John Huschi v. Minister of National Revenue, [1989] 1 CTC 2057, 89 DTC 30

Christie, A.C.J.T.C.:— This appeal relates to the appellant's 1981, 1982 and 1983 taxation years. The points in issue are these. First, the deduction by the appellant in computing his income of automobile expenses of $6,851, $7,165 and $9,649 in respect of 1981, 1982 and 1983 respectively. These amounts represent 80 per cent of the automobile expenses said to have been incurred by him in each of the years mentioned. The other 20 per cent was assigned to his personal use. Second, the disallowance by the respondent of a $500 employment expense deduction in relation to the appellant's 1982 and 1983 taxation years. Third, the adding of $24,700 and $28,611 to the appellant's income regarding his 1982 and 1983 taxation years respectively. These amounts had been paid to the appellant's wife, Sharon, by Associated Merchandising Services Ltd. ("Associated") and had been reported by her to Revenue Canada as her income. Other matters had been placed in controversy by the pleadings, but the Court was informed by counsel at the commencement of the hearing that these are no longer in dispute.

Associated was incorporated on January 10, 1973 under the laws of Saskatchewan. One hundred shares were issued, of which 50 were held by the appellant and the remainder by his wife. Both were directors of the company and the appellant was president. Mrs. Huschi was secretary. The corporation was involved in matters other than the two consulting services contracts that will be referred to in a moment. In this regard particular mention was made of income from coin-operated laundry equipment in apartment blocks and something called “Golf Media” that involved advertising at golf courses. During the years relevant to this appeal, however, the principal focus of Associated pertained to the two contracts. Associated's contract income for 1981 was $96,889 and from other sources $8,460. The same figures for 1982 are $93,658 and $8,563, and for 1983 are $92,310 and $3,900.

On January 1, 1980 Buffalo Broadcasting Company Ltd. (“Buffalo”) entered into an agreement with Associated. It provided:

1. The Company doth hereby agree to provide to Buffalo Broadcasting sales and promotion consulting services.

2. The Company agrees to assign its employee John Huschi to the provision of the services contemplated by this contract during the term of which he is to devote such time and attention to the affairs of Buffalo Broadcasting, as they may reasonably require, in arranging sales and promotion of sales and the supervision of sales agents and like matters relating to radio station CKRM in Regina.

3. The consideration payable to the Company for the services so provided shall be Four (4%) per cent of the gross sales achieved by Buffalo Broadcasting at its said radio station, payable monthly.

4. Buffalo Broadcasting hereby undertakes to cooperate with the Company in its need to provide annual holidays and other fringe benefits required by law to be provided by an employer to its employees.

Harvard Developments Limited ("Harvard") which is a subsidiary of McCallum Hill Ltd. acquired the assets of Buffalo. Harvard carried on its broadcasting enterprises under the name Harvard Communications. On January 1, 1983 Harvard entered into a contract with Associated. It provides:

1. The Company doth hereby agree to provide to Harvard Communications management, sales, and promotion consulting services.

2. The Company agrees to assign its employee John Huschi to the provision of the services contemplated by this contract during the term of which he is to devote such time and attention to the affairs of Harvard Communications, as they may reasonably require, in station management, arranging sales and promotion of sales, and the supervision of sales agents and like matters relating to radio stations CKRM and CFMQ-FM in Regina.

3. The consideration payable to the Company for the services so provided shall be sixty thousand dollars annually plus one percent commission on all air time and production sales up to 3.2 million dollars and five percent commission on sales exceeding 3.2 million at its said radio stations payable monthly. Harvard Communications also agrees to pay to the Company a Christmas Bonus of $1,154.00.

4. Harvard Communications hereby undertakes to cooperate with the Company in its need to provide annual holidays and other fringe benefits required by law to be provided by an employer to its employees.

Prior to these agreements having been made the appellant acquired considerable experience as a sales manager in the field of radio broadcasting and had been involved in that capacity with both CFMQ and CKRM when they were under separate ownership. Up to 65 persons were employed by Buffalo and later Harvard. In summary the duties and responsibilities of Associated under the contracts were as follows:

— Manage all affairs of a radio station on a day to day basis.

— Hire and fire as required.

— Hire, organize or reorganize departments or department heads to keep pace with changing times.

— Negotiate salaries with new employees and annual increases for all employees.

— Prepare for approval by the shareholders, projected revenue and expenses on a semi annual basis.

— Prepare monthly reports for shareholders explaining overages and shortfalls in projected figures.

— Insure sufficient cash flow through accepted procedures for collection of receivables.

— Oversee all revenue sources to insure maximized efforts to achieve and maintain continuous growth.

— Insure that on air presentation is considered within the realm of quality broadcasting and does not contravene CRTC guidelines and insure, as best possible, that any comment by on air personnel is not libellous or slanderous.

— Prepare all documentation required for renewal of broadcast licenses.

— Approve all expenditures that may not be budget items, including overtime, staff and non staff talent fees.

— Present for approval capital expenditures required to keep plant in neat, safe environment with considerations for the orderly replacement of obsolete equipment.

— Negotiate contracts with all suppliers whether it be for sport properties, music services, program services, satellite reception, etc.

As indicated at the outset, the appellant was an employee of Associated during the years under review. The T-4 slips issued by Associated and the appellant's returns of income show that his earnings from this source were $45,150 (1981), $44,800 (1982) and $45,848 (1983).

In reassessing in respect of automobile expenses the respondent relied on these assumptions:

a) the alleged automobile expenses of $6,850.75 in 1981, $7,165.06 in 1982 and $9,648.93 in 1983 were not outlays or expenses incurred by the Appellant in the course of his employment within the meaning of paragraph 8(1)(h) or 8(1)(f) of the

Act;

b) in any event the amounts claimed as automobile expenses in 1981, 1982 and 1983 were unreasonable in the circumstances.

In making these deductions the appellant relies on paragraph 8(1)(h) of the Income Tax Act. It reads:

8(1) 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:

(h) where the taxpayer, in the year,

(i) was ordinarily required to carry on the duties of his employment away from his employer's place of business or in different places,

(ii) under the contract of employment was required to pay the travelling expenses incurred by him in the performance of the duties of his office or employment, and

(iii) was not in receipt of an allowance for travelling expenses that was, by virtue of subparagraph 6(1)(b)(v), (vi) or (vii), not included in computing his income and did not claim any deduction for the year under paragraph (e),

(f) or (g),

amounts expended by him in the year for travelling in the course of his employment.

The evidence establishes that the appellant was ordinarily required to carry on the duties of his employment away from his employer's place of business. Not only was there a good deal of automobile travel within Regina, but there were also numerous journeys to points away from Regina, some of them a considerable distance.

While there is no evidence of an express term in the appellant's contract of employment requiring him to pay the travelling expenses that he incurred in the performance of the duties of his employment, this, having regard to all of the circumstances, must be implied. The appellant could not have been expected to properly discharge the duties of his employment without incurring such expenses. On this point, see: Rozen v. The Queen, [1986] 1 C.T.C. 50; 85 D.T.C. 5611, Betz v. The Queen, [1987] 1 C.T.C. 329; 87 D.T.C. 5223, and Moore v. The Queen, [1987] 1 C.T.C. 319; 87 D.T.C. 5217. Further, the appellant was not in receipt of any travelling allowance from Associated. With respect to the respondent's assumption that the expenses are unreasonable, I am satisfied that having regard to the amount of travel involved, the expenses claimed cannot be regarded as unreasonable. True the appellant used what is regarded as an expensive American-made automobile, but involved in his work is the making of impressions of affluency and I think that in our society it is generally recognized that driving a top-of-the-line automobile often has that result. Indeed counsel for the respondent was asked whether he was making a point of the kind of vehicle used by the appellant and the substance of his answer was no.

The appellant is entitled to succeed on the automobile expense aspect of this appeal.

In relation to the second issue, it is alleged by the respondent that Associated was carrying on a personal services business in providing services to Buffalo and Harvard. Paragraph 125(6)(g.1) of the Act defines personal services business in these terms.

125(6) In this section and section 129,

(g.1) “personal services business” carried on by a corporation in a taxation year means a business of providing services where

(i) an individual who performs services on behalf of the corporation (in this paragraph and paragraphs 8(3)(a.1) and 18(1)(p) referred to as an "incorporated employee"), or

(ii) any person related to the incorporated employee

is a specified shareholder of the corporation and the incorporated employee would reasonably be regarded as an officer or employee of the entity to which the services were provided but for the existence of the corporation, unless

(iii) the corporation employs in the business throughout the year more than five full-time employees who are not specified shareholders of the corporation or who are not related to any specified shareholder of the corporation, or

(iv) the amount paid or payable to the corporation in the year for the services is received or receivable by it from a corporation with which it was associated in the year.

Paragraph 125(9)(c) provides:

125(9) For the purposes of this section

(c) “specified shareholder" of a corporation in a taxation year means a taxpayer who owns, directly or indirectly, at any time in the year, not less than 10% of the issued shares of any class of the capital stock of the corporation . . .

Paragraphs 8(1)(a), 8(3)(a.1) and 18(1)(p)(iii) provide:

8(1) 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:

(a) a single amount in respect of all offices and employments of the taxpayer, equal to the lesser of $500 and 3% of the aggregate of

(i) his incomes for the year from all offices and employments (other than the office of a corporation director) before making any deduction under this section, and

(ii) all amounts included in computing his income for the year by virtue of paragraphs 56(1)(m) and (o).

8(3) In computing a taxpayer's income for a taxation year, no amount is deductible under paragraph (1)(a)

(a.1) if the taxpayer was in the year an incorporated employee and a specified shareholder (within the meaning assigned by paragraph 125(9)(c)) of a corporation that has deducted an amount described in subparagraph 18(1)(p)(iii) in computing its income for its taxation year ending in the year.

18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(p) an outlay or expense to the extent that it was made or incurred by a corporation in a taxation year for the purpose of gaining or producing income from a personal services business (within the meaning assigned by paragraph 125(6)(g.1) ), other than

(iii) any amount expended by the corporation in connection with the selling of property or the negotiating of contracts by the corporation if the amount would have been deductible in computing the income of an incor- porated employee for a taxation year from an office or employment if the amount had been expended by the incorporated employee under a contract of employment that required him to pay the amount

that would, if the income of the corporation were from a business other than a personal services business, be deductible in computing its income.

It is the position of the appellant that he did not perform the services on behalf of Associated that were received by Buffalo and Harvard under circumstances whereby he would reasonably be regarded as an employee of Buffalo and Harvard but for the existence of Associated. I concur in this position, having regard to the evidence and the principles enunciated by the Federal Court of Appeal in Wiebe Door Services Ltd. v. M.N.R., [1986] 2 C.T.C. 200; 87 D.T.C. 5025, that are applicable to the determination of whether a person is an independent contractor rather than an employee. It follows that Associated was not a "personal services business" within the definition under paragraph 125(6)(g.1) and consequently the prohibition prescribed by paragraph 8(3)(a.1) has no application. The appellant is entitled to deduct the $500 employment expense deductions in dispute.

Precisely what are the respondent's factual and legal premises in relation to the third point in issue is not altogether clear and nothing that transpired at the hearing is of much assistance in this regard. The notice of confirmation of the reassessments issued by the respondent states:

The amount of $24,700 in 1982 and $28,611.00 in 1983 paid by Associated Merchandising Services Ltd. to Sharon Huschi was included in computing your income in accordance with the provisions of Subsections 5(1) and 56(2) of the Act.

The subsections referred to read:

5(1) Subject to this Part, a taxpayer's income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by him in the year.

56(2) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer's income to the extent that it would be if the payment or transfer had been made to him.

Paragraphs 7(i), (j) and (k) of the reply to the notice of appeal appear to be the assumptions in that document that are relevant to this issue. They read:

(i) in the 1982 and 1983 taxation years, the spouse of the Appellant received $24,700.00 and $28,611.00 from Associated Merchandising Ltd. which was a personal services business;

(j) the amounts of $24,700.00 and $28,611.00 were part of the wages earned by the Appellant as an incorporated employee of Buffalo Broadcasting Company Limited and Harvard Communications and were paid to the spouse of the Appellant pursuant to the direction of or with the concurrence of the Appellant for the benefit of the Appellant or as a benefit that the Appellant desired to have conferred on his spouse;

(k) the spouse of the Appellant was not an incorporated employee of Associated Merchandising Ltd. within the meaning of Section 18(1)(p) of the Act.

There is no argument about what is said in paragraph 7(i) except that, as I have already indicated, Associated was not a personal services business if the assumption that it was has relevance. The same is true of paragraph 7(k) although again there is a question about the relevance of the assumption. With respect to paragraph 7(j) I have also already concluded that the money received by Associated for the consulting services rendered cannot be regarded as having been earned by the appellant as an employee of Buffalo or Harvard and this of itself disposes of the concept of his having been an incorporated employee. Also paragraph 125(6)(g.1) speaks of an individual being an incorporated employee of the corporation that provides the services not of the entity that is the recipient of them. The remainder of paragraph 7(j) merely paraphrases subsection 56(2).

I find no reason that would justify including the funds paid to the appellant’s wife by Associated in computing his income in 1982 and 1983. The evidence is that she spent hundreds of hours during the years under review assisting her husband in discharging Associated's obligations under its contracts with Buffalo and Harvard. There is a considerable element of public relations involved in the appellant’s work that involves attending numerous social functions and entertaining. A good deal of this entertaining involved travelling out of Saskatchewan. For example, in March 1982 about 100 advertising clients were taken to Las Vegas on a chartered aircraft. Their hotel rooms there were also paid for. The trip lasted five days. The appellant and his wife were host and hostess and these roles engaged their time morning, noon and night for a minimum of 10 to 12 hours per day. Two additional similar trips were made in 1982 and two in 1983. Other trips including the appellant's wife were made to Jasper, Halifax, Nashville, Toronto, Hawaii and Vancouver. The result of what is again uncontradicted and unimpaired evidence is that Associated received valuable services from the appellant's wife in return for the money that it paid her in 1982 and 1983.

To summarize: the appeal is allowed and the matter is referred back to the respondent for reconsideration and reassessment on the basis that in computing his income:

(a) for his 1981, 1982 and 1983 taxation years the appellant is entitled to deduct automobile expenses in the sums of $6,851, $7,165 and $9,649 respectively;

(b) for his 1982 and 1983 taxation years he is entitled to deduct $500 in each year by way of employment expense deductions; and

(c) for his 1982 and 1983 taxation years he is not required to include the $24,700 and $28,611 paid to his wife by Associated in those years.

The appellant is entitled to party-and-party costs.

Appeal allowed.