Roger Mercure■ ' I v. Minister of National Revenue, [1978] CTC 2215, 78 DTC 1165

Guy Tremblay [TRANSLATION]:—The case at bar was heard at Montreal, Quebec on June 9, 1977.

1. General Point at Issue

The Board must decide whether the appellant, a sales manager paid by salary and commission, can deduct the sums of $2,890, $6,465 and $6,568 respectively in calculating his net income for the taxation years 1971, 1972 and 1973.

2. Burden of Proof

The appellant has the burden of showing that the respondent’s assessments are incorrect. This burden of proof is derived not from a particular section of the Income Tax Act but from a number of judicial decisions, one of which is the judgment given by the Supreme Court of Canada in R R-W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.1. For the years under consideration, the appellant was a salesman for Clément et Frères Ltée. He was sales manager of the Montreal branch. The purpose of this company was to sell industrial and recreational equipment including caterpillar tractors and snowmobiles.

3.2. Under a verbal agreement, he had a basic salary plus a commission of three-fourths of 1% of his branch’s sales.

3.3. Though the appellant had two salesmen working under him, he also acted as sales representative himself. His territory was unlimited: “the planet Earth’’, he said.

3.4. At the beginning of his testimony the appellant stated that the only expenses for which he was reimbursed were those relating to a completed transaction. Later, when confronted with his employer’s Statement described in paragraph 3.12, he said that he was under the impression that he could only claim expenses relating to completed transactions.

3.5. Income in salary and commission, and expenses disallowed by the respondent, for the years under consideration are as follows:

3.6. The following are the expenses which were disallowed, as they appear on the tax returns:

3./. The car belonged to the employer. For 1971 and 1972 it seems that the appellant believed he had to pay the expenses incurred in using it.

3.8. The appellant did not produce supporting documents for the expenses disallowed by the respondent. He says that he no longer has them. He had some but they were later destroyed.

3.9. The appellant spent half his time away from the office, engaged in sales or promotion. Of this time spent away from the office, 35% was outside the Montreal district: Quebec, Ottawa, Churchill Falls and even Yellowknife.

3.10. During the years under consideration, 80% of sales resulted from his own efforts.

3.11. The expense accounts submitted to the employer were always accepted.

3.12. According to a statement by the employer dated April 4, 1975, and accepted as evidence by the appellant, it is stated, inter alia:

(a) that the appellant had worked for the company since 1965;

(b) that the appellant was required to perform his duties away from the company’s place of business:

(c) that the company’s main customers were the federal and provincial governments;

(d) that the car was provided by the company;

(e) that according to his contract he did not have to pay his own expenses;

(f) that the expenses for which he was reimbursed are those which were submitted.

3.13. By notice of assessment dated June 2, 1975 the respondent refused to allow the total amounts claimed.

3.14. Following a notice of objection, the respondent notified the appellant that the said notice of assessment was confirmed.

3.15. The appellant is appealing to the Board.

4. Act, Precedents and Comments

4.1. The main sections of the Act concerned in the case at bar are 3, 11(6) and 12(2) of the old Act and 3, 8(1 )(f) and 67 of the new Act.

The most important is paragraph 8(1 )(f) of the new Act, which is exactly the same as subsection 11(6) of the old Act:

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(1)(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)(l), not be deductible in computing the taxpayer’s income for the year if the employment were a business carried on by him;

4.2. Counsel for the respondent cited the following precedents: No 534 v MNR, 19 Tax ABC 388; 58 DTC 403; Louis A Mayrand v MNR, 33 Tax ABC 458; 63 DTC 954; Anthony Cekota v MNR, 36 Tax ABC 279; 64 DTC 654; Jean-Marc Bourassa v MNR, 12 Tax ABC 1; 54 DTC 554; F Joan Meier v MNR, [1967] Tax ABC 324; 67 DTC 224; Eric O Claus v MNR, 40 Tax ABC 395; 66 DTC 248; Edgar Lindsay v MNR, 31 Tax ABC 312; 63 DTC 289.

4.3. According to the evidence, it seems quite clear that the appellant does not fulfil the conditions of subparagraph (i) of paragraph 8(1 )(f), that is that “under the contract of employment [he] was required to pay his own expenses”. Thus the appellant cannot benefit from the terms of this section.

It would seem moreover, from the evidence, that there was a misunderstanding between the appellant and his employer regarding the expenses which could be claimed. Although the employer was willing to pay all expenses incurred in order to earn income, the appellant thought that he could only be reimbursed for expenditures relating to completed transactions.

Such a misunderstanding seems very curious, however. The appellant has been working for this employer since 1965. He is provided with a car. He pays the expenses of running this car himself, even though his employer is willing to reimburse him: The employer never finds that car expenses were claimed. Everyone knows that in a business of this kind there are sales representation costs, even when dealing with governments; and the appellant, who is a man of experience and sophistication, who travels all across Canada, who generates 80% of his company’s business, must surely have expenses as a representative: yet he does not keep any supporting documents, or, if he does, he neglects to claim these expenses.

If all these expenditures were disallowed the appellant would have only himself to blame.

However, the Board is convinced that expenditures were made in order to earn income, and that if they had been claimed, they would have been reimbursed. The company would in turn have claimed them as expenditures in calculating its income.

The Board believes it would be fair to allow one-fifth of the expenditures claimed.

5. Conclusion

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

Appeal allowed in part.