Gaétan Baillargeon v. Minister of National Revenue, [1990] 2 CTC 2472, 90 DTC 1947

Lamarre Proulx, T.C.J.:—This is an appeal against reassessments by the respondent, the Minister of National Revenue, for the 1983, 1984 and 1985 taxation years.

The questions at issue concern the application of paragraph 8(1)(f), subparagraph 8(1)(i)(ii) and subsection 163(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") —namely, whether entertainment, promotional and advertising expenses, automobile expenses and commissions paid to one's spouse may be deducted under paragraph 8(1)(f) and subparagraph 8(1)(i)(ii) of the Act. There is also the question of the penalties imposed for certain deductions claimed without supporting vouchers.

The amount of the expenses allowed and of those denied is not disputed. The respondent presented the following breakdown of these expenses in paragraph 3 of the reply to the notice of appeal:

The facts on which the respondent based the reassessment are set forth in paragraph 5 of the said reply and are as follows:

[Translation]

5. In assessing the appellant for the 1983, 1984 and 1985 taxation years, the Minister of National Revenue based himself on, among other things, the following facts:

(a) During the years in question, the appellant was a securities broker at Molson Rousseau Inc. and was remunerated by commissions;

(b) The appellant had an office at the place of business of Molson Rousseau Inc., his employer;

(c) The verbal agreement between the employer and the appellant did not require the latter to pay a salary to an assistant or to a substitute;

(d) The respondent has examined all the vouchers submitted by the appellant;

(e) Part of the expenses claimed by the appellant as a deduction in calculating his income involves expenses of a purely personal nature;

(f) Most of the expenses claimed by the appellant for entertainment, promotion and advertising were not supported by vouchers; in particular, the following amounts were not documented:

1983	$12,745.12
1984	$12,437.10
1985	$10,746.41

(g) The appellant used his automobile for his own personal use in a proportion of 50/50;

(h) Following an audit of the appellant by the respondent for the 1981 and 1982 taxation years, the appellant was advised in a letter dated February 29, 1984, of the obligation to retain appropriate documents in support of deductions claimed;

(i) In his tax returns for the 1984 and 1985 taxation years, the appellant, knowingly or under circumstances amounting to gross negligence, made false statements;

Let us examine the breakdown reproduced above.

For 1983

Under entertainment expenses denied: $9,124.57 was denied because it was not supported by documentary evidence. Vouchers in the amount of $500.70 were not accepted, because they were considered inadequate for entertainment purposes.

Under promotional and advertising expenses, an amount of $1,095 was rejected because the vouchers were judged inadequate. The balance of the amount was not supported by vouchers.

In the case of the automobile expenses, the Minister reduced the proportion claimed from 70 per cent to 50 per cent.

For 1984

The commission was paid to the appellant's wife. I will return to this matter later.

Under entertainment expenses: of the amount denied, only $800.41 was supported by vouchers.

Under promotion: the amount denied includes no amount supported by vouchers.

For 1985

Under entertainment expenses: with the exception of $567.66 denied because the vouchers were found inadequate, the rest is without vouchers.

Under promotion: $280.28 was supported by vouchers.

The taxpayer provided no evidence regarding the proportion of use of the vehicle. I therefore conclude that he agrees with the proportion determined by the respondent.

As regards the entertainment, promotional and advertising expenses claimed, the appellant's agent called as a witness the sales manager of a real estate brokerage who had, until 1982, been the sales manager for the appellant's employer. He testified that expenses on the order of ten per cent to 30 per cent of the gross amount of the commissions earned were within the norm. The appellant's gross income in commissions was $91,212 for 1983, $87,428 for 1984 and $80,992 for 1985.

If the proportion of expenses claimed without vouchers was small, I could perhaps overlook the failure to produce some vouchers, on the assumption that they had been lost or that the taxpayer had occasionally forgotten to ask for receipts. But here the proportion is too large. Furthermore, the appellant's agent has not supplied any evidence with regard to the expenses claimed with vouchers that were rejected as inadequate. Section 230 of the Act requires that the taxpayer keep books of account so that the respondent may establish clearly the amount of tax payable. The taxpayer has not done so since he has not supplied the respondent with such reasonably required documents, the taxpayer is not entitled to claim the deductions. In this regard, see Holotnak v. M.N.R., [1987] 2 C.T.C. 217; 87 D.T.C. 5443, at pages 221-23 (D.T.C. 5446-47), upheld by the Federal Court of Appeal, [1990] 1 C.T.C. 13; 89 D.T.C. 5527. I therefore find that the respondent correctly denied the deductions for the expenses claimed as entertainment, promotional and advertising expenses.

There remains the matter of the commission paid to the appellant's wife for 1984 and 1985. In paragraph 7 of the reply to the notice of appeal, the respondent gave the following reason for denying this expense:

[Translation]

7. He contends that the appellant's contract of employment did not require him to pay a salary to an assistant or to a substitute. Therefore, he is not entitled to a deduction for the amounts paid to his wife in 1984 and 1985;

As the appellant's agent notes, the respondent does not dispute that the appellant's wife worked for the appellant, that the amount of remuneration was reasonable in the circumstances, or that the amount was actually paid to her. The respondent's only argument is that the appellant was not required, under his contract of employment, to pay the salary of an assistant.

In the case of a fixed-remuneration contract of employment, I have no doubt that it would be necessary for that obligation to be mentioned in the contract of employment. In a case of employment where the individual is remunerated entirely by commissions, all the expenses that the employee can or must incur in order to earn his income are not necessarily set forth in the contract of employment.

According to the evidence, there was no written contract of employment. The appellant's employer provided him with a small office or location with a telephone. There was one secretary for some twenty employees. According to the appellant's testimony, the location of the office was not permanent. The employees could be moved from one place to another. The only permanent office was in the appellant's house, as was his only permanent assistant. She received and issued securities, collected payments, remitted cheques to pay income to holders of securities, kept contracts, and handled reception and telephone calls.

Then there was the testimony by two senior executives of brokerage firms— one brought by the appellant, the other by the respondent. Their testimony was similar. Expenses have to be incurred in order to earn commission income. There is no description of these expenses, nor any specific obligation to incur a particular type of expense. The matter is left up to the salesman, but he must incur such expenses in order to earn his income.

Here I refer to the decision by Taylor, J. in Neville v. M.N.R., [1988] 2 C.T.C. 2201; 88 D.T.C. 1546, where he explains that expenses deductible under paragraph 8(1)(f) of the Act may be deducted under paragraph 8(1)(f), which has roughly the same wording as 18(1)(a). Obviously, the commission salesman must be in the situation specified in paragraph 8(1)(f), that is, he must have to pay his own expenses. Subparagraph 8(1)(i)(ii) of the Act does not, in my Opinion, restrict the scope of the words: "amounts expended by him in the year for the purpose of earning the income from the employment," used in paragraph 8(1)(f). Subparagraph 8(1)(i)(ii) of the Act applies to all cases of employment income, and simply describes a particular expense that may be deducted. It must therefore be understood as describing one of the expenses to which subparagraph 8(1)(f)(i) of the Act refers.

By allowing some expenses to be deducted, the respondent acknowledged that the taxpayer was required, under his contract, to pay his own expenses. Even without this admission, the testimony of the two brokerage firm executives is to the same effect. The taxpayer was required to pay his own expenses, but he had a choice as regards these expenses. Both executives testified that the use of an assistant is not unusual. I refer also to the recent decisions by the Federal Court of Appeal in Verrier v. Canada, [1990] 1 C.T.C. 313; 90 D.T.C. 6202, at 316 (D.T.C. 6204), and Canada v. Gilling, [1990] 1 C.T.C. 392; 90 D.T.C. 6274, at 398 (D.T.C. 6278), which assert that even if it is not explicitly stated in the contract that one must pay one's own expenses, this can be considered as implicit, given the terms and conditions of the job.

Accordingly, I conclude that the commissions paid to the appellant's wife may be deducted in the calculation of his income for 1984 and 1985.

As regards the penalties, I doubt that there was gross negligence on the part of the taxpayer. His fault was rather in not producing vouchers in support of the amounts claimed for entertainment, promotional and advertising expenses, after having been informed in a letter dated February 29, 1984 (Exhibit 1-2), of the obligation to retain appropriate documents in support of deductions claimed. However, in that same letter he was allowed expenses in the amount of $7,500 for 1981 and $8,600 for 1982. Moreover, in 1983 the taxpayer was 60 years old. He states that he has always worked on commission and that he has never asked for receipts for his expenses. He has always claimed an approximate amount for his expenses, and says that he cannot change his way of operating.

He breaks down the amounts claimed as follows: $2,000 for tennis activities. He plays tennis twice a week. There he meets current or potential clients. Meals with clients, $2,000 per year. He eats with clients once a week. Gifts to the community: $1,500; receptions: $1,500; wedding presents: $750; expenses and office expenses: $1,500; theatre tickets: $500.

The respondent rightly refused these deductions because there were no supporting vouchers. As mentioned earlier, section 230 of the Act states that everyone who is required to pay taxes must keep books of account containing information making it possible to determine the amounts that may be deducted, and thus the amount of tax payable. The proportion of expenses claimed without vouchers is such that the respondent rightly refused to allow them to be deducted.

I cannot, however, find gross negligence on the part of the taxpayer. In view of the taxpayer's age and his ingrained manner of operating (which is perhaps attributable to the respondent's failure to require vouchers from him from the start), I find negligence but not gross negligence. The appellant testified that he actually incurred these expenses and that they were for the purpose of earning income. He does not have the vouchers that he should have kept, but this is a case, in my analysis of the evidence, where malicious intent is absent from the taxpayer's behaviour. The penalties imposed under subsection 163(2) of the Act are not valid in law.

The appeal is allowed to the following extent: of the expenses disallowed by the respondent, the appellant is entitled to claim the commissions paid to his wife for 1984 and 1985, and the penalties imposed are not valid in law.

Appeal allowed in part.