Date: 20010523
Docket: 2000-3657-IT-I
BETWEEN:
DONNA BLAIR-LAWTON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Sarchuk J.T.C.C.
[1] These are appeals by Donna Blair-Lawton from assessments made by the Minister of National Revenue (the Minister) with respect to her 1995 and 1996 taxation years by virtue of which she was denied the deduction of certain employment expenses in excess of those allowed by the Minister pursuant to subsection 8(2) of the Income Tax Act (the Act).
[2] At all relevant times, the Appellant was employed as a registered nurse and resided in the City of Portage la Prairie, Manitoba. On March 17, 1994, she entered into an Employment Contract[1] (the Contract) with Silver Screen Video Ltd. carrying on business as Gone Hollywood Video (the Employer), of Burnaby, British Columbia, and commenced employment as the manager of the Gone Hollywood outlet in Portage la Prairie.
[3] Throughout the taxation years in issue, the Appellant was employed as manager of the Portage la Prairie outlet under the terms of the Contract. More specifically, the business conducted by her was the negotiating of contracts for movie video rentals as well as the selling of videos and confectionery items. Pursuant to the Contract, the Appellant was to receive a salary of $2,000 per month and was entitled to vacations in accordance with the applicable legislation. In addition, the Contract also required her to make an investment of $20,000 in Gone Hollywood Portage. This investment entitled her to receive a commission of 10% of the net profits of Gone Hollywood Portage as determined at the end of each calendar month, such net profits to be determined by its gross receipts less all monthly operating expenses.
[4] The Appellant claimed the following employment expenses upon filing her 1995 and 1996 and income tax returns:
|
1995 |
1996 |
|
|
Motor vehicle expenses |
$460 |
$472 |
|
Accounting and legal |
305 |
|
|
Postage and courier (supplies) |
1,532 |
1,905 |
|
Computer rental |
735 |
|
|
Telephone |
545 |
|
|
Telephone/fax/computer |
1,471 |
|
|
Labour (assistant wage) |
2,595 |
12,923 |
|
Interest |
717 |
|
|
Capital cost allowance |
78 |
|
|
Unknown |
419 |
|
|
Travel |
798 |
|
|
Accommodation |
673 |
|
|
Meals |
78 |
|
|
TOTAL |
$7,386 |
$18,320 |
Of the foregoing expenses, the Minister allowed a deduction for wages in the amounts of $2,595 and $8,112 in the 1995 and 1996 taxation years respectively to account for wages paid to arm's length third parties. The Minister did not allow the Appellant a deduction for wages of $4,800 paid to her 13-year old daughter and did not allow the deduction of any of the other employment expenses claimed.
[5] The Appellant's position is that by virtue of the fact that she and her husband had made a substantial investment in the business, she had become a partner/owner of the business and conducted herself accordingly. Both testified that the Employer encouraged their interest and initiative in the business. She conceded that the Employer had declined to reimburse her for some of the expenditures she incurred but says it knew that these expenditures were made to promote Gone Hollywood's business in Portage La Prairie. It is the Appellant's position that the expenses claimed fall within the scope of the provisions of paragraphs 8(1)(f), 8(1)(h.1) and 8(1)(i) and in particular, subparagraphs 8(1)(i)(ii) and 8(1)(i)(iii) of the Act and should be allowed.
[6] Relevant Statutory Provisions
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.1) 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 motor vehicle expenses incurred in the performance of the duties of the office or employment,
amounts expended by the taxpayer in the year in respect of motor vehicle expenses incurred for travelling in the course of the office or employment, except where the taxpayer
(iii) received an allowance for motor vehicle expenses that was, because of paragraph 6(1)(b), not included in computing the taxpayer's income for the year, or
(iv) claims a deduction for the year under paragraph (f);
(i) amounts paid by the taxpayer in the year as
...
(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,
...
to the extent that the taxpayer has not been reimbursed, and is not entitled to be reimbursed in respect thereof;
Analysis
[7] Amounts Paid as Salary to an Assistant: The Appellant testified that the Gone Hollywood outlet in Portage la Prairie was to be open seven days a week, generally for 12 to 14 hours per day and for that purpose, the employment Contract permitted her to hire and dismiss assistants as necessary to provide appropriate service to the customers. She said that although the Employer paid a variable number of hours directly to the assistants each month, she was nonetheless obligated to pay assistants for any hours she believed were necessary to fulfil the terms of the Contract. With specific reference to her daughter, the Appellant said that she was hired for part-time, after-school work in connection with the operation of the store and that the services performed by the daughter were similar to those of other employees.
[8] In the course of both her testimony and that of her husband, it became apparent that the Appellant did not have unfettered authority with respect to the number of employees hired and the amount of wages thereby payable. First, the Employer specified the number of hours the Appellant was required to work (as manager and a salaried employee) and as well, set the specific number of hours per month that it was prepared to pay with respect to part-time employees. According to the Appellant, this varied from 280 to 300 hours per month depending on the Employer's assessment of the bottom line figures. The practice with respect to these employees was that the Appellant faxed information to the Employer who then did the payroll, made all of the necessary statutory deductions and paid the employees by cheque. The Appellant agreed that the Employer did not require her to hire additional assistants over and above those specifically authorized but says that based on the fact that she had signed a contract and had invested their own money in the business, she "felt that we were part owners and so we could do that".
[9] The denial of the deduction of these amounts by the Minister is in accord with the provisions of subparagraphs 8(1)(i)(ii) and (iii). The Appellant's decision to do so unilaterally notwithstanding the limitations set by the Employer do not bring her within the scope of the phrase "was required by the contract of employment" to pay a salary to an assistant. It should also be noted that included in the amount disallowed in taxation year 1996 was the sum of $4,800 allegedly paid to the Appellant's daughter.[2] There was no T4 nor any documentation with respect to the hours the daughter is supposed to have worked. On the evidence before me, no other conclusion can be reached but that the Minister was correct in disallowing the expenses claimed under this head.
[10] Automobile Expenses: The Appellant contends that it was necessary for her to use an automobile for business purposes, more specifically for monthly trips to Winnipeg to select and pick up movies as well as to a wholesale warehouse to purchase confectioneries, drinks, etc. Initially the Portage outlet was stocked with some 2,500 videos which had been supplied by the Employer. The practice was to rotate the videos on a regular basis but as a result of some problems, an arrangement was made by the Employer with a distributor in Winnipeg to provide that service. The Appellant was not required to pay for these movies since the Employer had opened the account with the Winnipeg distributor. She said it was necessary to personally attend at the distributors in that it saved delays and shipping fees and enabled her to personally select the movies which she believed would be marketable in Portage la Prairie. She also contends that significant savings on other supplies were achieved by purchasing them in Winnipeg and thus justified the use of the automobile. The automobile was also needed to permit her to perform banking duties, picking up cleaning supplies and other general management obligations.
[11] With respect to the automobile expenses, the Appellant relies on the provisions of subsections 8(1)(f) and 8(1)(h.1). Each section requires the taxpayer to establish, inter alia, that in the year she was ordinarily required to carry on the duties of her employment away from the Employer's place of business or in different places. In my view, the Appellant has not established that fact. Making a monthly trip to Winnipeg to pick up supplies such as soft drinks, confectionery and videos (which had they been ordered by telephone would have been shipped by the distributor to the Appellant the cost of which would have been borne by the Employer) falls substantially short of meeting the "ordinarily required to carry on the duties of her employment away from the Employer's place of business".
[12] The Appellant's claim fails for another reason as well. The T2200 certificate for taxation year 1995 (which, I might add, was completed by the Appellant's husband and was at some later point of time signed by the Employer) indicates that the Appellant was not required to work away from her place of business or in different places. Insofar as taxation year 1996 is concerned no T2200 was filed. Paragraph 8(10) of the Act provides that an amount otherwise deductible under paragraphs 8(1)(f), (h) or (h.1) or subparagraphs 8(1)(i), (ii) and (iii) by a taxpayer shall not be deducted unless a prescribed form signed by the taxpayer's employer certifying that the conditions set out in that provision were met. The Appellant has failed to meet these requirements and accordingly, her claim for expenses under this head were properly disallowed by the Minister.
[13] Sales Expenses: The Appellant contends that on the basis that she was a part owner of the business, she purchased general office supplies and incurred sales expenses in order to promote the interests of Gone Hollywood. She testified that a computer was leased for the specific purpose of designing promotion posters, notices, etc. and obtained a cellular phone to ensure she was available for consultation by her assistants at all times when the store was open to the public. Items such as T-shirts for promotional advertising purposes were a further cost incurred by the Appellant. The Appellant takes the position that she was required to incur the foregoing expenses and was required to pay the cost of supplies that were consumed directly in the performance of her duties under the Contract.
[14] The expenses referred to in the foregoing paragraph do not include the cost of videos, confectioneries, soft drinks, etc. in respect of all of which she was reimbursed in full by the Employer.[3] Rather, in 1995 they included amounts paid for accounting and legal services as well as interest and capital cost allowance all of which are not in any sense deductible pursuant to the provisions of section 8 of the Act. The remaining amounts reflect the rental cost of a computer and of a cell phone and telephone service. The evidence discloses that the Employer had supplied the Portage outlet with a computer together with a specialized program for video rentals. Although the Appellant conceded that the computer kept track of the entire store operation, she argued that it did not have a word processor and accordingly, the computer that her husband had leased and which was kept at the residence was a deductible expense. In a letter written by the Appellant's accountant it was claimed that both the computer and the cell phone were used "100% for business". The Appellant, however, maintains that although both were used for business purposes, she kept no record whatsoever to permit her to provide the Court with a reasonable estimate. The Appellant has not established an entitlement to deduct the cost of these supplies on the basis that they were consumed directly in the performance of her duties and that she was required by Contract of Employment to supply and pay for them.
[15] With respect to the 1996 income tax return, three further expense items must be dealt with, specifically travel, accommodation and meals in the amounts of $798, $673 and $78, respectively. These expenses were incurred by the Appellant with respect to a trip taken to Vancouver to meet the president of Gone Hollywood. The Appellant initially maintained that she did incur these expenses, however, it became apparent as her testimony unfolded that both her and her husband's expenses were submitted to the Employer but she was only reimbursed for her fare. She concedes that her husband's cost of travel in the amount of $798 ought not to have been claimed as an employment expense in her return. With respect to the accommodation item, the Appellant testified that it related to a conference with the Employer and that the amount itself was "the cost of us staying. They paid for one night or two nights, I think, and then we stayed for a couple of other nights to look around". She does not dispute that she has been reimbursed for her expenses and that the amounts in issue were expended to have her husband accompany her. These amounts in my view were properly disallowed by the Minister.
[16] The Appellant relied on her accountant Wayne Klippenstein to review the business's books and to claim the appropriate deductions. I feel constrained to observe that some of the Appellant's difficulties in this appeal can clearly be attributed to him. Motor vehicle expenses claimed were "ball-park" estimates. The interest expense item claimed was conceded by the accountant to be "nil" and was "recorded in error". He also admitted that a T2200 submitted by him to Revenue Canada on behalf of the Appellant for the taxation year 1997, was a falsified document in that he had taken a xerox copy of the 1995 T2200 and altered it to make the period of employment read 1997 and by changing the date of the Employer's Declaration to March 1998.
[17] Unfortunately for the Appellant these circumstances do not alter the fact that the expenses claimed are not deductible. For the foregoing reasons, the Appellant's appeals are dismissed.
Signed at Ottawa, Canada, this 23rd day of May, 2001.
"A.A. Sarchuk"
J.T.C.C.