Francis Albert De Santis v. Minister of National Revenue, [1984] CTC 2435, 84 DTC 1424

Taylor, TCJ:—This is an appeal heard in Toronto, Ontario, on January 16, 1984 against income tax assessments for the years 1977 and 1978 wherein the Minister of National Revenue disallowed amounts of $1,383.18 and $1,508.84 respectively deducted by the taxpayer as “promotion” expenses. Both the appellant and the respondent relied upon paragraph 8(1)(f) of the Income Tax Act, SC 1970-71-72, c 63, as amended. The appellant is a barrister and solicitor, practising in the city of Hamilton, Ontario. He agreed that he was an “employee” during the years in question, but stated that “he was remunerated in part by commissions fixed by reference to the gross monthly receipts of the firm (the law firm where he was employed) and with which he became associated as a partner near the start of the year 1979. He alleged that the “Expenditures (were) made . . . during the course of advancing his own practice and that of the firm, and are referrable to both existing and prospective clients from time to time”. The position of the respondent was that: “he was not remunerated . . . by commissions fixed by reference to the volume of sales made or contracts negotiated”, and “promotion expenses claimed were not incurred for the purpose of earning income from the employment”.

In testimony, the appellant noted that in 1977 he had received '/, of 1 per cent of the gross revenue of the firm in the form of that which he termed “commissions”, and in 1978 this had increased to / of 1 per cent of the gross revenue of the firm. The relevant amounts were shown as “commissions” on his T-4 wage slips. He had been allowed by Revenue Canada certain deductions claimed for “automobile expenses”, but as noted above, those entitled and claimed as “promotion” were disallowed. The “promotion” expenses at issue, in general, consisted of dinners and lunches with clients, prospective clients, other businessmen or friends and acquaintances who might assist him in building up a clientele. While the “development of a clientele” might well have a bearing on his prospects for admission to partnership (a situation which did develop in 1979), it was readily agreed by the parties that such “clientele”, to whatever degree it belonged to anyone, belonged to the firm, not to the appellant. A senior partner of the law firm testified that the provision of the percentage “commission” was an incentive to younger lawyers in the firm and it was understood that it should be used for “automobile expenses” and “promotion”.

With regard to the “automobile expenses” allowed by the Minister, I must assume that these were allowed under the provisions of paragraph 8(l)(h) and (j) of the Act since these provisions in principle have the same thrust as subparagraphs 8(l)(f)(i), (ii) and (iv) of the Act, the impediment to deductibility of the amounts at issue in this appeal must arise out of subparagraph 8(l)(f)(iii) of the Act which reads:

(f) Salesman's expenses.—where the taxpayer was employed in the year in connection with selling of property or negotiating of contracts for his employer, and

(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.

It was the argument of counsel for the appellant that all revenues (fees) of the law firm resulted from contractual obligations of some form between the firm and its clients and that the claim of this appellant must therefore fit within the term “other similar amounts fixed by reference to the volume of .. . or contracts negotiated”, even if the Minister succeeded in showing that the amounts were not “commissions” per se. Counsel for the Minister argued that one should view paragraph 8(1)(f) in light of a more standard percentage fee paid to a third party for arranging a “contract” between two other parties, ie a real estate agent. Counsel for the appellant took the view that no such narrow limitation was warranted.

I am inclined to accept that the format of payments made to the appellant can be encompassed within the phrase “commission or other similar amounts”, and therefore I would hesitate to adopt any narrow and restrictive view placed on this section by the Minister. However, I would assert that the “provision of legal services” (which it was agreed was the basic function of this appellant) must be synonymous with the term “negotiation of contracts” in the section quoted above in order for the appellant to succeed. On certain occasions a part of the taxpayer’s activities as an employee of the law firm could be described as “negotiation of contracts” that is he might indeed have accepted (on behalf of the firm) some obligation to perform a certain function. However, in my view the fulfillment of that obligation (the provision of legal services related to those “contracts”) is separate and distinct from any alleged negotiation of the contracts themselves. There could only be a very small portion of his total time taken up in such “negotiation of contracts” as opposed to the fulfillment of those contracts, therefore he could be deducting the major portion of the expenses claimed from income other than “commission” income. There is no evidence or testimony whatsoever to support a conclusion that the appellant performed this “negotiation of contracts” function directly and solely within the context of the time and effort dedicated to earning his “commission” income rather than performing that function as part of earning his regular base salary.

In the light of the testimony given by the appellant, I find it difficult to visualize that, at the particular times and on the specific dates and occasions when he allegedly incurred the “promotion”, expenses, he was engaged solely in earning a “commission” — the relatively minor portion of his total remuneration as an employee which arose out of the calculation of a percentage of the gross revenue of the firm. I do not suggest (although the implication was left by certain of the remarks of counsel for the respondent) that the appellant must show a negotiated contract or some progress toward one, for each promotion expense claimed, nor do I suggest that the percentage commission must have some mathematically calculable relationship to either his own work, or the contracts negotiated. I do say, however, that the commissions at issue were calculated by the law firm on a basis that had to do with fulfillment of obligations and provisions of legal services, and were not related solely to any alleged negotiation of contracts for the subsequent provision of those legal services.

As I see it, it is not the inherent function of a commission agent to fulfil a contract. His function technically stops at the point in time when the contract, yet to be fulfilled, is agreed upon. I am quite satisfied that had the legislators intended paragraph 8(1 )(f) of the Act to cover situations such as that presented to the Court in this appeal, some words such as “provision of services” etc would have been included therein. The fact that they were not speaks for itself, and this Court cannot read them into the section, such as to alter the basic deduction granted therein to a specific and limited group of taxpayers. While the facts are considerably different, there are certain comments made in Ernest Neufeld v MNR, [1981] CTC 2010; 81 DTC 18 which have a relevance to the judgment in the instant appeal.

The appeal is dismissed.

Appeal dismissed.