Citation: 2006TCC528
Date: 20061017
Docket: 2003-3609(IT)I
BETWEEN:
ANTHONY D. SAUVÉ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx J.
[1] This appeal concerns the 2001 taxation year. There are three questions at issue concerning the calculation of the Appellant's employment income:
1) whether an amount of $22,000 for office rent may be deducted under subparagraph 8(1)(i)(ii) of the Income Tax Act (the "Act");
2) whether an amount of $35,000 for the services of an assistant may be deducted under subparagraph 8(1)(i)(ii) of the Act; and
3) whether Internet expenses in the amount of $1,297 may be deducted under subparagraph 8(1)(i)(iii) of the Act.
[2] The aforementioned provisions read as follows:
8(1) Deductions allowed - 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) Dues and other expenses of performing duties - amounts paid by the taxpayer in the year as
. . .
(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 the office or employment and that the officer or employee was required by the contract of employment to supply and pay for.
[3] Paragraph 8(10) of the Act reads as follows:
(10) Certificate of employer - An amount otherwise deductible for a taxation year under paragraph (1)(c), (f), (h) or (h.1) or subparagraph (1)(i)(ii) or (iii) by a taxpayer shall not be deducted unless a prescribed form, signed by the taxpayer's employer certifying that the conditions set out in the applicable provision were met in the year in respect of the taxpayer, is filed with the taxpayer's return of income for the year.
[4] Paragraph 8(1)(f) of the Act reads as follows:
(f) Sales expenses [of commission employee] - where the taxpayer was employed in the year in connection with the selling of property or negotiating of contracts for the taxpayer's employer, and
(i) under the contract of employment was required to pay the taxpayer's own expenses,
(ii) was ordinarily required to carry on the duties of the employment away from the 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 travel expenses in respect of the taxation year that was, by virtue of subparagraph 6(1)(b)(v), not included in computing the taxpayer's income,
amounts expended by the taxpayer in the year for the purpose of earning the income from the employment (not exceeding the commissions or other similar amounts referred to in subparagraph (iii) and received by the taxpayer in the year) to the extent that such amounts were not
. . .
[5] With regard to paragraph (8)(1)(f) of the Act, amounts exceeding the amounts of commissions or other similar amounts have already been allowed as deductions in the calculation of the Appellant's employment income (as will be seen in the next paragraph of these reasons), therefore that provision can no longer have any application. Only subparagraph 8(1)(i) of the Act may now be considered in the analysis of this case.
[6] Mr. Marc-André Paquin, the appeals agent who handled the Appellant's file, explained that at the first audit stage, expenses in the total amount of $19,440 were allowed as deductions in the calculation of the Appellant's employment income. This exceeded by about $7,000 the amount earned as commission by the Appellant. That commission amount was $11,255.88 and the bonus amount was $388.47, for a total of $11,644.35, as shown in Exhibit I-4. The deductions may be itemized as follows: parking expenses, $1,750; office supplies, $4,609; an office at home, $231; car expenses, $11,067; and meal expenses, $1,783.
[7] The witness produced the offer of employment (Exhibit I-1) from IBM Canada accepted by the Appellant. It is dated December 11, 2000. Part of the Appellant's income tax return for the year 2001 was produced as Exhibit I-2. Mr. Paquin explained that two substantial amounts claimed by the Appellant and refused by the Canada Customs and Revenue Agency ("CCRA") are in dispute: one of $22,000 for office rent in Norwood, Ontario, although the Appellant's place of work was in Montreal, and the other of $35,000 for salary paid to an assistant.
[8] There is another amount that appears to be at issue according to the notice of appeal, but at the hearing there was no evidence, either oral or documentary, adduced as to its significance. This amount of $1,297 is claimed to have been incurred for Internet expenses. It must be noted that expenses in the amount of $4,609 were allowed for office supplies at the first audit stage and since no evidence was adduced by the Appellant at the hearing, I shall not deal further with this amount.
[9] Respecting the Norwood office, the appeals agent explained that he examined the T2200 form entitled "Declaration of Conditions of Employment" (Exhibit I-3) filed by the Appellant with his income tax return.
[10] On this form there are affirmative answers to the three parts of question 9a) and a negative answer to question 9b):
a) Did you require this employee under a contract of employment to:
• rent an office away from your place of business, or use a portion of his or her home?
• pay for a substitute or assistant?
• pay for supplies that the employee used directly in his or her work?
b) Did you or will you repay this employee for any of the expenses in 9a)?
[11] On the signature line appears the following: "For Tim Ross".
[12] Following receipt of this form, CCRA sent a questionnaire dated May 8, 2002, to Mr. Ross. The questionnaire (Exhibit I-4) was completed at IBM Canada and signed by Tim Ross. The answers given in this questionnaire were amended on October 31, 2002, to clarify certain points (Exhibit I-5). The amended version was also signed by Mr. Ross.
[13] It may be noted that among other things, the answers provided in the above-mentioned questionnaire were the reverse of those appearing in the form filed by the Appellant with his income tax return. According to the further testimony of Tim Ross, that first form was neither completed nor signed by the employer.
[14] Mr. Paquin stated that the Appellant worked in Montreal. Some expenses had been allowed for office space in the Appellant's Montreal residence. Nothing was allowed for the office in Norwood, Ontario. According to the CCRA questionnaire as amended, the employer did not require the Appellant to have an office at home from March 20, 2001, onward.
[15] Regarding the salary of $35,000 for an assistant, Mr. Paquin stated that the contract of employment must show that hiring an assistant is required by the employer. Nothing is mentioned about an assistant in the contract of employment and the answers given in the CCRA questionnaire did not confirm such a requirement.
[16] Mr. Sauvé testified that on December 11, 2000, he accepted an offer from IBM Canada to be a permanent employee as a consultant in the Quebec ERP-SAP Group under the direction of a Mr. Claudio Corelli. Mr. Sauvé's annual salary was $125,000.
[17] Mr. Sauvé stressed the fact that he had been hired by Claudio Corelli and not Mr. Ross and that it was with Mr. Corelli that the terms and conditions of employment were discussed. Mr. Ross was the Appellant's supervisor from March 19, 2001. According to the Appellant, Mr. Ross knew nothing of his conditions of employment.
[18] The Appellant stated that Mr. Corelli would have advised him to take an assistant and to have an office at home. According to the Appellant, this was a verbal agreement complementary to the signed offer of employment which does not contain all the terms and conditions of employment.
[19] The Appellant claimed to have mentioned to Mr. Corelli the existence of his two offices and his need of an assistant. The Appellant alleged that many of his counterparts had their spouses as assistants. He produced as Exhibit A-2 the invoices of his assistant.
[20] At the beginning, that is, from January 1, 2001, to March 19, 2001, there was no office space available for him at his employer's place of business in Montreal. After his duties changed, he was provided with office space from March 20, 2001, for the remainder of that year.
[21] The Appellant stated that he needed to maintain two offices, one at his residence in Montreal and a second at the residence of his parents in Norwood, Ontario. The Appellant also stated that he needed the services of an assistant, who was his partner and who, although residing in Montreal, allegedly worked out of the Norwood premises. The work done by the assistant would have consisted in helping in the preparation of presentation material intended for customers.
[22] The Appellant also stated that the Norwoodoffice had been rented before his change of position at IBM and he was committed to paying the lease. He produced as Exhibit A-1 the leasing agreement between him and his parents dated January 3, 2001. An official cheque dated November 30, 2001, is attached to the document.
[23] He added that the Declaration of Conditions of Employment form (Exhibit I-3) had been printed from the CCRA documents available to the public. He thought that it had not been signed by Mr. Ross but for Mr. Ross.
[24] Mr. Tim Ross testified. He is a partner in IBM in the business consulting services organization. This is his twentieth year at IBM. In 2001, he was the leader of the SAP practice for Canada. SAP is a commercial software. He stated that the Appellant was hired into the SAP practice, over which he had jurisdiction. Initially, the Appellant worked for one of Mr. Ross's managers and then Mr. Ross became his immediate supervisor.
[25] Mr. Ross explained that at the beginning the Appellant had been hired as a project manager. The objective was at first to put Mr. Sauvé on a project in which he would be working directly with the customer, and IBM would bill for his services.
[26] When Mr. Sauvé began to work for Mr. Ross after March 19, 2001, it was in the field of market development. Customers are looking for ways to improve their financial or procurement or manufacturing processes and SAP might enable them to do that.
[27] The witness stated that the Appellant did not have management responsibilities. The territory assigned to the Appellant was the province of Quebec, with some trips to Ottawa, Toronto and Labrador. The Appellant submitted for reimbursement expense claims for all the trips he made in the performance of his work.
[28] The T2200 form (Exhibit I-3) filed by the Appellant with his income tax return had not been completed at IBM Canada nor signed by Mr. Ross. The signature on it was not his. Questionnaires (Exhibits I-4 and I-5) had been completed at IBM Canada and these were signed by Mr. Ross.
[29] The basis for calculating the Appellant's commission is described by Mr. Ross at pages 59 and 60 of the Transcript as follows:
A. There were a number, back at that time, there were a number of factors. One was how the business performed in general, our area of the business, so the SAP practice. Another was how IBM performed and the third component would have been Mr. Sauvé's individual performance.
[30] Mr. Ross stated that as of March 20, 2001, the Appellant was not required under the terms of his contract of employment to maintain an office away from his place of work. IBM did not at any time require the Appellant to lease office space in Norwood, which is a four-hour drive from Montreal.
[31] Mr. Ross also stated that Mr. Sauvé was not expected to hire an assistant: "I've been a manager in IBM for a number of years, and there is no expectation that our employees will have to hire their own staff to support their jobs at IBM. They inherently have the skill and they bring that to the table, or there is support within IBM that's provided to them to complete the job" (Page 65 of the Transcript).
Analysis and conclusion
[32] I quote Mr. Justice Joyal in Canadav. Gilling (F.C.T.D.), [1990] F.C.J. No. 284 (QL), 90 DTC 6274 at page 6278:
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.
[33] This principle appears to have been accepted in the case law. See Schnurr v. Canada, [2004] T.C.J. No. 565 (QL). The requirement to rent an office or hire an assistant may be considered an implied term of the contract of employment if the circumstances of the employment are sufficient to support the existence of this requirement. The contractual relationship between the employer and the employee must be examined as well as the need for, and usefulness of, renting an office and hiring an assistant.
[34] The evidence has revealed that the T2200 form (Exhibit I-3) regarding the conditions of employment had been neither completed nor signed by the employer, although it purported to be from the employer. This form was included with the Appellant's tax return for the year 2001. This is a fact that undermines the credibility of the Appellant.
[35] At the beginning of his employment, the Appellant did not have office space at IBM. Although he was supposed to work on the premises of IBM's clients, there is no dispute that personal office space may have been needed by the Appellant at that time. The Minister allowed the expenses incurred for maintaining office space in the Appellant's self-contained domestic establishment in Montreal from January 1, 2001, to March 19, 2001.
[36] There was no evidence as to the usefulness of an office that was a four-hour drive from the Appellant's place of work and that was outside of the Appellant's work territory. Mr. Corelli, with whom the Appellant stated that he had first discussed his conditions of employment, was not called as a witness. Mr. Ross, the Appellant's supervisor from March 19, 2001, certainly did not agree that such a requirement existed.
[37] The claim of a deduction of an expense of $22,000 allegedly incurred for the leasing of a second office located in the Appellant's parents' house, a four-hour drive from Montreal, where the Appellant's place of work was located and outside of his work territory, appears patently unreasonable to say the least. It cannot reasonably have been required, and, in fact, it was not required that he have such an office in order to perform his duties. That expense cannot therefore be allowed.
[38] The evidence also revealed that the Appellant's conditions of employment did not specifically require him to hire an assistant. Did they impliedly require him to do so? When we are dealing with implied conditions of work, the matter must be subjected to closer scrutiny. The assistance provided to the Appellant was in the preparation of proposals to customers. Mr. Ross's testimony in that regard was that an employee must have the skills needed to do the job but that, if necessary, this kind of assistance is available within the firm. This is a complete denial of the Appellant's alleged need of an assistant. There was no evidence either suggesting that an assistant is customarily required in the normal carrying out of similar employment duties. Moreover, the amount of salary paid would appear to have been clearly disproportionate to the services provided and to the Appellant's salary.
[39] The Appellant is therefore not entitled to claim a deduction of $35,000 for the salary allegedly paid to an assistant.
[40] The appeal must be dismissed.
Signed at Ottawa, Canada, this 17th day of October 2006.
"Louise Lamarre Proulx"
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