[OFFICIAL ENGLISH TRANSLATION]
2000-918(IT)G
BETWEEN:
EDWARD GHALI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on January 17, 2001, at Québec, Quebec, by
the Honourable Judge Alain Tardif
Appearances
Counsel for the Appellant: Jacques Renaud
Counsel for the Respondent: Anne-Marie Desgens
JUDGMENT
The appeal from the assessments made under the Income Tax Act for the 1994 and 1995 taxation years is dismissed, with costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 16th day of August 2001.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 14th day of February 2003.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20010816
Docket: 2000-918(IT)G
BETWEEN:
EDWARD GHALI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] The Appellant is appealing the reassessments dated December 29, 1999, relating to his 1994 and 1995 taxation years.
[2] The respondent contends in the first place that the amounts of $5,000 and $9,928 paid to the appellant by Université Laval in Québec in 1994 and 1995 constituted research grants within the meaning of paragraph 56(1)(o) of the Income Tax Act (the "Act"). In the second place, the respondent further contends that she was correct in disallowing the deduction of the amounts of $2,731 for 1994 and $5,084 for 1995.
[3] For his part, the appellant submits that the amounts of $5,000 and $9,928 received from Université Laval were not research grants within the meaning of paragraph 56(1)(o) of the Act, but were rather from an expense account for expenses incurred in the course of his employment with Université Laval.
[4] The appellant's Notice of Appeal provides a fairly good summary of the evidence submitted and it would therefore be useful to reproduce its contents:
[TRANSLATION]
1. This appeal concerns the appellant's 1994 and 1995 taxation years;
2. During the years covered by this appeal, the appellant had been, for over 25 years, an associate professor in the department of mining and metallurgical engineering of the faculty of science and engineering at Université Laval in Québec
3. During the taxation years at issue, the appellant's relations with his employer and his performance of his professional duties were governed by the collective agreement of December 4, 1992, between Université Laval and the Syndicat des professeurs et professeures de l'Université Laval (hereinafter the "Collective Agreement");
4. More precisely, the Collective Agreement governing the professional relations between Université Laval and the appellant describes a professor's university teaching and research functions, and article 2.1.01 contains the following provisions:
University consist of:
(1) teaching;
(2) research; and
(3) internal and external participation.
Teaching and research are an intrinsic part of and constitute the fundamental features of the performance of every professor's university functions.
5. The research referred to above is carried out, inter alia, in the context of sabbatical activities, such activities being defined according to each university discipline, in accordance with the provisions of Articles 3.4 and 4.8 of the Collective Agreement, which read as follows:
3.4 WORKLOAD
3.4.08 Workload assignments take into account the professor's employment regime, the university activities in which he or she is engaged, his or her career path from a teaching and research perspective, and planning considerations for the unit concerned.
4.8 SABBATICAL YEAR
General provisions
4.8.01 A sabbatical year releases professors from their regular activities. It permits them to devote themselves to research work or scientific, artistic or literary activities related to the performance of their university functions. Its primary purpose is to further the renewal and enrichment of their knowledge.
The work or activities in question are defined in a sabbatical plan.
4.8.07 The Employer shall reimburse professors for the additional expenses they incur in carrying out their sabbatical plans in accordance with the terms and conditions set out in Appendix G.
6. This was the context in which the appellant submitted his sabbatical plan to the Dean of the university's science and engineering faculty on September 27, 1993, detailing in particular the research and work to be carried out in Canada and abroad for the period from September 1, 1994, to August 31, 1995;
7. The plan for sabbatical activities was duly approved by Université Laval authorities, and the appellant was accordingly released from his regular teaching duties in order to devote himself to sabbatical activities related to the performance of his university functions. These sabbatical activities were spread out from September 1994 to August 1995;
8. More particularly, the objectives sought by the appellant in the context of his sabbatical activities were:
a. restructuring, reviewing and updating undergraduate and masters-level courses;
b. self-renewal in the area of research: producing a few scientific pieces for publication, designing new projects and making visits of an academic nature to a few research laboratories;
9. In this connection, the appellant visited a number of places across Canada and in Europe and Africa;
10. In accordance with the Collective Agreement and, more particularly, under the terms and conditions set out in Appendix G to that agreement, an amount of $14,222 was allocated to the appellant by the Vice-Rector, Human Resources, of Université Laval, to compensate him for his travel costs and expenses, living expenses and various other expenses incurred in carrying out his project, it being understood that such costs and expenses were to be supported by documents proving the applicability of Appendix G;
11. On his return from sabbatical, the appellant prepared and submitted to university authorities a report on his sabbatical explaining his research and what he had accomplished, and that report was duly approved by his employer's faculty authorities;
12. With regard to costs, the appellant's expenses were much higher than the amount granted by Université Laval under the Collective Agreement;
13. Moreover, the Respondent's auditor was able to examine all the supporting documents in question in the course of auditing the appellant's affairs and his records;
14. In view of the issuance by Université Laval of T4A Supplementary forms indicating, as other income, amounts of $5,000 in 1994 and $9,228 in 1995, which corresponded to the supplementary expenses reimbursed to the appellant under article 4.8.07 of the Collective Agreement, the appellant deducted from those amounts the various expenses actually incurred by him on his sabbatical;
15. In the spring of 1998, Revenue Canada audited Université Laval and its professors, including the appellant, in relation, inter alia, to the expenses incurred by the professors in the their sabbatical activities;
16. On April 8, 1998, as part of that audit, the Revenue Canada representative examined the various factual items concerning the appellant referred to in the preceding paragraphs and concluded that expenses totalling $2,391 for the 1994 taxation year and $4,477 for the 1995 taxation year had been improperly deducted by the appellant;
17. In notices of reassessment dated March 11, 1999, Revenue Canada accordingly modified its initial assessments of the appellant to take into account the expenses indicated above that had been disallowed;
18. By notice of objection with accompanying schedules filed on April 29, 1999, the appellant disputed the correctness of the reassessments of March 11, 1999;
19. In notices of reassessment dated December 29, 1999, Revenue Canada corrected certain accounting errors contained in the notices of reassessment of March 11, 1999, but essentially maintained its decision to tax the appellant on the amounts in question that he had received from his employer in the context of his sabbatical activities, and it also found that certain expenses, totalling $2,731 for the 1994 taxation year and $5,084 for the 1995 taxation year, had been improperly deducted by the appellant;
20. The appellant submits that Revenue Canada is mistaken in considering the amounts at issue received by him from his employer, Université Laval, in the context of his sabbatical activities, to be taxable as research grants.
[5] In responding to the Notice of Appeal, the respondent reiterated the facts on which the assessments appealed from were based. Those facts are set out in paragraph 18 of the Reply to the Notice of Appeal and read as follows:
[TRANSLATION]
(a) The appellant was a professor at Université Laval in Québec in 1994 and 1995;
(b) in 1994 and 1995, the appellant took sabbatical leave in the course of which he performed research work in Canada and abroad;
(c) Université Laval paid the appellant a research grant of $5,000 in 1994 and $9,228 in 1995, which corresponded to the amounts provided for in the collective agreement between Université Laval and the Syndicat des professeurs et professeures de l'Université Laval;
(d) Université Laval issued to the appellant T4A Supplementary forms for the above amounts for the 1994 and 1995 taxation years;
(e) the appellant's deduction of the amounts of $2,731 for 1994 and $5,084 for 1995 was disallowed by the Minister of National Revenue because these expenses were not supported or because they were not reasonable, or because they constituted personal or living expenses of the appellant;
(f) the amounts received by the appellant during the 1994 and 1995 taxation years constituted research grants, which are expressly referred to in paragraph 56(1)(o) of the Income Tax Act (the "Act");
(g) the Minister of National Revenue accordingly included in the appellant's income, pursuant to paragraph 56(1)(o) of the Act, the amounts of $2,731 for 1994 and $5,084 for 1995 since they represented the amount by which of the grant received for each of those two years exceeded the total of eligible expenses incurred by the appellant for those years.
[6] In his testimony, the appellant explained that he had agreed to become involved in administration as department head for two consecutive terms of three years each.
[7] After this work as department head, the appellant explained, administrative duties had become less exciting.
[8] Wishing to put an end to his administrative duties in order to return to teaching, his real professional priority, he decided to take advantage of his entitlement to a sabbatical year in order to better prepare for his return to teaching.
[9] His status as department head meant that he could submit his plan for a sabbatical year directly to the Rector. His plan was accepted.
[10] Upon acceptance, the file was automatically referred to a specific department and it was all processed in accordance with the collective agreement based on a very detailed table.
[11] After his plan was considered and accepted, the appellant was informed by letter that he was entitled to an amount of $14,222 (Exhibit A-4). This was an amount defined as an authorization for expenses related to the sabbatical year. The letter in question referred to the relevant articles of the collective agreement and provided a breakdown of the allowance to which the appellant was entitled.
[12] To obtain the amounts, the appellant had to produce acceptable supporting documentation, failing which he might be deprived of those amounts.
[13] A Université Laval representative explained to the Court the process followed upon approval of a sabbatical leave application. He essentially confirmed the appellant's explanations and added that failure to submit the appropriate supporting documentation meant that the individual concerned would have to reimburse Université Laval. He also indicated that the T4A forms (Exhibit A-7) with the notation "research grants" had been prepared in accordance with the instructions and recommendations issued by Revenu Québec at the end of the 1980s.
[14] On the one hand, the appellant contends that the amounts that were paid out by the University and with respect to which T4A forms were issued did not constitute research grants; on the other hand, he argues that the amounts thus received represented simply reimbursements for expenses incurred in his employment as a professor at Université Laval. In other words, the appellant maintained that no benefit whatsoever was involved and that he had never derived any benefit from receiving the two amounts in question, namely $5,000 for the 1994 taxation year and $9,228 for the 1995 taxation year.
[15] With regard to the first question, although the T4A forms were issued by the employer with the notation "research grants", this does not automatically mean that the amounts were research grants within the meaning of paragraph 56(1)(o) of the Act.
[16] Since Parliament has not defined what constitutes a research grant, it is theoretically possible for anyone to so characterize various outlays and thus subject the recipient to the provisions relating to receipt of such a grant in subsection 8(1) and paragraph 56(1)(o) of the Act.
[17] In the case at bar, Université Laval characterized the amounts of $5,000 for the 1994 taxation year and $9,228 for the 1995 taxation year as research grants. Why were these amounts so characterized?
[18] The answer was forthcoming from the representative of Université Laval who explained that it was an administrative decision, taken as a result of a recommendation by Revenu Québec auditors early in the 1980s.
[19] This explanation certainly does not provide a sufficient basis for concluding that research grants are in fact involved here, even though Parliament has not seen fit to define that term. A research grant is generally given following a process in which the payer is free to agree or refuse to make the grant.
[20] The dictionary Le petit Robert defines "subvention" ("grant") as follows:
[TRANSLATION]
A subsidy asked for or required by the government to meet an unexpected expense (loan, tax).
Assistance granted to a group, a person, by the government or an association (public or private).
The dictionary Le petit Larousse defines "subvention" as follows:
[TRANSLATION]
Financial aid paid by the government or a public entity to a private person with the aim of promoting an activity of general interest in which that person is engaged.
The Termium Plus electronic terminology bank cites the following definition of "subvention":
[TRANSLATION]
An amount paid occasionally or regularly to an individual or a group as assistance, aid or a subvention in payment for certain services, etc.
And the dictionary Le Robert électronique, defines "subvention" as follows:
[TRANSLATION]
1. Financial aid granted as assistance;
2. A subsidy asked for or required by the government to meet an unexpected expense (loan, tax . . .).
3. Assistance granted to (a group, person) by the government or a public or private association.
[21] I do not believe I am distorting reality in affirming that a grant is made following a process in which the grantor is free to either make or refuse the grant. The decision to make or refuse a grant is generally a unilateral process for the granting organization.
[22] Is such freedom to make or not to make a grant to be seen in the case at bar? Can it be said that Université Laval had the absolute power, the ability and the authority to refuse the appellant's application? I do not think so.
[23] In the case at bar, that is not at all how things were. First of all, the evidence showed that the appellant and Université Laval shared an employer-employee relationship. That relationship was governed by a collective agreement which set out all the conditions and details relating to sabbatical leave.
[24] To obtain such leave, the interested party-the appellant in this case-had to satisfy the specific terms and conditions laid down in the collective agreement. For its part, Université Laval had real obligations the nature of which involved neither the ability nor the privilege to refuse that leave without reason. The collective agreement governed the entire process well, and did so to such a degree that the parties were subject to its clearly stated provisions.
[25] The amounts that were granted to the appellant and with respect to which T4A forms were issued for the 1994 and 1995 taxation years were paid to him pursuant to Appendix G to the collective agreement that was binding on the parties.
[26] Again according to Appendix G, the amounts involved were amounts to which the appellant was entitled in order to cover the costs and expenses associated with various trips and to take care of living expenses and various other expenses necessary to carry out the plan that he had submitted.
[27] In order to receive the amounts provided for in the collective agreement, the appellant had to produce supporting documents.
[28] The facts in the case at bar are similar to those in Mitchell v. Canada, [1999] T.C.J. No. 302 (QL). Mitchell was a tenured professor at Acadia University in Wolfville, Nova Scotia. In 1991, his employer approved the research program that he had submitted in relation to an application for sabbatical leave. The taxpayer, Mitchell, accordingly took advantage of the sabbatical leave provided for in his collective agreement and received an amount of $7,936 to cover his expenses, again, under the collective agreement.
[29] Judge Sarchuk noted that there was an employer-employee relationship between Professor Mitchell and Acadia University, which relationship was governed by a collective agreement.
[30] The Court therefore took into consideration the fact that the collective agreement stipulated or set out the purpose of sabbatical leave, to which those who qualified had an entitlement. The University had to approve the applications if they were in conformity with the collective agreement.
[31] In Mitchell, the collective agreement provided for the employees' remuneration and indicated the salary scale obtaining during sabbatical leave.
[32] After analysing all the facts, Judge Sarchuk reached the conclusion that the amount received by Mitchell during his sabbatical constituted an actual component of the salary agreed to by the parties in the collective agreement.
[33] Judge Sarchuk wrote as follows:
15 In light of these provisions, it is not possible to consider that the amount received by him during the term of his sabbatical constituted anything other than the bargained-for portion of his salary. There is nothing in the relevant Articles of the Agreement to suggest that either the employer or the employee considered a sabbatical salary to be a grant or fellowship or any other form of remuneration.
(Emphasis added.)
[34] In paragraph 20 of the judgment, there is the following:
20 The Appellant's position is that not only was he required by the terms of employment to carry out research but that the only way it could be done in his chosen field was to travel and incur expenses. These expenses, he says, are deductible pursuant to the provisions of paragraph 8(1)(h) of the Act which provides that:
8(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:
. . .
(h) where the taxpayer, in the year,
(i) was ordinarily required to carry on the duties of his employment away from his employer's place of business or in different places, and
(ii) under the contract of employment was required to pay the travelling expenses incurred by him in the performance of the duties of his office or employment,
amounts expended by the taxpayer in the year (other than motor vehicle expenses) for travelling in the course of the taxpayer's employment, except where the taxpayer
(iii) received an allowance for travelling expenses that was by reason of subparagraph 6(1)(b)(v), (vi) or (vii), not included in computing the taxpayer's income for the year, or
(iv) claimed a deduction for the year under paragraph (e), (f) or (g).
Paragraph 23 contains the following:
23 . . . Sabbatical leave is intended to provide a teacher with an opportunity to be absent from his teaching post to pursue scholarly interests related to his discipline but leaves the choice as to what and where as well as the matter of costs to the person on leave. Although in a general way the sabbatical program is approved by a committee, that fact is not altered since such approval does not (and cannot) mandate or direct the manner in which a particular scholarly pursuit is to be carried out.
[35] Judge Sarchuk's conclusion is thus consistent with the appellant's own analysis of the amounts obtained. My understanding of the provisions of subsection 8(1) of the Act is that, in order to be able to deduct expenses, it is essential that they be expenses that the taxpayer is required to incur and be responsible for in the performance of his duties. The taxpayer in question does not have the option of avoiding the expenditures or not making them.
[36] In the case at bar, there was no obligation, even though the expenditures contributed to enhancing the appellant's knowledge for the greater good and benefit of his students. The collective agreement provided for sabbatical leave; it did not require it. Furthermore, it provided for various scenarios, from no stay abroad to a very long stay abroad, as well as a kind of mixed formula under which the beneficiary of the sabbatical leave divided his leave between time abroad and time in his home location.
[37] After devoting a number of years of his career to administration for the benefit of the same employer, Université Laval, it was perhaps normal and even desirable that the appellant would want to again immerse himself in the intellectual activity specific to his teaching before resuming his professorial duties. This does credit to the appellant and speaks most eloquently of his professionalism; however, it was a personal action freely chosen by him.
[38] If the appellant had decided to return to teaching immediately at the end of his second term as department head, he could have resumed his position as a professor without any penalty and with no consequences for his career in terms of the employer-employee relationship.
[39] I recognize that the appellant's action was appropriate, noble and enriching for himself, his future students and his employer.
[40] The sabbatical year and the activities it involved were not mandatory. The appellant was entirely free to carry out any number of intellectual projects during his extended absence from the University in order to enhance his knowledge in his various areas of expertise.
[41] The great freedom, the many possibilities and the absence of the employer's authority are elements that, most unfortunately, preclude the appellant from availing himself of the provisions of subsection 8(1) of the Act.
[42] The strictness of the provisions of subsection 8(1) of the Act and the restrictions those provisions entail undoubtedly played a major role in the characterization of the amounts paid by universities to their professors with respect to sabbatical years. Indeed, Parliament provided in paragraph 56(1)(o) that research grants were subject to special tax treatment. In this regard, it is important to bear in mind the following words of Judge Bowman in Scheinberg v. Canada, [1996] T.C.J. No. 1:
4. Paragraph 56(1)(o) requires that there be included in computing the income of a taxpayer for a taxation year the following:
(o) The amount, if any, by which any grant received by the taxpayer in the year to enable him to carry on research or any similar work exceeds the aggregate of expenses incurred by him in the year for the purpose of carrying on the work, other than
(i) personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by him while away from home in the course of carrying on the work,
(ii) expenses in respect of which he has been reimbursed, or
(iii) expenses that are otherwise deductible in computing his income for the year.
(Emphasis added.)
In paragraph 7 of his judgment, Judge Bowman expressed himself as follows:
A couple of observations might be appropriate at this point. Paragraph 56(1)(o) is not a provision that allows a deduction. It requires the inclusion in income of the amount of a research grant to the extent that it exceeds the expenses relating to the research. Where the expenses exceed the grant it does not authorize the deduction of the excess. If those expenses are to be deducted the authority, if it exists at all, must be found elsewhere. . . .
[43] In that case, Judge Bowman came to the conclusion that the amount in dispute did indeed constitute a research grant that was subject to paragraph 56(1)(o). Further on, Judge Bowman wrote as follows:
. . . they related not to any business that he carried on but to his employment with the university. Doing research and publishing are necessary concomitants of being a university professor and the cost of research and publishing -- at least during a year when the professor is employed, whether on sabbatical leave or teaching at the university and doing research on his or her field -- relates to the employment as a professor. Section 8, which regulates very precisely the deduction of employment costs appears not to cover such expenditures.
[44] In the case at bar, it was established on a preponderance of evidence that the amounts of $5,000 for the 1994 taxation year and $9,228 for the 1995 taxation year, with respect to which were issued T4As bearing the notation "research grants", were not research grants at all, but one of the benefits related to the employment that the appellant held with Université Laval, the whole in accordance with the collective agreement.
[45] On the issue of whether the expenditures made were deductible under paragraph 8(1)(h) of the Act, my answer is in the negative, having regard to the fact that the appellant had no obligation to make the expenditures. Certainly, the expenditures were justified by concerns of intellectual honesty and professionalism and by a profound sense of duty, but they were neither mandatory nor essential in order for the appellant to keep his employment.
[46] The appellant could resume his professorial position without sanction or penalty; moreover, the initiative as regards the sabbatical leave was taken by the appellant. The University never compelled him to take the leave; at least the evidence does not show that it did.
[47] For these reasons, the appeal is dismissed with costs.
Signed at Ottawa, Canada, this 16th day of August 2001.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 14th day of February 2003.
Erich Klein, Revisor