26 February 1988 Income Tax Severed Letter

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

TO Winnipeg District Office Appeals Division Mr. H.L. Bergal, Chief of Appeals

ATTENTION: Mr. G. Roy

February 26, 1988

FROM Head Office Appeals Branch S. Ngan Tel: (613) 957-7213

XXXX

We are writing in response to your memorandum dated October 6, 1987, concerning the above-noted matter.

The basic facts, as we understand them are as follows:

1. 2. XXXX 3. 4. 5.

You are requesting our assistance because it seems that there is a conflict between the instructions in TOM 40(14)9.7(1)(F) and paragraph 8(1)(f) of the Act.

Office in the Home Expense

TOM 40(14(9.7(1)(F) sets out the conditions for allowing office in the home expenses. Two of the most important conditions are paragraph (a)1 and (a)2. They are as follows: (a) 1. The taxpayer's employer does not have an office within a reasonable distance from the employee's home. Court decisions indicate that where there is no other office available expenses may be allowed for an office in the home. However, where there is an office availa ble, the courts consider that working from an alternate office in the home is a convenience and expenses incurred are personal. (a) 2. There is reasonable evidence that one or more rooms in the home are used solely for the taxpayer's office.

Similar conditions are found in paragraph 3(a) and 3(b) of IT-352 . It is noted that IT-352

is dated November 22, 1976. However, IT-352 was written with respect to subparagraph 8(1)(i)(ii) and 8(1)(i)(iii) of the Act and not 8(1)(f).

It is our understanding that the above-mentioned "reasonable distance" and "a room used solely" tests are administrative positions adopted by our Assessing Division. They appear to have no statutory or judicial authority. The Department also has difficulty substantiating this position in Court. As Judge Taylor stated in the Thompson case, 1985 CTC 2415, "the point above ("a room used solely") is one which is not founded in legislation or jurisprudence, to my knowledge and the Minister rapidly abandoned it".

On this basis, in cases involving commission salesmen, we suggest that little or no emphasis be placed on the distance between the employee's home and his office or whether there is a room set aside solely for the purpose of earning income.

Subsection 8(1) of the Act states that:

"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..."

XXXX

For XXXX to make any deductions under subsection 8(1)(f), he must come within the ambit of each of subparagraphs 8(1)(f)(i), (ii) (iii) and (iv). This necessitates that he shall:

(a) be required under his contract of employment to pay his own expenses,

(b) be ordinarily required to carry on the duties of his employment away from his employer's place of business,

(c) be remunerated by commission, and

(d) not have been in receipt of a reasonable allowance for travelling expenses.

XXXX

It is a question of fact whether a second office is an office of personal convenience as in the George Hill case (63 DTC 1) or is a base of operation as in the Justin Cork case (1984 CTC 479).

By reviewing the recent court decisions with respect to the Office in the Home Expenses we notice that the Department has lost a number of cases.

The following is a sample of the cases that the Department lost:

Charles Roy (1985 CTC 2328, TCC)         Investment Fund Dealer
Justin Cork (1984 CTC 479, FCTD)*        Mechanical Design Draftman
Wayne Bryant (1980 CTC 2529, TRB)*       Medical Salesman
Nick- Thompson (1985 CTC 2413, TCC)*     RJR MacDonald Inc.
                                           Salesman
J. Vincent Toolsie (80 DTC 1209 TRB)   Lawyer
Heather Barnard (1985 CTC 2179)          Knitting Yarn Salesman
No: 732 v. MNR (61 DTC 251 TAB)        Real Estate Salesman
Valani (79 DTC 1206 TRB)               Real Estate Salesman
Goldhar (1985 CTC 2187 TCC)              Real Estate Salesman

There are cases that were decided in favour of the Department:

Harry Edward English (56 DTC 267 TAB) Professor
George Hill (63 DTC 1, TAB)            President of Private
                                           Company
Morton Adelson (1984 CTC 2693 TCC)*      Lawyer
John Charles Douglas (1985 CTC 2383 TCC) Ingram & Bell Ltd.
                                           Salesman
Nicholas Slawson (1985 CTC 2075 TCC)     Broker
J.A. Bowman (1985 CTC 2380 TCC)          Salesman and Branch
                                         Manager of Pitney Bowes
Lebera (81 DTC 276 TRB)                Freelance Draftsman
Robin (81 DTC 340 TRB)                 Doctor

* Cases currently under appeal.

Almost all the Office in the Home Expenses cases are dealt with at the Tax Court level. The exception is the Cork case which the Department appealed and lost at the Federal Court Trial Division. It is interesting to note that the Department lost all the cases relating to the real estate salesman. It appears that the Tax Court judges decided that a second office in the home is necessary for a real estate agent for the purpose of earning his income from the employment. Furthermore, the Department did not appeal the Golhar case which makes it difficult to disallow other real estate agent's Office in the Home Expenses.

In the real estate business, it is necessary to conduct business in the evening after the office is closed. Most offers to purchase are presented in the evening when husband and wife are available. Open houses are conducted on the weekends. The calling card of a real estate agent usually shows his office telephone number as well as his residence telephone number. It is also not uncommon to visit real estate agents after office hours to discuss real estate deals. Based on the above facts, we are of the opinion that a second office at home is necessary to a real estate agent for the purpose of earning his commissions. At the very least, it is his base of operations after the office is closed.

XXXX

Salary to Spouse

As it is stated above, once XXXX is allowed to claim deductions under paragraph 8(1)(f), he does not have to look elsewhere for deductions. In the Thompson case, the court held that "with the wording of section 8(1)(f) so broad - amount expended by him in the year for the purpose of earning the income from employment - 'I fail to see any reason that a bona fide commission should be required to rely on any subsection under section 8 of the Act, other than that particular one, (8(1)(f)), in order to deduct legitimate expenses. As I see it - everything available to salaried employees under the other subsections is available to the commission salesman under paragraph 8(1)(f) of the Act..."

It is our opinion that the salary paid to his wife can be allowed to XXXX under paragraph 8(l)(f) provided that it is reasonable and is for the purpose of earning income from employment.

We are returning the Orange File Folder together with XXXX 1983 and 1984 tax returns.

Section Chief Appeals and Referrals Division