Rose R Goldhar v. Minister of National Revenue, [1985] 1 CTC 2187, 85 DTC 202

Taylor, TCJ:—These are appeals heard in Toronto, Ontario, on November 21, 1984 against income tax assessments for the years 1979 and 1980 in which the Minister of National Revenue taxed the appellant as an employee, rather than as an independent contractor; and even under that set of circumstances disallowed certain expenses claimed to which the appellant felt entitled. The respondent relied, inter alia, upon paragraphs 8( l)(f), 8( l)(i), 18(l)(a), 18(1)(h) and subsection 8(2) of the Income Tax Act, RSC 1952, Chapter 148 as amended. Mr Arnold Goldhar the appellant’s husband, himself an accountant, had prepared the notices of appeal — and acted as agent in Court for Mrs Goldhar, who gave testimony. There are several interesting comments made in the notices of appeal, and accordingly for purposes which I hope will become clearer, later in this judgment, I reproduce them, (using the 1980 notice of appeal as the example):

Rose R Goldhar,

20 Hearthstone Cres Willowdale, Ont

M2R 1G3.

Registrar of the Tax Review Board,

Kent Professional Building,

381 Kent Street,

Ottawa, Canada,

KIA OMI.

Dear Sir: Re: 1980 Re-assessment

A claim for rent for office in my home for $1250.00 for the year 1980 was disallowed completely on grounds, it is necessary to have a contract of employment. This condition is never mentioned in your Tax Guide.

In the Income Tax Act Sub Paragraph 8(l)(i) (ii) (iii) a taxpayer is allowed to deduct home rental cost, if he has a contract of employment that states that an office at home or another location is necessary part of their employment. These words “Contract of employment’’ imply that there is an employer, employee relationship involved when in reality it does not really exist and real estate commission salespeople are self-employed and entitled to operating deductions. An employee is a person who performs a service for an employer for remuneration. Real Estate agents can perform services all year for no remuneration, if no successful deals are completed.

No employee is required to reimburse their employer 40% of their earnings which I had to do.

If I am to be classified as an employee and denied the office rental deduction, I, therefore, wish to receive the benefits which are the rights of an employee being:

1. yearly holidays with 4% remuneration

2. Statutory holidays paid for

3. minimum wage paid on a regular basis

I would like to point out that I received none of the above so how under the previously referred part of the Act can a real estate agent by classified as an employee.

In the residential real estate business, it is an absolute necessity to conduct business at odd hours and mostly in the evening when both husband and wife are available, and many times till 1.30 am in the morning or later from my home office. This is not unusual for a real estate agent, as about 85% of the income is derived from deals made in the late evening and at my home office.

Over the years no company has ever offered a contract of employment and they never will, as they turn over such a substantial amount of salespeople per year, the administrative costs would be prohibitive, but they all take their share of the income with respect to transactions completed in our homes.

In the recent bankruptcy of Natco Realty Ltd the agents were denied the status of employee, which would have made them a preferred creditor and were listed as ordinary creditors, and unable to collect commissions due them.

It seems the status of a real estate agent can be manipulated to the advantage of the party affected.

If I am an employee, I want the benefits of an employee. If I am self-employed, I am entitled to the rent deduction I took as no contract of employment is necessary, if you are self-employed.

Yours very truly,

(signed)

ROSE R GOLDHAR

The critical assertions of the Minister in the reply to notice of appeal were:

— the Appellant was at all material times employed by Del Realty Inc as a real estate agent;

— the Appellant was employed in connection with the selling of property and was remunerated wholly by commission;

— the Appellant was not required by her contract of employment to pay office rent;

— the Appellant was not required by her contract of employment to have an office in her home and did not have an office in her home;

— the Appellant did not pay any office rent for the purpose of earning income from employment.

The first issue to be decided is whether the appellant was an employee or self-employed. There was no evidence or testimony which could support her contention that she was self-employed, when cast against the prima facie evidence that she was an employee, — the T-4 wage slip from Del Realty and a clear statement from Del Realty of her status as an employee — (see Henry Molot v MNR, [1977] CTC 2170; 77 DTC 111). I am also satisfied that any taxpayer whose entitlement to deductions from income arises out of paragraph 8(1 )(f) of the Act, does so as an employee not as an independent contractor.

Del Realty, in completing a questionnaire for Revenue Canada, indicated that there was no contract of employment, either verbal or written, but that response cannot be taken seriously — clearly there was some such contract. Del Realty also had noted, on the same form, that the appellant had been “employed for the full year’’. The Court ruled at the hearing that she was an employee but also noted that, there was a contract of employment between Rose Goldhar and Del Realty — whether written, oral, or implied, still a contract of employment. That left the remaining question for the appellant still open — whether “under the contract of employment (she) was required to pay (her) his own expenses’’ — (paragraph 8(1 )(f) of the Act). Del Realty also had answered that affirmatively, in the same questionnaire, in response to “was he (she) required to pay his own expenses under contract of employment?’’. I am aware that response by the employer, does not with certainty, answer the question, but in the instant case there is no indication that any other arrangement existed between the parties. In essence, Del Realty simply left the question of “his(her) expenses’’ up to the appellant — apparently recognizing that there would be some expenses.

It was the contention of the appellant that the space in her home she called her “office’’ was an absolute necessity to her, and that the greater portion of her commission income was earned from that location, rather than the regular office of Del Realty. It was the contention of the respondent that the term “expenses’’, in the above subparagraph 8(l)(f)(i) of the Act could be and should be read in the — singular “expense’’, and that the contract of employment with Del Realty did not require specifically that Mrs Goldhar maintain an office. Counsel for the Minister based his view on the recent judgment of The Queen v Henry Cival, [1983] CTC 153; 83 DTC 5168, and in particular the following from pages 158 [5171] respectively:

I am prepared to assume for purposes of this appeal that Mr Cival could enter into an individual contract with his employer, covering an aspect of his employment, despite his being covered by the collective agreement, so long at least as the contract was not inconsistent with the terms of the agreement. [See Nova Scotia Civil Service Commission and Nova Scotia Employees’ Association (1980), 24 LAC (2d) 319.] In my view, the arrangement between Mr Cival and his employer, if a contract at all, was at most what is sometimes called a unilateral contract. [See S M Waddams, The Law of Contracts, c 4 “Unilateral Contracts”.] It 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 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(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.

Counsel also argued that Cival (supra) mandated a form of “bilateral” as opposed to a “unilateral” contract, and in his opinion there was no evidence before the Court in the instant case that Del Realty had, in effect, required that Rose Goldhar maintain an office. Accordingly that definition of the term “required” (found in Cival (supra)) should be transferred directly from 8(l)(h) into 8(1)(f) with the result that this appeal for the rental charge should be dismissed. Counsel recognized that there might not be a direct relationship between 8(l)(f) and 8(l)(h) arising out of Cival (supra).

While I recognize and appreciate the clarification, hopefully the final determination, by the Federal Court of the troublesome question raised in Cival (supra), I read it to state simply that the contract (if indeed one existed) covering the aspect of his employment at issue was not viable for Cival, because it did not provide for reciprocal commitment from both parties:

. . . 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. (See above from Cival (supra) ).

At this point I emphasize the sections of the Act relevant to this part, upon which the Minister relied — sections 8(1)(f), 8(l)(i) and 8(2). As I see it, once a taxpayer has positioned himself under the provisions of section 8(l)(f) of the Act, all the other portions of section 8, with the exception of 8( l)(j) and 8(2) fall by the wayside. The phrase in section 8(l)(f) “— amounts expended by him in the year for the purpose of earning the income from employment —” covers everything else. As an individual (an employee) receiving commission income which falls under paragraph 8(l)(f) of the Act, Mrs Goldhar must make any deductions claimed under that section of the Act — if for no other purpose than that to ensure that the other critical phrase in that section is met “— not exceeding the commission — received by him in the year”. Paragraph 8(l)(f) does not prescribe that the employer must identify in the contract of employment any specific requirement or any specific expense in order for the taxpayer to deduct it. It might even be suggested that the change of terms from “the (travelling) expenses” (8(l)(h)) — covered by Cival (supra) ), to “his expense” (8(1)(f)) delimits the obligation of the employer of a commission salesman (8(l)(f)) to merely making it clear to the salesman that he is “required to pay his own expenses”. It is possible that a simple statement to that effect would suffice — particularly if the “contract of employment” is a verbal agreement. Mrs Goldhar did not receive any allowance therefore no amount need, nor can be included as income under subparagraph 6(l)(b)(v) of the Act. It is also possible that the reference to subparagraph 6(l)(b)(v) in paragraph 8(1 )(h) of the Act, could indicate that taxpayers “employed in connection with selling of property or negotiating of contracts, subparagraph 6(l)(b)(v), remunerated by regular salary rather than commission income, must seek relief for expenses under the provisions of sections 8(l)(h) and 8(l)(i) of the Act, not under paragraph 8(l)(f). Therefore some provisions of paragraph 8(l)(h) of the Act, may be more restrictive than those of paragraph 8(l)(f) of the Act, (see Cival (supra)). However the determination of these other points is not specifically required in this judgment. There were no claims for expenses made by Mrs Goldhar against her employer, and to that degree the case before the Court may be seen to differ from D T Tozer v MNR, [1982] CTC 2835; 82 DTC 1815, wherein that taxpayer chose only to submit to his employer certain selected claims, and there was no proof provided that the employer required the payment of the excess amounts by Mr Tozer. Accordingly I am of the view that this appellant has satisfied the conditions precedent in paragraph 8(l)(f) of the Act — particularly 8(l)(f)(iv). Mrs Goldhar was required to pay her own expenses — they were not even considered to be expenses of Del Realty. Therefore whatever expenses she incurred were her own — if she incurred any at all, — and Del Realty took no responsibility for any of them.

In the instant case, as I see it, the “contract” between Rose Goldhar and Del Realty must have covered the various other items of expenses which were allowed by the Minister, since “automobile expenses” and “sales promotion” totalled some $2,243 in 1979 and $1,449 in 1980. Accordingly the deductions noted above ($2,243 and $1,449) must have been allowed by the Minister under paragraph 8(l)(f) (and correctly so I presume). I can think of no reason that “rent” if adequately and properly supported should not be as deductible under paragraph 8(l)(f) as are “automobile expenses” or “promotion”. Certainly I do not accept that for the particular item “rent”, the Minister can somehow reduce the term “to pay his own expenses", to “an expense" restricted to rent. I am completely satisfied that had Mrs Goldhar rented an office from a third party, that expense amount — if actually paid — would have been deductible from her commission

— under paragraph 8(1 )(f) of the Act. It was evident that she did a large part, perhaps nearly all, of the work from which she earned commissions from a physical area in her own home set-up, which was used for exactly that purpose. This was largely due to the hours of the day when her work was conducted, and the distance from her home (office) to the business office of Del Realty. As I see it, she was as much entitled to a “base of operations”, as was the taxpayer in Cork v MNR, [1981] CTC 2367; 81 DTC 346, upheld on appeal in The Queen v Justin Cork, [1984] CTC 479; 84 DTC 6515, even though Mr Cork was an “independent contractor”. I do not regard the amounts she claimed 1979 — $1,300, 1980 — $1,250 as unreasonable, nor did the testimony and evidence — including the cross examination of Mrs Goldhar — indicate that there were such. I would only point out that I am assuming no part of the “rental” charge is attributable to capital cost allowance on the home, or furnishings therein — (even office equipment) since I do not see in paragraph 8(1 )(j) of the Act, that capital cost allowance on such elements is deductible (see Quesnel v MNR, [1977] CTC 2143; 77 DTC 92. I would also note that the grounds are not clear to me, upon which the Minister disallowed certain other expenses originally claimed (but not reasserted at the hearing) with respect to:

— Depreciation of automobile

— Licence fees

— Telephone

— Office expenses, etc

In summary, the only matter raised at the hearing, and that from which the appellant sought relief, was the disallowance by the Minister of National Revenue of the “rent” charges of $1,300 and $1,250 for the years 1979 and 1980 respectively. The appellant is successful and the appeals are allowed. Mrs Goldhar has established that she was required under the contract of employment to pay her own expense, and that the rental charge at issue was a proper one of these. The entire matter is referred back to the Minister for reconsideration and reassessment according to these reasons for judgment. The appellant is entitled to party and party costs.

Appeals allowed.