The Queen v. Chrapko, 84 DTC 6544, [1984] CTC 594 (FCTD), rev'd 88 DTC 6487, [1988] 2 CTC 342 (FCA)

The Associate Chief Justice:—In these actions, both the Crown and the taxpayer, Chrapko, appeal from decisions of the Tax Review Board concerning assessments for Chrapko’s 1977 taxation year, one related to a disputed classification of income, the second to a disputed claim for travelling expenses.

In 1977, Chrapko was employed as a pari-mutuel cashier by the Ontario Jockey Club which operates several racetracks including Woodbine and Greenwood in Toronto and the Fort Erie track at Fort Erie, Ontario. Chrapko’s duties, which he performed at all three tracks, required him to verify tickets presented to him, to calculate and to pay the holder the correct amount. In the frenzied atmosphere of these transactions, mistakes and falsified tickets are not uncommon and by paragraph 8(c) of the relevant collective bargaining agreement, cashiers, like Chrapko, are required to accept personal responsibility:

It is understood and agreed that each and every employee shall pay, as and when required by the Employer any and all shortages for which he may be responsible; provided that where, in the opinion of the Employer, more than one employee is responsible for the loss, then such loss shall be split equally among such employees. The Employer agrees to post a list of shortages within 48 hours after they have ocurred and that such list will have been checked and confirmed prior to posting. The Employer agrees to conduct a review and examination of shortages arising on September 4, 1977, at Woodbine. During the course of this review, the Employer will consider cases in which a particular shortage may be attributed to a machine malfunction. The Employer will review such shortages and, in the absence of a resolution of each such shortage, agrees that any such shortages may be subject to a grievance procedure.

The practice of the employer was to post cash shortages a few days after their occurrence and to reflect the shortage in the next pay cheque. In the year in question, these shortages totalled $771 for Chrapko and the issue is the status of those sums, admittedly never actually received by Chrapko. During the course of argument, I raised the concern that a finding in favour of the taxpayer could become an invitation to these employees to avoid tax on income simply by taking personal cash advances, knowing that as between them and their employer, they would be deducted from their pay cheque. It must therefore be confirmed that for the purpose of this appeal, that is not considered to be the case. These reasons are confined to Chrapko’s responsibility for shortfalls due to erroneous pay-outs or to false claims. I also note from the evidence that there is no discretion exercised by either the employer of the employee in the disposition of this fund, which, by law, must be put in the pari-mutuel pool and thereby ultimately returned to the betting public.

The governing provision of the Income Tax Act is subsection 5(1):

5. (1) Subject to this Part, a taxpayer’s income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by him in the year.

Upon the question of whether these sums were constructively received by Chrapko, the thrust of the decision of the Tax Review Board is as follows:

The Appellant’s (Mr Chrapko) position was that the “‘salary, wages and other remuneration . . . received by him in the year’’ within the meaning of subsection 5(1) of the Income Tax Act was the total of the amounts received by him from the Jockey Club and not the total of what those amounts would have been had the employer not deducted the shortages. That position, in my view, is plainly correct. Any other conclusion would involve a finding, wholly unsupported by the evidence, that moneys advanced by the Jockey Club to the Appellant did not return that same amount less amounts of winning tickets surrendered, advances of salary.

Finally . .. Because the Appellant was entitled only to salary at the calculated rate less cash shortages, the amounts of such shortages cannot be regarded as payments or transfers of property made with the concurrence of the Appellant to his employer. They were never his to pay or transfer in the first place.

I find no fault with either the reasoning or the conclusion of the learned Chairman. The appeal must be dismissed.

The cross-appeal on the question of travelling expenses raises a more complex issue. In 1977, Chrapko resided in Niagara Falls, Ontario, and carried out his duties at all three racetracks, approximately 160 days in the two Toronto locations where the employer’s head office was located, and 50 days at Fort Erie. He claimed $1,780, $1,560 for travelling to either Greenwood or Woodbine, and $220 for travelling to Fort Erie. Under his contract of employment, Chrapko was responsible for such travelling costs and was not reimbursed by his employer and therefore claimed the deduction in accordance with the terms of paragraph 8(l)(h):

8 (1) In computing a taxpayer’s income for a taxation year from an office or employment, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(h) 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(l)(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;

The Minister disallowed the $1,560 claimed for travel to Toronto on the grounds that an employee who otherwise meets the requirements of paragraph 8(1 )(h) is only entitled to deduct travel expenses related to work sites outside the place where he ordinarily reports for work, in this case the Municipality of Metropolitan Toronto. In this action, the relevant portion of the pleading on behalf of the Minister is to be found in paragraphs 6 to 10 of the statement of defence by cross-appeal. I should add that in response to a question upon examination for discovery, it was confirmed that these were the specific grounds of dispute relied upon by the Minister:

6. The Minister of National Revenue, in computing the income of the Plaintiff by Cross Appeal for his 1977 taxation year, by Notice of Reassessment dated December 8, 1978, disallowed travel expenses in the amount of $656.70 thus leaving a balance of $1,780.00 ($2,436.70 less 656.70). By Notice of Reassessment dated March 25, 1980, the Minister of National Revenue disallowed further travel expenses in the amount of $1,560.00 representing the costs of travelling between his home in Niagara Falls and racetracks located in Toronto. The remaining $220.00 ($1,780.00 less $1,560.00) of travel expenses have not been disallowed by reassessment.

7. The Minister of National Revenue, in so reassessing the Plaintiff by Cross Appeal, relied upon the following findings or assumptions of fact:

(a) the facts assumed and pleaded in subparagraphs 6(a), (b) and (c) of the Statement of Claim;

(b) the Head Office of the Ontario Jockey Club is located in Metropolitan Toronto, Ontario;

(c) throughout 1977, the Plaintiff by Cross Appeal resided at his home in Niagara Falls, Ontario;

(d) throughout 1977, the place of business of the Ontario Jockey Club to which the Plaintiff by Cross Appeal usually reported to work was Metropolitan Toronto, Ontario.

B. STATUTORY PROVISIONS UPON WHICH THE DEFENDANT BY CROSS APPEAL RELIES AND THE REASONS WHICH HE INTENDS TO SUBMIT:

8. The Deputy Attorney General of Canada, on behalf of the Defendant by Cross Appeal relies, inter alia, upon Paragraph 8(1)(h) and Subsection 8(2) of the Income Tax Act, RSC 1952, Chapter 148 as amended.

9. The Deputy Attorney General of Canada, on behalf of the Defendant by Cross Appeal, submits that the expenses which the Plaintiff by Cross Appeal seeks to deduct; namely, those incurred in travelling between his home in Niagara Falls and racetracks located in Metropolitan Toronto, are commuting expenses and, as found by Member M J Bonner, not expenses incurred for . travelling in the course of his employment” within the meaning of Paragraph 8(1 )(h) of the Income Tax Act.

10. In any event, the Deputy Attorney General of Canada submits that the expenses incurred by the Plaintiff by Cross Appeal in travelling between his home and the place of work to which he “usually reported for work” or his “home base” — which in this case is Metropolitan Toronto — are commuting expenses and thus not deductible within the meaning of Paragraph 8(1)(h) and Subsection 8(2) of the Act.

The Tax Review Board decision is based on a strict interpretation of the words at the conclusion of paragraph 8(l)(h) “for travelling in the course of his employment”. Since this employee had no occasion to actually use his vehicle in carrying out his duties, the logical result of this reasoning is to deny the claim entirely. On that basis, the learned Chairman, I assume, had no difficulty in dismissing that portion of the appeal which related only to travel to Toronto.

The present submission on behalf of the Crown adopts the position taken by the Tax Review Board. Strictly speaking, the Minister was not authorized, much less obliged to allow any deduction, but having seen fit to allow the Fort Erie expenses, the Minister remains bound by that determination.

The submission on behalf of Chrapko is essentially that since the purpose of section 8(1 )(h) is to benefit the employee who must report to work in different places and since Chrapko clearly falls within that category, the Minister is bound by the terms of the section to allow him to deduct the cost of travelling to all three places of employment. In the absence of specific limiting provisions in the statute, the Minister has no authority to disallow.

The resolution of these questions must begin with consideration of two other sections, 18(l)(h) and 67:

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(h) personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on his business.

67. In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.

Where an employee travels to a single place of employment, no deduction is allowed. Such an employee may, of course, choose to live near or far from his place of work and thereby control any travel cost, but it remains a personal matter of no concern to the Revenue. It is equally clear that the provisions of paragraph 18(l)(h) permit the deduction of travelling expenses incurred by the taxpayer while away from home in the course of carrying on business, and quite properly, the deduction is in no way related to the employee reporting to work at one or several or, for that matter, at any particular place of business. What then is the purpose of the allowance established in paragraph 8(l)(h)? Surely not to come to the assistance of those already eligible to deduct under paragraph 18(l)(h). Rather, it seems to me to have been the intention of Parliament to establish an allowance for those who may be in a position to control the cost of travelling to their principal place of employment, but because they are required to report to work at different places, are not in the same position with respect to the other locations. That is the precise language used in paragraph 8 (i). [sic] Now, if that intention is to be subordinated to the latter phrase in subparagraph

(ii) “in the performance of the duties of his office or employment”, or to the concluding words “amounts expended by him in the year for travelling in the course of his employment”, then the effect is either to destroy the allowance entirely or to permit it to be claimed only in the very cases contemplated in paragraph 18(l)(h). I reject that reasoning and I conclude that the intent of paragraph 8(l)(h) is to allow employees, like Chrapko, who are required to perform their duties in different places, to deduct the cost of travel to such secondary locations as though they were expenses incurred in the course of employment.

That was the exact situation adjudicated upon by the same Tax Review Board Chairman, M J Bonner in A G Zawadowski, MD v MNR, ([1982] CTC 2573; 82 DTC 1583). There, a graduate medical-student was required to carry out duties for one employer in different hospitals in London, Ontario. I note that the only issue for the learned Chairman was whether there was one employer. Once that was resolved, the deduction under paragraph 8(1 )(h) was allowed for the cost of travelling between the taxpayer’s home and the three hospitals. There was no suggestion that the doctor used his vehicle during the course of his working hours, so there could have been no possibility of travelling expenses incurred “during the course of his employment”.

Unfortunately, if Chairman Bonner was right in the Zawadowski decision, and I think he was, he cannot also be right here in going on to disallow the deduction on the basis of the restricting words at the conclusion of subparagraph 8(l)(h) “amounts expended by him in the year for travelling in the course of his employment”. I draw support for my conclusion from the treatment of the almost identical problem by Thurlow, ACJ (as he then was) in The Queen v Thomas Healy ([1978] CTC 355; 78 DTC 6239), and in turn by the Federal Court of Appeal in the case of Thomas Healy v The Queen ([1979] CTC 44; 79 DTC 5060). Healy was another employee of the same Ontario Jockey Club working at the same three racetracks, Woodbine, Greenwood and Fort Erie. There were two distinctions which are important but which, in my opinion, do not alter the principle of the judgment: the first is that since Healy resided in Toronto, his claim for deductions, of course, was limited to his days at Fort Erie; second, since his claim included cost of meals, the Court had to consider the specific provisions of subsection 8(4) which have no application to the Chrapko case. The key paragraph of the decision of the learned trial judge is found at 357 [6241]:

In the view I have of the facts, it was a matter of regular occurrence, normal and not exceptional for the defendant to carry out his duties during the racing season as required by his employer at at least two, if not three, different places, that is to say, at Toronto and at Fort Erie or at the Greenwood, Woodbine and Fort Erie racetracks. I conclude, therefore, that the defendant’s situation fell within the meaning of paragraph 8(1)(h) and that he was entitled to a deduction in respect of his expenses of travelling in the course of his employment. Moreover, such expenses would, I think, ordinarily include but for the effect of subsection 8(4), the cost of his meals while at Fort Erie in the course of his duties.

That reasoning was affirmed in the Court of Appeal, which indeed went on to reverse the learned trial judge on his interpretation of subsection (4), thereby allowing the deduction entirely. As I interpret the Healy decisions, the Chrapko situation, at least in respect to Fort Erie, is indistinguishable and upon the same principle, Chrapko is entitled to the benefit of paragraph 8(l)(h) for cost of travelling to the different locations at which he carries out his duties.

Having resolved these questions, it seemed to me that section 67 would provide the Minister with the authority to disallow the Chrapko claims for travel to Toronto, or put it another way, to allow only the claims for Fort Erie as being “reasonable ... in the circumstances”. However, since the Minister had not identified section 67 in his reassessment, in his pleadings or in the examination for discovery in this action, there obviously had been no opportunity for counsel to argue the point. I therefore delivered oral reasons at Toronto on September 24, 1984, and invited counsel to make further submissions on three questions: first, whether section 67 authorized the Minister to make that kind of determination; second, whether the Minister could invoke section 67 without specific reference to it either in the assessment process or in this litigation; and finally, if sought, whether it was an appropriate case to permit an amendment to the pleadings. I heard further submissions on these questions at Toronto, on October 9, 1984.

Not surprisingly, there was no submission on the question of whether the provisions of section 67 were wide enough to authorize the kind of determination that would be applicable here. I therefore find that the Minister could have invoked that section to reach the conclusion that it is unreasonable to permit a taxpayer who otherwise qualifies under paragraph 8(l)(h) to live away from all places of employment and in turn, to deduct the cost of travel to all of them.

Counsel for the Minister, of course, endeavoured to persuade me that the language of section 67 is such as to bring it to the Minister’s assistance without specific reference and, in the alternative, sought the opportunity to amend the pleadings so as to now put the question in issue. I must reject both submissions. (See Transworld Shipping Ltd v The Queen, [1975] 12 NR 129, FC A at 142 and The Queen v Littler, [1978] CTC 235; 78 DTC 6179, FC A at 240).

Had the Minister made reference to section 67 in his reassessment, the appeal to the Tax Review Board may not have been taken. Had the Tax Review Board considered the applicability of section 67, this action might never have been commenced. In this action, had section 67 been pleaded or had it been identified in discovery as a basis for the Minister’s disallowance, the taxpayer might have chosen not to contest that aspect of the matter. Were it a matter of dispute, either party would, of course, have adduced evidence at trial. The Minister having failed to do so, it would now work a grave injustice to the taxpayer even with compensation as to costs to permit the Minister to amend his pleadings not only after trial and argument, but indeed after partial judgment.

Upon the reasoning in the Healy decision, it is clear that Chrapko falls within the provisions of paragraph 8(1 )(h) and that a portion of his claim for travelling expenses ought to have been allowed. The correct disposition would have been for the Minister to invoke section 67 so as to conclude that it would be unreasonable to permit the taxpayer to live away from all places of employment and equally unreasonable to permit the taxpayer to deduct the cost of travelling to Toronto, the head office of his employer and the Metropolitan area where the major portion of his duties was performed. Section 67, in my view, would equally authorize the Minister to permit the “reasonable deduction’’ for cost of travel to Fort Erie for the fifty days of racing there. Having failed to identify section 67 in his disposition of the Chrapko return for the 1977 taxation year, however, I am of the view that the Minister cannot now invoke it. The disallowance must be set aside.

Accordingly, the appeal by Her Majesty the Queen is dismissed, the crossappeal by Chrapko is allowed with costs and the matter is returned to the Minister for the appropriate disposition.