Citation: 2013 TCC 15
Date: 20130117
Docket: 2010-1002(GST)G
BETWEEN:
I-D Foods corporation,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Archambault J.
[1]
I-D Foods Corporation (IDF)
is appealing an assessment issued by the Deputy Minister of Revenue of Quebec
on behalf of the Commissioner of Revenue of Canada (Minister) pursuant
to the Excise Tax Act, R.S.C. 1985, c. E‑15 (ETA). The
relevant period is January 1, 2005 to December 31, 2007. By that
assessment, the Minister disallowed input tax credits (ITCs) for the
relevant period aggregating $126,338.98 in respect of car allowances paid by
IDF to its employees for the use of their cars in the course of the performance
of their employment duties. The relevant section is section 174 of the ETA,
which refers to subparagraphs 6(1)(b)(v), (vi), (vii) and (vii.1) of the
Income Tax Act, R.S.C. 1985 (5th supp.), c. 1 (ITA). In the
end, the main issue raised by this appeal is more legal than factual and
concerns the scope of the application of section 174 of the ETA. More specifically,
the issue is whether subparagraph 6(1)(b)(x) of the ITA, as interpreted by
the Federal Court of Appeal in Ville de Beauport v. Minister of National Revenue,
2001 FCA 198, [2002] 2 C.T.C. 161, must be taken into account in applying paragraph
174(c) of the ETA. There are a number of provisions that it would be
useful to reproduce here in order to understand the scope of that paragraph:
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Excise
Tax Act
Allowances and
Reimbursements
174. Travel and other allowances. — For the purposes of this Part, where
(a) a
person pays an allowance
(i) to an employee
of the person,
(ii) where the person
is a partnership, to a member of the partnership, or
(iii) where the person
is a charity or a public institution, to a volunteer who gives services to
the charity or institution
for
(iv) supplies all or
substantially all of which are taxable supplies (other than zero-rated
supplies) of property or services acquired in Canada by the employee, member
or volunteer in relation to activities engaged in by the person, or
(v) the use in Canada, in relation to activities engaged in by the person, of a motor vehicle,
(b) an
amount in respect of the allowance is deductible in computing the
income of the person for a taxation year of the person for the
purposes of the Income
Tax Act, or would have been so deductible if the person
were a taxpayer under that Act and the activity were a business, and
(c) in
the case of an allowance to which subparagraph 6(1)(b)(v),
(vi), (vii) or (vii.1) of that Act would apply
(i) if the
allowance were a reasonable allowance for the purposes of that subparagraph,
and
(ii) where the person
is a partnership and the allowance is paid to a member of the partnership, if
the member were an employee of the partnership, or, where the person is a
charity or a public institution and the allowance is paid to a volunteer, if
the volunteer were an employee of the charity or institution,
the person
considered,
at the time the allowance was paid, that the allowance would be a reasonable
allowance for those purposes and it is reasonable for the person to
have considered, at that time, that the allowance would be a
reasonable allowance for those purposes,
the following
rules apply:
(d) the
person is deemed to have received a supply of the property or service,
(e) any
consumption or use of the property or service by the employee, member
or volunteer is deemed to be consumption or use by the person and not
by the employee, member or volunteer, and
(f) the
person is deemed to have paid, at the time the allowance is paid, tax in
respect of the supply equal to the amount determined by the formula
A ×
(B/C)
where
A is the amount of the allowance,
B Is
(i) in prescribed
circumstances relating to a participating province, the percentage determined
in prescribed manner, and
(ii) in
any other case, the rate set out in subsection 165(1), and
C is the total of 100% and the percentage determined
for B.
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Loi
sur la taxe d’accise
Indemnités et
remboursements
174. Indemnités pour
déplacement et autres — Pour l’application de la présente partie, une personne
est réputée avoir reçu la fourniture d’un bien ou d’un service dans le cas
où, à la fois :
a) la personne
verse une indemnité à l’un de ses salariés, à l’un de ses associés si
elle est une société de personnes ou à l’un de ses bénévoles si elle est un
organisme de bienfaisance ou une institution publique :
(i) soit pour des
fournitures dont la totalité, ou presque, sont des fournitures taxables, sauf
des fournitures détaxées, de biens ou de services que le salarié, l’associé
ou le bénévole a acquis au Canada relativement à des activités qu’elle
exerce,
(ii) soit pour
utilisation au Canada d’un véhicule à moteur relativement à des
activités qu’elle exerce;
b) un montant au
titre de l’indemnité est déductible dans le calcul du revenu de la
personne pour une année d’imposition en application de la Loi de
l’impôt sur le revenu, ou le serait si elle était un contribuable aux
termes de cette loi et l’activité, une entreprise;
c) lorsque l’indemnité
constitue une allocation à laquelle les sous-alinéas 6(1)b)(v),
(vi), (vii) ou (vii.1) de la Loi de l’impôt sur le revenu s’appliqueraient
si l’indemnité était une allocation raisonnable aux fins de ces sous-alinéas,
les conditions suivantes sont remplies :
(i) dans le cas où la
personne est une société de personnes et où l’indemnité est versée à l’un de
ses associés, ces sous-alinéas s’appliqueraient si l’associé était un
salarié de la société,
(ii) si la personne est un
organisme de bienfaisance ou une institution publique et que l’indemnité est
versée à l’un de ses bénévoles, ces sous-alinéas s’appliqueraient si le
bénévole était un salarié de la personne,
(iii) la personne considère,
au moment du versement de l’indemnité, que celle-ci est une allocation
raisonnable aux fins de ces sous-alinéas,
(iv) il est raisonnable
que la personne l’ait considérée ainsi à ce moment.
De plus :
d) toute consommation ou utilisation
du bien ou du service par le salarié, l’associé ou le bénévole est
réputée effectuée par la personne et non par l’un de ceux-ci;
e) la personne est réputée
avoir payé, au moment du versement de l’indemnité et relativement à la
fourniture, une taxe égale au résultat du calcul suivant :
A × (B/C)
Où :
A représente le montant de l’indemnité,
B :
(i) dans les circonstances
prévues par règlement relativement à une province participante, le
pourcentage déterminé selon les modalités réglementaires,
(ii) dans les
autres cas, le taux fixé au paragraphe 165(1),
C la somme
de 100% et du pourcentage déterminé selon l’élément B.
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Excise
Tax Act
[GST] Rebates
253. (1) Employees and partners — Where
(a) a musical instrument, motor vehicle,
aircraft or any other property or a service is or would, but for subsection
272.1(1), be regarded as having been acquired, imported or brought
into a participating province by an individual who is
. . .
(ii) an employee of a registrant
(other than a listed financial institution),
. . .
(b) the individual has paid the tax (in
this subsection referred to as the “tax paid by the individual”) payable in
respect of the acquisition or importation of the property or service, or the
bringing into a participating province of the property, as the case may be,
and
. . .
the Minister
shall, subject to subsections (2) and (3), pay a rebate in respect of
the property or service to the individual for each calendar
year equal to the amount determined by the formula
A X (B - C)
where
A is
(a) where the tax paid by the individual
includes only tax imposed under subsection 165(1) or section 212 or 218, the
amount determined by the formula
. . .
B is an amount equal to
. . .
(c) the amount in respect of
(i) . . .
(ii) the supply of the service,
or
(iii) the supply in Canada of the other property,
as the case may be, that was
deducted under the Income Tax Act in computing the individual's income
for the year from an office or employment or from the partnership,
as the case may be, and in respect of which the individual did not receive
an allowance from a person, other than an allowance in respect of
which the person certifies, in prescribed form containing prescribed
information, that, at the time the allowance was paid, the person
did not consider
(d) the allowance to be a
reasonable allowance for the purposes of subparagraph 6(1)(b)(v),
(vi), (vii) or (vii.1) of that Act, or
. . .
C is the total of all amounts that
the individual received or is entitled to receive from the individual's
employer or the partnership, as the case may be, as a reimbursement in
respect of the amount that was so deducted.
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Loi
sur la taxe d’accise
Remboursements [TPS]
253. (1) Salariés et associés — Sous réserve des
paragraphes (2) et (3), le ministre rembourse un particulier — associé
d’une société de personnes, laquelle est un inscrit, ou salarié d’un
inscrit autre qu’une institution financière désignée — pour chaque
année civile relativement à un bien ou à un service, si les
conditions suivantes sont réunies :
a) un instrument
de musique, un véhicule à moteur, un aéronef ou un autre bien ou
service est considéré comme ayant été acquis, importé ou
transféré dans une province participante par le particulier, ou serait ainsi
considéré si ce n’était le paragraphe 272.1(1);
[…]
b) le
particulier a payé la taxe (appelée « taxe payée par le
particulier » au présent paragraphe) relative à l’acquisition ou à
l’importation du bien ou du service ou relative au transfert du bien dans une
province participante, selon le cas;
[…]
Le montant
remboursable correspond au résultat du calcul suivant :
A ×
(B - C)
où :
A représente :
a) dans le cas
où la taxe payée par le particulier ne comprend que la taxe imposée par le
paragraphe 165(1) ou les articles 212 ou 218, le montant obtenu par la
formule suivante :
[…]
B l’un des montants suivants, déduit en application
de la Loi
de l’impôt sur le revenu dans le calcul du revenu du
particulier pour l’année tiré d’une charge ou d’un emploi ou
provenant de la société et pour lequel le particulier n’a pas reçu d’allocation
d’une personne, exception faite d’une allocation que celle-ci ne considère
pas, selon l’attestation qu’elle a faite en la forme
déterminée par le ministre et contenant les renseignements requis, comme
étant, au moment de son versement, soit une allocation raisonnable
pour l’application des sous-alinéas 6(1)b)(v),
(vi), (vii) ou (vii.1) de cette loi, […]
[…]
c) le montant relatif
[…] à la fourniture du service ou à la fourniture au Canada de
l’autre bien, selon le cas;
C le total des montants que le particulier a reçus ou a le droit de
recevoir de son employeur ou de la société de personnes, selon le cas, à
titre de remboursement du montant déduit visé à l’élément B.
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Income tax act
Inclusions
6.(1) Amounts to be included as
income from office or employment — 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
. . .
(b) Personal or living expenses — 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,
. . .
(vi) reasonable
allowances received by a minister or clergyman in charge of or ministering to
a diocese, parish or congregation for expenses for transportation incident to
the discharge of the duties of that office or employment,
(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
(A) the municipality where the employer’s establishment at
which the employee ordinarily worked or to which the employee ordinarily
reported was located, and
(B) the metropolitan area, if there is one, where that
establishment was located,
in the performance of the duties of the employee’s office or
employment,
(vii.1) reasonable
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 in the performance of the duties of the office or employment,
. . .
and for the purposes of subparagraphs 6(1)(b)(v),
6(1)(b)(vi) and 6(1)(b)(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
(xi) where the
taxpayer both receives an allowance in respect of that use and is reimbursed
in whole or in part for expenses in respect of that use (except where the
reimbursement is in respect of supplementary business insurance or toll or
ferry charges and the amount of the allowance was determined without
reference to those reimbursed expenses);
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Loi de l’impôt sur le revenu
Éléments à inclure
6.(1) Éléments à inclure à titre de revenu tiré d’une charge ou
d’un emploi — Sont à inclure dans le calcul du
revenu d’un contribuable tiré, pour une année d’imposition, d’une charge
ou d’un emploi, ceux des éléments suivants qui sont applicables
:
[…]
b) Frais personnels ou de
subsistance — les sommes qu’il a reçues au cours de l’année à titre
d’allocations pour frais personnels ou de subsistance ou à titre d’allocations
à toute autre fin, sauf :
[…]
(v) les allocations
raisonnables pour frais de déplacement reçues de son employeur par un
employé et afférentes à une période pendant laquelle son emploi était lié
à la vente de biens ou à la négociation de contrats pour son employeur,
[…]
(vi) les
allocations raisonnables reçues par un ministre du culte ou un membre du clergé
desservant un diocèse, une paroisse ou une congrégation, ou en ayant la charge,
pour les frais de transport qu’a entraînés l’accomplissement des fonctions de
sa charge ou de son emploi,
(vii) les
allocations raisonnables pour frais de déplacement, à l’exception des
allocations pour l’usage d’un véhicule à moteur, qu’un employé — dont
l’emploi n’est pas lié à la vente de biens ou à la négociation de contrats
pour son employeur — a reçues de son employeur pour voyager, dans
l’accomplissement des fonctions de sa charge ou de son emploi, à l’extérieur
:
(A) de la municipalité où était situé l’établissement de
l’employeur dans lequel l’employé travaillait habituellement ou auquel il
adressait ordinairement ses rapports,
(B) en outre, le cas échéant, de la région métropolitaine où était
situé cet établissement,
(vii.1) les allocations
raisonnables pour l’usage d’un véhicule à moteur qu’un employé — dont
l’emploi n’est pas lié à la vente de biens ou à la négociation de contrats
pour son employeur — a reçues de son employeur pour voyager dans
l’accomplissement des fonctions de sa charge ou de son emploi,
[…]
pour l’application des sous-alinéas (v), (vi) et (vii.1), une
allocation reçue au cours de l’année par le contribuable pour l’usage
d’un véhicule à moteur dans l’accomplissement des fonctions de sa charge
ou de son emploi est réputée ne pas être raisonnable dans les
cas suivants :
(x) l’usage du véhicule n’est pas, pour la fixation de
l’allocation, uniquement évalué en fonction du nombre de kilomètres
parcourus par celui-ci dans l’accomplissement des fonctions de la charge
ou de l’emploi,
(xi) le contribuable, à la fois, reçoit une allocation pour cet
usage et est remboursé de tout ou partie de ses dépenses pour le même usage
(sauf s’il s’agit d’un remboursement pour frais d’assurance‑automobile
commerciale supplémentaire, frais de péage routier ou frais de traversier et
si l’allocation a été déterminée compte non tenu des dépenses ainsi
remboursées);
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Income Tax Act
Deductions
18.(1) — General limitations. In computing the income
of a taxpayer from a business or property no deduction shall be
made in respect of
. . .
(r) Certain automobile expenses — an amount paid or payable by the
taxpayer as an allowance for the use by an individual of an
automobile to the extent that the amount exceeds an amount determined
in accordance with prescribed rules, except where the amount so paid
or payable is required to be included in computing the individual’s income;
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Loi de l’impôt sur le revenu
Déductions
18.(1) Exceptions d’ordre général —
Dans le calcul du revenu du contribuable tiré d’une entreprise
ou d’un bien, les éléments suivants ne sont pas déductibles :
[…]
r) Allocation pour usage d’une automobile —
tout montant payé ou payable par le contribuable à titre d’allocation pour
usage d’une automobile par un particulier, dans la mesure où ce
montant excède le montant prescrit, sauf si le montant ainsi payé
ou payable doit être inclus dans le calcul du revenu du particulier;
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[My emphasis.]
Facts
[2]
IDF has been carrying
on a business of importing and distributing food products in Canada since 1948. Its annual sales approximated $85 million to $90 million per year
during the relevant period. IDF had during that period approximately 80
employees (described as sales representatives) involved in distributing its
products, and it paid their salaries every two weeks. According to the
testimony of Mr. Domenic Nardolillo, his remuneration was in part fixed
and in part based on the sales that he made. Besides the sales director, Mr. Nardolillo
was the only sales representative to testify at the hearing. Each IDF sales representative
was given an exclusive territory to service. The work was performed mostly on
the road and involved visiting stores and collecting orders five days a week.
[3]
The sales
representatives had to use their own cars to carry out their duties, and IDF paid
them a car allowance. According to Ms. Linda Ross, who was in charge of IDF’s
payroll, this car allowance had three components: the cost of gas, the cost of
insurance — up to a $1000 limit — as evidenced by an invoice, and the other costs for
the car. IDF determined the amount of the allowance using its in‑depth
knowledge of the number of kilometres to be travelled to cover a particular
territory. According to Diane Dault, the person in charge of sales, who has
been with the company for 29 years, the allowance is based on the kilometres having
to be driven by a sales representative and on the sales target assigned to that
sales representative. For instance, IDF took into account past experience with
regard to that particular territory, for example, the number of kilometres
driven in that territory in the preceding year. She also got daily and weekly
sales reports in respect of each of her sales representatives, so she knew
which clients had been visited in the territory.
[4]
Once the estimate of
the annual travelling costs for a particular territory was made, the total was
divided by 26 and a flat-rate allowance was paid every two weeks along with the
remuneration of the sales representatives. Certain sales representatives were allowed
to use a company credit card to pay for their gas. However, the amount of such
transactions was deducted from the car allowance (see Exhibit I-1, page 4.21). Furthermore,
the flat-rate allowance paid biweekly could be adjusted every three months to take
into account the actual cost of gas (see Exhibit I-1, page 4.20).
[5]
If a territory was
modified and the number of kilometres to be travelled increased or decreased,
adjustments would be made to the allowance. However, Ms. Ross indicated
that when she received the written statements of the annual business kilometres
travelled by the sales representatives, she did not make any adjustment to the
total allowance paid for the year. She just filed the statements. Moreover, Ms. Dault
indicated that she herself did not check those written statements; the only ones
she looked at were her own.
[6]
To illustrate this,
Exhibit I-1 was filed. It relates to some of IDF’s sales representatives. For
instance, Ms. Diana Hénault submitted on February 6, 2007, a written
statement indicating that she had driven 15,367 kilometres in 2006. According
to IDF’s biweekly payroll register, she was paid a flat-rate car allowance of
$261.54 for the pay periods ending on October 6 and October 20, 2006.
Mr. Marc Rousseau indicated in his written statement that he had
driven 28,103 kilometres in 2006. The amount of his flat-rate car allowance shown
on the payroll register was $469.08 for the pay periods ending on the same dates
as Ms. Hénault’s. Mr. Rousseau covered more kilometres and received a
higher flat-rate allowance than Ms. Hénault. Another example is the case
of Ms. Josée Lafrenière, who indicated in her statement that she had
driven 6,884 kilometres in 2006; she received a car allowance of $392.32 for
the same pay periods as Ms. Hénault and Mr. Rousseau (Exhibit I-1,
pages 4.7 to 4.9). However, she travelled only 44.8% of Ms. Hénault’s distance,
but she received an allowance equal to 150% of Ms. Hénault’s.
[7]
Mr. Siino, an employee
of the Minister who prepared the tables filed as Exhibits I-5 and I-6 and who
wrote the portion entitled “Autres constatations” in the appeals officer’s
report (Exhibit I-4), noted that some sales representatives had moreover received
exactly the same car allowance, although they had not travelled the same number
of kilometres. He also testified that the rate per kilometre computed by
reference to the total annual kilometres travelled by the sales representatives
and the total annual allowance paid by IDF varied between $0.11 and $1.35. He
also wrote that some of the rates per kilometre had decreased over time. He
gave as an example the case of Mr. Yves Beaucage, whose rate went from
$0.79 in 2006 to $0.48 in 2007.
[8]
Like Mr. Siino’s
observations, the summary prepared by an accountant hired by IDF in the context
of the appeal shows variances in the rates per kilometre. One sales representative,
whose kilometres driven were low, received $0.65 per kilometre while another,
who drove 38,748 kilometres, received only $0.20 per kilometre in 2005. We see
similar variances in 2006 and 2007. Another example is the case of one sales representative
who in 2007 received $1.35 per kilometre for 3,479 kilometres (see Exhibits A-4
and I-2.)
[9]
One of the tables
prepared by Mr. Siino (Exhibit I-6) also reveals that the allowance paid
by IDF was a biweekly flat-rate allowance as opposed to being a per-kilometre allowance
to be multiplied by the actual business kilometres travelled by a particular
sales representative. For example, in the case of Mr. Knowles, whose name
appears on Exhibit A-4, the summary shows that in 2007 he was paid $0.45 per
kilometre for 36,375 kilometres, for which he received an allowance of $16,305.01.
However, as demonstrated by Mr. Siino’s calculations, the actual rate per
kilometre was $0.4482 and not the round number of $0.45. Had IDF paid $0.45,
Mr. Knowles would have received $63.74 more.
[10]
The method employed by
IDF provided in most cases satisfactory results in indemnifying the sales
representatives for the travelling costs they incurred (Exhibit A‑4). Notwithstanding
the variances mentioned above, an analysis of the summary prepared by the
accountant reveals that the flat-rate allowances paid were in most cases reasonable.
Indeed, when the annual allowance is divided by the annual number of business kilometres
driven by each of the sales representatives, the results show a rate per kilometre
that was generally around $0.37 in 2005 and $0.45 in 2006 and 2007. In the
course of her review of the aforementioned summary, the appeals officer, Ms. Caroline
Daviau, listed the rates specified in the Quebec Regulation respecting the Taxation
Act for determining to what extent an amount would be deductible in
computing business income. The rate per kilometre for 2005 was $0.45 for the
first 5,000 kilometres and thereafter $0.39 per kilometre; for 2006 and 2007, it
was $0.50 for the first 5,000 kilometres and $0.44 for any additional
kilometres.
[11]
At the hearing and in
IDF’s Notice of Appeal, IDF’s counsel as good as conceded that the car
allowances were estimated. For instance, in IDF’s Notice of Appeal it is stated:
10. Adjustments were rare as the specific routes made it
possible to accurately estimate the employment kilometers driven;
18. The Appellant chose to adjust the Mileage Allowance only
where there was a material difference between the estimated
kilometers and the actual kilometers as from a business perspective,
minor adjustments would have been more costly to the employer than the actual
adjustments;
19. The Mileage Allowances were as such in fact calculated on
a per-kilometer basis. As for the decision to not adjust insignificant
discrepancies between the actual mileage driven and the estimated mileage,
this Appellant is entitled to conduct its business in the manner it chooses;
[My
emphasis.]
[12]
In his letter dated
September 16, 2009 to Ms. Daviau, the accountant stated on page
2: “[E]ach allowance was negotiated based on the estimated amount of
employment kilometers to be traveled and if necessary, the allowance would be
adjusted to reflect the actual
employment kilometers. Please note that adjustments [at the end of the year]
were rare as most employees were assigned a specific route making it likely to
accurately estimate the employment kilometers driven.” (Exhibit I-2). (My
emphasis.)
[13]
From this description,
I conclude that IDF was paying an allowance which was based on an estimated
number of kilometres to be travelled by a sales representative and not on the
actual kilometres driven. The amount estimated represented in most cases a very
good effort to fix a reasonable car allowance for the employees. However, the
issue is whether that method meets the requirements of section 174 of the ETA.
To paraphrase the argument made by IDF’s counsel, what must be determined is whether
the estimate made by IDF of the kilometres to be travelled meets the
requirements of section 174. More specifically, to use the wording of paragraph
174(c), the issue is whether the amount determined to be reasonable by
the person (employer) can be considered reasonable for the purposes of
subparagraph 6(1)(b)(v)
of the ITA.
Position of the appellant
[14]
IDF’s counsel took the
view during the hearing that section 174 of the ETA must be applied by reference
not only to subparagraph 6(1)(b)(v) but also to subparagraph 6(1)(b)(x)
of the ITA.
However, in his view, the requirements for the purpose of applying section 174 of
the ETA should be more liberally interpreted given that this section provides
that it is the person (the employer) who must determine whether the allowance
was reasonable at the time of its payment, and, in counsel’s view, that
determination by IDF was a reasonable one for the purposes of subparagraph 6(1)(b)(v)
of the ITA. In estimating the number of kilometres to be travelled, IDF was accurate
enough not to have to adjust the amount of the allowance at the end of the year
to reflect actual use of the car.
[15]
In addition, IDF’s counsel
submitted that the amount determined by IDF constituted a much better computation
of the actual kilometres travelled by each sales representative. In his view,
it would be doubtful that the sales representative’s computation of the kilometres
driven (as appearing in Exhibit I-1) would be more accurate than IDF’s. For
example, an employee could include in his mileage figure those kilometres driven
between his personal residence and IDF’s place of business.
[16]
In addition, counsel for
IDF submitted that a liberal interpretation of section 174 of the ETA is in
order given the context in which that provision is to be applied. An unduly
restrictive interpretation, such as that adopted by the Minister, would result in
IDF losing its ITC entitlements with respect to the GST paid indirectly through
the payment of the allowances to its employees. In effect, the disallowance of
the ITCs would amount to a windfall for the Minister.
[17]
However, that view does
not appear to be shared by IDF’s accountant, who maintained that the ITCs could
be recovered by the sales representatives. This is what he wrote to Ms. Daviau
on October 27, 2009 (Exhibit I-3) :
Furthermore,
please note that deeming the automobile allowances unreasonable and
therefore making them taxable would not benefit either the Minister or our
client.
As
clearly shown on the logs already submitted, the employees substantially
use their automobiles for employment purposes and therefore would be
entitled under section 63.1 of the Quebec Taxation Act to claim
automobile expenses for the years in question.
This
would result in having the Minister amend the 2005,
2006 and 2007 personal tax returns of all employees in order to allow
employment expenses and GST/QST rebates.
Since
there are approximately 110 employees that would be directly affected, the
Minister would have to amend approximately 330 personal tax returns.
[My
emphasis.]
Position of the respondent
[18]
The respondent’s counsel
submits that the assessment should be confirmed because the allowances paid by
IDF do not meet all the requirements of section 174 of the ETA. In order for an
allowance to be reasonable for the purposes of paragraph 174(c), it is
necessary that the measurement of the use of the vehicle be solely based on the
number of kilometres for which the vehicle was used in connection with the
employment, as required by subparagraph 6(1)(b)(x) of the ITA. In
support of this position, counsel for the respondent relied on the decision Tri-Bec
Inc. v. R., 2003 G.S.T.C. 75, 2003 G.T.C. 762, 2002 G.S.T.C. 27 (Fr.) at
paragraph 19, where Judge Lamarre Proulx stated:
19 Subparagraph
6(1)(b)(x) of the Income Tax Act is clear in my view. Since
section 174 of the Act refers to this statutory provision, a reasonable
allowance for the use of a motor vehicle is one that is fixed on the
basis of the number of kilometres travelled by the taxpayer in the
performance of the office or employment.
[My emphasis.]
[19]
In Beauport, where
the application of subparagraph 6(1)(b)(x) of the ITA was considered, Justice
Noël of the Federal Court of Appeal wrote, at paragraph 17:
17 In
this instance, the scheme introduced by the applicant does not take into
account the number of kilometres actually travelled by the employees
during the period for which the allowances are paid but is based on an
estimate determined by reference to the previous period. That is precisely
the type of calculation that was excluded when subparagraph 6(1)(b)(x)
was adopted and the Tax Court Judge's reading of that provision was in
conformity with the statutory language and not incompatible in any way with the
concept of an allowance.
[My
emphasis.]
[20]
The relevant facts of that
case are summarized at paragraph 5 of the reasons:
5 The
evidence established that the applicant had introduced a "motor vehicle
allowance policy" based on figures contained in a specialized publication
prepared by the Quebec Automobile Club (CAA-Quebec). To calculate an amount
per kilometre, the applicant together with the union tried to determine
average operating costs that took into account fixed and variable costs for the
use of a vehicle. It then applied that amount to a value representing the
approximate annual kilometres driven that was extrapolated from the total
kilometres actually driven by its employees during a three-month reference
period.
[My
emphasis.]
Analysis
[21]
Here, as was done in Beauport , IDF determined the allowance on the basis of past experience. The
measurement of the use of the vehicle was an estimated number of kilometres to
be travelled in a particular territory. The allowance could be adjusted on a
three-month basis to take into account the actual cost of gas. However, this
adjustment could not, in my view, differentiate between use of the car for the performance
of employment duties and use for personal purposes. Furthermore, at the end of
the year, when the sales representatives reported the actual number of business
kilometres for which they used their cars during the year, IDF did not adjust the
allowance paid in the year. Here, the rate per kilometre which was determined
by IDF’s accountant was useful to establish how reasonable the allowances paid
were; however, the actual number of business kilometres travelled by a
particular representative was not used in determining the actual allowance paid
to the representative. Therefore, as I have concluded above, the allowances
paid were based on an estimate of the kilometres to be travelled and not
on the actual number of kilometres for which the vehicles were in fact
used by the representatives in performing their duties during the relevant year.
[22]
If the ITA were the only Act to be
applied, the merit of IDF’s appeal would be easily determined, in light of the pronouncements
of the Federal Court of appeal in Beauport, which confirmed the decision
of Judge Dussault of this Court. However the issue to be determined is whether
the car allowances paid to the representatives meet the requirements of
paragraph 174 of the ETA. More particularly, it must be decided whether the
determination made by IDF that it had paid a reasonable allowance is reasonable
for the purposes of subparagraph 6(1)(b)(v) of the ITA. At the outset of
the hearing, I informed the parties that I had questions with respect to the
statement made in Tri-Bec at paragraph 19, which is reproduced above. I indicated
that I did not believe that section 174 of the ETA referred explicitly to subparagraph
6(1)(b)(x) of the ITA and that I was uncertain whether that subparagraph
applied.
[23]
After considering the positions of
the parties, including their written submissions, and reflecting on the issue,
I believe that the fact that section
174 does not refer explicitly to subparagraph 6(1)(b)(x) of the ITA does
not necessarily mean that it does not refer to it implicitly. In argument, both
counsel in this appeal stated
that they believed that the rule in subparagraph 6(1)(b)(x) of the ITA had
to be considered in applying subparagraph 6(1)(b)(v) for the purposes of
paragraph 174(c) of the ETA. In addition, both the Goods and Services
Tax Reporter (CCH) and the Canada GST Service
(Carswell) share the same view. In the latter, David Sherman writes with respect to section
174, in section G, under the heading “Whether a Travel Allowance is ‘Reasonable’
— Paragraph 174(c)”:
For
such allowances, paragraph 174(c) requires that the employer,
partnership, charity or public institution reasonably consider the allowance
to be “reasonable” under the ITA. Subparagraphs 6(1)(b)(x) and (xi) deem
certain allowances not to be reasonable : . . .
Subparagraph
6(1)(b)(x) clearly overrides subparagraphs (v)–(vii.1), so even if an
allowance is otherwise “reasonable” it is unreasonable if it is not based
solely on the number of kilometres driven: Beauport (Ville) v. R.,
[2002] 2 C.T.C. 161 (F.C.A.).
In
other words, a flat-rate allowance paid every month, or an allowance paid in
addition to reimbursement, is deemed unreasonable. No input tax credit or
GST rebate is available for the GST component of such an allowance. (See
the Tri-bec and Melville Motors cases discussed in section M
below.)
[My
emphasis.]
[24]
In the Goods and
Services Tax Reporter, in section 65-800 under the heading “Employee
Allowances”, it is stated.
Subparagraph
6(1)(b)(v), (vi), (vii) or (vii.1) of the ITA applies. These
subparagraphs apply to travelling allowances, including automobile allowances
paid to salespersons . . . Therefore an allowance which is not reasonable
under the per kilometre test in subparagraph 6(1)(b)(x) of the ITA
and the duplicating reimbursement test in subparagraph 6(1)(b)(xi) would
not be a reasonable allowance for purposes of section 174 of the Excise
Tax Act (ETA). However, the individual may be able to pursue a rebate
under section 253.
[My
emphasis.]
[25]
I also believe that
this interpretation of section 174 is the most reasonable one given that the
question to be answered under section 174 is whether the allowance would be a “reasonable
allowance for those purposes,” i.e., for the purposes of subparagraph 6(1)(b)(v)
of the ITA. The implicit reference to subparagraph 6(1)(b)(x) of the ITA
is required because of the close relationship between sections 174 and 253 of
the ETA and subparagraph 6(1)(b)(v) of the ITA. It is obvious that Parliament
intended that the three provisions be closely connected. This is evident not
only from the wording of paragraph 174(c) and subsection 253(1) of the ETA,
but also from the explanatory notes which where issued by the Department of Finance
when paragraph 174(c) was amended in 1993. To understand the context of
these notes and the amendments, it is useful to reproduce here sections 174 and
253 as they read before the 1993 amendments:
174.
Travel and other allowances — For the purposes of
this Part, where
(a)
a person pays a reasonable allowance to an employee or, where the person
is a partnership, to a member of the partnership
(i)
for supplies all or substantially all of which are taxable supplies (other than
zero-rated supplies) acquired in Canada by the employee or member in relation
to an activity engaged in by the person, or
(ii)
for the use in Canada, in relation to an activity engaged in by the
person, of a motor vehicle, and
(b)
an amount in respect of the allowance is deductible in computing the
income of the person for a taxation year of the person for the purposes of the Income
Tax Act, or would have been so deductible if the person were a taxpayer
under that Act and the activity were a business,
the
person shall be deemed to have received a taxable supply and to have paid, at
the time the allowance is paid, tax in respect of the supply equal to the tax
fraction of the amount of the allowance.
253.(1)
Employees and partners — Where tax is payable in
respect of
(a)
the acquisition or importation of an automobile, an aircraft or a
musical instrument, or
(b)
the supply of any other property or a service,
by
an individual who is a member of a partnership that is a registrant or who
is an employee of a registrant (other than a listed financial institution),
and the individual is not entitled to claim an input tax credit in respect of
the tax, subject to subsections (2) and (3), the Minister shall pay a rebate
for each calendar year to the individual equal to the amount determined by the
formula
A x (B - C)
where
A
is the tax fraction on the last day of the year,
B
is the total of all amounts each of which is
(a)
the capital cost allowance in respect of the automobile, aircraft or musical
instrument, or
(b)
the consideration or
part thereof for the supply of the other property or service,
that
was deducted under the Income Tax Act in computing the individual's income for the year from employment or from the partnership, as the case
may be, and
C
is the total of all amounts each of which is an amount
(a)
included in the total determined for B, and
(b)
in respect of which the
individual received an allowance or reimbursement from any other person.
[My emphasis.]
[26]
The following are the
explanatory notes for the new version of section 174 and section 253:
Bill
C-112 (February 11, 1993)
. .
.
Section
174: Employee and Shareholder Benefits
Section
174 deals with employee and partner allowances for expenses incurred by an
employee or partner and deems the person paying the allowance to have received
a supply and to have paid tax. This is in order for the person to be entitled
to an input tax credit under section 169 in respect of the allowance, to the
extent that it was paid in the course of commercial activities of the person. The
existing section applies only to allowances that are considered “reasonable”
for income tax purposes. Since, in the case of employees, the determination of
the “reasonableness” of the allowance is ultimately not made until the employee
determines his or her income at the end of the taxation year, the employer
paying the allowance could be in a position of having an input tax credit,
which was previously claimed in respect of what was thought to be a reasonable
allowance, denied as a consequence of the employee subsequently treating it as
unreasonable for income tax purposes. This would most often occur where the
employee regarded the allowance as not being sufficient to cover the actual
expenses for which the allowance was paid — i.e., an unreasonably low
allowance.
The
amendment to section 174 addresses this problem by
providing that a person's entitlement to an input tax credit or rebate in
respect of an allowance is based on whether, at the time the allowance is
paid, it is reasonable for the person to consider the allowance to be
reasonable for income tax purposes (or, in the case of an allowance paid to
a partner, to be reasonable for income tax purposes if the partner were,
instead, an employee).
This
amendment implements changes announced in the press releases of March 27, 1991,
September 14, 1992 and December 9, 1992 and is effective January 1, 1991.
Section
253(1) and (2): Employee and Partner Rebates
The
most important modification to subsection 253(1) is the introduction of a
requirement for a certification in respect of
allowances paid to employees or members of partnerships. Specifically, amended
subsection 253(1) provides that an employee is not entitled to a rebate
under this subsection in respect of expenses for which the employee has
received an allowance unless the employee has obtained a certification
from the person paying the allowance that the person did not consider,
at the time the allowance was paid, the allowance to be a reasonable allowance
for the purposes of subparagraph 6(1)(b)(v)(vi), (vii) or (vii.1) of the
Income Tax Act.
. .
.
This
amendment is consequential to amendments to section 174, whereby persons
are deemed to have paid tax, and hence are entitled to an input tax credit or
rebate in respect of an allowance based on whether, at the time the
allowance was paid, the person considered the amount to be reasonable for
income tax purposes. The amendment to subsection 253(1) will therefore
ensure that a rebate will not be paid to an employee or partner, if the
employer or partnership is entitled to an input tax credit or rebate in
respect of the same expense.
This
amendment was announced in the press releases of September 14, 1992 and
December 9, 1992. Certifications in respect of allowances will be required for
rebates claimed in respect of the 1992 and subsequent taxation years. The
certification will appear on the rebate application form.
Subsection
253(1) is also amended to replace the existing reference therein to an
“automobile” with a reference to a “motor vehicle”. This change ensures
consistency with paragraph 8(1)(j) of the Income Tax Act, which was recently
amended to refer to a “motor vehicle” rather than an “automobile”. This
change was announced in the press release of March 27, 1991.
[My
emphasis.]
[27]
Although one could
argue that subparagraph 6(1)(b)(x) of the ITA does not apply for the
purposes of 174(c) of the ETA on the basis that paragraph 174(c) does
not explicitly refer to it, I believe that the better view is that it does
apply. Therefore, subparagraph 6(1)(b)(x) has to be taken into account to
determine what constitutes a reasonable allowance for the purposes of subparagraph
6(1)(b)(v) of the ITA. I do not see any reason to exclude its
application. On the contrary, I see many reasons in favour of its being applicable.
For IDF to be able to claim ITCs for car allowances under section 174 of the ETA,
the allowances must be reasonable under subparagraph 6(1)(b)(v) of the ITA.
Subparagraph 6(1)(b)(x) of the ITA deems an otherwise reasonable
allowance under subparagraph 6(1)(b)(v) to be unreasonable if the
measurement of the use of the vehicle is not based solely on the number of
kilometres for which it was used.
[28]
In my view, it makes
sense to take into account subparagraph 6(1)(b)(x) in applying subparagraph
6(1)(b)(v) of the ITA for the purposes of section 174 of the ETA. It
results in a more harmonious application of those two Acts, which can be
illustrated as follows in this particular case. Given that under the ITA, IDF
sales representatives would have to include the car allowance in their income
because it was not a reasonable one as a result of the application of subparagraph
6(1)(b)(x) of the ITA, IDF could deduct the allowance under paragraph 18(1)(r)
of the ITA because it was included in the IDF representatives’ income from
employment. Those representatives would normally deduct their car expenses
under paragraph 8(1)(f) of the ITA and claim the GST rebate under section 253
of the ETA. In that situation, the GST “credit” (i.e., ITC or rebate) is
claimed by the person who deducts the car expenses. This is a logical result. Indeed,
if one were to adopt the view taken by IDF, the odd result would be that IDF
could claim the ITCs and the representatives could not, although they are the
ones who would be deducting the car expenses. This would be so because IDF
could not give the certification that is required by section 253 of the ETA in
order for the representatives to be entitled to claim the GST rebate. The
certification mechanism described in section 253 of the ETA prevents the
employer and the employee from each getting ITCs and the rebate for the same
expenses.
[29]
Having concluded that
the proper interpretation of paragraph 174(c) of the ETA requires that a
determination of what constitutes a reasonable allowance under subparagraph 6(1)(b)(v)
of the ITA must take into account the provisions of subparagraph 6(1)(b)(x)
of the ITA as interpreted by the Federal Court of appeal in Beauport,
and that the allowances paid by IDF were not determined by taking into
account solely the number of kilometres for which the representatives used their
cars, the inescapable consequence is, unfortunately for IDF, that the
requirements of section 174 have not been met. As stated by Mr. Justice
Noël in Beauport, at paragraph 17, an allowance based on an estimate of
the kilometres “is precisely the type of calculation that was excluded when subparagraph
6(1)(b)(x) was adopted”.
In order for the determination made by IDF (that the allowance was a reasonable
allowance at the time it was paid) to be reasonable, it had to be made in
conformity with subparagraph 6(1)(b)(v), taking into account the deeming
rule of subparagraph 6(1)(b)(x) of the ITA. The purpose of enabling an
employer, under paragraph 174(c) of the ETA, to determine what is
reasonable at the time of the payment is not to give the employer the power to
define the legal concept of “reasonable allowance” but to give it the
flexibility to conclude at that time (here, every two weeks), after taking into
account all the adjustments made in the course of the year, including those at
the end of the year, that the allowance will meet the legal definition of
“reasonable allowance”.
[30]
For all of these
reasons, the appeal by IDF is dismissed and costs are awarded to the respondent.
Signed this 17th day
of January 2013.
“Pierre Archambault”
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