Walter Yurkovich v. Minister of National Revenue, [1986] 2 CTC 2300, 86 DTC 1704

Taylor, T.C.J.:—This is an appeal heard in Edmonton, Alberta, on May 13, 1986, against an income tax assessment for the year 1981 in which the Minister of National Revenue disallowed travelling expenses claimed in the amount of $2,438.72. Mr. Yurkovich is, and was during 1981, an auditor with the Province of Alberta. The Minister of National Revenue relied upon sections 3, 8 and 248 of the Income Tax Act, R.S.C. 1952, c. 148 as amended by s. 1 of S.C. 1970-71-72, c. 63 as it applied to the appellant’s 1981 taxation year. In filing his income tax return the taxpayer had calculated that the total automobile expenses incurred amounted to $6,491.73 including depreciation; he had reported an amount of $2,152.01 received from his employer calculated at a rate per kilometre set under the terms of the collective union agreement governing his employment, as a deduction from this amount; he had concluded that his personal automobile had been used 56.2 per cent of the time on his employer's business; and finally he had calculated the disputed $2,438.72 as 56.2 per cent of the difference between his total automobile expenses of $6,491.73 (supra) minus his reimbursement of $2,152.01 ($6,491.73 - $2,152.01 x 56.2 per cent = $2,438.72). The Court notes that it is at least arguable that the automobile expenses which the appellant could claim against employment might be 56.2 per cent of the total automobile expense of $6,491.73 rather than 56.2 per cent of the net automobile expenses (after deduction of the receipt from his employer), but the mathematics of the taxpayer's claim did not arise as a specific point of dispute at the hearing.

Mr. Yurkovich in testimony provided to the Court adequate details of the cost of the travel expenses claimed — days on the road, paid bills, cost of insurance, repairs etc., as well as the capital cost of the automobile he purchased and used. The physical evidence presented — including advertisements for the position held by Mr. Yurkovich; employee applications and acceptance, union agreements etc. — all tended to support his assertions of the requirements of his employer related to his responsibilities. I had no difficulty with the “oral” or “implied” aspects of this supporting information and testimony. It was one case where it can literally be said that the more usual impediments of “requirements" arising out of paragraph 8(1 )(h) of the Act did not apply to Mr. Yurkovich. Some effort was made by counsel for the respondent to indicate that an automobile of lesser cost could have served the appellant’s purposes, at least to the degree required by the employer. I am not persuaded that the purchase and use by Mr. Yurkovich of a comfortable new Buick automobile was unreasonable. He is a large man, about 50 years of age during the years under review, and the territory he covered in the Province of Alberta in all weather conditions, made that kind of vehicle a serious consideration. Other than that point, very little direct challenge was made to the details of the amount claimed — which included depreciation on the automobile under paragraph 8(1)(j) of the Act.

It should be added that the testimony and evidence clearly supported a view that he was fully familiar with the fact he would receive such an “allowance", and he knew the rate per kilometre when he accepted the position. The documentation and testimony satisfied the Court that the first two conditions under paragraph 8(1)(h) of the Act had been fulfilled. In other words, “.. . (he) was ordinarily required to carry on the duties of his employment away from his employer's place of business or in different places; and 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, . . . .” His difficulty ultimately rested on whether he qualified

under subparagraph 8(1)(h)(iii) of the Act: . (he) 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) . . . .” This then required an examination of subparagraph 6(1)(b)(vii) of the Act as it impinged on his claim.

Particular emphasis was placed by both counsel on the cases of Cival at both the Federal Court — Trial Division and Federal Court of Appeal levels (Henry Cival v. The Queen, [1981] C.T.C. 392; 81 D.T.C. 511 (F.C.T.D.), and The Queen v. Henry Cival, [1983] C.T.C. 153; 83 D.T.C. 5168 (F.C.A.) and Rozen at the Tax Court level and that of the Federal Court — Trial Division (Aron Rozen v. M.N.R., [1984] C.T.C. 3038; 85 D.T.C. 15, (T.C.C.) and Aron Rozen v. The Queen, [1986] 1 C.T.C. 50; 85 D.T.C. 5611 (F.C.T.D.) levels. Counsel for the respondent also urged upon the Court the views expressed by the Tax Review Board in Donald H. Price v. M.N.R., [1980] C.T.C. 2386; 80 D.T.C. 1311, as follows, from page 2391 (D.T.C. 1315):

The acceptance by an employee of a specified mileage allowance for the use of a personal automobile in travelling on the employer’s business exhibits certain elements of agreement between the two parties that the travelling expenses can be contained within that limit. As I see it, it is a difficult task for an employee to subsequently bring in the Minister of National Revenue to share as a third party in that arrangement. Accordingly, in view of the references made earlier to the tenuous relationship between section 8(1) of the Act and Interpretation Bulletin IT- 272, the Board is careful to point out that even the fact a mileage allowance was “unreasonably low” would not necessarily result in the taxpayer having a claim for the difference against his employment income.

It was the view of counsel that the instant situation paralleled exactly that in Price (supra). In response to this, counsel for the appellant noted for the Court that the Minister should not now raise the question of “reasonableness” (not having done so in the pleadings) and he relied on the recent case of The Queen v. Gerald R. Chrapko, [1984] C.T.C. 594; 84 D.T.C. 6544, (F.C.T.D.) for that authority; and that the judgments of Cival and Rozen at the Federal Court — Trial Division level (supra), were support for the contention that the receipt of an allowance did not preclude a taxpayer from claiming additionally as Mr. Yurkovich had done in this case. In light of the comments arising in this judgment, I do not find it necessary to carefully review those cases and respond definitively to those observations, only that the remarks of counsel for the appellant, in themselves, did not persuade me of the validity of his position. The referenced comments from Price (supra) reflect a caution by the then Tax Review Board regarding interpretations which might be placed on paragraph 8(1 )(h) of the Act based on the wording of Interpretation Bulletin IT-272. At the same time, the Board recognized the Minister's right to assist taxpayers to whatever degree possible in the practical application of the section, as indicated by the following comments on page 2390 (D.T.C. 1314):

In Gauvin (supra), it was noted by the Board that it was difficult to find legislative support for paragraph 33(c) of Interpretation Bulletin IT-272, and while I would extend that comment to both paragraphs 33(a) and 35(a) of the same bulletin, I recognize that they are useful vehicles for dealing with a difficult section of the Act.

IT-272 (supra) which was in use at the time of this appeal has been replaced by IT-272R dated March 11, 1983. Whether the replacement (IT-272R) clarifies the situation for taxpayers to any great extent, may be a moot point. I do note paragraph 31 of Bulletin IT-272, which is repeated as I read it in paragraph 36 of Bulletin IT-272R as follows:

Where an employee receives an allowance for travelling expenses that meets the requirements of subparagraph 6(1)(b)(vii), the wording of that subparagraph is such that it prohibits him from voluntarily including the allowance in income for the purpose of qualifying for a deduction of expenses under paragraph 8(1)(h). This is because, unlike subparagraphs 6(1)(b)(v) and (vi), which refer to “reasonable” allowances, subparagraph 6(1)(b)(vii) refers to allowances “not in excess of reasonable amounts”. Too low an allowance is not “in excess” of a reasonable amount.

According to this interpretation of the relevant sections, applied to the circumstances of this case, since the amount of $2,152.01 received from his employer is "too low” to meet the reasonable expenses claimed by the taxpayer, Mr. Yurkovich would not have the “option” of including the amount in income (or for the same result, deducting it from his total expenses, as he did) and axiomatically (according to the Minister, and Bulletin 272R) the amount must be ignored in the computation of his income tax return. That of course presumes that the $2,152.01 is a valid "allowance” in itself for purposes of subparagraph 6(1 )(b)(vii). I shall deal with the point of "not in excess of reasonable amounts” shortly, but it would appear to me that unless the $2,152.01 first can be defined as an “allowance” the Minister's interpretation is on very tenuous grounds. I would quote from paragraph 29 of IT-272R as follows:

Allowances for Travelling Expenses

In this bulletin, the word “allowance” means any periodic or other payment that an employee receives from his employer, in addition to his salary or wages, without having to account for its use. An allowance is subject to tax unless it falls within the exceptions listed in subparagraphs 6(1)(b)(i) to (ix), subsection 81(3.1) or unless it is excluded from income under subsection 6(6) (see 43 below).

At the hearing, a request was made by the Court to counsel, that if either party had any submissions to make on the relationship between section 6 and section 8 of the Income Tax Act, with regard to this point or any other directly relevant point, it be done. I have reviewed the submissions, and they did provide some helpful direction which I have taken into account. Clearly that with which we are faced in the amount of $2.152.01 would normally be termed a "reimbursement” or "repayment”. There was no evidence that the mileage rates were calculated and paid in advance, in anticipation of travel. Rather they were paid as a result of the claims made by the appellant subsequent to and dependent on such travel. That would appear to place this amount of $2,152.01 outside the "allowance” category, and if it is not an "allowance” at all, subparagraphs 6(1)(b)(vii) and 8(1)(h)(iii) have no application. I would merely note in passing that in Jean-Paul Gagnon v. The Queen, [1986] 1 C.T.C. 410 at 413; 86 D.T.C. 6179 at 6181 (S.C.C.) the Supreme Court said:

The issue is whether the payments of $360 a month made by appellant to his former wife in the taxation years 1974, 1975 and 1976, for the repayment of two hypothecs and municipal and school taxes on the immovable of his former wife, can be deducted from appellant’s income under paragraph 60(b) of the Income Tax Act. [Emphasis mine.]

Since that judgment led to agreeing the amounts at issue were "allowances” for purposes of paragraph 60(b) of the Act, I can conclude that the "repayment” feature may not have constituted an impediment for the Supreme Court in that case.

There is another point which also comes out of the Supreme Court judgment in Gagnon (supra), and as I read it, it touches on this aspect of the character and nature of an "allowance”. The following may be found at pages 416-17 (D.T.C. 6183-84) of that judgment:

However, the condition could also mean that the recipient must be able to dispose of the amount completely, and that, provided she benefits from it, it is not relevant that she has to account for it and that she cannot apply it to certain types of expense at her complete discretion.

It seems to me, with respect, that the second interpretation is the correct one, in light of the earlier decisions which Pascoe appears to have misinterpreted.

What matters is not the way in which a taxpayer may dispose of, or be required to dispose of, the amounts he receives, but rather the fact of whether he can dispose of them or not.

What confirms me in this view is the restatement of this rule in Rutkin v. United States, 343 U.S. 130 (1951), affirmed in James v. United States, 366 U.S. 213 (1961), in which Warren C.J., at 219, cites the restatement in Rutkin:

A gain “constitutes taxable income when its recipient has such control over it that, as a practical matter, he derives readily realizable economic value from it” Rutkin v. United States, supra, at p. 137.

This restatement of the rule for determining what constitutes taxable income emphasizes the benefit the taxpayer derives from income, whatever the way in which it is derived.

Seen in this context, the third condition imposed by Pascoe must be corrected: for an amount to be an allowance within the meaning of paragraph 60(b) of the Income Tax Act, the recipient must be able to dispose of it completely for his own benefit, regardless of the restrictions imposed on him as to the way in which he disposes of it and benefits from it. [Emphasis mine.]

To return to the circumstances of the case at bar, there is no doubt that the recipient of the amounts in question, appellant’s former wife, could dispose of them completely, and that she derived from them what Burton, J. called in Rutkin, at 137, a “readily realizable economic value”. The duty which she had to apply these amounts to particular purposes does not affect the benefit she derived from them. These amounts are in the nature of income for her, and qualify as “allowances” within the meaning of both paragraphs 60(b) and 56(1)(b) of the Income Tax Act.

Respondent objected that the amounts in question, or at least a part of them, are not allowances since, in paying them, appellant was discharging a personal obligation which he had undertaken toward the hypothecary creditor. In my Opinion, this does not in any way alter the fact that the amounts were also paid pursuant to a divorce decree, as required by paragraph 60(b). In another case, M.N.R. v. Hastie, [1974] 1 F.C. 117; [1974] C.T.C. 131 Walsh J. refuted the same objection, at 128, (C.T.C. 139). When he wrote that the repayment of this personal debt was

.. strictly incidental to the fact that by making these payments ... he was maintaining a home for his wife and his children commensurate with their standard of living.

The “benefit” referenced in Gagnon (supra) appears quite evident — but it was not to Mr. Gagnon. Mrs. Gagnon, the recipient under both paragraph 60(b) and paragraph 56(1 )(b) of the Act was provided with shelter for herself and the children, and an education for her children by the repayments made by Mr. Gagnon in the reasoning of the Supreme Court. Since the amount received by Mrs. Gagnon was income, (probably taxable income) the opposite deduction claimed by the appellant Gagnon was proper and granted. In Gagnon (supra), the “repayment” feature arose because Mrs. Gagnon in the first instance paid the mortgage and educational costs at issue, and then there were reimbursements to her by Mr. Gagnon. There can be no question however that Mrs. Gagnon “benefited”, — in a direct and personal way. The same line of reasoning should hold true for Mr. Yurkovich but, this taxpayer was not better off by virtue of the payment to him by the employer of $2,152.01 for travel. There was no “personal” benefit in driving his own automobile on his employer's business, he did not gain anything. In his argument for this appeal, he was adversely affected, and would have been better off financially had he not driven for his employer. The amount received from his employer in this appeal — $2,152.01 — seems to miss a crucial requirement of an allowance as defined in Gagnon (supra), it provided no “benefit” to Mr. Yurkovich, and therefore would not be “income”. It is not even a “round” amount, an “estimate” or a “non-accountable” amount, to be received by him, irrespective of whether he does or does not use his automobile.

Heretofore, much has been said and written on points arising out of section 8 of the Act — asserting that perhaps the employee should look to the employer for satisfaction, rather than to the Minister of National Revenue under circumstances similar to these. I assume responsibility for my share of it. But viewed from the perspective taken in this decision, (based on Gagnon (supra)) I can find no reason to deny Mr. Yurkovich the claim he has made, since he has met the first two conditions under paragraph 8(1 )(h) of the Act, and the third condition is inapplicable. There still remains an imposing and challenging, but not insurmountable burden for the taxpayer, since it is still necessary to fulfil (or avoid) the conditions inherent in sections 6 and 8 of the Act. The spirit of certain recent judgments of higher Courts, in addiiton to Gagnon (supra), notably Stubart Investments Limited v. The Queen, [1984] C.T.C. 294; 84 D.T.C. 6305 (S.C.C.), The Queen v. Paul

E. Graham, [1985] 1 C.T.C. 380; 85 D.T.C. 5256 (F.C.A.) and Harold S. Hadley v. The Queen, [1985] 1 C.T.C. 62; 85 D.T.C. 5058 (F.C.T.D.) leads me to conclude that where the words of the Act leave possible room for positive consideration of the taxpayer's assertions, this must be accorded.

That leaves aside any discussion regarding the phrase “computed by reference to time actually spent by the employee . ..”, since that requirement would only become pertinent in the event we dealt with an “allowance” — and that, again, would only arise if the amount at issue were in excess of reasonable, which is not a problem in this appeal. I would note however that the phrase “computed by reference to time actually spent —” from subparagraph 6(1)(h)(vii) of the Act seems to be the basis for attempts by the Minister in IT-272 and IT-272R (supra) to equate “time actually spent”, with distance travelled. It may well be argued that this is an effort to utilize a section of the Act for taxing purposes when the wording of the section does not seem to cover everything desired by the Minister. I am quite satisfied that the insertion of a term such as “mileage” or “distance travelled” or something like that would resolve the difficulty, but as it now stands these are glaringly absent for the purpose to which the Minister would like to put the section, at least as I read IT-272R (supra). I recognize that some earlier judgments dealing with this difficult point have indicated that one might regard “distance travelled” as a function of “time spent”, but to my knowledge that point has not been definitively argued and determined. It could well be another avenue upon which the Minister would be required to tread lightly in his quest for “allowances”.

Finally, I just wish to comment on the fact that I did give consideration to a quite different perspective on this matter, but I was not required to pursue it to the end, by virtue of the conclusion already reached above. It could be argued that in the instant case, the “excess” paid out and now claimed by Mr. Yurkovich provided a benefit to the employer, in that the employer received value in the form of services rendered greater than that for which reimbursement was made. That benefit may indirectly become taxable since it could serve to increase the net income of the employer for that period. In the Gagnon (supra) matter, the fact that the payment created a “benefit” for the recipient, was cause to permit a deduction to the taxpayer, Mr. Gagnon. That line of reasoning leads to a possible conclusion that if any “benefit” (as an essential ingredient in an “allowance’’) can be seen, it must be in the payment of the $2,438.72 at issue in this appeal by Mr. Yurkovich on behalf of the employer. It is not impossible to perceive the amount claimed by Mr. Yurkovich ($2,438.72) as a “disbenefit” to him, viewed from that side, and deductible in some way, (irrespective of the impact of the $2,152.01 received from his employer) under paragraph 8(1)(h) of the Act, providing a relief similar to that accorded Mr. Gagnon.

Summary

In this matter it has not been demonstrated that the amount of $2,152.01 received from his employer is an “allowance”, which thereby serves to inhibit the claim of Mr. Yurkovich for the excess travel cost of $2,428.72. Following the logic outlined in this decision (based largely on Gagnon (supra)) it is difficult for me to see under which category of “income to be included” this amount of $2,152.01 reimbursement must be shown. Therefore, it is possible that had Mr. Yurkovich claimed for all the expenses incurred on behalf of his employer (56.2 per cent of $6,491.73) he might be entitled to it. It certainly can be held that Mr. Yurkovich is entitled to at least the lesser amount he has claimed — $2,438.72 and this decision will so determine. I appreciate the anomaly which could arise, if an amount received which is not an allowance (in this case $2,152.01) need not be included as income, while the total of the “amounts expended by him in the year for travelling in the course of his employment” paragraph 8(1)(h) would be deductible. Some enlightenment might be provided in a review of the Supreme Court of Canada judgment in The Queen v. Elizabeth Joan Savage, [1983] C.T.C. 393; 83 D.T.C. 5409, which would support the characterization of the $2,152.01 as income, in effect that which was done in this matter. I need not pursue that point under the circumstances of this case.

The appeal is allowed, and the matter referred back to the respondent for reconsideration and reassessment. The appellant is entitled to party and party costs.

Appeal allowed.