16 May 1986 Income Tax Severed Letter 7-0330 - [Salesmen's Expenses - Paragraph 8(1)(f)]

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

May 16, 1986

Assessing Division Compliance Programs Section

R.J. Banks

Farms, Personal & General Section N. R. Mitchell Tel. (613) 957-2139 Your file: HAV 4540-1

Salesmen's Expenses - Paragraph 8(1)(f)

This is in reply to your memorandum of February 6, 1986, concerning the deductibility of office expenses or wages of an assistant by commission salesmen. We regret the unavoidable delay in responding.

In your memorandum, you refer to three apparently conflicting memoranda issued by this Division and request our clarification. In the first of these memoranda, dated June 16, 1983, the opinion is expressed that subparagraph 8(1)(i)(ii) is the specific provision which narrows the deductibility of office and secretarial expenses for all taxpayers who are employees, notwithstanding that the terms of paragraph 8(1)(f) are also broad enough to allow for the deduction of such expenses under this latter provision. We would no longer endorse the view expressed above inasmuch as the Tax Court in Thompson v. M.N.R. 85 DTC 362 at 363 stated that:

"... 8(1)(f) is a specific section relating to "commission" salesmen. With the wording of section 8(1)(f) so broad "amounts expended by him in the year for the purpose of earning the income from employment", I fail to see any reason that a bona fide commission salesman should be required to rely on any subsection under section 8 of the Act, other than that particular one, (8(1)(f)), to order to deduct legitimate expenses. As I see it - everything available to salaried employees under the other subsections [i.e., 8(1)(i)(ii) and (iii)] is automatically available to the commission salesman under section 8(1)(f) of the Act - the separate and individual types of expenses (e.g. )"rent", "office supplies" etc., do not need to be further identified as covered under a different subsection."

(This is, of course, subject to the condition that the employee could satisfy all of the other requirements of paragraph 8(1)(f) of the Act.)

The main point in your inquiry concerns what you see as the conflict between our memoranda of August 12 and September 27, 1985 on the issue of the contractual requirement to pay expenses set out in subparagraph 8(1)(f)(i) of the Act. The earlier memorandum states that:

An employee may satisfy the words "under the contract of employment was required to pay his own expenses" used in subparagraph 8(1)(f)(i) of the Act where he has: 1) a written contract of employment specifying that he must pay his own expenses; or 2) an oral contract, an implied term of which is that he is required to pay his own expenses, and the requirement to pay his own expenses is normal in his employment situation. In summary, and with reference to subparagraph 8(1)(f)(i) of the Act only, the contract does not have to specifically require that an assistant be retained.

On the other hand, the memorandum of September 27, 1985 indicates that in order for an expense to be deductible under 8(1)(f), the employee must be contractually obligated to incur the specific expense in question.

As we see it, the resolution of this issue is not clear. The Cival case,

83 DTC 5168 (F.C.A.) dealing with paragraph 8(1)(h) of the Act, held that in order for automobile expenses to be deductible there must be a contractual requirement upon the employee to use his car in doing his job and to pay the expenses involved such that, if the employee did not do so, the employer would have an action against the employee for breach of contract. In Barnard 85 DTC 210 at 216, the Tax Court stated that "what was said in Cival regarding the nature of the contractual relationship which is necessary to allow a taxpayer to claim deductions is equally applicable to both paragraphs 8(1)(f) and 8(1)(h)."

In Slawson 85 DTC 63, the Tax Court dealt with a salesman's claim for deduction of various expenses under paragraph 8(1)(f) of the Act. The Court found that the taxpayer was not required by his contract of employment to pay (or incur) the expenses in question and denied the claim. Although the decision does not cite Cival, the reasoning of the Court appears to owe much to the latter decision. At page 65, Sarchuk T.C.J. stated that:

Careful consideration of the evidence leads me to conclude that it does not establish that the appellant was required by the contract of employment to pay certain expenses he incurred... While the appellant may have been expected to do many of the things which led to his incurring these expenses, I cannot find on the evidence before me that he was required by his contract of employment to do so... I cannot equate the expectations of the employer as described by the appellant and by [another witness] to a contractual requirement imposed upon the appellant, breach of which would have given a cause of action to the employer against him.

In Goldhar 85 DTC 202 at 205, the Tax Court said that "section 8(1)(f) does not prescribe that the employer must identify in the contract of employment [sic] any specific expense in order for the taxpayer to deduct it." This dictum is troubling but we believe it may be correct to take it to mean that the requirement to pay certain specific types of expenses need not be expressly stated in the contract, whether written or oral. However, in our view, it is nonetheless necessary (based on Barnard) that there be a contractual obligation to pay each expense for which a deduction is claimed under paragraph 8(1)(f). Such a contractual obligation could arise by implication having regard to all of the surrounding circumstances, to custom or to the overall relations of the parties. It need not be an express term of a written memorandum nor be an express term of a detailed oral agreement. (Problems of proof will therefore abound.)

Where the precise expense at issue is not specifically identified by the parties as an express term of a written or oral contract which obliges the employee to pay his own expenses, it would appear to follow (if indeed the principle in Cival must be applied to situations governed by paragraph 8(1)(f) of the Act) that a deduction under that paragraph may only be allowed with respect to those expenses which are so reasonable and objectively necessary to earn income from the employment that to incur and pay those expenses could be shown to have been the subject of a contractual obligation. Indeed, it is our view that if the employee is required by contract to pay his own expenses and that contract is bilateral in nature (as required by Cival; see Thompson at 364 - that is to say, it imposes obligations on both parties which either may sue to enforce), it would seem necessary that the nature and extent of the obligations imposed upon the employee (i.e., the types of expenses he is required to incur) must be reasonably ascertainable and must be (or must be capable of being found to be) terms of the contract.

Accordingly, we would endorse the restrictive view of subparagraph 8(1)(f)(i) indicated in our memorandum of September 27, 1965. That being said, we cannot regard this matter as being free from doubt and are hesitant to recommend or support a wholesale revision of the Department's approach with respect to that paragraph based on the current state of the jurisprudence. All of the relevant recent judgements were decided at a low level, i.e., the Tax Court. The precise issue under consideration would also not appear to have been the central issue to which the Court directed its mind in any of these decisions. Furthermore, on at least three occasions (Thompson at 364; Goldhar at 205 and Bowman 85 DTC 328 at 330) the Tax Court has suggested that "it might be seen and contended" that the conditions for qualification under paragraph 8(1)(f) are less stringent than those under paragraph 8(1)(h) or 8(1)(i). This view certainly has much to recommend it given the differences in wording regarding the contractual requirement for each of these provisions; subparagraph 8(1)(f)(i) would certainly seem to be written in less restrictive terms. In each of the three decisions cited above, the Court has drawn back from actually pronouncing what it believes the law to be. It should also be noted that both Thompson and Goldhar are currently under appeal to the Federal Court Trial Division.

Furthermore, attention must be given to the case of Rozen 85 DTC 5611 (F.C.T.D.) now being appealed to the Federal Court of Appeal. Rozen was decided with reference only to paragraph 8(1)(h) of the Act and a finding of fact was made that the taxpayer was indeed contractually required to incur and pay the specific travelling expenses which were at issue. However, the case is an instructive illustration of the willingness of the courts to construe such contractual obligations. Most significantly, Mr. Justice Strayer, in an obiter dictum at page 5613, stated his belief that the contractual requirement in 8(1)(h)(ii) of the Act can be interpreted more broadly than was done by the Federal Court of Appeal in Cival. The pending appeal decision may therefore shed some light on this issue and on those situations involving paragraph 8(1)(f) which are under consideration in this memorandum.

Our "conclusion" then is that it is probably premature, based on the current state of the law, to come to any firm conclusion as to the nature of the contractual requirement in paragraph 8(1)(f) of the Act. We are reluctant to recommend that the decision in Cival be ignored, at least until after the appellate decision in Rozen has been handed down. Any decision taken now may have to be undone or modified in light of the pending decisions of the Courts.

As discussed in our recent meeting, amendments to the legislation may be appropriate. Should you so wish, we could request a legal opinion on this subject.

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs branch

MKM/lb S. 8(1)(f) S. 8(1)(h)