Nick Thompson v. Minister of National Revenue, [1985] 1 CTC 2413, 85 DTC 362

Taylor, TCJ:—This is an appeal heard in Vancouver, British Columbia on January 30, 1985, against income tax assessments in which the Minister of National Revenue disallowed all deductions claimed as expenses against employment income for the year 1980 and all but $139 of the amount claimed in 1981. The notice of appeal filed by the taxpayer contains certain references to information and advice which he indicated had been received by Revenue Canada with regards to the claims made, indeed before many of the expenses had been incurred. It was explained to him by the Court that whether or not these occurred as he related them, the situation facing him at the hearing, was to establish that he was entitled, under the Income Tax Act, SC 1970-71-72 c 63, as amended, to the deductions claimed. There was a certain degree of confusion in the appellant’s mind regarding the status he could claim, as a taxpayer, in order to be so entitled. He had used the term “‘to run a business” in his notice of appeal, but there was no indication therein, or in his income tax return, that he was “in business”. He was an employee, but the precise nature of his employment appeared to be somewhat in doubt — whether the income was from salary or commissions.

The respondent in the reply to notice of appeal set out the situation as:

In the 1980 and 1981 taxation years the Appellant worked as a commission sales employee of RJR — MacDonald Incorporated.

— In his 1980 and 1981 individual Income Tax Returns the Appellant claimed a deduction for expenses incurred in the maintenance of an office in his home in the amount of $7,393.60 in 1980 and $2,952.00 in 1981.

The Respondent reassessed the Appellant for the 1980 and 1981 taxation years and disallowed a deduction for the home office expenses in 1980 and reduced the Appellant’s claim for home office expenses from $2,952.00 to $139.00 in 1981.

In so reassessing the Appellant for the 1981 taxation year, the Respondent relied upon the following assumptions of fact, inter alia:

in 1980 the Appellant did not maintain a room or area in his home that was used solely for the purpose of earning income;

— in 1981, the Appellant maintained an office occupying approximately 150 sq ft in his home which had a total square footage of 1,130 sq ft.;

— that portion of the Appellant’s home maintenance expenses attributable to the said home office amounted to $139.00 in the 1981 taxation year.

The respondent relies, inter alia, upon subparagraph 8(l)(i)(iv) and section 67 of the Income Tax Act.

For the taxation year 1981, neither the T4 wage slips nor the filed tax return of the appellant indicated that any of the income ($24,776.60) came from commissions. For the year 1980, there still was no indication of “commission” income, on the T4 wage slips, but in preparing his income tax returns Mr Thompson showed an amount of $1,365.64 as from commissions, out of the total of $21,874.60. It was his testimony that in both years he had received some commission income — a kind of “override” when his quota of sales — related to his base salary — had been exceeded. Mr Thompson agreed with the $1,365.64 figure for 1980, and indicated that the similar amount for 1981 would have been about $300. The Minister agreed with the appellant’s position on this part — without further confirmation.

For the year 1980, the taxpayer in claiming the deductions of $7,393.60, gave as details:

My Regional Office is Located in Richmond, BC, a distance of 480 miles.

50% of the square footage of my house is used for warehouse and office space.

A new office was constructed in a portion of the basement.

			Expenses	Allowable Expenses
Rent for 12 mos 600 X 12			7200.00	3600.00
Gas		—	274.94	137.47
Utilities 45.90 X 4		—	183.60	91.80
Hydro		—	227.55	113.77
Phone			176.40	88.20
Office Construction		-		3084.36
Labour	600.00
Material	2484.36
Total	3084.36
Insurance Home Fire			172.00	86.00
Improvements			384.00	192.00
				Total for allowable
				expenses Home used
				as office and
				Warehouse
				$7,393.60

Following is a list of office expenses incurred while performing my job functions of which only 25% of my residence was required

First the Court would refer to the Minister’s pleadings (supra) and in particular the reliance on subparagraph 8(l)(i)(iv) of the Act. I cannot imagine what relevance that particular reference has in this appeal, and counsel for the Minister made no move to amend it. Based on the Minister’s position at the hearing I am led to believe that the proper reference would be 8(l)(i)(ii) and 8(l)(i)(iii) and/or 8(l)(f) of the Act. The paragraph 8(l)(i) refers to a particular kind of expense deduction “dues and other expenses of performing duties’’ and “office rent” available to a salaried employee as a deduction, if the employee appropriately qualifies. The latter 8(l)(f) is a specific section relating to “commission” salesmen. With the wording of section 8(1)(f) so broad “— amounts expended by him in the year for the purpose of earning the income from employment —”, I fail to see any reason that a bona fide commission salesman should be required to rely on any subsection under section 8 of the Act, other than that particular one, (8(l)(f)), in order to deduct legitimate expenses. As I see it — everything available to salaried employees under the other subsections is automatically available to the commission salesman under paragraph 8(l)(f) of the Act — the separate and individual type of expenses (eg) “rent”, “office supplies” etc, do not need to be further identified as covered under a different subsection. I am aware that a detailed examination of the income of this appellant might reveal that he was disentitled to the benefits of paragraph 8(1 )(f) of the Act, by virtue of the conditions enumerated under clauses (i), (ii), (iii) or (iv) thereof, but counsel for the Minister did not raise that issue. At the Court appearance stage of an income tax dispute, it is the responsibility of the Minister to identify clearly and succinctly the exact task facing the appellant and that appears to be two-fold from the reply to notice of appeal (supra) — 1980 — “the appellant did not maintain a room or area in his home that was used solely for the purpose of earning income;” and 1981 — “that portion of the Appellant’s home maintenance expenses attributable to the said home office amounted to $139.00’. The first point above (“a room — used solely”) is one which is not founded in legislation or jurisprudence, to my knowledge, and the Minister rapidly abandoned it. It is therefore, the second point which must be overcome by the appellant to be successful in this appeal.

Therefore there appeared to be no quarrel that he earned a part of his income from commissions — now agreed by the Minister to be, 1980 — $1,365.64 and 1981 — $300, and that he was entitled to “office rent”, or some substitute for rent, ($139) at least in 1981.

The Minister informed the Court that the $139 allowed the appellant was calculated on the percentage of the floor area used for his office (150 square feet) in 1981 related to the total of the house 1130 square feet — but that only heat and light were considered as applicable. I don’t know whether that is fair or reasonable and I really see no reason to be concerned about it. But I am satisfied that if “heat” and “light” are somehow deductible (proportionately) then so should be other expenses of maintaining the ‘‘office and warehouse” portion of the house — taxes, mortgage interest, repairs, insurance, etc. Clearly the appellant cannot charge as expenses, certain portions of these costs (as a substitute for rent) and then also deduct something called “rent” which he has done in filing his returns. The same applied to the year 1980, even though nothing was allowed by the Minister and, it should be added, a considerable portion of the deduction claimed was for “capital expenditures”. But all of that is an assessing problem, not one for the Court.

Under the most favourable circumstances then, this taxpayer could be entitled to deductions of $1,365.64 for 1980 and $300 for 1981, under paragraph 8(l)(f) of the Act alone. The question then becomes — what was there to distinguish the requirement of this appellant for the expenses claimed in relation only to the small amounts of commission income, as opposed to the much greater amounts of salary income? The testimony of the appellant would indicate there was no difference. He spent about 40 per cent of his total working time in his office and warehouse — both part of his home — and 60 per cent of his time on the road. There was nothing to indicate that the expenses he claimed had to do only with the commission income — and, more importantly, there is no support for a conclusion that his employer required him to maintain an “office”, or to incur “expenses” related to the commission income, while not requiring that his duties in order to earn the salary income mandated the same facilities and latitude. Yet the Minister has accepted his requirement for an office, at least in 1981. It was the appellant’s testimony that the office and expenses were needed to earn his total income and that would have included his salary income. According to the appellant it was an understood part of his employment arrangement with his employer. That does seem reasonable to me in view of the fact that he was some 400 miles from his employer’s office and warehouse, and his duties obviously necessitated a base of operations and some form of warehouse storage. If the Court is to accept, without further confirmation or qualification, the Minister’s agreement that the appellant was required to have an office in 1981 ($139 al- lowed) — I can think of no reason to reject the appellant’s claim that such a requirement existed for the salary income as well as the commission income, and that there was a need for such an office in 1980 as well. Further, it does not appear logical to me that the Minister would be agreeing to a requirement by the employer that the taxpayer maintain an office to earn his salary income (and thereby deduct the $139 in 1981) while not having such a requirement for earning his commission income. Simply put, no matter from which source (salary or commission) the Minister permitted the deduction of $139 office rent — and that was not made crystal clear — the argument for legitimate deduction from the other source is equally valid. The signal case of Cival v The Queen, [1983] CTC 153; 83 DTC 5168, as I understand it, stands for the propositions that there must be a “contract of employment”, and to be entitled to the deductions under paragraph 8(l)(h) of the Act, there must be bilateral, not unilateral recognition of the requirement for them. In order for the Minister to permit the deduction of $139 under paragraph 8(1)(f) — but not under paragraph 8(1)(h) or (i) of the Act the Minister would be required to argue that the conditions for qualification under paragraph 8(l)(f) are less stringent than those under paragraph 8(l)(h) or 8(l)(i) of the Act. That might be seen and contended using the differences between the sections, such as “the (travelling) expenses” (8( l)(h)(ii)), and “his own expenses” (8( l)(f)(i) ), but the Minister did not so argue in this case. I also point out that Mr Thompson’s “travelling” expenses (automobile, room and board) were reimbursed to him by his employer — MacDonald Tobacco Limited — but the Minister did not contend that this reimbursement disqualified the taxpayer in any way from the deductions he sought.

In summary, the concession made by the Minister to this appellant sets up the situation which gives him entitlement to some deductions analogous to “office rent”, from income, whether he is considered a commission salesman or a salaried employee. While certain comments about “quantum” were made by counsel for the respondent in argument, that did not appear at any time to be the real point in dispute. The point in dispute appeared to be only whether the appellant had any entitlement to the deductions he sought — a point in my view already determined in favour of the appellant, when the respondent awarded him the amount of $139. Based on the hearing it is difficult to determine quantum, but the only viable determination for the Court as I see it, is to find in favour of the appellant, to the degree reasonable on the available facts.

The appeal is allowed in part, in order that the taxpayer be entitled to deduct the costs claimed for rent and telephone in the years in question — 1980 — $3,688.20, 1981 — $2,164.80. In all other respects the appeal is dismissed. The entire matter is referred back to the Minister of National Revenue for reconsideration and reassessment. Costs are not awarded.

Appeal allowed in part.