attempts to resolve matters with Revenue Canada. As such, that was not an expense incurred for the purpose of gaining income from an office or employment and is not allowed. Moreover, the calculation of allowable motor vehicle expenses contained in the statement (Schedule "A" to the Reply) is incorrect. The proper amount for allowable motor vehicle expenses should be determined by the following fraction:

29,275 x 3,223.06

34,642

This produces a figure of $2,723.71 which is $1,090.23 less than the figure claimed of $3,813.94. Thus, for 1995 the employment expenses allowed are 70% of $19,231.15 less (450 + 1,090.23) = $12,384.

[16] My second difficulty relates to the 1994 year because no Statement of Employment Expenses was submitted. However, counsel for the Respondent has not challenged the amount claimed in 1994 of $15,121 and consequently I am prepared to allow 70 percent of that amount namely $10,584.70.

[17] Adjusted as aforesaid I find the amounts are reasonable given the substantial commissions earned by the Appellant.

[18] In conclusion the appeals are allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with these Reasons for Judgment with the result that the employment expenses to be allowed to the Appellant are $12,384 for 1995 and $10,584.70 for 1994.

Signed at Ottawa, Canada this 12^th day of July, 2000.

"T.P. O'Connor"

J.T.C.C.