André Lalonde v. Minister of National Revenue, [1982] CTC 2358, 82 DTC 1341

The Chairman [TRANSLATION]:—The appeal of Mr André Lalonde is from reassessments by which the respondent disallowed deduction of the expenses claimed by the appellant as business expenses, amounting to $11,036.55, $13,457.96, $11,965.21 and $1,801.76 for the taxation years 1973, 1974, 1975 and 1976 respectively.

In support of his assessments, the respondent submitted in his amended reply to the notice of appeal that:

1. the appellant was an employee;

2. the expenses claimed by the appellant were not incurred for the purpose of gaining income within the meaning of paragraph 18(1)(a) of the Income Tax Act;

3. the appellant provided no supporting documentaion for his claim.

Summary of facts

The appellant, a consulting engineer, was a partner in the firm of Paul Pelletier, Consulting Engineers, from 1966 to 1970 inclusive. At that time the Paul Pelletier firm was awarded the majority of its contracts by the Government of Quebec.

After the change of government in the province of Quebec in 1970, the Paul Pelletier firm received no new government contracts and was obliged to discontinue its activities. The appellant alleged that in 1972 he began practising his profession independently, and obtained a contract from L Simard Ltée for mine work and several small contracts from Entreprises La- tendresse Inc for the erection of prefabricated schools for various school commissions in the vicinity of St-Bruno, Quebec. The appellant testified that his political allegiance prevented him from obtaining contracts from the new government directly. However, following the advice of persons close to the Government of Quebec on obtaining work by means of subcontracts, he approached the firm of Aymot, Bahl et Dérome, Consulting Engineers, which had been awarded several government contracts.

In 1972 the principal partner of Amyot, Bahl et Derome was Mr Amyot, with whom the appellant apparently negotiated verbally the terms of a contract for a study which he was to make of water purification on the Rivière des Hurons. According to the appellant, the salary rate for this contract was negotiated on an hourly basis, not an annual basis. Additionally, the appellant maintained that the remuneration for each contract had to be renegotiated. Mr Amyot died in 1973 and was replaced by Mr Dérome for administrative purposes, but Mr Dérome left the firm shortly afterwards and Mr Bahl remained the only partner in the firm during 1974 and 1975.

In the relevant period of 1973, 1974, 1975 and 1976 the firm gave the appellant three primary commissions deriving from government contracts:

1. a study of water purification in the Rivière des Hurons;

2. completing the study begun in a master plan for water purification,

and

3. a study on solid waste.

The possibility that the appellant might become a partner in the Bahl firm was raised in 1975. On February 1, 1976 a new partnership was created by Mr Bahl and the appellant was one of the partners in the new firm.

This proceeding is therefore concerned with the taxation years 1973, 1974 and 1975 until February 1, 1976. During this time, the appellant stated that he had no designated office with the firm; that he did a good part of his work at his office at home in St-Bruno, Quebec; that he used work tables which were available when he worked on the firm’s premises, and used its stationery and the limited amount of equipment necessary to prepare technical reports which constituted the greater part of his work. These reports and studies were signed by him, but the appellant noted that they were for the firm of Bahl and Amyot. The appellant was not required to work regular hours and was free to take vacations when he wished to do so.

In his testimony, Mr Bahl confirmed the statements of the appellant in part. He explained that after Mr Amyot’s death and Mr Dérome’s departure, he was unable to attend to all the details of the operation alone. However, he believed that the appellant was not paid, according to the negotiations, for each of the commissions he was given. Mr Bahl stated that all the studies made by the appellant of the environment were special, and that while the appellant enjoyed great freedom in performing his commissions and was subject to a minimum of supervision, the firm was always responsible for the work of its engineers in dealing with clients. Bahl et Associés had liability insurance which, Mr Bahl stated, covered the work of all engineers who were given special commissions. Mr Bahl confirmed that, before February 1, 1976, the appellant did not participate in the firm’s profits, and all the expenses incurred by the appellant in performing his commission were repaid to him by the firm.

However, Mr Bahl made a clear distinction between the status enjoyed by engineers and that of other employees, such as designers, but he did not know whether the statutory deductions from employee salaries (taxes, pension and unemployment insurance) also applied to the pay of engineers.

Mr Côme Lafreniere, an accountant who between 1973 and 1976 was primarily responsible for administration, stated that no amount was deducted for taxes, unemployment insurance or pension during the relevant years from the appellant’s pay, in accordance with an order received from the senior partner, who in 1973 was Mr Amyot. Mr Lafreniere explained that the responsibility of making the adjustments necessary in their tax returns was left to the engineers, as in practising their profession they could have other sources of income.

Mr Lafreniere testified that the appellant was paid on the basis of an annual salary; and that he was paid pro rata every two weeks. The amounts paid could vary in the case of advances being made or if the amount received included a reimbursement of expenses. The appellant did not participate in the profits of the firm.

One point was the subject of lively discussion between Mr Lafrenière and the appellant, who represented himself at the hearing: Mr Lafreniere contended that the appellant was issued a credit card by Amyot, Bahl et Dé- rome for the period between 1973 and February 1, 1976, and the appellant stated that the credit card was not issued until after February 1976. No conclusive evidence was presented on this point and the Board will disregard this part of the testimony.

It was not in dispute that the income reported by the appellant in the relevant period was received primarily from Bahl et Associés, and that all the expenses incurred in performing the various commissions given to the appellant by the Bahl firm were reimbursed to him; the appellant did not in any way participate in the profits of Bahl et Associés and was not a partner of the firm during the years in question.

It remains for the Board to decide:

(a) whether the evidence presented by the appellant can support the conclusion that the appellant was practising his profession independently and that, although Bahl was the primary source of his income, it was only one of the appellant’s clients;

(b) whether the expenses claimed by the appellant were incurred for the purpose of gaining an income in the practice of his profession and whether they are reasonable in the circumstances.

The evidence that the appellant had at least two clients, L Simard Ltée and Entreprises Latendresse Inc, in 1972 was not refuted. Mr Renald Chartrand, a technician responsible for administration with Entreprises Latendresse Inc, testified that the appellant was the consulting engineer retained by Latendresse in the relevant years for the technical part of building prefabricated schools for various school commissions. He stated that he had often met with appellant at his business office located in the basement of the appellant’s residence. In his testimony, Mr Bahl admitted that the appellant had other clients, and he admitted that through the appellant’s good offices his firm had obtained certain engineering contracts from clients of the appellant, including the frame of a factory for Entreprises Latendresse Inc and the construction of a bridge for the city of Contrecoeur, Quebec. The appellant kept for himself and performed the Latendresse contracts for prefabricated schools, while carrying out his commissions for Bahl et Associés.

In contrast with the facts in the cases cited by counsel for the respondent, the business expenses claimed by the appellant do not in any way relate to performance of the commissions he received from Bahl et Associés. The evidence is clear that the appellant was reimbursed by Bahl et Associés for all the expenses incurred by him in carrying out his commissions. The amounts claimed are business expenses which, the appellant contended, were incurred in practising his profession on his own behalf, independently of any work for Bahl. The chief point in the case at bar is therefore not whether the appellant was an employee of Bahl et Associés, but really whether he was practising his profession on his own behalf and whether the expenses claimed were incurred for the purpose of gaining income in the practice of his profession. Even if I were to find that the appellant was an employee of Bahl, must I conclude that he could not at the same time practise his profession on his own behalf? I do not feel that the two activities are mutually exclusive.

Furthermore, I am not persuaded that the facts establish that the appellant was an employee of Bahl. Mr Amyot initially gave the appellant a special commission, the duration of which was limited and the terms of which may have been forgotten after his death. The appellant was subsequently given two other special commissions which also were for a fixed period. The appellant had no designated office on Bahl’s premises and was not required to work specific hours; he could carry out his commission at home at his own pace and could take vacations when he wished. The supervision of the appellant’s work by Bahl and the responsibility which the firm assumed to its clients for the result of the studies entrusted to the appellant are much more comparable to those of a general contractor toward his subcontractor than of an employer toward an employee. Mr Bahl himself did not consider that either the appellant or the other engineers whom he from time to time gave special contracts were employees whose work constituted an integral part of his firm’s general operations. Mr Lafrenière made no deductions from the appellant’s pay because he did not regard him as an employee of the firm like the designers and an engineer named Desrochers, who at that time was recognized by Mr Bahl and Mr Lafreniere as an employee of the firm.

Although the point is not crucial to resolution of this matter, I am of the Opinion that the appellant was not an ordinary employee of Bahl et Associés between 1973 and February 1, 1976.

It must now be decided whether:

(a) the appellant incurred the expenses claimed for the purposes of earning a profit in the practice of his profession;

(b) the appellant had a reasonable expectation of a profit; and

(c) the expenses incurred for this purpose are reasonable.

In the circumstances which he described, the testimony of the appellant regarding the difficulty an engineer has in obtaining contracts in the engineering field in which he specialized seems plausible to me. However, municipalities and small and medium sized industries in the private sector remained a possible source of work. Although circumstances may have been against him at the time, he was nonetheless a professional engineer capable of performing any work he might be given. I think that it is normal in his profession for the appellant to accept the risk of incurring certain expenses in seeking new clients. It would not be reasonable to expect this type of expenditure to return an immediate benefit, and even less that these business expenses had no chance of generating income. In fact, the appellant’s efforts in search of clients in 1973, 1974 and 1975 produced two new contracts: the frame of a factory for Latendresse and the work in Contrecoeur which the appellant passed to Bahl before becoming a partner in the firm. Mr Bahl himself admitted that it was through these efforts made by the appellant that a major contract was obtained after 1976. I am satisfied that the appellant incurred business expenses in practising his profession in the relevant years and that he could have a reasonable expectation of deriving a profit from them.

Were the business expenses claimed by the appellant reasonable in the circumstances? The amount of the contracts which the appellant was able to obtain in practising his profession between 1973 and 1976, and the value of those which he passed on to Bahl, were not disclosed by the evidence. Further, in his presentation the appellant offered no evidence as to the quantum of the expenses claimed.

Counsel for the respondent, in a gesture which I consider to be most commendable, agreed to review with the appellant and the Department of National Revenue assessor the invoices which the appellant had in support of his claims.

In his tax returns for each of the years 1973, 1974, 1975 and 1976, the business expenses of the appellant were entered under the following headings:

EXPENSES

Fees paid

Travel expenses, moving, promotion and representation expenses

Association fees and charges

Rental

Secretarial expenses

Advertising and publicity

Professional journals and documentation

Telephone

Maintenance and repairs

Stationery, stamps and printing

Accounting fees

Interest on loans and bank charges

Depreciation of office furniture

Automobile expenses:

Gas, oil, grease, maintenance and repair

Insurance

Depreciation

Less: 25% personal use

After examining invoices which were not complete and which did not always correspond to the expenses claimed, counsel for the respondent said she was only prepared to accept half the expenses claimed by the appellant for travelling, moving, promotion and representational expenses, and I understood that she accepted the expenses under other items as claimed, if I came to the conclusion that they were business expenses. The appellant himself several times admitted that he noticed certain errors in calculating the expenses claimed and that an adjustment was necessary. In the circumstances, I feel that the new position taken by counsel for the respondent as to the quantum of the expenses claimed by the appellant is reasonable and my decision on this point affirms the position of the respondent.

The appeal is accordingly allowed and the whole referred back to the Minister for reassessment, so that the amounts claimed by the appellant for 1973, 1974, 1975 and 1976 may be treated as business expenses which are deductible, but taking into account that the expenses claimed for travel, moving, promotion and representational expenses for each of the said years are only allowed as to half the amounts claimed.

Appeal allowed in part.