Dale Andrew Drobot v. Minister of National Revenue, [1987] 2 CTC 2098, 87 DTC 371

Taylor, T.CJ.:—This is an appeal against an income tax assessment, for the year 1984, heard in Calgary, Alberta, on April 30, 1987, in which the Minister of National Revenue disallowed certain deductions claimed by the appellant against his employment income. The general facts of the case are detailed in the Minister’s reply to notice of appeal:

2. In his amended 1984 return of income the Appellant claimed the amount of $1,796.30 as other allowable expenses for an office-in-the-home as follows:

Electricity	$ 499.25
Gas	445.05
Interest	7,193.53
Insurance	109.00
Taxes	636.22
Repairs and Maintenance	98.44
	8,981.49
Less 80% personal	(7,185.19)
Total	$1,796.30

3. By Notice dated September 30, 1985, the Respondent reassessed the income tax liability of the Appellant by, inter alia, reducing his claim of $1,796.30 for other allowable expenses to $208.55 calculated as follows:

Electricity	$ 499.25
Gas	445.05
Interest	0
Insurance	0
Taxes	0

Repairs and Maintenance	98.44
	1,042.74
Less 80% personal	(834.19)
Other Employment Expenses	$ 208.55

4. In so reassessing the tax liability of the Appellant for his 1984 taxation year, and in respect of those matters here in issue, the Respondent relied, inter alia, upon the following assumptions of fact:

(a) during the [sic] 1984 the Appellant was employed full time by Prairie Cartage Ltd. but did not receive a commission income;

(b) The Appellant was required to maintain an office in his home by his employer;

(c) Interest, insurance and taxes expenses claimed by the Appellant in his 1984 taxation year were not supplies that were consumed directly by the Appellant in the performance of his duties of his employment with Prairie Cartage Ltd. and he was not required by his Contract of Employment to supply and pay for interest, insurance and taxes expenses.

B. STATUTORY PROVISIONS UPON WHICH THE RESPONDENT RELIES AND THE REASONS WHICH HE INTENDS TO SUBMIT

5. The Respondent relies, inter alia, upon Sections 3, subsection 8(2) and subparagraph 8(1)(i)(iii) of the Income Tax Act, R.S.C. 1952, c. 148, as amended by S.C. 1970-71-72, c. 63, s. 1, applicable to the Appellant's 1984 taxation year.

6. He submits that he properly disallowed the interest, insurance and taxes expenses claimed by the Appellant in his 1984 taxation year pursuant to subparagraph 8(1)(i)(iii) of subsection 8(2) of the Income Tax Act.

There was very little added for the Court's information by the testimony of the appellant. Mr. Drobot submitted the prescribed Revenue Canada form indicating that he was required by his employer to maintain an office, in connection with his employment responsibilities. The Minister did not challenge this situation.

Counsel for the Minister pointed out that to some degree support for considering such items as “electricity”, "gas" and "repairs and maintenance" as consumed (subparagraph 8(1)(i)(iii) of the Act) could be found in Herman Luks [No. 2] v. M.N.R. (Ex. Ct.), [1958] C.T.C. 345; 58 D.T.C. 1194. In my view, however, the Luks case (supra) provides no real direction with regard to the problem before the Court in this matter, since as I read it, the learned justice only examined "supplies" as contrasted with "equipment".

In the instant matter, when filing his income tax return, Mr. Drobot claimed an amount as "office rent" which was composed of the calculations noted above and totalled $1,796.30, which, if deductible any place, would appear to fit under subparagraph 8(1)(h)(ii) of the Act as "rent". The calculation is quite simple; he included all of the direct cost (not capital cost allowance) which he associated with operating his residence and based his use of his home for purposes of his employment at 20 per cent of the total. The Minister's counsel did not challenge either the individual or the total amounts involved. Neither was there any question raised with regard to the fact that Mr. Drobot actually did use some parts of his home for "business" purposes (the appellant's expression), nor that a 20 per cent amount was appropriate.

There are then two basic questions raised in this appeal. First, was the Minister correct in reassessing Mr. Drobot, and in doing so to use subparagraph 8(1)(i)(iii) of the Act, identifying certain of Mr. Drobot's claimed amounts as "supplies" and totally disallowing others? And second (if neces- sary) is Mr. Drobot's claim for "office rent" properly allowable under subparagraph 8(1)(i)(ii) of the Act?

Dealing with the first question — I can see no merit in the Minister's efforts to identify the allowed amounts — electricity, gas, repairs and maintenance — as “supplies that were consumed directly in the performance of the duties of his office or employment. . .”. They were not "consumed" as I understand that term for purposes of this section, and certainly not consumed directly any more than the items of interest, insurance, and taxes would have been. It cannot be said that the amounts allowed of:

could be separately and distinctly identified as having been "consumed" at the various specific periods of time when Mr. Drobot was using space in his home for "business" purposes as opposed to "consumed" at other times when portions of the house were being used for domestic purposes. To assert that the above three items — electricity, gas, repairs and maintenance

— could somehow be consumed for "business" purposes, without the utilization of the home structure, and its other attendant costs — interest, insurance, and taxes, appears illogical to me. I do not regard "consumed" in this section of the Act, to have the specific meaning of "burned-up", as it might be argued could apply to "gas". I doubt that any of these expenses might be legitimately classified as "supplies" as per subparagraph 8(1)(i)(iii), but I do not need to decide that. That may conflict with the assessing policy described in IT-352 dated November 22, 1976, dealing with Employees Expenses — but that is a problem for the Minister, not for the Court.

We then turn to the second question, to determine if the original claim of Mr. Drobot for $1,796.30 for "office rent" can be deducted under subparagraph 8(1)(i)(ii) of the Act. That subparagraph reads:

(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 effect, Mr. Drobot made a charge of almost $150 per month for the use of a portion of his residence for "business" purposes. He calculated that by reference to the established costs of operating the residence, and there was no indication at the hearing that an amount of $150 per month in itself was regarded as unreasonable by the Minister. At the hearing the Minister did not specify that to gain the identification as "rent", Mr. Drobot somehow would have been required to make out a cheque and physically "make payment" to himself — although that procedure might more firmly insulate the deduction claimed from the Minister's disallowance. I would suggest that the interpretation of subparagraph 8(1)(i)(ii) as it applies to this case, “office rent . . . the payment of which . . . was required by the contract of employment" might well be looked at from the viewpoint of the employer. I am prepared to interpret that clause as simply meaning that the contract of employment must require that the employee maintains an office, and himself, be responsible for any costs associated therewith, or as in this case any additional costs arising out of the provision of this space for purposes of gaining his income. The deduction Mr. Drobot seeks should qualify as office rent for purposes of subparagraph 8(1)(i)(ii) of the Act.

Before finalizing this judgment, I would just make reference to certain other jurisprudence which has some relevance.

In Nick Thompson v. M.N.R., [1985] 1 C.T.C. 2413; 85 D.T.C. 362, no question was raised by the Minister indicating that the disallowance of "office rent" was because the taxpayer had not technically made a payment of a specific amount identified as “office rent" to a third party, but instead had made an estimate of the amount of total house expenses which could reasonably be attributed to that portion of his house used for the purpose of earning income. Obviously the Court did not allow as deductions, amounts which might have resulted in a duplication of the estimated amount.

In Anthony R. Merleau v. M.N.R., [1986] 1 C.T.C. 2381; 86 D.T.C. 1292, there was a third party involved — the appellant's wife — but the Court did not agree that the percentage of total house costs described by the appellant as "rent", should be deductible without a clear indication of their separate identity as "rent", rather than just part of the maintenance of a home as part of regular domestic responsibility.

In Robert M. Cruikshank v. M.N.R., [1985] 2 C.T.C. 2344; 85 D.T.C. 633, this Court did address a question not dissimilar to that before the Court in the instant appeal — and I quote from page 635:

In this day of modern technology it must be recognized that substitutes are available, many of which are less expensive than former alternatives. In the present case a full or part-time telephone secretary would have been permitted at a much higher annual cost than $447.88. Here we do have people involved with the answering service who "wrote down messages and informed me when I. was needed for work". This service acted as a "substitute" for the taxpayer when required and accordingly the expense of the appellant is one which qualifies under subparagraph 8(1)(i)(ii) of the Act.

I am informed that Cruikshank (supra) is under appeal, but the question of "substitutions" as such, is not clearly evident in the instant appeal, although much that was said by the learned judge in Cruikshank (supra) helps to enlighten this matter.

The appeal is allowed and the entire matter is referred back to the respondent for reconsideration and reassessment.

The appellant is entitled to party and party costs.

Appeal allowed.