Heather Barnard v. Minister of National Revenue, [1985] 1 CTC 2178, 85 DTC 210

Christie, ACJTC:—This appeal relates to the appellant’s 1980 taxation year. The issue is whether she is entitled to deduct certain expenses claimed by her as a commission saleswoman. She was employed under a verbal contract by a corpo- ration to sell knitting yarns in Hamilton and in an area of Ontario east of that city. In the year under review the appellant earned $15,019.13, which included commissions of $5,107.95. It is alleged by the respondent that the appellant received a reasonable allowance for travelling in the amount of $6,704. The appellant says she received $3,907.87. She also says that the amount expended by her in earning the $15,019.13 was $6,845.12.* [1]

When considering what a commission salesperson may deduct in calculating his or her taxable income, these are the basic provisions of the Income Tax Act (“the Act”) to be addressed with particular focus, of course, on paragraph 8(l)(0:

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:

(a) a single amount in respect of all offices and employments of the taxpayer, equal to the lesser of $500 and 3% of the aggregate of

(i) his incomes for the year from all offices and employments (other than the office of a corporation director) before making any deduction under this section, and

(ii) all amounts included in computing his income for the year by virtue of paragraphs 56(1 )(m) and (o).

56. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(m) amounts received by the taxpayer in the year as or on account of an adult training allowance paid to him under the Adult Occupational Training Act, except to the extent that they were paid to him as or on account of an allowance for his personal or living expenses while he was living away from home;

(o) the amount, if any, by which any grant received by the taxpayer in the year to enable him to carry on research or any similar work exceeds the aggregate of expenses incurred by him in the year for the purpose of carrying on the work, other than

(i) personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by him while away from home in the course of carrying on the work,

(ii) expenses in respect of which he has been reimbursed, or

(iii) expenses that are otherwise deductible in computing his income for the year.

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

(1) 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(l)(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)(1), not be deductible in computing the taxpayer’s income for the year if the employment were a business carried on by him.

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.

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.

8. (2) Except as permitted by this section, no deductions shall be made in computing a taxpayer’s income for a taxation year from an office or employment.

(3) In computing a taxpayer’s income for a taxation year, no amount is deductible under paragraph (l)(a)

(a) if any amount has been deducted under paragraph (1)(f) in computing his income for the year,

(4) An amount expended in respect of a meal consumed by an officer or employee shall not be included in computing the amount of a deduction under paragraph (1)(f) or (h) unless the meal was consumed during a period while he was required by his duties to be away, for a period not less than twelve hours, from the municipality where the employer’s etablishment to which he ordinarily reported for work was located and away from the metroplitan area, if there is one, where it was located.

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(1) an outlay or expense made or incurred by the taxpayer after 1971,

(i) for the use or maintenance of property that is a yacht, a camp, a lodge or a golf course or facility, unless the taxpayer made or incurred the outlay or expense in the ordinary course of his business of providing the property for hire or reward, or

(ii) as membership fees or dues (whether initiation fees or otherwise) in any club the main purpose of which is to provide bdining, recreational or sporting facilities for its members.

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.

In my opinion these statutory provisions come to this. What is commonly known as a commission salesman 1s, for the purposes of the Act, a person described in subparagraph 8( 1 )(f)(iii). In order for a person to make any deductions under subsection 8(l)(f) he must come within the ambit of each of subparagraphs 8(l)(f)(i), (ii) and (iv). This necessitates that he shall:

(a) be required under his contract of employment to pay his own expenses,

(b) be ordinarily required to carry on the duties of his employment away from his employer’s place of business, and

(c) not have been in receipt of a reasonable allowance for travelling expenses.

What is said in (c) reflects my understanding of the meaning of subparagraph 8(1)(f)(iv) because the kind of allowance described in the subparagraph is one that is to be excluded in computing the income of a taxpayer under subparagraph 6(l)(b)(v) and those allowances are “reasonable allowances for travelling expenses’’. As I see it, if a commission salesman receives an allowance for travelling expenses, whatever its adequacy may be in fact, and it is not included in computing his income, he fails to comply with subparagraph 8(l)(f)(iv) and is not entitled to make any deductions under paragraph 8(l)(f). That is to say if he receives a travelling allowance which he regards as unreasonable, but nevertheless does not include it in computing his income he has thereby, at the time of filing his return, chosen to act on it as a reasonable allowance and the respondent is entitled to assess or reassess on that basis. On the other hand, if he receives an allowance for travelling expenses and takes the position that it is not a reasonable allowance and includes it in his income, he is within subparagraph 8(l)(f)(iv) subject only to dispute which may arise regarding whether the allowance received was in fact reasonable. This could be important in some situations because, if a commission salesman is within paragraph 8(l)(f) he may, subject to any certain exceptions to which reference will be made, deduct all reasonable amounts expended by him for the purpose of earning income from his employment as a commission salesman, including any interest paid by him on borrowed money employed for the purpose of acquiring an automobile or aircraft used in the performance of his employment and such part of the capital cost to him of an automobile or aircraft used in the same manner as is allowed under Part XI of the Income Tax Regulations. Subparagraph 8(l)(f)(iv) relates only to travelling expenses so, if a commission salesman fails to include an allowance for travelling expenses in computing his income, even if he regards it as unreasonable, he is precluded from simultaneously deducting in calculating his income any other kind of expenses incurred by him for the purpose of earning income from his employment as commission salesman.

The amounts claimed as a deduction by a commission salesman must not:

(i) exceed the commissions or other similar amounts received by him;

(ii) include outlays, losses or replacements of capital or payments on account of capital except in relation to automobiles or aircraft as previously mentioned;

(iii) include outlays or expenses for the use or maintenance of property that is a yacht, a camp, a lodge or a golf course or facility or as membership fees or dues in a club the main purpose of which is to provide dining, recreational or sporting facilities for its members;

(iv) include the employment expense deductions of $500 or 3 per cent as the case may be; or

(v) include amounts expended in respect of meals consumed by him unless the meal was consumed during a period while he was required by his duties to be away, for a period of not less than 12 hours, from the municipality where his employer’s establishment to which he ordinarily reported for work was located and away from the metropolitan area, if there is one, where it is located.

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 MNR, 3 Tax ABC 141; 50 DTC 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 provides that any payment made to any person in connection with any employment or 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 a 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 intalments. 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." (Emphais added)

In Campbell v MNR, 13 Tax ABC 273; 55 DTC 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 MNR, [1967] CTC 346; 67 DTC 5235, Noël, J said this with reference to paragraph 6(l)(b) of the Act — it was paragraph 5(l)(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(l)(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 subsequent payment by the employer to reimburse him for his expenses is an “allowance”.

I am not unmindful of The Queen v Pascoe, [1975] CTC 656; 75 DTC 5427 which was followed and applied in The Queen v Gagnon, [1981] CTC 463; 81 DTC 5377. The statutory provision under consideration in these appeals was paragraph 60(b) of the Act which provides:

60. There may be deducted in computing a taxpayer’s income for a taxation year such of the following amounts as are applicable:

(b) an amount paid by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if he was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, his spouse or former spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year.

I have not based my conclusion in this case on those appeals because I am not satisfied that the word “allowance” in paragraph 60(b) has the same meaning as it does in subparagraph 8( l)(f)(iv). It may have, but not necessarily so. “Words, phrases, sentences, etc which appear in legislation cannot be constructed in isolation. They must be viewed in their entire context and their import may well differ depending on the nature of that environment”: Geweth v MNR, [1984] CTC 2275 at 2276; 84 DTC 1257 at 1258. The judgment in Gagnon was appealed to the Supreme Court of Canada. The case was argued on December 19, 1984. Judgment was reserved and has not been delivered to date.

Paragraph 8(l)(h) of the Act 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.

With respect to the statutory provisions referred to in subparagraph 8(l)(h)(iii), subparagraph 6(l)(b)(v) and paragraph 8(1 )(f) have already been cited. The others 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

(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 ordinarily 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.

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:

(e) amounts disbursed by the taxpayer in the year for meals and lodging while employed by a railway company

(i) away from his ordinary place of residence as a relieving telegrapher or station agent or on maintenance and repair work, or

(ii) away from the municipality and the metropolitan area, if there is one, where his home terminal was located, and at a location from which, by reason of distance from the place where he maintained a self-contained domestic establishment in which he resided and actually supported a spouse or a person dependent upon him for support and connected with him by blood relationship, marriage or adoption, he could not reasonably be expected to return daily to that place,

to the extent that he has not been reimbursed and is not entitled to be reimbursed in respect thereof.

(g) where the taxpayer was an employee of a person whose principal business was passenger, goods, or passenger and goods transport and the duties of the employment required him, regularly,

(i) to travel, away from the municipality where the employer’s establishment to which he reported for work was located and away from the metropolitan area, if there is one, where it was located, on vehicles used by the employer to transport the goods or passengers, and

(ii) while so away from such municipality and metropolitan area, to make disbursements for meals and lodging,

amounts so disbursed by him in the year to the extent that he has not been reimbursed and is not entitled to be reimbursed in respect thereof.

Paragraph 8(l)(j), subsection 8(4) and section 67 which are quoted (supra), also apply in relation to paragraph 8(1 )(h).

The combined effect of paragraphs 5(a) and (b) of the respondent’s reply to the notice of appeal is an admission that the appellant was a commission sales- woman at the relevant time. Nevertheless in paragraph 6 of the reply the respondent relies on paragraph 8(l)(h) as well as paragraph 8(l)(f). This is redundant pleading and reliance on it in making submissions to the Court is irrelevant argument. If an appellant is a commission salesman, paragraph 8(l)(h) has no application. It relates to a person other than a commission salesman who is seeking to deduct “amounts expended by him in the year for travelling during the course of his employment”. It has been suggested that the reference to subparagraph 6(l)(b)(v) in subparagraph 8(l)(h)(iii) makes paragraph 8(l)(h) applicable to commission salesmen. While subparagraph 6(l)(b)(v) speaks of an employee employed in connection with the selling of property or negotiating of contracts for his employer, there can be many taxpayers so employed who are on fixed salaries without commissions. While in the opening words of paragraph 6(l)(f) reference is made to a taxpayer employed in connection with the selling of property or negotiating of contracts for his employer these words relate to commission salesman because they are conjunctively tied in with the words “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.” One might ponder about the precise purpose of including in paragraph 8(l)(h) reference to subparagraph 6(l)(b)(v) and the second group of words in parenthesis in subparagraph 6(l)(b)(vii), but this, in my opinion, does not detract from what 1 consider to be the proper conclusion to be drawn rom the legislation which is that paragraphs 8(l)(f) and 8(l)(h) are mutually exclusive.

Of course, this does not prevent jurisprudence in relation to paragraph 8(l)(h) being applied to paragraph 8(l)(f) and vice versa. I believe that the judgment of the Federal Court of Appeal in The Queen v Cival, [1983] CTC 153; 83 DTC 5168, falls within this category. That case was concerned with a claim for deductions under pargraph 8(1 )(h). The appellant who worked in the Payroll Audit Section of National Revenue, at the request of the Department, uses his own automobile in carrying out the duties of his employment under an arrangement whereby he was reimbursed on a mileage rate. In the year under review, 1977, the appellant’s expenses in respect of his automobile exceed the amount received for mileage by $512.03. The issue was whether the appellant was entitled to deduct this amount under paragraph 8(1)(h). It was held that he did not comply with subparagraph 8(l)(h)(ii) and therefore was not entitled to deduct the $512.03. Ryan, J., who delivered the judgment of the Court of Appeal said at 158 [5171]:

It (the relationship between the appellant and his employer regarding the latter’s automobile) was an arrangement under which his employer undertook to reimburse him on a mileage basis for expenses he incurred in using his car in the performance of his duties. I do not interpret the arrangement as involving a promise by Mr Cival to use his car in performing his duties and to pay the expenses out of his own pocket in return for an undertaking by his employer to reimburse him. To put it another way: as I see the arrrangement, 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(l)(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. This is enough to dispose of the appeal.

While the kind of contract under consideration in Cival is the one described in paragraph 8(l)(h)(ii) whereby, under his contract of employment, the employee is required to pay the travelling expenses incurred by him in the performance of the duties of his employment and the kind of contract referred to in subparagraph 8(l)(f)(i) is one whereby, under the contract of employment, the employee is required to pay his own expenses for the purposes of earning his income as a commission salesman, what was said in Cival regarding the nature of the contractual relationship which is necessary to allow a taxpayer to claim deductions is equally applicable to both paragraphs 8(l)(f) and 8(1)(h).

For reasons already given the appellant was clearly a person described in subparagraph 8(l)(f)(iii). I have no difficulty in concluding that she also comes within subparagraph 8(l)(f)(i). It was her unqualified evidence that she was required to pay expenses and, in particular, she said that: “If I did not have a car, I did not have a job.” When asked what her employer would have done if she had refused to use her car she replied: “Fired me”. It is equally clear on the evidence that whatever the appellant received from her employer for expenses was not included in calculating her income in her 1980 return.

The difficulty in the case lies in determining the question whether what the appellant received regarding travelling expenses was an “allowance” within the meaning of subparagraph 8(l)(f)(iv). If the answer is no, the sequential question which must be dealt with is what amount did she receive for expenses from her employer.

By reason of financial restraints the appellant was not represented at the hearing. As is not uncommon in such circumstances the evidence was not helpful in many respects in that it was often incoherent in relation to the principal issue in the litigation and was disorganized. The appellant was under considerable stress throughout the hearing. Nevertheless I must deal with the evidence as best I can. On the whole of it I have concluded that what the appellant received from her employer was not an “allowance for travelling expenses” within the meaning of paragraph 8(l)(f)(iv). These facts which I accept were in the appellant’s testimony. Within her sales territory payment of her expenses was confined to specified geographical limitations. Precise amounts were prescribed for meals and lunch was not included. Monthly “expense reports” were sent by her to her employer. Furthermore, in his reply to the notice of appeal, the respondent alleges in paragraph 5(c) that the amount received by the appellant from her employer for travelling expenses for 1980 was $6,704. Counsel for the respondent reiterated this exact amount at the hearing. The $4 belies an allowance. Rather it suggests detailed accountability. Also in her 1980 return the appellant alleged that the amount received from her employer was $3,907.87. This figure also speaks for itself regarding accountability and it was submitted to Revenue Canada long before the eruption of the dispute which led to this appeal. Having concluded that the amount which the appellant received was not an allowance I must deal with the question whether she received $6,704 as alleged by the respondent or $3,907.87 as asserted by her. In cross-examination the appellant refused to accept the correctness of the $6,704 figure. She suggested that this was the amount paid to her over a two-year period. Counsel for the respondent then confronted the appellant with a document which, on its face, purported to relate to the latter’s 1980 taxation year and contained information supplied on July 26, 1983, to Revenue Canada by the president of the appellant’s employer. It showed payments totalling $6,704. While the appellant readily agreed that the president’s signature was on the document, she flatly rejected its accuracy. The only testimony adduced at the hearing was that of the appellant and I accept her uncontradicted evidence on this aspect of the appeal.

The appeal is allowed and the matter is referred back to the respondent for reconsideration and reassessment on the basis that the $3,907.87 received from her employer for expenses shall be included in computing her income as a com- mission saleswoman in her 1980 taxation year and there shall be deducted in computing that income $6,845.12 being the amount expended by her in 1980 for the purpose of earning it. The appellant is entitled to her party and party costs if she has incurred any.

Appeal allowed.