Robert C Rickerd v. Minister of National Revenue, [1980] CTC 2929, 80 DTC 1838

The Chairman:— The appeal of Robert C Rickerd is from an assessment in respect of the 1976, 1977 and 1978 taxation years, for which the appellant claimed business expenses in the amounts of $4,109.72, $3,549.16 and $4,686.67 respectively. Of those amounts, the respondent disallowed $3,475 for 1976, $2,320 for 1977 and $3,828 for 1978.

Summary of Facts

The appellant, an employee of the Department of National Defence, is also in his spare time a writer of articles pertaining to aviation and had written manuscripts, prepared material and had ideas for publication in various magazines. In order to obtain the exposure necessary to be recognized as an author in a specialized field, he donated some of his articles and assigned his author’s rights for their publication in a magazine called “Flight Comment” which, as I understand it, is published by a division of the Department of National Defence. (Exhibit A-1)

Submissions

It is the appellant’s submission that the amounts claimed during the pertinent taxation years were advertising and promotional expenses incurred for the purpose of earning income and/or was a gift to the Crown.

The respondent contends that the expenses claimed are not outlays or expenses within the meanings of paragraph 18(1 )(a) of the Income Tax Act, SC 1970-71-72, c 63, as amended, and are not gifts to Her Majesty in the right of Canada within the meaning of paragraph 110(1 )(b) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

The appellant in his notice of appeal raises two distinct points. Paragraph 18(1 )(a) of the Act which is pertinent to the first point reads:

(a) General limitation.—an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

In assessing the appellant, the respondent allowed expenses which were actually incurred for the material necessary for a writer, but disallowed as a deductible expense the value attributed by the appellant of his time and effort in writing articles. The appellant estimated the value of his articles at $25 per hundred words in 1976 and $40 and $44 for articles written in 1977 and 1978 respectively, allegedly the going rate for writers. Other than the articles given to the publishers of “Flight Comment”, the appellant admitted on cross-examination that none of his articles were published in 1976,1977 and 1978.

The articles may well have been donated by the appellant to gain exposure and can in that sense be considered as advertising and promoting himself as a writer. However, counsel for the respondent was correct in pointing out that the amounts claimed were not advertising or promotional expenses because the appellant expended no money and made no outlay of funds which is clearly required by paragraph 18(1 )(a) of the Act.

In the Hutterian Brethren Church of Wilson v Her Majesty The Queen, [1979] CTC 1 ; 79 DTC 5052, cited by the respondent, Mr Justice Mahoney of the Federal Court Trial Division, stated at 4 and 5055 respectively:

The actual cost to each colony of labour, being the cost of goods and services Supplied to and consumed by members and their families has been allowed. The cost of outside purchases is deducted from revenue in arriving at taxable income while the value of goods and services produced on the colony is simply ignored for both revenue and expense purposes. There is no basis for the proposition that the

fair market value of donated labour should be deducted from the net profit of a colony. It is not among the deductions from income allowed to a taxpayer in the calculation of taxable income.

This decision was appealed and confirmed by the Federal Court of Appeal Division, Hutterian Brethren Church of Wilson v Her Majesty The Queen, [1980] CTC 1; 79 DTC 5474. In his reasons for judgment, Mr Justice Heald stated at pages 4 and 54/76 respectively:

I agree with the learned Trial Judge that the appellant would not be entitled to deduct from its net profit the fair market value of donated labour if there had been donated labour. I also agree that to the extent the appellant has claimed the actual cost of labour, it has been allowed and this of itself, is sufficient to dispose of appellant’s submission so far as this appeal is concerned.

In the instant appeal, the outlays for the actual cost of materials required by a writer were also allowed, but the alleged fair market value of the appellant’s donation to the publishers of "Flight Comment” does not come within the meaning of advertising or promotional expenses as set out in paragraph 18(1 )(a) of the Act and as interpreted by both divisions of the Federal Court.

In support of his second point that the amounts in issue were gifts to Her Majesty, the appellant relied heavily on Paragraph 6 of Interpretation Bulletin IT-288 dated February 9, 1976, which reads:

6. In the case of authors, composers or artists, who donate their own literary manuscripts, musical compositions or works of art, a distinction is made between property disposed of as an ordinary incident of the artist's vocation, ie property created with the specific intention or hope of it being sold (paintings, sculptures, etc), and property which is not disposed of as an ordinary incident of the artist’s business (diary, correspondence, etc). The former constitutes part of the artist’s inventory and therefore is not a capital property and subsection 110(2.2) is not applicable.

It is difficult, under the circumstances, to see how the above paragraph of the Interpretation Bulletin IT-288, can be of any assistance to the appellant in claiming that the amounts claimed in 1976, 1977 and 1978 were gifts to Her Majesty. The articles which the appellant donated to the Department of National Defence were saleable items. Indeed the purpose of donating the articles was to acquire necessary exposure as a writer which would enable him to sell similar articles or manuscripts which he claimed he had in his possession. These articles were written by the appellant for the purpose and with the intention and the hope of selling them. They were, in my opinion, part of his inventory and are not capital property; subsection 110(2.2) of the Act is therefore not applicable.

The appellant also contended that the articles donated to the Department of National Defence were gifts to Her Majesty within the meaning of paragraph 110(1)(b) of the Act.

Although the facts in F H Gaudin v MNR, 13 Tax ABC 199; 55 DTC 385, cited by counsel for the respondent may differ somewhat from those of the instant appeal since the issue in the Gaudin case (supra) was the deductibility of charitable donations, the principles enunciated therein by the then Assistant Chairman of the Tax Appeal Board are pertinent and applicable to gifts to Her Majesty. Mr Cecil L Snyder, QC stated at 201 and 386 respectively:

It may be said to be settled that in order to deduct amounts up to ten per cent of income under this section the individual must actually part with the amounts claimed as deductions by way of gift. There can be no quid pro quo for the payment. It is also essential in proving a charitable donation to obtain a receipt for the gift from the donee and file this receipt with the income tax return. It has also been established that the gifts made in kind instead of cash are not deductible in practice on account of the problem of correct valuation. It would be difficult to prove ‘payment of the amounts’ under the strict language of the section. It will be therefore readily understood why, in the past, there has been a refusal to allow gifts of free goods, services or property to charity save under the most exceptional circumstances.

Mr Snyder referred to three tests which are as pertinent in determining what are gifts to Her Majesty as they are in determining what are charitable donations.

1. The amounts parted with must be by way of a gift. In the instant appeal the articles were donated not as a gift but as a means of acquiring exposure and publicity for the sale of his other articles.

2. The gift must not be in kind because of the difficulty of evaluating its precise value in cash. In claiming the deductions of alleged gifts to Her Majesty, the appellant having parted with no money, estimated the value of his articles at between $25. and $44. per 100 words without presenting any supporting evidence to that effect.

3. Before amounts claimed as charitable donations of gifts to Her Majesty, can be deducted from income, receipts must be filed with theMinister. The appellant had no receipts.

The appellant does not meet any of the above tests nor does he fall within the provisions of paragraph 18(1)(a), paragraph 110(1)(b) or subsection 110(2.2) of the Act. The Minister therefore, did not err in disallowing $3,475, $2, 320 and $3,828 for each of the taxation years 1976, 1977 and 1978 since they were neither business expenses nor gifts to Her Majesty.

The appeal is dismissed.

Appeal dismissed.