Gerald Faubert v. Minister of National Revenue, [1979] CTC 2723, 79 DTC 641

Guy Tremblay [TRANSLATION]:—This case was heard in Montreal, Quebec on May 10, 1978.

1. Issue

The issue is whether the respondent was justified in refusing to allow the deduction of $4,009 in 1974 and $4,964 in 1975 for automobile expenses in computing the income of the appellant, a travelling salesman paid solely on a salary basis. The appellant received a car allowance of $2,600 a year. In addition, his employer paid for his ordinary gasoline and oil expenses upon presentation of receipts. Regular maintenance, repairs and insurance were the appellant’s responsibility.

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 of the Supreme Court of Canada in R RWS Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.1 During 1974 and 1975 the appellant was employed by Frank Mariano et Cie Inc, a company that sells sports equipment.

3.2 He worked as a salesman. His territory covered almost the entire province, with the exception of Metropolitan Montreal and vicinity, extending to the North shore and including the Saguenay Lac St-Jean area and the Gaspé peninsula.

3.3 He was paid solely on a salary basis.

3.4 He also received an automobile expense allowance of $50 a week, or $2,600 a year. In addition, the company paid his ordinary gasoline and oil expenses upon presentation of the receipts. The other expenses (regular maintenance expenses, repairs, insurance, and so on) were the appellant’s responsibility.

3.5 The expenses not paid by the employer, which were not disputed by the respondent, amounted to $5,346 (including depreciation of $2,804) in 1974 and $6,619 (including depreciation of $3,049) in 1975. After subtracting 25% for personal use, the appellant claimed a deduction of $4,009 in 1974 and $4,964 in 1975.

3.6 The 25% personal use consisted, inter alia, of about 20 trips in the Laurentians over the year and travel from home to the employer’s office.

3.7 The appellant maintained that he travelled about 50,000 miles in 1974 and 45,000 miles in 1975.

3.8 In his notices of reassessment dated February 25,1977 the respondent added to the appellant’s income the sum of $4,009 claimed as expense. For 1975 he added the sum of $2,364, that is, $4,964-$2,600. The appellant had already included the automobile allowance of $2,600 in his income in 1975, something he had not done in 1974.

3.9 Notices of objection were filed on May 10, 1977; the respondent replied on September 12,1977, confirming the notices of reassessment of February 25, 1977.

3.10 An appeal was filed with the Tax Review Board on December 1, 1977.

4. Act, Case Law and Comments

4.1 The main provisions concerned in this case are subparagraph 6(1 )(b)(v), paragraph 8(1 )(h), subsection 8(2) and section 67 of the new Act. They read as follows:

6(1)(b) Personal or living expenses.—all amounts received by him in the year as an allowance for personal or living expenses or as an allowance for any other purpose, except

(v) reasonable allowances for travelling expenses received by an employee from his employer in respect of a period when he was employed in connection with the selling of property or negotiating of contracts for his employer.

8(1)(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 dedcution for the year under paragraph (e), (f) or (9),

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

8(2) General limitation. Except as permitted by this section, no deduction shall be made in computing a taxpayer’s income for a taxation year from an office or employment.

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.

4.2 The respondent cited the following 11 cases:

1. Henri Gingras v MNR, [1963] CTC 194; 63 DTC 1142;

2. William C Aitken v MNR, [1961] Tax ABC 152; 61 DTC 172;

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

4. Rosaire Cossette v MNR, 13 Tax ABC 170; 55 DTC 365;

5. Donald Campbell Davey v MNR, 27 Tax ABC 306; 61 DTC 531;

6. Roger Guay v MNR, [1970] Tax ABC 1201; 70 DTC 1781;

7. Stanley Karp v MNR, [1968] Tax ABC 1018; 68 DTC 742;

8. Edgar Raymond v MNR, [1971] Tax ABC 79; 71 DTC 47;

9. No 534 v MNR, 19 Tax ABC 388; 58 DTC 403;

10. F Joan Meier v MNR, [1967] Tax ABC 324; 67 DTC 224;

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

4.3 Comments

For the appellant (an employee paid solely on a salary basis) to be able to deduct the sums claimed, he must satisfy the three conditions in paragraph 8(1 )(h). He must satisfy all these conditions, not only one or two.

The evidence showed that the first condition, set out in subparagraph (i), was Satisfied. The appellant did in fact carry on his employment duties away from his employer’s place of business.

Has the second condition (set out in subparagraph (ii) been satisfied? In short, was the appellant required, under his contract of employment, to pay the travelling expenses incurred by him in the performance of the duties of his office or employment?

Does the fact that his employer paid him $50 a week as an allowance plus ordinary gasoline and oil expenses mean that the employee was not required to pay his own expenses? Certain decisions seem to support this position:

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

F Joan Meier v MNR, [1967] Tax ABC 324; 67 DTC 224.

Does the fact that the employer did not pay all the appellant’s travelling expenses (as the evidence established—see paragraph 3.4) alter the situation in any way?

The Board is of the view that as soon as the taxpayer is required to pay part of the expenses (regular maintenance, repairs and insurance, as in the present case), he satisfies the condition in subparagraph (ii). The Act does not say he must pay all travelling expenses.

Has the third condition, set out in subparagraph (iii), been satisfied? In short, was the appellant in receipt of a travelling allowance that was not included in his income by virtue of subparagraph 6(1)(b)(v)?

It is clear from the evidence that the appellant received a sum for travelling expenses from his employer (see paragraph 3.4 of the facts). Does this amount satisfy the conditions in subparagraph 6(1 )(b)(v), in other words, did it constitute “reasonable allowances for travelling expenses?

What does the word “reasonable” mean? In the context of subsection 6(1), the word “reasonable”means chiefly that the expenses paid by the employer must not be excessive; the respondent could then reduce the non- taxable portion, in other words, the reasonable portion, and tax the excess, that is, the unreasonable portion.

Can the word “reasonable” have a different meaning when one is referring to subparagraph 6(1)(b)(v) but in the context of paragraph 8(1 )(h) (and also 8(1)(f))? The Board is of the view that the word “reasonable means “the happpy medium” inter alia, and that the excess or unreasonable portion may be in either direction, in other words, either unreasoanbly high (allowing the Department of Revenue to reduce the expenses) or unreasonably low (allowing the taxpayer to adjust the amount given so that it corresponds to the expenses actually incurred). The Income Tax Act does not exist only for the administrator, the Department of Revenue, but also for those administered, the taxpayers.

Was the amount received in the present case reasonable? According to the evidence (paragraphs 3.5, 3.6 and 3.7 of the facts), the appellant incurred expenses in addition to gasoline and oil, which were paid by the employer, and received allowances (not including the amounts paid for oil and gasoline) as follows:

The Board is of the view that automobile expenses do not consist only in gasoline and oil but also in repairs, insurance payments, depreciation, and so on.

According to the evidence there is thus a difference of $1,409 in 1974 and $2,364 in 1975 between the actual expenses claimed and the allowance.

The Board, which must decide on the evidence, is of the view that the allowance was not reasonable and that the expenses claimed should be allowed and the allowance received included in the appellant’s income, having regard to the facts set out in paragraph 3.8.

5. Conclusion

The appeal is allowed and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed.