14 June 1988 Income Tax Severed Letter 7-2577 - [Paragraph 8(1)(f) of the ITA]

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.

JUN 14 1988

Head Office Small Business and General Division F.B. Fontaine (613)957-2140 XXXX (the "taxpayer") Paragraph 8(1)(f) of the Income Tax Act (the "Act")

This is in reply to your memorandum of January 20, 1988 addressed to Head Office - Office Examination Division concerning the above-noted subject.

Our understanding of the situation is as follows:

XXXX

You request an opinion as to whether the seduction made by the taxpayer to allowable under paragraph 8(1)(f) of the Act.

Based on the taxpayer's responsibilities described in 2 above we will assume that the taxpayer was required, under his contract of employment to pay his own expenses. This would be so especially if failure to make good the loss to the employer would have resulted in the taxpayer's dismissal. Also, assuming that the requirement under subparagraph 8(1)(f)(iv) of the Act is met, it is our opinion that the payment of XXXX made by the taxpayer would be a deductible expenditure under paragraph 8(1)(f) if the amount can be considered to have been paid for the purpose of earning income from employment.

In the Tax Review Board case "of Lavoie v. MNR (82 DTC 1291) it was concluded that legal expenses of a commission salesman (the "appellant") were deductible under paragraph 8(1)(f) as the expenses arose from the appellant's misconduct in pursuit of commission income. The Board's deliberation in that case involved the legal conclusion that the "employment" purpose test in paragraph 8(1)(f) was equivalent to the "business" purpose test in paragraph 18(1)(z) and that the principles governing deductions from business income were to be applied, mutatis mutandis, to deductions under paragraph 8(1)(f).

Interpretation Bulletin, IT-185 deals with losses from theft for the purposes of paragraph 18(1)(a) of the Act and states that a loss of cash through theft is allowed as a deduction where the taxpayer's business involves this risk. The rule that the loss should arise in the ordinary course of the income producing activity and should constitute an inherent risk of operations applies equally to income from a business or the type of employment contemplated in paragraph 8(1)(f). This rule generally would include a loss that normally would be insurable under a policy of insurance. Losses arising from innocent or negligent misrepresentation, as opposed to losses arising from the taxpayer's own fraud, are generally insurable.

Since the evidence revealed that no fraud was committed by the taxpayer, it must be concluded that the loss arose from an event that is, in its nature, a risk normally incidental to the taxpayer's income earning activity and, therefore, generally insurable. On this basis, it is our view that the amount of XXXX paid by the taxpayer in 1985 would be considered to have been expended for the purpose of earning income from employment. Therefore, provided that our assumptions above are correct, the amount would be deductible by the taxpayer under paragraph 8(1)(f) of the Act. The deduction, however, should be limited to the net loss to the employer for the taxpayer) after taking into account any insurance recovery or restitution in the year in which the deduction was claimed. A recovery in any other year la income in the year in which it is received.

The opinion expressed herein is loosed solely on the facts of this particular case and, in particular, the fact that there is no evidence to show that the taxpayer or anyone related to him was responsible in any way for the cash shortages. Since the ROMP wee involved ant conducted an investigation, it would appear that no such person was so responsible. In the absence of such an investigation, however, our response could be quite different.

We trust these comments will be helpful to you.

ORIGINAL SIGNED BY

P.D. FUOCO

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

c.c. Office Examination Division - Head Office. L. Webb