Nicholas J Slawson v. Minister of National Revenue, [1985] 1 CTC 2075, 85 DTC 63

Sarchuk, TCJ [ORALLY]:—The taxpayer has appealed from assessments of income tax for the 1978 and 1979 taxation years. In computing his income he sought to deduct the sums of $9,476 and $9,724 in those years respectively, as amounts expended by him with respect to entertainment, transportation, and miscellaneous expenses. Subsequently, the latter group was described by Mr Slawson during the course of the appeal as advertising and promotion expenses. The respondent allowed the deduction of $555 and $1,455, respectively, as an employment expense and the disallowance of the balance in each year is in issue between the parties.

In the years in question, Mr Slawson was employed by Alfred Bunting and Company Limited and by Gardiner Watson Limited. As well, in each case, the appellant was a minority shareholder. His duties revolved around the sale of securities and investments, principally to institutional clients, but also to retail or individual clients. He was compensated by both companies strictly on a commission basis. The client bases he serviced are quite separate and distinct. The principal group consisted of institutional clients and formed a very substantial percentage of his sales volume. In his words, “it would overwhelm the retail sales simply by the size of orders”. These clients were located in Toronto, southern Ontario, and in western Canada, requiring him to travel to Winnipeg, Edmonton, Calgary, and Vancouver on occasion. It was expected by both employers that he would meet with his assigned institutional clients regularly to review their portfolios, to make presentations with the purpose of updating them on new developments both in a given industry and with respect to individual stocks and to make the necessary comments and suggestions. This was done through private meetings at the clients’ offices, and quite often as well, this was done over lunch at private luncheons set up by the appellant. He incurred expenses and he was reimbursed by his employers for the expenses so incurred. According to Mr Slawson and a fellow broker, Mr Morgan, who also gave evidence, the only test applied by the employer was reasonableness. There were no guidelines, although discussions with fellow salesmen and shareholders gave the appellant ‘‘an inherent idea of what was acceptable or not”. He gave as an example the situation where if significant or unusual expenses were anticipated relating to a special presentation, it would be pre-cleared in most instances. In certain other circumstances, both the appellant and the other witness, Morgan, said they chose not to submit a claim for expenses. Mr Slawson said that in some cases there would be expenses relating to certain accounts which were not significant revenue producers to the firm, that were difficult to rationalize on behalf of the firm. The criteria he essentially used is whether the expenses related to immediate business or whether the expenses were to promote possible future business. The decision not to seek reimbursement was solely Mr Slawson’s. He exercised his own discretion. I note, however, that there was no evidence adduced suggesting that a claim for reimbursement of these expenditures would have been rejected if reasonable and if made for the purpose of earning or producing income. There was evidence that both companies were small, were quite cost-conscious, and made a determined effort to keep their overhead down, but I cannot infer from that with any certainty that these expenses, if submitted, might or might not have been accepted. There is no evidence before me on that issue.

A second category of expenses was incurred in relation to the appellant’s retail clients. There was a slight degree of impreciseness in Mr Slawson’s evidence as to the ratio between institutional and retail clients both in gross numbers and in volume of business transacted. I conclude, however, from what he said that retail clients represented only an incidental part of his production both in terms of sales and commissions. With respect to expenses incurred relative to these retail clients the situation was quite different. Although incurred in generally the same manner, that is cost of travel to and from meetings with them, cost of lunches and dinners, these expenses, even though incurred to enable him to properly review his clients’ portfolios and promote sales, were not considered by the employer to be reimbursable. Accepting the appellant’s testimony and that of Mr Morgan that as employees they were expected to maintain a relationship with their retail clients, it is nonetheless clear that as far as the employer was concerned each and every such expenditure was at the risk of the salesman. No evidence was adduced from the employer or from anyone else to the contrary.

A third category of expense claimed as a deduction was described as promotional and related to expenses incurred in the course of meetings over lunch or drinks with brokers from other firms. The rationale put forward in support of this claim was the need to stay abreast of trends and of new developments and approaches. It was, according to Mr Slawson, necessary to exchange ideas with one’s peers if one wanted to be a good broker.

If I may deal with this latter category of expense first. I am unable to distinguish it from an expense incurred while taking a course of instruction. Expenses generally incurred for what may be described as professional development have been held not to be expenses incurred to earn income, although very often the result is to increase the taxpayer’s earning-power in future years. I agree with the comments of Fordham in Bicknell v MNR, which is at [1972] CTC 2031; 72 DTC 1001. For these reasons, this category of expense was properly disallowed by the Minister.

Paragraph 8(1)(f) provides four specific conditions, each one of which has to be met by the appellant. The appellant is seeking the benefit of a right of deduction to which he would not be entitled except for this particular section. In such cases, it is incumbent upon him to establish that his claim falls clearly within the exempting provision, failing which his appeal must fail.

Dealing firstly with subparagraph 8(l)(f)(i), (and I will paraphrase), certain expenses are deductible (by the taxpayer) where they are incurred in connection with the selling of property for his employer and where under the contract of employment the employee was required to pay his own expenses. Careful consideration of the evidence leads me to conclude that it does not establish that the appellant was required by the contract of employment to pay certain expenses he incurred. That applies to both the extra or excess expenses relating to the institutional clients and to expenses incurred with respect to the retail clients. While the appellant may have been expected to do many of the things which led to his incurring these expenses, I cannot find on the evidence before me that he was required by his contract of employment to do so. It was suggested that failure to perform these functions and to bear the costs incidental thereto could have led to termination of his employment by either of the employers. The evidence, in my view, falls short of establishing this assertion. I cannot equate the expectations of the employer as described by both the appellant and by Mr Morgan to a contractual requirement imposed upon the appellant, breach of which would have given a cause of action to the employer against him.

Having found the appellant was not required to incur the expenses, the reasoning of Judge Taylor in Tozer v MNR, [1982] CTC 2835; 82 DTC 1815 at 2838 [1817], commends itself to me. I do not propose to read the relevant passage, counsel for the Minister having referred to it in the course of her argument. In view of my conclusion, of course, it is not necessary to consider whether or not any of the other three conditions of paragraph 8(1 )(f) have been satisfied.

The appeals are dismissed.

Appeals dismissed.