[OFFICIAL ENGLISH TRANSLATION]
Date: 20010816
Docket: 2000-918(IT)G
BETWEEN:
EDWARD GHALI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] The Appellant is appealing the
reassessments dated December 29, 1999, relating to his 1994 and
1995 taxation years.
[2] The respondent contends in the
first place that the amounts of $5,000 and $9,928 paid to
the appellant by Université Laval in Québec in 1994
and 1995 constituted research grants within the meaning of
paragraph 56(1)(o) of the Income Tax Act (the
"Act"). In the second place, the respondent
further contends that she was correct in disallowing the
deduction of the amounts of $2,731 for 1994 and $5,084 for
1995.
[3] For his part, the appellant
submits that the amounts of $5,000 and $9,928 received from
Université Laval were not research grants within the
meaning of paragraph 56(1)(o) of the Act, but were
rather from an expense account for expenses incurred in the
course of his employment with Université Laval.
[4] The appellant's Notice of Appeal
provides a fairly good summary of the evidence submitted and it
would therefore be useful to reproduce its contents:
[TRANSLATION]
1. This appeal
concerns the appellant's 1994 and 1995 taxation years;
2. During the
years covered by this appeal, the appellant had been, for over 25
years, an associate professor in the department of mining and
metallurgical engineering of the faculty of science and
engineering at Université Laval in Québec
3. During the
taxation years at issue, the appellant's relations with his
employer and his performance of his professional duties were
governed by the collective agreement of December 4, 1992, between
Université Laval and the Syndicat des professeurs et
professeures de l'Université Laval (hereinafter the
"Collective Agreement");
4. More
precisely, the Collective Agreement governing the professional
relations between Université Laval and the appellant
describes a professor's university teaching and research
functions, and article 2.1.01 contains the following
provisions:
University consist of:
(1) teaching;
(2) research; and
(3) internal and external participation.
Teaching and research are an intrinsic part of and constitute
the fundamental features of the performance of every professor's
university functions.
5. The research referred to above is carried out,
inter alia, in the context of sabbatical activities, such
activities being defined according to each university discipline,
in accordance with the provisions of Articles 3.4 and 4.8 of the
Collective Agreement, which read as follows:
3.4 WORKLOAD
3.4.08 Workload assignments take into account the
professor's employment regime, the university activities in which
he or she is engaged, his or her career path from a teaching and
research perspective, and planning considerations for the unit
concerned.
4.8 SABBATICAL YEAR
General provisions
4.8.01 A sabbatical year releases professors from their
regular activities. It permits them to devote themselves to
research work or scientific, artistic or literary activities
related to the performance of their university functions. Its
primary purpose is to further the renewal and enrichment of their
knowledge.
The work or activities in question are defined in a sabbatical
plan.
4.8.07 The Employer shall reimburse professors for the
additional expenses they incur in carrying out their sabbatical
plans in accordance with the terms and conditions set out in
Appendix G.
6. This was
the context in which the appellant submitted his sabbatical plan
to the Dean of the university's science and engineering faculty
on September 27, 1993, detailing in particular the research and
work to be carried out in Canada and abroad for the period from
September 1, 1994, to August 31, 1995;
7. The plan
for sabbatical activities was duly approved by Université
Laval authorities, and the appellant was accordingly released
from his regular teaching duties in order to devote himself to
sabbatical activities related to the performance of his
university functions. These sabbatical activities were spread out
from September 1994 to August 1995;
8. More
particularly, the objectives sought by the appellant in the
context of his sabbatical activities were:
a.
restructuring, reviewing and updating undergraduate and
masters-level courses;
b.
self-renewal in the area of research: producing a few scientific
pieces for publication, designing new projects and making visits
of an academic nature to a few research laboratories;
9. In this
connection, the appellant visited a number of places across
Canada and in Europe and Africa;
10. In accordance with the
Collective Agreement and, more particularly, under the terms and
conditions set out in Appendix G to that agreement, an
amount of $14,222 was allocated to the appellant by the
Vice-Rector, Human Resources, of Université Laval, to
compensate him for his travel costs and expenses, living expenses
and various other expenses incurred in carrying out his project,
it being understood that such costs and expenses were to be
supported by documents proving the applicability of
Appendix G;
11. On his return from
sabbatical, the appellant prepared and submitted to university
authorities a report on his sabbatical explaining his research
and what he had accomplished, and that report was duly approved
by his employer's faculty authorities;
12. With regard to costs,
the appellant's expenses were much higher than the amount granted
by Université Laval under the Collective Agreement;
13. Moreover, the
Respondent's auditor was able to examine all the supporting
documents in question in the course of auditing the appellant's
affairs and his records;
14.
In view of the issuance by Université Laval of T4A
Supplementary forms indicating, as other income, amounts of
$5,000 in 1994 and $9,228 in 1995, which corresponded to the
supplementary expenses reimbursed to the appellant under article
4.8.07 of the Collective Agreement, the appellant deducted from
those amounts the various expenses actually incurred by him on
his sabbatical;
15. In the spring of 1998,
Revenue Canada audited Université Laval and its
professors, including the appellant, in relation, inter
alia, to the expenses incurred by the professors in the their
sabbatical activities;
16. On April 8, 1998, as
part of that audit, the Revenue Canada representative
examined the various factual items concerning the appellant
referred to in the preceding paragraphs and concluded that
expenses totalling $2,391 for the 1994 taxation year and $4,477
for the 1995 taxation year had been improperly deducted by the
appellant;
17. In notices of
reassessment dated March 11, 1999, Revenue Canada accordingly
modified its initial assessments of the appellant to take into
account the expenses indicated above that had been
disallowed;
18. By notice of objection
with accompanying schedules filed on April 29, 1999, the
appellant disputed the correctness of the reassessments of March
11, 1999;
19. In notices of
reassessment dated December 29, 1999, Revenue Canada corrected
certain accounting errors contained in the notices of
reassessment of March 11, 1999, but essentially maintained its
decision to tax the appellant on the amounts in question that he
had received from his employer in the context of his sabbatical
activities, and it also found that certain expenses, totalling
$2,731 for the 1994 taxation year and $5,084 for the 1995
taxation year, had been improperly deducted by the appellant;
20. The appellant submits
that Revenue Canada is mistaken in considering the amounts at
issue received by him from his employer, Université Laval,
in the context of his sabbatical activities, to be taxable as
research grants.
[5] In responding to the Notice of
Appeal, the respondent reiterated the facts on which the
assessments appealed from were based. Those facts are set out in
paragraph 18 of the Reply to the Notice of Appeal and read as
follows:
[TRANSLATION]
(a) The appellant
was a professor at Université Laval in Québec in
1994 and 1995;
(b) in 1994 and
1995, the appellant took sabbatical leave in the course of which
he performed research work in Canada and abroad;
(c)
Université Laval paid the appellant a research grant of
$5,000 in 1994 and $9,228 in 1995, which corresponded to the
amounts provided for in the collective agreement between
Université Laval and the Syndicat des professeurs et
professeures de l'Université Laval;
(d)
Université Laval issued to the appellant T4A Supplementary
forms for the above amounts for the 1994 and 1995 taxation
years;
(e) the appellant's
deduction of the amounts of $2,731 for 1994 and $5,084 for 1995
was disallowed by the Minister of National Revenue because these
expenses were not supported or because they were not reasonable,
or because they constituted personal or living expenses of the
appellant;
(f) the
amounts received by the appellant during the 1994 and 1995
taxation years constituted research grants, which are expressly
referred to in paragraph 56(1)(o) of the Income Tax
Act (the "Act");
(g) the Minister of
National Revenue accordingly included in the appellant's income,
pursuant to paragraph 56(1)(o) of the Act, the
amounts of $2,731 for 1994 and $5,084 for 1995 since they
represented the amount by which of the grant received for each of
those two years exceeded the total of eligible expenses incurred
by the appellant for those years.
[6] In his testimony, the appellant
explained that he had agreed to become involved in administration
as department head for two consecutive terms of three years
each.
[7] After this work as department
head, the appellant explained, administrative duties had become
less exciting.
[8] Wishing to put an end to his
administrative duties in order to return to teaching, his real
professional priority, he decided to take advantage of his
entitlement to a sabbatical year in order to better prepare for
his return to teaching.
[9] His status as department head
meant that he could submit his plan for a sabbatical year
directly to the Rector. His plan was accepted.
[10] Upon acceptance, the file was
automatically referred to a specific department and it was all
processed in accordance with the collective agreement based on a
very detailed table.
[11] After his plan was considered and
accepted, the appellant was informed by letter that he was
entitled to an amount of $14,222 (Exhibit A-4). This was an
amount defined as an authorization for expenses related to the
sabbatical year. The letter in question referred to the relevant
articles of the collective agreement and provided a breakdown of
the allowance to which the appellant was entitled.
[12] To obtain the amounts, the appellant
had to produce acceptable supporting documentation, failing which
he might be deprived of those amounts.
[13] A Université Laval
representative explained to the Court the process followed upon
approval of a sabbatical leave application. He essentially
confirmed the appellant's explanations and added that failure to
submit the appropriate supporting documentation meant that the
individual concerned would have to reimburse Université
Laval. He also indicated that the T4A forms
(Exhibit A-7) with the notation "research
grants" had been prepared in accordance with the
instructions and recommendations issued by Revenu Québec
at the end of the 1980s.
[14] On the one hand, the appellant contends
that the amounts that were paid out by the University and with
respect to which T4A forms were issued did not constitute
research grants; on the other hand, he argues that the amounts
thus received represented simply reimbursements for expenses
incurred in his employment as a professor at Université
Laval. In other words, the appellant maintained that no benefit
whatsoever was involved and that he had never derived any benefit
from receiving the two amounts in question, namely $5,000 for the
1994 taxation year and $9,228 for the 1995 taxation year.
[15] With regard to the first question,
although the T4A forms were issued by the employer with the
notation "research grants", this does not automatically
mean that the amounts were research grants within the meaning of
paragraph 56(1)(o) of the Act.
[16] Since Parliament has not defined what
constitutes a research grant, it is theoretically possible for
anyone to so characterize various outlays and thus subject the
recipient to the provisions relating to receipt of such a grant
in subsection 8(1) and paragraph 56(1)(o) of the
Act.
[17] In the case at bar, Université
Laval characterized the amounts of $5,000 for the 1994 taxation
year and $9,228 for the 1995 taxation year as research grants.
Why were these amounts so characterized?
[18] The answer was forthcoming from the
representative of Université Laval who explained that it
was an administrative decision, taken as a result of a
recommendation by Revenu Québec auditors early in the
1980s.
[19] This explanation certainly does not
provide a sufficient basis for concluding that research grants
are in fact involved here, even though Parliament has not seen
fit to define that term. A research grant is generally given
following a process in which the payer is free to agree or refuse
to make the grant.
[20] The dictionary Le petit Robert
defines "subvention" ("grant") as
follows:
[TRANSLATION]
A subsidy asked for or required by the government to meet an
unexpected expense (loan, tax).
Assistance granted to a group, a person, by the government or
an association (public or private).
The dictionary Le petit Larousse defines
"subvention" as follows:
[TRANSLATION]
Financial aid paid by the government or a public entity to a
private person with the aim of promoting an activity of general
interest in which that person is engaged.
The Termium Plus electronic terminology bank cites the
following definition of "subvention":
[TRANSLATION]
An amount paid occasionally or regularly to an individual or a
group as assistance, aid or a subvention in payment for certain
services, etc.
And the dictionary Le Robert électronique,
defines "subvention" as follows:
[TRANSLATION]
1. Financial aid granted as assistance;
2. A subsidy asked for or required by the government to meet
an unexpected expense (loan, tax . . .).
3. Assistance granted to (a group, person) by the government
or a public or private association.
[21] I do not believe I am distorting
reality in affirming that a grant is made following a process in
which the grantor is free to either make or refuse the grant. The
decision to make or refuse a grant is generally a unilateral
process for the granting organization.
[22] Is such freedom to make or not to make
a grant to be seen in the case at bar? Can it be said that
Université Laval had the absolute power, the ability and
the authority to refuse the appellant's application? I do not
think so.
[23] In the case at bar, that is not at all
how things were. First of all, the evidence showed that the
appellant and Université Laval shared an employer-employee
relationship. That relationship was governed by a collective
agreement which set out all the conditions and details relating
to sabbatical leave.
[24] To obtain such leave, the interested
party-the appellant in this case-had to satisfy the specific
terms and conditions laid down in the collective agreement. For
its part, Université Laval had real obligations the nature
of which involved neither the ability nor the privilege to refuse
that leave without reason. The collective agreement governed the
entire process well, and did so to such a degree that the parties
were subject to its clearly stated provisions.
[25] The amounts that were granted to the
appellant and with respect to which T4A forms were issued
for the 1994 and 1995 taxation years were paid to him pursuant to
Appendix G to the collective agreement that was binding on the
parties.
[26] Again according to Appendix G, the
amounts involved were amounts to which the appellant was entitled
in order to cover the costs and expenses associated with various
trips and to take care of living expenses and various other
expenses necessary to carry out the plan that he had
submitted.
[27] In order to receive the amounts
provided for in the collective agreement, the appellant had to
produce supporting documents.
[28] The facts in the case at bar are
similar to those in Mitchell v. Canada, [1999] T.C.J. No.
302 (QL). Mitchell was a tenured professor at Acadia University
in Wolfville, Nova Scotia. In 1991, his employer approved the
research program that he had submitted in relation to an
application for sabbatical leave. The taxpayer, Mitchell,
accordingly took advantage of the sabbatical leave provided for
in his collective agreement and received an amount of $7,936 to
cover his expenses, again, under the collective agreement.
[29] Judge Sarchuk noted that there was an
employer-employee relationship between Professor Mitchell and
Acadia University, which relationship was governed by a
collective agreement.
[30] The Court therefore took into
consideration the fact that the collective agreement stipulated
or set out the purpose of sabbatical leave, to which those who
qualified had an entitlement. The University had to approve the
applications if they were in conformity with the collective
agreement.
[31] In Mitchell, the collective
agreement provided for the employees' remuneration and indicated
the salary scale obtaining during sabbatical leave.
[32] After analysing all the facts, Judge
Sarchuk reached the conclusion that the amount received by
Mitchell during his sabbatical constituted an actual component of
the salary agreed to by the parties in the collective
agreement.
[33] Judge Sarchuk wrote as follows:
15 In light of these
provisions, it is not possible to consider that the amount
received by him during the term of his sabbatical constituted
anything other than the bargained-for portion of his salary.
There is nothing in the relevant Articles of the Agreement to
suggest that either the employer or the employee considered a
sabbatical salary to be a grant or fellowship or any other form
of remuneration.
(Emphasis added.)
[34] In paragraph 20 of the judgment, there
is the following:
20 The Appellant's position
is that not only was he required by the terms of employment to
carry out research but that the only way it could be done in his
chosen field was to travel and incur expenses. These expenses, he
says, are deductible pursuant to the provisions of paragraph
8(1)(h) of the Act which provides that:
8(1) 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:
. . .
(h) where the
taxpayer, in the year,
(i) was ordinarily required to carry on the duties of
his employment away from his employer's place of business or
in different places, and
(ii) under the contract of employment was required to pay the
travelling expenses incurred by him in the performance of the
duties of his office or
employment,
amounts expended by the taxpayer in the year (other than motor
vehicle expenses) for travelling in the course of the
taxpayer's employment, except where the
taxpayer
(iii) received an allowance for travelling
expenses that was by reason of subparagraph 6(1)(b)(v), (vi) or
(vii), not included in computing the taxpayer's income for
the year, or
(iv) claimed a deduction for the year under paragraph
(e), (f) or (g).
Paragraph 23 contains the following:
23 . . . Sabbatical
leave is intended to provide a teacher with an opportunity to be
absent from his teaching post to pursue scholarly interests
related to his discipline but leaves the choice as to what and
where as well as the matter of costs to the person on leave.
Although in a general way the sabbatical program is approved by a
committee, that fact is not altered since such approval does not
(and cannot) mandate or direct the manner in which a particular
scholarly pursuit is to be carried out.
[35] Judge Sarchuk's conclusion is thus
consistent with the appellant's own analysis of the amounts
obtained. My understanding of the provisions of subsection 8(1)
of the Act is that, in order to be able to deduct
expenses, it is essential that they be expenses that the taxpayer
is required to incur and be responsible for in the performance of
his duties. The taxpayer in question does not have the option of
avoiding the expenditures or not making them.
[36] In the case at bar, there was no
obligation, even though the expenditures contributed to enhancing
the appellant's knowledge for the greater good and benefit of his
students. The collective agreement provided for sabbatical leave;
it did not require it. Furthermore, it provided for various
scenarios, from no stay abroad to a very long stay abroad, as
well as a kind of mixed formula under which the beneficiary of
the sabbatical leave divided his leave between time abroad and
time in his home location.
[37] After devoting a number of years of his
career to administration for the benefit of the same employer,
Université Laval, it was perhaps normal and even desirable
that the appellant would want to again immerse himself in the
intellectual activity specific to his teaching before resuming
his professorial duties. This does credit to the appellant and
speaks most eloquently of his professionalism; however, it was a
personal action freely chosen by him.
[38] If the appellant had decided to return
to teaching immediately at the end of his second term as
department head, he could have resumed his position as a
professor without any penalty and with no consequences for his
career in terms of the employer-employee relationship.
[39] I recognize that the appellant's action
was appropriate, noble and enriching for himself, his future
students and his employer.
[40] The sabbatical year and the activities
it involved were not mandatory. The appellant was entirely free
to carry out any number of intellectual projects during his
extended absence from the University in order to enhance his
knowledge in his various areas of expertise.
[41] The great freedom, the many
possibilities and the absence of the employer's authority are
elements that, most unfortunately, preclude the appellant from
availing himself of the provisions of subsection 8(1) of the
Act.
[42] The strictness of the provisions of
subsection 8(1) of the Act and the restrictions those
provisions entail undoubtedly played a major role in the
characterization of the amounts paid by universities to their
professors with respect to sabbatical years. Indeed, Parliament
provided in paragraph 56(1)(o) that research grants were
subject to special tax treatment. In this regard, it is important
to bear in mind the following words of Judge Bowman in
Scheinberg v. Canada, [1996] T.C.J. No. 1:
4.
Paragraph 56(1)(o) requires that there be included in computing
the income of a taxpayer for a taxation year the following:
(o) The amount, if
any, by which any grant received by the taxpayer in the year to
enable him to carry on research or any similar work exceeds
the aggregate of expenses incurred by him in the year for the
purpose of carrying on the work, other
than
(i) personal or living expenses of the taxpayer except
travelling expenses (including the entire amount expended for
meals and lodging) incurred by him while away from home in the
course of carrying on the
work,
(ii) expenses in respect of which he has been
reimbursed, or
(iii) expenses that are otherwise deductible in computing his
income for the
year.
(Emphasis added.)
In paragraph 7 of his judgment, Judge Bowman expressed himself
as follows:
A couple of observations might be appropriate at this point.
Paragraph 56(1)(o) is not a provision that allows a deduction. It
requires the inclusion in income of the amount of a research
grant to the extent that it exceeds the expenses relating to the
research. Where the expenses exceed the grant it does not
authorize the deduction of the excess. If those expenses are to
be deducted the authority, if it exists at all, must be found
elsewhere. . . .
[43] In that case, Judge Bowman came to the
conclusion that the amount in dispute did indeed constitute a
research grant that was subject to paragraph 56(1)(o).
Further on, Judge Bowman wrote as follows:
. . . they related not to any business that he carried on but
to his employment with the university. Doing research and
publishing are necessary concomitants of being a university
professor and the cost of research and publishing -- at least
during a year when the professor is employed, whether on
sabbatical leave or teaching at the university and doing research
on his or her field -- relates to the employment as a professor.
Section 8, which regulates very precisely the deduction of
employment costs appears not to cover such expenditures.
[44] In the case at bar, it was established
on a preponderance of evidence that the amounts of $5,000 for the
1994 taxation year and $9,228 for the 1995 taxation year, with
respect to which were issued T4As bearing the notation
"research grants", were not research grants at all, but
one of the benefits related to the employment that the appellant
held with Université Laval, the whole in accordance with
the collective agreement.
[45] On the issue of whether the
expenditures made were deductible under paragraph 8(1)(h)
of the Act, my answer is in the negative, having regard to
the fact that the appellant had no obligation to make the
expenditures. Certainly, the expenditures were justified by
concerns of intellectual honesty and professionalism and by a
profound sense of duty, but they were neither mandatory nor
essential in order for the appellant to keep his employment.
[46] The appellant could resume his
professorial position without sanction or penalty; moreover, the
initiative as regards the sabbatical leave was taken by the
appellant. The University never compelled him to take the leave;
at least the evidence does not show that it did.
[47] For these reasons, the appeal is
dismissed with costs.
Signed at Ottawa, Canada, this 16th day of August
2001.
J.T.C.C.
Translation certified true
on this 14th day of February 2003.
Erich Klein, Revisor
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