Tax Court of Canada Judgments

Date: 19981207

Docket: 97-2049-GST-I

BETWEEN:

THE CORPORATION OF THE CITY OF BRANTFORD,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Rip, J.T.C.C.

[1] The Corporation of the City of Brantford ("City") appeals from an assessment issued under Part IX of the Excise Tax Act (“Act”) in which the Minister of National Revenue (“Minister”) disallowed a rebate of Goods and Services Tax (“GST”) claimed by the appellant pursuant to section 259 of the Act in respect of allowances paid by the City to members of its Council, the Public Utilities Commission and the Board of Commissioners of Police for the period January 1, 1994 to February 29, 1996.

[2] Eligibility for the rebate is determined by Section 174 of the Act:[1] To be eligible for the rebate the City must pay the allowance to its employee for supplies all or substantially all of which are taxable supplies (other than zero-rated supplies) of property or services acquired in Canada. The Minister says that the City did not provide any evidence on how the allowance paid to its officers was to be used and that the allowance was not necessarily for supplies all or substantially all of which are taxable supplies. The Minister also questioned whether the allowance was reasonable.

[3] The evidence at trial consisted of the testimony of Mr. Gregory Beal, the Accounting Manager for the City and Mr. Michael Hancock, a City councillor during the relevant period and at trial, as well as the following facts agreed to by the parties:

1. The Appellant is an incorporated municipality governed by the Municipal Act, R.S.O. 1990, c.M. 45, as amended (the “Municipal Act”).

2. The Appellant is registered for GST under Part IX of the Act.

3. The Appellant is a “public service body” within the meaning ascribed under subsection 123(1) of the Act and is a “selected public service body” as that term is defined under subsection 259(1) of the Act.

4. The Appellant, in addition to carrying on commercial activities, also makes tax-exempt supplies. The Appellant is generally entitled to claim rebates in respect of GST it pays or is deemed to pay for goods and services acquired or deemed to be acquired for use in making tax-exempt supplies.

5. The amount in dispute in this appeal is $10,429.14, plus related penalty and interest, which represents the total amount of GST rebates claimed by the Appellant in respect of non-accountable allowances paid to municipal officers (the “Municipal Allowance”) in its returns for the reporting periods ended April 30,1995, August 31, 1995 and December 31, 1995. The Appellant claimed the rebates under sections 174 and 259 of the Act.

6. The Appellant filed its return for the reporting period ending April 30, 1995 on June 5, 1995. In this return, the Appellant claimed, for the first time, a total GST rebate of $9,021.35 in respect of the Municipal Allowances paid during the period from April 1, 1991 to April 30, 1995 inclusive. The Appellant had not claimed a rebate in respect of the Municipal Allowances in any of its previously filed GST returns.

7. In its return for the reporting period ending August 31, 1995, which was filed on September 28, 1995, the Appellant claimed a rebate of $702.52 in respect of the Municipal Allowances paid from May 1 to August 26, 1995.

8. In its return for the reporting period ending December 31, 1995, which was filed on January 30, 1996, the Appellant claimed a rebate of $705.26 in respect of the Municipal Allowances paid from September 1 to December 31, 1995.

9. The Appellant’s rebate claims in respect of the Municipal Allowances were disallowed by the Minister of National Revenue (the “Minister”) by Notice of Assessment dated May 30, 1996 and bearing the number 08GP0102780 (the “Assessment”).

10. The Appellant objected to the Assessment.

11. The Assessment was confirmed by the Minister.

12. During the period under appeal, the Appellant’s By-Law 223-88 was in force and provided for an annual honorarium to be paid to each member of City Council, the Public Utilities Commission and the Board of Commissioners of Police, one-third of which honorarium was stated in the by-law to be deemed to be for expenses incident to the discharge of their respective duties.

13. The Municipal Allowances equal one-third of the honorariums referred to in paragraph 12, above.

14. The Municipal Allowances were limited and predetermined amounts in that they were equal to one-third of the honorariums referred to in paragraph 12, above.

15. The Municipal Allowances were at the complete disposition of the recipient with no requirement for the recipient to provide documentation or receipts in relation to the spending thereof.

16. The recipients of the Municipal Allowances are employees within the meaning of the Act.

17. The Municipal Allowances are allowances for “expenses incident to the discharge of the [officers’] duties ... as [officers]” within subsection 81(3) of the Income Tax Act, R.S.C. 1985, c.1 (5th Supplement), as amended, and thus were properly excluded in calculating the recipient’s income for the purposes of that [statute].

18. The Appellant maintained documentation evidencing the recipients of the Municipal Allowances, the amount of the Municipal Allowances paid to each recipient, the total GST the Appellant claimed to be deemed by section 174 of the Act to have been paid in respect of the Municipal Allowances and the reporting period in which the Municipal Allowances were paid.

[4] Mr. Gregory Beal is responsible for the City’s payroll, accounting, and filing of GST returns, amongst other things. He is knowledgeable about how the City makes payment of honoraria to its officials. According to Mr. Beal, the City records an honorarium payment in each councillor’s payroll as to one-third as an allowance and two-thirds as salary. Revenue Canada T4 form, a Statement of Remuneration Paid, distributed to employees at the end of the taxation year, sets forth the taxpayer's taxable income in box 14. A note at the bottom of Mr. Hancock's T4 form for 1994, issued by the City, states that a municipal officer's expense allowance of $3,666.69 is not included in box 14. Mr. Hancock's taxable employment income (in box 14) is $7,331.31. The non -taxable allowance represents one-third of the total honorarium. Any pay cheque sent to the elected officers includes both the taxable and non-taxable portions of the honorarium less source deductions.

[5] Mr. Beal testified that when an elected officer incurs expenses for specific events outside the City, the person is reimbursed by the municipality “over and above” the honorarium. The amount of the reimbursement is supported by receipts.

[6] Mr. Beal estimated that 14 positions in the City are eligible for the non-taxable allowance. Receipts are not required for payment of the allowance. Mr. Beal stated, and Mr. Hancock confirmed, that the recipients of the allowance are not accountable to Council for how the money is used, nor are they directed as to its use.

[7] Michael Hancock is a councillor with the City. He is also self-employed in his own business. As councillor, Mr. Hancock is chair of several committees and sits on other committees. He has been reelected councillor in several elections since 1988. He also has been a member of the Police Commission.

[8] Mr. Hancock described his duties as a councillor as legislative, constituent and community development. A councillor typically incurs expenses. He must pay for office space. There are only two offices at City Hall for its ten councillors. He is called upon to interview people and he requires an office for that purpose. Therefore, he has converted a bedroom at his home to an office. Also, he says, he requires a telephone answering machine, cabinets, desk, chair, computer, pager and a cellular telephone. He paid for this equipment with the funds from the non-taxable allowance. He incurs long distance calls since he is consistently working outside of the City. He incurs car expenses, including gasoline and parking, plus “nickels and dimes all over the place”. Mr. Hancock is often called upon to make donations, attend functions and fund-raising activities in the municipality and part of the allowance is used to pay his way at these functions. As Police Commissioner, he incurs similar expenses. Mr. Hancock testified that the Police Commissioner or a member of the Police Commission is not entitled to expenses in addition to those he or she may receive as a councillor.

Submissions

[9] The respondent submits several reasons the appeal should be dismissed. Firstly, the City failed to keep records containing information to determine the amount of rebate to which the City may be entitled, contrary to subsection 286(1) of the Act. Persons claiming a rebate must meet the same stringent criteria as registrants who wish to obtain an input tax credit pursuant to sections 169 and 170 of the Act.[2]

[10] The respondent submits that section 174 is a deeming provision that has the effect of enabling an employer to claim an input tax credit under section 169 of the Act or a rebate under section 259 in respect of allowance paid for certain expenses, to the same extent as would have been the case had the employer incurred the expense directly.[3] Section 174 ensures parity of treatment between an employer who pays GST in respect of taxable supplies acquired directly and an employer who pays an allowance to an employee, who uses the allowance to acquire taxable supplies in relation to his employer's activities and to pay GST when he acquires the taxable supplies. In either case, the employer effectively paid GST in respect of the acquisition of the supplies.[4]

[11] Respondent's counsel concedes that an employee is not required to produce invoices or receipts to an employer to substantiate he or she has actually spent the amount of the allowance. The non-taxable portion of the honorarium is a true allowance. In The Queen v. Pascoe, 75 DTC 5427 at 5428, Pratte J., speaking for the Federal Court of Appeal, held that

...[a]n allowance is a limited predetermined sum of money paid to enable the recipient to provide for certain kinds of expense, its amount is predetermined in advance and, once paid, it is at the complete disposition of the recipient who is not required to account for it.

[12] Section 174 of the Act, respondent's counsel says, requires the employer to establish the nature and intent, or purpose, of the allowance; that is, that the allowance was for the acquisition by the employee of taxable supplies in relation to activities engaged in by the employer.

[13] A general statement in the City's by-law 223-88 to the effect that one-third of the employee's salary "shall be deemed to be for expenses incident to the discharge" of the officer's duties is insufficient for the purposes of demonstrating compliance with subparagraph 174(a)(iv) [or paragraph 174(b)] of the Act, counsel insists, and is not a record within the meaning of subsection 286(1) of the Act.The declared purpose of the allowance is too open-ended, the respondent suggests.

[14] In the respondent's view, in order for the employer to demonstrate compliance with subparagraph 174(a)(iv) [and paragraph 174(b)], it would be appropriate for the employer's books and records to provide evidence of the type of anticipated expense that the allowance was intended to cover when the employer set the allowance (i.e., the type of supply the employer intended the employee to acquire with the allowance), the tax status of that supply (i.e., taxable, zero-rated or exempt), and the method by which the amount of the allowance was determined or calculated by the employer.

[15] Respondent's counsel stated that it would be appropriate for the employer's books and records to reflect the fact that this information was communicated to the employee prior to, or at least at the time of, the actual payment of the allowance to the employee.

[16] By way of example, counsel suggests, an employer might have a written job description detailing an employee's duties of employment and a written policy in place pertaining to the calculation and payment of an allowance to the employee to enable the employee to carry out particular duties of employment (e.g. per diem meal allowance, travel allowance based on kilometres driven, taxi allowance based on estimated number and duration of trips, etc.). This would ensure that the allowance to the officer would be for supplies all or substantially all of which are taxable supplies (other than zero-valued supplies) of property acquired in Canada by the officer in relation to the City's activities; subparagraph 174(a)(iv).

[17] Respondent's position is that an allowance can be intended for a particular purpose, and further, that an employer may determine the amount of the allowance with reference to projected or average expenses or costs. This, counsel says, is recognized by the Courts in cases such as Pascoe, supra; Byers v. M.N.R., 85 DTC 129 (T.C.C.) at 131; A.G. Canada v. MacDonald, 94 DTC 6262 (F.C.A.) at 6264; North Waterloo Publishing Ltd. v. The Queen, 1998 CanRepNat 167 (F.C.A.) at p.2 para.1.

[18] Counsel says she finds support for this proposition since subsection 243(3) of the Ontario Municipal Act specifically permits the council of a municipality to pass a by-law providing for the payment of a specified amount or amounts "calculated according to a specified rate" in lieu of the amount of actual expenses incurred "in respect of items of expenditure specified in the by-law where the

specified amounts or rates, in the opinion of council, reasonably reflect the actual expenses that would be incurred."

[19] Respondent also claims that the amounts of the allowances would not be deductible if the appellant were a taxpayer under the Income Tax Act and the activity was a business since the amount of the allowance is not reasonable in the circumstances and therefore the deduction of the amount of the allowance would be prohibited: section 67 of the Income Tax Act.

[20] Respondent submits the allowances at issue were not reasonable because: a) there was no predetermined type of expense for which the allowances were paid; b) the amount of the allowances was not determined or calculated in reference to projected or estimated costs or expenses of any kind; and c) the allowance was arbitrarily set at one-third of what would otherwise be salary for every municipal officer, rather than being determined on an individual basis for each particular officer in contemplation of his or her particular circumstances. Therefore, assuming the appellant were a taxpayer for purposes of the Income Tax Act, the appellant would not be entitled to a deduction in respect of the allowances in computing income for the purposes of that Act. Accordingly, the appellant has also not met the requirements of paragraph 174(b) of the Act.

[21] Subsection 81(3) of the Income Tax Act provides that an elected officer of a municipality, a utilities board or similar body or a member of a particular school board ("public body") who is paid by that public body an allowance for "expenses incident to the discharge of the person's duties as such an officer or member" shall not include the amount of the allowance as income if the amount does not exceed one-half of the salary or other remuneration the person received

from the public body,[5] that is, one-third of the aggregate of the amount of the allowance and salary and other remuneration.

[22] One must bear in mind that an elected officer of a municipal council or of a municipal commission, or an elected member of a public or separate school board is not a typical employee.[6] Their employer as a public body and their relationship with that employer is not one of master and servant. These people are elected for a fixed term to represent the public. During their term of office, nobody supervises the work of these officers or tells them how their work ought to be performed.[7] Each such officer has his or her own way of representing constituents and of discharging the duties for which he or she has been elected.

The employer is not dealing with employees whom it can hire, supervise and fire in the normal course. An elected officer of the employer is not one to whom the employer gives a job description and a written policy pertaining to a statutory allowance to enable the employee to carry on that employee's duties of office. To put it in the words of the vernacular of today's youth: Revenue Canada should get real. An elected officer of a municipality or municipal commission or a member of a school board is a "person vested with some portion of the functions of government, to be exercised for the benefit of the public".[8] One must, in these circumstances, reasonably assume that the officers will observe the purpose of the allowance stated in the provincial statute authorizing the allowance and, in the appeal at bar, the City's by-law granting the allowance. These people must have discretion in their use of the allowance in order to discharge the duties of their

office to the best of their ability. This is not to say the municipal council or other public body cannot by by-law or resolution place further reasonable limits on

how the allowance may be spent so long as the elected officer spends the allowance in the discharge of his or her duties as such officer or member. In the case at bar, restrictions imposed by the Municipal Act, that the allowance is for expenses incident to the discharge of the officer's duties as an officer, is sufficient for the purpose of section 174 of the Act. There is no reason to suspect that in the normal course the allowance will not be spent for taxable supplies in Canada.

[23] The Income Tax Act provides, at subsection 81(3), that the allowance is "for expenses incident to the discharge of the person's duties as such an officer or member". Respondent's counsel referred me to subsection 243(3) of the Municipal Act for the proposition that a municipal council may pass a by-law providing for the payment of a specified amount or amounts calculated according to a specified rate in lieu of the actual amounts of expenses incurred. Counsel took comfort in subsection 243(3): the City's by-law 223-88 could have, and should have, followed the statutory provision. However, section 255[9] of the

Municipal Act provides that where an elected member of a municipal council or local board, by virtue of a by-law or resolution of council or the board, is paid a salary or other remuneration, one-third of the remuneration is "deemed to be for expenses incident to the discharge of [the elected officer's] duties as a member of the council or...board,” wording not dissimilar to subsection 81(3) of the Income Tax Act. Section 243 of the Municipal Act applies to all employees of a municipality regulated by that statute, both elected employees and those hired under a traditional master and servant relationship. Section 255 of the Municipal Act applies only to elected employees.

[24] The amount of this allowance was predetermined to enable the elected recipient to provide for expenses of discharging his or her duties, and it is at his or her discretion to spend it for the purpose intended: Pascoe, supra. For Revenue Canada to insist on more is an extra legal requirement. There is nothing open-ended in its provincial legislature authorizing the allowance.

[25] Both the Municipal Act and the City's by-law 223-88 provided that the allowance is for the elected officer's expenses incident to the discharge of his or her duties of office. This, in my view, is sufficient, in the particular nature of the true relationship between the employer and elected employee at bar, to satisfy a reasonable person that the allowance was for supplies all or substantially all of which are taxable supplies (other than zero-rated supplies) of property or service acquired in Canada by the officer in relation to the employer's activities. To any extent that any of the allowance was for the use of a motor vehicle, it is clear the use of the motor vehicle was in Canada and was related to the City's activities.

[26] I cannot find the amount of the allowance was not reasonable. The portion of the allowance to the total remuneration paid is authorized by the Municipal Act and is sanctioned by the Income Tax Act. Parliament and the Ontario legislature obviously were of the view that the allowance is proper and reasonable. The allowance depends on an elected officer's total remuneration from the municipality or other public body. Where Parliament and the provincial legislature both approve and exempt from tax a precise portion of an amount of remuneration paid to such an employee, the courts should be most reluctant to find that such amount may be an unreasonable expense to the employer.

[27] The appeal is allowed with costs.

Signed at Ottawa, Canada, this 7th day of December 1998.

"Gerald J. Rip"

J.T.C.C.

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