[OFFICIAL ENGLISH TRANSLATION]
Date: 20020307
Docket: 2000-5161(GST)I
BETWEEN:
TRI-BEC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] This is an appeal from a
reassessment, notice of which bears number 204114 and is
dated September 29, 2000, for the period from March 1,
1996, to February 28, 1999.
[2] The Minister of National Revenue
(the "Minister") established that the appellant's
net tax was $403,277.24, including a tax adjustment of $2,348.54,
interest of $198.69 and penalties of $268.49. The tax adjustment
stemmed from a difference between the goods and services tax
(GST) collected and the tax reported in the amount of $540.50,
and input tax credits ("ITCs") of $1,808.04 to which
the appellant was purportedly not entitled. The credits were in
respect of unqualified personal expenses and allowances for the
use of a motor vehicle. In the case of allowances for the use of
a motor vehicle, the appellant apparently paid fixed allowances
for travelling expenses, allowances not calculated on the basis
of the number of kilometres travelled.
[3] The appeal concerns the ITCs that
were not allowed and the assessment of the penalty. It raises the
following three points: (1) the expenses in respect of which
the ITCs of $1,037.40 were disallowed because they were personal
expenses were in fact used for entertaining clients and for
advertising for the purpose of earning business income; there was
apparently an increase in turnover. In addition, according to the
notice of appeal, as a result of a Revenue Canada taxation audit,
those expenses were the subject of discussions and were
purportedly accepted by the Minister as business expenses;
(2) the ITCs of $517.24 relating to the motor vehicle
allowances granted were said to be denied because they were not
reasonable; those allowances are granted to certain office
employees for travel required in the performance of their duties,
in particular for client hospitality activities, estimates, bids,
site visits, collecting cheques, bank deposits, meetings with
suppliers and so on; travel reports were apparently produced but
rejected by the auditor; and (3) cancellation of the penalty
of $268.49 is sought since, if an error was made in computing the
net tax, it was a mere error, not an act of bad faith.
[4] The witness for the appellant
party was Gail Pilon, the financial controller of the
business. He is the secretary of the board of directors. The
president of the appellant did not appear at the hearing.
Mr. Pilon explained that it was he who had met the auditors
at both levels.
[5] The appellant is a registrant for
the purposes of the application of the Excise Tax Act (the
"Act"). It operates a building contractor
business specializing in ventilation, air conditioning,
electrical work and heating.
[6] The personal expenses in respect
of which the ITCs were disallowed mainly involve the purchase of
bottles of wine, some clothing purchases and a few purchases made
in drug stores near the residence of the appellant's
president. Of the $1,037 amount that is in dispute, approximately
$800 related to alcohol. Exhibit A-3 is the list of
expenses that were not allowed for the purposes of the ITCs.
Exhibit A-2 is a list of the businesses to which the
appellant purportedly gave bottles of wine as gifts. According to
Mr. Pilon, the appellant did not want to give the names of
the individuals who received the gifts fearing that the
Department might tax them.
[7] The witness filed, as
Exhibit A-4, excerpts from the appellant's
financial statements for the years from 1996 to 1999. The
business's turnover increased from $3,400,000 to $6,000,000
over that period. The witness stated this to explain the
significant number of gifts given by the business.
[8] The amount of the ITCs relating to
the motor vehicle allowances is $517.24 and covers the 1996 and
1997 period. The witness stated that the business had paid
employees who used their own vehicles a reasonable allowance for
the performance of their duties described above. In his
testimony, Mr. Pilon spoke of allowances of $50 or $75 a
week. He explained that, at the end of the year, the employee
prepared an annual statement of his kilometrage and that an
adjustment was made if he had received too much. The witness
filed the kilometrage reports prepared by the employees in
question as Exhibit A-3.
[9] Albert Dubé, a
financial management officer with the Quebec Ministère du
Revenu, testified for the respondent party. Mr. Dubé
explained that there is a departmental directive stating that,
when a registrant pays fixed allowances not based on kilometrage,
those amounts paid do not qualify for the input tax credit.
However, allowances based strictly on kilometrage are eligible
for the credit. He filed that directive as
Exhibit I-1. It is GST Memorandum
400-3-11, more particularly paragraphs 12 to 17
of that memorandum, which read as follows:
General Treatment
12. Section 174 of
the Act provides that where a person pays a reasonable
allowance to an employee or a member of a partnership for the use
of a motor vehicle in Canada, in relation to an activity engaged
in by the person, that person shall be deemed to have received a
taxable supply and to have paid tax equal to 7/107ths of the
amount of the allowance at the time the allowance was paid.
Reasonable Allowances
13. Where a registrant
pays a reasonable allowance to an employee or a member of a
partnership for the use of a motor vehicle in Canada, and where
no amount is included in computing the individual's income
for income tax purposes, the registrant is deemed to have paid
tax equal to 7/107ths of the amount of the reasonable
allowance.
14. An individual is not
eligible to claim an employee and partner rebate under
section 253 of the Act, in respect of an allowance,
when a registrant has claimed, or is entitled to claim a rebate
or an ITC in respect of that allowance.
Unreasonable Allowances
15. Where a registrant
pays an allowance that is required to be included in the income
of the individual receiving the allowance for income tax
purposes, the amount of tax deemed to have been paid by the
registrant is equal to the tax fraction of the amount of the
allowance that was not included in the individual's
income.
16. For income tax
purposes, a registrant will be deemed not to have paid tax
in respect of an allowance when:
(a) the registrant
pays an allowance to an individual for the use of a vehicle, and
the measurement of the use of the vehicle is not based solely on
the number of kilometres the vehicle is driven in connection
with, or in the course of, employment;
(b) the individual
receives an allowance in respect of the use of the vehicle and is
reimbursed in whole, or in part, for expenses in respect of the
use; or
(c) the allowance is
included in the individual's income; or
(d) the vehicle is
for use outside Canada.
17. Accordingly, a
registrant is not eligible to claim an ITC or a rebate to the
extent that the allowance is required to be included in the
registrant's income for income tax purposes.
[10] Mr. Dubé stated that the
allowances received could range from $200 to $300 a week or from
$900 to $1,200 a month.
Arguments
[11] Counsel for the respondent argued that,
under section 174 of the Act, if the transportation
allowance granted to the employee is fixed and not based on
kilometrage, that allowance is considered as salary. A business
may not claim an input tax credit on salary. However, if an
allowance is considered reasonable by the fact that it is paid on
the basis of kilometrage, the business is deemed to have paid the
tax for that service and may claim the related inputs. It is a
fiction of the Act that the business is deemed to have
paid the tax if the allowance is reasonable.
[12] Expenses are considered reasonable
within the meaning of subparagraphs 6(1)(b)(v), (vi),
(vii) or (vii.1) of the Income Tax Act. If they are
considered reasonable within the meaning of the Income Tax
Act, they need not be included in computing the worker's
income. If they are considered unreasonable, they must be
included in his income.
[13] Counsel for the respondent also argued
that registrants wishing to claim inputs are obligated to have
documentation to justify the amounts they have paid and the
amounts they wish to claim. This obligation exists under the
Input Tax Credit Information (GST/HST) Regulations for the
purposes of section 169 of the Act. Counsel noted
that the allowances paid under the various construction decrees
have been allowed. Allowances paid regularly without regard to
kilometrage have been disallowed.
[14] Counsel argued that the expenses in
respect of which the ITCs were disallowed were personal. The onus
was on the appellant to show the contrary, which it did not do
when it refused to give the names or some of the names of the
recipients.
[15] The appellant's agent stated that
one employee was an estimator, another, a representative and yet
another, a buyer. There was also his own case. He used his car,
inter alia, to make bank deposits, see customers to sign
releases and pick up cheques. Mr. Pilon claimed that the
allowances are reasonable and that adjustments of the actual
kilometrage are made at the end of the year.
[16] Mr. Pilon said that he had handed
over all supporting documentation during the Department's
investigation and had not been questioned during the audit about
the disallowed expenses. At the objections stage, the appellant
did not want to give the names of the recipients of the gifts. He
referred to Interpretation Bulletin IT-518R dated
April 16, 1996, more particularly to the following passage
in the "Summary":
. . . a taxpayer may normally deduct reasonable
amounts paid or payable for food, beverages, or entertainment if
those amounts are incurred for the purpose of earning income from
a business. . .
Conclusion
[17] The relevant portion of
section 174 of the Act reads as follows:
174. For the purposes of this Part,
where
(a) a person
pays an allowance
(i) to an employee of the person, . . .
...
(b) an amount
in respect of the allowance is deductible in computing the income
of the person for a taxation year of the person for the purposes
of the Income Tax Act, or would have been so deductible if
the person were a taxpayer under that Act and the activity were a
business, and
(c) in the
case of an allowance to which
subparagraph 6(1)(b)(v), (vi), (vii) or (vii.1) of
that Act would apply
(i) if the allowance were a reasonable allowance for the
purposes of that subparagraph, . . .
the following rules apply:
(d) the
person is deemed to have received a supply of the property or
service, . . .
[18] Subparagraphs 6(1)(b)(v),
(vi.1) and (x) of the Income Tax Act read as follows:
6(1) Amounts to be included
as income from office or employment
(1) There
shall be included in computing the income of a taxpayer for a
taxation year as income from an office or employment such of the
following amounts as are applicable:
. . .
(b)
Personal or living expenses - all amounts received by the
taxpayer in the year as an allowance for personal or living
expenses or as an allowance for any other purpose, except
. . .
(v) reasonable
allowances for travel expenses received by an employee from the
employee's employer in respect of a period when the employee
was employed in connection with the selling of property or
negotiating of contracts for the employee's employer,
. . .
(vii.1) reasonable allowances for the use of a
motor vehicle received by an employee (other than an employee
employed in connection with the selling of property or the
negotiating of contracts for the employer) from the employer for
travelling in the performance of the duties of the office or
employment,
. . .
and, for the purposes of subparagraphs (v), (vi) and
(vii.1), an allowance received in a taxation year by a taxpayer
for the use of a motor vehicle in connection with or in the
course of the taxpayer's office or employment shall be deemed
not to be a reasonable allowance
(x) where the
measurement of the use of the vehicle for the purpose of the
allowance is not based solely on the number of kilometres for
which the vehicle is used in connection with or in the course of
the office or employment, . . .
[19] Subparagraph 6(1)(b)(x) of
the Income Tax Act is clear in my view. Since
section 174 of the Act refers to this statutory
provision, a reasonable allowance for the use of a motor vehicle
is one that is fixed on the basis of the number of kilometres
travelled by the taxpayer in the performance of the office or
employment.
[20] During the hearing, the appellant's
agent filed the kilometrage report summaries as
Exhibit A-3. He was not cross-examined on those
reports. Nor did the Minister's agent comment on them. At the
objection stage, according to the memorandum on objection filed
as Exhibit I-5, reference was made to only one person,
Raynald Gosselin. Exhibit A-3 refers to
Raymond Trahan, Gilles Boudreau, Gail Pilon and
Richard Hudon. I find the supporting documents concerning
Richard Hudon clearer than those of the other three persons.
Every week, Mr. Hudon filed a requisition showing the number
of kilometres travelled and the purpose of the trips¾bids
or site visits. Each week, he received an allowance of $75. The
amount reimbursed per kilometre was $0.33. At the end of the
year, an adjustment of $13.86 was made.
[21] In the absence of any specific comments
contradicting the respondent party on the details given by
Mr. Hudon, I find that the motor vehicle allowance in his
case was based on kilometres travelled. In the other three cases,
the details are too vague for me to believe that the allowance
was based on actual kilometrage.
[22] With regard to the wine expenses, the
onus was on the appellant to show that those expenses had been
incurred in the context of its business as required by
section 169 of the Act, which allows the input tax
credit to be claimed.
[23] Since the appellant's agent
referred me to Interpretation Bulletin IT-518R, Food,
Beverages and Entertainment Expenses, I wish to cite a
portion of paragraph 19 of that bulletin:
19. For any outlay for
entertainment to qualify as a deductible expense, a taxpayer must
be prepared to demonstrate that the amount was incurred for the
purpose of earning income . . . . Records should
be maintained of the names and business addresses of the
customers or other persons being entertained, together with the
relevant places, dates, times and amounts supported by such
vouchers as are reasonably obtainable. Expenses that are personal
in nature (other than expenses incurred by the taxpayer while
away from home in the course of carrying on business) are not
deductible by virtue of paragraph 18(1)(h).
. . .
[24] Similarly, it is my view that the
Minister is entitled to know to whom the gifts were given.
Otherwise, it would be easy to pass off personal expenses as
business expenses. In my opinion, the evidence adduced by
Exhibit A-2 is insufficient to prove that the expenses in
issue were business expenses.
[25] The respondent made no representation
or comment on the assessment of the penalty. Relying on the
decision by the Federal Court of Appeal in Canada v.
Consolidated CDN Contractors Inc., [1999] 1 F.C. 209, I
do not see any clear manifestation of a lack of diligence in this
case. It is therefore my view that the assessment of the penalty
is not founded under the Act.
[26] The appeal is allowed with respect to
the allowance for the use of a motor vehicle in the case of
Richard Hudon and the cancellation of the penalty.
Signed at Ottawa, Canada this 7th day of March 2002.
J.T.C.C.
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