Charles J Corrigan v. Minister of National Revenue, [1978] CTC 2310, 78 DTC 1256

Delmer E Taylor:—This is an appeal against an income tax assessment for the year 1974 in which the Minister of National Revenue disallowed an amount of $3,228.11 regarded by the taxpayer as an expenditure for the purpose of earning income. The respondent relied, inter alia, on paragraphs 8(1 )(f), 18(1)(h), 20(1 )(a) of the Income Tax Act, RSC 1952, chapter 148, as amended in particular by SC 1970-71- 72, chapter 63, as amended, and subsection 1100(1) of the Income Tax Regulations, SOR 54-682 as amended.

Facts

During the year in question the appellant was a commission salesman living in Kitchener, Ontario and employed by Equitable Life of Canada (hereinafter called the. “company”) for most of the year. It was his first year in that role, and his gross income was $10,742.05, primarily from commissions. The expenses he sought to deduct on filing his tax return were reported on Schedule 9 and are summarized as follows:

The $3,228.11 disallowed formed part of the total $8,318.22 shown above, and details are provided later in this decision.

Contentions

The respondent’s reply to notice of appeal provided the following details regarding the disallowances:

(a) the amount of $1,416.51 which was part of the amount the appellant had claimed as advertising and promotional expenses was disallowed as it was used for personal use and not for the purpose of generating income;

(b) the amount of $784.48 which was part of the amount claimed as automobile expenses was disallowed as it had not been substantiated by receipts or vouchers;

(c) the amount of $30 which was part of the amount claimed as business taxes or fees was disallowed as it was an expenditure of a personal nature;

(d) the amount of $124.87 which had been claimed as convention expenses was disallowed as it was an expenditure of a personal nature;

(e) the amount of $57.18 which had been claimed as an expense for office supplies was disallowed as it was an expenditure of a personal nature;

(f) the amount of $100 which was part of the amount claimed as telephone expenses was disallowed as it was an expenditure of a personal nature;

(g) the amount of $715.07 which was part of the amount claimed as a capital cost allowance on his car was disallowed as the appellant did not own the automobile upon which he claimed the capital cost allowance as of December 31, 1974.

At the start of the hearing counsel for the appellant withdrew the portion of the appeal dealing with items (c), (d) and (e). The appellant asserted that the balance of the amounts (a), (b), (f) and (g) had been improperly disallowed—some portions because receipts were either lacking or inadequate, and the balance calculated on an arbitrary basis by the Revenue Canada assessor.

Evidence

The appellant, and a Mr Hauck, garage operator in Kitchener, gave evidence regarding the validity of the amounts charged. Mr Hauck stated that all amounts for the appellant at his garage had been for work, supplies, gasoline, repairs, etc to the appellant’s car—a 1970 Torino. The evidence on the points in contention can be summarized as follows:

Item (a) — Bills and receipts were submitted totalling some $2,538.23 of the $2,818.94 originally claimed.

Item (b) — Work orders and statements indicating payments on account were submitted totalling about $900, claimed by the appellant to more than cover the amount disallowed by the assessor.

Item (f) — Long-distance telephone calls from home and office and pay phones were more than $12 per week according to the appellant. He had maintained no record of these.

Item (g) — The Board was referred to the capital cost allowance schedule attached to the appellant’s tax return, and the appellant stated he had sold:the 1970 Torino in November 1974, and leased a car thereafter.

Under cross-examination the appellant agreed that included in the bills submitted to support item (a) were accounts for Christmas gifts totalling about $400, of which approximately $200 were given to members of his family and close friends, many of whom were also clients.

No one appeared to give evidence for the Minister for any disallowance—whether the basis was that receipts submitted were unacceptable, or simply because of an arbitrary reduction. Counsel for the Minister related for the Board that from the “acceptable” bills for entertainment and promotion, a /3 arbitrary reduction had been made; from one item in the automobile expenses (parking and washing) a /2 arbitrary reduction had been made; and the amount submitted originally by the appellant for personal use of automobile ($682.11) which he had calculated at 15% of total automobile expenses, had been increased by the assessor to 25%, also on an arbitrary basis.

Argument

Counsel for the appellant submitted the $270.81 ($2,818.94 - $2,538.23) had been expended by his client for entertainment and promotion, and should be allowed, even though bills were not available to support it. Further, counsel stated there was no basis for disallowing Christmas gifts which had been included therein, and certainly nothing to support an arbitrary disallowance of /s of the balance of the “acceptable” bills submitted. On the automobile expenses, his position was that apparently only $95.45 of the total could not be supported by bills, and that even these should not be disallowed; and no arbitrary disallowance of /2 of parking and car washing expenses, nor the change from 15% to 25% charged against the appellant for personal use of the car was proper. The estimated charge for long-distance calls was reasonable at $150, and again no basis was given for an arbitrary disallowance of 4 of that amount. Finally, the appellant should be permitted to deduct either his capital cost allowance for 1974 or the terminal loss on the sale of the automobile in November of that year.

Counsel for the respondent held out that in addition to disallowing amounts of either entertainment and promotion (a), automobile expenses (b), or telephone (f) for which no bills were available, the assessor had the responsibility to also determine if the amounts charged were “reasonable”, particularly when considered against the total commission income earned—and it had been his judgment that the further arbitrary disallowances were in order. On the matter of the capital cost allowance or terminal loss on the automobile, counsel’s position was that no capital cost allowance could be charged because the appellant had not owned the automobile at December 31, 1974, and that the terminal loss provision under the Act did not apply to an employee, even a commission salesman.

Counsel for the appellant requested the Board’s attention to the following cases: No 125 v MNR, 9 Tax ABC 235; 53 DTC 415; St James v MNR, 41 Tax ABC 64; 66 DTC 322.

The references from counsel for the respondent were: Tim Alfred Brice Clements v MNR, 21 Tax ABC 77; 58 DTC 752; No 589 v MNR, 21 Tax ABC 153; 59 DTC 41; James Sommerville v MNR, 41 Tax ABC 45; 66 DTC 328; Leslie W Ainsworth v MNR, [1968] Tax ABC 782; 68 DTC 596.

Findings

First the Board points out, with appropriate emphasis, that when arbitrary disallowances to the filed return of a taxpayer are made by income tax officials, the onus and responsibility of an appellant in an action against such measures might well be viewed in relation to the degree of direct evidence provided to the Board by the officials involved to support the rationale for such adjustments. In the instant case, as pointed out earlier, the Board, and consequently the appellant and his counsel, were not provided with any such opportunity by the respondent. In this matter, arbitrary adjustment percentages of 1 /4, 1/3, 16 and *%% were apparently utilized by the assessor with respect to different amounts involved in the assessment, and the Board has no basis upon which to judge the validity of these percentages. Accordingly, the evidence of the appellant in many areas remains uncontradicted, and will be so treated by the Board. . i

Dealing with the points at issue in order as they are set out in this decision:

The Board has no basis upon which to agree the appellant should be allowed the $280.71 for which there are no vouchers, and the $200 paid for Christmas gifts to his relations is also disallowed. The

Again the $95.45 for which there are no vouchers is. disallowed, but the $363.09 which the assessor apparently found unacceptable is allowed. The deduction made directly for 50% of the parking and washing charges is reversed, and allowed to the appellant. The personal charge for the use of the automobile is left at 25% as determined by the assessor, rather than the 15% as suggested by

There is no basis for such a reduction and the appellant is permitted the entire $150, which appears to me to be reasonable.

This is disallowed. The respondent is correct, and in addition to the case references noted earlier, the Board would suggest a review of Albert Quesnel v MNR, [1977] CTC 2143; 77 DTC 92, particularly the exclusion of “outlays, losses, or replacements of capital or payments on account of capital’’ from deductions permitted to any employee.

In view of the intricacy of this matter, the Board takes the precaution of reconstituting the statement of expenses (Schedule 9 of the tax return), as it should apply to the taxpayer, from this appeal:

Decision

The appeal is allowed in part to permit the appellant to deduct expenses in the amount of $5,786.08 ($6,688.76 - $902.68) from his gross commissions rather than the amount originally claimed of $7,636.11. In all other respects the appeal is dismissed. The matter is referred back to the respondent for reassessment accordingly.

Appeal allowed in part.