Rosalind M. Peters v. Minister of National Revenue, [1986] 2 CTC 2221, 86 DTC 1662

Christie, A.C.J.T.C.:—The dispute is over whether in computing her income for her 1982 taxation year the appellant is entitled to deduct $4,437.57 in travelling expenses pertaining to the use of her automobile in discharging the duties of her employment. This amount is 75 per cent of the expenses said to have been incurred in operating and maintaining the vehicle, 25 per cent having been assigned to personal use.

In the year under review she was employed as a social worker and attendance counsellor by the Dufferin-Peel Roman Catholic Separate School Board. In the course of her employment she was required to work at seven schools and to make visits to the homes of students. Attendances at Family Court were also involved. The appellant is a member of a union, The Association of Professional Student Services Personnel. In the first eight months of 1982 the collective agreement between the union and the school board provided:

Article 9 — Allowances

9.010 Employees who are required to travel to schools and/or other locations to perform their duties are required to provide their own transportation. Such employees shall receive $48.00 per month up to 240 km (150 mi.) and $0.20 per km ($0.32 per mi.) thereafter. Mileage shall be calculated from the employee's office. (Board Office or E.R.C.).

For the remaining four months the agreement provided:

Article 9 — Allowances

9.010 Employees who are required to travel to schools and/or other locations to perform their duties are required to provide their own transportation. Such employees shall receive $56.40 per month up to 240 km (150 mi.) and $0.23.5 per km ($0.37.6 per mi.) thereafter. Mileage shall be calculated from the employee's office. (Board office or E.R.C.).

These clauses intend that during the first eight months of 1982 the appellant was entitled to a minimum of $48 per month if she travelled 240 kilometres (150 miles) or less, i.e. if for example she drove only 100 kilometres in a month in the course of her employment, she was nevertheless entitled to the minimum. If she travelled in excess of 240 kilometres per month her entitlement was to an amount being the product of multiplying the excess number of kilometres times 20¢. Members of the union were entitled to this amount even though it might be established that 20¢ per kilometre was not actually spent in operating the automobile. The minimum for the last four months was $56.40 and the rate per kilometre in excess of 240 kilometres was 23.5¢. In fact the amount received by the appellant from the school board was the minimum payable per month for seven months (six in the first eight months and one in the last four months of 1982), which was a small fraction of the sum she sought to deduct for travelling expenses in her return of income. In computing her income for 1982 the appellant included the amount received by her from the school board for travelling expenses. In reassessing the respondent deducted the amount in computing her income and disallowed the claimed deduction of $4,437.57.

The automobile used by the appellant in the performance of the duties of her employment in the year under review was a new 1982 Chrysler LeBaron, the purchase price of which ($12,400) was almost entirely financed. She said she owned a second car in that year.

In order to succeed the appellant must have complied with each of subparagraphs (i), (ii) and (iii) of paragraph 8(1)(h) of the Income Tax Act ("the Act”). Paragraph 8(1)(h) provides:

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.

Subparagraphs 6(1)(b)(v), (vi) and (vii) provide:

6(1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

(b) all amounts received by him in the year as an allowance for personal or living expenses or as an allowance for any other purpose, except

(v) reasonable allowances for travelling expenses received by an employee from his employer in respect of a period when he was employed in connection with the selling of property or negotiating of contracts for his employer,

(vi) reasonable allowances received by a minister or clergyman in charge of or ministering to a diocese, parish or congregation for expenses for transportation incident to the discharge of the duties of his office or employment,

(vii) allowances (not in excess of reasonable amounts) for travelling expenses received by an employee (other than an employee employed in connection with the selling of property or negotiating of contracts for his employer) from his employer if they were computed by reference to time actually spent by the employee travelling away from

(A) the municipality where the employer’s establishment at which the employee ordinarily worked or to which he ordinarilly made his reports was located, and

(B) the metropolitan area, if there is one, where that establishment was located,

in the performance of the duties of his office or employment.

There is no doubt that the appellant complied with subparagraph 8(1 )(h)(i). The leading authority regarding subparagraph 8(1)(h)(ii) is The Queen v. Henry Cival, [1983] C.T.C. 153; 83 D.T.C. 5168. This appeal pertained to a claimed entitlement to deductions under paragraph 8(1 )(h). The respondent was employed by National Revenue in its Payroll Audit Section. At the request of the Department he used his own automobile in executing the duties of his employment under an arrangement whereby he was reimbursed on a mileage rate. In 1977, which was the year under review, the respondent's expenses in relation to his vehicle exceeded the amount received on the mileage basis by $512.03. The issue was whether he was entitled to deduct this amount under paragraph 8(1)(h). The Crown's appeal was allowed on the ground that Cival was not within paragraph 8(1)(h)(ii). The essential reason for this result is contained in this passage from the reasons for judgment delivered by Mr. Justice Ryan on behalf of the Federal Court of Appeal at 158 (D.T.C. 5171):

. . . as I see the arrangement, Mr. Cival was not contractually bound to use his car in doing his job and to pay the expenses involved: 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. It follows that, to adopt the words used in subparagraph 8(1)(h)(ii), he was not required under his contract of employment to pay the expenses incurred by him in using his car in the performance of the duties of his employment.

While, if the appellant had had the benefit of assistance by counsel the evidence in this regard may have been more satisfactory, I believe, on balance, that her uncontradicted testimony establishes that, unlike Cival, she was contractually bound to use her car in discharging the duties of her employment whithin the meaning of the passage just quoted. That, as a practical matter, in a context such as this an employer would sue an employee for breach of contract is very doubtful. The likelihood is that the employee would simply be discharged for cause.

A question was raised at the hearing regarding whether the amount received by the appellant from the school board is “an allowance" within the meaning of subparagraph 8(1)(h)(iii). In Barnard v. M.N.R., [1985] 1 C.T.C. 2178; 85 D.T.C. 210, the proper interpretation to be placed on paragraph 8(1 )(f) of the Act was considered by this Court. It provides:

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.

This is said at 2182-83 (D.T.C. 213-14):

With respect to subparagraph 8(1 )(f)(iv) it is important to bear in mind what constitutes an “allowance” within the meaning thereof. In Oil Investments Ltd. v. M.N.R., 3 Tax A.B.C. 141; 50 D.T.C. 479, the Income Tax Appeal Board gave consideration to the meaning of the word “allowances” in subsection 3(4) of the Income War Tax Act which provided that any payment made to any person in connection with any employment as allowances on a per diem or other periodic basis shall, subject to certain specified exemptions, be salary of such person and taxable as income.

In January 1946, the appellant had retained S. as legal advisor and general agent in the United States and agreed to pay him $10,000 per annum in equal monthly instalments. In addition, the appellant agreed to reimburse S. for certain specified expenses in an amount not to exceed $9,800 per annum. The estimated maximum of expenses was also to be paid in equal monthly instalments. The chairman of the Board, R. T. Graham, J. said at 144 [480-1]:

Section 3(4), it will be noted, applies only where there are allowances for expenses on a per diem or other periodic basis. Here it is true that the maximum of expenses payable under the agreement was remitted by monthly instalments. Nevertheless, under the terms of the agreement the amount payable was the amount actually expended and the company could at any time require an accounting by Sackett and if the total were not expended, could have claimed a refund of the surplus.

I think the purpose of section 3(4) is clear. It was enacted in 1942-43 and was meant to strengthen the controls thought necessary over wages and salaries. I do not think it was ever intended that the provision would apply to the payment by any company of actual out-of-pocket expenses paid out to the company’s agents or servants. It deals with an allowance of a specified sum which is payable whether actually expended or not. (Emphasis added)

In Campbell v. M.N.R., 13 Tax A.B.C. 273; 55 D.T.C. 434 the appellant, who was a superintendent of nurses at a hospital, received $50 per month for the use of her car in transporting patients of the hospital. Although not expressly mentioned in the reasons of the Income Tax Appeal Board, it appears clear that the payments were non-accountable. It was held that they were an allowance within the meaning of subsection 3(4) of the Income War Tax Act and paragraph 5(b) of the Income Tax Act 1948 which provided that income for a taxation year from employment is the salary received by the taxpayer in the year plus all amounts received by him as an allowance.

In Ransom v. M.N.R., [1967] C.T.C. 346; 67 D.T.C. 5235, Noël, J. said this with reference to paragraph 6(1)(b) of the Act — it was paragraph 5(1)(b) at the time relevant to the Ransom decision — at page 359 [5243]:

A reimbursement of an expense actually incurred in the course of the employment or of a loss actually incurred in the course of the employment is not an “allowance” within the meaning of the word in section 5(1)(b) as an allowance implies an amount paid in respect of some possible expense without any obligation to account.

I adopt as a correct statement of the law regarding the meaning of the word “allowance”, in the context under consideration, this passage from Canadian Income Taxation, 3rd (1983) edition by Edwin C. Harris at page 102:

An “allowance” is a round amount given to an employee to cover expenses that he will incur, such as travel or entertainment, on his employer’s behalf. The employee is not required to account to the employer later for what he has actually spent. If the employee accounts to the employer for his actual expenses, neither an initial advance given him by his employer nor any subse- quent payment by the employer to reimburse him for his expenses is an “allowance”.

I am satisfied that the foregoing reasoning applies equally to subparagraph 8(1 )(h)(iii) and that what the appellant received from her employer was “‘an allowance” within the meaning thereof.

Paragraphs (e), (f) and (g) of subsection 8(1) deal with expenses of certain railway company employees, salesmen's expenses and transport employee's expenses respectively. They have no application to this appeal and so that portion of subparagraph 8(1)(h)(iii) relating thereto can be ignored in the determination of this matter. What remains is to interpret and apply the first portion of subparagraph 8(1 )(h)(iii) which contains that troublesome double negative. Bearing in mind the conjunctive nature of this subparagraph in relation to subparagraphs 8(1 )(h)(i) and (ii), I regard that portion as meaning that if a taxpayer is in receipt of an allowance for travelling expenses which can be excluded in computing his income for a taxation year because:

(a) it was reasonable and he was employed in connection with selling property or negotiating contracts for his employer (subparagraph 6(1)(b)(v));

(b) it was reasonable and he was a minister or clergyman incurring expenses for transportation incident to the discharge of the duties of his office or employment (subparagraph 6(1 )(b)(vi) ); or

(c) it was not in excess of a reasonable amount, his employment is not of the kind described in subparagraph 6(1)(b)(v) and the allowance was computed by reference to time actually spent by him travelling away from the municipality where his employer's establishment at which he ordinarily worked or reported was located and the metropolitan area, if there is one, where that establishment was located, in the performance of the duties of his office or employment;

the taxpayer is not qualified for a paragraph 8(1)(h) deduction. Such a deduction is unavailable to a taxpayer who can, by virtue of subparagraphs 6(1)(b)(v), (vi) or (vii), exclude the allowance which he has received from the computation of his income.

The description of the taxpayer in the immediately preceding paragraph who is said not to be entitled to make deductions under paragraph 8(1)(h) does not fit the appellant inasmuch as she was not employed in the kind of work described in subparagraphs 6(1 )(b)(v) or (vi) nor was the allowance for travelling expenses which she received computed by reference to time as required under subparagraph 6(1)(b)(vii). It follows that she is entitled under paragraph 8(1)(h) to deduct amounts expended by her in 1982 for travelling in the course of her employment. A taxpayer who is authorized to deduct travelling expenses under paragraph 8(1)(h) can include interest and capital cost allowance under paragraph 8(1 )(j). It provides:

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:

(j) where a deduction may be made under paragraph (f) or (h) in computing

the taxpayer’s income from an office or employment for a taxation year,

(i) any interest paid by him in the year on borrowed money used for the purpose of acquiring

(A) an automobile that is used, or

(B) an aircraft that is required for use

in the performance of the duties of his office or employment, and

(ii) such part, if any, of the capital cost to him of

(A) an automobile that is used, or

(B) an aircraft that is required for use

in the performance of the duties of his office or employment as is allowed by regulation.

Section 67 of the Act provides:

67. In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.

This section applies to claimed deductions under paragraph 8(1)(h). But does it apply to deductions made under paragraph 8(1)(j)? In my opinion the answer is no in relation to a properly ascertained capital cost allowance because this is an amount fixed by regulations made by the Governor in Council. When regard is had to the scheme of the Act in relation to deductions which can be made respecting outlays or expenses it would, in my view, be inconsistent therewith to say that a claimed deduction can be declared unreasonable under section 67 if its amount has been determined by a formula contained in regulations. This would introduce an element of uncertainty in the Act which could not have been intended by Parliament. This is not to suggest that if a taxpayer engages in a transaction or operation designed to produce a capital cost allowance which has the effect of unduly or artificially reducing his income it cannot be disallowed as a deduction. It can under subsection 245(1). Harris v. M.N.R., [1966] C.T.C. 226; 66 D.T.C. 5189 is a case in point. The facts as set out in the D.T.C. headnote are:

In March 1960 Company D purchased a service station property (land and building) for $31,000. The service station property was leased the following month to an oil company for 25 years at an annual rental of $3,900, the oil company being given the right to renew its lease or purchase the property under certain conditions. In October 1960 Company D, requiring financing, granted to the appellant (a physician) a concurrent lease on the same service station property. This lease was for a term of 200 years at a yearly rental of $3,100 and contained an option exercisable by the appellant to purchase the service station property for $19,500 at the end of the 200-year period. To obtain this lease-option, the appellant deposited $10,000 with Company D. It was arranged that Company D would collect the $3,900 rent from the oil company, deduct the $3,100 rent payable by the appellant, and remit the $800 balance to him. In filing his 1960 return, the appellant, relying on the provisions of section 18 (as they read at the time but which were repealed in 1963), did not deduct the rent paid by him under the lease-option agreement but claimed as a deduction from his other income capital cost allowance of some $30,000 on the service station building, maintaining that he was deemed by the section to have acquired the building at a capital cost of over $600,000 (200 years’ rent at $3,100, plus the option price of $19,500, minus the value of the land). The Minister refused the deduction of any capital cost allowance but granted a deduction for the rent paid by the appellant in the year.

The position of the Minister was sustained by the Supreme Court of Canada. Cartwright, J. (as he then was) in delivering the judgment of the Court said at 241 (D.T.C. 5198):

While, in view of the conclusions at which I have arrived on the points dealt with above, it is not necessary to express an Opinion upon the other grounds on which counsel for the respondent opposed the appeal, I propose to state briefly my opinion on the position taken in ground (e) set out above which was fully argued.

Section 137(1) (now subsection 245(1)) of the Income Tax Act reads as follows:

137.(1) In computing income for the purposes of this Act, no deduction may be made in respect of a disbursement or expense made or incurred in respect of a transaction or operation that, if allowed, would unduly or artificially reduce the income.

If, contrary to the views I have expressed, we had accepted the appellant's submission that the transaction embodied in the lease was one to which section 18 applied and that on the true construction of the lease and the terms of that section the appellant was prima facie entitled to make the deduction of the capital cost allowance of $30,425.80 claimed by him, I would have had no hesitation in holding that it was a deduction in respect of an expense incurred in respect of a transaction that if allowed would artificially reduce the income of the appellant and that consequently its allowance was forbidden by the terms of section 137(1). The words in the subsection “a disbursement or expense made or incurred" are, in my opinion, apt to include a claim for depreciation or for capital cost allowance, and if the lease were construed as above suggested the arrangement embodied in it would furnish an example of the very sort of “transaction or operation" at which section 137(1) is aimed.

On the other hand I think an amount of interest sought to be deducted under paragraph 8(1 )(j) could be said to be unreasonable under the authority of section 67 on the basis that the rate of interest paid on the loan was unreasonable in the circumstances.

In this appeal there is no suggestion that the amount of capital cost allowance sought to be deducted is not in accordance with the regulations, nor has it been said that the rate of interest paid by the appellant was unreasonable. This leads me to the conclusion that the appellant is entitled to her claimed deductions of $1,804.50 in interest plus $1,743.50 by way of capital cost allowance for a total of $3,548. This is 80 per cent of the total claimed deduction of $4,437.57 for travelling expenses. Assuming that the appellant actually drove the minimum 150 miles in each of the seven months previously mentioned (1050 miles), which is doubtful, the rate per mile in respect of interest and capital cost allowance alone is a somewhat startling $3.38. After subtracting interest and capital cost allowance from the amount sought to be deducted ($4,437.57 — $3,548) the remainder is $889.57. This amount relates to gasoline, repairs, licence, Ontario Motor League membership and insurance.

There is no evidence before me that contradicts the appellant’s assertion that this sum was actually expended or that provides some basis upon which to say at what point these expenses ceased to be reasonable. For example a good portion ($477) of the $889.57 was spent for insurance which does not readily lend itself to a finding of unreasonableness. The other large item is $367 for gasoline and repairs. This strikes me as high for a new car in respect of what was likely less than 1050 miles, but again having regard to what is before me a reduction would be purely speculative.

The appeal is allowed and the matter is referred back to the respondent for reconsideration and reassessment on the basis that in computing the appellant’s income for her 1982 taxation year she is entitled to deduct $4,437.57 in respect of travelling expenses under paragraphs 8(1)(h) and 8(1 )(j) of the Act and that the allowance for travelling expenses received by her shall be included in her income for that year.

The appellant is entitled to party and party costs if she has incurred any.

Appeal allowed.