Citation: 2007TCC620
Date: 20071016
Docket: 2006-2110(IT)I
BETWEEN:
VIRGILIU GAGEA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Little J.
A. Facts
[1] In the 2000 and
2001 taxation years, the Appellant was employed as a commission salesperson by
Westminster Securities Ltd. (“Westminster”) Chartwell Securities (“Chartwell”) and BMO Nesbitt Burns
(“Nesbitt”).
[2] The Appellant
reported the following income:
2000 Taxation Year
Employment
Income (Commissions)
Westminster $3,915.68 $3,915.68
Chartwell $29,630.41 $21,216.64
2001 Taxation Year
Employment
Income (Commissions)
Westminster $3,256.72 $3,256.72
Nesbitt $30,591.48 $30,591.48
[3] The Appellant said
that in September 2000 while acting as a financial advisor with Westminster he handled the purchase
of 300 shares of American Telephone and Telegraph (“AT&T”) for a customer
by the name of Peter Nabokow.
[4] The Appellant said
that Mr. Nabokow provided the Appellant with a cheque for the 300 AT&T
shares and the cheque was returned by the bank with an NSF (Not Sufficient Funds)
stamp. The Appellant also said that Mr. Nabokow provided a second cheque which
was also returned with an NSF stamp.
[5] The Appellant said
that the Sales Manager at Westminster forced him to cover the loss suffered on the AT&T share
transaction and the 300 shares of AT&T that Mr. Nabokow had purchased were
transferred by the Sales Manager to the Appellant’s personal account.
[6] In April 2001, the
Appellant sold the 300 shares of AT&T and suffered a loss of $3,317.00 (U.S. funds) or approximately
$6,000.00 in Canadian funds
[7] The Appellant said
that he did not claim the loss when he filed his income tax return for the 2001
taxation year. However, the Appellant said that he discussed the loss with the
auditor from the Canada Revenue Agency when he was audited. The Appellant said
that the auditor told him that he could not deduct the loss suffered re. the
300 AT&T shares.
B. Issue
[8] The issue is
whether the Appellant can deduct the loss of $6,000.00 suffered by him on the
sale of 300 shares of AT&T in determining his income for the 2001 taxation
year.
C. Analysis
[9] As noted above, the
Appellant was an employee of Westminster. As an employee the Appellant was restricted to the deductions
allowed by subsection 8(1) of the Income Tax Act (the “Act”).
[10] In my opinion the
Appellant is not allowed to deduct the loss of $6,000.00 suffered by him on the
sale of the 300 AT&T shares pursuant to the provisions contained in
subsection 8(1) of the Act. In support of my conclusion, I refer to the
decision of the Supreme Court of Canada in Gifford v. The Queen et al.,
2004 DTC 6120.
[11] In Gifford,
the Supreme Court was dealing with the deductions that might be claimed by
financial advisors of an investment company (Midland Walwyn Capital Inc.). In
the Gifford case Justice Major speaking for the Court said:
11
Before turning to the specific issues raised by this appeal, it is useful to
review the general scheme for allowing deductions under the Act. The appellant
taxpayer here earned income from employment and under the Act could only make
deductions, as a result of s. 8(2), if the deduction was expressly allowed
under s. 8.
12
If an employee meets the requirements of s. 8(1)(f)(i) to (iv), he is
then allowed to deduct any expense made for the purpose of "earning the
income from the employment". If the expense is a payment "on account
of capital", s. 8(1)(f)(v) removes it from the scope of
expenses that can be deducted.
13
When the source of income is a business or property as opposed to employment,
the scope of available deductions is much broader because s. 9 states that the
taxpayer's income will be the profit from the business or property. In
calculating the profit from a business or property a taxpayer can make
deductions in accordance with generally accepted accounting principles unless
precluded by some other section of the Act. Sections 18(1)(a) and (b)
are similar to the portions of s. 8(1)(f) that act as general limits on
what can be deducted. Section 18(1)(a) states that only those expenses
incurred for the purpose of gaining or producing income from a business or
property can be deducted, and s. 18(1)(b) uses similar language as s.
8(1)(f)(v) to, among other things, preclude deductions of payments
"on account of capital".
14
While the general rules are similar, the exceptions create differences in the
ability of taxpayers who earn their income from employment as opposed to from
business or property to claim deductions in what appear to be similar
circumstances.
15
If an employee otherwise meets the requirements of s. 8(1)(f) but is
prohibited from making a deduction because the expense is a payment "on
account of capital" within s. 8(1)(f)(v), the only exception
provided by the Act is s. 8(1)(j). This section allows for the deduction
of payments on account of capital where the item purchased is either a motor
vehicle or an aircraft in a manner similar to the capital cost allowance
deduction under s. 20(1)(a) discussed below. The employee taxpayer is
also allowed to deduct the interest paid on money borrowed to purchase either
of these items.
16
In contrast, a taxpayer earning income from business or property may be able to
deduct expenses that fall within s. 18(1)(b) pursuant to a number of
exceptions in the Act. Two of the more common exceptions are in s. 20(1)(a)
and (b). Section 20(1)(a) allows a portion of the capital cost of
certain property to be deducted from this income, if the regulations provide
for a capital cost allowance in relation to that type of property. Section
20(1)(b) provides a similar deduction for expenditures to purchase
certain intangible capital assets, such as goodwill. Section 20(1)(c) is
a specific provision that allows interest to be deducted when it is paid on
money borrowed for certain purposes.
17
That employees are treated differently than taxpayers earning income from
business or property under the Act is not novel nor readily seen as fair. It
has resulted in significant litigation when taxpayers attempted, with limited
success, to cast themselves as independent business owners as opposed to
employees to attempt to get the advantage of the more favourable
deductions.
[12] Since the Appellant
was an employee of Westminster engaged as a commercial salesperson selling securities to the public, he
is limited to the deductions allowed by subsection 8(1) of the Act. In
my opinion the loss suffered by the Appellant with respect to the sale of 300
shares of AT&T is not deductible by subsection 8(1) of the Act.
[13] Based on an analysis
of the facts presented by the Appellant in Court it would appear that he should
be able to claim a capital loss in connection with the loss suffered by him on
the sale of the 300 shares of AT&T.
[14] The appeals are
dismissed without costs.
Signed at Toronto, Ontario,
this 16th day of October 2007.
“L.M. Little”
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