Rene Gervais v. Minister of National Revenue, [1981] CTC 2496, 81 DTC 414

Guy Tremblay [TRANSLATION]:—This case was heard at Quebec City, Quebec on October 15, 1979. The case was taken under advisement on January 9, 1980.

1. Issue

It is necessary to determine whether the appellant, a telegraph and railway employee, is entitled to deduct from his income the total amount of $2,143 as a deduction for meal expenses and for expenses relating to an automobile, and also not to include in his income the sum of $2,417.15 representing the amount of allowances received from his employer for lodging and automobile expenses.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 1951; DTC 1182.

3. Facts

3.01 During 1976 the appellant worked for Canadian National Railways as a relieving telegrapher, relieving dispatcher and relieving station agent.

3.02 In the performance of his duties the appellant replaced other employees of Canadian National Railways who were sick or on leave and he could thus be called upon to work in any of the company’s stations situated in Quebec. The appellant was accordingly required in 1976 to go to Jon- quiere, St-Felicien, Chambord, Lac-Edouard, Chibougamau and Quebec City.

3.03 During his 1976 taxation year the appellant received from his employer several sums as allowances for automobile and lodging costs totalling $2,417.15 (Exhibit I-2).

3.04 Of this sum of $2,417.25, $1,347.61 was paid and received as an allowance for automobile costs and $1,069.54 was paid and received as an allowance for lodging costs.

3.05 The allowances totalling $1,347.61 for automobile expenses were computed at a rate of $0.165 mile travelled for a total of 8,177 miles during 1976. This rate was paid to the appellant when he had to work at a station other than his home terminal located at Desbiens, Quebec. The mileage allowed was that travelled from the taxpayer’s residence to the station in the town in which he was to replace someone and the return journey. The mileage paid for could be travelled daily or at the beginning and end of the assignment, depending on the circumstances.

3.06 The allowances totalling $1,069.54 for lodging expenses were computed at a rate of $15 per day of absence from the appellant’s home terminal. Meals were not paid for.

3.07 When the appellant’s place of work was close to his home terminal and it was to Canadian National’s advantage to proceed in this way, it would require the appellant to travel in the morning and evening. In such cases the appellant received an allowance for automobile expenses on the basis of the miles travelled but he did not receive the allowance of $15 per day for lodging.

3.08 When he filed his 1976 income tax return the appellant claimed as expenses $1,450 for meal costs and $693 for automobile costs.

3.09 In his assessment of February 28, 1978, the respondent allowed the deduction of $1,450 for meal expenses but disallowed the deduction of $693 for automobile expenses. The respondent did not include the allowance of $2,147.15.

3.10 Following a notice of objection the respondent added to the appellant’s income the allowance of $2,147.15 received as travelling and lodging ex- penses, while continuing to allow the expense of $1,450 for meals and to disallow the automobile expense of $693.

4. Act, Case Law, Comments

4.1 Act

The principal sections of the Income Tax Act involved in this case are the following: paragraph 6(1 )(a), subparagraph 6(1 )(b)(viii), paragraphs 8(1)(e), 8(1 )(h), 8(1 )(j) and subsection 248(1), the definitions of personal or living expenses. These sections read as follows:

6. Amounts to be included as income from office or employment

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

(a) Value of benefits—the value of board, lodging and other benefits of any kind whatever (except the benefit he derives from his employer’s contributions to or under a registered pension fund or plan, group sickness or accident insurance plan, private health services plan, supplementary unemployment benefit plan, deferred profit sharing plan or group term life insurance policy) received or enjoyed by him in the year in respect of, in the course of or by virtue of an office or employment;

(b) Personal or living expenses—all amounts received by him in the year as an allowance for personal or living expenses or as an allowance for any other purpose, except

(vii) allowances (not in excess of reasonable amounts) for travelling expenses received by an employee (other than an employee employed in connection with the selling of property or negotiating of contracts for his employer) from his employer if they were computed by reference to time actually spent by the employee travelling away from

(A) the municipality where the employer’s establishment at which the employee ordinarily worked or to which he ordinarily made his reports was located, and

(B) the metropolitan area, if there is one, where that establishment was located.

in the performance of the duties of his office or employment.

8. Deductions allowed

(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 that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(e) Expenses of certain railway company employees employed away from ordinary residence or home terminal — amounts disbursed by the taxpayer in the

year for meals and lodging while employed by a railway company

(i) away from his ordinary place of residence as a relieving telegrapher or station agent or on maintenance and repair work, or

(ii) away from the municipality and the metropolitan area, if there is one, where his home terminal was located, and at a location from which, by reason of distance from the place where he maintained a self-contained domestic establishment in which he resided and actually supported a spouse or a person dependent upon him for support and connected with him by blood relationship, marriage or adoption, he could not reasonably be expected to return daily to that place,

to the extent that he has not been reimbursed and is not entitled to be reimbursed in respect thereof;

(h) Travelling expenses—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 his 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 employment;

(j) Automobile costs—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,

(i) any interest paid by him in the year on borrowed money used for the purpose of acquiring an automobile used in the performance of the duties of his office or employment, and

(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.

248. Definitions

(1) In this Act,

“Personal or living expenses’’—“personal or living expenses” includes

(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit,

(b) the expenses, premiums or other costs of a policy of insurance, annuity contract or other like contract if the proceeds of the policy or contract are payable to or for the benefit of the taxpayer or a person connected with him by blood relationship, marriage or adoption, and

(c) expenses of properties maintained by an estate or trust for the benefit of the taxpayer as one of the beneficiaries.

4.2. Case Law

The board was referred to the following case law:

(a) Nature of an allowance

1. R Rv M Pascoe, [1975] CTC 58; 75 DTC 5427;

2. A AG of Canada v Weaver, [1975] CTC 646; 75 DTC 5462;

3. C C Cotton v The Queen, [1976] CTC 406; 76 DTC 5232;

4. R v J Guay, [1977] CTC 605; 77 DTC 5420

(b) restrictive interpretation of an exemption section

5. W A Sheaffer Pen of Canada Ltd v MNR, [1953] CTC 345; 53 DTC 1223;

6. West Hill Redevelopment Co Ltd v The Queen, [1969] CTC 581; 69 DTC 5385;

7. Dame Mary Wylie v City of Montreal (1885), 12 SCR 386;

8. W G Lumbers v MNR, [1943] CTC 281; 2 DTC 631:

(c) travel between residence and place of work: personal expense

9. H Luks (No 2) v MNR, [1958] CTC 345; 58 DTC 1195;

10. A Mifsud v MNR, [1978] CTC 2537; 78 DTC 1408;

(d) Subparagraph 6(1 )(b)(vii) and paragraph 8(1 )(h)

11. Rv E L Lavers, [1978] CTC 341; 78 DTC 6230;

12. A Bunn v MNR, [1979] CTC 2470; 79 DTC 409.

4.3 Comments

4.3.1. Lodging and meal expenses

In his written pleadings the respondent confessed judgment in respect of the sum of $1,069.54 for lodging expenses. This amount is not to be included in the appellant’s income.

4.3.2. Travelling expenses

With respect to the travelling expenses in the amount of $1,347.61, there is no provision for deducting these in paragraph 8(1 )(e). The legislator doubtless assumed that railway company employees may or must travel only by rail or that provision is made elsewhere in the Act for the deduction of their travelling expenses.

The respondent assumed that in this case the travel allowance was income in the form of a living allowance in accordance with paragraph 6(1 )(a), cited supra.

According to the respondent, subparagraph 6(1 )(b)(vii), cited supra, does not apply. The travelling allowance was in effect not computed by reference to “time actually spent by the employee travelling away from”Desbiens “in the performance of the duties of his office or employment”, as provided for in subparagraph 6(1 )(b)(vii). Thus the sum of $1,347.61 should be included in his income.

In support of this contention the respondent cited R v EL Lavers et al. In this case, however, the appellant (a Nova Scotia government inspector who had travelled across the province for purposes of his employment) received a fixed monthly allowance of $87 for his travels plus a reduced rate of 9.8¢ per mile in lieu of a single rate of 17.4€ per mile. Only the sum of $87 per month was in issue. The sum of $524.37 received at the rate of 9.8¢ per mile was not in issue since it had not been included in income. The monthly allowance had to be included in income because it was not computed by reference to the time spent away. The respondent also referred to A Bunn v MNR et al. This involved a railway company employee who received $0.50 per mile from his employer and who also claimed automobile expenses in computing his income. The sum of $0.50 per mile was, however, not included in his income.

4.3.3 The Board must consider the respondent’s argument that the allowance for travelling expenses at a fixed rate per mile is not computed by reference to the time spent by the appellant away from Desbiens. A good example in the instant case is the fact that when the appellant travelled to work for a week in Quebec City he was paid only for his return travel from Desbiens to Quebec City and not for use of the vehicle within Quebec City. The appellant was working in fact at the Quebec City station and his travel from the hotel (his temporary place of residence) to the station was not paid for. The appellant would have received the same amount of travelling expenses whether he had remained in Quebec City for one, two, three or four days. Thus, on the basis of the facts and according to the wording of the statutory provision cited above, it appears that the travelling allowance was not computed by reference to “time spent travelling away from” Desbiens but by reference to the miles travelled. It may be said in another respect, however, that once he had arrived in Quebec City the appellant was no longer travelling. He remained in Quebec City for five days. He would not travel again until he returned to Desbiens. Thus the appellant was in practice paid only for the period during which he was travelling between Des- biens and Quebec City and between Quebec City and Desbiens. Since he was paid only for this time, can it therefore be said that the allowance was in practice computed “by reference to time actually spent travelling away from” Desbiens? From one point of view, yes, because he was paid only for the time that he was actually travelling. From another point of view the answer may be no, because the scale used was not per hour but per mile. It cannot be denied, however, that the distance was travelled during the time intended for travel. The English version reads “.. computed by reference to time actually spent by the employee travelling away. . .”. This confirms that it is necessary to refer to the time and not to the distance covered. As the Board must give a strict interpretation to the Income Tax Act, and in particular to exemption sections, it must uphold the position of the Department that the provision in subparagraph 6(1 )(b)(vii) does not apply to the instant case and that the sum of $1,347.61 must be included in the appellant’s income.

4.3.4 The respondent raised another argument against the application of subparagraph 6(1 )(b)(vii). In order to go to his workplace outside the town, the appellant in effect did not go via his local office at Desbiens. He went directly from his residence to his workplace. According to the decision of the Supreme Court in Dr E R Henry v MNR, [1972] CTC 33; 72 DTC 6005, the cost of such travel is not allowable as a deduction. According to the respondent, the allowance received for this expense must therefore be included in income.

The case cited applies to the travelling expenses of a person working within a city or the surrounding area (that case involved an anesthetist who worked at various hospitals) and not to those who leave their residence to work in distant places. By this token, moreover, all government inspectors who travel across the country and go directly from their residences to distant towns without calling at the head office should be allowed to have their allowance for expenses included in their income.If this had been the only argument made, it would not have been accepted.

4.3.5. Is there a section, however, that would authorize the actual expenses incurred by the appellant as against his income?

We should consider paragraph 8(1 )(h), cited supra, which concerns travel expenses. As a relieving employee, the appellant was required to perform his duties outside his employers’ business, which was in the instant case his home terminal, in other words, Desbiens station. He actually went to other towns to work and was thus in the performance of his employment when he was travelling.

The condition laid down in subparagraph 8(1 )(h)(i) is satisfied.

The third condition laid down in subparagraph 8(1 )(h)(iii) is also satisfied, since the appellant did not receive any allowance under subparagraphs 6(1 )(b)(v), (vi) or (vii) that was not included in his income. The allowance received was, in fact, included in his income.

As for the second condition, namely, that by virtue of his contract of employment the appellant was required to pay his travelling costs, there was insufficient evidence to support this. On the contrary, the evidence showed that the appellant received 16.5€ per mile from his employer as compensation. The fact that this allowance must be included in income does not mean that it does not prove the employer paid the employee’s travelling exenses.

The Board regrets that it cannot allow the deduction of automobile expenses because of the construction it must place on the Act.

4.8.6 The appellant referred the Board to Interpretation Bulletin IT-272 issued by the Minister of National Revenue concerning expenses of the kind involved in this dispute.

Although the Board is not bound by this Bulletin, it is not without informative value with respect to the Department’s policy in this case.

Paragraph 33 of the said Bulletin is significant:

Where an employee receives an allowance based on mileage for the use of his car in the employer’s business, the following comments apply:

(a) If the allowance is reasonable, the Department considers this a reimbursement for the use of the car. Therefore, the amount of the allowance is excluded from income and no automobile expenses or capital cost allowance may be claimed under paragraphs 8(1)(h) and (j).

(b) Where a mileage allowance is in excess of a reasonable amount or where it covers the employee’s personal expenses such as driving back and forth to work, such excess or such amount received for personal expenses is included in income. It may be necessary for the Department to examine the vouchers and other supporting documents to establish the excess or the personal expense portion.

(c) Where an employee considers that the mileage allowance he receives is unreasonably low, he may include it in income and claim his automobile expenses and capital cost allowance under paragraphs 8(1 )(h) and i) provided he qualifies under these paragraphs. An employee claiming automobile expenses in excess of the mileage allowance received should attach a detailed list of automobile expenses to his income tax return and must be prepared to substantiate his claim fully with vouchers, daily logbook or similar record of total miles driven and miles driven in his employer’s business, and any other pertinent documents.

4.3.7 It is clear from the wording of this document, as from Lavers and Bunn, the facts of which were that the Department had not included in income allowances received and computed at a certain amount per mile, that the Department is acting arbitrarily by taxing some persons and not others even though according to subparagraph 6(1 )(b)(vii), as it is drafted, all allowances computed on a mileage basis should in fact be included in income.

Even by applying the Minister’s scale explained in paragraph 33 of IT-272, namely: “If the allowance is reasonable, the Department considers this a reimbursement for the use of the car. Therefore, the amount of the allowance is excluded from income . ”, the allowance received by the appellant should have been excluded from income because the allowance of $0.165 is reasonable in the sense that it is not excessive.

However, even this rate is not valid in law. The Board wonders under which section an allowance computed according to mileage may be excluded from the income of the person receiving it. Allowances received by government inspectors are not included in income. Why? The appellant’s allowance was included in his income solely after he had filed an objection. Prior to that it had been excluded.

In fact, the Department may rely on equity in order not to include the allowances of certain taxpayers in income, but the Board cannot do this. In truth, such an allowance is neither a personal or a living allowance. It is simply a restrictive interpretation of paragraph 6(1 )(b) that forces the Board to include in income an allowance that is explicitly provided for in subparagraphs (i) to (viii) of paragraph (b) of subsection (1) of section 6.

This is not the first time that the Board has had to confirm the injustice of a situation where it is necessary to include in income an allowance for expenses that are not a personal expense and that are, moreover, an expense incurred in the performance of the duties of an office or employment that cannot be deducted from income under paragraph 8(1)(h) or 8(1 )(j) because of the restrictive interpretation that must be given to this provision. The Act does not conform with reality.

To resolve this problem, in effect, the legislator would have to bring subparagraph 6(1)(b)(vii) into line with reality. In short, it would be sufficient to change, for example, the wording to . . . computed by reference to distance covered or time actually spent . . .” and in the French version, “. . . calculées en fonction de la distance parcourue ou du temps passé à voyager à l’extérieur . . .”.

Such an amendment would not only remove a source of injustice but also, we feel, eliminate many notices of objection and appeals in which taxpayers, administrators and courts must spend time and money that could be devoted to more important ends. Moreover, to be even more effective this amendment should apply at the latest to 1980.

5. Conclusions

The appeal is allowed in part and the matter referred back to the respondent for reassessment.

Appeal allowed in part.