Rejean Garneau v. Minister of National Revenue, [1978] CTC 2440, [1978] DTC 1314

Guy Tremblay [TRANSLATION]:—The case at bar was heard at Quebec City on May 12, 1977.

1. Summary

The question is whether the amounts of $750 claimed in 1973 and $3,645.21 claimed in 1974 as commission salesman expenses can be allowed as deductions.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results not from any specific section of the Income Tax Act, but from several judicial decisions, including the judgment of the Supreme Court of Canada in F? W 8 Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts Concerning 1973

3.1. In 1973 the appellant was a representative for Richard & Frères Inc. of Ste-Foy, Quebec. The appellant summarized the nature of the company’s business by describing it as an industrial supplier, that is, a company. that sold to industries involved in manufacturing heavy machinery and other work equipment.

3.2. The appellant’s work consisted in visiting customers to offer them merchandise, taking orders, seeing that the merchandise was delivered and ensuring that the machinery was installed according to standards.

3.3. The appellant’s territory was on the North Shore of the St Lawrence, from St-Raymond de Portneuf to Baie St-Paul, in Charlevoix County.

3.4. The appellant regularly travelled by car to meet customers. He often drove them to Trois-Rivières and Montreal to meet with sup- pliers, see the machinery and have its operation explained to them. He made ten to twelve such trips to Montreal and Trois-Rivières during the time he worked for this employer. He would leave in the morning and return the following evening.

3.5. The appellant went to Baie St-Paul and St-Raymond de Portneuf approximately twelve times, and each trip took roughly 12 hours.

3.6. When he was not travelling outside the Metropolitan Quebec City region, the appellant spent half his day at the company’s warehouse, and the rest visiting customers. He travelled 600 to 700 miles by car each week.

3./. Sixty per cent of the meal expenses he claimed were personal expenses and the remainder was for customers.

3.8. He worked for this employer for six months, from March to September 1973. In November and December of that year he worked for Beau Rivage Construction Ltée on straight salary.

3.9. In his 1973 income tax return the appellant claimed a gross income of $7,386.96: $5,047.50 in commission from Richard & Frères Inc, and the balance from Beau Rivage Construction Ltée. He claimed $700 for accommodation and meals, and $1,495 for automobile expenses—$695 for miscellaneous outlays and $800 for capital cost allowance.

3.10. The appellant’s employer did not reimburse him for any of his expenses, and did not pay an automobile allowance, even though the appellant was paid on commission.

3.11. At the hearing the appellant swore that when he filed his 1973 income tax return, he had on hand all the supporting documentation concerning expenses.

However, when he moved in 1975 his wife thought that these documents and returns were no longer necessary, and threw them in the garbage.

3.12. In assessing the 1973 income tax return, the respondent accepted the outlay of $695 for the car, disallowed half the depreciation, namely $400, and half the accommodation and meal expenses, namely $350.

4. Facts Concerning 1974

4.1. The appellant worked for Simpsons-Sears from March to Decetnber 1974 as a carpet salesman, a travelling salesman: he did not work solely in the store, but also had to travel in the performance of his duties.

4.2. The appellant was apparently paid on commission only. In 1974 he reported a gross income of $9,796.35, which was solely commissions. However, his employer did pay $0.15 per mile when the appellant was required to visit individuals whose name was supplied by the em- ployer, or individuals who came to the store. The purpose of such visits was to measure rooms, show samples, check up on complaints received, and so on. These were the only automobile expenses paid by the employer. Salesmen submitted their mileage sheets, along with the names of the customers visited, every two weeks. Over the year, the employer gave the appellant $589.89, for approximately 3,930 miles.

4.3. The appellant was required to work at least 37 /2 hours a week, half of which had to be spent at the office. The rest of the time was spent visiting customers. The evidence shows that the appellant actually worked 50 to 70 hours a week.

4.4. Mr Jacques Desjardins, manager of the carpet division at Simp- sons-Sears, Said that because of the heavy competition, travelling salesmen have to work very hard, more than the required 37 /2 hours a week, if they want to make a good income. Eighty out of one hundred customers have to be revisited by travelling salesmen.

4.5. Mr Garneau said that 60% of the customers are individuals and 40% companies.

4.6. In filing his 1974 income tax return the appellant claimed $300 in representation costs, chiefly meals, and $4,460.27 for automobile expenses, $1,050 of which was capital cost allowance. He. deducted 25% for his personal use of the car, reducing the automobile expenses to $3,345.21. The total claimed amounts to $3,645.21 if the $300 in representation costs is added.

4.7. The respondent rejected the total expense claim of $3,645.21 when he issued the assessment.

4.8. The supporting documentation for 1974 was also destroyed in 1975, along with the documents pertaining to 1973, as described in paragraph 3.11.

4.9. The assessments for both 1973 and 1974 were issued on October 24, 1975. The appellant objected, but in his notification of July 29, 1976 the respondent maintained the assessments in their original amounts. On October 28, 1976 the appellant filed an appeal with the Board.

4.10. Since the appeal was not filed within the required time, a judgment of the Board delivered on March 18, 1977 authorized the extension of notice of appeal to the Board and ordered that the notice of appeal, which was received at the same time as the motion for extension of appeal, be considered a valid notice of appeal.

5. Act, Comments and Case Law

5.1. Is paragraph 18(1 )(a) of the new Act applicable?

The Board must rule out the application of paragraph 18(1)(a) at the outset, because it is clear from the evidence that the expense in question was not “made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property”.

The appellant did in fact work for employers in the two years in question. At no time did he carry on his own business or incur expenses to produce income from property (apartment buildings, and so on) owned by him.

Since the source of the taxpayer’s income was neither property or business, it could only be an office or employment, according to the list of sources of income given in paragraph 3(a): office, employment, business and property.

Since the crux of the problem in the case at bar involves deductible expenses, we must consider what expenses can be deducted from income from an office or employment.

Subsection 8(2) is clear:

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

5.2. What subsections of section 8 of the new Act apply?

When compared to the facts introduced in evidence concerning the appellant’s employment, several. of the subsections of section 8 must be eliminated outright (member of the clergy, railway company employees, and so on). However, at first glance some other subsections seem to apply, for example the one concerning salesman’s expenses, namely 8(1)(f) and other related subsections—8(1)(h), 8(1)(j) and 8(4):

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:

(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 deduction for the year under paragraph (e), (f) or (g),

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

(j) Automobile costs.—where a deduction may be made under paragraph (f) or (h) in computing the taxpayer’s income from an. office or employment for a taxation year,

(i) any interest paid by him in the year on borrowed money used for the purpose of acquiring an automobile used in the performance of the duties of his office or employment, and

(ii) such part, if any, of the capital cost to him of an automobile used in the performance of the duties of his office or employment as is allowed by regulation;

(4) Meals.—An amount expended in respect of a meal consumed by an officer or employee shall not be included in computing the amount of a deduction under paragraph (1)(f) or (h) unless the meal was consumed during a period while he was required by his duties to be away, for a period of not less than twelve hours, from the municipality where the employer’s establishment to which he ordinarily reported for work was located and away from the metropolitan area, if there is one, where it was located.

5.3. Does paragraph 8(1 )(f) actually apply?

Paragraph 8(1 )(f) lists eight conditions, all of which must be met if the section is to apply.

5.3.1. Condition one: Selling of property or negotiating of contracts.

There is no doubt that for 1973 and 1974 the appellant met the first condition provided for in paragraph 8(1)(f), that is, he was “employed . . . in connection with the selling of property or negotiating of contracts for his employer”. The evidence makes this quite clear. We need only reread paragraphs 3.1, 3.2 and 4.1 of this judgment to be convinced of this.

5.3.2. Condition two: The employee must pay his own expenses.

The second condition, which is given in subparagraph 8(1)(f)(i), is that under his contract of employment the appellant was required to pay his own expenses. In 1973, when the appellant worked for Richard et Frères in Ste-Foy, there is no doubt that he met this condition. The Board cites paragraph 3.10 of the facts.

The evidence showed that in 1974 (paragraph 4.2) the appellant’s employer paid some car expenses, namely $0.15 a mile, when the appellant was required to visit customers whose names had been supplied by the employer and who lived a limited distance from the office.

The appellant’s return, which was submitted by the respondent to the Board in accordance with the Act, does not allow us to decide whether the $589.89 paid by the employer was included in the appellant’s income, because the T4 form issued by the employer was not forwarded with the return. The appellant, for his part, could not produce it at the hearing, because all his papers had been destroyed.

5.3.3. Condition three: “was ordinarily required to carry on the duties of his employment away from his employer’s place of business.”

In light of the evidence outlined in paragraphs 3.3 to 3.6, the Board concludes that the appellant met this condition. In 1973 alone, the appellant’s trips outside the city and the average of 600 to 700 miles a week covered in visiting customers are sufficiently conclusive.

The Board’s findings are the same for 1974. The appellant spent 18/2 hours of his average work week of 60 hours in the office, and the rest on the road.

5.3.4. Condition four: Paid on commission.

According to the evidence, the condition described in subparagraph 8(1 )(f)(iii) was met for both 1973 and 1974.

5.3.5. Condition five: Received no allowance.

The evidence shows that the condition described in subparagraph 8(1)(f)(iv) was met. In the case of 1974, the Board does not know whether the $0.15 per mile was included in the appellant’s income, as discussed at the end of paragraph 5.3.2.

However, if this is the only condition that the appellant did not meet, the Board could order that:the $589.89 in question be included in his income, provided the appropriate expenses were deducted.

5.3.6. Condition six: Amounts expended for the purpose of earning the income from the employment, up to the amount received in commissions.

In the case of 1973, the amounts expended by the appellant, as outlined in paragraphs 3.9 and 3.12, are without a doubt expenses incurred for the purpose of earning income from his employment. Are they reasonable expenses within the meaning of section 67? The $400 in car expenses, which was disallowed, is reasonable. With regard to the accommodation and meal expenses, considering the proven fact that 60% of the meal expenses was personal, the Board feels that $200 of the $350, which was rejected, would be reasonable. However, this information was not reinforced by supporting documentation. This in fact is one of the chief reasons why the respondent rejected the claim of $750. The evidence indicates that the supporting documentation was destroyed through carelessness. In the Board’s view, the matter is a question of credibility. Should it believe the appellant and his wife? There is no reason not to believe them.

The figures for 1974 are given in detail in paragraph 4.6.

In light of all the facts introduced in evidence, the Board concludes that the expenses claimed were incurred for the purpose of earning income from employment. At first glance the $3,345.21 claimed as automobile expenses seems reasonable, even if the income from commissions was $9,796.35. The percentage of the income represented by the automobile expenses—30%—does seem rather high. However, in the Board’s opinion there is necessarily a substantial minimum involved in automobile expenses for a year. Since the appellant worked only ten months—from March to December—the Board would definitely accept $3,000 as a reasonable amount in the circumstances. The $300 claimed for representation costs, chiefly meals, could be reduced to $150. The appellant himself said that 50% of the meals were for himself.

Moreover, with regard to meals, subsection 8(4) cited above has been considered in reducing the claim by half. The other half is maintained, because this amount covers meals with customers as representation costs.

The decision regarding the supporting documentation that was destroyed is the same as for 1973, and hence the Board allows the expense if the other conditions of paragraph 8(1 )(f) are met.

5.3./. Conditions seven and eight.

Unlike the sixth condition, the last two conditions are described in subparagraphs 8(1)(f)(v) and (vi). The expenses must not be capital outlays and/or club dues, and so on.

These two conditions were also met.

6. Since all the conditions contained in paragraph 8(1 )(f) were met, the Board must therefore admit the appellant’s claim in part, as follows:

—1973: $600 of $750;

—1974: add the sum of $589.89 to the appellant’s income if it has not already been added, and admit the automobile expenses of $3,000 and $150 in representation costs.

7. Conclusion _ .

The appeal is allowed in part, and the assessments in question are referred back to respondent for reconsideration and reassessment in accordance with the reasons for judgment.

Appeal allowed in part.