Date: 19991001
Docket: 98-1048-IT-I
BETWEEN:
ROGER ROUILLARD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] This appeal under the informal procedure concerns the 1996 taxation year. The point at issue is whether certain expenses that the appellant must incur in order to meet the requirements of his employment are deductible under section 8 of the Income Tax Act (the "Act").
[2] The facts on which the Minister of National Revenue (the "Minister") relied in making his assessment are set out in paragraph 7 of the Reply to the Notice of Appeal (the "Reply") as follows:
[TRANSLATION]
(a) the appellant is a serviceman;
(b) the appellant claimed he incurred the following expenses in the course of his employment during the year in issue:
(i) haircuts $182.00
(ii) cleaning and repairing
of military uniforms $140.00
$322.00
(c) the appellant claimed the sum of $322.00 as "other deductions" for the 1996 taxation year;
(d) the Minister disallowed the deduction of $322.00 because it was not deductible under section 8 of the Income Tax Act.
[3] The facts set out in the Notice of Appeal are as follows:
[TRANSLATION]
. . . Because of our status and the fact that we represent our country, we are required to be well turned out at all times. The Queen's Regulations and Orders for the Canadian Forces. Ref.: Canadian Forces Dress Manual, Chapter 2, Section 2, page 2-2-1, hair, beards, jewellery.
Personal Appearance
The deportment and appearance of all ranks, in uniform or when wearing civilian attire, shall on all occasions reflect credit on the CF and the individual. It is the responsibility and duty of all officers, warrant officers and non-commissioned officers to ensure that, by their vigilance, actions and example, the policies, regulations and instructions contained in the QR & Os are adhered to by all ranks.
My superiors required me to have my hair cut every two weeks and failure to do so might lead to disciplinary measures against me for conduct detrimental to good order and discipline.
[4] The appellant testified that he had to have his hair cut every two weeks in order to comply with the army's haircut requirement. As for clothing maintenance, the appellant received a non-taxable allowance of $17.05 a year, but said this allowance was not sufficient.
Analysis
[5] In Symes v. Canada, [1993] 4 S.C.R. 695, Iacobucci J. conducted a lengthy analysis of both personal and business expenses. While we are not concerned here with business income, it is nevertheless interesting to see whether the expense in question would be allowed as a business expense. It would appear that it would not, based on Iacobucci J.'s finding at page 739, and I quote:
. . . Traditionally, expenses that simply make the taxpayer available to the business are not considered business expenses since the taxpayer is expected to be available to the business as a quid pro quo for business income received. . . .
[6] I believe it would nevertheless be useful to cite lengthy excerpts from this decision to show that the distinction between a personal and a business expense is not always easy to determine and to establish the criteria that should be considered in ascertaining whether an expense is one of a personal or business nature.
(pages 726-27)
In Bowers v. Harding, the Hardings (a married couple) were employed in the operation of a school, and they received a joint salary for this employment. Mr. Harding engaged a household servant, according to the admitted facts of the case, in order "to enable his wife to have time to perform her duties as schoolmistress" (p. 23). Since the relevant tax legislation treated the couple's joint salary as Mr. Harding's alone, he sought to deduct the expense of the housekeeper upon the basis that it was incurred "wholly, exclusively, and necessarily in the performance of the duties of his . . . employment": Income Tax Act (U.K.), 16 & 17 Vict., c. 34, s. 51.
The attempted deduction was disallowed. In the eyes of the court, the Hardings were proposing a "but for" test for deductibility. In other words, they were arguing that "but for the housekeeper", the income could not have been earned. Baron Pollock rejected this test in the following terms (at p. 26):
When a man and his wife accept an office there are certain detriments as well as profits, but is in no sense an expenditure which enables them to earn the income in the sense of its being money expended upon goods, or in the payment of clerks, whereby a tradesman or a merchant is enabled to earn an income. . . . If we were to go into these questions with great nicety we must consider the district in which the person lives, the altitude at which he lives, the price of meat, and the character of the clothing that he would require, in many places indeed the character of the services and the wages paid to particular servants, and the style in which each person lives, before we could come to any conclusion.
I am aware that many people might question the applicability of the language and circumstances of Bowers v. Harding, supra. Indeed, there are many ways that it might be distinguished. First, it deals with income from employment, rather than with income from business. Second, the expense in question related to "housekeeping", rather than to child care (or, at least, if child care was involved, the case report fails to disclose so). Third, the expense was compared against the very strict requirement that it be made "wholly, exclusively and necessarily" for the purpose of earning the income, and no identical requirement arises on the facts of this case. Finally, perhaps, like the trial judge below, one could merely focus upon the fact that the case came from "another age" and from "another system" (p. 72).
. . .
(pages 732-33)
. . . Professor Brooks adopts this view, and suggests that the only true question under s. 18(1)(a) is: "was the expense incurred for a personal or business purpose?" (supra, at p. 253). Other commentators propose other tests which vary in the extent to which they borrow directly from the language of s. 18(1)(a). Examples include a "predominant purpose" test (C. F. L. Young, "Case Comment on Symes v. The Queen", [1991] Brit. Tax Rev. 105, at p. 105), or, more basically, a test which requires simply an income earning purpose: Krishna, The Fundamentals of Canadian Income Tax, supra, at pp. 365-66; E. C. Harris, Canadian Income Taxation (4th ed. 1986), at pp. 191-92.
. . .
(pages 737-39)
It may also be relevant to consider whether a particular expense would have been incurred if the taxpayer was not engaged in the pursuit of business income. Professor Brooks comments upon this consideration in the following terms (at p. 258):
If a person would have incurred a particular expense even if he or she had not been working, there is a strong inference that the expense has a personal purpose. For example, it is necessary in order to earn income from a business that a business person be fed, clothed and sheltered. However, since these are expenses that a person would incur even if not working, it can be assumed they are incurred for a personal purpose — to stay alive, covered, and out of the rain. These expenses do not increase significantly when one undertakes to earn income.
I recognize that in discussing food, clothing and shelter, I am adverting to a "but for" test opposite to the one discussed earlier. Here, the test suggests that "but for the gaining or producing of income, these expenses would still need to be incurred". I must acknowledge that because it is a "but for" test, it can be manipulated. One can argue, for example, that "but for work, the taxpayer would not still require expensive dress clothes". However, in most cases, the manipulation can be easily rejected. Continuing with the same example, one can conclude that the expense of clothing does "not increase significantly" (Brooks, supra, at p. 258) in tax terms when one upgrades a wardrobe. Alternatively, one can focus upon the change in clothing as a personal choice. Or, finally, considering that all psychic satisfactions represent a form of consumption within the ideal of a comprehensive tax base, one can focus upon the increased personal satisfaction associated with possessing a fine wardrobe.
Taking up this last point, I note that in a tax system which is at least partly geared toward the preservation of vertical and horizontal equities ("[h]orizontal equity merely requires that 'equals' be treated equally, with the term 'equals' referring to equality of ability to pay" and "vertical equity merely requires that the incidence of the tax burden should be more heavily borne by the rich than the poor": V. Krishna, "Perspectives on Tax Policy" in Essays on Canadian Taxation, supra, at pp. 5 and 6-7), one seeks to prevent deductions which represent personal consumption. To the extent that a taxpayer can make a lifestyle choice while maintaining the same capacity to gain or produce income, such choices tend to be seen as personal consumption decisions, and the resultant expenses as personal expenses. Professor Brooks gives the example of commuting expenses, which necessarily vary according to where one chooses to live (assuming, of course, that the taxpayer has some choice in this regard). In some cases, it may be helpful to analyze expenses in these terms.
Since I have commented upon the underlying concept of the "business need" above, it may also be helpful to discuss the factors relevant to expense classification in need-based terms. In particular, it may be helpful to resort to a "but for" test applied not to the expense but to the need which the expense meets. Would the need exist apart from the business? If a need exists even in the absence of business activity, and irrespective of whether the need was or might have been satisfied by an expenditure to a third party or by the opportunity cost of personal labour, then an expense to meet the need would traditionally be viewed as a personal expense. Expenses which can be identified in this way are expenses which are incurred by a taxpayer in order to relieve the taxpayer from personal duties and to make the taxpayer available to the business. Traditionally, expenses that simply make the taxpayer available to the business are not considered business expenses since the taxpayer is expected to be available to the business as a quid pro quo for business income received. . . .
[7] It may be seen from this analysis that the test—any expense that would not be incurred but for the business constitutes a business, not a personal expense—is a test that may be useful but is virtually impossible to apply in view of the variety of choices that individuals may make. I believe that what is stated to be the traditional test is the test which should be adopted because it applies equally to everyone. According to this test, if I interpret it correctly, any expense that must be made by a person in order to report for work will be considered a personal expense. Certain positions require that one be well dressed but each person determines the amount of money that person wishes to invest in clothing. Some positions require a neat personal appearance. Some individuals may be able to provide the kind of care needed to achieve this on their own, while others need the help of persons specializing in the field. Some live far from their place of work, while others live closer but their housing may be more expensive. As Baron Pollock wrote in Bowers v. Harding, (1891) 3 Tax Cas. 22 (Q.B.), in a passage cited in paragraph 6 of these reasons:
When a man and his wife accept an office there are certain detriments as well as profits, but is in no sense an expenditure which enables them to earn the income in the sense of its being money expended upon goods, or in the payment of clerks, whereby a tradesman or a merchant is enabled to earn an income. . . . If we were to go into these questions with great nicety we must consider the district in which the person lives, the altitude at which he lives, the price of meat, and the character of the clothing that he would require, in many places indeed the character of the services and the wages paid to particular servants, and the style in which each person lives, before we could come to any conclusion.
[8] I believe it must be concluded that all expenses incurred in order to report to one's normal place of work for one's usual duties are personal expenses incurred as a quid pro quo for remuneration. In the case of servicemen, their employment agreement requires them to be available for their work activities with regulation haircuts and well-maintained clothing. The salaries they receive are the quid pro quo for this availability to comply with the regulations. Thus, if the income in question were business income, it would appear to be certain that the appellant would not be entitled to the deduction because the expense would be of a personal nature.
[9] What we are dealing with here is employment income. In the case of employment income, deductions are provided for in section 8 of the Act. In Les principes de l'imposition au Canada, 1999, 12th ed., Wilson & Lafleur, Lord, Sasseville and Bruneau write, at page 108: [TRANSLATION] "Section 5 defines the basic rules for computing employment income. Sections 6 and 7 list the amounts that are to be included in computing income. Section 8 enumerates the deductions permitted in computing employment income." (My emphasis.)
[10] The authors state the following at page 135 of the same work, in the chapter entitled [TRANSLATION] "Deductions permitted in computing income from an office or employment": "The tax treatment of deductions from income from an office or employment is subject to very strict rules. Subsection 8(2) provides that no deduction is possible with the exception of those expressly permitted by the Act." (My emphasis.) Subsection 8(2) of the Act reads as follows:
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.
[11] The deductions permitted are enumerated in subsection 8(1) of the Act. The only provision that might possibly apply to the situation raised by the taxpayer in the instant appeal is that in subparagraph 8(1)(i)(iii) of the Act. Paragraph 8(1)(i) reads as follows:
(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:
. . .
(i) amounts paid by the taxpayer in the year as
(i) annual professional membership dues the payment of which was necessary to maintain a professional status recognized by statute,
(ii) office rent, or salary to an assistant or substitute, the payment of which by the officer or employee was required by the contract of employment,
(iii) the cost of supplies that were consumed directly in the performance of the duties of the office or employment and that the officer or employee was required by the contract of employment to supply and pay for,
(iv) annual dues to maintain membership in a trade union as defined
(A) by section 3 of the Canada Labour Code, or
(B) in any provincial statute providing for the investigation, conciliation or settlement of industrial disputes,
or to maintain membership in an association of public servants the primary object of which is to promote the improvement of the members' conditions of employment or work,
(v) annual dues that were, pursuant to the provisions of a collective agreement, retained by the taxpayer's employer from the taxpayer's remuneration and paid to a trade union or association designated in subparagraph (iv) of which the taxpayer was not a member,
(vi) dues to a parity or advisory committee or similar body, the payment of which was required under the laws of a province in respect of the employment for the year, and
(vii) dues to a professions board, the payment of which was required under the laws of a province,
to the extent that the taxpayer has not been reimbursed, and is not entitled to be reimbursed in respect thereof.
(My emphasis.)
[12] The leading case concerning this paragraph is Luks [No. 2] v. M.N.R., 58 DTC 1194. I refer to Thurlow J.'s comments at page 1198:
"Supplies" is a term the connotation of which may vary rather widely, according to the context in which it is used. In s. 11(10)(c) it is used in a context which is concerned with things which are consumed in the performance of the duties of employment. Many things may be consumed in the sense that they may be worn out or used up in the performance of duties of employment. The employer's plant or machinery may be worn out. The employee's clothing may be worn out. His tools may be worn out. And materials that go into the work, by whomsoever they may be provided, may be used up. "Supplies" is a word of narrower meaning than "things", and in this context does not embrace all things that may be consumed in performing the duties of employment, either in the sense of being worn out or used up. The line which separates what is included in it from what is not included may be difficult to define precisely but, in general, I think its natural meaning in this context is limited to materials that are used up in the performance of the duties of the employment. It obviously includes such items as gasoline for a blow torch but, in my opinion, it does not include the blow torch itself. The latter, as well as tools in general, falls within the category of equipment.
[13] Paragraphs 9 and 10 of Interpretation Bulletin IT-352R2 describe, based on various judicial decisions, the supplies that may be considered as being consumed directly in the performance of the duties of employment.
9. The word "supplies" as used in subparagraph 8(1)(i)(iii) is limited to materials that are used up directly in the performance of the duties of the employment. In addition to certain expenses related to a work space in a home, as explained in 5 above, supplies will usually include such items as
(a) the cost of gasoline and oil used in the operation of power saws owned by employees in woods operations;
(b) dynamite used by miners;
(c) bandages and medicines used by salaried doctors;
(d) telegrams, long-distance telephone calls and cellular telephone airtime that reasonably relate to the earning of employment income; and
(e) various stationery items (other than books) used by teachers, such as pens, pencils, paper clips and charts.
. . .
10. Supplies, as used in subparagraph 8(1)(i)(iii), will not include:
(a) the monthly basic service charge for a telephone line;
(b) amounts paid to connect or licence a cellular telephone;
(c) special clothing customarily worn or required to be worn by employees in the performance of their duties; and
(d) any types of tools which generally fall into the category of equipment.
[14] Subparagraph 8(1)(i)(iii) requires that supplies be consumed directly in the performance of the duties of the office or employment. Can haircuts be considered as supplies within the meaning of this subparagraph? As stated in the two previous paragraphs, it would appear that the term "supply" has always been interpreted, in the context of the said subparagraph, as meaning a physical object, not the provision of a service, a meaning which it may have in the Excise Tax Act (goods and services tax). I do not have to decide this matter, however, because there is another essential condition that must be met: the supplies must have been consumed directly in the performance of the duties of the office or employment. This requirement refers to the notion of personal expense by excluding it. A haircut is an expense incurred for the purpose of reporting to work, not performing one's work. It is not incurred directly in the performance of one's employment. It would be excluded as a personal expense in computing business income, and it is excluded from employment income because it is doubtful that haircuts and the maintenance of uniforms are supplies within the meaning of subparagraph 8(1)(i)(iii) of the Act and especially because, as in the case of a personal expense, they were not consumed directly in the performance of the duties of the appellant's employment.
[15] In Cuddie et al. v. The Queen, 98 DTC 1822, Judge Bell of this Court made the same finding with respect to haircuts.
[16] The deduction sought is not allowed under section 8 of the Act and the appeal is accordingly dismissed.
Signed at Ottawa, Canada, this 1st day of October 1999.
"Louise Lamarre Proulx"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]