Watt v. R., [1997] 2 CTC 2651

Margeson T .C J .:

The appeal is from a reassessment for the 1994 taxation year, notice of which was dated May 28, 1996. By reassessment, the Minister allowed the amount of $260 as medical expenses, for transportation services, instead of the amount of $1,519 as originally claimed.

The Minister disallowed the claimed expenses on three grounds: (1) the Appellant had not filed receipts with the Minister for the disallowed expenses in accordance with subsection 118.2(1) of the Income Tax Act (the Act); (2) those expenses were not proven to have been paid or incurred; and (3) they were not reasonable.

Before the trial commenced the parties filed an Agreed Statement of Facts as set out herein:

AGREED STATEMENT AS TO FACTS

The Appellant and the Respondent do hereby agree with each other in connection with the truth and accuracy of the following facts and statements:

1. The Appellant, Doria Watt (having Social Insurance Number 632- 699-831) is an individual resident of La Ronge, Saskatchewan.

2. The Appellant has submitted a claim to the Respondent on account of medical expenses with respect to her 1994 taxation year (for medical expenses in connection with the period December 6, 1993 - December 5, 1994) in the amount of $3,096.00.

3. The Respondent has allowed medical expenses for the Appellant in the amount of $1,656.00.

4. The difference between the position of the Appellant and the position of the Respondent in connection with the medical expense claim relates solely to the item respecting “travel -use of personal vehicle”:

(a) The Appellant has made a medical expense claim of $1,519.00 in connection with this item ($0.31 per kilometre);

(b) The Respondent has allowed only $260.00 in connection with this item ($0.05 per kilometre x 5200 kms).

5. The Appellant says that in determining the travel expenses in connection with the use of her vehicle, the particulars and method of calculation used by the Appellant is as follows:

Date of	Destination	Number	Rate per	Amount
Trip		of	Km
			Claimed by
		Km
			Appellant
December Saskatoon,		800	$0.31	$ 248.00
6, 1993	SK
January	Prince Al-	500	$0.31	155.00
26, 1994	bert, SK
May 31,	Prince Al-	500	$0.31	155.00
1994	bert, SK
June 27,	Prince Al-	500	$0.31	155.00
1994	bert, SK
July 14,	Saskatoon,	800	$0.31	248.00
1994	SK
October	Prince Al-	500	$0.31	155.00
17, 1994	bert, SK
October	Saskatoon,	800	$0.31	248.00
19, 1994	SK
November	Prince Al-	500	$0.31	155.00
9, 1994	bert, SK
Total		4,900		$ 1,519.00

There were no receipts filed with the Minister supporting the medical expense claim of $1,519.00 for “travel - use of personal vehicle”.

6. The amount per kilometer that the Respondent has suggested as being reasonable is $0.05 per kilometer (i.e. 5,200 km x $0.05 = $260.00), being the amount that the Respondent is prepared to allow in connection with “travel - use of personal vehicle”.

7. The Appellant and Respondent agree that the travel in question related to transportation of the Appellant and/or the children of the Appellant from the locality where the Appellant dwells to visit medical persons in circumstances where:

(a) The amount of travel required was at least 40 kilometers; (b) Substantially equivalent medical services were unavailable within the Appellant’s locality;

(c) The Appellant was taking a reasonably direct travel route;

and

(d) It was reasonable for the Appellant to travel to that place for medical services.

These are the requirements of paragraph 118.2(2)(g) of the Income Tax Act (Canada) (the “Act”). The Appellant and Respondent agree that these requirements have been satisfied.

8. The Appellant’s claim for the use of the vehicle is made pursuant to subsection 118.2(4) of the Act.

9. The Appellant and the Respondent agree that during the time periods which are relevant to this appeal, the applicable transportation rates allowed to employees of the Federal Government, and the applicable transportation rates allowed to employees of the Saskatchewan Public Service within the Province of Saskatchewan are more particularly set forth in Schedule “A” annexed hereto and forming part of this Agreed Statement as to Facts.

DATED at the City of Saskatoon, in the Province of Saskatchewan this 79 day of February, 1997.

PRIEI., STEVENSON, HOOD & THORNTON

Per:

Beaty Beaubier, on behalf of the Appellant

DATED at the City of Saskatoon, in the Province of Saskatchewan this day of February, 1997.

DEPUTY ATTORNEY GENERAL OF CANADA

Solicitor for the Respondent.

Per:

Dona Gilbertson, Agent of the Respondent.

In addition the Respondent called Jyotsna Custead, an appeals officer with Revenue Canada. She reviewed the file in question.

She produced Exhibit R-1, which was an excerpt from the Taxation Operations Manual containing a breakdown of motor vehicle expenses allowed by the Department of Finance, according to the provinces.

She admitted that the Appellant was only allowed gasoline expenses which she calculated at 5 cents a kilometre in accordance with the schedule.

The witness did not allow other expenses set out in Exhibit R-1 for oil, tires, maintenance and repairs, insurance, licences and miscellaneous. She submitted that if she had allowed what she referred to as “operating expenses” that the proper allowance would have been 14 cents per kilometre.

She said that the Federal Government allows a rate of 30 cents to 31.5 cents per kilometre to its employees but this amount includes not only “op- erating expenses” but also “ownership costs, insurance costs, or employee reported costs”.

In cross-examination she said that the allowance was based upon what a reasonable rate would be across Canada. The allowance to employees of Revenue Canada is a policy decision.

She was shown Exhibit A-l, which the Court admitted into evidence subject to weight, over the objection of counsel for the Respondent. This excerpt showed that the Department of Finance, Canada, was allowing employees, as a limit for deductible tax-exempt allowances paid by employers to employees as of 1997, from 33 cents to 35 cents for the first 5,000 kilometres and from 27 cents to 29 cents for each additional kilometre thereafter.

She admitted that her department was not following what counsel for the Appellant believed was the finding in Enns v. R., (1996), 96 D.T.C. 1676 (T.C.C.), where Bell, T.C.C.J., under the facts in that case found that the rate of 30 cents a kilometre was a reasonable one.

She took the position that under Regulation 7386, for the purposes of paragraph 18(l)(r) of the Act, the allowance was 31 cents per kilometre.

Argument of the Appellant

Counsel for the Appellant said that the position of the Respondent as set out in paragraphs 1 and 2, as referred to in paragraph 7 of the Reply to Notice of Appeal (Reply) were without merit. It would be impossible to have a receipt for a deemed payment as contemplated by subsection 118.2(4) of the Act. Secondly, the expenses claimed were reasonable under the same subsection.

Counsel argued that Regulation 7386 referred to the actual costs of driving, not just so called “costs of operation” or “direct costs”. Further, paragraph 18(1)(r) uses the term — “use by an individual of an automobile”.

This is an indication that the legislators had in mind all of the expenses related to the use of an automobile be they so-called “direct” or “indirect” expenses.

He also argued that section 12 of the Interpretation Act, R.S.C. 1985, Chap. I-21 dictated that the interpretation of subsection 18.2(4) be given such a “fair, large and liberal construction and interpretation” that the amount claimed could be allowed.

He asked that the appeal be allowed with costs.

Argument of the Respondent

Counsel for the Respondent took the position that the Appellant had not complied with section 118.2 and that was the end of the matter. Otherwise, subsection 118.2(4) prevents the appeal from being successful.

Counsel said that there was a difference between an amount paid “in respect of the operation of a vehicle” under subsection 118.2(4) and an amount paid “in respect of expenses incurred which were not related directly to the operation of the vehicle.”

This result can be seen by reference to Regulation 7305.1 and paragraph 6(l)(k) where the terms used are: “amounts related to the operation” under which the amount of 12 cents is allowed for a car salesman. This distinction can also be seen by reference to Income Tax Bulletin IT-63R5 at page 6, where the terms used with respect to the automobile are — “operation of the automobile” (“operating costs”).

Counsel made reference to R, v. Burnco Industries Ltd., (1984), 84 D.T.C. 6348 (Fed. C.A.) in support of the position that there is a difference between “expenses relating to the operation” of a vehicle and other expenses which do not relate directly to operation, such as insurance, capital cost allowance and interest. In the case of capital cost allowance it cannot be an expense since there is no obligation to pay. See also, Harris v. Minister of National Revenue, (1966), 66 D.T.C. 5189 (S.C.C.), which counsel cited in support of her proposition that to allow something that was not an expense would entitle the taxpayer to artificially reduce income. Capital cost is not an outlay or expense.

Counsel pointed out that the amount permitted by the Minister was reasonable in light of the very limited use of the vehicle.

Counsel said that the sections referred to by counsel for the Appellant deal with “allowances” and not “expenses”. Counsel further argued that if the amount allowed was found not to be fair, then the reasonable amount would be 14 cents a kilometre in accordance with the evidence.

Rebuttal

In rebuttal, counsel for the Appellant said that paragraph 6(l)(k) and 6(1)(1), refer to “operating expenses”.

Further, he argued that if the Court should not allow the whole amount per kilometre as requested, then the amount of 14 cents a kilometre would be reasonable.

Costs

On the matter of costs, counsel for the Appellant pointed out that an Offer of Settlement was made to the Respondent on January 30, 1997 with respect to costs and if the Appellant is successful here costs should be awarded to the Appellant in the amount of $1,500, lump sum, together with disbursements, since the issues in question here are the same as those in Enns, supra.

If the Court should allow less than 31 cents a kilometre then costs should be taxed in his favour.

Counsel for the Respondent also pointed out that an offer of settlement had been made to the Appellant on November 14, 1996 on the basis of 15 cents a kilometre and if the Court does not allow more, then there should be no costs awarded to the Appellant.

Analysis and Decision

With respect to the first three arguments raised by counsel for the Respondent as set out in the Reply in paragraph 7(b) and (c) the Court finds no merit in those arguments.

It is clear from a reading of subsection 118.2(1), paragraph 118.2(2)(g) and subsection 118.2(4) that two entirely different situations are contemplated.

In the case at bar, as in Enns, supra, and as argued by counsel for the Appellant here, it is impossible to provide a receipt for a “deemed payment”. The Appellant on the facts of this case was entitled to avail herself of either provisions, she chose the latter.

However, when the Court reads all of the provisions, in light of the facts presented here, it is satisfied that the expenses that would be allowed to the Appellant under paragraph 118.2(1) are all expenses which she proves, by the filing of the necessary receipts, which represent a payment “to a person engaged in the business of providing transportation services to the extent that the payment is made for the transportation of (i) the patient”. The paragraph makes no mention of a payment “in respect of the operation of the vehicle” only. If, however, the taxpayer’s right to the deductions depended upon the deemed payment under subsection 118.2(4) he or she is entitled only to claim a deemed payment to the person providing the service — “in respect of the operation of the vehicle”.

It is the Court’s position that there is a difference between costs or expenses incurred “in respect of the operation of a vehicle” and expenses or costs incurred in respect of a vehicle for matters other than those related to its Operation, i.e. capital cost, interest, insurance.

The Court’s position in that regard is strengthened by the terms used in the cases referred to and in the clear difference as mandated in the sections of the Act already referred to and in the Regulations.

Counsel for the Appellant said that he could not perceive any difference between the two concepts but the Court is satisfied that there clearly is such a distinction.

It is not for the Court to contemplate why the legislators would have drawn such a distinction except to say that it would be much simpler for the department to be able to allow the whole deduction when the receipt is accepted since the payment is to someone other than the taxpayer and may be more likely to be legitimate.

Counsel for the Appellant also argued the case of Enns, supra, but it was his position that there was no real discussion as to the difference between costs paid in respect of the operation of the vehicle and other costs that might not be included therein.

The Court notes that on page 1677 of the Enns decision, supra, Bell, T.C.C.J. does refer to the words “in respect of” the operation of the vehicle and decides that such words “simply characterize the amount deemed to have been paid”. However, it appears to this Court that the words — “such amount as is reasonable in the circumstances, can only reflect back to the words, “in respect of the operation of the vehicle, so that the expenses, to be allowed, must be reasonable in the circumstances and relate to the operation of the vehicle.”

The Court now turns to a consideration of the terms, “such amount as is reasonable in the circumstances”.

The Court is satisfied that the amount allowed by the Minister in this case was not reasonable in the circumstances. Although the determination of what is reasonable under the circumstances is a question of fact for this Court to decide, it need not disregard the evidence adduced as to what range of expenses are being allowed in respect to the operation of motor vehicles to employees of the department.

The witness called by the Respondent made it clear that she made no allowance for any expenses other than gasoline, but one cannot operate a motor vehicle on gasoline alone.

Exhibit R-l, introduced by counsel for the Respondent considers other items that the Court concludes were “in respect of the operation of the vehicle” including oil, tires, repairs and possibly insurance and license fees. The Appellant should have been allowed a reasonable amount under those headings.

The Court finds that a reasonable amount under the circumstances would be 14 cents per kilometre and that amount is allowed.

The appeal is allowed and the matter referred back to the Minister of National Revenue for reassessment and reconsideration, on that basis.

With respect to the matter of costs, it is true that the Respondent made an offer of settlement to the Appellant which was fractionally higher than the amount found by this Court to be reasonable, but the Court is satisfied that counsel for the Appellant was not representing the Appellant at that time. If he had, the result may have been different. This Court will allow costs to the Appellant, to be taxed, on a party and party basis.

Appeal allowed in part.