Kinahan v. R., [1998] 1 CTC 2207

Rip T.C.J.:

Prior to November 1992 Michael Kinahan was employed by Isolofoam Co. Ltd. (“Isolofoam”) as a salesman in Southwestern Ontario. In preparing his 1994 tax returns, he deducted, in computing his income, expenses incurred by him in the performance of his duties in 1992 for which he was not reimbursed by his employer. The appeal is from his tax assessment for 1994 in which he was denied the deduction.

Mr. Kinahan was paid a salary. Under his contract of employment he was to be reimbursed by his employer for expenses incurred in the performance of his duties. These expenses included meals, lodgings, gasoline and telephone. He was also to receive a monthly car allowance of $500. At the end of each month Mr. Kinahan would prepare a statement of expenses and send it to his employer’s office in Toronto where it would be verified and then forwarded to the employer’s head office in Quebec for payment. Isolofoam reimbursed all claims by Mr. Kinahan up to and including August 31, 1992.

Mr. Kinahan incurred expenses of $1,011.49 in September 1992 and he estimated he incurred expenses of approximately $300 during the first two weeks of October 1992. In mid-October 1992 Isolofoam was placed in receivership and the receiver refused to reimburse Mr. Kinahan his out of pocket expenses and pay the car allowance for September 1992. Mr. Kinahan did not make a claim for October because he realized Isolofoam’s financial plight at the time.

In 1994 Mr. Kinahan received the amount of $2,681.00 from the Ontario Ministry of Labour Employee Wage Protection Program. These funds, as Mr. Kinahan explained, represented vacation and termination pay which the employer was unable to pay to the employee as a result of a receivership or bankruptcy. Mr. Kinahan agreed the money received did not represent unpaid salary.

Mr. Kinahan did not include the amount of $2,681.00 he received from the Ontario government in his income for 1994 and this amount has been added to his income for 1994. The parties agree the sum of $2,681.00 is employment income. However, Mr. Kinahan submits that the amount of employment expenses for which he was not reimbursed by his employer in 1992 should be deducted from the income of $2,681.00 he received in 1994.

In computing a taxpayer’s income for a taxation year for employment only certain types of expenses that are wholly applicable to the employment are allowed and they are described in section 8 of the Income Tax Act (“Act”). Indeed, subsection 8(2) provides that:

Except as permitted by this section, no deductions shall be made in computing a taxpayer’s income for a taxation year from an office or employment.

Paragraph 8( 1 )(/) states that in order for a salesperson to deduct expenses from employment income, that person, amongst other things, is required to pay his own expenses and be remunerated in whole or in part by commissions or similar amounts fixed by reference to sales. Mr. Kinahan’s income from Isolofoam was not fixed by reference to sales. Further, under his contract of employment, he was to be reimbursed any expenses. This provision does not assist Mr. Kinahan.

Paragraph 8(1 )(/i) permits an employee to deduct travel expenses where under the contract of employment he or she is required to pay the travel expenses incurred in the performance of the duties of employment. This provision also does not assist Mr. Kinahan: again, his employer was required to reimburse his expenses.

Mr. Kinahan had a claim against his employer in 1992 as a result of his employer’s inability, or the receiver’s refusal, to reimburse expenses he incurred in the performance of his duties and which the employer owed to him. He was a creditor of Isolofoam. Unfortunately there is no provision in the Act that permits the appellant to deduct his loss from employment income in 1992, which year is not the year in issue, or from the money he received from the Ontario government in 1994.

In most cases similar to that at bar, the employee is reimbursed by his or her employer and does not suffer any loss. I do not pretend to know - there is no evidence - whether receivers generally honour bona fide expense claims of employees of employers who are in receivership. Creditors of the employer, other than employees, may deduct bad debts owing to them in computing their business income: subsection 20(1)(p). The employee, however, cannot deduct the bad debts owing by his or her employer. Parliament ought to consider amending the Act to permit an employee to deduct a loss in special circumstances similar to that at bar.

Unfortunately, therefore, the appeal will have to be dismissed.

Appeal dismissed.