[OFFICIAL ENGLISH TRANSLATION]
2000-5161(GST)I
BETWEEN:
TRI-BEC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on February 1, 2002, at Québec, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Agent for the Appellant: Gail Pilon
Counsel for the Respondent: Louis Cliche
JUDGMENT
The appeal from the assessment of goods and services tax made under the Excise Tax Act, notice of which is dated September 29, 2000, and bears number 204114, is allowed with respect to the allowance for the use of a motor vehicle in the case of Richard Hudon and the cancellation of the penalty.
The whole without costs in accordance with the attached Reasons for Judgment.
The appellant is entitled to no further relief.
Signed at Ottawa, Canada, this 7th day of March 2002.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Date: 20020307
Docket: 2000-5161(GST)I
BETWEEN:
TRI-BEC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] This is an appeal from a reassessment, notice of which bears number 204114 and is dated September 29, 2000, for the period from March 1, 1996, to February 28, 1999.
[2] The Minister of National Revenue (the "Minister") established that the appellant's net tax was $403,277.24, including a tax adjustment of $2,348.54, interest of $198.69 and penalties of $268.49. The tax adjustment stemmed from a difference between the goods and services tax (GST) collected and the tax reported in the amount of $540.50, and input tax credits ("ITCs") of $1,808.04 to which the appellant was purportedly not entitled. The credits were in respect of unqualified personal expenses and allowances for the use of a motor vehicle. In the case of allowances for the use of a motor vehicle, the appellant apparently paid fixed allowances for travelling expenses, allowances not calculated on the basis of the number of kilometres travelled.
[3] The appeal concerns the ITCs that were not allowed and the assessment of the penalty. It raises the following three points: (1) the expenses in respect of which the ITCs of $1,037.40 were disallowed because they were personal expenses were in fact used for entertaining clients and for advertising for the purpose of earning business income; there was apparently an increase in turnover. In addition, according to the notice of appeal, as a result of a Revenue Canada taxation audit, those expenses were the subject of discussions and were purportedly accepted by the Minister as business expenses; (2) the ITCs of $517.24 relating to the motor vehicle allowances granted were said to be denied because they were not reasonable; those allowances are granted to certain office employees for travel required in the performance of their duties, in particular for client hospitality activities, estimates, bids, site visits, collecting cheques, bank deposits, meetings with suppliers and so on; travel reports were apparently produced but rejected by the auditor; and (3) cancellation of the penalty of $268.49 is sought since, if an error was made in computing the net tax, it was a mere error, not an act of bad faith.
[4] The witness for the appellant party was Gail Pilon, the financial controller of the business. He is the secretary of the board of directors. The president of the appellant did not appear at the hearing. Mr. Pilon explained that it was he who had met the auditors at both levels.
[5] The appellant is a registrant for the purposes of the application of the Excise Tax Act (the "Act"). It operates a building contractor business specializing in ventilation, air conditioning, electrical work and heating.
[6] The personal expenses in respect of which the ITCs were disallowed mainly involve the purchase of bottles of wine, some clothing purchases and a few purchases made in drug stores near the residence of the appellant's president. Of the $1,037 amount that is in dispute, approximately $800 related to alcohol. Exhibit A-3 is the list of expenses that were not allowed for the purposes of the ITCs. Exhibit A-2 is a list of the businesses to which the appellant purportedly gave bottles of wine as gifts. According to Mr. Pilon, the appellant did not want to give the names of the individuals who received the gifts fearing that the Department might tax them.
[7] The witness filed, as Exhibit A-4, excerpts from the appellant's financial statements for the years from 1996 to 1999. The business's turnover increased from $3,400,000 to $6,000,000 over that period. The witness stated this to explain the significant number of gifts given by the business.
[8] The amount of the ITCs relating to the motor vehicle allowances is $517.24 and covers the 1996 and 1997 period. The witness stated that the business had paid employees who used their own vehicles a reasonable allowance for the performance of their duties described above. In his testimony, Mr. Pilon spoke of allowances of $50 or $75 a week. He explained that, at the end of the year, the employee prepared an annual statement of his kilometrage and that an adjustment was made if he had received too much. The witness filed the kilometrage reports prepared by the employees in question as Exhibit A-3.
[9] Albert Dubé, a financial management officer with the Quebec Ministère du Revenu, testified for the respondent party. Mr. Dubé explained that there is a departmental directive stating that, when a registrant pays fixed allowances not based on kilometrage, those amounts paid do not qualify for the input tax credit. However, allowances based strictly on kilometrage are eligible for the credit. He filed that directive as Exhibit I-1. It is GST Memorandum 400-3-11, more particularly paragraphs 12 to 17 of that memorandum, which read as follows:
General Treatment
12. Section 174 of the Act provides that where a person pays a reasonable allowance to an employee or a member of a partnership for the use of a motor vehicle in Canada, in relation to an activity engaged in by the person, that person shall be deemed to have received a taxable supply and to have paid tax equal to 7/107ths of the amount of the allowance at the time the allowance was paid.
Reasonable Allowances
13. Where a registrant pays a reasonable allowance to an employee or a member of a partnership for the use of a motor vehicle in Canada, and where no amount is included in computing the individual's income for income tax purposes, the registrant is deemed to have paid tax equal to 7/107ths of the amount of the reasonable allowance.
14. An individual is not eligible to claim an employee and partner rebate under section 253 of the Act, in respect of an allowance, when a registrant has claimed, or is entitled to claim a rebate or an ITC in respect of that allowance.
Unreasonable Allowances
15. Where a registrant pays an allowance that is required to be included in the income of the individual receiving the allowance for income tax purposes, the amount of tax deemed to have been paid by the registrant is equal to the tax fraction of the amount of the allowance that was not included in the individual's income.
16. For income tax purposes, a registrant will be deemed not to have paid tax in respect of an allowance when:
(a) the registrant pays an allowance to an individual for the use of a vehicle, and the measurement of the use of the vehicle is not based solely on the number of kilometres the vehicle is driven in connection with, or in the course of, employment;
(b) the individual receives an allowance in respect of the use of the vehicle and is reimbursed in whole, or in part, for expenses in respect of the use; or
(c) the allowance is included in the individual's income; or
(d) the vehicle is for use outside Canada.
17. Accordingly, a registrant is not eligible to claim an ITC or a rebate to the extent that the allowance is required to be included in the registrant's income for income tax purposes.
[10] Mr. Dubé stated that the allowances received could range from $200 to $300 a week or from $900 to $1,200 a month.
Arguments
[11] Counsel for the respondent argued that, under section 174 of the Act, if the transportation allowance granted to the employee is fixed and not based on kilometrage, that allowance is considered as salary. A business may not claim an input tax credit on salary. However, if an allowance is considered reasonable by the fact that it is paid on the basis of kilometrage, the business is deemed to have paid the tax for that service and may claim the related inputs. It is a fiction of the Act that the business is deemed to have paid the tax if the allowance is reasonable.
[12] Expenses are considered reasonable within the meaning of subparagraphs 6(1)(b)(v), (vi), (vii) or (vii.1) of the Income Tax Act. If they are considered reasonable within the meaning of the Income Tax Act, they need not be included in computing the worker's income. If they are considered unreasonable, they must be included in his income.
[13] Counsel for the respondent also argued that registrants wishing to claim inputs are obligated to have documentation to justify the amounts they have paid and the amounts they wish to claim. This obligation exists under the Input Tax Credit Information (GST/HST) Regulations for the purposes of section 169 of the Act. Counsel noted that the allowances paid under the various construction decrees have been allowed. Allowances paid regularly without regard to kilometrage have been disallowed.
[14] Counsel argued that the expenses in respect of which the ITCs were disallowed were personal. The onus was on the appellant to show the contrary, which it did not do when it refused to give the names or some of the names of the recipients.
[15] The appellant's agent stated that one employee was an estimator, another, a representative and yet another, a buyer. There was also his own case. He used his car, inter alia, to make bank deposits, see customers to sign releases and pick up cheques. Mr. Pilon claimed that the allowances are reasonable and that adjustments of the actual kilometrage are made at the end of the year.
[16] Mr. Pilon said that he had handed over all supporting documentation during the Department's investigation and had not been questioned during the audit about the disallowed expenses. At the objections stage, the appellant did not want to give the names of the recipients of the gifts. He referred to Interpretation Bulletin IT-518R dated April 16, 1996, more particularly to the following passage in the "Summary":
. . . a taxpayer may normally deduct reasonable amounts paid or payable for food, beverages, or entertainment if those amounts are incurred for the purpose of earning income from a business. . .
Conclusion
[17] The relevant portion of section 174 of the Act reads as follows:
174. For the purposes of this Part, where
(a) a person pays an allowance
(i) to an employee of the person, . . .
...
(b) an amount in respect of the allowance is deductible in computing the income of the person for a taxation year of the person for the purposes of the Income Tax Act, or would have been so deductible if the person were a taxpayer under that Act and the activity were a business, and
(c) in the case of an allowance to which subparagraph 6(1)(b)(v), (vi), (vii) or (vii.1) of that Act would apply
(i) if the allowance were a reasonable allowance for the purposes of that subparagraph, . . .
the following rules apply:
(d) the person is deemed to have received a supply of the property or service, . . .
[18] Subparagraphs 6(1)(b)(v), (vi.1) and (x) of the Income Tax Act read as follows:
6(1) Amounts to be included as income from office or employment
(1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:
. . .
(b) Personal or living expenses - all amounts received by the taxpayer in the year as an allowance for personal or living expenses or as an allowance for any other purpose, except
. . .
(v) reasonable allowances for travel expenses received by an employee from the employee's employer in respect of a period when the employee was employed in connection with the selling of property or negotiating of contracts for the employee's employer,
. . .
(vii.1) reasonable allowances for the use of a motor vehicle received by an employee (other than an employee employed in connection with the selling of property or the negotiating of contracts for the employer) from the employer for travelling in the performance of the duties of the office or employment,
. . .
and, for the purposes of subparagraphs (v), (vi) and (vii.1), an allowance received in a taxation year by a taxpayer for the use of a motor vehicle in connection with or in the course of the taxpayer's office or employment shall be deemed not to be a reasonable allowance
(x) where the measurement of the use of the vehicle for the purpose of the allowance is not based solely on the number of kilometres for which the vehicle is used in connection with or in the course of the office or employment, . . .
[19] Subparagraph 6(1)(b)(x) of the Income Tax Act is clear in my view. Since section 174 of the Act refers to this statutory provision, a reasonable allowance for the use of a motor vehicle is one that is fixed on the basis of the number of kilometres travelled by the taxpayer in the performance of the office or employment.
[20] During the hearing, the appellant's agent filed the kilometrage report summaries as Exhibit A-3. He was not cross-examined on those reports. Nor did the Minister's agent comment on them. At the objection stage, according to the memorandum on objection filed as Exhibit I-5, reference was made to only one person, Raynald Gosselin. Exhibit A-3 refers to Raymond Trahan, Gilles Boudreau, Gail Pilon and Richard Hudon. I find the supporting documents concerning Richard Hudon clearer than those of the other three persons. Every week, Mr. Hudon filed a requisition showing the number of kilometres travelled and the purpose of the trips¾bids or site visits. Each week, he received an allowance of $75. The amount reimbursed per kilometre was $0.33. At the end of the year, an adjustment of $13.86 was made.
[21] In the absence of any specific comments contradicting the respondent party on the details given by Mr. Hudon, I find that the motor vehicle allowance in his case was based on kilometres travelled. In the other three cases, the details are too vague for me to believe that the allowance was based on actual kilometrage.
[22] With regard to the wine expenses, the onus was on the appellant to show that those expenses had been incurred in the context of its business as required by section 169 of the Act, which allows the input tax credit to be claimed.
[23] Since the appellant's agent referred me to Interpretation Bulletin IT-518R, Food, Beverages and Entertainment Expenses, I wish to cite a portion of paragraph 19 of that bulletin:
19. For any outlay for entertainment to qualify as a deductible expense, a taxpayer must be prepared to demonstrate that the amount was incurred for the purpose of earning income . . . . Records should be maintained of the names and business addresses of the customers or other persons being entertained, together with the relevant places, dates, times and amounts supported by such vouchers as are reasonably obtainable. Expenses that are personal in nature (other than expenses incurred by the taxpayer while away from home in the course of carrying on business) are not deductible by virtue of paragraph 18(1)(h). . . .
[24] Similarly, it is my view that the Minister is entitled to know to whom the gifts were given. Otherwise, it would be easy to pass off personal expenses as business expenses. In my opinion, the evidence adduced by Exhibit A-2 is insufficient to prove that the expenses in issue were business expenses.
[25] The respondent made no representation or comment on the assessment of the penalty. Relying on the decision by the Federal Court of Appeal in Canada v. Consolidated CDN Contractors Inc., [1999] 1 F.C. 209, I do not see any clear manifestation of a lack of diligence in this case. It is therefore my view that the assessment of the penalty is not founded under the Act.
[26] The appeal is allowed with respect to the allowance for the use of a motor vehicle in the case of Richard Hudon and the cancellation of the penalty.
Signed at Ottawa, Canada this 7th day of March 2002.
|
"Louise Lamarre Proulx" |
J.T.C.C.