Date: 19980728
Docket: 97-2263-IT-I
BETWEEN:
JOHN O'CONNELL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rip, J.T.C.C.
[1] The key issue in these appeals from assessments for 1994
and 1995 is whether an allowance contemplated by subparagraph
6(1)(b)(iv) of the Income Tax Act
("Act") is received by an employee from the
employee's employer as a full reimbursement for actual
expenses incurred for travel, as claimed by the appellant, or is
paid by the employer to compensate the employee to some
reasonable extent for travel, as claimed by the Minister of
National Revenue ("Minister") in making the
assessments.
[2] At all relevant times, John O'Connell, the appellant,
was the sole shareholder of 800546 Ontario Limited
("Ontario"), a corporation which owned 50% of the
shares in J.O.C. Fashion Inc. ("JOC"). Another
corporation, Your Man Inc. ("Man"), was related to JOC.
Mr. O'Connell was president of both JOC and Man. Both
corporations operated retail stores, one selling women's
clothing and the other selling men's clothing in the St.
Catharines, Ontario area. Mr. O'Connell was buyer for
both corporations. As buyer, he travelled to Toronto
approximately three times a week and to Montreal four times a
year. He also drove to New York City once a year. Mr.
O'Connell negotiated contracts for both corporations.
[3] Mr. O'Connell stated that JOC sells ladies high
fashion clothing and the image of the retailer is important to
manufacturers and their agents who sell designer clothing to
JOC.
[4] In travelling to the various cities on behalf of JOC and
Man, Mr. O'Connell uses a BMW 735(i) ("BMW")
automobile which he purchased in 1993 for $66,040. The money was
advanced to him by JOC and he repaid JOC $1,000 a month on
account of both interest and capital. During 1994 the amount of
interest paid by Mr. O'Connell was $3,633; the balance of the
$12,000, namely $8,367, was on account of loan capital.
[5] There is no issue between the parties that Mr.
O'Connell actually drove the distances he says he did. He
maintained a diary of his travels and did not include in the
distances travelled, travel between his home and office.
[6] At trial the parties agreed that the appellant's
business use of the BMW was 79% in 1994 and 73% in 1995. In these
years, Mr. O'Connell received mileage allowances from JOC and
Man in the amount of $14,700 in 1994 and $13,600 in 1995.
Apparently the appellant's total annual mileage was 17,350 in
both 1994 and 1995, of which business mileage was 13,695 and
12,580, respectively.[1]
[7] Mr. O'Connell testified that he claimed an allowance
of one dollar for each mile he drove for JOC and Man. There was
no explanation given at trial for the difference between the
business mileage and the amount received by
Mr. O'Connell, given that he was to receive one dollar a
mile.
[8] Mr. O'Connell was of the view that the allowance of
one dollar a mile "seemed fair" and was the same amount
he received from a publicly traded corporation of which he was a
director.
[9] The appellant's position is that a reasonable
allowance for travel expenses should be aggregate of the actual
costs of operating the vehicle in the year and the annual
depreciation or capital cost allowance on that vehicle. In 1994
the operating costs of the BMW were $7,381 and the capital cost
allowance calculated by Revenue Canada was $7,038. In 1995 the
operating costs of the BMW were $9,622 and the capital cost
allowance calculated by Revenue Canada $4,927. The aggregate of
the operating costs and capital cost allowance in each of the
years was $14,419 for 1994 and $14,549 for 1995. The business
portions of these amounts are $11,391 in 1994 and $10,621 in
1995.
[10] The mileage allowances received by Mr. O'Connell in
1994 and 1995 exceeded the business portions of the total amounts
in each year by $3,309 and $2,979 respectively. The Minister
included in the appellant's 1994 and 1995 incomes the excess
amounts of $3,309 and $2,979, respectively, as a benefit the
appellant received from the corporations in his capacity of an
employee or, alternatively, in his capacity as a shareholder in
accordance with subsection 6(1) and section 15 of the Act.
In the Minister's view the excess amounts received by the
appellant were not reasonable allowances for travel expenses in
accordance with subparagraph 6(1)(b)(v) of the
Act.
[11] The Minister accepted Mr. O'Connell's costs
of operating the BMW in each of the years under appeal as a
"reasonable allowance". However, he invoked paragraph
13(7)(g) of the Act and section 7307 of the
regulations to the Act to limit the capital cost of the
BMW to $24,000 plus federal and provincial taxes on acquisition
of a vehicle costing $24,000. In the appellant's view, the
Minister should look to depreciation, and not capital cost
allowance, to determine what is a reasonable amount of
depreciation or capital cost allowance in calculating the
allowances. In the case at bar, according to the appellant,
depreciation should be calculated on the basis of the BMW had a
life of five years, as estimated by the appellant. If this were
the case, then 20% of the actual cost of the vehicle would be
added to the annual operating costs to determine a reasonable
allowance.
[12] There are two matters that I must consider, firstly, what
is an "allowance"[2] and secondly, what is a "reasonable
allowance". The ordinary dictionary meaning of the word
"allowance" includes: "a limited portion or
sum" and "to put upon an allowance; to limit in the
amount allowed".[3] These are common sense meanings of the word. The
French version of subparagraph 6(1)(b)(v) uses the word
"allocations" where the word "allowances" is
used in the English version of the Act. Like the word
"allowance", the word "allocation"
contemplates the payment of a sum of money or the payment of a
benefit.[4] The
words "allocation" and "prestation" in the
French language are synonymous.
[13] The automobile allowances paid by the two companies to
Mr. O'Connell were, in effect, an attempt to reimburse him
for his automobile expenses and depreciation on the vehicle.
However, an allowance is different from a reimbursement. A
reimbursement involves the payment of an expense of the employer
by an employee and the recovery of that amount from the employer.
The employee must account to the employer. An allowance is
“an arbitrary amount usually paid in lieu of a
reimbursement.”[5] It is a predetermined sum of money paid to an employee
for certain kinds of expenses incurred by the employee. The
employee can use the sum as he wishes without having to account
for any expenditures.
[14] The amount a taxpayer receives from his employer as an
allowance is included in his or her income unless that allowance
falls within the exceptions listed in paragraph 6(1)(b) or
subsection 81(3.1) of the Act or is excluded from income
under subsection 6(6).[6]
[15] Subparagraph 6(1)(b)(v) allows reasonable
allowances for travelling expenses received by an employee from
his employer in respect of a period when he was employed in
connection with the selling of property or negotiating contracts
for his employer. Therefore, the requirements for this
non-taxable allowance are: 1) selling property or negotiating
contracts, 2) the allowance must be for travelling expenses,
including motor vehicle expenses and 3) the allowance is
reasonable.
[16] In R. M. MacDonald v. Canada, 94 DTC 6262,
Linden, J.A., for the Federal Court of Appeal, stated at page
6264:
[. . .] the general principle defining an
"allowance" for purposes of paragraph 6(1)(b) is
composed of three elements. First, an allowance is an arbitrary
amount in that it is a predetermined sum set without specific
reference to any actual expense or cost. As I noted above,
however, the amount of the allowance may be set through a process
of projected or average expenses or costs. Second, paragraph
6(1)(b) encompasses allowances for personal or living
expenses, or for any other purpose, so that an allowance will
usually be for a specific purpose. Third, an allowance is in the
discretion of the recipient in that the recipient need not
account for the expenditure of the funds towards an actual
expense or cost.
[17] Furthermore, with respect to the general philosophy of
taxing allowances, Linden, J.A., stated in Verdun v.
The Queen, 98 DTC 6175 at 6176 (F.C.A.):
[. . .] Even when these amounts are not used for any improper
purpose, and even when they are reasonable estimations of the
costs, our law treats them as additional remuneration, not as
reimbursement of expenses, which require detailed receipts being
submitted for reimbursement. This is felt to be necessary in
order to ensure that allowable, reimbursed, personal expenses are
accurately recorded and that the system is fair for all
Canadians, even though extra accounting costs may be
incurred.
[18] An allowance, therefore, merely attempts to compensate to
a limited amount the employee for an expense the employee
incurred in the course of the employee's employment. In
certain circumstance the allowance may indeed cover the
employee's out of pocket expenses. Paragraph 6(1)(b)
lists those allowances, the amounts of which are not included in
an employee's income from employment. However the allowances
for travel or for the use of a motor vehicle must be reasonable:
subparagraph 6(1)(b)(v), (vii) and (vii.1).
[19] The word "reasonable", of course, can mean all
things to all people. At bar, the real issue in dispute between
the parties is to what extent capital cost allowance should be
considered as reasonable. The appellant wants to ignore capital
cost allowance and rely solely on what is reasonable depreciation
for the vehicle. In my view to determine what the word
"reasonable" contemplates in subsection 6(1), reference
ought to be made to other provisions of the Act which are
concerned with travel allowances and the capital cost of a
passenger vehicle. Guidance may be taken from paragraph
18(1)(r) of the Act and section 5307 of the
regulations to the Act with respect to what Parliament
thinks is a reasonable deduction of capital cost allowance and
section 7306 of the regulations to the Act for amounts
viewed as reasonable payment by an employer for kilometres driven
by an employee in the course of employment.
[20] In computing income or loss from a business or property,
paragraph 18(1)(r) limits the deduction available to a
taxpayer in respect of an allowance for the use by an individual
of an automobile in accordance with prescribed rules. Regulation
7306 sets out the limits for the purposes of paragraph
18(1)(r) for an allowance with respect to the kilometres
driven by the employee. If the allowance exceeds these prescribed
limits, the employee may only deduct the excess amount only if
the excess amount is required to be included in the
employee's income. As stated earlier, paragraph
13(7)(g) and regulation 7307 together place a ceiling on
the capital cost allowance for passenger vehicles.
[21] I do not question Mr. O'Connell's testimony that
the image of JOC, in particular, is helped when its suppliers see
him driving a luxury automobile. The Minister appears to agree:
he considered the costs of repairs and maintenance on the vehicle
as a reasonable portion of the allowance in question.
[22] In determining what comprised a reasonable allowance to
Mr. O'Connell, the Minister looked to limits the Act
imposed on taxpayers claiming automobile expenses in computing
income from a buttress, in particular the capital cost allowance
provisions in paragraph 13(7)(g) and regulation 7307.
This, in my view, is a satisfactory starting off point to
determine what Parliament contemplated to be a reasonable
allowance. The appellant has not convinced me that the Minister
erred in referring to these provisions. Obviously Parliament
wanted to limit the amount of capital cost allowance on a motor
vehicle and put a ceiling on what it believes is a reasonable
amount. To totally ignore paragraph 13(7)(g) and
regulation 7307 would be to ignore the object and spirit of what
Parliament considers a "reasonable allowance" for the
purposes of subparagraph 6(1)(b)(iv). It may well be that
the prescribed amount of $24,000 in regulation 7307 ought to be
increased - the amount of $24,000 was fixed in 1991 and the price
of passenger vehicles has increased substantially since then, as
anyone who recently purchased an automobile can attest. In
considering what is a reasonable allowance, I might have
considered the capital cost of an automobile acquired in 1993 to
have a ceiling slightly in excess of $24,000. This, however, was
not pleaded nor did the appellant attempt to produce any such
evidence.
[23] In the circumstances, the assessment ought not to be
disturbed. The appeal is dismissed.
Signed at Ottawa, Canada this 28th day of July 1998.
"Gerald J. Rip"
J.T.C.C.
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