Fred Schnopel v. Minister of National Revenue, [1979] CTC 2766, 79 DTC 654

Guy Tremblay [TRANSLATION]:—This case was heard in Montreal, Quebec on May 11, 1978.

1. Issue

The issue is whether the respondent was justified in refusing to allow the sums of $2,584.56 in 1971 and $4,784.21 in 1972 as deductions for automobile and other miscellaneous expenses in calculating the income of the appellant, a salesman paid on both a salary and a commission basis.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof derives not from one particular section of the Income Tax Act but from a number of judicial decisions, including the judgment of the Supreme Court of Canada in R RWS Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.1 During 1971 and 1972 the appellant was employed by the International Business Machines Company, hereinafter referred to as IBM.

3.2 The appellant sold office equipment, supplies and other products.

3.3. In 1971 his territory consisted of part of Quebec City and Beauce and Portneuf counties. The main ofice was in Ste-Foy at the time. In 1972 he moved to Rimouski, with the Gaspé peninsula as his territory.

3.4 He spent most of his time on the road meeting customers.

3.5 He was paid on both a salary and a commission basis:

3.6 The appellant was obliged to supply his own automobile. However, IBM paid his automobile expenses in the following manner, as described by IBM’s personnel administration manager, Mr A R Wansbrough, in a letter dated November 27, 1974 (Exhibit A-1):

Before April 3, 1973—the greater of the following two amounts:

(a) $2.30 per day for each day the automobile is used for work, plus

(b) $0.049 a mile for the first 140 miles each week,

$0.069 for each mile over 140 miles,

or

$0.17 per mile for the first 50 miles each week,

$0.12 per mile for the next 50 miles,

$0.08 for each additional mile.

After April 2, 1977:

(a) $2.50 per day for each day the automobile is used for work, plus

(b) $0.052 per mile for the first 140 miles each week,

$0,072 for each mile over 140 miles

or

$0.17 per mile for the first 50 miles each week,

$0.12 for the next 50 miles,

$0.08 for each additional mile.

3.7 According to the same document, entertainment expenses were generally not reimbursed, with the exception of the old minor expense.

3.8 During the years in question the appellant received the following amounts:

These amounts were not included on the T-4 and the appellant did not declare them as income, just as the respondent did not include them.

3.9 For the years in question the appellant claimed the following amounts in his tax returns:

3.10 The appellant had all the receipts for the autombile expenses and 40 to 60% of the receipts for the other expenses. According to the appellant, it is often impossible to obtain receipts for these latter expenses.

3.11 On March 24, 1975 notices of reassessment were issued by the respondent, disallowing the expenses claimed.

3.12 Notices of objection were filed on June 20, 1975 and the respondent issued his reply on February 10, 1977; he confirmed the notice of assessment for 1971 and issued a reassessment for 1972, adding $842.74 to the appellant’s income.

3.13 On May 7, 1977 an appeal was filed with the Tax Review Board.

4. Act, Case Law and Comments

4.1 The main provisions concerned are paragraph 8(1)(f), subparagraphs 8(1 )(i)(iii) and 6(1)(b)(v) of the new Act, which are similar to subsection 11(6) and subparagraph 5(b)(v) of the old Act. They read as follows:

8.(1)(f) Salesman’s expenses.—where the taxpayer was employed in the year in connection with the selling of property or negotiating of contracts for his employer, and

(i) under the contract of employment was required to pay his own expenses,

(ii) was ordinarily required to carry on the duties of his employment away from his employer’s place of business,

(iii) was remunerated in whole or part by commissions or other similar amounts fixed by reference to the volume of the sales made or the contracts negotiated, and

(iv) was not in receipt of an allowance for travelling expenses in respect of the taxation year that was, by virtue of subparagraph 6(1 )(b)(v), not included in computing his income,

amounts expended by him in the year for the purpose of earning the income from his employment (not exceeding the commissions or other similar amounts fixed as aforesaid received by him in the year) to the extent that such amounts were not

(v) outlays, losses or replacements of capital or payments on account of capital, except as described in paragraph (j), or

(vi) outlays or expenses that would, by virtue of paragraph 18(1)(l), not be deductible in computing the taxpayer’s income for the year if the employment were a business carried on by him.

8(1)(i) Dues and other expenses of performing duties.—amounts paid by the taxpayer in the year as

(iii) the cost of supplies that were consumed directly in the performance of the duties of his office or employment and that the officer or employee was required by the contract of employment to supply and pay for.

6(1 )(b) Personal or living expenses.—all amounts received by him in the year as an allowance for personal or living expenses or as an allowance for any otner purpose, except

(v) reasonable allowances for travelling expenses received by an employee from his employer in respect of a period when he was employed in connection with the selling of property or negotiating of contracts for his employer.

4.2 The following cases were cited by the respondent:

Case Law

Cyril John Ransom v MNR, [1967] CTC 346; 67 DTC 5235;

F Joan Meier v MNR, [1967] Tax ABC 324; 67 DTC 224;

Michael J Zukiwski v MNR, [1977] CTC 2371; 77 DTC 261;

Eric O Claus v MNR, [1966] Tax ABC 395; 66 DTC 248;

Anthony Cekota v MNR, [1964] Tax ABC 279; 64 DTC 654;

Pook v Owen, [1968] 1 All ER 261.

4.3 Comments

The Board is of the view that the appellant satisfies the conditions in paragraph 8(1 )(f).

One of the conditions set out in the above-cited sections that must be met if the appellant’s expenses are to be disallowed is that the employer must pay him a reasonable allowance.

Are the allowances described in paragraph 3.6 of the facts reasonable?

Supposing that in 1972 the appellant had covered 500 miles a week, which would be a minimum for someone with the appellant’s territory (see paragraph 3.3 of the facts), the appellant would have received a maximum of less than $0.12 a mile.

Was this amount reasonable in the years concerned? At first sight it would seem so. However, the Board is of the view that in order to ascertain a reasonable cost per mile, it is necessary to take into account not only the cost of gasoline and oil but also all the other expenses (insurance, depreciation, and so on). The Board must consider the evidence presented. The ap-

pellant put forward one fact that has not been contradicted: 75% of his actual automobile expenses (all supported by receipts) amount to:

Faced with this evidence, the Board can only conclude that in this case the allowance was not reasonable.

But what in fact does the word “reasonable” mean? In the context of subsection 6(1), the word “reasonable” means chiefly that the expenses paid by the employer must not be excessive; the respondent could then reduce the non-taxable portion, in other words, the reasonable portion, and tax the excess, that is, the unreasonable portion.

Can the word “reasonable” have a different meaning when one is referring to subparagraph 6(1 )(b)(v) but in the context of paragraph 8(1)(h) (and also 8(1)(f))? The Board is of the view that the word “reasonable” means “the happy medium”, inter alia, and that the excess of unreasonable portion may be in either direction, in other words, either unreasonably high (allowing the Department of Revenue to reduce the expenses) or unreasonably low (allowing the taxpayer to adjust the amount given so that it corresponds to the expenses actually incurred). The Income Tax Act does not exist only for the administrator, the Department of Revenue, but also for those administered, the taxpayers.

In conclusion, the Board is therefore of the opinion that the expenses claimed are much more realistic. It is of the view that the sums received from the employer, described in paragraph 3.8 of the facts, should be included in the appellant’s income and that all the automobile expenses and 60% of the other expenses should be allowed; the office expenses should be refused, since the evaluation did not establish that the appellant was required to maintain an office at his expense under subparagraph 8(1)(i)(iii).

5. Conclusion

The appeal is allowed in part and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed in part.