Guy Duchesne v. Minister of National Revenue, [1978] CTC 2197, 78 DTC 1156

Guy Tremblay [TRANSLATION]:—The case at bar was heard at Quebec City on May 5, 1977.

1. Summary

Meal expenses as well as travel and entertainment allowances of the order of $3,000 for each of the years 1973 and 1974 were disallowed by the respondent in calculating the income of the appellant, who is a real estate agent. It must be determined whether these expenses should be accepted in whole or in part.

2. Burden of Proof

The appellant has the burden of showing that the respondent’s assessment is incorrect. This burden of proof is derived not from a particular section of the Income Tax Act but from a number of judicial decisions, one of which is the judgment delivered by the Supreme Court of Canada in R W 8 Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.1. In 1973 and 1974, the appellant was a real estate agent and worked in this capacity for the Quebec Trust Company.

3.2. The appellant’s job consisted partly in finding buyers for properties of which the description and the owner’s name were provided by the employer. Another part of the appellant’s job was to obtain authorization to sell properties and find buyers to buy them.

3.3. His income consisted solely of a commission, which was 50% of the commission received by his employer on sales of real estate.

3.4. On the subject of supporting documents, the appellant maintained that in practice it is easy to forget to ask for receipts when they can be obtained, and sometimes they are impossible to obtain, especially for entertainment expenses.

3.5. The appellant maintained: that he submitted all the supporting documents he possessed to the respondent’s employees. The appellant maintained that when he tried to consult them afterwards, the respondent’s agents told him that they could not find the documents.

3.6. Ninety per cent of the appellant’s work was done inside the Province of Quebec and 10% outside Quebec. Inside Quebec, most of the sales were made in the metropolitan district of Quebec City.

3./. From another point of view, 20% of his time was spent outside of metropolitan Quebec, and during this time he spent periods of more than 12 hours a day outside of the city.

3.8. The appellant’s testimony also revealed that he included in the item “meals” not only meals taken alone but also meals which he ate with customers; the latter expenses could also be included under the item “entertainment expenses”.

3.9. The respondent did not call any witnesses, since the auditor who could have given evidence was absent.

3.10. In reassessing the two years under consideration, on March 10, 1976, the respondent disallowed expenses totalling $4,902.54 for 1973 and $4,480.30 for 1974.

3.11. After some negotiating, the respondent issued another reassessment on September 10, 1976, reducing the disallowed expenses to $3,427.62 for 1973 and $2,829.61 for 1974.

3.12. The following table shows in detail the expenses under dis- cussion:

3.13. The appellant filed an objection on March 17, 1976, and appealed to the Board on October 18, 1976.

4. Act and Comments

Paragraph 8(1)(f), subsections 8(2), 8(4) and section 67 of the new Act are the main sections bearing on the case at bar:

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,

ii) 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 the 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;

(2) General limitation.—Except as permitted by this section, no deductions shall be made in computing a taxpayer’s income for a taxation year from an office or employment.

(4) Meals.—An amount expended in respect of a meal consumed by an officer or employee shall not be included in computing the amount of a deduction under paragraph (1)(f) or (h) unless the meal was consumed during a period while he was required by his duties to be away, for a period of not less than twelve hours, from the municipality where the employer’s establishment to which he ordinarily reported for work was located and away from the metropolitan area, if there is one, where it was located.

67. General limitation re expenses.—In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.

Given the requirements of the Act, especially the requirements for deciding whether expenses are reasonable, the Board would very much have liked to see the taxpayer’s supporting documents. Moreover, the requirement of supporting documents also derives from a fundamental principle of sound accounting. Even if the Board does not always require each and every supporting document before allowing all expenses, it does require most of these receipts.

Since the burden of proof rests with the taxpayer, it was important that he should produce them during the inquiry.

According to the appellant, it was practically impossible for him to keep receipts to justify all the expenses claimed. However, he did produce a number of them. The evidence, which has not been contradicted, is to the effect that the said receipts were lost by the respondent’s employees. The Board cannot blame the appellant for not producing them during the inquiry. However, in order to decide the case at bar fairly, the Board should at least know what percentage of expenses were supported by the receipts supplied to the respondent. The appellant could not give this percentage because he did not have the receipts, and the respondent did not call any witnesses.

The Board recognizes that entertainment expenses are inherent in the appellant’s work as a real estate agent. Gross incomes of $28,937.47 in 1973 and $27,382.99 in 1974 presuppose hospitality, good relations, glasses of Scotch or whatever, dinners, games of golf and so On.

Furthermore, if the respondent’s employees did in fact allow a large part of the expenses, there must have been some receipts, and if they did not allow all the expenses, some receipts must have been MISSING.

Since the case is before the Board and it must pass judgment, is the Board entitled to refer to the judgment of the Department’s employees when they have not even presented their case and, according to evidence which has not been contradicted, they have lost the supporting receipts that the appellant was entitled and required to produce at the inquiry? The answer is no.

Considering all these facts, the Board cannot simply dismiss the appellant’s appeal. In this case it can and indeed must consider equity, which it may not always do in interpreting the Income Tax Act.

The Board believes it is just and reasonable to allow an overall amount of $1,000 in additional expenses for each of the years concerned. Thus, on the one hand, the appellant will realize that he has only himself to blame if expenses are disallowed when he has no supporting documents, and, on the other hand, the respondent will realize that a taxpayer is entitled to have returned to him the documents he has produced in order to discharge the burden of proof which rests on him, either before the Board or before a higher court.

5. Conclusion

Allows the appeal in part and refers the assessments under dispute back to the respondent for reassessment, allowing in the calculation of the appellant’s income an overall additional amount of $1,000 in expenses for each of the years 1973 and 1974.

Appeal allowed in part.