Jean-Paul Fluet v. Minister of National Revenue, [1982] CTC 2319, 82 DTC 1319

Guy Tremblay [Translation]:—This case was heard at Montreal, Quebec on May 14, 1981.

1. Point at Issue

The point at issue is whether the appellant, a bank manager, is entitled to deduct from his 1978 salary of $24,312.70 the sum of $295.50 that he paid his employer as a penalty.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof derives not from one particular section of the Income Tax Act but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182. Also, in accordance with the same judgment, the presumed facts on which the respondent relied in establishing the assessment or reassessment must also be regarded as true until proven otherwise by the appellant.

In the present case, the assumptions of fact on which the respondent based the assessment issued on August 17, 1979 are set out in paragraph 2 of the reply to the notice of appeal, which reads as follows:

[Translation]

2. In assessing the appellant for the 1978 taxation year, the Minister of National Revenue relied, inter alia, on the following presumptions of fact:

(a) During the taxation year at issue, the appellant was employed by the Montreal City and District Savings Bank as the manager of its branch situated at 515 Décarie, in Montreal;

(b) In computing his income for the taxation year at issue, the appellant is seeking to deduct a sum of $295 that he paid to his employer as a fine the latter had imposed;

(c) The sum claimed constitutes a personal expense of the appellant.

3. Facts

3.01 The appellant admitted the facts alleged in subparagraphs (a) and (b) of paragraph 2 of the reply to the notice of appeal, cited in full above, but specified that he was the manager of the bank branch. He denied subparagraph (c) of the said paragraph.

3.02 As appears from the tax return filed by the appellant for the 1978 taxation year, the latter’s salary income was $24,312.70.

3.03 During the above-mentioned year, the appellant, in the course of his duties, advanced the sum of $295.60 to a customer of the bank, an advance that the said customer did not repay. The appellant had based his decision to make the advance on the fact that several sums had already been advanced to this customer and that these advances had been repaid.

The appellant’s employer, however, took the position that the appellant had made a bad decision, that is to say, a decision that was not consistent with the bank’s policy. The employer subsequently, in accordance with bank regulations, imposed on him a penalty equal to the sum advanced.

3.04 The appellant then requested his employer to withhold the penalty in question from his gross salary by reducing it from $530 to $235 for one week. The appellant received an answer stating that the computer was not programmed to perform this kind of task.

The appellant affirmed, however, that when an employee is penalized through a temporary suspension, the computer may then be programmed to withhold the unearned portion from the employee’s pay. The appellant’s notice of appeal clearly summarizes his testimony in this respect: “From that moment on, he is no longer on the payroll and therefore cannot receive any more paycheques. Later on, when he is reinstated subsequent to an inquiry, he receives only that portion of his salary that is adjudged to be owing to him. In this manner, therefore, the lost portion of his salary constitutes the penalty, but is not taxed in this case.”

3.05 On December 18, 1978, the appellant made out a cheque to his employer for the sum of $295.60 with the note “Penalty imposed on employee for advance of funds on customer account” (followed by the name of the customer and his account number), “bank case No 78-33-914”.

3.06 In issuing the assessment notice dated August 17, 1979 in respect of the appellant’s 1978 taxation year, the respondent disallowed the deduction claimed by the appellant for $295.60 that he had paid as a penalty.

3.07 Further to a notice of objection filed on September 20, 1979, the respondent, in a notice dated February 27, 1980, confirmed the assessment notice issued on August 17, 1979, once again disallowing the deduction of $295.60.

3.08 On May 7, 1980, the appellant filed a notice of appeal with the Tax Review Board.

4. Act — Case Law — Comments

4.01 Act

The principal section of the Income Tax Act involved in this case is section 8. It is this section and this section only that sets out the deductions allowed in cases where the taxpayer is an employee.

Subsection 8(2) of the Act reads as follows:

(2) General limitation. 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.

The deductions allowed in the said section 8 bear on the following points:

8(1 )(a) Employment expense deduction.

8(1 )(b) Legal expenses of employee.

8(1)(c) Clergyman’s residence.

8(1 )(d) Teachers’ exchange fund contribution.

8(1 )(e) Expenses of certain railway company employees employed away from

ordinary residence or home terminal.

8(1)(f) Salesman’s expenses.

8(1 )(g) Transport employee’s expenses.

8(1 )(h) Travelling expenses.

8(1 )(i) Dues and other expenses of performing duties.

8(1)(j) Automobile costs.

8(1 )(k) Unemployment insurance premium.

8(1 )(l) Canada Pension Plan contribution.

8(1 )(m) Contribution to registered pension plan.

8(3) Limitation re employment expense deduction.

8(4) Meals.

8(5) Certain annual dues not deductible.

8(6) “Contribution limit” defined.

8(7) Teachers.

8(8) Employees’ contributions to pension fund for arrears.

Section 248 of the Act reads in part as follows:

“Office”.—“office” means the position of an individual entitling him to a fixed or ascertainable stipend or remuneration and includes a judicial office, the office of a Minister of the Crown, the office of a member of the Senate or House of Commons of Canada, a member of a legislative assembly or a member of a legislative or executive council and any other office, the incumbent of which is elected by popular vote or is elected or appointed in a representative capacity and also includes the position of a corporation director; and “officer” means a person holding such an office;

“Employment”.— “employment” means the position of an individual in the service of some other person (including Her Majesty or a foreign state or sovereign) and “servant” or “employee” means a person hoding such a position;

“Employee”.—“employee” includes officer;

“Employer”.—“employer”, in relation to an officer, means the person from whom the officer receives his remuneration;

4.02 Case Law

Counsel for the respondent referred the Board to the judgments rendered in the cases below by the following tribunals:

The former Tax Appeal Board (TAB)

The Tax Review Board (TRB)

The former Exchequer Court of Canada (ECC)

The Federal Court of Canada (FCC)

1. Timothy Furgale v MNR, [1970] Tax ABC 129; 70 DTC 1093;

2. Stephen Gramlewicz v MNR, [1975] CTC 2303; 75 DTC 226;

3. Ralph L Grein v MNR, [1968] Tax ABC 768; 68 DTC 598;

4. Edward H Rossman v MNR, [1967] Tax ABC 393; 67 DTC 273;

5. Imperial Oil Ltd v MNR, [1947] CTC 353; 3 DTC 1090;

6. Sunshine Mining Co v The Queen, [1975] CTC 223; 75 DTC 5126;

7. Jean-Paul Fluet v MNR, [1978] CTC 2902; 78 DTC 1657.

4.03 Comments

4.03.1 One of the appellant’s principal arguments is that if the deduction of the penalty had been programmed into the computer and carried out at source, he would not have been taxed on this amount, just as an employee who has been penalized through a temporary suspension of one or two weeks is not taxed.

4.03.2 The Board is of the opinion that the deduction or non-deduction at source of the penalty is prima facie an administrative question only and cannot in theory affect the substance of the Act. The crux of the issue is to determine what is income and what is not income. In actual fact, when the appellant violated the bank directives, he was at his place of work and was paid for the work he did. The salary that he received at the time constitutes income for the appellant and that income is taxable within the meaning of the Income Tax Act.

If the penalty imposed by the bank had taken the form of a temporary suspension of one week, and the appellant had neither worked during nor been paid for that period, the Board is of the opinion that such unearned and unpaid salary would not have been taxable in his hands. This would also be the case had he been penalized through a reduction of salary in respect of future work.

However, the penalty imposed by the bank took the form of a fine equal to the amount advanced to the customer, an amount that the said customer did not repay to the bank. In theory, a penalty of this kind does not affect the basic salary that was in fact earned; this is true regardless of whether the fine is paid directly by the employee, as occurred in this case, or whether it is deducted from future salary by the employer himself, as a form of com- pensation (if the computer is programmed to do this). That does not alter the fact that income was earned and that it is taxable; nor does it have any bearing on the substance of either the facts or the Act.

The income earned is therefore taxable whether the fine is paid directly by the employee or is deducted from his salary. Can the fine, however, be allowed as a deduction?

4.03.3 In view of the fact that all the deductions allowed against income from an office or employment are set out in section 8 of the Act and that no provision is made therein for the payment of a fine to one’s employer, the deduction cannot be allowed.

The Tax Review Board, like any other tribunal in this country, must interpret the Income Tax Act strictly, since the Act falls within the realm of public law.

The need for strict interpretation obliges the tribunal to allow only such deductions as are explicitly provided for; moreover, the words used in the legislation must be interpreted according to their dictionary meaning unless they are defined in the Act.

In the instant case, the Act contains no provision, either general or particular, that would enable the Board to allow the deduction claimed. Unfortunately for the appellant, the appeal must be dismissed.

5. Conclusion

The appeal is dismissed.

Appeal dismissed.