C George Johnston v. Minister of National Revenue, [1980] CTC 2766, 80 DTC 1644

The Chairman:—The appeal of Mr C George Johnston is from an income tax assessment in respect to the 1975 and 1976 taxation years.

The issue in this appeal has to do principally with the quantum of expenses claimed by the appellant for the purpose of earning income. It is the appellant’s contention that he was a manufacturer’s agent and for purposes of this appeal, I do not believe anything turns on the actual title that the appellant had with G H Wood & Company Limited.

The appellant in fact was a salesman and it has been made clear that, in his relationship with the company, the appellant was obliged to pay all the expenses incurred by himself in the carrying out of his duties.

It is the appellant’s evidence and it was not contested, that for the period of 1974,1975 and 1976, the period in which he was operating for G H Woods & Company Limited, he was successful in increasing the income of that company by 52% from 1974 to 1975 and by an additional 20% in the 1976 taxation year.

The appellant also indicated, without producing any actual figures to that effect, that the expenses that he had incurred for purposes of earning income for the 1975 taxation year were 11.4%. During 1975, it is my understanding that the appellant was operating for part of the year only. In 1976, his expenses were 12% of his income.

For the 1975 taxation year, the commission income, which I understood is exclusively from G H Wood & Company Limited, was $23,570.90 and in 1976 it was $30,520.04.

One of the strangest things about this appeal is that, even though we are dealing with expenses and the Board is being asked to decide a case as to the amount of the expenses the appellant has claimed, the Board has not been provided with one single voucher.

The onus of establishing the amount of the expenditures claimed by the appellant, is on the appellant. It is up to him to prove to the Board that the amount of expenses claimed were in fact paid, and for the purpose of gaining income.

I think that this is a proper moment to indicate that the Board can only work on the basis of the evidence that is brought before it, and in this case there have been a lot of loopholes and vagueness in the facts, which make it almost impossible for the Board to arrive at a precise decision.

I think the Board can take judicial notice that a salesman who has to earn income from sales, whether he’s working for a big company or on his own, has to incur expenditures to a considerable degree and on many occasions it is very difficult to obtain vouchers or some proof of having incurred expenses.

I think, the Board can also take judicial notice that gifts are sometimes made by the taxpayer where the recipient is not always willing to see his name mentioned. That situation has to be taken into account.

On the other hand, I think it is only reasonable for the appellant to understand that he has a responsibility to indicate and to prove to the Board that the expenditures claimed were in fact made. I do not believe anyone looking at the figures of the appellant’s income for 1975 and 1976 can state that the expenses which he claimed are unreasonable. I think that they are reasonable; whether or not they are proven is another thing.

Should the Board at this stage request that all the vouchers, if available, be brought before it, or can it act as the Department of National Revenue did and allow in one instance 90% of the entertainment and promotional and travel expenses for 1975 and in another, for 1976, allow 75% of these expenses? What is the Board to do? On what basis can it be expected that the Board make definite decision in this matter?

I cannot help but say that it seems rather strange to me, unless there is some very deep principle involved somewhere which I cannot see just now, that this appeal should come before the Board. There are many other appeals which I believe are more complicated and more significant than this one. In this case, nothing is presented to the Board on which a meaningful decision can be made.

In the evidence regarding the 1975 taxation year the appellant claimed expenses in the amount of $3,803.94 and in 1976, the amount of $7,766.26. He was assessed and the expenses were reduced by some $800 in 1975 and some $1,500 in 1976. Finally, by reassessment, expenses in the amount of $3,509.78 for 1975 and $6,128.80 for 1976 were allowed.

If we now look at the information which was provided by counsel for the respondent, we find that in 1975 the amount that was disallowed for automobile expenses was $94.96. This is an arbitrary figure, the 5% of automobile expenses considered by the respondent to have been for the personal use of the appellant. The evidence however, which was not contradicted, was that the appellant used a business car which was so cluttered up with his products that it could not really be used for personal use.

In my view, it is a logical and reasonable explanation. There is no evidence to the contrary, and the 5% should not have been disallowed and he should have been allowed the full amount of the automobile expenses.

Of course the federal gas tax rebate, has stay in, for both 1975 and 1976. Then we come down to entertainment, promotion and travel in which, as of June 26, 1979, the Minister allowed 90% of the expenses claimed but on what basis, why 90% and why not 95% or 85%?

The Board has no basis on which to should try to second-guess the respondent. I do believe that it is reasonable to ask the Board to determine the question in such circumstances. On the other hand, there is a definite responsibility for the appellant to show that 100% of the expenditures for entertainment, promotion and travel were expended and he did not carry that out. I have nothing before me which confirms the basis on which the expenditures were claimed. There is not one voucher or figuree that has been presented to the Board in support of the appellant’s claim.

Nor having not been given any valid reason to change the amount of deductions allowed by the Minister and I am going to leave it at 90%.

In 1976 the amount of the automobile expenses that was disallowed, was $378.92 on the basis that 10% was used for personal use. For the same reason, as for the 1975 taxation year I am going to allow that automobile expenses in full because I am satisfied that the evidence given by the appellant in that respect is credible and should be accepted.

We then come down to entertainment and promotional expenses in which an amount of $693.92 was disallowed, representing 25% of the amount claimed. I have not been given any basis on which the respondent based that figure nor do I have any counterproof to the effect that the Minister’s assessment in this respect was wrong. I have no alternative but to leave that as it Is.

As far as the travel to Washington, Oregon, North Carolina and California or whatever, I am satisfied that the appellant did travel to the areas mentioned—there is some evidence in a letter to that effect. I agree that the date of the first letter about Mr Johnston—from Mr Tughan to Mr Johnston—was in December 1976 and actually there is a reply in 1977. But I am satisfied that expenditures were made by the appellant to travel on business to the places he mentioned. There is no vouchers and no other evidence that the amount was expended and actually, what I am doing is trying to make a reasonable decision and that is about the only thing one can do under the circumstances; I am therefore going to allow the travel expenditures in the amount of $428.91.

In conclusion I allow the appeal and refer the matter back to the Minister on the basis that all the automobile expenses claimed in 1975 and 1976 be allowed and that travel expenses in the amount of $428.91 be also allowed.

In all other matters, the appeal is dismissed.

Appeal allowed in part.