Alicia A. Yorke and Craig C. Yorke v. Minister of National Revenue, [1989] 1 CTC 2040, 89 DTC 12

Couture, CJ.T.C.:—These appeals were heard together, but only the appeal of Craig C. Yorke was dealt with on the understanding that a change to his reassessment will give rise to an adjustment to the reassessment of Alicia A. Yorke. Any further reference to the appellant is therefore a reference to Craig C. Yorke.

In his return of income for 1982 the appellant sought to deduct $8,319 for automobile expenses plus $755 as the cost of maintaining an office in his home. These claimed deductions totalling $9,074 were disallowed under a notice of reassessment dated December 31, 1984. The appellant objected and by a subsequent notice of reassessment dated July 15, 1986 the $755 was allowed. Prior to being reassessed in 1984 the appellant had notified Revenue Canada that $12,088 should be included in calculating his income. This sum is what he received from his employer for travelling expenses arrived at by adopting the scale payable to employees of the Government of Nova Scotia for travel expenses. It exceeded the actual expenses incurred by the appellant by $3,769.

The respondent contends that the entire $12,088 is "an allowance for personal or living expenses" within paragraph 6(1)(b) of the Income Tax Act and that none of the exceptions in that paragraph are applicable. The appellant says that this amount is a reimbursement of expenses or alternatively $8,319 is deductible in computing his income for 1982 under paragraph 8(1)(h) as amounts expended by him in the year for travelling in the course of his employment.

The appellant lives in Truro, Nova Scotia and since 1973 has been an employee of Carsand-Mosher Photographic Limited (the company) which was established in 1966. Its head office is in Truro, but since 1981 has also operated a retail outlet in Halifax. It is engaged in the sale of photographic material and equipment, the processing of films and the operation of a portrait studio. Its shareholders are the appellant's mother, 49 per cent; an unrelated individual named André Bureau, 49 per cent and his brother Wade,2 per cent.

The evidence of the appellant and that of his brother is that because of the company's low pricing policy, a large part of the company's camera sales was to customers in Halifax. The price for a camera in Truro was between $50 and $100 lower than its competitors' price for the same camera in Halifax. Customers were willing to drive 100 kilometers to Truro to benefit from this discount. However, by 1980 Halifax merchants had responded by reducing their prices substantially leaving a differential of about $20. In late 1980 the company also purchased one-hour photo finishing equipment which proved successful. The new pricing policy of the company's competitors in Halifax caused it to lose its Halifax customers.

In 1981 a branch store was opened in Halifax to meet the sales competition there and to introduce the fast film processing service in that market.

It was decided that the appellant would manage the Halifax store and would travel daily between Truro and Halifax, The main reason for this decision was that all the operating activities of the company were to remain in Truro and the branch store was to be a sales operation only. The appellant was to use his automobile on a daily basis to transport material, supplies, equipment and personnel from Truro to Halifax and to return back to Truro in the evening bringing back the work that had to be processed there. At that time, black and white films were being processed in Truro and so was the reproduction of old photographs, art work, restoration and retouching.

Each morning the appellant would report at the Truro location shortly after 8:00 a.m., attend to whatever duties he had to perform and pick up whatever had to be taken to the Halifax store. He would arrive there between 10:30 a.m. and 11:00 a.m. In order to be able to do these things, it was necessary to acquire a larger automobile and this resulted in the appellant purchasing a Dodge Aries stationwagon in 1981. As part of his regular duties, he attended business meetings with his mother and his brother. They were generally held in the evenings or on Sundays in her home to discuss the company's affairs.Having considered the evidence and the legislation, I am not satisfied that the amount of $12,088 paid to the appellant in the taxation year 1982 was an allowance within the meaning of paragraph 6(1)(b) of the Act. In my opinion it constituted a reimbursement of expenses incurred by him in the course of his employment.

The word "allowance" is not defined in the Act, but has been judicially interpreted in Samson v. M.N.R., [1943] C.T.C. 47; 2 D.T.C. 610. Thorson, P. of the then Exchequer Court said:

In view of what has already been stated it is, perhaps not necessary to say that the use of the word “allowance”, whether in a statute or otherwise, does not of itself determine whether the amount of it is solely reimbursement of expense or whether it may have implications of remuneration. It is clear that in many cases the provision of an allowance, having regard to all the attendant circumstances, is in reality the payment of remuneration in respect of which the recipient is properly assessable for income tax purposes. The test is not merely that the amount is fixed. No such easy determination is possible, however convenient it may be for administrative purpose. In each case the true nature of the amount, by whatever name it may be described, must be determined.

The Federal Court of Appeal has considered the meaning of the word "allowance" in the context of the application of paragraph 11(1)(1) (now 60(b)) of the Act dealing with alimony payments. In The Queen v. Pascoe, [1975] C.T.C. 656; 75 D.T.C. 5427. Pratte, J. who delivered the unanimous judgment of the Court said at 658 (D.T.C. 5428):

First, we are of the opinion that the payment of those sums did not constitute the payment of an allowance within the meaning of paragraph 11 (1)(l). An allowance is, in our view, a limited predetermined sum of money paid to enable the recipient to provide for certain kind of expense; its amount is determined in advance and, once paid, it is at the complete disposition of the recipient who is not required to account for it. A payment in satisfaction of an obligation to indemnify or reimburse someone or to defray his or her actual expense is not an allowance; it is not a sum allowed to the recipient to be applied in his or her discretion to certain kind of expenses.

[Emphasis added.]

In the subsequent case of Jean-Paul Gagnon v. The Queen, [1986] 1 C.T.C. 410; 86 D.T.C. 6179 Beetz, J. of the Supreme Court of Canada wrote the unanimous opinion of the Court. While he disagreed with the statement by Pratte, J. in which he held that to be an allowance the amount, once paid, must be "at the complete disposition of the recipient” he agreed with the remainder of the description by Mr. Justice Pratte of what constitutes an allowance.

The agreement in the present situation between the appellant and his employer whereby he is reimbursed on the basis of the mileage travelled in the course of his employment at a fixed rate cannot be construed as an allowance within the meaning of paragraph 6(1)(b) because it does not meet the test enunciated by Pratte, J. It is not a sum of money limited and predetermined, as it varies according to the number of miles travelled. It is paid only if the appellant has used his automobile in the course of his employment. I may add that an allowance in paragraph 6(1)(b) is an amount paid in anticipation of expenses to be incurred by an employee in the course of his employment. A reimbursement of expenses is an amount normally remitted to an employee for expenses already incurred in the course of his employment.

In the light of the definition of an allowance by Pratte, J. the amount of $12,088 paid to the appellant in 1982 was not an allowance within the meaning of paragraph 6(1)(b). Furthermore, it cannot be construed as salary, wages and other remuneration including gratuities as provided by subsection 5(1). Therefore, the amount was not income of the appellant received by him in the year. It was a reimbursement of expenses.

However, by his own admission the amount of $12,088 exceeded the expenses actually incurred by him for the use of his automobile by $3,769. In my view, this amount falls in the category of a benefit by virtue of his employment as provided in paragraph 6(1)(a) and taxable accordingly.

For the above reasons the appeal is allowed and the appellant is entitled to his costs on a party-party basis.

Appeal allowed.