R. H. Cutmore v. Minister of National Revenue, [1986] 1 CTC 2230, 86 DTC 1146

Christie, A.C.J.T.C.:— This appeal is brought to challenge reassessments and confirmation thereof by the respondent regarding income tax payable by the appellant in respect of his 1980, 1981 and 1982 taxation years. It was agreed by counsel that the disposition of this appeal will govern the determination of 9 other appeals.* [1] Reference in these reasons to “the appellant” is confined to Mr. Cutmore.

The facts are straightforward and concise. Dr. John Macnamara is chairman of the board and chief executive officer of the Algoma Steel Corporation, Limited (“the Corporation”). It is a large integrated steel company which means that its operations span from the mining of raw materials such as iron ore, coal and limestone to their transformation into different kinds of steel products. The principal site of its activities is Sault Ste. Marie. It has 9,000 employees which is about one-third of the entire work force of the city. Its 1985 sales were of the order of $1.1 billion. Except to a relatively unimportant degree, its market is North America.

In 1978, Macnamara, who was then president and chief executive officer, decided to emulate other large industrial concerns by offering to the senior executive group of the Corporation as a “perk,” personal financial counselling services. The senior executive group is composed of Macnamara, vice presidents, the corporations legal officer and secretary and the treasurer. During the years under review the appellant was Vice President, Accounting. The counselling services available were advice in relation to income tax matters and more. They were available from a firm of chartered accountants designated by the Corporation, which paid for the services. They were regarded in the words of Macnamara “as part of the total remuneration package.” Members of the senior executive group were not required to take advantage of these services but, if they did, the cost was regarded by all concerned as a taxable benefit to those who received them and the amounts expended were included in the statements of remuneration paid which they received from the Corporation.

In December 1980 Macnamara informed the senior group in writing that the policy described would continue subject to the qualification that henceforth members of the senior executive group and, if applicable, their wives were required to have their income tax returns prepared in consultation with a professional adviser. The relevant portion of the directive reads:

Having considered this matter in some depth from various viewpoints, I have decided to implement as Corporate policy a requirement that your personal annual income tax return (not related to business activities outside the Corporation) and, if applicable, that of your wife, be prepared by a professional income tax specialist. The fees and expenses incurred for this service will be borne by the Corporation. The selection of the specialist may be made by the executive but must be approved by the Corporation.

The basic reason for implementing this policy is to avoid any embarrassment to either yourself or the Corporation which could result from problems which might arise from incorrect reporting on your personal income tax return. Also, this service will free the executives from the sometimes laborious task entailed in the preparation of annual personal tax returns and thereby not detract from time required for the diligent discharge of their duties as corporate officers.

The appellant was charged with the responsibility of administering this policy.

In his evidence Macnamara expanded on what motivated his decision to make the use of professional help mandatory in the preparation of income tax returns. His professional background and that of most of the senior executive group was not related to financial services. He had decided in 1978 to employ a firm of chartered accountants in the preparation of his returns because of increasing complexities and “so that I could then feel completely free of any problems that might be associated with income tax returns.” He subsequently resolved that it would be in the best interests of the Corporation to take steps to ensure that its senior executives did not get involved in filing improper income tax returns because this "would certainly have a very negative impact on the Corporation.” He added:

The principal reason (for the decision) was to ensure that their (senior executives) actions did not in way reflect on the credibility of the corporation and their personal and individual positions within the company. So that was the motive. It was purely a business decision.

This decision did not come about because of any history of adversity to the Corporation arising out of difficulties encountered by its senior executives regarding their income tax. Macnamara’s actions were purely preventative in nature.

The appellant said that, commencing in 1974, because of his investments and other commercial activity he had had his returns prepared in consultation with his accountants. He continued to do this under both the optional policy of 1978 and the mandatory requirement of 1980. He added that, once the mandatory requirement was established he would not have addressed his mind to the question of the necessity or desirability of retaining professional assistance in the preparation of his income tax returns. He simply conformed.

In 1980, 1981 and 1982 the appellant, in compliance with the instructions issued by Macnamara, retained a firm of chartered accountants to advise and assist him in the preparation of his returns of income for his 1979, 1980 and 1981 taxation years. The fees charged for these services were paid to the accountants by the Corporation and were not included by it in the statements of remuneration paid which it issued pertaining to the appellant and he omitted to include these amounts in computing his income for the years in dispute. In the reassessments they were included in computing his income. The Corporation deducted the fees paid by it as a business expense.

I have no difficulty in arriving at the conclusion that the requirement that the senior members of the executive group retain tax specialists to advise and assist in the preparation of their income tax returns was a bona fide business decision motivated by the desire to protect the Corporation's reputation for integrity. Concern that its reputation in business could be damaged by dishonesty or perceived dishonesty on the part of members of its senior management in reporting their liability to income tax is realistic. Further it is understandable that the Corporation has a vital interest in safeguarding the reputability of its senior executive group not only in the community where they live, but throughout the financial and business circles in which they function and with departments of government with which they deal.

The previously mentioned directive sent by Macnamara to members of the senior executive group gave explanations for it in addition to that of the interests of the Corporation. It spoke of avoiding embarrassment to the executives and of freeing them from the task of preparing their returns. Nevertheless I am satisfied that the primary and overriding motive was to protect the reputation of the Corporation. Without that consideration the policy would not have been implemented. Also, as the appellant observed while testifying, it was embarrassment to members of senior management regarding their income tax affairs that was considered to be a potential source of harm to the Corporation and that was the thing that the policy was intended to prevent.

The gist of the submission made at the hearing by counsel on behalf of the appellant is that if I, in substance, came to the conclusions which I have now arrived at regarding the purpose and bona fides of the mandatory policy, this entitles his client to succeed on this appeal.

It has been held that a corporation can expend money in order to avoid apprehended scandal that would injure its reputation or to defend itself against public attack on its business integrity and in either case the sums spent are deductible as a business or revenue expense: Mitchell (Inspector of Taxes) v. B. W. Noble Limited, [1927] 1 K.B. 719 and Federal Commissioner of Taxation v. Snowden & Willson Proprietary Limited (1958), 99 C.L.R. 431. This however is not by any means determinative of the tax liability of a direct or indirect recipient of the benefit of such expenditures whatever his relationship might be to the taxpayer.

As I see it the outcome of this appeal depends on whether the amounts paid by the Corporation to the accountants chosen by the appellant come within these words in paragraph 6(1)(a) of the Income Tax Act (“the Act”):

6 (1) There shall be included in computing the income of a taxpayer for a taxation year as income from . . . employment such of the following amounts as are applicable:

(a) the value of .. . benefits of any kind whatever .. .

. .. received or enjoyed by him in the year in respect of, in the course of, or by virtue of. . . employment.

It was at one time erroneously thought that in order for a benefit to be within the ambit of these words it must have been received as remuneration for services rendered as an employee, i.e. the causative factor for the conferring of the benefit was services rendered by the recipient: see for example Estate of Phaneuf v. The Queen, [1978] C.T.C. 21; 78 D.T.C. 6001 and Ransom v. M.N.R., [1967] C.T.C. 346; 67 D.T.C. 5235. In Phaneuf, Thurlow, A.C.J. (as he then was) said at 27 (D.T.C. 6005):

While the language of the statutes differ, the test expressed by Viscount Cave, L.C. appears to me to express, as well as it can be expressed, the essence of what falls within the taxing provision of the Income Tax Act. Is the payment made “by way of remuneration for his services” or is it “made to him on personal grounds and not by way of payment for his services”? it may be made to an employee but is it made to him as employee or simply as a person. Another way of stating it is to say is it received in his capacity as employee, but that appears to me to be the same test. To be received in the capacity of employee it must, as I see it, partake of the character of remuneration for services. That is the effect that, as it seems to me, the words “in respect of, in the course of or by virtue of an office or employment” in paragraph 6(1)(a) have.

The payments in issue in this appeal are not of that kind. The misconception referred to was rectified in The Queen v. Savage, [1983] C.T.C.393; 83 D.T.C. 5409. Dickson, J. (as he then was) delivered the judgment of four of the five members of the Supreme Court of Canada who heard that appeal. After quoting the passage just cited from Phaneuf he said at 399 (D.T.C. 5414):

With great respect, however, I do not agree with the latter part of the passage last quoted and in particular the statement that, to be received in the capacity of employee, the payment must partake of the character of remuneration for services. Such was the conclusion in the English cases but based on much narrower language. Our Act contains the stipulation, not found in the English statutes referred to, “benefits of any kind whatever . . . in respect of, in the course of, or by virtue of an office or employment”. The meaning of “benefit of whatever kind” is clearly quite broad; in the present case the cash payment of $300 easily falls within the category of “benefit”. Further, our Act speaks of a benefit “in respect of” an office or employment. In Nowegijick v. The Queen, [1983] C.T.C. 20; 83 D.T.C. 5041 this Court said, 25 [D.T.C. 5045], that:

The words “in respect of” are, in my opinion, words of the widest possible scope. They import such meanings as “in relation to”, “with reference to” or “in connection with”. The phrase “in respect of” is probably the widest of any expression intended to convey some connection between two related subject matters.

See also Paterson v. Chadwick, [1974] 2 All E.R. 772 (Q.B.D.) at p. 775.

I agree with what was said by Evans, J.A. in R. v. Poynton, [1972] 3 O.R. 727 at 738, speaking of benefits received or enjoyed in respect of, in the course of, or by virtue of an office or employment:

I do not believe the language to be restricted to benefits that are related to the office or employment in the sense that they represent a form of remuneration for services rendered. If it is a material acquisition which confers an economic benefit on the taxpayer and does not constitute an exemption, e.g., loan or gift, then it is within the all-embracing definition of s. 3.

While the appeal was dismissed on the ground that the three $100 payments received by Mrs. Savage from her employer were prizes within the meaning of paragraph 56(1)(n) of the Act,* [2] I do not regard what the Chief Justice said about paragraph 6(1)(a) as obiter dicta. Even if it were, this passage from the reasons for judgment delivered by Robertson, C.J.O. on behalf of the Ontario Court of Appeal in City of Ottawa v. Township of Nepean et al., [1943] O.W.N. 352 at 353, applies equally to this court:

What was there said (in City of Ottawa v. Town of Eastview et al., [1941] S.C.R. 448 at 459) may be obiter, but it was the considered opinion of the Supreme Court of Canada and we should respect it and follow it, even if we are not strictly bound by it.

This was cited with approval by Mr. Justice Chouinard in delivering the judgment of the Supreme Court in Sellars v. The Queen, [1980] 1 S.C.R. 527 at 530.

In my view the payments in issue in this appeal are within the applicable limits of paragraph 6(1)(a) described by Chief Justice Dickson. I do not regard the motivation behind the conferring of the benefits or the fact that the acceptance can be considered to have been a requirement of the appellant's employment to render paragraph 6(1)(a) inoperative in respect of them.

In section 8 of the Act there is a catalogue of things that can be deducted in computing a taxpayer's income for a taxation year from employment. Subsection 8(2) provides: “Except as permitted by this section, no deductions shall be made in computing a taxpayer's income for a taxation year from an office or employment.” Section 8 was not invoked by the appellant and it has no application to this appeal.

The appeal is dismissed.

Appeal dismissed.