The Queen v. Swingle, 77 DTC 5301, [1977] CTC 448 (FCTD)

Collier, J:—This is an appeal by the plaintiff, through the Minister of National Revenue, from a decision of the Tax Review Board.

The defendant is a chemist. He holds a doctorate degree in applied science. He also has a post-doctorate degree. Since February 1, 1971 he has been employed in the Public Service of Canada. Until December 1973 he was with the Royal Canadian Mounted Police crime detection laboratory. He worked as a forensic chemist evaluating physical evidence for prosecutions contemplated or carried out.

He then went to the Department of Transport. Again his employment was in the field of chemistry and analysis. He was designated as an analyst pursuant to subsection 731(1) of the Canada Shipping Act. That was in the area of pollution and pollution prevention. Under the relevant legislation a certificate of an analyst is admissible in evidence in any prosecution and, in the absence of any evidence to the contrary, is proof of the statements contained in the certificate.

The defendant is presently Manager of Laboratory Services (Pacific Region), Department of Fisheries and Environment, Environmental Protection Services. He has 17 persons working under him. He is responsible for the quality of the work coming out of the laboratory.

He is, as well, a designated analyst pursuant to the Northern Inland Waters Act, the Arctic Waters Pollution Prevention Act and the Clean Air Act. He retains his designation as an analyst pursuant to the Canada Shipping Act. In his present employment he has prepared reports in regard to matters such as oil spills. He has, of course, issued certificates of analysis. hey have similar evidentiary characteristics as those authorized by the Canada Shipping Act. Since his employment wit hthe Public Service he has given and still gives expert evidence in courts. His educational and professional credentials have been accepted.

He, practically and realistically, has to keep up with most modern technical developments in chemistry. This is necessary in order to remain up to date in his present position as manager. It is equally necessary in order to make himself available for promotion, or for employment elsewhere, including the private sector.

In competitions in the Public Service, membership in co-called professional societies is considered a desirable qualification. This is perhaps even more so in the private sector.

All of the above facts were testified to by the defendant. His evidence was uncontradicted.

The appeal earlier referred to arises this way. The defendant, to keep abreast of rapidly changing developments in chemistry, has taken membership in a reasonable selection of chemical and allied societies. These organizations publish learned journals. They provide valuable technical information and knowledge. The defendant has, himself, published papers in some of the journals.

He is a member of the Forensic Society. That is a well-known organization in the United Kingdom. Its members are chemists and other professionals. He also belongs to and receives literature from the Chemical Society of Britain. The Royal Institute of Chemistry is amalgamated, in part, with that society. The United Kingdom Food and Drug Act (1952) requires a chemist giving evidence under that Act to have membership in the Royal Institute. The defendant is a member as well of the American Chemical Society. Lastly, he has membership in the Canadian Institute of Chemistry.

All these organizations require payment of annual dues. In his 1974 tax return the defendant claimed as deductions the sum of $193.15. That amount was made up as follows:

The Minister of National Revenue allowed the deduction of $72 paid to the Professional Institute of the Public Service of Canada.* [1] The balance of $121.15 was disallowed. The assessment increased the defendant’s tax liability by $38.

The dispute as to the permissibility of the deductions arises from subparagraph 8(1)(i)(i) of the Income Tax Act. [2] For purposes of reference, I set out the whole of paragraph (i):

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:

(i) amounts paid by the taxpayer in the year as

(i) annual professional membership dues the payment of which was

necessary to maintain a professional status recognized by statute,

(ii) office rent, or salary to an assistant or substitute, the payment of which by the,officer or employee was required by the contract of employment,

(iii) the cost of supplies that were consumed directly in the performance of the duties of his office or employment and that the officer or employee was required by the contract of employment to supply and pay for,

(iv) annual dues to maintain membership in a trade union as defined

(A) by section 3 of the Canada Labour Code, or

(B) in any provincial statute providing for the investigation, conciliation or settlement of industrial disputes,

or to maintain membership in an association of public servants the primary object of which is to promote the improvement of the members’ conditions of employment or work, and

(v) annual dues that were, pursuant to the provisions of a collective agreement, retained by his employer from his remuneration and paid to a trade union or association designated in subparagraph (iv) of which the taxpayer was not a member,

to the extent that he has not been reimbursed, and is not entitled to be reimbursed in respect thereof;

It is common ground that the payments made by the defendant to the four organizations are “annual professional membership dues”. The plaintiff concedes the defendant is a “professional”, in the sense he is qualified and skilled in the general field of chemistry. The nub of the dispute is whether the payment of the amounts was “necessary to maintain a professional status recognized by statute”. The Tax Review Board found the payments were allowable deductions. The Minister now appeals that judgment to this Court.

Some legislative and legal history is, in considering paragraph 8(1 )(i), appropriate.

The Income War Tax Act, RSC 1927, c 97 and amendments, had no counterpart to 8(1 )(i). But several decisions dealt with the deductibility, under that legislation, of annual dues paid by employees in respect of the carrying on of their employment.

Bond v MNR, [1946] CTC 281; 2 DTC 907, is the leading authority. The taxpayer was a salaried employee of the City of Winnipeg. He was by profession a lawyer. He performed legal duties for his employer. He was a member of the governing body for lawyers in Manitoba. He paid annual dues to that organization. He could not legally practise as a lawyer without maintaining membership in the Law Society and paying those annual dues. He sought to deduct them, as an expense, from income. Thorson, P held the dues to be a permissible deduction. I set out the essential portions of the Court’s reasons (pp 284-5):

Two lines of argument were laid out by counsel for the respondent in support of the disallowance of the deduction. One was that it was excluded under Sec 6(a) of the Income War Tax Act which provides:

“6. 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.’’

Counsel admitted frankly that the appellant could not continue to be counsel for the City of Winnipeg without continuing to be a member of the Law Society of Manitoba and had to pay the annual fees and special assessment sought to be deducted in order to retain such membership but contended, nevertheless, this this [sic] disbursement was not wholly, exclusively and necessarily laid out by the appellant for the purpose of earning the income in that it was made only for the purpose of retaining his professional qualification so that he could earn the income but was not made for the purpose of earning it. The disbursement was said to be related to the maintenance of the professional qualification but not to the earning of the income. It was admitted by counsel that while the taxing authority has not allowed the deduction of Law Society annual fees in the case of practising lawyers in receipt of a salary of a fixed amount it has allowed such deduction in the case of those whose remuneration is by way of fees. It is obvious, of course, that if the contention put forward by counsel is sound then the deduction is no more justifiable in the one case than in the other, for the same argument would apply to both; the deduction is permissible either in both cases or in neither. Moreover, in as much as the fees paid by the appellant were annual practising fees, it would also seem to follow that all similar fees, such as annual license fees, would have to be disallowed as deductions on the ground that they were paid to entitle the taxpayer to do business but not for the purpose of earning the income.

And at pages 2838-9:

Sec 6(a) is an excluding section. It prohibits the deduction of disbursements or expenses “not wholly, exclusively and necessarily laid out or expended for the purpose of earning the income”. Can it reasonably be said that the amount paid by the appellant to the Law Society falls within the exclusions of the section? I do not think so. The appellant had to pay this amount in 1943 in order to be entitled to practise law in that year. It was an annual practising fee. If he did not pay it he would be suspended and then struck off the rolls. Any attempt on his part thereafter to perform his duties would be contrary to law and constitute an offence for which he would be subject to a penalty and also to an injunction preventing him from continuing his attempt at practice. The payment of the amount was, therefore, necessary to the lawful and continuous performance of his duties and the earning of the income. Moreover, I think it was inherent in the contractual relationship between the appellant and the City of Winnipeg that he should continue to be a lawyer in good standing since his duties could not be performed without such standing. The maintenance of good standing was essential to the valid performance of his contract without which he could not earn the income. In my view, he had to pay the fees to earn the income and could not do so without paying them. The expenditure was an annual one which he could not escape but had to make. It constituted a working expense as part of the process of earning the income. Likewise, it was clearly made for the purpose of enabling him to carry on his duties and earn the income. That it was necessarily made for such purpose is quite clear, and there is nothing to indicate that it was made otherwise than wholly and exclusively for such purpose. In my view, the payment by a practising lawyer to his law society of his annual practising fees or an obligatory annual assessment is not a disbursement or expense “not wholly, exclusively and necessarily laid out or expended for the purpose of earning the income” and is not excluded as a deduction from his remuneration by Sec 6(a) of the Act. Moreover, it meets the test of deductibility of expense laid down in the cases referred to. The appellant is, therefore, entitled to a deduction of the amount claimed by him unless he is excluded therefrom for some other reason such as the one advanced by counsel for the appellant.

It was contended that since the appellant had a salary of a fixed amount there could be no deduction of any expenses from it, and that the amount of the income being fixed it was of itself “net” income and, therefore, taxable income. I have already referred to the admission made by counsel that the department has allowed the deduction of the annual fees paid by practising lawyers to their law societies where their remuneration is by way of fees, but has not allowed any such deduction where it is by way of fixed salary. I am unable to see any justification in principle for any such discrimination of treatment, and it ought not to be approved by the Court unless the law clearly so demands.

Page 292:

. . In my view, it is clear that what is to be taxed is the annual “net” profit or gain or gratuity, regardless of whether the profit or gain or gratuity is “ascertained” as being one kind of income or “unascertained” as being a different kind. Such an interpretation is a sound grammatical one; it also removes the unfair discrimination of the present departmental practice. In my judgment, an income is not necessarily net annual profit or gain or gratuity and, therefore, taxable income merely because it is a salary of a fixed amount, and there is nothing in the Income War Tax Act that excludes the deduction of proper disbursements or expenses from such fixed amount in order to determine the amount thereof that is taxable.

A similar conclusion was reached in Rutherford v MNR, [1946] CTC 293: 2 DTC 914. The taxpayer there was a lawyer employed by a provincial government as legislative counsel. Thorson, P found there was no distinction in principle between his status and that of the taxpayer in the Bond case.

Cooper v MNR, [1949] CTC 146; 4 DTC 573, followed the reasoning of the Bond decision. Cooper was a salaried motion picture projectionist. He sought to deduct annual dues paid to his trade union. He had to be a union member in order to be employed as a projectionist. The Court held the dues were permissible deductions.

As I see it, the effect of the three decisions referred to was this.” [3] Where a taxpayer’s income was derived from an office or employment he could deduct dues he was required to pay in order to exercise the very right to carry on his profession or calling, and thus earn salary or remuneration.

Then, effective 1949, came the Income Tax Act, SC 1948, c 52.t [4] There were, as well, some relevant amendments (applicable to the 1949 taxation year) to the Income War Tax Act.

Section 5 of the 1948 statute provided that income from an office or employment was the salary, wages or other remuneration received (plus certain other benefits or allowances) minus certain deductions permitted by particular sections of the statute . . . “but without any other deductions whatsoever’’.

The relevant part of the amendment to the Income War Tax Act was as follows:

(6) In computing the income from an office or employment, no amount is deductible for a disbursement or expense laid out for the purpose of earning the income.

There was no change in the applicable provisions of the 1948 legislation until 1951. In my view, Parliament had, for those years, taken away the right to deduct the Bond, Rutherford and Cooper type expenses.

The predecessor of present paragraph 8(1)(i) appeared in 1951. It became subsection 11(10) of the old Act:* [5]

11. (10) Notwithstanding paragraphs (a) and (h) of subsection (1) of section 12, the following amounts may, if paid by a taxpayer in a taxation year, be deducted in computing his income from an office or employment for the year

(a) annual professional membership dues the payment of which was necessary to maintain a professional status recognized by statute that he was required by his contract of employment to maintain,

(b) office rent, or salary to an assistant or substitute, the payment of which by the officer or employee was required by the contract of employment,

(c) the cost of supplies that were consumed directly in the performance of the duties of his office or employment and that the officer or employee was required by the contract of employment to supply and pay for, and

(d) annual dues to maintain membership in a trade union as defined

(i) by paragraph (r) of subsection (1) of section 2 of the Industrial Relations and Disputes Investigation Act, or

(ii) in any provincial statute providing for the investigation, conciliation or settlement of industrial disputes,

or to maintain membership in an association of public servants the primary object of which is to promote the improvement of the members’ conditions of employment or work,

to the extent that he has not been reimbursed, and is not entitled to be reimbursed in respect thereof.f [6]

At the same time, section 5 (dealing with income from employment) was amended (in part) as follows:

minus the deductions permitted by paragraphs (g), (j) and (o) of subsection

(1) of section 11 and by subsections (5) to (11), inclusive, of section 11 but without any other deductions whatsoever.

In 1952, paragraph (e) was added to subsection 11(10):$ [7]

(e) annual dues that were, pursuant to the provisions of a collective agreement, retained by his employer from his remuneration and paid to a trade union or association designated in paragraph (d) of which the taxpayer was not a member,

At that point in time, subsection 11(10) was identical to present paragraph 8(1)(i), except in two aspects. One is immaterial. The reference to the Industrial Relations and Disputes Investigation Act has been changed to the Canada Labour Code. The other difference is, in my view, of some significance.

In 1957, the words at the end of paragraph 11 (10)(a), “that he was required by his contract of employment to maintain’’, were deleted.* [8] It is implicit in the Bond case that it was a requirement of the taxpayer’s employment that he pay the annual dues. Otherwise, he could not render the services required under his contract.

I turn now to the case before me. Counsel for the plaintiff contends that, even if the defendant has a professional status recognized by Statute, the payment of the dues in question was not necessary to maintain that status. The defendant, it is said, retains his professional status as a chemist or analyst whether he pays annual dues to these societies or not; his legal right to carry on his profession is not dependent on belonging to any of them. MNR v Montgomery, [1970] CTC 115; 70 DTC 6080,t [9] was relied on. The taxpayer, in addition to being a self-employed practising lawyer, was an officer in the RCNR. He sought, unsuccessfully, to deduct wardroom dues. The essence of the reasons of Kerr, J is at pages 120-21 [6084]:

Counsel for the appellant submitted that a lawyer, for example, who is carrying on a general practice, does not need Section 11(10)(a) in order to deduct his Barristers Society’s dues, for such dues may be deducted as a business expense of carrying on his practice; but that the lawyer who is employed and receives a salary under a contract of employment requires Section 11 (10)(a) in order to deduct such dues, which are dues that each of the lawyers must pay in order to maintain his membership in the Society and the right to practice which goes with such membership.

I am satisfied that as an officer in the RCNR the respondent is a person with a “profession”, that the status of an officer in the RCNR is a professional status recognized by statute, ie the National Defence Act, that the wardroom mess of HMCS Tecumseh is composed of RCNR officers, and that it was necessary for the respondent to pay wardroom dues.

But it does not follow that those wardroom dues fall within Section 11(10)(a). It is my opinion that the necessity that Parliament was contemplating in that subsection is directly related to the essential purpose to be served by the payment of the professional membership dues. Inherent in the subsection is a direct relationship between membership in a professional society and professional status. The status recognized by statute is a professional status that is dependent upon membership in the professional society. No membership, no status. Such dues are no doubt used for the needs of the society, but the primary purpose of their payment is retention of membership, with its rights and privileges. It is clear to me that wardroom dues are paid for a very different purpose, namely, to defray operational costs of the mess, which is a room or suite where the members meet, eat, converse, entertain, etc. A wardroom mess can be established by a very few officers, even three or four. I understood LCDR Gwillim to say that he had served in 50 messes. The purpose of the payment of wardroom dues is not, in my opinion, to maintain a professional status. The status of a navy officer does not call for membership in a mess, unlike the practice of medicine, for example, which calls for membership in a medical society established by statute.

Officers receive their commissions from the Crown. No dues are paid to obtain or maintain their commissions and officer status. My attention was not drawn to any specific recognition of a wardroom mess in a statute, and I scarcely think that the status of membership in a wardroom mess is a professional status recognized by statute.

The consequence of failure on the part of an officer to pay his wardroom dues conceivably might be loss of his status as an officer, and in that negative and limited sense it may be said that payment is necessary to maintain his status, but, in my opinion, that possibility is remote from what Parliament was contemplating and endeavouring to provide in the Income Tax Act when enacting Section 11(10)(a). If it were intended to include dues payable for operation of messes in the armed forces, it would have been easy to have said so expressly.

In my opinion, therefore, the wardroom dues in question are not deductible under Section 11(10)(a).

The plaintiff argues the Montgomery case holds that the only deductible dues are those which have the effect of maintaining one’s professional status and, at the same time, are the source of the right to carry on the practice of the particular profession. I do not think the Montgomery case goes that far.

I can visualize situations where a profession is recognized by statute, but where no annual dues are required to be paid in order to carry on that profession; yet at the same time it may be “necessary” to belong to organizations in order to remain qualified, in the practical and business sense; to be able effectively to perform, and earn income, in a particular profession.

For example, I think it indisputable that accountancy is a profession; that an accountant is a “professional”. A particular person may be a highly qualified and skilled accountant. That profession is, in British Columbia for example, recognized by statute: see the Chartered Accountants Act, RSBC 1960, c 51, and the Certified General Accountants Act, RSBC 1960, c 47. But one is not bound to be a member of the Institute of Chartered Accountants or of the Association of Certified General Accountants in order to practise the general profession of an accountant. An outsider is merely prevented from using the designation chartered accountant or certified general accountant. I can foresee, however, that a highly qualified and skilled accountant (in the general sense) may well find it necessary to pay annual dues to an appropriate professional organization in order to maintain his high qualifications and skills, and so be able to continue selling his services to others, including an employer.

Subparagraph 8(1)(i)(i) must not be read in isolation. In subparagraph (iv), for example, there is no requirement that the union dues there specified must be paid by the taxpayer, in order to obtain or keep employment in a particular calling (the situation in the Cooper case). On the other hand, the dues specified in subparagraph (v) are those that must be paid in order for the taxpayer to retain employment, even though he is not a member of the particular union (the so-called “union shop’’ situation).

Counsel for the parties here indicated this suit was of some importance; it was regarded as somewhat of a test case; the result would likely affect other taxpayers. Fortunately or unfortunately, I do not propose to express any opinion on the main issue and submissions outlined above, or as to the precise interpretation of the subparagraph of the statute.

To my mind, the defendant has not proved one essential matter, quite necessary before the so-called main issue can be met. The defendant is a chemist or an analyst, or perhaps both. If he is viewed as a chemist, it has not, as I see it, been shown, on the materials before me, that the professional status of a chemist is one “recognized by statute’’. I am convinced the defendant has indeed a “professional” Status in his particular field—just as much as a doctor or lawyer. But no statutes recognizing that professional status were put before me, nor cited.

If the defendant is viewed merely as an analyst, I have difficulty in holding, on the evidence before me, that an analyst has a “professional status recognized by statute”. I assume there are many kinds of analysts. The legislation earlier referred to (the Canada Shipping Act, the Northern Inland Waters Act, the Arctic Waters Pollution Prevention Act and the Clean Air Act) do not define an “analyst”. Nor do they describe that occupation in any manner from which a “professional status” can be inferred. The statutes merely provide that “any person”, or sometimes a “qualified person” may be designated as an analyst. Subsection 731(1) of the Canada Shipping Act (to use it as an example) reads:

731. (1) The Minister may designate any person as a pollution prevention officer or an analyst for the purposes of this Part.

But when one turns to subparagraph 8(1 )(i)(i) of the Income Tax Act the use of the term “professional” seems to infer special skills, abilities, or qualifications. The statutes relied on by the defendant are silent as to those matters. The defendant has not brought his claim for the deductions clearly within the terms of this subparagraph conferring the right.* [10]

The appeal must, in my view, be allowed. The Minister’s assessment, on the facts here, is correct. It is agreed that subsection 178(2) is applicable. The Minister shall therefore pay the reasonable and proper costs* [2] of the taxpayer.