Henry Cival v. Her Majesty the Queen, [1981] CTC 392, 81 DTC 5311

Smith, D J:—This is an appeal by a taxpayer from the decision of the Tax Review Board dated July 4, 1979, dismissing the taxpayer’s appeal from the assessment for income tax of his income for the taxation year 1977.

The plaintiff is a payroll auditor in the Winnipeg office of the Department of National Revenue. His duties require him to be away from his employer’s office for ninety % or more of his working hours. Some of his work takes him to the premises of many taxpayers in Winnipeg, but a great deal of it requires him to travel to various cities and towns outside the city. The evidence indicates that at the request of his immediate superior he agreed to use his own automobile for transportation to and from the business premises where his duties required him to go. This use of his car resulted in his incurring substantial transportation expenses in addition to those resulting from using the car for his own purposes.

No formal contract was entered into with respect to his travelling expenses on Departmental business, but the Treasury Board of the Federal Government issues a travel directive which makes provisions relating to compensation for expenses of this kind. This document is not a statute but it does set out governmental policy, which the officials of government will carry out. The revised edition of this directive, dated April, 1977, was effective for most of that year. Part 3 of the directive deals with transportation procedures and private vehicle rates. Paragraph 3.03 sets out the mileage rates. The portion relevant to the facts of this case reads as follows:

3.03 The mileage rates payable for authorized official use of private cars within and without the headquarters area are:

All provinces

except Nfld.,

(a) when the employer requests, and the employee	N.W.T. and Yukon
agrees to the use of the car:	cents per mile
(i) for each of the first 4,000 miles
per fiscal year	19.5
(ii) for each mile for 4,001 to 8,000 miles
per fiscal year	17.5
(iii) for each mile in excess of 8,000 miles
per fiscal year	16.5
(b) when an employee requests permission to use
a car, and the employer agrees	9.0

Paragraph 3.061 provides:

3.061 The rates prescribed above . . . are paid on the basis of a two-rate system as follows:

(a) when the employer requests the employee to use a private vehicle and the employee agrees, the rates paid are designed to offset the cost of “ownership” and the cost of “operating” a private vehicle, ie;

(i) “Ownership Costs”, consisting of depreciation, provincial tax, finance charges, insurance and license fees, and

(ii) “Operating Costs”, consisting of gasoline, oil, lubrication, tires, maintenance and repairs,

(b) when the employee requests permission to use a private vehicle and the employer agrees, the rates paid cover only the “operating costs”.

The plaintiff clearly comes under 3.03(a). He was paid mileage at the rate prescribed in this paragraph. It is also clear that he comes under 3.061(a), which paragraph indicates that the rates payable under 3.03(a) are designed to offset both “Ownership Costs” and “Operating Costs”, and that ownership costs include depreciation. I understand paragraph 3.061(a) as meaning that the rates payable under 3.03(a) are designed to offset all ownership and operating costs as described in 3.061(a), or more accurately, all such costs as the government is willing to pay.

The amount paid to the plaintiff under paragraph 3.03(a) for the 1977 taxation year was $1,270.89. He claims the expenses incurred by him that were attributable to the use of the car on government business in that year, 42% of the total expenses, amounted to $1,782.92, and consisted of the cost of insurance, gas, oil and repairs, and capital cost allowance (depreciation). He thus claims in respect of both ownership costs and operating costs. There is no dispute between the parties as to the accuracy of his figures. The amount claimed for capital cost allowance is $985.95, More than half of all the expenses.

In the result the expenses exceeded the amount paid to him by $512.03. In other words, the mileage payments at 19.5 cents per mile fell $512.03 short of offsetting the ownership and operating costs they were designed to offset.

On his income tax return for 1977 he deducted this amount of $512.03. The deduction was disallowed by the Minister on assessment and that decision was upheld by the Tax Review Board.

The rules governing what may be deducted from otherwise taxable income are statutory. They are not affected by Treasury Board Directives. The rules respecting deduction of travelling expenses are found in paragraph 8(1 )(h) and subparagraph (j)(ii) of the Income Tax Act, which read as follows:

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 the 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,

(ii) under the contract of employment was required to pay the travelling expenses incurred by him in the performance of the duties of the office or employment, and

(iii) was not in receipt of an allowance for travelling expenses that was, by virtue of subparagraph 6(1)(b)(v), (vi) or (vii), not included in computing his income and did not claim any deduction for the year under paragraph (e),

(f) or (g),

amounts expended by him in the year for travelling in the course of his employ- ment.

(j) where a deduction may be made under paragraph (f) or (h) in computing

the taxpayer’s income from an office or employment for a taxation year,

(ii) such part, if any, of the capital cost to him of an automobile used in the performance of the duties of his office or employment as is allowed by regulation.

Two points are clear to me from reading these provisions: first, under paragraph (h) all three situations described in subparagraphs (i), (ii) and ill) must be shown to exist in order to qualify for deduction of travelling expenses; second, capital cost allowance (depreciation) is not included in travelling expenses under paragraph (h), but may be deducted under paragraph (J), if and to the extent that it is allowed by regulation. In my view the word “regulation” in subparagraph (ii) of paragraph (J) means “regulation enacted by Order in Council under statutory authority”. Thus it does not include a Treasury Board Directive.

Part XI of the Income Tax Regulations deals with capital cost allowances. section 1100(1 )(a) lists 25 classes of property and the maximum percentage of the capital cost of property in each class which may be deducted in each taxation year. Schedule B to the Regulations contains a description of the kinds of property that are included in each class, and the first kind of property mentioned in class 10 is “automotive equipment including a trolley bus but excluding an automotive railway car acquired after May 25, 1976, a railway locomotive or a traincar”. This description obviously includes an automobile. In respect of property in class 10 the maximum percentage deductible is 30.

Applying these provisions to the situation described supra in subparagraph 8(1 )(J)(ii) of the Act, it is clear that the maximum amount of capital cost that may be deducted each year in respect of an automobile owned and used by an employee in the performance of the duties of his employment is the proportion of 30 per cent of the capital cost that the use of the automobile for the duties of his employment is of the total use of the automobile for that taxation year. As the original capital cost is depreciated by the amount deducted each year, the maximum amount deductible, in the language of section 1100(1 )(a) of the Regulations, is 30% of the indicated proportion.

of the amount remaining . . . of the undepreciated capital cost to him as of the end of the taxation year of property of the class (ie: the automobile), before making any deduction under this subsection for the taxation year,

It is government policy to pay for the use of private automobiles in its service by inclusive mileage rates allowances, which rates have increased over the years by reason of the increasing prices of cars and increasing costs of operating them. Such a method of payment does not lend itself to an accurate payment of depreciation computed on a basis of a fixed rate of cents per mile. This is so because a car depreciates in value year after year, regardless of the number of miles it is driven. To illustrate, let us assume that five cents per mile is allowed for depreciation, to be paid for as a capital cost allowance, and that a new car bought for $10,000 is driven on government business, during the first year after acquisition, a distance of 5,000 miles. Depreciation at the allowable rate of 30% would be $3,000. If the private use of the car was also 5,000 miles, making a total of 10,000 miles for the year, half the total depreciation of $3,000, ie, $1,500 would be sustained by the taxpayer in respect of the government use of the car, while the amount he would receive as a Capital cost allowance at five cents a mile would be $250, or only one-sixth of the actual depreciation. If the car had been driven a total of 20,000 miles, of which 10,000 miles were on government business, he would have received $500 or one-third of the actual depreciation. And if the mileage rate allowed for depreciation had been 10 cents per mile the amount he would have received as capital cost allowance would have been doubled in each case. If the plaintiff’s experience in 1977 was about average, significantly more than 10 cents per mile would be needed to fully recoup the taxpayer for his allowable depreciation. This would certainly be true in all cases where the car is new or only one or two years old, is fairly high in price and during the year in question has only been driven a moderate distance on government business.

On the other hand if the car, costing $10,000 new, had been 5 years old at the beginning of the year, its depreciated value at that time, allowing 30% depreciation each year on the depreciated value at the beginning of the year, would have been $1,680.70. Thirty per cent depreciation for the sixth year of operation would have been $504.21. For his 50% of miles driven it would have been $252.11. The amount he would have received as capital cost allowance at five cents per mile for 5,000 miles would have been $250, approximately the same as the allowable depreciation; at ten cents per mile it would have been $500, or approximately double the allowable depreciation; at ten cents per mile for 10,000 miles it would have been $1,000 or about four times the allowable depreciation.

Similarly, a uniform mileage rate does not take into account the wide differences that exist in new car prices.

My conclusion is that, having adopted a mileage rate as a simple, convenient method of paying for private cars used on government business, the government has almost certainly, in fixing a rate for cases in which the employer has requested an employee to use his own car on government business, tried to set a rate that was reasonably fair, that in some cases would result in overpayment of depreciation costs and in other cases would result in underpayment, depending on such factors as the cost and age of the car, the number of miles driven on government business and the number of cents per mile allowed for depreciation.

To be completely fair, in cases where the employer, viz, the government, has asked the employee to use his automobile for government purposes and the employee has done so, the government should pay the full cost of having and using the car for its proportion of its use during the year, including depreciation, no more and no less. The government’s policy is designed to produce this result, more or less approximately, but as we have seen, payment of a fixed number of cents per mile sometimes results in the employee receiving more than the full cost of the car for the proportion of the total car mileage for the year that is attributable to government use, and sometimes, as in the present case, leaves the employee with substantial uncompensated expense. In the one case the amount of the overpayment is net income and properly subject to income tax. In the other the amount of the uncompensated expense could be eliminated by allowing it to be deducted from the employee’s income for the year.

As indicated supra depreciation; though not strictly speaking, included in the term “travelling expenses”, is, in my opinion a deductible property expense under subparagraph 8(1)(J)(ii) of the Act, section 1100 of the Regulations, and Schedule B to the Regulations. However, under the decision of the Tax Review Board, the plaintiff, for the 1977 taxation year, after receiving the full amount of the mileage payment to which he was entitled, finds himself with uncompensated expenses for use of his automobile for government purposes in the amount of $512.03. It is this amount which he claims the right to deduct from his income for 1977. In order to show that he is entitled to make this deduction he must prove that all three conditions set out in paragraph 8(1 )(h), quoted supra, have been complied with.

With regard to the condition stated in subparagraph (i) the evidence establishes clearly that it has been complied with. The parties disagree with respect to subparagraph (ii). For convenience I think it will be useful to quote it again at this point. It provides:

(h) where the taxpayer, in the year,

(i)

(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, and

amounts expended by him in the year for travelling in the course of his employment” may be deducted from the taxpayer’s income for the year.

Counsel for the plaintiff claims that his client was required to pay the travelling expenses, this claim being denied by the defendant. The words “under the contract of employment” have some significance in deciding which view is correct. There is no evidence that the plaintiff was employed under a written contract, nor that he was informed that under the terms of his employment he would be required to pay the travelling expenses incurred by him on government business. The government’s policy, as set out in paragraphs 3.03 and 3.061 of the Treasury Board Directive, quoted supra, indicate, on the contrary, that, while he usually paid these expenses in the first instance, he was to be compensated for them by receiving the mileage payment authorized for this purpose. The general practice was for the employee to keep a record of his travelling expenses, including the number of miles travelled, and every two weeks he would put in a detailed statement of expenses and would receive payment for them, including the authorized payment for the number of miles his car had been driven on government business. On some occasions he would estimate in advance what his expenses would be, ask for and receive the amount estimated, any necessary adjustments being made when his detailed statement of actual expenses was submitted following his return to Winnipeg. In either case it is clear that his authorized travelling expenses would not be borne by him finally, but would be paid by the government. The real intention was that the employee would be reimbursed by the government for expenses incurred by him in carrying out his duties.

Unfortunately, as we have seen, the total of the mileage payments received by the plaintiff in 1977, fell short by $512.03, of paying the government’s share of his total automobile expenses in that year, including depreciation of the car. Consequently, unless he is successful in this action he will be $512.03 Out of pocket, because as the person who incurred the expenses and the person who owned the car, the loss will have to be borne by him, unless he has a right to pass it on to someone else.

Counsel for the plaintiff submits that, since the government is not bound to pay more than the amount payable under its policy, the plaintiff is required to pay the shortfall of $512.03. As I view the situation the plaintiff most certainly must pay the shortfall. Nothing in the terms of the arrange- ment for the use of the car on government business provides that he shall do so, but one of the terms is that what he will be paid is limited to the authorized mileage allowance. That authorized amount being insufficient to pay all the car expenses intended to be provided for, it is clear that the shortfall results from the insufficiency of the mileage rate, in the circumstances of this case, to encompass all the expenses. Consequently I think it may be held properly that, since the shortfall of $512.03 which the plaintiff must pay is occasioned by the insufficiency of the payment provision of the arrangement, the plaintiff, under the contract, is required, in the broad sense of that word, to pay the shortfall. The fact that he is not required to pay all the car expenses should not prejudice his position with respect to the portion he is required to pay. Thus, in my opinion the plaintiff has shown that condition il) has been complied with.

Turning to condition (iii), for convenience I repeat it here. It provides:

8(1 )(h) where the taxpayer in the year,

(iii) was not in receipt of an allowance for travelling expenses that was, by virtue of subparagraph 6(1 )(b)(v), (vi) or (vii), not included in computing his income and did not claim any deduction for the year under paragraph (e),

(f) or (g),

amounts expended by him in the year for travelling in the course of his employment” may be deducted from the taxpayer’s income for the year.

None of the provisions in the subparagraphs and paragraphs mentioned in subparagraph (iii) supra apply, in my opinion, to the situation we are dealing with in this case. Consequently, it cannot be said that the plaintiff, in 1977, was in receipt of an allowance for travelling expenses that was, by virtue of any of the provisions of the stated subparagraphs of paragraph 6(1 )(b), not included in computing his income. Nor did he claim any deduction for that year under any of paragraphs (e), (f) or (g) of subsection 8(1). In my view condition (iii) of paragraph 8(1)(h) has been complied with.

Finally the jurisprudence that has developed on the kind of issue we are dealing with requires consideration. Most of it is found in decisions of the Tax Appeal Board or Tax Review Board which were not taken by way of appeal to the courts.

Counsel for the defendant referred particularly to five cases, all of them decisions of the Tax Appeal Board except the two most recent cases of the five, which were decisions of the Tax Review Board. The five cases are:

Anthony Cekota v MNR, 36 Tax ABC 279; 64 DTC 654;

Meier v MNR, [1967] Tax ABC 324; 67 DTC 224;

Roger Guay v MNR, [1970] Tax ABC 1201; 70 DTC 1781;

L A Krieger v MNR, [1979] CTC 2283; 79 DTC 269;

James R MacDonald v MNR, [1980] CTC 2796; 80 DTC 1685.

The headnote in the report of the Cekota case states:

“all three requirements of section 11(9)” — now section 8(1 )(h) “must be met before a taxpayer can obtain relief. In this case, although paragraph (a)” now (i) “had

been satisfied, paragraph (b)” now (ii) “did not meet with compliance. The employer had agreed to reimburse the appellant for any expenses incurred by him while travelling abroad on business and the evidence did not establish that the appellant was obliged to pay any of his own travelling expenses.”

The present case differs on two points of fact. The government (employer) did not agree to pay all of the plaintiff’s expenses. Under its policy it did pay for necessary lodging, meals and long distance telephone calls, but for the use of his car it unilaterally set a mileage rate of so many cents per mile and paid that amount, which amount, as we have seen, was insufficient, by $512.03, to pay all the costs of the car for the government portion of the car’s use in 1977. We have also seen that, because of the insufficiency of the government payment, the plaintiff, of necessity, had to bear the burden of the amount, $512.03. In my view, this decision is not injurious to the plaintiff’s case.

In the Meier case the employee had used her car on her employer’s business in 1964 for one trip only, a distance of 171 miles, for which she was reimbursed at 10 cents per mile. She deducted in her income tax return for that year the cost of operating the car for the full year, having been advised erroneously that she was entitled to do so. It was held that she was not entitled to the deduction. The requirements of section 11(9), now 8(1 )(h) had not been met. Having been reimbursed for her trip on her employer’s business, she was not required to pay the travelling expenses incurred in the performance of her duties. The decision clearly turned on the fact that she had been reimbursed.

In the Roger Guay case the appellant sought to deduct from his 1968 income a substantial amount additional to what he had received from his employer for the use of his car in the performance of his duties. The Minister disallowed the claim and the Tax Appeal Board upheld that decision. The Board, in giving its decision, said:

In order for an employee to have the right to deduct travelling expenses from his income (in this case salary), he must not have received any sum in lieu of travelling expenses. If he does receive any sum to cover travelling expenses occasioned by his work or in the course of his work, the Act does not permit him to claim them.

The Board then quoted the three paragraphs of subsection 11(9) of the Act, now subparagraphs of paragraph 8(1 )(h), and also subsection 11(11), now paragraph 8(1 )(j). It then concluded:

As the appellant, on the one hand, was not required to pay his travelling expenses, and on the other hand, was in receipt of an allowance for travelling expenses, I regret that I must find there is no ground for this appeal.

I am unable to accept this conclusion or the statement of law contained in the first quotation supra. I have found nothing in the Act that can properly be interpreted as meaning that payment by an employer to an employee, whether as an allowance or a reimbursement, of any amount, however small or inadequate, for travelling expenses incurred by the employee in the performance of his duties, will prevent the employee from claiming successfully the right to deduct expenses properly incurred. It is difficult to think that Parliament had any intention that an inadequate payment should have such a result. I have stated, earlier in these reasons, that in my opinion, where an employer pays an employee part only of the car expenses incurred by the employee in using his automobile in the performance of his duties, the result is that the employee is required to pay the balance of these expenses.

The second ground for the decision in the Roger Guay case, is, in my opinion, definitely wrong. It is not every allowance received for travelling expenses that prevents a taxpayer, under subparagraph 8(1 )(h)(iii), from claiming a right to deduct any travelling expenses from his income for the year in which they were incurred, but only an allowance that was, by virtue of subparagraph (v), (vi) or (vii) of paragraph 6(1 )(b) not included in computing his income, or if the taxpayer claimed any deduction for the year under paragraph (e), (f) or (g) of subsection 8(1). Neither in the Roger Guay case nor in the present case do the car expenses with which those cases are concerned fall into any of the situations described in any of the indicated subparagraphs and paragraphs. Further, in the present case counsel for the plaintiff stated that the allowance or reimbursement of car expenses that he claimed was required to be included in his income for the year and was so included.

In the Krieger case the taxpayer travelled on his employer’s business up to 30 days each year. He received a travel allowance and claimed to deduct additional expenses. It was held by the Tax Review Board that he did not qualify for the deduction because he was not “ordinarily” required to be away from his employer’s place of business, he was not obliged to pay travelling expenses. This case differs from those we have just been considering only on the ground that the taxpayer was not “ordinarily” required to be away from his employer’s place of business, which is not the situation we are concerned with.

In the James R MacDonald case the Tax Review Board dismissed the taxpayer’s appeal on the ground that he was not required to pay the travelling expenses he incurred. Further, he was in receipt of both a travelling allowance and a mileage allowance. The case is on all fours with some of the others already discussed. I deem it unnecessary to discuss it further.

I have read a number of other decisions of the Tax Appeal Board and of the Tax Review Board. All of them are to the same effect as those discussed Supra. I have also read several decisions of the Federal Court and of the Supreme Court of Canada, which dealt with deductions from income, but have concluded that they were of little assistance in the present case as none of them dealt with the kind of situation and statutory provisions with which we are here concerned.

With all due respect for what appears to have been the invariable view of Tax Appeal Boards and Tax Review Boards, I am unable to accept their view of the law as correct.

To begin with, in this case there is no dispute as to the items of automobile expense claimed by the plaintiff, or as to the amounts of such items. Nor is there any dispute as to the amount paid to the plaintiff for those expenses. Consequently I accept as a fact that the total amount claimed was legitimately incurred by him in the performance of the duties of his employment. It is likewise clear that, after receiving the amount paid to him by the government under its policy of reimbursement or allowance, there was a balance outstanding of $512.03. He is not entitled to any further payment under the government’s policy, but the costs were incurred by him and unless he can deduct them from his income, he must bear the burden of them. As indicated earlier, in the broad sense of the expression “he was required to pay them” under the arrangement for payment by the government, be- cause it was the failure of that arrangement to pay all the automobile costs which saddled him with the burden of the balance of them. In my view therefore subparagraph 8(1 )(h)(ii) of the Income Tax Act has been complied with.

In my view, also, the Tax Appeal Boards and Tax Review Boards have been mistaken in their understanding of the meaning and effect of subparagraph 8(1 )(h)(iii) of the Act. As stated above, that subparagraph does not apply generally to all allowances for travelling expenses. It does not even apply, in terms, to all such allowances that are not included in computing the taxpayer’s income. It only applies to such allowances as are, by virtue of subparagraphs (v), (vi) or (vii) not included in computing the taxpayer’s income and to deductions claimed under paragraphs (e), (f) or (g) of section 8(1). None of those subparagraphs or paragraphs have any relation to the kind of situation we have in this case. I cannot find that subparagraph (iii) of paragraph 8(1 )(h) has not been complied with.

In the final result the plaintiff will have judgment in his favour with costs. The matter is referred back to the Minister of National Revenue for reassessment of the plaintiff’s income for the year 1977 on the basis that he is entitled to deduct the sum of $512.03 from his income for tnat year, being the balance of automobile expenses incurred in that year in the performance of the duties of his employment, but disallowed by the Minister.

Appeal allowed with costs.