Henri Kirouac v. Her Majesty the Queen, [1996] 3 CTC 2915 (Informal Procedure)

Tremblay J.T.C.C.: — This appeal was heard under the informal procedure at Québec, Quebec, on October 5, 1995.

1. Point at Issue

According to the originating documents, the point at issue is whether the appellant, a life insurer for L’Industrielle-Alliance, is entitled to claim expenses of $35,448 and $36,005, respectively, in calculating his income for the 1990 and 1991 taxation years.

The respondent allowed $17,437 in 1990 and $18,491 in 1991. After reconsidering the expenses, the Minister added to the allowed expenses $7,023 in 1990 and $6,879 in 1991. There thus remained a difference of $10,414 in 1990 and of $11,612 in 1991. It is these amounts that are in issue.

The respondent contends that certain expenses were not incurred and that others were of a personal nature.

2. Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s reassessments are incorrect. That burden of proof arises from a number of judicial decisions including a judgment by the Supreme Court of Canada in Johnston v. Minister of National Revenue, [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182.

2.02 The facts assumed by the respondent in the instant case are described in subparagraphs (a) to (d) of paragraph 7 of the Reply to the Notice of Appeal and read as follows:

7. In order to make these reassessments, the Minister made the following assumptions of fact:

(a) during the years in issue, the appellant was employed by L’Industrielle- Alliance, a life insurance company (the “company”), as an insurance agent;

[admitted, but to be completed]

(b) the appellant reported the following commission income during the years in issue:

	1990	1991
L'Industrielle-Alliance	$38,299 $43,005
The Standard Life Assurance Company	5,104	0
	43.403 15.1.9112

[Admitted.]

(c) the appellant did not show that the expenses enumerated below, amounting to $17,437 for the 1990 taxation year and to $18,491 for the 1991 taxation year, were incurred during those years in order to earn income from his employment and/or for the purpose of gaining or producing income from a property or business within the meaning of paragraphs 8(1 )(f), 18(1)(1) and 18(l)(a) of the Act:

	1990	1991
Travel expenses	$ 6,180	$ 6,478
Entertainment expense (80%)	6,410	5,770
Telecommunications	1,422	1,844
Office expenses	2,111	2,218
Bank charges and interest 1,314	2,181
	217,437	$18.49]

[Denied.]

(d) on November 15, 1994, for the sole purpose of settling the dispute with the appellant, the Minister issued notices of reassessment in respect of the appellant for the 1990 and 1991 taxation years, revising the expenses in issue as follows:

1990

	NISSUE	ALLOWED DIFFERENCE
Travel expenses	$6,180	$3,090	$ 3,090
Entertainment
expense (80%)	6,410	3,205	3,205
T elecommunications	1,422	200	1,222
Office expenses	2,111	528	1,583
Bank charges
and interest	1,314	0	1,314
	$17.437 $7.023 $10.414
	IN ISSUE ALLOWED DIFFERENCE
Travel expenses	$ 6,478	$3,239	$ 3,239
Entertainment
expense (80%)	5,770	2,885	2,885
Telecommunications	1,844	200	1.644
Office expenses	2,218	555	1,663

Bank charges
and interest	2,181	0	2,181
	$18-491 $6879 $11.612

[Translation.]

3. Facts Adduced in Evidence

In addition to the above admissions, the evidence was completed by the appellant’s testimony and that of Claude Potvin for the respondent.

3.01 The detailed expenses claimed by the appellant in his income tax returns were as follows for the two years in issue:

	1990	1991
Automobile	$11,557	$10,884
Less: Personal portion (25%)	2,889	2,721
Deductible portion	8,668	8,163
Commissions paid	1,082	981
Losses on premiums	851	872
Repayment, premiums paid	2,854	3,120
Travel expenses	6,180	6,478
Entertainment expense (80%)	6,410	5,770
Agent's permit and licence	340	403
Magazines and documentation	821	732
Telecommunications	2,422	2,844
Postage, stationery	1,243	1,114
Advertising and association	902	879
Office expenses	2,111	2,218
Bank charges and interest	1,314	2,181
Fees	250	250
		236,005
	235,448

3.02 The appellant explained that he was receiving pension income of the amount of $40,000, in addition to his commission income.

3.03 The appellant has been in life insurance for 37 years. He knows many people. Eighty per cent of his clients are in the province of Quebec, including 30 per cent in greater Québec and 12 to 15 per cent in greater Montréal.

3.04 In addition to an office in the L’Industrielle- Alliance building, he has another one in his own home, even though the company does not require him to have one there. A certain number of his clients, he said, want to see him alone at his home, not at L’Industrielle-Alliance’s office, where other life insurers whom they know would be. He contends moreover that he is not entitled to use the L’Industrielle-Alliance’s office to insure a client with another insurance company. Moreover, the L’Industrielle-Alliance’s office closes at 5:00 p.m. He receives clients at his home in the evenings.

3.05 His son has also sold life insurance with him for a number of years. He has been associated with “Le Groupe Dubeau” for the previous four years. The appellant knows that he will retire in a few years, and that his business will be transferred to his son. This fact is an incentive for him to maintain a good business and to work accordingly.

3.06 Claude Potvin, an auditor with the Department of Revenue Canada for 12 years, explained that many expenses were disallowed in the appellant’s case:

(a) they were considered as personal, mainly restaurant expenses of $4 to $12; (b) the vouchers bore no date;

(c) some vouchers were filed in duplicate; or

(d) they were considered ineligible, such as home office expenses, golf expenses and unjustified travel expenses.

3.07 Mr. Potvin sent the appellant a summary of changes which read as follows:

Summary of Changes

	Summary of Changes
1990	Claimed Allowed		Difference
Travel expenses	$ 6,180.00	$	0.00		$ 6,180.00
Entertainment expense	6,410.00	0.00			6,410.00
Telecommunications	2,422.00	1,000.00			1,422.00
Office expenses	2,111.00	0.00			2,111.00
Bank charges and
interest	1,314.00	0.00			1,314.00
	.437,00	$1.000.00			$17-437.00
1991	Claimed	Allowed Difference
Travel expenses	$ 6,478.00	$	0.00		$6,478.00
Entertainment expense	5,770.00		0.00		5,770.00
Telecommunications	2,844.00	1,000.00			1,844.00
Office expenses	2,218.00		0.00		2,218.00
Bank charges and
interest	2,181 00		0.00		2,181.00
	19.49100	5100000			18,491.00

Explanation:

The vouchers that you filed do not in any way support the expenses claimed.

[Translation.]

3.08 In response to his first audit, a notice of objection was filed by the appellant and a new audit was conducted.

According to the appellant, the new auditor did not examine the vouchers, but in essence allowed 50 per cent of the disallowed expenses. This appears moreover from the allegation at 2.02: 7(d) of the assumptions of fact. This percentage was apparently allowed in order to settle the case.

3.09 According to Mr. Potvin, all taxpayers who are in the same field as that of the appellant claim expenses of approximately 20 to 30 per cent of commission income.

4. The Law - Analysis

4.01 The Law

The provisions involved in the instant appeal are paragraphs 8(1 )(f), 18(l)(a) and 18(1 )(1) and section 67 of the Income Tax Act (the “Act”). They read as follows:

8(1)(f) Salesman s expenses. — where the taxpayer was employed in the year in connection with the selling of property or negotiating of contracts for his employer, and

(i) under the contract of employment was required to pay his own expenses,

(ii) was ordinarily required to carry on the duties of his employment away from his employer’s place of business,

(iii) was remunerated in whole or part by commissions or other similar amounts fixed by reference to the volume of the sales made or the contracts negotiated, and

(iv) was not in receipt of an allowance for travelling expenses in respect of the taxation year that was, by virtue of subparagraph 6(l)(b)(v), not included in computing his income,

amounts expended by him in the year for the purpose of earning the income from the employment (not exceeding the commissions or other similar amounts fixed as aforesaid received by him in the year) to the extent that such amounts were not

(v) outlays, losses or replacements of capital or payments on account of capital, except as described in paragraph (j), or

(vi) outlays or expenses that would, by virtue of paragraph 18(1 )(1), not be deductible in computing the taxpayer’s income for the year if the employment were a business carried on by him;

18. General limitations.

(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) General limitation — an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

18(1)

(1) Use of recreational facilities and club dues. - an outlay or expense made or incurred by the taxpayer after 1971,

(i) for the use or maintenance of property that is a yacht, a camp, a lodge or a golf course or facility, unless the taxpayer made or incurred the outlay or expense in the ordinary course of his business of providing the property for hire or reward, or

(ii) as membership fees or dues (whether initiation fees or otherwise) in any club the main purpose of which is to provide dining, recreational or sporting facilities for its members;

67. General limitation re expenses.

In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.

4.02 Analysis

4.02(1) On the whole, the evidence showed that, in 1990, the appellant claimed expenses of $35,448 against commission income of $43,403, that is, 80 per cent of his commission income and, in 1991, expenses of $36,005 against commission income of $43,005, that is, 83 per cent of his income.

4.02(2) In 1990, the respondent allowed 68 per cent of the expenses claimed, that is, $24,258 out of $35,448 and, in 1991, 70 per cent, that is, $25,370 out of $36,005.

4.02.3 According to the experience of the respondent’s auditor, expenses ordinarily claimed in a case of this kind represent 20 to 30 per cent of income.

4.02.4 Whereas section 67 of the Act, according to which expenses in computing income are deductible only “to the extent that the outlay or expense was reasonable in the circumstances”;

Whereas a certain number of expenses must be disallowed (3.06);

Whereas the respondent allowed expenses equal to 68 per cent and 70 per cent of income for the years in issue, it is the Court’s view that the respondent was more than reasonable in the circumstances.

5. Conclusion

For the aforementioned reasons, the appeal is dismissed.

Appeal dismissed.