The Queen v. Gilling, 90 DTC 6274, [1990] 1 CTC 392 (FCTD)

Joyal, J.: —This is an appeal by the Crown, by way of a trial de novo, from a decision of the Tax Court of Canada allowing the defendant taxpayer certain expenses against commission income earned by him in the taxation years 1979-1980.

The Background:

The defendant, at all material times, was carrying on the duties and responsibilities of an elevator manager for the Manitoba Pool Elevators. His operations covered two functions. The main function was the handling, storage and forwarding of grain bought for the account of the Canadian Wheat Board from grain producers in his area. The other function was the sale of farm supplies to farmers and the provision of certain services to them.

In consideration of his duties and responsibilities as manager of the grain operations, the defendant was paid a salary. In consideration of the farm supplies and services operation, he was paid a commission.

In the year 1979, the defendant reported total earnings of $27,198.28 of which $10,272.22 constituted commissions. For the year 1980, he reported earnings of $29,277.16 of which $10,934.16 represented commissions.

Against his commission earnings, the defendant claimed travel expense and other deductions of $3,051,73 in 1979 and $4,306.04 in 1980.

The Minister of National Revenue, by notices of reassessment dated April 8, 1982, disallowed the foregoing deductions.

The defendant appealed to the Tax Court of Canada. He was successful. Brulé, T.C.J. in his judgment reported at [1985] 1 C.T.C. 2287; 85 D.T.C. 246, found upon an analysis of the facts before him that the taxpayer, in the process of earning commission income over and above his salary arising from his employment, was engaged in a separate small business and thereby became entitled to the claimed expenses pursuant to paragraph 18(1)(a) of the Income Tax Act.

The Case for the Crown:

The main thrust of the Crown to have its 1979 and 1980 reassessments restored was to invite the Court to look carefully at the "expense" provisions contained in paragraph 8(1)(f) of the Act. Unless a taxpayer can meet all the conditions imposed under that section, said the Crown, the expenses claimed cannot be allowed as deductions from income.

First of all, Crown counsel submits that all the facts before this Court establish that the defendant was an employee and not an independent contractor or commission salesman. As an elevator manager for Manitoba Pool Elevators (M.P.E.), his terms and conditions of employment were those settled with his employer by the Grain Services Union. These terms set the salary rate and the percentage of commission the respondent was to receive. It was clear that over and above the salary attached to the defendant's duties in running a grain elevator operation, he was entitled to commissions earned on sales of grain, seeds and farm supplies which he could generate. Both functions, however, were integral to his duties and responsibilities and his employer had control over both of them.

Furthermore, no contractual provision could be found requiring the respondent to pay his own expenses, including his travelling expenses. If the defendant did incur expenses in the performance of his duties, he was entitled to reimbursement under the union contract.

Finally, according to Crown counsel, the defendant was not ordinarily required to carry on his duties away from his employer's place of business, or in a different place, as that condition is found in paragraph 8(1)(f) of the statute.

The Case for the Defendant:

The defendant, in turn, urges the Court to consider that his duties and responsibilities are a composite of many factors all of which may be gleaned from his own actual experience as well as from a number of documents jointly filed and admitted by the parties.

It appears clear, suggested counsel, that the primary duty of the defendant is to carry out "administrative duties . . . associated with the purchase and transportation of grain”, as found by Commissioner J. Stewart Gunn in an inquiry report under the Canada Labour Code and found at Tab 7, page 28. Also in that document, the Commissioner finds that the elevator managers carried out administrative duties in the receipt and sale of farm commodities.

At Tab 9, page 8, a M.P.E. publication outlining M.P.E. functions and programmes, there are listed various farm supplies which were marketed by it to include fertilizer, chemicals, twine, grain bins as well as services on fertilizer and chemicals uses and soil testing.

At Tab 11, there are outlined the duties and expected performances of the Farm Services Division of M.P.E., including, inter alia, the provisions of services to members designed to meet their needs, to complement the grain business by helping to increase patronage and to provide additional income and incentives to managers.

Tab 14 is a performance record form which contains specific references to the defendant's obligations to adhere to farm supply sales policy, to collection of accounts and to required attendances upon railway agents, upon members and at Board and sub-district meetings.

At Tab 15, which is the management contract applicable to the defendant, there is found a provision holding him responsible for shortages in farm supplies, for railway charges for overloaded grain cars and for fines imposed by either the Canadian Wheat Board or the Canadian Grain Commission for breach of their rules.

There is also found at Tab 19 Circular No. 45, dated November 6, 1979, a directive for a manager to use his "best efforts in seeking 'on farm’ control and preventing infestation” of elevators.

Tab 20 is a document to the same effect where the manager is directed to spend more time visiting members and soliciting business.

The oral evidence of defendant before me was meant to confirm that his actual work experience was in conformity with his contract of employment and that he was duly engaged in the promotion of M.P.E.’s presence in the community and in the marketing of its farm supplies. For his general duties as elevator manager, he was paid a salary. For his specific duties in promoting and selling farm supplies, he was paid a commission. Both functions involved travel away from his ordinary place of business, attendances upon and consultations with farmers and participation at various meetings. The defendant also owned a small trailer attached to his automobile on which he loaded supplies for delivery to customers.

All of these duties, urged his counsel, ordinarily required the defendant to carry on the duties of his employment away from his employer's place of business, that he was required to pay his own expenses, was remunerated by commission and was not in receipt of an allowance for travelling expenses. In effect, said counsel, all the requirements of section 8(1)(f) of the statute had been met.

Paragraph 8(1)(f) of the Income Tax Act reads as follows:

8. (1)(f) 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;

The defendant also relies on paragraph 18(1)(a) of the statute which prohibits deductions from a taxpayer's income in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property.

The Findings:

There would not appear to be much dispute over the amounts of expenses claimed by the defendant and that they were in fact incurred. Neither would there appear to be serious conflict over the facts surrounding the dispute. What is left for a trial judge is an assessment of these facts, the application of the relevant statutory provisions and an analysis of more recent jurisprudence covering the subject matter.

The documents filed jointly by the parties and to some of which I have already referred, contain in my respectful view ample evidence to conclude that the defendant's duties to his employer included duties relating to the sales of farm supplies and the carrying on of farm services. Employer circulars, directives, guidelines and the like are replete with instructions or requests to elevator managers in relation to that part of the employer's operations.

There is also ample evidence that quite apart from the promotional activities requested of the defendant which were part of his general managerial functions and for which reimbursement for out-of-pocket expenses was provided in Schedule "C" of the collective agreement, the expenses claimed appear to me to have been incurred in relation to other duties or functions. I should also find that in earning commission income, the employee was obliged to attend on farmers, deliver farm supplies, provide services on site, all of which required him to so perform his duties away from his place of employment. I should also find that his failure to perform these duties would have had a prejudicial effect on his employment or on his career.

Of interest in this respect is a joint submission by both M.P.E. and Grain Services Union dated February 24, 1982, addressed to Revenue Canada, Taxation (Tab 40) setting out that elevator managers are required to sell farm supplies and seeds, that the remuneration for this work is by way of commission, that the duty requires the manager to incur travelling expenses and that, notwithstanding Schedule "C" of the Collective Agreement, it was and is a matter of practice between the parties that managers are not reimbursed by the employer for these expenses.

To this submission, the employer and the union received an encouraging reply on March 19, 1982 (Tab 41) where Revenue Canada indicated that elevator managers qualified to claim deductions under paragraph 8(1)(f) of the statute provided they could demonstrate that the amount of travel actually incurred was sufficient to meet the “ordinarily required" test imposed by paragraph 8(1)(f)(ii).

This admission by the Crown is far from conclusive. In fact, it begs the question as to whether or not elevator managers or any one of them, including the defendant, meet the "ordinarily required" test. It may nevertheless be interpreted as a statement by the Crown that an elevator manager meets the other tests imposed by paragraph 8(1)(f).

I note, however, that the Crown's statement is dated 1982, well after the taxation years in question and it did not stop the Crown from alleging that another condition as well had to be put to the test, namely that under the contract of employment, the defendant was required to pay his own expenses as found in subparagraph 8(1)(f)(i). Referring in this respect to the union agreement, the Crown suggested that in the absence of a specific provision submitting the employee to that obligation, the condition could not be met.

The Case Law:

Counsel for the Crown quoted as authority a decision of the trial division of this Court in Dennis Verrier v. The Queen, [1988] 2 C.T.C. 274; 88 D.T.C. 6478, where, in dismissing the taxpayer's appeal, the learned trial judge, in respect of certain expenses claimed by a successful automobile salesman, found that the taxpayer had failed to establish that he was “ordinarily required to carry on the duties of his employment away from his employer's place of business" and that promotion activities, requiring outlay of expenses were activities not specifically required by the taxpayer's employer. At page 279 (D.T.C. 6481), it was said:

Such activities include making contact with “bird dogs” (persons encouraged by the plaintiff to refer customers to him), the demonstration of vehicles at the home or place of business of clients, picking up from customers cars already purchased to take them in for servicing and leaving the customer a "courtesy car" owned by the plaintiff, entertaining the customer with coffee or meals, etc. It is clear from the evidence that none of these activities of the plaintiff were specifically required by his employer. As Mr. Gary Gillis who was general manager of Birchwood (Motors) at the time in question, testified, "we would expect him to service his clientele as he deemed necessary". What the employer was interested in was results, i.e., sales. The plaintiff was a very successful salesman. No doubt the particular means which he employed were important to that success. But they were means chosen by him and to the extent that they took him away from the dealership that was his choice. I do not believe that he has met the burden of proof which is on him to show that these many activities performed by him away from the dealership were “ordinarily required” to be so performed.

I should note here that the Verrier case as well as the Betz case, infra, were pending before the appeal court when the case at bar came before me. It was suggested that I might reserve judgment pending a determination of the several issues by the Court of Appeal.

The Verrier appeal was heard on February 20, 1990 and judgment reversing the trial judgment rendered on March 2, 1990, (A-1040-88), [1990] 1 C.T.C. 313; 90 D.T.C. 6202. Mahoney, J.A., on behalf of the Court, concluded that the trial judge had erred in law in his construction of paragraph 8(1)(f). His Lordship relied on the case of Hoedel v. The Queen, [1986] 2 C.T.C. 419; 86 D.T.C. 6535 where his brother Heald, J.A. had found that an employer's failure to carry out a task which can result in an unfavourable assessment by his employer is pretty much evidence that the test in issue is a duty of employment. Similarly, Mahoney, J.A. could find that the car salesman's failure to sell enough cars might result in his discharge was pretty much evidence that getting out of the showroom and hitting the road was a condition of employment.

In the case of Betz v. Canada, [1990] 1 C.T.C. 371; 90 D.T.C. 6201, A-236-87, also issued on March 2, 1990, the Federal Court of Appeal dismissed out of hand an appeal by the Crown from a trial decision of Collier, J. reported at [1987] 1 C.T.C. 329; 87 D.T.C. 5223.

Collier, J., in that case, dealt with a school principal who had incurred certain automobile expenses to carry out what were various duties said to be required in the course of his employment. His case was founded on paragraph 8(1)(h) of the Act which deals specifically with "travelling expenses" of employees and the terms of which are substantially the sames as found in paragraph 8(1)(f).

After reciting the various attendances made by the plaintiff upon parentteacher organizations, parent groups and community groups with his school, and after accepting that a failure to perform these duties would result in an unfavourable assessment of the plaintiff for future career purposes, Collier, J. found that these duties formed an implied term of the plaintiff's contract of employment and as such any expense incurred fell within the provisions of paragraph 8(1)(h). He adopted in that respect the reasoning of Strayer, J. in Rozen v. The Queen, [1986] 1 C.T.C. 50; 85 D.T.C. 5611, who, absent an express term in the employment contract, allowed a similar expense to a chartered accountant who was expected to use his own car to travel to clients’ offices and service their books.

The Conclusions:

Admittedly, it is a question of fact whether or not an employee on salary or on commission or both can claim expenses under paragraph 8(1)(f) or paragraph 8(1)(h) of the statute. Nevertheless, I view the Federal Court of Appeal decision in the Verrier case and the endorsement of the trial decision in the Betz case as indicating that neither section of the Act imposes technical considerations which would tend to defeat the intent and spirit of the legislation when the realities of any employer-employee contract are subject to scrutiny. If such a guide to its interpretation should favour a school principal whose salary is assured in any event, it should all the more so, in a proper case, favour an employee paid on commission and whose efforts to earn income in that fashion are far more dependent on his ability to hustle. In any event, as was noted by Mahoney, J.A. in the Verrier case, any deduction allowed such an employee is a deduction from income and not a deduction from tax. He must still absorb the after-tax expense out of his own pocket, a situation markedly different from that of an employee whose expenses are fully reimbursed by the employer.

The Court of Appeal in the two cases cited has also recognized that a specific requirement for an employee to pay his own expenses or to carry out duties outside of his normal place of business need not be patently expressed in a contract of employment. A court, upon studying the experience of the relationship and all surrounding circumstances may well apply common sense and conclude that these are implied terms.

I should find nothing in the case before me to distinguish it from the two cases I have cited. I should find that the defendant meets all the tests set out in paragraph 8(1)(f) and that the expenses he has claimed are deductible thereunder.

It will be recalled that Brulé, T.C.J. viewed the activities of the defendant in his farm supplies function as being in the nature of a separate small business and decided that the expenses he incurred were deductible under paragraph 18(1)(a) of the Act. It is an interesting point but in view of mv findings that the defendant meets the conditions imposed under paragraph 8(1)(f), it might be wiser for me not to traverse that point or comment on it.

The appeal by the Crown is dismissed. Pursuant to section 178(2) of the Income Tax Act, the defendant is entitled to his costs on a solicitor-client basis.

Appeal dismissed.