27 September 1985 Income Tax Severed Letter B-6292 - [Paragraphs 8(1)(f) and (h)]

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.

September 27, 1985

Assessing Division Compliance Program Section

Non-Corporate Rulings Division Alan Jane your File: HAV 4540-1

Paragraphs 8(1)(f) and (h)

This is in reply to your memorandum of August 12, 1985 and attachments regarding the use of paragraphs 8(1)(f) and (g) of the Income Tax Act (the "Act") by employees of XXXX (the "agency"). We understand that certain employees of the agency earning commission income have deducted amounts for travel expenses including familiarization trips, maintaining an office in their homes and for wages paid to assistants. We further understand that there is no written contract of employment and that the employer, while initially advising that its employees were not contractually bound to incur these expenses, now maintains that certain employees are ordinarily required to travel by using their own automobiles in the course of their employment. On this basis the employees who receive no reimbursement or allowance feel entitled to deduct the expenses mentioned above.

We understand your view is that the expenses claimed are not deductible unless it is confirmed that the employees are contractually obligated by their employer to incur these expenses. While we are in agreement with the view you expressed, we would like to add some comments which we hope will be of assistance.

Our review of the case law indicates that the issue of contractual obligation is essentially a question of fact. Accordingly, the outcome of any particular case depends on the evidence adduced and the findings of fact made by the trial judge. Further, in determining whether a contractual obligation exists, the court will base its decision on whether or not failure by an employee to incur the expense involved would itself be a breach of contract that could give rise to dismissal by the employer. The Queen v. Cival 83 D.T.C. 5168 (F.C.A.)

Where this question was put to the employer or the employee, the answer weighed heavily in the final outcome. For example in the case of Goldhar v. M.N.R. 85 D.T.C. 202, the employer, a real estate agency, answered a Revenue Canada questionnaire to the effect that the employee involved, who earned commission income, was required to "pay her own expenses". Since there was no evidence or indication of any other arrangement in this case, the Court found that a contractual obligation did exist and allowed the employee to deduct office rent for an office she maintained in her home. Also the Court noted that the employer apparently recognized there would be some expenses and simply left that responsibility up to the employee.

An employee was asked the same question in Barnard v. M.N.R. 85 D.T.C. 210. There the appellant was employed under a verbal contract to sell knitting yarns in Hamilton and in an area west of Hamilton. The employee stated that she was required to use her car and that if she did not have a car she would not have a job. When asked what would happen if she refused to use her car, the employee answered that she would be fired. No other testimony was adduced at the bearing and accordingly the Court found that there was a contractual obligation.

In contrast to these decisions are a half dozen or so other recent cases where there was no direct or clear statement or other indication as to whether an employee was required to incur the expenses under his contract of employment. In these cases the Court would not equate an employer's expectations of an employee incurring expenses to contractual requirements to do so, breach of which would give rise to a cause of action by the employer against the employee. This reasoning prevailed where it was unclear what would happen to the employee if he refused to incur the expenses or, where incurring the expense was important to achieving desirable employee work results or in order to maximize an employee's earnings. Stated in another way, the Courts have held that if failure to incur an expense (e.g., use one's own automobile and incur the related expenses) cannot by itself result in dismissal or other disciplinary action, the incurring of that expense is not to be regarded as the fulfillment of a contractual term of his employment.

Looking at the information we have received regarding the employees of XXXX it is our opinion that the letter of April 17, 1985 from the agency and the questionnaire referred to therein concerning automobile expenses do not contain sufficient information to enable the Department to determine whether or not the employees have met the requirements of the Act to deduct those expenses. In our view, the questionnaire does not address the requirements in subparagraphs 8(1)(f)(ii) (iv) or 8(1)(h)(ii) and (iii). It would be helpful if the questionnaire also asked whether employees would be in breach of their employment contract if they did not use their own automobile in the course of their employment and incur their own expenses in so doing. The answer to that question would satisfy the Federal Court of Appeal's interpretation of the requirements in paragraph 8(1)(h) as expressed in the Cival case which was also followed in the recent Barnard case in regard to paragraph 8(1)(f). Quoting from the latter judgment the Court said, "... 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)."

It is our opinion that the subject expenses claimed by employees of XXXX should be denied unless there is clear evidence of a contractual obligation on the part of the employees to pay such expenses. Although the Department may encounter difficulties with the claim for automobile expenses, it is our view that the other expenses claimed are clearly not allowable. Unlike the Goldhar case, there is no evidence of a statement in the verbal employment contract that an employee is required to "pay his own expenses".

With respect to the other claim for travelling expenses, i.e., relating to the familiarization trips, it is our view that where the employee is not required by his employer to take these trips, expenses incurred in connection therewith should not be deductible. We say this primarily because, again, the employee is not contractually bound to take the trip, and secondly because such costs are in the nature of professional development and training, a personal or living expense. The case of Slawson v. M.N.R. 85 D.T.C. 63 denied a deduction to an institutional securities broker for meeting with other brokers, to keep up to date with new developments and to exchange ideas regarding his employer's product (securities). The Court cited the case of Bicknell v. M.N.R. 72 DTC 1001 as authority for the proposition that the cost of professional development is not an expense incurred to earn income from employment even though it may help the taxpayer to become more knowledgeable about his employer's product and thus possibly result in higher earnings

In the attached memorandum from the Hamilton District office the case of No. 524 v. M.N.A. 58 D.T.C. 380 was raised as a possible authority for travel agents to deduct the cost of familiarization trips. In our view that case has no application to the situation at hand because it was decided in reference to earning income from business or property. Although the taxpayer in that case was said to be an employed agent this point is not entirely clear because the board member noted that the taxpayer was much like a free lance, at liberty to come and go as he pleased and to seek business wherever he could obtain it. Regardless of whether the taxpayer was an independent contractor or an employee, that case dealt with paragraphs 12(1)(a) and (b) of the former Income Tax Act - identical to paragraphs 18(1)(a) and (b) of the present Act. As you know, in determining income from business, a taxpayer may deduct any reasonable expense incurred for the purpose of earning such income that does not contravene the rules prohibiting deductions as set out in sections 18 and 19 of the Act or as permitted by section 20 of the Act. Conversely, in determining income from employment, no deduction can be made except for those specifically allowed in section 8 of the Act. Also the Canadian decisions cited in the case of No. 524 v. M.N.R, dealt with income from business and not income from employment. In any event there is authority to the effect that travelling expenses incurred to improve or add to one's knowledge are not expenses incurred to earn income. See Leigh v. M.N.R. 53 D.T.C. 78 (T.A.B.) and Burt v. M.N.R. 53 D.T.C. 136 (T.A.B.). Finally, in the last paragraph of the No. 524 case, the board member was careful to point out that his finding cannot be relied on as authority for a travel agent to visit any part of the world annually and expect to be allowed the resulting expense as a deduction from income as a matter of right.

We hope these comments will be of assistance.

for Director Non-Corporate Rulings Division