Judgments

Decision Information

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A-1040-88
Denis Verrier (Appellant)
v.
Her Majesty the Queen (Respondent)
INDEXED As: VERRIER v. CANADA (C.A.)
Court of Appeal, Mahoney, Hugessen and Mac- Guigan JJ.A.—Winnipeg, February 20; Ottawa, March 2, 1990.
Income tax — Income calculation — Deductions — Appeal from trial judgment disallowing expenses under Income Tax Act, s. 8(1)(f) — Commissioned automobile salesman deduct ing expenses for gas and oil for demonstrator and courtesy cars, parking charges incurred while conducting business, ad vertising and entertaining expenses and finders' fees — In addition to required shifts in showroom, time spent making contact with prospective customers — Trial Judge holding time away from dealership appellant's choice as responsible for method employed to make sales — Appeal allowed — Deductible expenses not required to relate to necessity for appellant's absence from showroom — S. 8(1)(h) dealing with travelling expenses — S. 8(4) indicating s. 8(1)(f) and (h) dealing with different allowable deductions — Interaction of s. 8(4) and 8(l )( . 1) meaning employee may be "ordinarily required" to carry on duties of employment away from employer's establishment to which "ordinarily reported" for work — As failure to sell enough cars grounds for discharge, and both employer and salesman recognizing necessity for conducting some work away from showroom, salesman ordi narily required to carry on duties of employment away from employer's place of business.
STATUTES AND REGULATIONS JUDICIALLY CONSIDERED
Federal Court Act, R.S.C., 1985, c. F-7, s. 52(b)(î). Income Tax Act, S.C. 1970-71-72, c. 63, ss. 8(1)(/), (h),(4), 177(b)(iv).
CASES JUDICIALLY CONSIDERED
APPLIED:
Hoedel (G.) v. The Queen, [ 1986] 2 C.T.C. 419; (1986), 86 DTC 6535; 72 N.R. 399 (F.C.A.).
REVERSED:
Verrier v. Canada, [1989] 2 F.C. 71; [1988] 2 C.T.C. 274; (1988), 88 DTC 6478; 23 F.T.R. 217 (T.D.).
COUNSEL:
C. M. Fien and C. E. Gorelick for appellant. Wilfrid Lefebvre, Q.C. and Sandra E. Phil- lips for respondent.
SOLICITORS:
Simkin, Gallagher, Winnipeg, for appellant.
Deputy Attorney General of Canada for respondent.
The following are the reasons for judgment rendered in English by
MAHONEY J.A.: This is an appeal from a reported decision of the Trial Division, [1989] 2 F.C. 71, which upheld the assessment of the appel lant's 1979 and 1980 income tax returns on the basis that he was not entitled to claim certain expenses pursuant to paragraph 8(1)(f) of the Income Tax Act [S.C. 1970-71-72, c. 63], which provides:
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 soun—, or such part of the following amounts as may reasonably be regarded as applicable thereto:
• • •
(J) 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 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(l)(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 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)(/), not be deductible in computing the taxpayer's income for the year if the employment were a business carried on by him.
There is no dispute that the appellant met the requirements of subparagraphs (iii) and (iv) nor that the amounts claimed did not fall within sub- paragraphs (v) and (vi). What is disputed is whether his contract of employment required him to pay his own expenses, as provided by subpara- graph (i), whether he was ordinarily required to carry on his duties away from his employer's place of business, as provided by subparagraph (ii), and whether the amounts claimed were expended for the purpose of earning his commission income. That the amounts were actually expended by him in the year claimed is not disputed.
All of the evidence was directed to 1980. It is agreed that the facts as to 1979 are not materially different. The appellant was a highly successful automobile salesman employed by a Winnipeg dealership. In 1980, sales of 269 vehicles at retail, 25 at wholesale and 175 fleet vehicles generated commissions of $65,977.32. He claimed $7,391.28 disputed expenses which the learned Trial Judge described [at pages 72-73] as including:
... gas and oil for his demonstrator automobile (provided free of charge to him by his employer) and for the two "courtesy" cars owned and provided by him to his customers for their use when their cars were being serviced. The expenses claimed also include parking charges incurred while conducting business, advertising carried out by the plaintiff on his own to seek customers for himself, entertainment expenses (coffee and meals) incurred for the benefit of customers or prospective customers, and commissions or finders' fees paid by him to persons referring customers to him where the referral resulted in a sale.
In the view of the matter taken by the learned Trial Judge, it was not necessary for him to deal expressly with whether the expenses claimed were amounts expended for the purpose of earning income or whether, under his contract of employ ment, the appellant was required to pay his own expenses. The undisputed evidence points only to affirmative answers to those questions.
There was no written contract of employment and, hence, no express condition readily at hand to demonstrate whether the appellant "was ordinarily required to carry on the duties of his employment away from his employer's place of business." The learned Trial Judge held that he was not. Some of the appellant's absences from the dealership, such as taking customers on test drives, taking sold vehicles elsewhere to get custom equipment installed and delivering their vehicles to purchas ers, were characterized as "errands" which did not amount to "duties ... away from his employer's place of business". As to the rest, he held [at page 78]:
However most of the activities relied on by the plaintiff involve means employed by him at his discretion to find cus tomers, to encourage them to buy cars from him, and to encourage them to come back to him for future purchases through various follow-up services offered by him. Such activi ties include making contact with "bird-dogs" (persons encouraged by the plaintiff to refer customers to him), the demonstration of vehicles at the home or place of business of clients, picking up from customers cars already purchased to take them in for servicing and leaving with the customer a "courtesy car" owned by the plaintiff, entertaining customers with coffee or meals, etc. It is clear from the evidence that none of these activities of the plaintiff were specifically required by his employer. What the employer was interested in was results, i.e. sales. The plaintiff was a very successful salesman. No doubt the particular means which he employed were important to that success. But they were means chosen by him and to the extent that they took him away from the dealership that was his choice.
That entire finding is said to be founded on an error in law in that the learned Trial Judge is said to have misunderstood the clear intention of para graph 8(1)(j). That misunderstanding is, it is said, manifest in his opinion that the provision is illogi cal, which he expressed more than once. At one point, he said [at pages 73-74]:
It is common ground that if [the requirements of subpara- graphs (i) and (ii)] are met, the expenses deductible under paragraph 8(1)W are not limited to those attributable to the fact that the plaintiff was ordinarily required to carry on the duties of his employment away from his employer's place of business. In other words, once he can show that he meets the requirements of [subparagraphs (i) and (ii)] then any expenses howsoever incurred for the purpose of earning income from his employment are deductible. The illogicality of this provision will be discussed later.
At another, he said [at page 74]:
It is difficult to give a purposive interpretation of the words "ordinarily required" within the context of subparagraph 8(1)(/) because the expenses deductible under that paragraph bear no necessary relationship to the fact that a taxpayer is "ordinarily required to carry on the duties of his employment away from his employer's place of business". Once he estab lishes that he is so required, he can then deduct any expenses incurred for the purpose of earning income from the employ ment. The logic of this provision is far from apparent. For example, there are no doubt many commission salesmen (e.g. of clothing or furniture) who are never obliged to leave their employer's place of business for work purposes but who may well incur promotional expenses such as sending greeting cards to, or buying coffee for, customers or prospective customers. They are unable to claim under this paragraph. Similarly, salaried persons cannot claim under it, even though in many employment situations it is thought advantageous for those in supervisory roles to entertain members of their staff, at their own expense.
The learned Trial Judge seems to have felt that, somehow, the deductible expenses contemplated ought to relate to the necessity of the appellant's absence from the showroom but that sort of expense is dealt with by paragraph 8(1)(h) and subsection 8(4) makes clear, if that be necessary, that paragraphs 8(1)(f) and (h) deal with two different allowable deductions.' The necessary interaction of subsection 8(4) and paragraph 8(1)(f) leads to the conclusion that an employee may be "ordinarily required" to carry on the duties of his employment away from the employ er's establishment to which he "ordinarily report ed" for work.
8. (1) In computing a taxpayer's income ... there may be deducted ...
(h) where the taxpayer, in the year,
(i) was ordinarily required to carry on the duties of his employment away from him employer's place of business or in different places,
(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, and
(iii) was not in receipt of an allowance for travelling expenses...
amounts expended by him in the year for travelling in the course of his employment;
• • •
(4) 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)(/) 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 employ er's establishment to which he ordinarily reported for work
(Continued on next page)
The criterion chosen by Parliament to differenti ate between commission salesmen entitled to deduct their expenses and those not so entitled, namely that those entitled be "ordinarily required" to carry on their duties away from their employer's establishment, may be arbitrary but it is clear and the provision must be applied according to its plain meaning, whatever one's view of its logic. The legislative objective is apparent. A taxpayer entire ly dependent on commissions directly related to sales volume and not entitled to claim his expenses from his employer is, in many respects relevant to the scheme of the Income Tax Act, more compa rable to a self-employed person than to a conven tional salaried employee. Such a taxpayer benefits from laying out the deductible expenses only because that results in increased income. Absent a 100% tax rate, allowance of the deduction does not fully compensate the taxpayer for the outlay; that compensation is realized in increased sales, pre cisely what the learned Trial Judge found to be the interest of the appellant's employer, and concomi tant increased commission income, the appellant's (and, one might have thought, the fisc's) interest.
I am of the opinion that the learned Trial Judge erred in law in his construction of paragraph 8(1)(f). It remains to consider whether that led him to the wrong result in the present case. There is no contradictory evidence. Most salesmen, but not the appellant, were required by the employer to take shifts manning the showroom: six hours a day Monday through Thursday, four hours on Friday and four hours on alternate Saturdays. When hiring a new salesman, the employer's evi dence was:
... initially we'd clarify with the individual that we had hours of on duty work with the dealership with the expectation though that certainly they being six hour shifts, that we were well aware that no salesperson could make a living working six hours a day and expect to do the job. The indication on our part at that stage would be to make sure that the salesperson would in fact cultivate their, you know, their own clientele, go out on their own, talk to friends, relations, acquaintances, continue on
(Continued from previous page)
was located and away from the metropolitan area, if there is
one, where it was located.
with their day's work when they were not on shift. [Transcript, Vol. II, p. 165,11. 13 to 24.]
As to his own understanding, the appellant was asked and answered:
Q. ... did Mr. Gillis ever tell you how many cars you had to sell or was [sic] to be expected to sell?
A. No. If you didn't sell enough cars, you were just dismissed from your job.
This Court had occasion, in Hoedel (G.) v. The Queen, [1986] 2 C.T.C. 419 (F.C.A.), to consider the term "ordinarily required to carry on the duties of his employment away from his employ er's place of business" as it is used in subpara- graph 8(1)(h)(i), and held, per Heald J.A. [at pages 422-423], that:
... if an employee's failure to carry out a task can result in an unfavourable assessment by his employer, it would seem to me that such a circumstance is compelling evidence that the task in issue is a duty of employment.
It would seem to me that if failure to sell enough cars would have resulted in the appellant's dis charge and if both employer and salesman recog nize that enough cars can only be sold if the salesman conducts some of his work away from the showroom, then the salesman is ordinarily required to carry on the duties of his employment away from his employer's place of business.
It follows that, in my opinion, the learned Trial Judge erred in concluding that the appellant was not entitled to claim the deduction of expenses under paragraph 8(1)(f) of the Income Tax Act in his 1979 and 1980 returns. I would allow the appeal with costs here and in the Trial Division and, pursuant to subparagraph 52(b)(i) of the Federal Court Act [R.S.C, 1985, c. F-7] and subparagraph 177(b)(iv) of the Income Tax Act, I would refer the appellant's returns for those years back to the Minister for reconsideration and reassessment.
HUGESSEN J.A.: I agree. MACGUIGAN J.A.: I agree.
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