REASONS
FOR JUDGMENT
Lyons J.
[1]
This is an appeal by Michael Tulman, the
appellant, from a reassessment of his 2011 taxation year whereby the Minister
of National Revenue (the "Minister") disallowed a deduction for
employment expenses. The appellant initially claimed employment expenses
totalling $17,937,[1]
and subsequently increased the claim to $24,120 (the "Amount") relating
to a trip to Las Vegas.[2]
[2]
At the hearing, the appellant informed the Court
that he is no longer claiming a deduction in respect of the vehicle expenses
referred to in the Amended Reply.[3]
The disputed Amount comprises:
Travel
Expenses $7,539
Entertainment, Gifts and Promotional Items $16,580
[3]
The issue is whether the appellant is allowed to
deduct the Amount as employment expenses in the 2011 taxation year.
[4]
The appellant testified that MenuPalace.com
(“MenuPalace”) was started in 1999 and by 2011 it had grown to thirty
employees. In 2011, he was the Chief Executive Officer and an employee of
MenuPalace (his “employer”). He said that he had no written employment
contract in 2011 because he employed himself. He was also the CEO and
shareholder of MTGL Holdings Inc. (doing business as Dealfind.com)
("MTGL"). MTGL is a shareholder of MenuPalace.[4] He stated that because he was
a thirty-three per cent shareholder of Dealfind and he contributed to its
growth, he should get thirty per cent of the expenses.
[5]
According to the appellant, he went to Las Vegas to attend the Yellow Pages Convention ("Convention"). He described it
as full of seminars, booths and exhibits which attracts companies that do
mostly local advertising such as Groupons. He also wanted to meet with three
individuals from three separate companies that were potentially interested in
MenuPalace and/or Dealfind. He identified the individuals as Eric
Lefskovsky (Groupon), Mr. Shamis (Ricon) and Mr. Vartran (PC Medics).[5] The appellant stated that his
trip was a month in advance of negotiations that would take place with the potential
of a $3l million dollar financing deal.
[6]
The appellant confirmed in cross-examination
that he went to Las Vegas because of the Convention and for a business trip.
However, in response to subsequent questions by counsel for the respondent, the
appellant admitted that the Convention had ended on April 19, 2011, which was
the day before he arrived. He agreed that Good Friday was on April 22, 2011 and
Easter Monday was on April 25, 2011. He also admitted that most employees are
not required to work on statutory holidays.
[7]
In re-direct examination, the appellant stated
that executives go before or after the Convention to hold meetings.
[8]
He testified, and confirmed in cross-examination,
that his employer did not require him to go to Las Vegas. He said that he was permitted
to attend but the expenses would not be paid by his employer. He stated that he
incurred the Amount as expenses to obtain larger bonuses. He explained that he
received $630,000 in salary which is tied to his performance to increase his
bonus and take-home pay. He stated that in 2010 he was signing big contracts
for $2 or $3 million.
[9]
In cross-examination, he was asked about an
Executive Employment Agreement, dated June 30, 2012 and signed by the appellant
as the CEO of MTGL (the "Agreement"). The Agreement is between MTGL
and the appellant. He said that the Agreement shows that he was making over
$150,000 as the CEO in MTGL, and that the bonus is tied to his performance
which is similar to his arrangement with MenuPalace in 2011. The appellant
acknowledged that under the Agreement that only reasonable travelling expenses incurred
by him would be reimbursed by the MTGL, but he was permitted to incur other
employment‑related expenses for which he would not receive any
reimbursement.[6]
[10]
Counsel for the respondent produced a completed
Form T2200, Declaration of Conditions of Employment for the 2011 taxation year
(“Form”).[7]
The appellant agreed it had been signed by Jason Redman, a former Chief
Financial Officer of the employer, and that he was authorized to sign the Form
which is dated April 16, 2012. The evidence established that in certifying the
conditions of employment, the employer indicates on the Form that the appellant
was required to pay for expenses for which he did or will receive reimbursement,
but was not required to pay other expenses for which he would not be reimbursed
nor receive an allowance.[8]
It also indicates that he was not paid by commission according to the volume of
sales made or contracts negotiated.[9]
The appellant admitted that commission was not paid but said it could have been
paid. He suggested that Mr. Redman had incorrectly completed the
Form.
[11]
During cross-examination, the appellant
acknowledged that the hotel bill, totalling $6,179, is for the five-day trip to
Las Vegas commencing on April 20, 2011 immediately before the Easter long
weekend.[10]
The bill includes charges for the room, movies, spa, laundry, restaurants,
in-room dining and eight charges for the mini bar during his stay. He said that
he was not with his wife. When questioned as to the expenses relating to one of
the restaurants, the Wazuzu which he had attended three times, he said that he
did not recall how many people were with him or who accompanied him.
[12]
He also acknowledged that the lounge bill,
totalling $2,786, was for what he described as a social gathering with four
other people at the lounge.[11]
The bill includes two bottles of Veuve ($790), a bottle of Patron Silv. tequila
($425), a Carafe ($65), six smart water ($54), six Corona beer ($54) and one
bottle of Dom Perignon ($795). He said that two people from Ricon were at the
gathering. When asked by counsel for the respondent as to whether he had
agendas, calendars or other documentation to corroborate the meetings, he said
that he had lost access to emails and calendars as it was Google-based.
[13]
The appellant admitted, in cross-examination,
that he had previously been audited by the Canada Revenue Agency ("CRA")
relating to travel expenses to Panama City in 2004 and since 2008 he was aware
of the need to document expenses for trips.
Arguments
[14]
The appellant argued that he decided to take a
business trip to Las Vegas to enable him to potentially earn larger bonuses
which are linked to his performance in implementing the business plan. He
asserted that although he did not receive commission income in 2011, the
bonuses are akin to commission income. Therefore, he is entitled to deduct the
Amount as employment expenses.
[15]
The respondent argued that the trip was for
personal purposes, therefore the Amount, part of which was unsubstantiated,
comprises non-deductible personal expenses.
[16]
Even if the Amount comprises employment-related
expenses, he was not required by his employer to pay the expenses as mandated
by paragraphs 8(1)(f) and 8(1)(h) of the Income Tax Act (the
"Act"). The respondent relies on the Form which states that in
2011 the appellant was not required to pay for other expenses for which the
appellant did not receive an allowance or reimbursement.
[17]
Alternatively, the respondent argued that the appellant
is not permitted to deduct the amount of $16,580 as he was not remunerated by
commission income in 2011 pursuant to paragraph 8(1)(f) of the Act.
[18]
In the further alternative, if he received
commission income, the appellant is only entitled to deduct fifty per cent of
the amounts expended for meals, beverages and entertainment in accordance with
section 67.1 of the Act.[12]
Legislation
[19]
Subsection 8(2) stipulates that no amounts other
than those specifically described in section 8 may be deducted in computing
income from an office or employment. In this case, the relevant provisions of
the Act are as follows:
8(1) Deductions allowed. 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) Sales
expenses - 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 8(1)(f)(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 8(1)(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) Travel
expenses - 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 the travel expenses incurred
by the taxpayer in the performance of the duties of the office or employment,
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),
6(1)(b)(vi) or 6(1)(b)(vii), not included in computing the taxpayer’s income for the year,
or
(iv) claims
a deduction for the year under paragraph 8(1)(e), 8(1)(f) or
8(1)(g);
…
8(4) Meals.
An amount expended in respect of a meal consumed by a taxpayer who is an
officer or employee shall not be included in computing the amount of a
deduction under paragraph 8(1)(f) or 8(1)(h)
unless the meal was consumed during a period while the taxpayer was required by
the taxpayer’s duties to be away, for a period of not less than twelve hours,
from the municipality where the employer’s establishment to which the taxpayer
ordinarily reported for work was located and away from the metropolitan area,
if there is one, where it was located.
…
67.1(1) Expenses for food, etc. Subject
to subsection (1.1), for the purposes of this Act, other than sections 62, 63,
118.01 and 118.2, an amount paid or payable in respect of the human consumption
of food or beverages or the enjoyment of entertainment is deemed to be 50 per
cent of the lesser of
(a) the
amount actually paid or payable in respect thereof, and
(b) an
amount in respect thereof that would be reasonable in the circumstances.
Analysis
[20]
The appellant has the onus to demolish the
Minister’s assumptions in order to show that the reassessment is incorrect. He
has failed to discharge that onus as he has not shown that the Amount comprises
employment-related expenses, nor has he shown that he was required by his
employer to pay his own expenses in the Amount for the trip to Las Vegas. He has also failed to show that he received commission income in 2011.
Nature of expenses
[21]
Initially the appellant testified, and confirmed
in cross-examination, that he went to Las Vegas to attend the Convention, and described
the nature and the format of the event. He subsequently admitted, however, that
he had arrived in Las Vegas the day after the Convention ended and immediately
before the Easter long weekend. He also said that it was a business trip as he
wanted to meet with the three individuals he identified. With the exception of
stating that two individuals from Ricon attended a social gathering at the
lounge, the appellant provided little, if any, evidence detailing or
corroborating such meetings, and did not produce any documentary evidence, such
as calendars, agendas or other information, for those or any other meetings or
activities relating to the Amount of expenses claimed. No witnesses were called
by the appellant to testify to corroborate his testimony as to the meetings or
activities. This evidence does not instill confidence.
[22]
Apart from the hotel and lounge bills, produced
by counsel for the respondent, the appellant did not provide any other bills or
details in support of the remaining part of the Amount. The hotel and lounge
bills, $6,179 and $2,786, respectively, show charges for a hotel room, movies,
spa, laundry, restaurants, in-room dining, eight charges for the mini-bar
items, beverages and alcohol. When questioned as to who accompanied him and how
many people were present at the Wazuzu restaurant, he said that he did not
recall. This paucity of detail is a concern especially since the appellant was
aware, since at least 2008, of the need to be able to substantiate claims for
travel expenses.
[23]
Considering the inconsistency in his testimony
as to the Convention, the timing of the trip over the Easter long weekend, and
the nature of the expenses reflected on the two bills, and considering the
appellant's generalized statements in his evidence without any documentary
evidence and very little detail relating to meetings or activities during his
trip, on the balance of probabilities, I find that the Amount comprises
personal expenses.
[24]
In light of the above conclusion and although
unnecessary, I will deal with the remaining points since a fair amount of evidence
was directed to those points.[13]
Did the employer require the appellant to pay his own employment
expenses?
[25]
To qualify for a deduction for an employment
expense specified in paragraphs 8(1)(f) or 8(1)(h), a taxpayer
must satisfy the conditions in each provision.
[26]
In terms of the appellant’s situation, even if
the Amount comprises employment related expenses, the applicable conditions the
appellant must still satisfy are found in subparagraph 8(1)(f)(i),
relating to sales expenses, and subparagraph 8(1)(h)(ii), relating to
travel expenses, that comprise the Amount.
[27]
Those subparagraphs read:
8(1) Deductions allowed. 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) Sales
expenses - 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,
…
(h)
Travel expenses -
where the taxpayer, in the year,
…
(ii) was
required under the contract of employment to pay the travel expenses incurred
by the taxpayer in the performance of the duties of the office or employment, …
[28]
To be eligible for a deduction under either
subparagraph, the appellant must show that he was "required" by his
contract of employment to pay his own sales expenses and travel expenses
incurred by him in conjunction with his employment, and for which he is not
entitled to reimbursement from his employer.
[29]
There is a distinction in being permitted to do
something and being required to do something as noted by Bowie J. in Morgan
v Canada, 2007 TCC 475, 2007 DTC 1360, at paragraph 12.
[30]
Absent an express requirement in a written
contract, if it is tacitly understood by the employer and employee that such
payment was to be made and necessary to fulfill the duties, that would suffice.
[31]
In his testimony, the appellant said that there
was no written contract. However, by his own admission, and as confirmed in
cross-examination, the appellant's understanding was that he was permitted but
not required to pay the sales and travel expenses comprising the Amount
relating to the trip to Las Vegas. Thus, it was his choice to pay such
expenses to enable him to earn larger bonuses. The admission is reinforced by
the answers on the Form, signed by Mr. Redman, which provides evidence of the
terms of employment. The Form indicates that the appellant would be
reimbursed for certain expenses for which he was required to pay for, but would
not be reimbursed, nor receive an allowance, for other expenses he was not
required to pay for.[14]
I accept this as compelling proof. Thus, while the employer permitted the
appellant to pay the Amount, the appellant was not required by his employer to
pay it as mandated by subparagraphs 8(1)(f)(i) and 8(1)(h)(ii).
[32]
In Karda v Canada, 2005 TCC 564, 2005 DTC
1375, the court found that it may have been a smart economic decision for the
employee to voluntarily incur car employment expenses to improve his bonus and
create additional income, but under the ordinary meaning of subparagraph 8(1)(f)(i),
he was not required to pay for such expenses. This is analogous to the
appellant's situation in seeking to earn larger bonuses.
[33]
Similarly, in Pitzel v Canada, [2002] 2 CTC 2949, paragraphs 8(1)(f) and 8(1)(h) and subsection 8(2) were
under consideration. Angers J. held that even though additional expenses
incurred by Mr. Pitzel were employment related, Mr. Pitzel was not
required by his employer to incur such expenses. Despite Mr. Pitzel was a
fifty per cent shareholder plus an employee and had a reason to benefit beyond
a mere employee, the expenses were not deductible because the employer did not
require him to incur the expenses.
[34]
In view of the testimony of the appellant and
the conditions of his employment on the Form, it is not possible to find that
he was “required” by his employer to pay the Amount. Therefore, the appellant
fails to meet the conditions under subparagraphs 8(1)(f)(i) and 8(1)(h)(ii)
and is precluded from deducting the Amount.
[35]
I conclude that there was no evidence that the
appellant was required to incur employment expenses in the Amount claimed. Thus
the appellant is ineligible for the deduction. I now turn to the other
condition in subparagraph 8(1)(f)(iii).
Commission fixed by reference to sales volumes or contracts
negotiated
[36]
As previously noted, under subparagraph 8(1)(f)(iii),
an employee may deduct sales expenses but the employee must be employed in the
year in connection with selling property or negotiating contracts for his
employer, and be remunerated wholly or partially by commissions or similar
amounts fixed by the volume of sales made or contracts negotiated.
[37]
In Griesbach v. Canada (Minister of National
Revenue – MNR), 91 DTC 142, Christie J. concluded that the bonus
was not akin to a commission under section 8 because the determination was not
by direct reference to the sales volume. At page 3, paragraph 5, Christie J.
stated:
To my mind the
result is that in order for expenses to be deductible under that paragraph the
remuneration pertaining thereto must be fixed by reference to the volume of the
sales made or the contracts negotiated by the taxpayer claiming those
deductions. Twenty per cent of the pre-tax gross profits of an employer with a
number of employees is not synonymous with remuneration so fixed.
[38]
In his testimony the appellant admitted, and
confirmed in cross‑examination, that he did not receive commission
income, and stated it could have been paid. He also agreed that the Form,
signed by Mr. Redman, indicates that the appellant was not paid wholly
partially by commission according to the volume of sales made or contracts
negotiated.[15]
Subsequently, he suggested that Mr. Redman had made an error in completing the
Form. However, he did not call Mr. Redman to testify to corroborate the purported
error. As noted by counsel for the respondent, the Form had been completed four
months after the conclusion of 2011. This would have given Mr. Redman an
opportunity to look back and determine if commission income had been paid. I
infer that no error was made and accept this evidence.
[39]
Despite his admission that he did not receive
commission income, the appellant urged the Court to characterize the bonus as
commission income since his bonus is tied to his performance. He referenced
Schedule A in the Agreement in support of his assertion. In his closing
argument, the appellant added that it ties into the implementation of business
plans. I note that the Agreement refers to salary and then states that the
amount of the bonus, if any, shall be tied directly to the attainment of annual
objectives as determined by the Board in its sole discretion.[16]
[40]
In the present case, the Agreement, referenced
by the appellant in his testimony, links the bonus (if any) to the performance
of annual corporate objectives. In my view, neither that nor the implementation
of business plans is a sufficient nexus to qualify as remuneration fixed by
reference to sales volumes or contracts negotiated to bring the appellant within
the ambit of subparagraph 8(1)(f)(iii).[17]
Furthermore, no other explanation was provided as to how the bonus was
quantifiable in order to qualify as remuneration so fixed.[18]
[41]
Based on the evidence, I find that the appellant
was not remunerated wholly or partially by commissions or other similar amounts
fixed by reference to the volume of the sales made on the contracts negotiated
pursuant to subparagraph 8(1)(f)(iii). Since commission income is a
pre-requisite to deductibility, I conclude that the appellant is precluded from
deducting the amount of $16,580 for entertainment, gifts, and promotional
items.
[42]
I conclude that the appellant is unable to
deduct the expenses in the Amount claimed under paragraph 8(1)(f) or
paragraph 8(1)(h) of the Act.
[43]
The appeal is dismissed.
Signed at Ottawa, Canada, this 9th day of May 2014.
"K. Lyons"
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