Melvin Dueck v. Minister of National Revenue, [1981] CTC 2111, 81 DTC 177

John B Goetz:—This is an appeal by the appellant with respect to his 1975 and 1976 taxation years whereby he declared income and expenses on the basis of being self-employed, as an independent agent in the business of selling insurance. The appellant relied upon section 12 and subsection 18(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended. The respondent assessed the appellant as an employee of Pioneer Life Assurance Company during the 1975 and 1976 taxation years because he had been given a sales territory comprising the Province of Manitoba and had received commission income from Pioneer Life Assurance Company. The Minister relied, inter alia, as follows in his reply to notice of appeal:

7. The Minister of National Revenue relies inter alia, upon sections 2, 3, 8 and 248 of the Income Tax Act, as amended for the appellant’s 1975 and 1976 taxation years, and upon Regulation 1102 and Schedule B of the Income Tax Regulations, as amended for the appellant’s 1975 and 1976 taxation years.

8. He submits that the appellant was an employee of Pioneer Life Assurance Company and that under the appellant’s contract of employment with Pioneer Life Assurance he was not required to maintain an office with the result that the appellant was not entitled to claim any deduction in respect of expense for the cost of maintaining an office in his home by virtue of subparagraph 8(1 )(i)(ii) and subsection 8(2) of the Act.

9. He submits that the amount of expenses claimed by the appellant in excess of the amounts allowed by the respondent (other than the amounts for expenses of maintaining an office in the appellant’s home) were not incurred for the purpose of earning income from the appellant’s employment with Pioneer Life Assurance Company and, consequently, were not deductible pursuant to the provisions of paragraph 8(1 )(f) and subsection 8(2) of the Income Tax Act.

Facts

The appellant had been a semi-trailer truck driver for Gulf of Canada and decided to try his fortunes in selling insurance for Pioneer Life Assurance Company (hereinafter referred to as “Pioneer”) in the years 1975 and 1976. In his returns for the said years, he stated as present employer — “Pioneer Life”. He maintains that he was an independent contractor as an insurance agent for Pioneer and that his expenses for the two relevant years exceeded his income.

The appellant filed as Exhibit A-1, “Agent’s Contract, . . . made this 30th day of May, 1975, between Pioneer Life Assurance Company of Regina, Saskatchewan, hereinafter called the Company, and Melvin Dueck, of Winnipeg, Manitoba, hereinafter called the agent.” Some of the pertinent clauses read as follows:

1. APPOINTMENT

The Company hereby appoints the agent as an independent contractor for the purpose of soliciting, procuring, and submitting applications for all of the forms of life insurance issued by the Company.

3. STATUS OF AGENT

This contract shall in no way be construed as having established the relationship of employer and employee between the company and the agent although the company may from time to time prescribe rules and regulations respecting the matters referred to herein, and such rules and regulations shall be conformed to and observed by the agent. If training courses, sales methods and materials, prospect leads, office facilities, or similar agent services are extended or made available to the agent, it is agreed that the purpose and effect thereof shall be to assist the agent in obtaining applications for insurance with the company.

The appellant filed as Exhibit A-2 an agent’s contract between Dueck and Pioneer, commencing October 1, 1976. The relevant clauses in this contract are clauses 1 and 2 which are identical to clauses 1 and 3 cited above. Subparagraph (f) of clause 3 prohibits the appellant to “work for or act on behalf of any other insurance company or subsidiary of any insurance company, directly or indirectly during the term of this agreement”. He was merely licensed as an insurance agent and not as a broker. He was subject to certain regulations of the company in the preparation of application forms, etc.

The appellant maintained a small office in his home but gave no information as to the size of the office, although the office had an extension to his home personal phone. He received all his mail there and kept his own filing system. His business cards mainly disclosed his name, with the name of Pioneer in small letters at the bottom right hand corner thereof. He was remunerated for his efforts solely by way of commissions which was set out in the agent’s contracts. Quotas were suggested but never enforced. The appellant says that he attended training school which cost him $700 together with obtaining his licence as an insurance salesman. The company supplied him with company application forms, limited stationery for use for memos between offices and administrative use, letterheads and preaddressed envelopes. Other stationery used by him were at his own expense. He did his own typing, filing and mailing. He said that he did his work from his office in his home, in that all of the company’s 60 agents worked out of a small office, dimension: 25' x 25', and could sometimes use the phone from that point. He purchased promotional material such as pens, pocket calendars, attended various meetings and purchased business cards. He could not publish the company name and it merely showed on the letterhead that he was an agent for Pioneer. His promotional material was all approved by the company.

He never received any salary or wages from Pioneer although he became district manager in 1976 and his commissions would increase accordingly with the duty of hiring and training agents, whom he recruited and trained in his home. Commission cheques were sent from Regina to his home. Applications and premiums had to be according to fixed figures set and approved by the company.

The company provided him with a handbook or manual showing him the premiums for different types of insurance coverage. He states that his expenses substantially exceeded his income in 1975 and 1976 taxation years, and that while he was acting as district manager, he recruited and trained his agents from his home office but they did not do well. He finally resigned in that obviously he was not meant to be an insurance agent and took what he calls “a good salary job”. The office he said he used in his home was not specified in his contract but was necessary for his activities as an insurance agent for the company. In the small office he had a desk, a chair and a telephone.

Quoting from paragraphs 4 and 5 of the reply to notice of appeal, the following indicates what was claimed by the appellant and what was allowed by the respondent:

4. In filing his 1975 T-1 tax return, the appellant claimed and the respondent subsequently allowed the following expenses:

	1975
	Expense claimed
	(as filed
Item	per return)		Allowed		Disallowed
Car Expenses:
Interest	$	Nil	$	417.48
Insurance		Nil		137.67
Gasoline	1,109.33			367.87
Maintenance & repairs		999.92		770.35
CCA	1,590.00		1,184.02
	$3,699.25		$2,877.39
Less 35% personal use		Nil	1,007.09
	$3,699.25		$1,870.30		$1,828.95
Licence		133.00		133.00	Nil
Parking		45.00		45.00	Nil
Car Washes		33.50		33.50	Nil
Advertising & Promotion		82.00		90.25	- 8.25
Travel & Accommodation		208.78		Nil	208.78
Entertainment		506.19		269.32	236.87
Training allowance		190.00		190.00	Nil
Telephone		75.35		29.55	45.80
Office Equipment & Supplies		854.50		10.37	844.13
Winnipeg Flying Club		646.58		318.01	328.57
	$6,474.15		$2,989.30		$3,484.85

5. In filing his 1976 T-1 tax return, the appellant claimed and the respondent allowed the following expenses:

	1975
	Expense claimed
	(as filed
Item	per return)	Allowed	Disallowed
Car Expenses:
Operating Expense	$1,595.20	$2,216.56
CCA	1,113.00	874.18
	$2,708.20	$3,090.74
Less 35% personal use	Nil	1,081.76
	$2,708.20	$2,008.98	$	699.22
Accounting	29.00	25.00		Nil
Advertising & Promotion	88.25	90.25		— 2.00
Travel & Accommodation	72.51	72.51		Nil
Entertainment	982.27	250.00		732.27
Telephone	198.71	80.88		117.83
Office Equipment & Supplies	606.31	61.41		544.90
Winnipeg Flying Club	715.47	672.29		43.18
Fire & Liability Insurance	516.00	Nil		516.00
Interest, Exchange, etc	1,766.66	Nil	1,766.66
Rent	1,321.11	Nil	1,321.11
CCA (Class 8)	156.23	Nil		156.23
	$9,156.72	$3,261.32	$5,895.40

Findings

The respondent treated the appellant solely as an employee and not as an independent contractor and therefore took the position that the expenses relating to his office maintained by him were not required for the purpose of earning income and further that his contract of employment did not require him to keep an office. It seems to me that the appellant could not operate in any other way in any efficient manner unless he worked from his car.

Issue

The main issue to be determined by me is whether the appellant was an employee of Pioneer or acted as a sales agent, therefore as an independent contractor for Pioneer.

Chitty on Contracts, Twenty-Fourth Edition, Volume II, London, Sweet & Maxwell, 1977, at p 530, paragraph 3508, states:

. . . The particular words found in the contract between the parties are not conclusive, since the law is only concerned with the nature or substance of the relation which the contract has created.

The appellant was a licensed life insurance agent selling insurance under a prescribed arrangement with Pioneer Life. He was only remunerated on a purely commission basis and had no fixed hours and could come and go as he pleased and do as little or as much work as he chose.

I would find that he was a free-lance or independent contractor and in no sense an employee. The expenses directly relating to the maintenance of the office were deductible as expenses incurred for the purpose of earning the appellant’s income.

see Daniel DiFrancesco v MNR, 34 Tax ABC 380; 64 DTC 106; Chris G Danggas v MNR, 35 Tax ABC 44; 64 DTC 196; and No 732 v MNR, 26 Tax ABC 285; 61 DTC 251. See also Dr William H Alexander v MNR, [1969] CTC 715; 70 DTC 6006, wherein the appellant in that case, Dr William H Alexander, was employed by a hospital for the purpose of being responsible for the radiology department. His duties as a radiologist included the interpretation of films and consultations with the attending physicians regarding the radiological findings. In addition, the radiologist was responsible for consultation with regard to methods and procedures used in the radiology department. The hospital considered him as a member of the medical staff of the hospital. Jackett, P held that Alexander was not under a contract of service employed as an officer or servant of the hospital authority and found with some hesitation at 724 and 6011 respectively:

On the other hand, a contract for services is a contract under which the one party agrees that certain specified work will be done for the other. A contract of service does not normally envisage the accomplishment of a specified amount of work but does normally contemplate the servant putting his personal services at the disposal of the master during some period of time.

At 725 and 6011 respectively he says:

A servant can be employed on terms that he is paid on a basis related to the volume of work and that he himself hires and pays help that is required.

At pages 726 and 6012 respectively he further states:

With considerable hesitation, having regard particularly to the fact that during the years in question the appellant carried on the work exactly as he would have done if he had been an employee, my conclusion is that he was working under a contract for services and was therefore not an officer or servant.

In perusing the calculations of the expenses allowed and disallowed by the respondent in 1975, I find that the appellant should be allowed 25% of his personal use of his vehicle.

Although realizing that it is an arbitrary decision on my part, I cannot see the appellant, in 1975, spending $506.19 for entertainment and I approve the figure allowed by the Minister. I believe he should be allowed $104 for travel and accommodation. The entry for “Office Equipment & Supplies” expense of $854.50 seems to be most excessive; I allow him $300 for this item. Similarly, I approve the figure of the allowance of $318.01 made by the Minister for the appellant’s membership in the Winnipeg Flying Club.

Dealing with paragraph 5 of the reply to notice of appeal, relating to the expenses claimed and allowed for 1976, I would disallow the figures sought as expenses claimed by the appellant for “Office Equipment & Supplies” but allow him $300 as a reasonable figure in this regard. Similarly, with respect to the Winnipeg Flying Club, I approve the figure as allowed by the Minister. With respect to “Fire & Liability Insurance”, I find that this is not a legitimate expense under the circumstances. I disallow the expense claimed as “Interest, Exchange, Etc” as the appellant gave no evidence as to what this item consisted of and so agree with the respondent in disallowing this item of expense. I disallow the amount of $1,321.11 claimed for rent but allow the appellant $600 for use of his home office in 1976. His claim for entertainment in the sum of $982.27 is, to me, excessive but I allow him $350 for entertainment in view of his evidence that he had dinners and meetings with prospects and recruits, the cost of which was mainly borne by him.

I have also considered the following cases: Massey v Crown Life Insurance Co., [1978] 2 All ER 576; and Co-Operators Insurance Association and Robert Henry (Bert) Kearney, [1965] SCR 106.

Decision

The appeal is allowed in part and the matter referred back to the respondent for reconsideration and reassessment accordingly.

Appeal allowed in part.