Jean L Sansoucy v. Minister of National Revenue, [1980] CTC 2312, 80 DTC 1276

Guy Tremblay [TRANSLATION]:—This case was heard at Montreal, Quebec on March 19, 1979.

1. Point at Issue

The question is whether the appellant is justified in fact and in law in claiming the sum of $1,445 in computing his income for the 1976 taxation year, on account of travel and other expenses related to the negotiation of contracts for his employer, pursuant to paragraph 8(1 )(h) of the new Income Tax Act. The appellant was paid a salary plus 5% of net profit before taxes.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessments are 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 R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.01 On July 15, 1974 the appellant was executive vice-president of the COJO contracts division of Opéra Diamond Ltée, in accordance with the contract of employment (Exhibit A-1) concluded on July 15, 1974 between the appellant and the company.

3.02 The appellant had purchased company shares for the sum of $1,200.

3.03 The appellant’s function consisted of organizing the sales section for “Olympic” jewellery, for which the company held an international licence from the Organizing Committee of the 1976 Olympic Games, by a contract signed on June 14, 1974 and May 15, 1975. The company had sales outlets in Montreal and the United States.

3.04 Organization of the said section also meant that the appellant had to negotiate contracts with various organizations in foreign countries. Inter alia, he made two trips to Europe, one of which was in January 1976.

3.05 According to clause 5 of the contract of employment, the appellant received an annual salary of $25,000 plus ‘‘a commission of 5% on the net profit before taxes of operations resulting from the LICENCE”.

3.06 The appellant’s representation and travel expenses were reimbursed by the company. In February 1976, the company owed the appellant the sum of $1,445 as the result of a trip to Europe made in January of that year.

3.07 Early in February 1976, the Bank Canadian National refused to continue its credit to the company and took possession of its property.

3.08 On February 25, 1976 a petition in bankruptcy was filed against the company. The preferred claims alone amounted to over $2 million and the assets to less than $1 million.

3.09 The appellant was never reimbursed the travel expenses of $1,445. In filing his 1976 tax return, he claimed them in computing his net income.

3.10 Mr Roger Laplante, treasurer of Opéra Diamond Ltée in 1974,1975 and 1976, testified that between July 1974 and February 1976 the appellant never received the said commission of 5% described in paragraph 3.04 above.

The only amounts received by the appellant from the company consisted of salary and reimbursement of expenses.

4. Act— Case Law—Comments

4.1 Act

It was admitted between the parties that paragraph 8(1 )(f) of the new Act did not apply in the case at bar. The said “5% commission” was, first, not a commission within the meaning of subparagraph (iii), because it was not “fixed by reference to the volume of the sales made or the contracts negotiated”, which implies that such commissions do not take into account whether profits were made. On the contrary, the 5% commission to which the appellant was entitled was based only on profits. Secondly, even if these commissions met the terms of paragraph 8(1)(f), the section still could not apply in the case at bar because no commission was paid in 1976. the expenses claimed cannot exceed the commissions received.

Paragraph 8(1 )(h) appears in the view of the parties to be the only one for discussion, and it reads as follows:

Deductions allowed.

(1) In computing a taxpayer’s income for a taxation year from an office or employment, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(h) Travelling expenses.—where the taxpayer, in the year,

(i) was ordinarily required to carry on the duties of his employment away from his employer’s place of business or in different places,

(ii) under the contract of employment was required to pay the travelling expenses incurred by him in the performance of the duties of his office or employment, and

(iii) was not in receipt of an allowance for travelling expenses that was by virtue of subparagraph 6(1)(b)(v), (vi) or (vii), not included in computing his income and did not claim any deduction for the year under paragraph (e), (f) or (g)-

amounts expended by him in the year for travelling in the course of his employment.

4.2 Case Law

The parties cited the following cases:

1. Troy William Beaver v MNR, 23 Tax ABC 83; 59 DTC 585;

2. MNR v Claude Rousseau, [1960] CTC 336; 60 DTC 1236;

3. Louis A Mayrand v MNR, 33 Tax ABC 458; 63 DTC 954;

4. Anthony Cekota v MNR, 36 Tax ABC 279; 64 DTC 654;

5. Eric O Claus v MNR, 40 Tax ABC 395; 66 DTC 248;

6. Marvin L Tkachuk v MNR, [1978] CTC 3114; 78 DTC 1830.

4.3 Comments

4.3.1 Expenses deductible under paragraph 8(1)(h):

In order to rely on this section, a taxpayer claiming a deduction under paragraph 8(1 )(h) must meet the three conditions set out in subparagraphs (i), (ii) and (iii). These conditions are in fact conjunctive.

In the opinion of the Board conditions (i) and (iii) were met. There remains condition (ii). This condition is that the employee “under the contract of employment was required to pay the travelling expenses”. When linked with the other two, (i) and (iii), it authorizes deduction of the expense incurred.

According to the evidence, the employer reimbursed expenses. It is clear that when an employee receives an advance from his employer, to pay his expenses and to remit the difference in the event of lower expenses, or to obtain reimbursement of the difference if the expenses are greater, condition (ii) has not been met. Substantially and materially, it is exactly the same as if the employee claimed the expense in its entirety only after it has been incurred, as in the case at bar. Accordingly, it cannot be said that the employee was substantially “under the contract of employment ... required to pay the travelling expenses”. Moreover, the decisions cited above are to this effect.

The fact that at some point, as in the case at bar, an expense is not reimbursed does not change the nature of the general clause contained in the contract. The non-payment of an expense is not material in deciding as to the nature of this clause. The expense becomes a debt, but is it allowable under paragraph 8(1)(h)? In the opinion of the Board it is not, because it does not meet the specified conditions.

4.3.2 Capital loss under subsection 50(1).

Although the parties were agreed that the only section involved in the case at bar is paragraph 8(1 )(h), the Board wonders if subsection 50(1) does not apply to the case at bar. The amount not paid to the appellant by the company would appear to become a debt which might be a basis for a capital loss.

In order to be admitted as a capital loss, any loss must result from a disposition of property. That is the requirement of paragraph 38(b). A debt is regarded as a “disposition of property”.

Clause 54(c)(ii)(B) provides:

(c) “disposition” of any property, except as expressly otherwise provided, includes

(ii) any transaction or event by which

(B) any debt owing to a taxpayer or any other right of a taxpayer to receive an amount is settled or cancelled.

Subsection 50(1), as it stood in the year in question, read as follows:

Debts established to be bad debts.

(1) For the purposes of this subdivision, where a debt owing to a taxpayer at the end of a taxation year (other than a debt owing to him in respect of the disposition of a personal-use property) is established by him to have become a bad debt in the year, he shall be deemed to have disposed of it at the end of the year and to have reacquired it immediately thereafter at a cost equal to nil.

When this section states “for the purposes of this subdivision”, it refers to subdivision (c) of division B’ this subdivision (sections 38 to 55) relates to taxable capital gains and allowable capital losses.

During the course of the year the debt owed to the appellant by the company, in the amount of $1,445 (basic cost) proved to be a bad debt. In February 1976, the company went into bankruptcy (paragraphs 3.08 and 3.09 of the facts). Accordingly, the appellant was deemed to have disposed of it at a cost equal to nil at the end of 1976, and thus to have made a capital loss of $1,445 and an allowable capital loss of $722.50.

However, the applicability of subsection 50(1) is subject to the applicability of the following condition, namely that the debt was acquired for the purpose of gaining income from a business. This condition, contained in subparagraph 40(2)(g(ii), reads as follows:

(2) Limitations. Notwithstanding subsection (1)(g) a taxpayer’s loss, if any, from the disposition of a property, to the extent that it is

(ii) a loss from the disposition of a debt or other right to receive an amount, unless the debt or right, as the case may be, was acquired by the taxpayer for the purpose of gaining or producing income from a business or property (other than exempt income) or as consideration for the disposition of capital property to a person with whom the taxpayer was dealing at arm’s length,

is nil.

According to the evidence, the expense incurred by the appellant which was the basis for the debt was incurred during a trip to Europe in January 1976, for the purpose of negotiating contracts with European organizations regarding the sale of “Olympic” jewellery. It seems clear to the Board that the expense was incurred for the purpose of producing income for the company and that accordingly the loss suffered was not equal to nil.

The taxpayer’s allowable capital loss of $722.50 is accordingly valid and may be deducted from income in the said year pursuant to paragraph 3(e). The capital loss sustained by the company regarding Opéra Diamond Ltée shares held by the appellant as a result of the bankruptcy would also appear to be allowable under the Act. However, it is not the subject of this appeal.

5. Conclusion

The appeal is allowed in part and the whole referred back to the respondent for reassessment in accordance with the foregoing reasons for judgment.

Appeal allowed in part.