Burton v. The Queen, 2005 TCC 471 (Informal Procedure)

REASONS FOR JUDGMENT

(delivered orally from the Bench on July 8, 2005

at Hamilton, Ontario)

Woods J.

[1]      This is an appeal by Brian Burton in respect of assessments made under the Income Tax Act for the 2000 and 2001 taxation years.

[2]      During this period, Mr. Burton and his wife indirectly owned all the shares of Smith Steel & Fabrication Inc. and Mr. Burton was employed as its general manager. This appeal concerns a number of expenses incurred by Mr. Burton that were reimbursed by Smith Steel. The Crown submits that the reimbursements should be included in computing income as employee benefits. The Crown relied mainly on paragraph 6(1)(a) of the Act.

[3]      The expenses at issue can be broken down into three groups and I will consider each of these in turn.

[4]      The first group concerns a trip to San Jose, California taken by Mr. Burton, his wife and two children. Mr. Burton testified that he had combined a family trip to a wedding in San Jose with some business for Smith Steel. He and his family were in San Jose for five days and while there Mr. Burton made some investigations about raising funds for a possible acquisition of a corporation in a similar business to Smith Steel. The investigation was short lived because the three venture capital companies that he consulted all thought that the purchase price was wildly excessive. Mr. Burton testified that because these investigations were on behalf of Smith Steel he thought that the corporation should reimburse him for part of the cost of the California trip. The amount reimbursed was $1,777 which represented the cost of the hotel. He was not reimbursed for the car rental, air fare or meals.

[5]      The Crown submits that there is not sufficient evidence to link the California trip to Smith Steel. Counsel argued that Smith Steel might not have been the acquirer. It could be acquired by another corporation or by Mr. Burton himself.

[6]      I do not agree with this. In my view it is not necessary that Smith Steel be identified as the buyer of the target company in order for Smith Steel to legitimately reimburse its general manager for travel expenses related to a possible acquisition. In the early stages of investigating an acquisition, it is premature to decide on an ownership structure. Smith Steel was one of the entities in the group that might have made the purchase. Where costs are incurred in the early stages before the ownership structure is settled on, I do not think that it is unreasonable for the preliminary costs to be incurred by any one of the entities that may end up acquiring the target. If the target is actually purchased by another company, it may be necessary for the actual purchaser to reimburse expenses incurred by other entities. In this case, the investigations did not progress beyond a very preliminary stage. In my view, the reimbursement of these expenses is not unreasonable and it does not result in a taxable benefit to Mr. Burton.

[7]      I now turn to lodging expenses that were reimbursed by Smith Steel. These expenses were incurred because Mr. Burton lived 144 kilometers from his work at Smith Steel. Because it was too far for him to drive on a daily basis, he stayed at a bed and breakfast in Atwood where Smith Steel was located for two nights each week. The cost of the lodging was reimbursed by Smith Steel. The amounts incurred were $2,587 and $1,675 in 2000 and 2001, respectively.

[8]      Generally, meals and lodging are personal expenses and any reimbursement of these expenses by an employer should be included in income as a taxable benefit under paragraph 6(1)(a). There are some exceptions to this general rule. The exception that is relevant for purposes of this appeal is the exception for special work sites in subsection 6(6) of the Act.

[9]      In order for this exception to apply, the work place must be a location at which the duties performed by the taxpayer are of a temporary nature. Mr. Burton submits that he always intended his investment in Smith Steel to be temporary, about 18 months, and that his duties in Atwood, therefore, were temporary.

[10]     The Crown submits that Mr. Burton's duties were not of a temporary nature. I agree with the Crown's position regarding this issue.

[11]     In my view, Mr. Burton has not established that his duties in Atwood were temporary. Mr. Burton gave evidence regarding his business plan for the corporation. Specifically his plan was to change certain aspects of the business within a year and then sell the corporation. However, this evidence about a business plan was simply that - a business plan which, like all business plans, would have been subject to change depending on a myriad of factors that affect business decisions. In fact, it appears that Mr. Burton did subsequently consider a change to the business plan. In his testimony regarding the California trip, Mr. Burton stated that in 2000 he was investigating an acquisition with a view to possibly expanding the Smith Steel business.

[12]     In my view, a business plan is not sufficiently firm to enable one to conclude that Mr. Burton's duties were of a temporary nature. Although Mr. Burton may have initially thought that Smith Steel would be sold within a few years, that would be a business decision that would be made later and that would presumably depend on several things, including whether a suitable buyer could be found. Indeed the fact that Mr. Burton investigated an expansion of the business instead of a sale suggests that his engagement as general manager at Atwood was not temporary. He testified that if he had bought the other company, his work would have moved to Toronto but this is speculative. In my view, there was no definite plan for Mr. Burton to leave Atwood at any particular time.

[13]     Although this is sufficient for me to dispose of this issue, I would also note that the testimony by Mr. Burton was not detailed or precise enough for me to really understand what the true situation was. For example, Mr. Burton testified that Smith Steel was only held for 21 months. This would have satisfied CRA's criteria for what is temporary as set out in the CRA's interpretation bulletin that Mr. Burton referred to. That criterion refers to duties lasting no more than 24 months. Mr. Burton's testimony that the actual period of ownership was 21 months is inconsistent with statements that he made in his notice of appeal and in a letter to the Hamilton Tax Office where he indicated that the corporation was owned for 28 months.

[14]     In considering the evidence as a whole, then, I do not find that Mr. Burton's duties in Atwood were of a temporary nature. For this reason I conclude that the exemption for special work sites in subsection 6(6) does not apply and the reimbursement of lodging in Atwood should be included in computing income.

[15]     Before moving on to the next group of expenses, I would note that there are many decisions of this court on subsection 6(6) that are relevant to this appeal and that were not referred to by either party. One case, Guilbert v. M.N.R., is a 1991 decision of Justice Dussault. It suggests that a special work site does not include an employer's regular place of business. In light of my conclusion that Mr. Burton's duties were not of a temporary nature, it is not necessary that I consider the Guilbert decision.

[16]     I now turn to the last group of expenses which are car expenses. Mr. Atwood was reimbursed for car expenses incurred by him in driving between Atwood and his residence in Oakville and was also reimbursed for business trips. These reimbursements were on a per kilometre basis. The Crown does not take issue with the reimbursement of business trips but submits that the trips between Atwood and Oakville are personal and that the reimbursement of these expenses should be included in income as a taxable benefit. The CRA assessed tax on 75 percent of the reimbursement on the basis that 25 percent was for business trips. Mr. Burton does not take issue with this allocation. The only issue, then, is whether the reimbursement that relates to travel between Atwood and Oakville should be included in computing income. These amounts are $6,348 and $4,801 for 2000 and 2001, respectively.   

[17]     Generally, travel between work and home is a personal activity and any reimbursement of such travel costs must be included in computing income under paragraph 6(1)(a) or 6(1)(l). Mr. Burton suggests that the reimbursement is exempt under subparagraph 6(1)(b)(x). I disagree. This exception only applies to the use of a vehicle in connection with employment. The use of the vehicle in this case was personal and was not in connection with employment. Mr. Burton also suggests that the reimbursement is eligible for the special work site exception but, for the reasons above, I have concluded that this provision does not apply.

[18]     As a result of these findings, the appeal will be allowed on the basis that the reimbursement of car expenses and lodging in Atwood should be included in computing income but that the reimbursement related to the California trip should not be.

Signed at Edmonton, Alberta this 29^th day of July, 2005.

Woods J.