Paul Trudel v. Minister of National Revenue, [1953] CTC 126

CAMERON, J.:—These appeals have to do with assessments to income tax made upon the appellant for the taxation years, 1944 and 1945. The appellant is a chartered accountant, a partner in a large accounting firm in Montreal which he joined in 1945, having been previously employed by that firm as a student of accountancy.

In his return for 1944, he claimed as deductions the items described as follows:

Total: $2,974.50

It would appear that when the appellant was first assessed for that year, the deductions claimed were allowed. However, the appellant was reassessed on October 29, 1948, and thereby all of the deductions claimed were disallowed.

In his return for the year 1945, the appellant claimed as deductions the following items :

Total: $3,161.74

By his assessment dated June 22, 1948, the respondent totally disallowed these deductions.

The appeal relates solely to the deductibility or otherwise of these items.

The only evidence given at the hearing was that of the appellant. It appears to have been the policy of the firm in which he was a partner, to pay all the normal and proper expenses of the employees and partners when directly concerned with the transaction of the firm’s business. If a partner or employee were engaged on an out-of-town audit, his travelling and hotel expenses were paid by the firm. Some extra allowances were also made to employees for ‘‘representation’’ or ‘‘entertainment’’ expenses and while so employed, the appellant had received allowances of that type. But it was the fixed policy of the partnership that each partner would personally pay all representation or entertainment expenses that he might incur and that no part thereof would be paid by or be recoverable from the firm.

The appellant became a partner during the year 1943 and in his income tax return for that year claimed certain sums of the same nature as those now claimed. He says that an official of the Department advised him that his claim for that year could not be allowed as he had been an employee for most of the period, but such claims would be allowed to him as a partner in subsequent years if properly vouched. Such a statement, if made, would not, of course, be binding upon the respondent (Woon v. Minister of National Revenue, [1951] Ex. C.R. 18 at pp. 24, 25; [1950] C.T.C. 263).

Then the appellant says that following his appeals he appeared before two members of the Appeal Section of the Income Tax Department in February, 1949, to support his claim to these deductions for the years 1944 and 1945 ; that at that time he produced to them vouchers for the total amounts claimed for each year; that he frankly admitted that some, at least, were for expenses of a personal nature and were not deductible; that they suggested or perhaps agreed that under all the circumstances a deduction of $2,000.00 for each year would be fair and reasonable. Following that interview, he wrote a letter on February 18, 1949, to Mr. MeMorrow (said to have been one of the men before whom he had appeared) withdrawing his appeal for both years and adding:

41 The reason for my withdrawal has been the confirmation of these expenses in 1944 and 1945 for an amount of $2,000.00 each year.”

The evidence is not at all clear as to whether the appellant appeared before the Income Tax Advisory Board or before the Income Tax Appeal Board, respectively established under the fifth and third schedules to the Income War Tax Act, as enacted by c. 55, Statutes of Canada, 1946. That matter, however, is of no importance, for neither Board appears to have made a finding or reached any conclusion on the matter. In fact, neither Board could have done so by reason of the provisions of Section 69F of the Act, which limited their jurisdiction to assessments of income of the 1946 and subsequent taxation years. Whatever informal opinion they may have arrived at or communicated to the appellant can be of no assistance to him on this appeal.

The first difficulty that confronts the appellant is that he cannot support the present appeals by the production of any vouchers whatever. His car was stolen in April, 1949, and when it was recovered his brief case, which had contained his personal tax files and the vouchers he had submitted to the Department of National Revenue, was missing and has never been found. He was completely unable to recall the details of any of the named items, but did state that the vouchers which he had had were receipts for the various sums he had expended and that in each category, the amount now claimed was supported by vouchers.

His evidence indicates that the items in dispute fall into two main categories, (a) representation or entertainment expenses and (b) expenses of maintaining and operating his motor car.

The entertainment expenses, he says, were undertaken with the purpose of winning clients for his firm. They consisted of expenses incurred at hotels and clubs where he entertained and gave luncheon and dinner parties for his friends and some times for his friends’ friends. He was a member of the Laval Golf Club and of the St. Denis Club (a social organization) and at each his bills were over $50.00 per month. He belonged also to the Reform Club (a social and political organization) and the Garrison Club. At each of these clubs he entertained his friends and all of his bills, including those incurred for his own personal benefit, as well as for his friends, were included in the vouchers mentioned.

The vouchers in respect of the claim for travelling expenses, included all the expenses incurred in each year in connection with his car, whether it had been used entirely for his own personal convenience or otherwise. Gas, oil, repairs, maintenance and even depreciation were included in his claim. He was unable to furnish any details of any of the items or to state the purpose for which the car had been used on any occasion, except that in one year—he thought it was in 1944—he had motored to a convention at St. John.

The appellant quite frankly stated in regard to both categories, that a substantial part—but just what part he could not say— was for his own personal and living expenses, and could not possibly be claimed as deductions.

In order to succeed, the appellant must establish affirmatively, that the outlays claimed are not barred by the provisions of Section 6(1) (a) of the Income War Tax Act, which is as follows:

“6. (1) In computing the amount of the profits or gains to be assessed, a deduction shall not be allowed in respect of

(a) disbursements or expenses not wholly, exclusively and necessarily laid out or expended for the purpose of earning the income.”

As to ‘‘travelling and moving’’ expenses referred to in the 1944 return, and the ‘‘travelling and automobile’’ expenses mentioned in the 1945 return, I need say but little. They refer entirely to the expenses of operating and maintaining the appellant’s own private automobile and all of such expenses are included therein. There is no satisfactory evidence that they were connected with the appellant’s business in any way or that they were ‘‘wholly, exclusively and necessarily laid out or expended for the purpose of earning the income’’. In my view, they were personal expenses and as such, they were also barred from deduction under Section 6(1) (f) of the Act. The appeal in regard to those items must fail.

No evidence was given as to the nature of the claim “general expenses’’ for the year 1944. The appellant could give no explanation of how the item was made up and all he could say about it was that it was neither an entertainment or a travelling expense. The appeal in regard thereto will also be dismissed.

There remains only the claim in each year for monies said to have been expended to promote the appellant’s business interests. I have noted above the admission of the appellant that a substantial part of these items relate to outlays which were entirely personal to him and were not incurred in connection with his business or for the purpose of promoting good will or of interesting prospective clients. I am without any knowledge whatever as to what are the relative proportions of the outlays which are personal and those which might be deemed to be promotive. That fact alone is sufficient to warrant the dismissal of the appeal. I was invited to accept the figure of $2,000.00 per annum, which, it was suggested, had commended itself to the income tax officials seen by the appellant in 1949; or, alternatively, to fix an amount which I might consider fair and reasonable. In the absence of any specific information, I must decline to do so.

But there is another ground on which I think the appeal must be dismissed. I am satisfied from the evidence that in incurring these expenses, the appellant’s main purpose was to entertain his friends. All his monthly accounts at the four clubs were included in the claims. There was no direct evidence that he entertained clients. He said ‘‘you entertain friends at large— not necessarily clients’’ and that on occasions the friends of his friends were also included. It may well be that in providing entertainment for his friends, he also had in mind the possibility that by broadening his circle of friends he might, indirectly, attract clients to his office; in fact, he did suggest that some new clients may have been gained as a result of such entertainment, but no details were given. I am satisfied that even if he hoped to promote his firm’s interests his main purpose was to provide social entertainment for his friends. That being so, the outlays were not made exclusively for the purpose of earning the income.

In Beeson v. Bentleys, Stokes and Lowless, [1952] T.R. 239, Romer, L.J., said at p. 243:

4 ‘If the Special Commissioners were intending to indicate by his language, and to find as a fact, that the partners had in mind a dual purpose, namely, the furtherance of their professional interest and the social entertainment of their friends, then the expenditure in question would not meet the test of exclusiveness which the rule requires, and this appeal must succeed, unless there was no material upon which the Special Commissioners could arrive at such a finding.’’

Inasmuch as the appellant has failed to establish that the expenditures in this category, or any specific part thereof, were exclusively laid out or expended for the purpose of earning the income, the appeal as to these items must also be disallowed.

In this case I have not found it necessary to consider the general question as to whether under the Income War Tax Act, entertainment expenses are permissible deductions, and I express no opinion in regard thereto.

For the reasons which I have stated, the appeals will be dismissed with costs.

J udgment accordingly.