Horace Boivin v. Minister of National Revenue, [1979] CTC 3059

Guy Tremblay [TRANSLATION]:—The case at bar was heard at Montreal, Quebec, on November 18, 1977. The last pleadings were received on January 20, 1978 and, since no reply was subsequently received, the Tax Review Board took the whole under advisement on February 10, 1978.

1. Point at Issue

The issue is whether:

(a) in 1973 and 1974 the appellant, as the City of Granby’s industrial commissioner, met the requirements of paragraph 8(1 )(f) of the new Act, and was employed “in connection with the selling of property or negotiating of contracts’’ for his employer, the City of Granby; and

(b) for 1973 and 1974, the sums of $3,500 and $5,500 respectively can be allowed as deductions against commissions of $3,035.70 and $10,595.04.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results not from any particular provision of the Income Tax Act, but from several court decisions, including the judgment rendered by the Supreme Court of Canada in F? W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.1 The appellant has been acting as industrial commissioner for the City of Granby since 1970. A written contract, signed on February 25, 1971, gave effect to the verbal agreement concluded in 1970. This contract was filed as Exhibit A-1.

3.2 The contract reads as folows:

CITY OF GRANBY, a duly incorporated body politic, hereinafter referred to as “the City” and represented by Mr Jean-Louis Tétreault, Mayor and Mr Donat Brosseau, Clerk, duly authorized for the purposes of this contract,

—and—

MR PIERRE-HORACE BOIVIN, industrial consultant, having his domicile and residence at 85 Elgin St, Granby, hereinafter referred to as “Mr Boivin”;

THE ABOVE PARTIES AGREE AS FOLLOWS:

The City retains the professional services of Mr Boivin as an industrial consultant, who accepts on the following terms and conditions.

1. The said undertaking is for a period of one (1) year, from February 1, 1971 to January 31, 1972, with no provision for renewal by tacit agreement.

2. Mr Boivin’s remuneration is set as follows:

—$20,000 a year plus, as additional remuneration for each new business which constructs a plant:

(a) on land belonging to the City:

—$0.03 per square foot of the constructed plant area which is to be used for production, and of any additions made thereto;

—$0.01 per square foot of the constructed plant area which is to be used for warehousing, and of any additions made thereto;

no remuneration will be paid for the rental of existing buildings;

(b) on other land situated within the City limits:

—$0.015 per square foot of the constructed plant used for production, and of any additions thereto;

no remuneration will be paid for rentals or for warehousing;

the whole provided that these new plants are built as a result of representations made by the industrial consultant.

The said additional renumeration shall only be payable once construction has begun.

The said remuneration for additions shall be applicable to and payable for all construction erected after January 1, 1970.

No renumeration shall be payable, claimable or due after the departure of Mr Boivin or the termination of his employment, unless an agreement has previously been reached between the parties with respect to a particular company which has already decided officially to settle in Granby.

3. The parties agree that any dispute as to the interpretation of this contract and its practical implications with respect to the calculation of additional remuneration shall be submitted to a single arbitrator who is hereby designated as the municipal judge of the City of Granby. The parties agree in advance to accept any decision of the said arbitrator, which shall be final and shall have the force of law between the parties.

4. This contract cancels any previous agreement, written or verbal, which may have been made by the parties.

5. This contract is retroactive to February 1, 1971, the date of the resolution authorizing this contract.

The parties entirely subscribe thereto.

GRANBY, this twenty-fifth day of February, 1971.

3.3 This contract was subsequently renewed, and was still in force in 1973 and 1974.

3.4 In addition to this written contract, a verbal agreement was reached concerning the appellant’s car expenses when he used his car to travel outside the city limits on official business. He received $0.16 a mile. These expenses will be referred to hereinafter in these reasons for judgment as extra muros. The evidence showed that the appellant often used his car for such purposes as picking up visitors from abroad at the Dorval airport.

3.5 The matter of other expenses inherent in his employment (expenses related to receiving guests at home or at his residence in Magog and car expenses in Granby and Magog) was discussed before the contract was signed. It was agreed that the commissions provided for in paragraph 2 of the contract would fairly compensate for the said expenses. These expenses will be referred to hereinafter as intra muros.

When the appellant invited guests to dine at a restaurant, however, the City paid the bills. Two trips to Europe made by the appellant in 1973 in the performance of his duties were also paid for by the City.

3.6 The appellant did not present the City with bills for expenses incurred for intra muros receptions, since the commissions which he received were intended to compensate for these. It was in fact agreed that these expenses would be compensated for through the commissions rather than being paid for directly by the City; as the appellant pointed out, it would have been difficult and “politically” embarrassing to claim these expenses, because it was difficult to calculate the exact expenditures for each occasion.

3.7 Both parties admitted that the following commissions were earned and expenses claimed for the year in question:

3.8 The evidence showed that 94 industrial prospects visited Granby in 1973, and 62 visited in 1974.

3.9 The details concerning these prospects were filed as Exhibit A-5 and A-6. The Board cites the first prospect on the 1973 list as an example:

INTERNATIONAL RESEARCH ORGANIZATION

37 rue Tailbout, Paris 9e, France

Mr Berghgracht, President

Norbert Laplume, Manager

40,000 square foot plant—10 acres

Investment: $1,200,000

Lot near railway—110 jobs

Paper products

3.10 According to Mr Boivin, an average of three to five years was required between the first contract with the foreign industrialists and the actual investment.

3.11 According to Mr Boivin, when he entered into the contract with the City of Granby, the latter knew that he would receive guests in his home, and indeed was counting on this. The appellant had a family home in Granby and a summer residence in Magog. Both these residences were used to receive visitors and to provide sleeping accommodation.

3.12 The appellant filed a partial list of organization representatives received in 1974, either at home in Granby or his summer residence in Magog, as Exhibit A-7. Twenty-two visiting organizations were listed, including one party of 375 people and another of 72. The number of visitors usually ranged between 2 and 8 people, the average being 6.

The Board cites two cases taken from the list:

Case No 1: File No 404

Company: LANDES CANADA LTD, GERMANY

NAME: Mr Landes and party

Number of persons: 4

Number of days: 1

Expenses: $54

Case No 2: File No 336

Company: LES INDUSTRIES CANSACO LTEE, PARIS, FRANCE

Name: Mr M Berghgracht and associates

Number of persons: 5

Number of days: 3

Expenses: $135

3.13 The total expenses recorded on this partial list were $3,227.20.

3.14 Not all the appellant’s time was spent in meetings with visitors, however. According to the evidence, he spent approximately 70% of his working time at the office, if a working day is considered to be from 9 am to 5 pm.

3.15 Evidence was submitted that, as at September 1976, the industrial commissioner’s work since 1970 had brought the following results:

—visits by industrial groups: 580;

— new industries established: 89;

—new investment: $65,705,087;

—grants obtained for the investment: $22,365,00;

—jobs created: 4,682.

3.16 The appellant filed a letter from the respondent relating to expenses authorized in 1970 as Exhibit A-4. The respondent objected to the filing of this document. The Board allowed it to be filed, subject to the decision to be rendered during deliberation on the case. The decision appears in paragraph 4.4.

4. Act, Precedents and Comments

4.1 Act

The applicable section is paragraph 8(1 )(f) of the new Act, which reads as follows:

8. Deductions allowed.

(1) 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 or such part of the following amounts as may reasonably be regarded as applicable thereto:

(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 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 the employment (not exceeding the commissions or other similar amount 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 8(1)(l), not be deductible in computing the taxpayer’s income for the year if the employment were a business carried on by him.

4.2 Conditions to be met

4.2.1 The first condition to be met is that, in the years in question, the appellant must have been “employed ... in connection with the selling of property or negotiating of contracts for his employer”.

The respondent maintains that if the appellant’s mandate was to attract industries to settle in the territory of the City of Granby, this did not necessarily imply that the land acquired by the owners of the new plants was owned by the City of Granby. Consequently, the appellant did not meet the basic requirement of paragraph 8(1)(f). At first glance, this agreement appears rather conclusive.

A closer look at the contract of employment, however, reveals in paragraph 2 that certain commissions were to be paid for new plants constructed on “land belonging to the City”, while others were to be paid for new plants constructed on “land situated with the City limits”.

First of all, the Board feels that the appellant’s duties were related to the sale of goods (land). Secondly, it feels that even if none of the lots had belonged to the City of Granby, the appellant had nonetheless received a mandate from his employer to negotiate contracts in the larger sense of the word. Setting up a plant in a city necessarily implies a number of conditions which must be approved by the city. The appellant served as an intermediary. According to the evidence presented, an average of three to five years elapsed between the first contact and the actual investment. This required not only a lot of subsequent contacts and information, but also discussions and negotiations in which the City had an interest, even though it may not always have been directly involved.

4.2.2 Was the condition pursuant to which the appellant “under the contract of employment was required to pay his own expenses” was fulfilled?

As a result of the verbal contract proven, which was described in paragraphs 3.4 and 3.5, certain expenses (car expenses for trips outside the City, restaurant expenses and so on) were directly reimbursed upon presentation of vouchers. Intra muros expenses, however, such as those incurred in receiving visitors at his residences, car expenses when travelling in the city and so on, were reimbursed through the commissions he earned. In his written submissions, the respondent maintains that:

The taxpayer moreover repeatedly stated that the only reason he was given commissions was to help defray personal expenses he could not charge to the City. If he was reimbursed by his employer, he cannot claim that he was required to pay his own expenses.

The Board feels that if the respondent wanted to be logical in this reasoning, it would not include the commissions received in the calculation of the appellant’s income at all, since they were really no more than the reimbursement of expenses. The Board will not decide to this effect, however, since the verbal agreement extends the written contract, but cannot contradict it. The Board notes that the contract provided for remuneration to be paid partly through commissions on sales made or contracts negotiated (subparagraph 8(1 )(f)(iii)). The commissions must be included as part of the income. However, appellant as required to pay his own expenses in accordance with a verbal agreement (subparagraph 8(1 )(f)(i)) precisely because of the commissions, and in principle he should be allowed to subtract these expenses from his commissions.

4.2.3 Was the requirement described in subparagraph 8(1 )(f)(ii), to the effect that the appellant was “ordinarily required to carry on the duties of his employment away from his employer’s place of business” met by the appellant?

According to the evidence, the appellant spent 60 to 70% of the time normally worked by an employee, whose hours are 9 to 5, at the office.

However, nothing in the contract (Exhibit A-1) stated that the appellant was required to work from 9 to 5. On the contrary, the very nature of his work implied that his working hours could not be calculated in this manner. The evidence showed that the appellant’s evenings, weekends and time taken for the trips to Europe also had to be included in the calculation. An examination of Exhibit A-7 and of the testimony of the appellant convinced the Board that over 60% of the time devoted by the appellant to carrying out his mandate was spent “away from his employer’s place of business”.

4.2.4 Was the requirement of subparagraph 8(1)(f)(iv), that the appellant “was not in receipt of an allowance for travelling expenses . . . that was, by virtue of subparagraph 6(1 )(b)(v), not included in computing his income” met by the appellant?

To answer this question, subparagraph 6(1 )(b)(v) must be cited:

6. Amounts to be included as income from office or employment.

(1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

(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 other 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.

The evidence showed in this respect that the car expenses which were reimbursed were only for those trips outside the city, namely to Montreal (to pick up visitors at the airport, bring them back and so on). Other car expenses, for use of his car within the City of Granby or to take visitors to his summer residence in Magog and bring them back, were not paid. Although the evidence did not indicate the intra muros mileage, the appellant’s activities and the number of visitors were sufficient to show that it was substantial. It can therefore be concluded that the appellant’s car was used intra muros in proportion to these activities.

The commissions, however, were explicitly intended to compensate for these intra muros expenses related to his car and the receptions in his home. Moreover, a strict interpretation of subparagraphs 8(1)(f)(iv) and 6(1 )(b)(v) would seem to imply that since the appellant’s travelling expenses were paid, the condition stipulated was not met; and since all the conditions must be met for subparagraph 8(1)(f) to apply, this section does not apply in the case at bar.

In answer to the above reasoning it may be argued that since, according to the evidence, the commissions were intended to compensate solely for intra muros expenses, no travelling allowance was paid in this regard. Moreover, if one considers the activities of the appellant as a whole, intra and extra muros, one could conclude that the travelling allowance was not reasonable. It is clear that if only subparagraph 6(1)(b)(v) is taken into account, the allowance would be considered reasonable because it is not excessive. This subparagraph is in fact an exception to the first part of paragraph (b), which imposes a tax on reimbursed personal expenses. If the expenses were excessive—for example, one dollar a mile for the use of a car—the allowance would not be considered reasonable and would therefore be taxable. The Board does not see how the respondent can use this section to show that an allowance of, for example, two cents a mile is taxable because it is insufficient and therefore unreasonable.

Should the word “reasonable” in subparagraph 6(1 )(b)(v), seen in the light of subparagraph 8(1)(f)(v), that is, seen as an expense to be deducted and not only as income not to be taxed, not be interpreted in its fullest sense, that is, with both its meanings, as an excessive or an insufficient allowance? Is this not the normal interpretation? The Board believes so and does not see why such an interpretation should not be given to the word, although some earlier decisions, including one by the former Member of the Board F S W Fordham, Stanley Karp v MNR, [1968] Tax ABC 1018; 68 DTC 742, seem to indicate otherwise. Other decisions in cases similar to the one at bar do use this interpretation R Cossette v MNR, 13 Tax ABC 170; 55 DTC 365.

Each decision is naturally dependent on the evidence as to whether the allowance paid in accordance with subparagraph 6(1)(b)(v) is reasonable or not. In terms of activities intra and extra muros, is it reasonable for only extra muros expenses to be paid when a large proportion of the car expenses are the result of intra muros activities? The Board does not believe so.

In terms of the intra muros activities only, no allowance was paid other than the commissions provided for in the contract—commissions provided explicitly to compensate for intra muros activities, according to the evidence. Since the said commissions must be included in the appellant’s income, it is only natural that the intra muros expenses be deducted from such income.

The Board feels that this interpretation of the wording of the text is consistent with its usual meaning. Where tax legislation is interpreted in a restrictive manner, the usual meaning of words must not be excluded.

4.3 Commissions, Expenses and Vouchers

The last condition involves determining whether the expenses incurred were for the purpose of earning income and whether they exceeded the commissions received. According to the evidence submitted (paragraph 3.7 of the Facts), the commissions and expenses were:

No figures were given to show what proportion of the $3,500 and $5,500 claimed was for car expenses.

No figures were submitted with respect to expenses other than the partial list (Exhibit A-7) showing expenses for receptions in 1974, in the amount of $3,227 (paragraph 3.12 and 3.13 of the Facts). In fact, on other supporting documents were submitted to the Board with respect to expenses.

It is true that the Act does not require supporting documents as such. Nevertheless, in matters of taxation the principles, methods and practices of business and accounting must be used as the bases for interpretation, unless the case is specifically provided against the Act, Royal Trust Co v MNR, [1957] CTC 32; 57 DTC 1055. The fact that vouchers are required wherever possible to justify the payment of expenses is a well-known accounting principle.

The Board feels that in practice it would be impossible to produce vouchers for expenses related to receiving, and providing meals and sleeping accommodation for, visitors in the appellant’s residences. How can one distinguish between purchases made exclusively for the family and those relating to guests? The fact of entertaining numerous guests throughout the year also tends to lead to other expenses for home improvements, painting, new carpeting and so on. How can these expenses be calculated? Clearly, it was partly because of the problems involved in producing such vouchers that the commissions were stipulated in the contract.

4.4 Decision on the Objection to Exhibit A-4

As explained in paragraph 3.16 of the Facts, the appellant filed a document sent by the respondent relating to expenses in 1971 as Exhibit A-4. The respondent objected to this exhibit, arguing that it was not relevant to 1973 and 1974. The respondent cited two recent decisions, one by the Supreme Court of Canada, Cam Gard Supply Limited v MNR, [1977] CTC 143; 77 DTC 5134, and the other by the Federal Court of Canada, William A Gibbon v Her Majesty the Queen, [1977] CTC 334; 77 DTC 5193. Moreover, the appellant seemed to rely on this exhibit to show that supporting documents were not required, since it related to an agreement between the respondent and the appellant.

The Board examined the two decisions mentioned above, in which it was held that action by the Department of National Revenue in one year could not bind it for other years. The appellants had pleaded estoppel against the Crown. The fact that the department had allowed maintenance payments to be deducted one year, even though they were not the result of a judgment or written agreement, did not bind the department for the following years.

Exhibit A-4 is a document which was attached to the notice of assessment for the 1970 taxation year. It contains the following sentence: “Your entertainment costs have been allowed in the amount of $3,500, the maximum amount allowable on the basis of the information provided.”

The Board does not feel that this statement was an understanding for subsequent years. The respondent is in no way bound by this document. The Board feels that the respondent is not bound by the fact that in 1970, 1971 and 1972 he considered the appellant’s expenses for receiving guests at his residence as entertainment costs. The respondent may dispute the nature of these expenses in subsequent years.

4.5 For the years in question, the respondent held that the expenses related to receiving guests were not incurred to earn income, but were personal expenses or, at the most, preliminary expenses which would enable the appellant to be in a position to earn income. Alternatively, it might be a capital expenditure for goodwill. The respondent cited No 337 v MNR, [1957] CTC 384; 57 DTC 20, in which the appellant claimed $1,570 as entertainment expenses. The court concluded that the expenses were not entertainment expenses, but did not state what the nature of the expenses really was. The judgment simply stated that they were preliminary. Several cases were cited to support the decision. In one case, the expenses related to a trip to Europe to try to obtain a shipping agency and borrow money, Knud Birch Schioler v MNR, 2 Tax ABC 211; 50 DTC 316. In another case, a fire insurance company went bankrupt, and the insurance agent paid his clients’ premiums to another fire insurance company Raymond Hing Leong v MNR, 5 Tax ABC 177; 51 DTC 407. Both these cases, like many others, involved the protection of goodwill or an attempt to obtain assets, such as the shipping agency. They were considered capital expenditures.

The respondent also cited Maxwell Raber v MNR, 10 Tax ABC 202; 54 DTC 170. In this case, unsupported expenditures by an agent for meals, gifts, drinks, hockey, football and theatre tickets for customers or prospective customers were considered capital expenditures for purposes of goodwill. It should be remembered that this judgment was written in 1954. The courts have long since moved beyond this point of view.

In this case under consideration, I feel that an industrial consultant should not be considered in the same way as an ordinary salesman of goods or an insurance agent, even though subparagraph 8(1 )(f) also applies to such persons.

Negotiating contracts, most of the time with strangers, for millions of dollars worth of investments, cannot be done in a matter of weeks. The evidence showed that these negotiations may take an average of three to five years to finalize. It is clear that each customer must be looked upon as a special case. When an individual’s territory covers Europe and America, there is really no question of building up goodwill. Each client must be convinced that it would be to his financial advantage to build his plant in Granby. No one builds a million dollar plant in the same way that he buys insurance or a car. The first is based solely on financial interests, while the others can to a great extent be based on the confidence one has in the salesman.

The respondent also claimed that the appellant’s expenses at his residences were personal expenses. He argued that in fact the meetings were more social gatherings than anything else. In addition, these expenses, which could have been charged directly to the City, were paid by means of commissions because they were “politically” embarrassing (paragraph 3.6 of the Facts).

If these expenses were politically embarrassing, it was because they were personal expenses, the respondent concluded; and if they were considered personal with regard to the City, they were also personal with regard to calculating income under the Income Tax Act.

The fact of producing bills for receptions at one’s private residence is also a touchy matter from a psychological viewpoint. These bills are in fact the type always likely to be brought up at municipal council meetings and be subject to comments from taxpayers, even though they are part of the individual’s work and help to bring millions of dollars of investments into the town. It is a well-known fact, to anyone who has in any way lived close to and observed political life, and especially municipal politics, that pettiness and meanness can be very common indeed. The Board understands why the appellant can say it was embarrasing, without this implying that the expenses were personal.

On the contrary, the Board is of the opinion that the expenditures were made to earn income.

4.6 The respondent refused to allow expenses of $3,500 (1973) and $5,500 (1974). As was stated earlier, supporting documents are in practice impossible to obtain. The partial list included as Exhibit A-7 for 1974, honestly estimated the expenses related to receiving 22 organizations at $3,227. Moreover, according to Exhibits A-5 and A-6, 62 organizations visited Granby in 1974. No evidence was presented to show that receptions at the appellant’s residence were held for each of these organizations. It was simply stated that the list of 22 organizations was a partial list. That leaves 40 organizations. No evidence was presented to indicate what proportion of these remaining organizations were received at the appellant’s residence. The Board feels that the evidence is not sufficiently complete. It does, however, consider it to be just and reasonable that $5,000 be allowed on the $4,800. Moreover if it takes into account intra muros car expenses, in- eluding depreciation, the Board must allow the entire sum of $5,500 claimed.

As for 1973, the Board cannot allow more than the commissions received, that is, $3,035.70, because paragraph 8(1)(f) authorizes expenses only to a maximum of the amount of commissions received.

The Board allows the entire $3,035.70 claimed, even though it does not have a list of the visiting organizations which were received in 1973, as it does for 1974. It relies on the fact that in 1973, 94 organizations visited Granby and the cost of the receptions and car expenses must easily have totalled $3,035.70. Even though the Board is convinced that the expenses were incurred and therefore allows them, it feels that a complete account of receptions given and of intra muros car mileage would facilitate the evaluation of expenses.

5. Conclusion

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

Appeal allowed in part.