|
Docket: 2002-3511(IT)G |
|
BETWEEN: |
|
TOM WILLIAMS, |
|
Appellant, |
|
and |
|
|
|
HER MAJESTY THE QUEEN, |
|
Respondent. |
Appeals heard on October 13, 2004, at Vancouver, British Columbia, by
|
The Honourable Justice Campbell J. Miller |
|
|
|
|
|
Appearances: |
|
|
|
|
|
Counsel for the Appellant: |
Kim Hansen |
|
Counsel for the Respondent: |
Victor Caux |
JUDGMENT
The appeals from assessments of tax made under the Income Tax Act for the 1997 and 1998 taxation years are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that in computing income, the Appellant is entitled to deduct $76,864 in 1997 and $75,029 in 1998 pursuant to paragraphs 8(1)(h) and 8(1)(i) of the Act. Costs to the Appellant.
Signed at Ottawa, Canada, this 21st day of October, 2004.
|
"Campbell J. Miller" |
Miller J.
|
Citation: 2004TCC706 |
|
Date: 20041021 |
|
Docket: 2002-3511(IT)G |
|
BETWEEN: |
|
TOM WILLIAMS, |
|
Appellant, |
|
and |
|
|
|
HER MAJESTY THE QUEEN, |
|
Respondent. |
REASONS FOR JUDGMENT
Miller, J.
[1] Mr. Tom Williams received advances on commission income of $141,500 and $165,960 in 1997 and 1998, respectively. He contends that he is entitled to certain employment expenses for those years of $76,864 and $75,029, respectively. The position of the Minister of National Revenue (the Minister) is that these employment expenses do not qualify for deduction pursuant to paragraphs 8(1)(i) or 8(1)(h) of the Income Tax Act as the monies were not expended by Mr. Williams but by Mr. Williams' employer. The Parties considered, in the alternative, the application of paragraph 8(1)(f), but for the reasons that follow it will be unnecessary for me to address that provision. I find the employment expenses do qualify for deduction.
[2] No oral evidence was given, as the Parties relied upon the following brief Statement of Agreed Facts:
The Appellant and the Respondent, through their respective counsel, each admit the following facts for all purposes of this appeal:
1. At all material times during the years 1997 and 1998 the Appellant, Tom Williams, was employed by the securities brokerage firm Whalen, Beliveau as a senior technology analyst. There was no written employment agreement between the Appellant and Whalen, Beliveau.
2. The Appellant was employed by Whalen, Beliveau in their Vancouver, British Columbia office to perform due diligence, and help put together, broker and sell large scale high-tech securities offerings.
3. In performing these duties, the Appellant was ordinarily and regularly required to travel extensively, primarily in eastern Canada, California and the eastern United States of America.
4. Whalen, Beliveau and the Appellant agreed that he would be remunerated on a commission basis for the services which he provided to them. Whalen, Beliveau agreed that the Appellant would earn one-quarter of any gross commissions received by Whalen, Beliveau on any sales of securities for which the Appellant was responsible or directly involved.
5. Whalen, Beliveau also agreed to provide the Appellant with regular monthly monetary draws and other amounts requested by the Appellant from time to time as advances against the commissions to be earned by the Appellant. All such draws and other advances were treated by Whalen, Beliveau as employment income paid to the Appellant and the Appellant was provided with T-4 Statements of Employment Income in respect of such amounts by Whalen, Beliveau.
6. The Appellant was responsible for his own travel expenses and any other employment expenses which he incurred in performing his duties to earn the commissions including remuneration paid to his sales assistant. All of these expenses (the "Employment Expenses") were necessary for the Appellant to arrange and negotiate transactions for Whalen, Beliveau. The Appellant was not specifically required by the terms of his contract of employment to employ a sales assistant, but as a practical matter, it was not possible for the Appellant to perform the duties of his employment without a sales assistant.
7. The Appellant did not receive an allowance and was not reimbursed or entitled to be reimbursed for any of the Employment Expenses by Whalen, Beliveau.
8. Whalen, Beliveau paid the Employment Expenses on the Appellant's behalf and the moneys it paid for the Employment Expenses were treated as a debt owing to it by the Appellant. Whalen, Beliveau expected to recoup these moneys from future commissions earned by the Appellant.
9. The Appellant left the employ of Whalen, Beliveau in 1998. None of the transactions with which the Appellant was involved were ever completed. Consequently no commissions were ever earned by Whalen, Beliveau from the Appellant's services and no commissions or other amounts ever became payable to the Appellant other than the monthly draws and other advances previously paid to him by Whalen, Beliveau as advances against commissions to be earned by him.
10. Whalen, Beliveau demanded that the Appellant repay the moneys advanced to him to pay the Employment Expenses when he left their employ. Notwithstanding such demand, the Appellant has not repaid any amount in respect of these moneys to Whalen, Beliveau.
11. The Appellant and the Respondent agree that the statutory conditions stipulated by paragraphs 8(1)(f) and 8(1)(h) of the Income Tax Act for deductibility of the Employment Expenses have been met, except that the Respondent says that:
a) The Appellant did not pay or expend the Employment Expenses in the year or that the Appellant was reimbursed or entitled to be reimbursed for the payments by his employer, Whalen, Beliveau, because the Appellant has never repaid to Whalen, Beliveau the moneys advanced to pay the Employment Expenses; and
b) The Appellant is also not entitled to deduct the Employment Expenses under paragraph 8(1)(f) because he never actually received any commissions in the relevant years, but only advances on account of future commissions.
12. The Appellant claimed the Employment Expenses paid in 1997 and 1998 as deductions from income when he filed his returns of income for those taxation years.
13. The Minister of National Revenue reassessed the Appellant to tax in respect of his 1997 taxation year by Notice of Reassessment dated September 5, 2001 and assessed the Appellant to tax in respect of his 1998 taxation year by Notice of Assessment dated August 8, 2001. The 1997 reassessment and the 1998 assessment denied the deduction of the Employment Expenses.
14. The amounts of the Employment Expenses at issue in this appeal and to which the Appellant will be entitled if this appeal is allowed are:
|
Year |
Travel Expenses |
Sales Assistant Salary |
Total |
|
1997 |
$64,864 |
$12,000 |
$76,864 |
|
1998 |
$70,529 |
$4,500 |
$75,029 |
15. None of the Employment Expenses at issue in this appeal have been reported by the Appellant as income or otherwise included in his income.
[3] The T-4 slips for the 1997 and 1998 taxation years were the only other evidence. On these slips the $141,500 and $165,960 amounts were recorded as commission income.
[4] The relevant provisions of the Income Tax Act read as follows:
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:
...
(f) where the taxpayer was employed in the year in connection with the selling of property or negotiating of contracts for the taxpayer's employer, and
(i) under the contract of employment was required to pay the taxpayer's own expenses,
(ii) was ordinarily required to carry on the duties of the employment away from the 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 travel expenses in respect of the taxation year that was, by virtue of subparagraph 6(1)(b)(v), not included in computing the taxpayer's income,
amounts expended by the taxpayer in the year for the purpose of earning the income from the employment (not exceeding the commissions or other similar amounts referred to in subparagraph (iii) and received by the taxpayer in the year) to the extent that those amounts were not
(v) outlays, losses or replacements of capital or payments on account of capital, except as described in paragraph (j),
(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 the taxpayer, or
(vii) amounts the payment of which reduced the amount that would otherwise be included in computing the taxpayer's income for the year because of paragraph 6(1)(e);
...
(h) where the taxpayer, in the year,
(i) was ordinarily required to carry on the duties of the office or employment away from the employer's place of business or in different places, and
(ii) was required under the contract of employment to pay the travel expenses incurred by the taxpayer in the performance of the duties of the office or employment,
amounts expended by the taxpayer in the year (other than motor vehicle expenses) for travelling in the course of the office or employment, except where the taxpayer
(iii) received an allowance for travel expenses that was, because of subparagraph 6(1)(b)(v), (vi) or (vii), not included in computing the taxpayer's income for the year, or
(iv) claims a deduction for the year under paragraph (e), (f) or (g);
(Emphasis added)
...
(i) amounts paid by the taxpayer in the year as
(i) ...
(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,
[5] Mr. Williams cannot rely on paragraph 8(1)(h) if he relies on paragraph 8(1)(f). For this reason, the Appellant's counsel, Mr. Hansen, presented his argument firstly relying on paragraphs 8(1)(h) and 8(1)(i), and only in the alternative turning to paragraph 8(1)(f).
[6] Dealing first with paragraph 8(1)(h), the only issue is whether the travel expenses were "amounts expended by" Mr. Williams.
[7] Both Parties addressed the definition of "expended", relying upon both Canadian and British cases[1] and upon Black's Law Dictionary. I found the Respondent's reference to the following comment from the case of Oram of particular interest:
It is perhaps a matter of first impression based on the impression that the word 'expenditure' makes on one, but I think that the whole group of words, 'expenditure', 'expended', 'expenses' and so on and so forth, in a revenue context, mean primarily money expenditure and, secondly, expenditure in money's worth, something which diminishes the total assets of the person making the expenditure, ...
[8] The Respondent maintains that Mr. Williams has yet to diminish his own assets - he has not paid anything out. All he has done has been to "incur" an obligation, an obligation to his employer; but it was his employer who actually paid out the money.
[9] The Appellant's position is that there is no question monies were expended in 1997 and 1998, and further that it was Mr. Williams who expended them. It is immaterial where Mr. Williams got the money to do so; from family, from a bank or from his employer. The fact is there was a cash outlay for travel expenses of $64,864 in 1997 and $70,529 in 1998. The Appellant argues there is no issue of accrued but unpaid expenses. The question is whose money was expended?
[10] The Respondent relies on Ryan v. Canada,[2] a decision of Justice Mogan. In Ryan, the taxpayer relied on the Ontario Legal Aid Plan to cover legal expenses. She attempted to deduct the legal expenses paid by OLAP. Mogan J. said the following:
9 ... It was paid by the Ontario Legal Aid Plan ("OLAP"). The Appellant states, however, that under the terms of her arrangement with OLAP, although her legal costs were paid by the plan, there is a provision that if a person obtains legal aid and owns property in Ontario, then OLAP can put a lien on the property for the amount that it expends on behalf of the person. Apparently, the amount paid out by OLAP becomes recoverable from that person if the property is sold or if the mortgage on the property is refinanced. The Appellant said that there is a lien on her property in favour of OLAP, and that she expects to continue to own her home but that the mortgage comes up for renewal in the year 2000. She expects that she will have to pay the plan sometime this year when she refinances her mortgage.
...
16 The Appellant admits that she did not pay the legal costs of $9,534. Her legal costs were paid by OLAP. She clearly has not paid any amount within the meaning of paragraph 18(1)(a). The question is whether she has incurred a liability? The Appellant's access to the Ontario Legal Aid Plan is part of what Canadians sometimes call "the social net". The lien placed on the Appellant's home by OLAP may not be evidence of an absolute liability. It may be evidence of only a conditional claim dependent upon the value of the home at the time of its sale.
17 I think the situation does differ significantly from that which would prevail if the Appellant had borrowed money from a bank to pay her legal costs. She would have a very real and immediate liability to the bank.
[11] Mr. Caux, counsel for the Respondent, quite properly referred me also to Nissim v. The Queen,[3] a decision of Associate Chief Justice Bowman, also dealing with the deductibility of legal expenses arising from payments by OLAP. Associate Chief Justice Bowman stated:
22 Based on the appellant's obvious credibility I am satisfied that the amounts claimed were incurred and were in fact paid. A substantial part of the amounts claimed in 1994 and 1995 were paid by The Ontario Legal Aid Plan and she owes the amounts to the plan which has put a lien on her house for that indebtedness.
23 It was argued that she did not pay the amounts. I am unable to accept this contention. She became liable for the legal fees. The Ontario Legal Aid Plan paid them on her behalf and continues to demand payment from her. The situation does not differ significantly from that which would prevail had she borrowed the money to pay the fees from the bank.
[12] Certainly Associate Chief Justice Bowman saw the similar situation more in the nature of a bank loan. Did Mr. Williams have a real and immediate liability, to use Justice Mogan's expression? The facts surrounding Mr. Williams' indebtedness, though not elaborate, are clear in a number of respects:
(i) he was responsible for his own travel expenses;
(ii) he did not receive an allowance for travel expenses;
(iii) he was not reimbursed or entitled to reimbursement;
(iv) Whalen, Beliveau paid the expenses on behalf of Mr. Williams;
(v) Whalen, Beliveau and Mr. Williams treated such monies as a debt owing by Mr.Williams to Whalen, Beliveau;
(vi) Whalen, Beliveau expected to recoup the monies from future commissions; and
(vii) Whalen, Beliveau demanded payment from Mr. Williams when he left their employ.
These facts support a finding of an immediate and absolute liability of Mr. Williams to Whalen, Beliveau every time monies were expended on travel expenses, in effect a finding that it was Mr. Williams' money being spent.
[13] Mr. Williams had agreed with Whalen, Beliveau that because they had control over monies which they both expected would be owed to Mr. Williams, Mr. Williams was authorizing them to pre-spend his money. But it goes further: if Whalen, Beliveau is not in a position of owing Mr. Williams money, it is open to them to simply demand that Mr. Williams pay, which is just what they did when he left their employ. I find this was not a contingent liability, but a liability payable on demand.
[14] It is not the exchange of physical cash or whose credit card was used to pay that determines who expended the money, but it is the legal relationships that are in play which must be examined. I will use an example of the purchase of an airline ticket to help clarify the legal relationships. Say Mr. Williams places an order with Air Canada for a $1,000 airline ticket. He advises Whalen, Beliveau of his order and Whalen, Beliveau either provides Mr. Williams with a credit card number to pay Air Canada, or contacts Air Canada directly to pay them. Air Canada receives payment and issues Mr. Williams a ticket. In accordance with its arrangement that travel costs are Mr. Williams' responsibility, Whalen, Beliveau records this $1,000 as a receivable from Mr. Williams. Mr. Williams acknowledges he is indebted to Whalen, Beliveau. Whalen, Beliveau demands payment.
[15] What are the legal relationships? Was the purchase of the ticket a contract between Mr. Williams and Air Canada or between Whalen, Beliveau and Air Canada? Was Air Canada paid at Mr. Williams' direction or was Mr. Williams issued the ticket at Whalen, Beliveau's directions? Who indeed entered the contract with Air Canada? Regrettably, I have little detailed evidence as to how these contracts came about, though I do know travel costs were to be Mr. Williams' responsibility. I also know Mr. Williams was the beneficiary of the travel arrangements. I find on balance that it was Mr. Williams who contracted with Air Canada: he would be the one obliged to make payment under that contract, and indeed payment was made.
[16] What is the legal relationship between Mr. Williams and Whalen, Beliveau: employer-employee certainly. But also, vis-à-vis the travel costs, there existed the relationship of debtor and creditor. Mr. Williams was obliged to reimburse Whalen, Beliveau on a demand basis for the costs of the Air Canada ticket. This is more than simply an employee advance only to be recouped from subsequent earnings. It was more in the nature of a demand loan. Because the funds or credit did not pass through Mr. Williams' hands on the way to Air Canada, does not negate the nature of this relationship. I find that Mr. Williams effectively made these payments.
[17] The Respondent is concerned that this interpretation somehow makes mockery of the cash versus accrual nature fundamental to the deduction of employment expenses. I disagree. It is the timing of the payment of the expenses that is critical. The employment expenses were paid in the pertinent year: there is no accrual. Otherwise, the situation is that the expenditures are deductible if Mr. Williams paid his debt on December 31 in the year, but not if he paid his debt on January 1 of the next year. That puts the timing issue on the inappropriate payment, the debt payment, as opposed to the expense payment.
[18] Mr. Williams has not yet paid his debt. That situation is addressed by the legislation, particularly subsection 6(15) of the Income Tax Act. This section provides that if Mr. Williams' debt is forgiven, such amount is a taxable employee benefit.
[19] I conclude that because Whalen, Beliveau, on Mr. Williams' behalf, paid the expenses which were Mr. Williams' responsibility and were incurred by Mr. Williams, with an immediate and real obligation of Mr. Williams to pay Whalen, Beliveau, that the amounts were expended by Mr. Williams for purposes of qualifying for the paragraph 8(1)(h) deduction. They were his expenses which he, in effect, borrowed funds to pay.
[20] I turn now to paragraph 8(1)(i), dealing with salary paid to an assistant. For similar reasoning as above, I find the payment was made by Mr. Williams. The only issue then is whether he was required to do so by his contract of employment. The Respondent relied on comments in the 1985 decision of Justice Sarchuk in Slawson v. M.N.R.[4] where he indicated:
Dealing firstly with section 8(1)(f)(i), (and I will paraphrase), certain expenses are deductible (by the taxpayer) where they are incurred in connection with the selling of property for his employer and where under the contract of employment the employee was required to pay his own expenses. Careful consideration of the evidence leads me to conclude that it does not establish that the appellant was required by the contract of employment to pay certain expenses he incurred. That applies to both the extra or excess expenses relating to the institutional clients and to expenses incurred with respect to the retail clients. While the appellant may have been expected to do many of the things which led to his incurring these expenses, I cannot find on the evidence before me that he was required by his contract of employment to do so. It was suggested that failure to perform these functions and to bear the costs incidental thereto could have led to termination of his employment by either of the employers. The evidence, in my view, falls short of establishing this assertion. I cannot equate the expectations of the employer as described by both the appellant and by Mr. Morgan to a contractual requirement imposed upon the appellant, breach of which would have given a cause of action to the employer against him.
Subsequent to the Slawson case, both the Federal Court-Trial Division and the Federal Court of Appeal have addressed this issue. The following summary of Justice Joyal's in Gilling v. The Queen[5] sets out their positions:
The Verrier appeal was heard on February 20, 1990 and judgment reversing the trial judgment rendered on March 2, 1990 (A-1040-88) [90 DTC 6202]. Mahoney J.A., on behalf of the court, concluded that the trial judge had erred in law in his construction of section 8(1)(f). His Lordship relied on the case of Hoedel v. The Queen (1986),86 DTC 6535, where his brother Heald J.A. had found that an employer's failure to carry out a task which can result in an unfavourable assessment by his employer is pretty much evidence that the test in issue is a duty of employment. Similarly, Mahoney J.A. could find that the car salesman's failure to sell enough cars might result in his discharge was pretty much evidence that getting out of the showroom and hitting the road was a condition of employment.
The Court of Appeal in the two cases cited has also recognized that a specific requirement for an employee to pay his own expenses or to carry out duties outside of his normal place of business need not be patently expressed in a contract of employment. A Court, upon studying the experience of the relationship and all surrounding circumstances may well apply common sense and conclude that these are implied terms.
[21] The Parties agreed it was not possible for Mr. Williams to perform duties of employment without a sales assistant, and that Mr. Williams was responsible for remunerating a sales assistant. This may be sufficient to find that the provision of an assistant was an implied term of the contract. Yet, paragraph 8(1)(i) does not stipulate that an assistant must be "required by the contract of employment", but that the payment of salary to an assistant was required by the contract of employment. I find, based on the wording of the agreed Statement of Facts that Mr. Williams was responsible for this expenditure, and based on the fact that Whalen, Beliveau effectively loaned funds to Mr. Williams to cover this expense, that the contract of employment did require Mr. Williams to pay any assistant he employed. He therefore qualifies for the paragraph 8(1)(i) deduction.
[22] For these reasons, I allow the appeals and refer the matter back to the Minister of National Revenue for reassessment on the basis that Mr. Williams is entitled to deductions pursuant to paragraph 8(1)(h) of $64,864 and $70,529 in 1997 and 1998, respectively, and to deductions pursuant to paragraph 8(1)(i) of $12,000 and $4,500 in 1997 and 1998, respectively. Costs to the Appellant.
Signed at Ottawa, Canada, this 21st day of October, 2004.
|
"Campbell J. Miller" |
Miller J.
|
CITATION: |
2004TCC706 |
|
COURT FILE NO.: |
2002-3511(IT)G |
|
STYLE OF CAUSE: |
Tom Williams and Her Majesty the Queen |
|
PLACE OF HEARING: |
Vancouver, British Columbia |
|
DATE OF HEARING: |
October 13, 2004 |
|
REASONS FOR JUDGMENT BY: |
The Honourable Justice Campbell J. Miller |
|
DATE OF JUDGMENT: |
October 21, 2004 |
|
APPEARANCES: |
|
Counsel for the Appellant: |
Kim Hansen |
|
Counsel for the Respondent: |
Victor Caux |
|
COUNSEL OF RECORD: |
|
For the Appellant: |
|
Name: |
Kim Hansen |
|
Firm: |
Kim Hansen |
|
For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |