Ernest Neufeld v. Minister of National Revenue, [1981] CTC 2010, 81 DTC 18

D E Taylor:—This is an appeal heard in Toronto, Ontario, on September 22, 1980, against income tax assessments for the years 1975 and 1976 in which the Minister of National Revenue disallowed expenses of $4,822 and $6,841 deducted by the appellant from his income as an employee. Mr Neufeld’s income was entirely earned on commissions, and for the year 1975 that income was $15,335 and for 1976, $19,084.57. The claimed expenses were detailed by him as follows:

In assessing the appellant, the respondent relied, inter alia, upon paragraph 8(1 )(f) and (h) and subsection 8(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Contentions

The appellant claimed the deductions under paragraph 8(1)(f) of the Income Tax Act and based his claim on the fact that:

— he was employed in the capacity of store manager with the responsibility of selling clothing;

— he was ordinarily required to carry out his duties away from his employer’s place of business. These duties were:

—soliciting and meeting prospective contract customers —deliver to customers

—making promotional public appearances

—exchanging stock between stores

—company sales meeting

— he was remunerated strictly on commissions;

—he did not receive any allowance or reimbursement for these expenses.

The respondent asserted in the reply to notice of appeal that:

—under his contract of employment the appellant was not required to pay his own expenses;

— under his contract of employment the appellant was not ordinarily required to carry on the duties of his employment away from his employer’s place of business, such place being the store which he managed;

—the appellant’s travelling expenses did not come within the meaning of paragraphs 8(1 )(f) or 8(1 )(h) of the Income Tax Act and are specifically prohibited from being deducted in the computation of his employment income by virtue of subsection 8(2) of the Act.

Evidence

Comprehensive and detailed information in support of the taxpayer’s position was competently and carefully presented by counsel for the appellant. This included the testimony of one of Mr Neufeld’s superiors, Mr Douglas Carson, who stated that it was understood the taxpayer was required by virtue of his position to perform the tasks described previously—he could not have been a manager unless he did all the things required to promote his store, maintain his staff, deliver and pick up goods, etc, in short anything that was needed. Neufeld asserted that he increased his total earnings in this way since he had not only a basic commission on his own sales, but overriding commissions on staff sales and volume. Some of the expenses claimed had been estimated, but general evidence was provided that would support the fact that at least a large part of the expenses had been incurred. The Minister did not specifically challenge the quantum of these expenses. The appellant’s trips out of the store were irregular, and could take half an hour or half a day depending on the destination and purpose. He usually tried to make the visits to other stores in the chain (to pick up or deliver merchandise), to the tailors, to customers, the post office, etc, during the hours or days when his own store was not too busy. Some trips were made once or twice a week, some only once or so a month. An estimate was made by him that he was away from the store about 15 hours per week out of the 60 hours per week his schedule of work called for.

Argument

Counsel for the appellant noted that the conditions required for the deduction had been met—including that the appellant was “ordinarily required to carry on the duties of his employment away from his employer’s place of business” subparagraph 8(1 )(f)(ii)).

Counsel for the respondent conceded the Minister would agree that the appellant met the first condition in paragraph 8(1 )(f)—that “under his contract of employment he was required to pay his own expenses”; however, the appellant failed to prove that he had met the second condition (noted in the paragraph directly above). In counsel’s view, he was not “ordinarily required to carry on his duties away from his employer’s place of business” since only a portion of his time had been spent away from the store at which he was the manager. Counsel contended “ordinarily required” meant most of the time, not just on exceptional occasions. Case law referred to was:

Ben Stromberg v MNR, 9 Tax ABC 393; 54 DTC 28;

Jacob Dover v MNR, 22 Tax ABC 467; 59 DTC 515;

Jos C Tremblay v MNR, [1969] Tax ABC 1211; 70 DTC 1006;

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

Thomas Healy v Her Majesty The Queen, [1979] CTC 44; 79 DTC 5060. Findings

The Board notes that counsel for the respondent abandoned the Minister’s position as stated in the reply to notice of appeal: “under his con tract of employment the appellant was not required to pay his own expenses”. No rationale for that abandonment was provided, and the evidence presented at the hearing did not lead with certainty to any conclusion that Mr Neufeld was required to pay his own expenses— “under the contract of employment”.

It was also pointed out by counsel for the respondent that the expenses for “accounting” ($100 in 1975 and $125 in 1976) were for the preparation of the appellant’s income tax returns for those years and, as an employee, the appellant was not entitled to any such deduction under either paragraph 8(1 )(f) or paragraph 8(1 )(h). In the same manner, the appellant was not entitled to the deductions for “Staff and Store Promotion” under paragraph 8(1)(h) ($1,283 in 1975 and $2,724 in 1976). Counsel pointed out that since thos expenses were not incurred while the appellant was away from the employer’s place of business on business, nor during the periods he was engaged in “selling of property or negotiating of contracts”, they were of very doubtful deductibility under paragraph 8(1 )(f) of the Act. However, the fact that the appellant did not meet the specific conditions in subparagraph 8(1 )(f)(ii) (“ordinarily required”) covered all of these amounts in any event, and it was upon that basis that the Minister was making his case, according to counsel.

In my opinion it may be easier to say what “ordinarily required” is not, rather than to say that what it /s. The cases of Dover (supra), Tremblay (supra) and Krieger (supra) all referenced as support the noted case of Stromberg (supra)— and in my view, for good reason. Stromberg was an appeal heard and decided by three leading Members of the then Tax Appeal Board.The key phrase in Stromberg is to be found at pages 396 and 29 respectively:

One of such conditions is that the taxpayer was “ordinarily required to carry on the duties of his employment away from his employer’s place of business”. That, on the evidence heard, was not the situation here. Appellant was ordinarily in the retail store. His departures therefrom were only occasional and infrequent. He was not like a commercial traveller or travelling salesman who is usually away from his headquarters and merely reports thereto from time to time.

However, I find nothing in Stromberg which would warrant the use of simple mathematical calculations—“one-third”, “50%”, or any other to be applied in adding up the work time “away” as opposed to the work time “at” the employer’s place of business in allowing or dismissing appeals on this point. In my opinion the crux of subparagraph 8(1)(f)(i) of the new Act (paragraph 11 (6)(b) of the old Act) is the purpose and nature of the employment of the taxpayer as agreed upon under the contract of employment, and understood by both parties.

Paragraph 8(1 )(f) contains specific conditions, enumerated (i) to (iv), for “deductibility of expenses”. The first specific condition —“... was required to pay his own expenses” is immediately attached in subparagraph 8(1 )(f)(i) to the preamble phrase “under the contract of employment” but, in my view, it does not make that the only one of the four conditions which must be founded in the contract of employment. Only the employer could assert as a condition of employment that the taxpayer “was ordinarily required to carry on the duties of his employment away from his employer’s place of business” subparagraph 8(1 )(f)(ii)). It is inconceivable to me that in hiring Mr Neufeld, his employer (Grafton-Fraser Limited) stated as such a specific condition of his employment that he would be “ordinarily required” to be away from the store for which he was to be the manager. It was clearly Mr Carson’s testimony regarding the “out of store tasks” which are at issue in this appeal that the taxpayer was expected to perform them as part of the position of manager. That testimony from a superior, however, is not equivalent to direct evidence from Grafton’s (the employer), nor even in its own right does it portray Mr Neufeld’s position as anything other than the store manager, in primary terms. As I see it, the appellant was quite plainly “ordinarily required” to be in his store and managing it. Such management apparently entailed leaving the store when necessary to expedite, buy, sell, pick up alterations or deliver merchandise. It is difficult to imagine an employment situation covering the “selling of property or negotiating of contracts” which would not entail external work such as this occurring on a fairly regular basis. In my view it is for this reason that Stromberg (supra) highlighted ‘‘the commercial traveller or travelling salesman” aspect of the provisions of paragraph 8(1 )(f), thereby making the distinction and qualification for such deduction very apparent. Subparagraph 8(1 )(f)(i) does not lend itself easily to similar inclusion of the position of store manager for the same deductions, and certainly not in this present case.

I noted earlier that I found little merit in the “percentage” argument (in this case about 25% of the taxpayer’s time allegedly away from the employer’s place of business). To whatever degree any merit might be found in the “percentage” argument, it would not be readily evident to me in a 75/25 split in the store, rather than out of the store, in any event.

Although Healy (supra) dealt with two different sections of the Act (paragraph 8(1 )(h) and subsection 8(4)), the term “ordinarily” occurs in both, and was directly noted in the judgment. As I read it, the judgment did not determine even under paragraph 8(1 )(h) that the appellant Healy was “ordinarily required to carry on the duties of his employment away from his employer’s place of business” but rather (and this is the distinction for subparagraph 8(1 )(f)(ii)) that he was “ordinarily required to carry on the duties of his employment . . . in different places”. Therefore, that part of the Healy judgment dealing with “ordinarily” has limited (if any) application in this appeal. As for the word “ordinarily”, as it occurs in subsection 8(4), I would conclude that Healy (supra) at 47 and 5063 respectively supports the opinions I have expressed in this decision:

I think, on the contrary that the expression “reported for work” when used with the word “ordinarily” applying the dictionary meaning of it, refers to the reporting in a larger sense, not a narrower one, namely, “in most cases” or as a general rule. (Italics mine)

The comments of the learned judge in the penultimate paragraph of Healy do not appear to dilute the importance and general applicability of the above quotation in my view.

Conclusion

The relevant jurisprudence leads me to the conclusion that the term “ordinarily required” from subparagraph 8(1 )(f)(ii) of the Act should be applied to the main context of the “duties of employment” for which the taxpayer is responsible. In the instant case that is the position of manager in and of the clothing store. The fact that either through a general understanding with his employer or by his own choice Mr Neufeld performed some of his duties away from the store does not serve to place him in the special category for expense deductions for those salesmen “ordinarily required” to do so away from the employer’s place of business” “in most cases, usually, or com- monly”. In my view that is not moderated by any extraneous factors such as increase in employer’s income, increase in the employee’s income, modest or reasonable expenses, whether or not the expenses are proved or documented, etc. Paragraph 8(1 )(f) of the Act does not serve to provide expense deductions to a taxpayer merely because the income in question arises from commissions rather than from salary. It is reserved for a special and carefully defined category of employee-taxpayers. Any employee choosing, or agreeing to seek relief for expenses incurred in the course of his employment under the Income Tax Act rather than requiring restitution from his employer, stands at considerable risk of finding himself out the narrow parameters of that section.

Decision

The appeal is dismissed.

Appeal dismissed.