John Charles Douglas v. Minister of National Revenue, [1985] 1 CTC 2382, 85 DTC 298

Taylor, TCJ:—This is an appeal heard in Vancouver, British Columbia, on January 30, 1985, against income tax assessments for the years 1979 and 1980 in which the Minister of National Revenue disallowed certain expenses claimed as deductions against commission income. The notice of appeal reads:

Although my T4 slips for the years 1979 and 1980 showed most of my income to be salary, in fact all of my income is commission. The T4 slip issued by my employer is in error. I have documentation and my employer will support that I am a fully commissioned salesman and my total income is from commission — none is salary. Therefore the expenses claimed in those years should have been allowed.

As recounted in the reply to notice of appeal, the respondent relied on the following assumptions of fact:

— at all material times in his 1979 and 1980 taxation years, the Appellant was an employee of Ingram & Bell Ltd and was engaged in the selling of property or negotiating contracts for the said employer;

— under the terms of his contract of employment, he was remunerated in part by a fixed salary and in part by commissions fixed by reference to the volume of sales made or contracts negotiated on behalf of his employer;

— in his 1979 taxation year, his fixed salary from his contract of employment was $6,396.68 and his commission were $235, and the said amounts were reflected in the T4 income tax form prepared for the Appellant by his employer and submitted by the Appellant in his 1979 income tax return;

— in his 1980 taxation year, his fixed salary from his contract of employment was $18,353.86 and his commissions were $787.69, and the said amounts were reflected in the T4 income tax form prepared for the Appellant by his employer and submitted by the Appellant in his 1980 income tax return;

— under the terms of his contract of employment, he was not required to pay his own expenses;

— under his contract of employment, the Appellant was not required to provide office space and he did not incur such expenses for office space;

— under his contract of employment, the Appellant was not required to supply and pay for supplies consumed directly in the performance of the duties of his employment and he did not incur any such costs;

— under his contract of employment, the Appellant was reimbursed by his employer with respect to expenses incurred by him in the performance of the duties of his employment.

The Respondent relies, inter alia, upon paragraphs 8(1)(f), 8(l)(h) and 8(l)(i) of the Income Tax Act, c 63, SC 1970-71-72, as amended.

The documentation upon which both parties relied (Exhibit A-l) was the Agreement dated April 17, 1980.

—AGREEMENT—

COVERING SALES ACTIVITY ON ALL INGRAM & BELL DIVISION SALES TERRITORIES

EXPENSES

Expenses such as hotel accommodation, meals, etcetera, incurred when working outside your City of residence are reimbursed by the Company. Expense accounts must be submitted on a weekly basis to your Branch. Receipts must be provided covering all automobile expenses as well as accommodation, entertainment and miscellaneous expenses as outlined on the Expense Report form. Two copies, accurately completed, of your Automobile Expense Worksheet must be attached to your weekly expense report. The Branch will forward a copy of your expense reports to the appropriate assigned Manager.

Expense accounts must be current at all times and should arrive for payment within the calendar week following the occurrence of those expenses. Filing expenses over fourteen (14) days in arrears could result in that portion of the expenses which are in arrears being disallowed.

Every effort must be made to control all expenses and entertainment must be reasonable and have a defined objective in mind.

Telephone expenses must be submitted with original telephone company statements showing exact charges for business calls and must be submitted within seven (7) days of receipt of telephone bill. Rental of equipment is not included; the only exception being where a business phone is installed in a non-branch location as approved by the Marketing & Sales Office (see Policy re Long-Distance Charges attached).

AUTOMOBILE

Separately, an Ingram & Bell Company Car Plan has been distributed and from time to time modifications of this plan will be sent to you. This covers the Fleet Management and Leasing Arrangement that is undertaken with Peterson, Howell & Heather of Canada Limited.

Each representative has a responsibility to ensure that he becomes familiar with the Automobile Policy and particularly with the segment that relates to maintenance and cost control that must be effected by everybody in the operating cost of the automobiles in the Company Fleet. All automobile repair expenses up to the amount of $150.00 must be approved, prior to the work being undertaken, through your assigned Regional Manager and in amounts above $150.00 must be approved by Head Office. Every effort must be made to ensure automobiles are kept clean and in good working order.

TERMINATION

This agreement may be terminated by either party on receipt of fourteen (14) days notice unless contrary arrangements have been agreed to by both parties (subject to applicable Provincial Legislation). It is agreed that on termination all monies owing to the Company by way of Permanent Travel Advance, Expense Accounts, Personal Invoice Charges, Automobile Damage other than wear and tear as covered by the Automobile Policy and any representatives’ share of the deductible amount that relates to collision insurances and samples, not returned at cost may be deducted from any monies owing either by way of salary, bonus, commission or expenses. Your specific agree- ment with this paragraph relating to monies owing to the Company is so indicated by your signature.

ADDENDUM NO. 5

“INGRAM & BELL DIVISION REMUNERATION POLICY” M/S

ANNUAL SALARY

An annual salary is paid to each representative and is unconditionally guaranteed provided the sales year is completed.

Sufficient gross profit to cover salary payments must be derived from the territory before commissions become payable.

Because salaries are derived through a system that relates to gross profit on a territory, salary revisions will be made from time to time on the recommendation of your assigned Manager, but in no case will the amount available in salary exceed 80% of the commission earned on the territory, averaged out over the previous three calendar years.

Should salary being paid in any given period cause a deficit when compared with the representative’s share of the gross profit, this amount would carry on to the succeeding period unless arrangements to the contrary are specified in writing between the parties.

Commissions are arrived at by different percentages of gross profit allocated to each department.

Commission rates may be adjusted from year to year to reflect market conditions or specific areas where increased sales activity would be deemed essential.

For the purposes of arriving at salary and commission, only dollars resulting from merchandise that is shipped and billed can be considered.

A sales representative must complete a full sales period before he can participate in either commission or any other remuneration program that may be offered from time to time. “Sales period” is designated as three accounting months, or one quarter.

On resignation before completion of the sales year, the sales representative automatically disqualifies himself from any commission or bonus other than holdback which may have been previously earned.

Commissions are payable on a quarterly basis, less 20% holdback which is computed on a Sales period basis and paid at the conclusion of the sales year.

New representatives may be hired and qualify for the salary component only. Full participation in the total remuneration program for new sales representatives will be recommended by the assigned Manager to the Director, Marketing & Sales. New representatives gaining full participation will qualify for the period following approval of their participation in the full Ingram & Bell Division remuneration program.

BONUS PROGRAM

The Bonus Program in the Ingram & Bell Division is uniquely a year-to-year program and can be cancelled at any time at the discretion of Management and is not to be considered an ongoing part of the total remuneration package.

Bonuses will normally be payable in quarterly or yearly segements and will relate directly to the activitities planned for any given sales year. The purpose and intention behind bonuses are to achieve specific longterm objectives that relate to increasing the market share of the Ingram & Bell Division.

SALES INCENTIVES

Special sales incentives will be offered from time to time and these will be subject to individual regulations at the time of their announcement. In order to participate in the Bonus or Special Incentive Programs that may be offered, it is mandatory that a representative complete the sales year as no partial payments on these programs are allowed.

Mr Robert John Pratt, Sales Manager for the employer testified as a witness for Mr Douglas. He provided interesting and helpful detail on the relations be- tween the senior personnel and the sales representatives, including the general perspective that the representatives (such as Mr Douglas) were paid wholly on commission. In my view the two most pertinent comments made by Mr Pratt were: (1) that Exhibit A-l (the agreement) was being rewritten since the lawyer for Ingram & Bell indicated the existing agreement probably was unenforceable in Court; and (2) that the employer showed the salesmen as “salaried”, because this provided a better “base rate” for certain other charges such as medical insurance, life insurance etc. It appeared to him that the insuring companies did not classify “commission salesmen” as regular employees, at least for these purposes. The essence of Mr Pratt’s testimony was that Mr Douglas was paid on commission.

In argument, counsel for the appellant took the view that the issue before the Court was to determine the status of Mr Douglas — salaried employee, or commission salesman. Counsel for the respondent agreed that such a determination might be useful, perhaps necessary, but that the real issue was that Mr Douglas was not required by his contract of employment to incur the expenses claimed.

The point made by Mr Pratt (supra), that Exhibit A-1 might not be strictly legal, was not pursued by either party, by I would think at the minimum, some portions thereof are ambiguous, possibly obscure. The first sentence in the section headed “Addendum No. 5”’ quoted from Exhibit A-l above is a good example of that uncertainty. Since the issue in this appeal, as seen by counsel for the appellant, is that Mr Douglas must be held to be a commission salesman, then it rests with the appellant to so demonstrate. Such demonstration cannot be provided, wtihout serious question, from the agreement above, and the other factors which the Court must take into account militate against such a conclusion. The company (Ingram & Bell) clearly treated Mr Douglas as a salaried employee, at least to the limits of his “base salary income” — the employer did that in dealing with its own internal insurers for employee benefits, and in the preparation of the T4 wage slips. While Mr Douglas would like to regard the “base salary” as some kind of “draw against commissions” the rationale for so regarding it, in a legal sense, is not evident to me in the agreement. Since the “base salary” was related to the previous year’s earnings where possible, I think a view that the “base salary” in effect set a target level for sales is a more appropriate interpretation of the agreement. Finally, whatever may have been the private understandings of Mr Douglas with Mr Pratt, or anyone else, it was not shown to the Court that these should be preferred over the words of the agreement, if there appeared to be a conflict. I am not prepared to accept that Mr Douglas was paid on commission to an extent greater than that accorded him on the T4 wage slips, and accepted by the Minister in assessing.

With regard to the taxation year 1979, it was pointed out at the hearing that the amount of $235 shown as “commission income” in the reply to notice of appeal (supra), was in fact, not earned by Mr Douglas from Ingram & Bell, but from a previous employer in 1979. Since the only information available to the Court dealt with the alleged relation between Mr Douglas and Ingram & Bell, the Court has no basis upon which to consider any of the claimed expenses as pertaining to the earnings from the previous employer. Accordingly the appeal for the year 1979 will be dismissed.

With regard to the taxation year 1980, one might assume that the entire commission earnings of $787.69 would be used up by even a portion of the total expenses claimed of $5,503.14. However, that is not my reading of the Act (see De Santis v MNR, [1984] CTC 2435; 84 DTC 1424). Mr Douglas may only deduct from the $787.69 under paragraph 8(l)(f) of the Act, and then only to the extent that the expenses claimed were incurred in earning that income — not his salary income. Since the Court is not aware what part (if any) of the claimed $5,503.14 can be related to the commission income of $787.69, there is no basis for a deduction against it. With regard to the prospect of any deductions against the salary income, that would come under paragraph 8(l)(h) and 8(l)(i) of the Act, and again no basis was provided to the Court for such deduction thereunder. In order for such a deduction under paragraph 8(1 )(h) of the Act to be appropriate, this appellant must show that he was required (as a salaried employee) to incur the expenses claimed (see The Queen v Cival, [1983] CTC 153; 83 DTC 5168). I would not rule out the prospect that this could be done, but I note that the relevant clauses in the agreement leave it very much in doubt. This is the aspect of the appeal which was particularly stressed by the Minister, but did not seem to be regarded as crucial by the appellant.

In summary, the appellant has failed to show that under the contract of employment he was entitled to deduct expenses which might be claimed under section 8 of the Act.

The appeal is dismissed.

Appeal dismissed.