Michel Boily v. Minister of National Revenue, [1988] 2 CTC 2277, 88 DTC 1605

Tremblay, T.C.J. [Translation]:—This appeal was heard on March 9, 1987 at the City of Quebec, Quebec.

1. Issue

The issue is whether the appellant, a real estate agent with the Montreal Trust Company, is justified in deducting $6,000 and $609.67, respectively, as office expenses in the calculation of his income for 1982 and 1983.

The appellant argues that under his contract with Montreal Trust, he is obliged to maintain an office and to cover the expenses it entails.

The respondent disallowed the expense on the grounds that Montreal Trust provided the appellant with an office located at its place of business and did not require him to pay office rent.

2. Burden of Proof

2.01 The appellant has the burden of demonstrating that the respondent's assessments are unfounded. This burden of proof is based on a number of judicial decisions, including the judgment of the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 The Court ruled in that judgment that the presumed facts underlying assessments or reassessments by the respondent are presumed to be true until proof to the contrary. In this case, the facts presumed by the respondent are described in subparagraphs (a) to (c) of paragraph 5 of the respondent's reply to the notice of appeal. This paragraph reads as follows:

[Translation]

5. In reassessing the appellant for the 1982 and 1983 taxation years, the respondent, the Minister of National Revenue, relied inter alia on the following presumptions of fact:

(a) during the taxation years in dispute, the appellant was employed by the Montreal Trust Company as a real estate agent; [admitted]

(b) during the 1982 and 1983 taxation years, the employment contract between the appellant and the Montreal Trust Company did not require him to pay office rent; [denied]

(c) during the 1982 and 1983 taxation years, the appellant's employer, the Montreal Trust Company, provided him with an office that was located at its place of business; [admitted]

3. Facts

3.01 The appellant, who was 30 years of age at the time this matter was heard, had worked since 1981 for the Montreal Trust Company as a real estate agent.

3.02 The appellant produced as Exhibit A-1 a letter dated February 5, 1981 signed by him and addressed to Montreal Trust, in which he accepted the conditions of employment appended to the letter. Also appended to the letter was a document concerning certain policies (place of work, personal expenses, automobile and home office) that were an integral part of the employment contract. The document reads as follows:

[Translation]

The following policies are an integral part of your employment contract with Montreal Trust.

(a) Place of Work: The Agent is not confined to any specific place of work, subject only to any limitation in your real estate agent's licence.

(b) Personal Expenses: The Agent shall be responsible for all expenses that are not normally the responsibility of the Broker and all expenses for which he has not received the prior written consent of the Broker. It is understood that the Agent will pay the Associations and Chambre d’Immeuble fees, the cost of his licence and his security, the Multiple Listing Service subscription fees and the costs of all personal advertising. He authorizes the Broker to make the necessary deductions directly from his commissions when personal expenses have been incurred by the Broker.

(c) Automobile: The Agent will not be reimbursed for any expenditure for the use of his automobile.

(d) Home Office: To maintain in functioning condition a personal office in his residence so as to be able to provide a quality service to our clients, during and outside of the Broker's normal hours of business, both from the Broker's office and from the Agent's residence. The Agent will treat calls from clients with the same importance regardless of whether they are made to the Broker's office or to his residence.

3.03 As Exhibit A-2, the appellant also produced a document issued by Montreal Trust to all real estate agents in the Quebec City region. It reads as follows:

[Translation]

DATE: March 29, 1983

SUBJECT: Expenses of representation and home office

In order to clarify the situation concerning your expenses of representation, we wish to remind you that, as indicated in your employment contract, you shall be responsible for all your expenses pertaining to moving and representation costs and expenses incurred by the operation of a personal office that you shall maintain in your residence.

3.04 The appellant explains that 75 per cent of the sales he makes are transacted by the office on the Ile d'Orléans. Three or four days a week he goes to the Montreal Trust office for one-half hour to two hours per day. The rest of the time, he works on the road.

Meetings and telephone contacts are done mainly after the clients’ normal hours of work, in the evening or on weekends, including Sundays. That is why, practically and economically, it is necessary to have an office in one's home: to reach clients or be available to them if they wish to communicate with their agent. Furthermore, and accordingly, the agent had to keep a copy of clients' files at the residence office in order to serve them more effectively.

3.05 In 1981, the appellant was still living with his parents in Beauport. Since he was unable to have an office in their residence and to receive clients there, he decided to open a permanent office in St-Pierre, Ile d’Orléans, to increase sales and facilitate his work. He maintains that he had no choice, since the company's office was located 35 miles from his sector of work.

During the first year, in 1981, the appellant made an income of $12,000 from sales commissions. In 1982, he made $32,000, including more than $17,000 on Ile d'Orléans alone.

As Exhibit A-3, he produced a list of nine sales of land on Ile d'Orléans: five at St-Laurent, one at St-Jean, two at St-Pierre and one at St-François. The commissions totalled $17,746.87.

Office rental and secretarial expenses amounted to $8,000 (Exhibit A-4):

The respondent disallowed the $6,000 and allowed the $2,000. The appellant submits that Lisette Jalbert included the amount of $8,000 in her income for 1982.

3.06 In 1983, the appellant made $40,031 in commission income from real estate sales. Among the expenses he claimed was the sum of $609.67 (Exhibit 1-1), or 20 per cent of the total of all expenses in relation to the domicile of his spouse. These expenses are the following:

The appellant, considering that his office occupied 20 per cent of the house, took 20 per cent of all the expenses.

The appellant submits that not only did he pay all the accounts, but that the electricity, telephone and insurance accounts were invoiced to his name. The $609.67 was disallowed by the respondent.

3.07 In April 1983 the appellant married Lisette Jalbert. In 1982, she had acquired from her mother the ancestral home situated at 2379, chemin Royal, St-Pierre, Ile d'Orléans. The appellant had advanced her the required cash. In addition, he says, he spent $50,000 on improvements to the home.

3.08 On cross-examination, the appellant explained that the Montreal Trust office on rue Lavigerie, west of Ste-Foy, was open from 8:30 a.m. to 5:00 p.m. but that from 5:00 p.m. to 9:00 p.m. there was only a receptionist to answer the telephone.

3.09 Mrs. Jacqueline Houle, the real estate office manager for Montreal Trust, testified that all agents, when hired, had to sign the documents produced as an appendix to Exhibit A-1, determining the conditions of employment.

Montreal Trust handles the general advertising for the real estate agency. When the agent goes to the company's office, a small two by three foot table is available for him, with a telephone. Exceptionally, he may receive a client, but this is not very practical.

The general office retains the original of the contracts, and the local office of each agent retains photocopies.

Mrs. Houle confirmed that 75 per cent to 80 per cent of the transactions are made through the offices of the individual agents. When an agent does not have an office, she has no difficulty noticing it because of the lower number of transactions.

4. Law — Cases - Analysis

4.01 Law

The main provision of the Income Tax Act that is involved in this case is paragraph 8(1)(f), which reads as follows:

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:

(f) where the taxpayer was employed in the year in connection with the selling of property or negotiating of contracts for his employer, and

(i) under the contract of employment was required to pay his own expenses,

(ii) was ordinarily required to carry on the duties of his employment away from his employer's place of business,

(iii) was remunerated in whole or part by commissions or other similar amounts fixed by reference to the volume of the sales made or the contracts negotiated, and

(iv) was not in receipt of an allowance for travelling expenses in respect of the taxation year that was, by virtue of subparagraph 6(1)(b)(v), not included in computing his income,

amounts expended by him in the year for the purpose of earning the income from the employment (not exceeding the commissions or other similar amounts fixed as aforesaid received by him in the year) to the extent that such amounts were not

(v) outlays, losses or replacements of capital or payments on account of capital, except as described in paragraph (j) or

(vi) outlays or expenses that would, by virtue of paragraph 18(1)(l), not be deductible in computing the taxpayer's income for the year if the employment were a business carried on by him;

4.02 Cases

The cases cited by counsel for the respondent are the following:

1. Verrier v. M.N.R., [1986] 1 C.T.C. 2018; 86 D.T.C. 1027 (F.C.A.);

2. The Queen v. Cival, [1983] C.T.C. 153; [1983] 2 F.C. 830; 83 D.T.C. 5168 (F.C.A.);

3. Slawson v. M.N.R., [1985] 1 C.T.C. 2075; 85 D.T.C. 63 (T.C.C.);

4. Mireault v. M.N.R., [1985] 1 C.T.C. 2167; 85 D.T.C. 170 (T.C.C.);

5. Coulter v. M.N.R., [1986] 1 C.T.C. 2054; 86 D.T.C. 1048 (F.C.A.);

6. Clarke et al. v. M.N.R., [1984] C.T.C. 2944; 84 D.T.C. 1839 (T.C.C.);

7. Cohen v. M.N.R., 31 Tax A.B.C. 216; 63 D.T.C. 237.

4.03 Analysis

A. Respondent's Submissions

4.03.1 In relation to 1982, counsel for the respondent developed three arguments.

The first was that the appellant was not required under his contract to pay his own expenses in accordance with subparagraph 8(1)(f)(i) of the Income Tax Act.

Counsel argued, in effect, that the contract did not include the document written by Montreal Trust describing the policies of the brokerage firm in relation to such things as personal expenses and the home office (para. 3.02). These policies were only guidelines that were not signed. And guidelines, according to the judgment delivered by the Federal Court of Appeal in Cival (para. 4.02(2)), are not part of the contract of employment. They do not create any contractual obligation.

4.03.2 The Cival Case

Since this case is the basis of the respondent's ruling, it is appropriate to summarize it at this point.

Cival was an appeal to the Federal Court of Appeal by the Minister of National Revenue from a judgment of the Federal Court, Trial Division. The facts and the decision are summarized at [1983] 2 F.C. 830:

In 1977, at the request of his employer, the respondent, a civil servant, used his own Car to carry on the duties of his employment. Under an arrangement with his Department, he was reimbursed at a fixed mileage rate designed to offset the cost of owning and operating a car. However, that mileage rate did not entirely cover his expenses. The respondent claimed travelling expenses in respect of the shortfall. The Minister disallowed that deduction, the Tax Review Board upheld the Minister's assessment and the Trial Division allowed the appeal from the Board's decision. This is an appeal from the Trial Division judgment.

Held, the appeal should be allowed. The question is whether the respondent is entitled to this deduction under paragraph 8(1)(h) of the Income Tax Act. The answer depends on whether he was required by his contract of employment to pay the expenses incurred by him in using his automobile. Neither the collective agreement nor the applicable Regulations or statutory provisions required him to use his own car or to pay the expenses involved. As for the arrangement between the respondent and his employer, it was at most a unilateral contract and it created no contractual obligation on the respondent to use his own car or to pay the expenses incurred in its use. While the question of whether the mileage reimbursement would be an “allowance” is not in issue, it is pointed out that the answer might well be found in Ransom v. The Minister of National Revenue, [1968] 1 Ex. C.R. 293.

Counsel first admitted that subparagraph 8(1)(h)(ii) of the Act (dealing with travelling expenses), which applied in Cival, does not apply per se in this appeal. In this appeal, it is subparagraph 8(1)(f)(i) (dealing with office expenses) that applies.

However, subparagraphs 8(1)(f)(i) and 8(1)(h)(ii) have a similar point. In both instances they concern a taxpayer who "under the contract of employment was required to pay" some expenses. It is the similar wording of the two provisions that makes it possible to apply Cival to this appeal, according to counsel.

Counsel also cited Coulter (para. 4.02(5)), in which subparagraph 8(1)(i)(ii) was involved. It reads as follows:

8. (1) . . .

(i) amounts paid by the taxpayer in the year as . . .

(ii) office rent, or salary to an assistant or substitute, the payment of which by

the officer or employee was required by the contract of employment. . . .

In Coulter, Christie, A.C.J.T.C. held that the contract did not require the taxpayer to pay rent.

4.03.3 The respondent's second submission concerning 1982 is that even if the policy concerning the home office was part of the contract, it cannot be applied in this case. This was not in fact a home office but an office rented at St-Pierre, Ile d’Orléans (para. 3.05). Even if this was a good way to do business, counsel says, there is no evidence that Montreal Trust requires its employees to rent premises elsewhere. No proceedings could have been taken against the appellant by Montreal Trust to require him to lease premises. Here, too, the respondent invokes one of the reasons given at page 837 F.C. (C.T.C. 158) in Cival". . . if at any time during 1977 he had refused to use his car for this purpose, he would not have been suable by his employer for breach of contract."

4.03.4 Concerning 1983, counsel invokes again the lack of a written contract and the fact that the policy guidelines were not part of the written contract. Furthermore, these guidelines were not signed by the appellant.

4.03.5 The second submission by counsel for the respondent concerning 1983 is that the appellant did not himself make the expenditures in relation to that year (para. 3.06), but that these were, instead, expenses incurred by his spouse. She is the one who is actually the owner of the house. Although the husband voluntarily contributed to the expenses of the house, which did not belong to him, he does not thereby gain the right to claim the expenses, counsel submits.

B. Decision of the Court

4.03.6 Concerning the issue whether the document explaining the policies of Montreal Trust (para. 3.02), which is part of Exhibit A-1, was not part of the appellant's employment contract because it was not signed by the appellant, I do not share the opinion of counsel for the respondent.

Many contracts between employer and employee are oral contracts. They nevertheless have lawful effect although there may be some difficulty in presenting evidence concerning them.

In the case at hand, there is a written contract. Now, even a written contract can be amended by an oral agreement. In this particular case, the policies issued by Montreal Trust were not countersigned by the appellant, but they were accepted; his entire conduct proves this. Moreover, the appellant was not unaware that these policies were an integral part of the contract, as is demonstrated by the preamble of the document (para. 3.02). Furthermore, the document dated March 29, 1983, issued by Montreal Trust (Exhibit A-2) and cited in paragraph 3.03, clearly confirms that the policies (Exhibit A-1) were an integral part of the employment contract.

In addition, schedules A and B mentioned in the letter of February 5, 1981 (part of Exhibit A-1) concern only the remuneration of agents. There is therefore a part of the contract that is missing: the part dealing with expenses in relation to sales (advertising, etc.) that are to be borne by either of the parties or both. This aspect cannot fail to be part of the agreement, whether it is oral or written.

I conclude, therefore, that the policies of Montreal Trust concerning expenses are part of the contract of employment.

4.03.7 The second point concerning 1982 is that if the contract of employment requires an agent to maintain a personal office, it is at his own residence that he is required to do so. He is not forced to rent outside premises.

The purpose of choosing the residence is undoubtedly so that the salesman-agent can be reached more easily at any time, so he is more accessible to clients both during and after normal office hours, including weekends. The text states clearly ”. . . during and outside of the Broker's normal hours of business” (para. 3.02(d)).

Montreal Trust, of course, would not object to the rental of an office outside an agent's residence if the office had the same advantages. Such an office is in fact a synonym for efficiency (paras. 3.05 and 3.09). In 1982 the appellant was residing with his parents and could not maintain an office there. He therefore rented premises elsewhere, at St-Pierre, Ile d'Orléans.

How is this agreement to be construed in light of subparagraph 8(1)(f)(i) of the Act: ”. . . the taxpayer . . . under the contract of employment was required to pay his own expenses".

This latter provision pertains to tax law and must be narrowly construed. On the other hand, the agreement between Montreal Trust and the appellant is a civil contract, which must be construed in accordance with the principles of interpretation of a contract of that nature.

What criterion applies? Why not the one used by the Federal Court of Appeal in Cival, referred to earlier (para. 4.03.3), which I formulate in the interrogative for the purposes of this appeal. Was the appellant, who was unable to have an office in his residence, suable by Montreal Trust for opening an office outside of his residence but with the same advantages of accessibility?

In practice, Montreal Trust would probably not have sued him, but, in law, could it have grounds to do so? In civil law, it is the substance of the obligation that must be sought.

In fact, is the substance of the obligation maintaining an office in the residence or "to maintain in functioning condition a personal office in his residence so as to be able to provide a quality service to our clients", as the document says?

It seems to me that the latter alternative is the substance. The residence is simply to facilitate the operation of the office, since even in the absence of the agent his spouse and children can reply and accordingly provide information.

The agent who cannot fulfil this obligation at his residence must make his own arrangements in order to have an office that renders him accessible to his clients.

In my opinion, Montreal Trust is entitled to demand this obligation from its agents in such circumstances. The respondent's strict construction goes to the construction of the substance of a civil contract.

4.03.8 Independently of the above reasons, another argument works in the appellant's favour. Under subparagraph (b) of paragraph 3.02, the agent shall be responsible for all personal expenses that are not normally the responsibility of the broker. An office expense is the responsibility of the agent and the expenditure is made with a view to earning income within the meaning of subparagraph 8(1)(f)(iv).

Even an interested third party like the Minister of National Revenue, who is entitled to enforce the Act strictly, is subject to the interpretation that must be given to subparagraph (b) of paragraph 3.02, in coordination with subparagraph 8(1)(f)(iv).

This argument was, moreover, upheld by the Slawson decision, despite the fact that the appeal was dismissed. It was stated (at C.T.C. 2077; D.T.C. 64) that the appellant must fulfil the four conditions of paragraph 8(1)(f) to be entitled to the expense. Yet the condition that is being disputed in this appeal is 8(1)(f)(i), which stipulates that the appellant "under the contract of employment was required to pay his own expenses" related to the sale of properties in performance of his duties. When subparagraph (b) of paragraph 3.02 speaks of personal expenses, it is obvious that these are expenses related to sales that the appellant was personally obliged to defray and not personal expenses within the meaning of “personal or living expenses" as defined in subsection 248(1).

In this case, the rental expense "was not normally the responsibility of the broker", and was related to the sales and made in order to earn income.

4.03.9 Conclusion concerning 1982

I would therefore allow the appeal in relation to the 1982 taxation year.

4.03.10 Concerning 1983, the evidence is clear that the appellant was residing at St-Pierre, Ile d’Orléans. The house was in the name of the appellant's spouse. However, he was the one who paid the telephone, electricity, maintenance, tax and insurance accounts, which totalled $3,048.37, and three of these accounts (electricity, telephone and insurance) were also invoiced to his name. The appellant, considering that his office occupied 20 per cent of the house, claimed 20 per cent of these current expenses, or $609.67.

The Court cannot adopt the respondent's submission that because the appellant was not an owner he cannot claim the expense although he paid it.

The husband and his spouse form the family unit. When they live in a house which is owned by either one or both, or in a rented dwelling, this is their place of residence. The husband paid these current expenses.

Twenty per cent of the house is used as an office for the purpose of earning income within the meaning of subparagraph 8(1)(f)(iv).

4.03.11 Decision concerning 1983

The appeal is allowed for 1983, allocating the sum of $609.67 for expenses.

5. Conclusion

The appeal is allowed for the 1982 and 1983 taxation years and the matter is referred back to the respondent for reconsideration and reassessment.

Appeal allowed.