Cormier v. R., [1998] 1 CTC 3105, 98 DTC 1070

Lamarre T.C.J.:

These are appeals from assessments of the appellant for the 1989 and 1990 taxation years.

The appellant is a podiatrist [1] and in computing his professional income for the 1989 and 1990 taxation years he deducted amounts of $30,277 and $41,893 respectively as salaries and education expenses paid with respect to his daughter Linda Cormier.

The Minister of National Revenue (“the Minister”) disallowed these expenses for each of the years in question on the ground that they were personal expenses that could not be deducted in computing the appellant’s business income pursuant to ss. 9(1) and 18(1 )(a) of the Income Tax Act (“the Act”). He further considered that the amount claimed was not reasonable in the circumstances and could not be deducted pursuant to s. 67 of the Act. The Minister also relied on ss. 118.5, 118.6 and 118.9 of the Act in saying that there is already a complete code dealing with the tax treatment of tuition fees and education expenses and he consequently maintained that the education expenses could not be deducted as business expenses. Finally, the Minister argued that if these expenses were incurred for the purpose of gaining or producing income from a business they were capital outlays within the meaning of s. 18( 1 )(Z?) of the Act and so could not be claimed by the appellant as current expenses in computing his business income.

Facts

The appellant, his wife Gisèle Cormier and his daughter Linda Cormier all testified. The appellant has been practising as a podiatrist since 1970. He has always worked for himself. He has a clinic where he sees patients. His wife has been working with him for 20 years. She acts as secretary-receptionist, assistant and administrator.

Linda Cormier began working for the clinic in 1983. Initially it was only summer work and her duties were those of secretary-receptionist. She subsequently put in several sessions as a trainee with other podiatrists in the province of Quebec. She also completed two years at the University of Ottawa in biology. As no podiatrie medicine program was offered in the province of Quebec, [2] she then took correspondence courses with the SMAE Institute (“the Institute”)- [3] in Britain. This course of study, which usually takes three years, was completed by Linda Cormier in a year and a half since the Institute gave her several credits for her two years of biology at the University of Ottawa. She next went to Britain, where she spent a month taking her exams in order to obtain her diploma from the Institute. In 1986 she accordingly acquired the following two titles: “Member of the Surgical School of Chiropody” and “Member of the British Chiropody Association”.

As she was initially told that this diploma was sufficient to practise in the province of Quebec, she then took steps to become a member of the Ordre des podiatres du Québec. She was working for the appellant at the time. A year and a half later she was told by the Ordre that their admission policies had changed and that she could not be a member since she had not completed three years’ study in podiatry. Accordingly, in 1988 she undertook fresh studies at the New York College of Podiatrie Medicine affiliated with New York University (“the NYCPM”). The podiatrie medicine program offered by the NYCPM was recognized by the Government of Quebec for loan and grant purposes. [4]

After obtaining her diploma in Britain in December 1986, Linda Cormier ceased living with her parents. She worked full time as a podiatrie

See

assistant in the appellant’s clinic. As she was not a member of the Ordre she could not make diagnoses, do surgery or prescribe medication. She was paid $400.43 every two weeks when she began that employment and by the end of 1987 she was receiving $461.98.

When she learned that she would have to undertake further studies, she had to find financing. The appellant, for his part, counted on Linda Cormier to maintain client services as well as to increase income from his business. He also mentioned that he was thinking of hiring a podiatrist to take over the clinic on his retirement. It would seem that podiatry is a profession which is almost dying out in Quebec. According to Linda Cormier, there were 120 podiatrists in Quebec in 1988 and in recent years this figure has fallen to 89.

In view of this the appellant offered to pay all his daughter’s education expenses for the four-year period of her studies which were to begin in September 1988. These expenses also included the cost of books as well as transportation and a small salary for living in New York while she was studying. In return Linda Cormier undertook to work at the appellant’s clinic for four years after receiving her diploma. She obtained her doctorate in podiatrie medicine from the NYCPM on May 20, 1992. [5] She then returned to the appellant’s clinic as an employee. Her employment contract expired in 1996. Since then, she has remained in the appellant’s employ and is currently negotiating with him to become co-owner of the clinic.

Since Linda Cormier obtained her diploma in 1992 the appellant’s business has expanded. The appellant first enlarged his clinic and then opened a second office in Hull. The number of employees increased from three to six.

The expenses paid by the appellant for Linda Cormier’s studies amounted to $18,659.59 for 1989 and $29,390 for 1990. She also obtained a bursary of $10,457 in 1989. The appellant also paid her a salary totalling $10,219 for the period from February 1988 to January 1989 (the fiscal year of the appellant’s business ends on January 31 of each year) and a salary totalling $9,607.43 for the period beginning February 1989 and ending in January 1990. From February 1988 to September 1988 Linda Cormier worked at the clinic full time. At that time her salary was $925.70 a month (except for March 1988, when she received $1,390.29). After she began her studies in New York in September 1988 her salary fell to $654.98 a month until May 1989. Linda Cormier returned to the appellant’s clinic to work in June 1989 and received $1,233.09 for that period. She subsequently received a salary of $822.06 a month until she returned for good in 1992. Since then her annual salary has increased from $30,000 initially to $39,000 at the present time. The appellant considered these salary and education expenses paid during those years as expenses of operating his business. The Minister disallowed the deduction of these expenses.

Analysis

Business expense: ss. 9(1) and 18(l)(a)

Counsel for the respondent argued, to begin with, that Linda Cormier could not have been an employee of the appellant while she was studying in New York. He argued that no employer-employee relationship could have existed during that period. I infer from this that the respondent is on this basis challenging the deductibility by the appellant of any expense incurred in respect of Linda Cormier.

In my opinion, that is not how the matter should be approached. First, for the period preceding September 1988 Linda Cormier worked for the appellant full time. Subsequently, although Linda Cormier was not working since she was on education leave, she had made a firm commitment to return to work for the appellant for four years at the end of her leave, and so she did. The salary she received from the appellant was paid to her under her contract of employment and was as such taxable in her hands as employment income. [6] Linda Cormier also included the amount she received as salary in her tax returns. On this point, I am therefore of the opinion that the salary paid to Linda Cormier during the years at issue is an operating expense which the appellant could certainly deduct from the income from his business.

Counsel for the respondent argued, secondly, that the expenses associated with Linda Cormier’s studies were not expenses incurred for the pur- pose of gaining or producing business income, but were actually personal expenses of the appellant.

Education expenses are deductible as business expenses in computing the appellant’s income under s. 9(1) of the Act if the deduction is consistent with ordinary business principles or well-recognized principles of normal business practice (see Royal Trust Co. v. Minister of National Revenue (1956), 57 D.T.C. 1055 (Can. Ex. Ct.), at 1059). Accordingly, if it can be concluded that the expenses associated with an employee’s studies are recognized as business expenses in normal business practice, the employer paying such expenses should ordinarily be able to deduct them in calculating his taxable profit. In the instant case, the question that arises is whether the deduction is prohibited by well-recognized rules of normal business practice on the ground that the expense was not incurred for the purpose of gaining or producing income or that it was a personal expense of the appellant.

As to the question of whether this education expense was incurred for the purpose of gaining or producing business income or whether it was a personal expense of the appellant, the Supreme Court of Canada ruled on the distinction to be made in the case of child care expenses in Symes v. R., [1993] 4 S.C.R. 695 (S.C.C.). At page 727 the Court cites a passage from an analysis made by Prof. B.J. Arnold in “The Deduction for Child Care Expenses in the United States and Canada: A Comparative Analysis”, (1973) 12 West. Ont. L. Rev. 1, at p. 27:

The test established by the case [Bowers v. Harding] [7] for distinguishing between personal and living expenses involved a determination of the origin of the expenses. If the expenses arose out of personal circumstances rather than business circumstances the expense was a non-deductible personal expense.

Following this passage, laccobucci J. said, at pp. 727-28:

There are obvious tautologies within this approach. “Personal expenses” are said to arise from “personal circumstances”, and “business expenses” are said to arise from “business circumstances”. But, how is one to locate a particular expense within the business/personal dichotomy?

...proper analysis of this question demands that the relationship between child care expenses and business income be examined more critically, in order to determine whether that relationship can be sufficient to justify the former’s deductibility. This proposition, in my opinion, leads naturally to s. 18(1 )(a), which sets out the relationship required by the Act.

The question that must be asked, therefore, is whether education expenses are not excluded by s. 18(1)(a) of the Act.

Section 18( 1 )(a) reads as follows:

(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) 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 order to be deductible as business expenses, education expenses must have been incurred by the appellant for the purpose of gaining or producing income from the business.

Various tests were used by the Supreme Court of Canada in Symes, supra, in an exhaustive analysis of commentary and case law on this point. laccobucci J. said, at p. 733:

All these tests include some reference to the purpose of an expense. In considering the extent to which a purpose test is appropriate, I wish to make note of the decision of Wilson J. in Mattabi Mines Ltd. v. Ontario (Minister of Revenue), [1988] 2 S.C.R. 175. Therein, Wilson J. considered a taxation provision substantially similar to s. 18(l)(a), she examined jurisprudence on s. 18(l)(a), and she came to the following conclusion (at p. 189):

The only thing that matters is that the expenditures were a legitimate expense made in the ordinary course of business with the intention that the company could generate a taxable income some time in the future.

The existence of a business-related purpose within the meaning of s. 18(1)(a) is a question of fact to be decided taking all the circumstances into account, in the light of various factors (Symes, supra, at 736 and 742).

Accordingly, it may be asked whether the deduction is generally accepted as a business expense. The Court may also determine whether the taxpayer intended to produce business income by incurring this expense, or whether the need to incur the expense existed for the taxpayer in any case independently of the business. In other words, does the expense fill a need of the business or a need of the taxpayer? However, this idea of a business need should not be analysed in isolation where the argument is made that the expense may be regarded as personal (Symes, supra, at 736).

Décary J.A. of the Federal Court of Appeal said the following in Symes v. R., [1991] 3 F.C. 507 (Fed. C.A.), at 523:

...the concept of a business expense has been developed exclusively in relation to the commercial needs of the business, without any regard to the particular needs of those in charge of the business...

Considered in this light, the expense incurred by the appellant for Linda Cormier’s education can in my opinion be regarded as an expense meeting both a need of his business and a particular need of the appellant (if it is to be argued that the appellant would in any case have incurred this expense given his paternal relationship with Linda Cormier).

Applying the test of the purpose of the expense, it can be said, from the facts presented in evidence, that the expenses incurred by the appellant for Linda Cormier’s education were legitimately incurred in the ordinary course of business and for the obvious purpose of eventually producing taxable income for the appellant’s business. The evidence in fact disclosed that the podiatry clinic had expanded after the conclusion of Linda Cormier’s studies, thereby increasing the income of the business.

Further, I cannot conclude from the evidence that the appellant would have incurred such expenses anyway if he had not thought it necessary for his business. The appellant mentioned that he wanted to hire a podiatrist to help him serve his clients and to take over his business as well. It should also be borne in mind that the appellant had already paid the tuition fees for his daughter’s studies leading to her obtaining a degree in Britain. That degree was initially supposed to enable her to practise as a podiatrist. It cannot be assumed that, after having already paid for the obtaining of an initial university degree, he would have ventured to personally finance the obtaining of another university degree by his daughter. The fact that she wished to specialize in the field in which his business was engaged was certainly a factor which encouraged the appellant to incur the expense for the benefit of his business.

As to whether this type of expense is generally recognized as a business expense, it is true that no specific evidence was submitted on this point. However, Interpretation Bulletin IT-357R2 issued by Revenue Canada recognizes that training costs are deductible as current expenses if they were incurred to maintain, update or upgrade an already existing skill or qualification. Revenue Canada therefore appears to recognize a commercial practice according to which such training costs are a business expense which may be deducted provided they do not qualify as a capital expenditure.

Bearing the foregoing in mind, I feel that the education expenses incurred by the appellant for Linda Cormier were so incurred for the purpose of gaining or producing income from his business; these expenses could be taken into account in computing his income under s. 9(1) of the Act and they were not excluded by s. 18(1 )(a) of the Act.

Tuition and education credit

Counsel for the respondent also argued that education expenses are already the subject of a tax credit under ss. 118.5, 118.6 and 118.9 of the Act and therefore cannot be deducted under a more general provision of the Act. The relevant passages of these sections of the Act read as follows:

118.5: Tuition credit.

(1) For the purpose of computing the tax payable under this Part by an individual for a taxation year, there may be deducted,

(b) where the individual was during the year a student in full-time attendance at a university outside Canada in a course leading to a degree, an amount equal to the product obtained when the appropriate percentage for the year is multiplied by the amount of any fees for his tuition paid in respect of the year to the university, except any such fees

(i) paid in respect of a course of less than 13 consecutive weeks’ duration,

(ii) paid on his behalf by his employer to the extent that the amount thereof is not included in computing his income, or

(iii) paid on his behalf by the employer of his parent, to the extent that the amount thereof is not included in computing the income of the parent by reason of subparagraph 6( 1 )(£?)(ix)...

118.6(2) Education credit. For the purpose of computing the tax payable under this Part by an individual for a taxation year, there may be deducted an amount determined by the formula

A x $80 x B

where

A is the appropriate percentage for the year, and

B is the number of months in the year during which the individual is en-

rolled in a qualifying educational program as a full-time student at a designated educational institution,

if such enrolment is proven by filing with the Minister a certificate in prescribed form issued by the designated educational institution and containing prescribed information and, in respect of a designated educational institution described in subparagraph (a)(ii) of the definition “designated educational institution’’ in sub- section (1), the student is enrolled in the program to obtain skills for, or improve his skills in, an occupation.

118.9: Transfers to supporting person.

(1) Where the parent or grandparent of an individual (other than an individual in respect of whom the individual’s spouse deducts an amount under section 118 or 118.8 for the year) files with the Minister for a taxation year a prescribed form containing prescribed information, there may be deducted in computing the tax payable by the parent or grandparent, as the case may be, under this Part for the year an amount determined by the formula

À - B

where

A is the lesser of $680 and the total of all amounts each of which is an

amount that the individual may deduct under section 118.5 or 118.6 for the year; and

B is the amount of the individual’s tax payable under this Part for the year

computed before any deductions under this Division (other than sections 118, 118.3 and 118.7).

A tax credit thus exists for tuition fees and education expenses, which credit may be claimed by a taxpayer on the conditions stated in the Act. This credit is very low compared to the actual cost incurred for university studies. Counsel for the respondent argued that the appellant was limited to the amount of the deduction provided for in these specific sections of the Act and suggested, as was done with regard to the question of child care expenses raised in Symes, supra, that the appellant could not now rely on a more general provision in order to deduct the full amount of the expense.

I do not subscribe to this argument. Unlike s. 63, which provides that a certain amount will be deductible for child care expenses provided these expenses are incurred to enable the taxpayer to carry on a business, this condition does not have to be met to obtain a tuition or education credit. Furthermore, the tuition credit is not calculated in terms of the income earned, as is the case with the deduction for child care expenses. It is a credit which is allowed for the purpose of reducing the tax payable. It is not a specific deduction provided for by the Act with regard to computing income. In my opinion, therefore, it cannot be said that ss. 118.5, 118.6 and 118.9 are, by their very wording, really a code in themselves, complete and independent, as was held in Symes with regard to s. 63 of the Act.

In my view, the situation is more akin to that which existed in Olympia Floor & Wall Tile (Que.) Ltd. v. Minister of National Revenue, [1970] Ex. C.R. 274 (Can. Ex. Ct.). The question there was whether the taxpayer could deduct as a business expense the full amount of charitable donations which he had made in the year or whether he was limited to the maximum amount specified in s. 27(1 )(a) of the Act (now s. 118.1). Jackett P. of the Exchequer Court of Canada, as he then was, said the following concerning the application of s. 27(1)(a), at p. 283:

...it follows that what is being permitted by that provision is a deduction of an amount that has been given out of the corporation’s income after it has been earned and not a deduction of an amount that has been laid out as part of the income earning process...

Jackett P. accordingly concluded that s. 27(1 )(a) was not a bar to the deduction of charitable donations to the extent that he was satisfied that those contributions were made essentially in order to increase sales and so could constitute business expenditures (at 277).

laccobucci J. commented on the decision in Olympia Floor & Tile as follows in Symes, at p. 749:

In my view, what that case says is that a particular expenditure, such as a charitable donation, may be made for more than one purpose. In such a case, it will be relevant to consider whether the actual purpose of the expenditure is addressed in the Act. If a specific provision exists which limits deductibility in respect of that purpose, then that should be the end of the matter. If, however, the purpose is not addressed in a specific provision, recourse may be had to more general rules governing deductibility.

In the instant case, as I see it, the appellant made a business decision based on the needs of his business when he agreed to pay Linda Cormier’s tuition fees. The fact that Linda Cormier was his daughter does not, in my view, change the nature of this expenditure. I conclude from the appellant’s testimony that he had particular confidence in his daughter, but that he probably would have acted in the same way if he had been dealing with another, equally reliable, person.

As I have concluded that the tuition fees paid by the appellant were business expenses incurred by him in order to increase his business income, I do not think that those expenses were, for the appellant, expenses of the type mentioned in ss. 118.5 et seq. I note that L’Heureux-Dubé J. specifically addressed this matter of tuition fees in an obiter dictum in Symes, at p. 810:

In fact, there are a number of instances under the Act where a taxpayer may claim a deduction under more than one section of the Act for an expense incurred for a single purpose. Tuition deductions may be deducted under the section for tuition expenses or under general business expenses incurred for the purpose of gaining or producing income.

In my view, these expenses were incurred by the appellant to earn business income and are not amounts which he laid out from income already earned, which would be personal expenses of the appellant.

Capital outlay: s. 18(1)(b)

Finally, counsel for the respondent argued that the expense was a capital outlay that was not deductible under s. 18(1 )(Z?) of the Act. That section reads as follows:

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part...

The question of whether an expense is on capital account is a mixed question of law and fact. The Supreme Court of Canada said the following in Johns-Manville Canada Inc. v. R., [1985] 2 S.C.R. 46 (S.C.C.), at p. 62:

Textwriters have made heroic attempts to reconcile the fluctuating tests and standards applied by the courts in determining this question. Repeatedly it is said, except for the one authority already noted, British Insulated and Helsby Cables [British Insulated and Helsby Cables v. Atherton, [1926] A.C. 205] ... that the question is one of law. No doubt in the predominant sense that is true. However, the underlying facts upon which the question of law is determined are SO interwoven with the principles of law that it is difficult to say that it is not at least a mixed question of law and fact.

In Minister of National Revenue v. Algoma Central Railway, [1968] S.C.R. 447 (S.C.C.), Fauteux J. said that this question should be answered in terms of the circumstances surrounding the expense, not on the basis of a single test. At p. 449, he said the following:

Parliament did not define the expressions “outlay ... of capital” or “payment on account of capital”. There being no statutory criterion, the application or nonapplication of these expressions to any particular expenditures must depend upon the facts of the particular case. We do not think that any single test applies in making that determination... [8]

This approach was moreover adopted by the Privy Council in B.P. Australia Ltd. v. Commissioner of Taxation of Australia (1965), [1966] A.C. 224 (Australia P.C.). Lord Pearce said the following, at pp. 264-65:

The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in border line cases; and conflicting considerations may produce a situation where the answer turns on questions of emphasis and degree. That answer:

“depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process”:

per Dixon J. in Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946), 72 C.L.R. 634, 648.? [9]

In that case the Privy Council held that a payment made by a taxpayer as an inducement to a service station operator to sign an exclusive agency contract was an income expenditure, and not a capital outlay. The contract had a life of five years and thus was an asset of sorts which amounted to an opportunity by the taxpayer to market its gasoline exclusively through the operator’s outlet. Nonetheless, Lord Pearce said, at p. 260:

B.P.’s ultimate object was to sell petrol and to maintain or increase its turnover. There can be no doubt that the only ultimate reason for any lump payment was to maintain or increase gallonage. [10]

In its analysis the Privy Council also considered whether the expense was incurred to create the structure which would allow the business to begin earning income or whether it was part of the process engaged in to produce business income. The Privy Council said the following, at p. 271:

Finally, were these sums expended on the structure within which the profits were to be earned or were they part of the money-earning process? [11]

The second hypothesis was adopted on the basis that the benefit procured by the expenditure was to be used “in the continuous and recurrent struggle to get orders and sell petrol”. [12] The question thus comes down to determining whether the expense led to the acquisition of a means of production or to the use of such a means. Was it an expense leading to the creation or expansion of the business or simply an expense incurred in the course of operating that business (see Hallstroms, supra, at p. 647)?

Another test developed by the Privy Council in British Insulated & Hel- sby Cables Ltd. v. Atherton (1925), [1926] A.C. 205 (U.K. H.L.), is to consider whether the expense has been incurred once and for all to create an asset or benefit which will be of lasting value to a business. That case concerned a lump sum paid by the appellant company to create a pension fund for the benefit of its employees. The Privy Council concluded by a three to two majority that it was an expenditure on capital account. Viscount Cave said the following, at p. 214:

The payment of 31,784/., which is the subject of dispute, was made, not merely as a gift or bonus to the older servants of the appellant company, but (as the deed shows) to “form a nucleus” of the pension fund which it was desired to create; and it is a fair inference from the terms of the deed and from the Commissioners’ findings that without this contribution the fund might not have come into existence at all. The object and effect of the payment of this large sum was to enable the company to establish the pension fund and to offer to all its existing and future employees a sure provision for their old age, and so to obtain for the company the substantial and lasting advantage of being in a position throughout its business life to secure and retain the services of a contented and efficient staff.

In his dissenting judgment Lord Blanesburgh was of the opinion that the expenditure in question was not a capital expenditure since it had not resulted in the acquisition of any asset, as the pension fund was not the property of the appellant company. The expense incurred by it had not brought it any real and definite benefit. Additionally, Lord Blanesburgh noted that a payment which qualifies as a business expenditure is not changed into a capital outlay merely because the recipient invests it on his own account.

In Johns-Manville, supra, at p. 59, after a lengthy examination of the various tests analysed by the writers and the courts with regard to this point, Estey J. summed up the situation as follows:

There is almost an endless rainbow of expressions used to differentiate between expenditures in the nature of charges against revenue and expenditures which are capital. It has been said that the terminology employed is merely an attempt to identify particular factors which may tilt the scale in a particular case in favour of one or the other conclusions.

The instant case, in my opinion, is one in which the scale might equally as well tilt to one side as to the other. On the one hand, the expense in question is one which extended over a four-year period and which very probably will not be incurred by the business again. Moreover, this expense may be regarded as having been incurred in order to obtain a lasting benefit for the business. Quite apart from the commitment given by Linda Cormier to return and work for the business for four years, it may be assumed that the appellant undertook to pay such an expense in order to be sure of having his employee’s services for the much longer term. It may also be said that the effect of the expense was to increase the production capacity of the business since the degree obtained by Linda Cormier now permitted her to do things which the appellant had previously been doing by himself.

However, one could also say that the expense did not provide the business with any asset or lasting benefit. It could in fact be argued that, as in B.P. Australia, supra, the ultimate purpose of the expense was to satisfy and maintain already existing clientele or to increase that clientele by acquiring one more employee for a period of at least four years. However, there was no stipulation in the agreement concluded between the appellant and Linda Cormier that, at the end of those four years, she was to undertake to continue rendering services to the business. In this respect the situation differs from that in British Insulated & Helsby Cables Ltd., supra, in which the expenditure was used to create a permanent pension fund for the employees of that company.

As Jackett P. of the Exchequer Court said in Minister of National Revenue v. Algoma Central Railway(1967), 67 D.T.C. 5091(Can. Ex. Ct.), at p. 5095, the cases in which the advantage resulting from the expenditure was held to be an enduring benefit (and thus constituted a capital outlay) were those in which the advantage was a direct consequence of the expenditure. It was the advantage so acquired that would provide a long-term benefit to the business of whomever incurred the expense.

Can it be said here that a four-year commitment constitutes a long-term benefit? I do not think so, since it is quite usual for businesses to require a commitment for a period equivalent in length to the duration of the employee’s studies. In the High Court of Australia judgment in Sun Newspapers Ltd. v. Federal Commissioner of Taxation (1938), 61 C.L.R. 337 (Australia H.C.), Dixon J. enunciated certain principles, at p. 363:

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment. [13]

The expenditures in the instant case were actually made in return for services to be rendered by Linda Cormier for a period commensurate with the payment. It was not a final payment securing her services for the future. The nature of the benefit sought was not permanent.

Additionally, the period of four years does not as such alter the nature of a benefit which, on the basis of other factors, is not regarded as a lasting benefit.

Lord Pearce said the following in B.P. Australia, supra, at p. 274:

...but the actual period of time for which these particular payments were made, as in the consideration of the nature of the advantage (above), gives no indication which could outweigh the indications given by other considerations.

The case is not easy to decide, but on a balance of all the relevant considerations the scales appear to incline in favour of the expenditure being revenue and not capital outgoings.

Furthermore, if the expense is considered from a practical and commercial standpoint, it is unlikely that an employer would have incurred such expense if he had not regarded it as an essential element in the pursuit of profits for his business. As I have already concluded that this was not a personal expense of the appellant, the fact that the employer was the employee’s father does not in my view alter this interpretation.

In view of the ambiguous interpretation that may be resorted to in attempting to classify the education expense paid by the employer, I would apply the oft-stated rules of interpretation set out inter alia in Johns- Manville, supra, at p. 67:

On the other hand, if the interpretation of a taxation statute is unclear, and one reasonable interpretation leads to a deduction to the credit of a taxpayer and the other leaves the taxpayer with no relief from clearly bona fide expenditures in the course of his business activities, the general rules of interpretation of taxing statutes would direct the tribunal to the former interpretation.

This rule of construction was restated by the Supreme Court of Canada not long ago in Québec (Communauté urbaine) c. Notre-Dame de Bon- secours (Corp.), [1994] 3 S.C.R. 3 (S.C.C.), at p. 20:

Only a reasonable doubt, not resolved by the ordinary rules of interpretation, will be settled by recourse to the residual presumption in favour of the taxpayer.

Further, I would add that in Interpretation Bulletin IT-470R issued by Revenue Canada, it is stated in paragraph 18 that where an employer has paid tuition fees on behalf of an employee, the amount paid should be reported as income of the employee for the year in which the payment was made. In my view, if the benefit is a taxable one for the employee it is logical to consider it to be an operating expense for the employer’s business.

Finally, I have reviewed the Exchequer Court judgment in Levin v. Minister of National Revenue (1971), 71 D.T.C. 5047 (Can. Ex: Ct.), in which Kerr J. came to the conclusion that education expenses are not deductible as business expenses from a taxpayer’s professional income since, for such a professional, they are capital expenses. I entirely concur in this conclusion to the extent that the taxpayer who is studying to obtain a degree acquires an asset for himself which in due course will enable him to gain or produce income from his profession. The position is quite different, I think, in the case of an employer who pays his employee’s tuition fees: it is not the employer who receives a permanent benefit, but rather the employee.

Reasonable expense

In closing, counsel for the respondent mentioned that the amount claimed was unreasonable in the circumstances. The expenses claimed corresponded to what it cost the appellant to pay the tuition fees. As there is nothing in the Act to limit the amount of the deduction, I would allow all of the amount claimed as an operating expense of the business.

Decision

The appeals are allowed and the assessments referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the amounts of $30,277 and $41,893 which the appellant paid as salary and training expenses for each of the taxation years 1989 and 1990 respectively are expenses deductible in computing his business income for each of those years under ss. 9(1) and 18( 1 )(a) of the Act.

Appeal allowed.