Philip v. Esnouf v. Minister of National Revenue, [1993] 2 CTC 2785, 93 DTC 1034

Sarchuk T.C.C.J.:— Philip V. Esnouf (Esnouf) appeals from reassessments of tax for the 1986, 1987 and 1988 taxation years. In each of the years in issue Esnouf claimed expenses allegedly incurred either in the course of employment or in the course of carrying on business. He also claimed moving expenses pursuant to the provisions of subsection 62(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act").

Of the expenses claimed the Minister disallowed the amounts of $6,240, $9,867.45 and $9,160 in taxation years 1986, 1987 and 1988 respectively. The Minister’s position is that the expenses were properly adjusted and disallowed on the basis that they were not supported by receipts or other forms of supporting documents confirming the alleged expenses; certain expenses were duplicated; certain amounts were not established to have been expended for the purpose of gaining or producing income from employment; in certain instances the expenses exceeded commission income and earned from that source and that in any event they were not reasonable.

Mr. Esnouf testified on his own behalf. A number of expense items are in issue and with respect thereto Esnouf produced a melange of receipts, vouchers and other documents. His evidence and the documentary material does not lend itself to ready analysis or summarization. Thus for the sake of clarity I will deal with each taxation year separately and adopt the categorization of expenses contained in schedules prepared by an auditor with Revenue Canada (part of Exhibit A-4).

Before turning to specific items it is appropriate to deal with Esnouf's assertions regarding the nature of his employment in the years in issue. It is his position that at all relevant times he was an independent contractor and not an employee.

From January to April 1986 he worked for Ocean City Realty ("Ocean"). Then he became associated with Island Home Realty ("Island") and worked there until September 1987 when he moved from Victoria, British Columbia to Halifax, Nova Scotia to take up new employment with L. Paul Hebert & Assoc. ("Hebert"), an architectural firm. This association continued well into 1988 following which Esnouf purports to have carried on a consulting business of his own.

I am satisfied that in taxation year 1986 Esnouf was employed by Ocean as a real estate salesman. Nothing in his testimony nor in his agreement with Ocean (part of Exhibit A-6) suggests that he was anything but an employee. I am also satisfied that Esnouf was an employee of Island. In both instances the companies were the selling or listing agents and maintained the requisite trust accounts. Both companies provided office space, telephone answering services, secretarial service and processed all transactions. The evidence also discloses that Ocean remitted payments on behalf of Esnouf for Canada Pension Plan and Unemployment Insurance premiums and carried errors and omissions insurance. In every respect the relationships were consistent with the usual employment arrangements between real estate brokers and their salespersons.

Mr. Esnouf, who is accredited as an architect, also asserted that he was not an employee of Hebert but rather acted as a consultant with the understanding that this was to lead to a partnership. He insisted that he was retained to be a supervisor/expeditor on a renovation project and as a "lobbyist" to obtain new business for Hebert from the provincial government. He also maintained that throughout this period he carried on an architectural consulting business from his residence (and alleges that he continued to do so in 1988 after his association with Hebert was terminated).

It is, however, a fact that he was provided with an office and related services and necessities. His wages were $1,000 per week and were reported by both payor and payee as employment income (Esnouf says this was an error). Following his move to Halifax in September 1987 his income for that year and for 1988 consisted of the wages paid by Hebert and $4,068 in unemployment insurance benefits. No income was earned by Esnouf from his consulting business. On the evidence I am satisfied that it would be inappropriate to categorize his association with Hebert as anything but that of employer/ employee.

As a result any expenses to which Esnouf may be entitled in the taxation years under appeal can only be permitted to the extent that he can bring himself within the provisions of paragraphs 8(1)(f), 8(1)(h) and 8(1)(i) of the Act.

I turn now to the expenses claimed in 1986. The following schedule represents the adjustments made by the Minister:

Other Allowable Expenses

1986

		Claimed		Revised		Adjustment
Gross Income:
(A) Ocean City		$ 22,229		$ 22,229		0
(B)	Island Home		0		0	0
	Subtotal	$ 22,229		$ 22,229		0
Expenses:
(A) Paid Ocean City		$	6,504	$	3,524	$2,980
(B)	Paid Island Home		1,928		0	1,928
(C) Pager			463		0	463
(D) Other			869		0	869
(E)	Auto		1,701		1,701
	— Operating
	— Depreciation		175		175	0
	Less: Personal (20 per cent)		(375)		(375)	0
Line 109: Other Allowable Expenses		$ 11,265		$	5,025	$6,240
New Commission		$ 10,964		$ 17,204		$6,240

Conclusions — 1986 taxation year

I have considered Esnouf's evidence relating to each category of expenses referred to in the schedule and reached the fol owing conclusions:

(A) Paid Ocean City: $3,524, the amount allowed by the Minister, represents payment by Esnouf to Ocean City with respect to matters such as his share of advertising, cost of multiple listing books, office charges, telephone, real estate licence and so forth. No evidence was presented by Esnouf to warrant the allowance of any further expenses in this category.

(B) Paid Island Home: (C) Pager: (D) Other: These three items were disallowed on the basis that no payments were made to Island by Esnouf in 1986. No evidence to the contrary was adduced. Furthermore no commissions were earned by Esnouf in 1986 while employed by Island. Paragraph 8(1)(f) of the Act provides that commission expenses may not exceed commissions earned from that source. Accordingly the disallowances were correct.

(E) Auto: Mr. Esnouf was allowed his automobile expenses as claimed.

The Minister's assessment with respect to the 1986 taxation year has not been demonstrated to be wrong.

Taxation year 1987 — moving expenses

Arising out of his move from Victoria to Halifax Esnouf claimed expenses in the total amount of $11,598.37. The Minister allowed the sum of $3,305.92. The following schedule indicates the revisions made by the Minister.

While Esnouf's evidence was somewhat difficult to follow it would appear that he and his wife first travelled to Halifax in their automobile, towing a trailer carrying some of their belongings. Esnouf then flew back to Victoria, rented a Ryder truck and transported the rest of their property. Efforts to purchase a residence fell through and Esnouf moved into rental accommodation. Then in March 1988 Esnouf completed his move by purchasing a home at Wolfville, Nova Scotia.

In the course of his testimony it became apparent that virtually all of the amounts allowed by Revenue Canada as moving expenses were based on receipts and other information provided by Esnouf following repeated requests by the auditor. Although Esnouf maintains that he has additional receipts none which were relevant were presented.

Dealing with each category in this schedule sequentially I make the following findings.

Removal expenses

In the T1-M form filed with his return (Exhibit A-2) Esnouf claimed the sum of $3,917.97 as removal expenses. These were described as "Self/Air Can & Ryder Truck Rental, 510 + 2687.97 + 720". The Minister allowed $3,005, made up of $549 for air fare, $1,985 for truck rental and $497 in trip expense. These amounts represented verified claims. No other material of consequence was made available to the Court and no explanation of the additional $912.05 claimed was forthcoming. Esnouf is entitled to no further relief under this head.

Transportation costs

The Minister appears to have rejected all amounts under this head. That may well be because it was not possible from an examination of Esnouf's T1-M to determine that two trips had been required nor was there any allocation of expenses to each segment of the move. I accept that initially Esnouf drove from Victoria to Halifax with his wife and that he incurred expenses in so doing. It would appear the amounts claimed as "Transportation Costs" represent this stage of the move. I have concluded that some of these amounts should be allowed notwithstanding the absence of documentary support. The amount claimed as "transportation costs — auto” appears to be on the high side and will be reduced to $535. This will account for running costs as well as incidentals such as the Victoria-Vancouver ferry. [1] The amounts claimed for lodging and meals for six days travelled appear to be reasonable and they will be allowed in the amounts claimed being $246 and $179.40.

Temporary living expenses

With respect to temporary accommodation Esnouf claimed the maximum permitted number of days: 15. It is not possible to determine from his evidence whether this expense was incurred following his initial arrival, or after his second trip. He provided no receipts, although in his claim he did indicate the address at which he purports to have stayed during this period of time and the name of the landlord. That information being readily available to him there is absolutely no reason why he could not have provided some documentation from the landlord to support his position. His failure to do so justifies me in drawing the inference that the evidence would have been unfavourable to him. He is entitled to no further relief under this head.

Selling costs

These amounts relate to costs incurred in the sale of his residence in Victoria. It transpires, however, that on July 29, 1987 he accepted an offer from an arm's length purchaser (Exhibit A-3). Then on August 7,1987 a second offer to purchase was accepted by Mr. Esnouf, in this case from his son. Esnouf conceded that the first transaction was aborted in order to permit his son to buy the home. The amount of $3,010 claimed as real estate commission was in fact a payment by Esnouf to cancel the first transaction. No commission was paid with respect to the second transaction. The sum of $300 allowed by the Minister represented the actual legal costs of transferring the property from Esnouf to his son. No invoices were submitted with respect to any advertising with respect to the sale. Esnouf is entitled to no further relief under this head.

Purchase cost

The acquisition of a new home in Halifax was delayed and I accept Esnouf's explanation regarding that matter. Section 62 of the Act provides that a taxpayer in computing his income for the taxation year in which he moved from his old residence to his new residence or for the immediately following taxation year may deduct certain expenses. The cost of legal services in respect of the acquisition of a home is a properly deductible expense. Clearly this section was intended to cover situations where the physical move took place in close proximity to year end and expenses were also incurred in the following year. I see no reason why the legal costs of purchasing his home should be rejected as simply on the basis that there was an intervening tenancy for a short period of time while permanent accommodation was being sought. To disqualify a taxpayer on the basis that the temporary rental accommodation became a residence for the purpose of section 62 seems to be too narrow an interpretation.

I therefore hold that the legal expenses in the amount of $1,320 incurred to effect the purchase are properly deductible in the year in which they were incurred. That, according to the evidence, is 1988 and not 1987 as originally claimed.

I turn next to “other expenses" claimed in taxation year 1987. In his return Esnouf categorized these as (A) arising out of an architectural practice and (B) those incurred while he was acting as a real estate agent. The Minister’s schedule sets out the amounts claimed and allowed in each of the two categories.

Other Allowable Expenses 1987

	Claimed		Revised	Adjustment
(A) Architectural Practice
Auto	$ 450.00		0	$ 450.00
Office In Home		216.00	0		216.00
Stationary		211.70	0		211.70
Entertainment		76.80	0		76.80
Board of Trade		80.00	0		80.00
Subtotal	$ 1,035.50		0	$ 1,034.50
(B) Real Estate Agent
Real Estate Board	$	217.00	0	$	217.00
Real Estate Licence		200.00	0		200.00
Extra Assessment		35.00	0		35.00
Course		120.00	0		120.00
Auto		6,919.20	3,298.00		3,621.20
Pager		345.60	0		345.60
Advertising		1,815.37	0		1,815.37
Stationary		298.50	0		298.50
ML Books		441.00	0		441.00
Office Desk Rental		3,150.00	4,858.00	(1,708.00)
Office Charges		1,013.49	0		1,013.49
Telephone		372.42	0		372.42
Entertainment		674.49	0		674.49
Office in Home		988.20	0		988.20
Miscellaneous		398.68	0		398.68
	$16,988.95		$8,156.00	$ 8,832.95
Total Other Allowable Expense	$18,023.45		$8,156.00	$ 9,867.45

I propose first to deal with the expenses arising out of the Hebert employment.

1. Auto

As an employee Esnouf, pursuant to paragraph 8(1)(h) of the Act, would be entitled to deduct travelling expenses if incurred within the limitations of that paragraph. I accept that some of his duties necessitated attendance at a project site away from Hebert's office and that Esnouf used his own vehicle for that purpose. However his evidence also indicated that a substantial portion of the automobile costs related to travel between his home and Hebert's office. He attempted to justify this on the basis that he was a consultant and not an employee and that his base of operations, both for his own architectural practice and for the purposes of carrying out his obligations to Hebert, was in his home. Thus all travel qualified.

The evidence does not support his position. As previously stated he was employed by Hebert and not in business for himself. I have however concluded that the automobile expense should be allowed in part. On the limited evidence before me one-third business use would appear to be more than adequate. The amount of $150 will therefore be allowed.

2. Office in Home

The expenses claimed under this head were properly disallowed since they do not meet the criteria set out in paragraph 8(1)(i) of the Act. The office was not required by his contract of employment with Hebert.

3. Stationery, Entertainment and Board of Trade

With respect to these three items they are not in my view amounts which may be deducted pursuant to the provisions of section 8 of the Act.

I turn next to the expenses claimed as expenses while employed by Island.

Automobile expenses

There is no doubt that Esnouf was required to maintain his own vehicle and pay all business expenses relating thereto. In 1986 the Minister did allow a modest expense claim, although inadequately vouchered, on the basis that it was not unreasonable. In 1987 Esnouf claimed automobile expenses in the amount of $6,919.20 calculated, as he noted on his return: "Auto 22,320 k.m. @ .31." This was reduced to $3,298.

There is no doubt that the amount allowed by the Minister is an arbitrary figure considered to be reasonable in the circumstances. It is a fact that Esnouf failed to maintain even the most rudimentary mileage logs. He did not provide any other relevant documentation or information. His testimony as to the amount of travelling required consisted of generalities. He included travel to and from the office (in keeping with his stand that he was not an employee). The evidence adduced on this issue is insufficient to justify any increase in the amounts allowed by the Minister.

General expenses

The amount of $4,858 allowed under the head Office Desk Rental appears to represent various items such as multiple listing books, Victoria Press, office service charges, postage, signs, telephone, Victoria Real Estate Board dues, business cards, map books. The amount also appears to be the total of the vouchered items. A review of the documents tendered by Esnouf suggests that was the case. Since he provided virtually no additional evidence of substance I am not convinced that the Minister's adjustments were wrong.

With respect to the office in the home and certain related expenses, i.e., telephone, entertainment and miscellaneous, limited evidence was adduced and it fails to provide a basis for further relief.

Taxation year 1988

In this year Esnouf claimed $9,160 as expenses. In so doing he advised Revenue Canada that:

Esnouf Associates Architects employed 1 Jan 1989 to end of August 1989 on a fee for service basis in Halifax with L. Paul Hebert Associates for services of principal, Philip Esnouf. Specific project terminated end of August 1989. [2]

EXPENSE SUMMARY
Operating	Auto 15,933 km. @ $0.33	$5,258
	Telephone	1,570
	Residence Allow 12 per cent	520
	15 per cent	1,050
	Miscel.	307
Profess.	Hfx. Board of Trade	80
	N.S.A.A.	375
TOTAL		$9,160

Mr. Esnouf testified that these expenses reflected the whole of the year, not just the period of his employment with Hebert. He also stated that during the last four months of the year he was attempting to carry on his own architectural practice and was attending seminars at the university.

In this taxation year, as in previous years, Esnouf failed to maintain any mileage log or other records relating to his automobile. The amount claimed was arrived at in consultation with his accountant and is in my view excessive. In three months of employment with Hebert in 1987 he claimed $450 as automobile operating expenses. In 1988, during eight months of employment with Hebert and four months of “self employment” he claimed $5,258 with little other than a change of address to justify the substantial increase. I allowed one-third of the amount claimed in 1987. In my estimation $500 is a reasonable amount for automobile expenses for the period of time that Esnouf was employed by Hebert in 1988. No further allowance can be made for automobile expenses thereafter as there is virtually no evidence regarding his alleged business activities in that period.

The claim with respect to "residence allowance” and telephone charges I assume represent costs of the office at home. These are neither permitted nor justified.

Given the nature of his employment with Hebert the fee paid to the Nova Scotia Association of Architects in the amount of $375 is allowed.

In summary the appeal with respect to taxation year 1986 is dismissed. The appeals for 1987 and 1988 are allowed and the matters are remitted back to the Minister for reassessment as set out in these reasons. There will be no costs.

Appeals allowed in part.