Tax Court of Canada Judgments

Docket: 2000-1731(IT)G

BETWEEN:

LES INSTALLATIONS GMR INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

[OFFICIAL ENGLISH TRANSLATION]

Appeals heard on November 20, 2002, at Québec, Quebec

Before: The Honourable Judge Pierre Archambault

Appearances:

Counsel for the Appellant:                 Daniel Bourgeois

Counsel for the Respondent:             Anne-Marie Boutin

____________________________________________________________________

JUDGMENT

The appeal from the assessment made under the Income Tax Act (the Act) for the 1997 taxation year is dismissed.

The appeals from the assessments made under the Act for the 1992, 1993, 1994, 1995 and 1996 taxation years are allowed. The assessments for the 1993 and 1994 taxation years are vacated. The assessments for the 1992, 1995 and 1996 taxation years are referred back to the Minister of National Revenue (the Minister) for reconsideration and reassessment on the basis that:

(i) for the 1992 taxation year, the taxpayer corporation (GMR) is entitled to a deduction in the amount of $70,999.80, and the penalty assessed under subsection 163(2) of the Act is applicable only to the underestimated income in the amount of $10,978.20; and

(ii) for the 1995 and 1996 taxation years:

(a) the amount of the expenses in respect of cheques issued to Réginald Tremblay, deduction of which was disallowed, is $5,625 (instead of $7,500) for the 1995 taxation year and $5,925 (instead of $11,850) for the 1996 taxation year, and no other penalty regarding these amounts may be assessed under subsection 163(2) of the Act;

(b) GMR is entitled to the deduction in the amount of $4,187 in computing its business income for the 1996 taxation year; and

(c) with respect to meal allowances, GMR is not entitled to an amount higher than the amount that it was allowed by the Minister.

GMR is entitled to 75 per cent of its costs.

Signed at Ottawa, Canada, this 27th day of March 2003.

"Pierre Archambault"

J.T.C.C.

Translation certified true

on this 11^th day of February 2004.

Sophie Debbané, Revisor

Citation: 2003TCC176

Date: 20030327

Docket: 2000-1731(IT)G

BETWEEN:

LES INSTALLATIONS GMR INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

[OFFICIAL ENGLISH TRANSLATION]

REASONS FOR JUDGMENT

Archambault, J.T.C.C.

[1]      Les Installations GMR inc. (GMR) has appealed from income tax assessments for the 1992 to 1997 taxation years inclusive. These appeals raise a number of issues. In order to analyse these issues, it is appropriate to combine, first, the 1992 to 1994 taxation years (the statute-barred taxation years) and, second, the 1995 to 1997 taxation years (the non-statute-barred taxation years). For the statute-barred taxation years, at issue is whether the Minister of National Revenue (the Minister) was authorized to make reassessments outside the normal reassessment period and specifically whether, in filing its income tax returns for those taxation years, GMR made a misrepresentation that is attributable to neglect, carelessness or wilful default. If the Minister was authorized to make assessments in the circumstances, at issue is whether, in computing its income, the taxpayer corporation was entitled to deduct $81,978 for the 1992 taxation year, $3,000 for the 1993 taxation year, and $18,000 for the 1994 taxation year, which amounts were paid to Réginald Tremblay, the principal shareholder of GMR. The Minister considered that those amounts were appropriated for Mr. Tremblay's personal use whereas GMR claimed that they were used to pay kickbacks to certain employees of its clients. The Minister disallowed deduction of those amounts and assessed penalties on the basis of the income tax payable thereon. These are the only points at issue for the statute-barred taxation years.

[2]      For the non-statute-barred taxation years, following the admissions made at the beginning of the hearing,[1] the only remaining point at issue is the applicability of section 67.1 of the Income Tax Act (the Act) to the amounts paid by GMR to some of its employees. At the beginning of the hearing, the parties agreed that the amounts at issue for the taxation years concerned, that is, the amounts claimed by GMR as deductible and disallowed by the Minister as non-deductible, are $4,604 for the 1995 taxation year, $8,674 for the 1996 taxation year, and $4,970.50 for the 1997 taxation year.[2] If section 67.1 of the Act is not applicable, the taxpayer corporation is entitled to the deduction of these amounts.

Facts

[3]      During the relevant taxation years, GMR operated a business selling and installing petroleum equipment. GMR's head office is located in St-Romuald, near Québec. It operates its business in all parts of Quebec and most of its contracts are carried out outside the Québec city area. For example, it has carried out contracts on the Magdalen Islands, in the Mingan archipelago, in Rivière-du-Loup, in the Beauce region, in the Estrie region, in Trois-Rivières, in Montréal and in Papineauville.

[4]      GMR had approximately 20 employees. Some of the employees' working conditions were governed by an order-Quebec's Decree respecting the installation of petroleum equipment, R.R.Q. 1981, c. D-2, r. 33, made on December 31, 1981, under Quebec's Act respecting collective agreement decrees. Under section 7.02 of this order, the employer shall reimburse all reasonable expenses for transportation, room and board of employees who must reside away from home. During the non-statute-barred taxation years, GMR paid $4.28 for breakfast, $9.63 for lunch and $9.63 for supper. Excluding breakfast Monday and supper Friday, this amount represented $103.79 per employee per week.

[5]      Mr. Tremblay stated that, of GMR's contracts from 1991 to 1993, most were obtained through contacts with individuals in the petroleum industry and the others were obtained through calls for bids. In early 1993, GMR signed a five-year comprehensive agreement with a petroleum company that gave GMR exclusive rights to install petroleum equipment for the company and entitled it to payment for the installation work on the basis of the cost-plus method.

[6]      Mr. Tremblay stated that in the construction industry it was routine to have to pay kickbacks in order to obtain contracts. Following an audit, an auditor from Quebec's Ministère du Revenu (Revenu Québec) disallowed the deduction of expenses in the amount of $81,978.20 claimed by GMR in computing its business income for the 1992 taxation year. The auditor found 10 cheques issued by GMR to Mr. Tremblay. One of these cheques, in the amount of $10,978.20, had to do with the purchase of a car for Mr. Tremblay's daughter. Apparently the auditor was told that the other cheques, totalling $70,999.80, were used to pay kickbacks to key individuals in petroleum companies in order to obtain contracts for GMR. The auditor also found amounts of $3,000 for the 1993 taxation year and $18,000 for the 1994 taxation year, apparently used for the same purpose. Deduction of these amounts as expenses was disallowed and a penalty in respect thereof was assessed since GMR refused to name the individuals to whom these kickbacks were paid.

[7]      In GMR's accounting records, kickbacks are shown in various accounts. For example, for the 1992 taxation year, the "entertainment expenses" account ($3,000 plus $4,000 plus $10,000 plus $4,000); various client accounts ($6,000 plus $7,000 plus $10,000 plus $12,000); and the "wage maintenance" account ($15,000). For the 1993 taxation year, a kickback in the amount of $3,000 is shown in one client's account and for the 1994 taxation year, kickbacks are shown in the following accounts: "equipment maintenance" ($4,000); "miscellaneous contracts" ($6,000); and "miscellaneous maintenance" ($4,000 plus $4,000).

[8]      According to the testimony of the Revenu Québec auditor, the amounts of these kickbacks and the purchase price of the car were not only disallowed as deductible expenses in the computation of GMR's income but were also included in Mr. Tremblay's income as a taxable benefit. To the auditor's knowledge, neither GMR nor Mr. Tremblay contested that decision. In support of his testimony, the Revenu Québec auditor submitted his audit report dated March 21, 1996.

[9]      The Minister's audit began nearly two years later on January 27, 1998, and was completed on June 12, 1998. After receiving copies of the Revenu Québec TP-7 forms, the Minister made reassessments concerning GMR for the statute-barred taxation years by making the same changes that Revenu Québec had made. As is indicated in her report, the Minister's auditor obtained very little co-operation from GMR's representatives, who even refused to explain to her how GMR's accounting system worked. On this point, the Minister's auditor wrote as follows in her report:

[translation]

[The taxpayer corporation] did not co-operate since it did not provide us with all the accounting records required in order to follow the audit trail. As well, when we asked the taxpayer corporation to provide us with certain explanations and vouchers, they were not given to us.

Apparently, the Minister's auditor was never told that the payments made to Mr. Tremblay were used to pay kickbacks since that explanation does not appear in her audit report.

Analysis

Statute-barred taxation years

[10]     The relevant provision in disposing of the issue raised by the statute-barred taxation years is subparagraph 152(4)(a)(i) of the Act, which reads as follows:

(4) The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer's normal reassessment period in respect of the year only if

(a) the taxpayer or person filing the return

(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, ...

[Emphasis added.]

The 1992 taxation year

[11]     For the 1992 taxation year, I consider that the respondent has successfully established that GMR made a misrepresentation that is attributable to neglect, carelessness or wilful default in deducting from its income the amount of $10,978.20 used to purchase a car for the daughter of the principal shareholder. That expense is clearly personal and not deductible, and no explanation provided in the testimony of GMR's representatives has shown any reason not to find that GMR made a misrepresentation that is attributable to neglect, carelessness or wilful default. Consequently, the Minister was authorized to make a reassessment for the 1992 taxation year.

[12]     Once it was acknowledged that the Minister was authorized to make such an assessment, the onus was on GMR to establish facts in support of its claims that the assessment was erroneous and specifically that it was entitled to deduct the amount of $70,999.80 paid as kickbacks. As counsel for the appellant confirmed in his argument, Mr. Tremblay or any other GMR representative was not about to disclose the names of the individuals to whom the kickbacks were paid. As a result, the situation is one in which the taxpayer refuses to provide full evidence of the facts that can support its claims that the amounts at issue were paid to third parties in order to earn business income. According to Mr. Tremblay, the amounts paid to him by cheque were deposited into his bank account. Apparently he then withdrew the money in cash in order to pay it to third parties. Since the evidence is incomplete, it is far from certain that a court would accept as probative claims that are uncorroborated by either testimony from the third parties or documentary evidence establishing that those amounts were paid to those third parties. Taxpayers who deliberately act in this manner place themselves in a very vulnerable position and may become the authors of their own misfortune.

[13]     In particular, this approach was taken by Judge Kempo of this Court in United Color and Chemicals Ltd. v. The Queen, 92 DTC 1259, at page 1263 ([1992] 1 C.T.C. 2321, at page 2327):

... That the rebate arrangements were conducted secretly and carried an aura of impropriety are, apart from attracting a heavier burden of proof, not in themselves determinative....

[Emphasis added.]

[14]     In Muller's Meats Ltd. v. M.N.R., 1969 CarswellNat 101 ([1969] Tax A.B.C. 171; 69 DTC 172), Board Member Davis writes at paragraphs 23 and 24 (Tax A.B.C., at pages 178 and 179; DTC, at pages 177 and 178):

[23] This appeal raises once again the problem of the deductibility of unvouchered and unsubstantiated business expenses. I am of the opinion that, in the case of bribes or other improper payments, the burden of proof is, if anything, heavier than in the case of an ordinary and proper payment of a business expense, because the circumstances surrounding such payments are clouded with suspicion. If a taxpayer is willing to pay a bribe in order to do business, it throws open to question how much reliance can be placed upon his unsupported and uncorroborated evidence as to the actual amounts he paid to informants, or whether indeed he paid out any amounts at all in this fashion. When, as an officer of the company, he failed to give his wife, whose responsibility it was to record the payments in the cash book, any information other than initials and amounts to justify entries with regard to substantial sums of cash which he claimed to have paid out and which had been drawn from the company's coffers, it is only reasonable that he should expect his story to be received with a certain amount of scepticism by the taxation authorities.

[24] In the circumstances of this matter, not only were there no receipts evidencing the fact that the payments had been made but, on the ground that he did not want to imperil the company's dubious scheme for profit-making, the witness refused to disclose the names of any of the persons to whom the alleged payments had been made. This is readily understandable, but it is well-settled law that, if a taxpayer fails to support with appropriate receipts his claims with regard to the deduction of specific items of expense, he has no one but himself to blame if the Minister of National Revenue declines to permit him to deduct such items from his income. In the Holmes case (supra), I had occasion to deal with this question at some length, and I referred to the Exchequer Court judgment of Cameron, J., in Murray v. Minister of National Revenue, (1950) Ex. C.R. 110 at 112 [50 DTC 723 at 725], where the learned judge held that there is an onus on a taxpayer to come forward with acceptable evidence to show that he did so expend the sums which he claims as deductions.

[Emphasis added.]

[15]     In my opinion, one reason for being more demanding about evidence where the deduction of kickbacks is concerned is the real possibility that the taxpayers claiming to have paid such kickbacks may have kept the amounts concerned, thus appropriating them for their own benefit, without declaring them as income. The purchase of a car for Mr. Tremblay's daughter is an eloquent example of this possibility.

[16]     Here, however, there are special circumstances that argue in favour of Mr. Tremblay's version of the facts. In fact, before the Minister's audit began, Mr. Tremblay filed income tax returns that were amended in order to include in his income the amounts that GMR paid him for payment to third parties. The total of the amounts included in Mr. Tremblay's income for the 1991, 1992 and 1993 calendar years is $130,561 whereas the total of the amounts disallowed by the Minister for GMR's statute-barred taxation years is $92,000. The disparity between these two amounts is not surprising since GMR's fiscal year does not correspond to the calendar year. GMR's fiscal year ends on March 31. That said, in my opinion, the fact that the total amount declared by Mr. Tremblay is higher than the total amount of the kickbacks disallowed by the Minister and the value of the taxable benefit relating to the purchase of the car lends credibility to Mr. Tremblay's version of the facts.

[17]     As well, if the deduction of the expense in the amount of $70,999.80 for the 1992 taxation year were disallowed, there would be an element of double taxation. In fact, GMR apparently paid the income tax on the amount of $70,999.80, while Mr. Tremblay in all likelihood included this same amount in his income. In these circumstances, I am prepared to accept Mr. Tremblay's testimony that the amount of $70,999.80 paid to him was used to pay third parties in order to obtain contracts for GMR. Consequently, GMR is entitled to deduct this amount in computing its income.

[18]     In deducting $10,978.20 as a personal expenditure that it knew or ought to have known it was not entitled to deduct, GMR made a false statement in its income tax returns in circumstances amounting at least to gross negligence. Consequently, the penalty provided for in subsection 163(2) of the Act in respect of that amount must be upheld.

The 1993 and 1994 taxation years

[19]     For the 1993 and 1994 taxation years, I consider that the Minister has not successfully established that GMR made a misrepresentation that is attributable to neglect, carelessness or wilful default in filing its income tax returns. On a balance of probability, the respondent has not successfully established that the amounts of $3,000 for the 1993 taxation year and $18,000 for the 1994 taxation year paid as kickbacks were not paid in order to earn business income. Consequently, the respondent has not established that a misrepresentation was made. The respondent's evidence has not established the extent to which the income tax returns and the accompanying financial statements could be considered erroneous. Therefore, the Minister was not authorized to make reassessments for the 1993 or 1994 taxation years. In any case, even if the Minister had been authorized to do so, I would have found-as I did for the 1992 taxation year-that the amounts could be deducted from GMR's income, for the same reasons noted above.

Non-statute-barred taxation years

Section 67.1 of the Act

[20]     There remains the issue of the applicability of section 67.1 of the Act to GMR's expense of reimbursing its employees who worked outside the Québec area. In this case, this section gives rise to a serious problem of interpretation for a number of reasons. First, the wording of this section is far from clear; this point is made, as we shall see, by the fact that Parliament has repeatedly found it necessary to amend this section. Second, there are differences between the English and the French versions of this section, particularly its title,[3] noted in the margin. The French version of the title reads "Frais de représentation", whereas the English version of the title reads "Expenses for food, etc." The French version of the title is misleading. When we read this section in its entirety, we realize that it is not limited to that type of expenses. Third, there have been two cases in which this Court, in circumstances quite similar to those of these appeals, reached divergent decisions. In Les Structures G. B. Ltée v.The Queen, 97 DTC 1146, Lamarre Proulx J.T.C.C. found that section 67.1 of the Act was applicable to compensation paid to employees for food expenses. In Racco Industrial Roofing Limited v. The Queen, 97 DTC 331, Mogan J.T.C.C. found the opposite: that an employer could deduct 100 per cent of allowances paid to employees required to work at a remote job site.

[21]     First of all, it is worth reproducing the relevant passages of section 67.1:[4]

SECTION 67.1: Expenses for food, etc. (1) For the purposes of this Act, other than sections 62, 63 and 118.2, an amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment shall be deemed to be 50% of the lesser of (a) the amount actually paid or payable in respect thereof, and (b) an amount in respect thereof that would be reasonable in the circumstances.	ARTICLE 67.1: Frais de représentation. (1) Pour l'application de la présente loi, sauf des articles 62, 63 and 118.2, un montant payé ou payable pour des aliments, des boissons ou des divertissements pris par des personnes est réputé correspondre à 50 % du moins élevé du montant réellement payé ou payable et du montant qui serait raisonnable dans les circonstances.
(2) Exceptions. Subsection (1) does not apply to an amount paid or payable by a person in respect of the consumption of food or beverages or the enjoyment of entertainment where the amount	(2) Exceptions. Le paragraphe (1) ne s'applique pas au montant payé ou payable par une personne pour des aliments, des boissons ou des divertissements dans les cas suivants:
(a) is paid or payable for food, beverages or entertainment provided for, or in expectation of, compensation in the ordinary course of a business carried on by that person of providing the food, beverages or entertainment for compensation;	a) le montant est payé ou payable pour des aliments, des boissons ou des divertissements fournis contre paiement ou en vue de l'obtention d'un bénéfice dans le cours normal des activités d'une entreprise exploitée par cette personne et qui consiste à fournir contre paiement ces aliments, ces boissons ou ces divertissements;
(b) relates to a fund-raising event the primary purpose of which is to benefit a registered charity;	b) le montant est payé ou payable dans le cadre d'une levée de fonds dont le principal objet est un objet charitable d'un organisme de bienfaisance enregistré;
(c) is an amount for which the person is compensated and the amount of the compensation is reasonable and specifically identified in writing to the person paying the compensation;	c) le montant est payé ou payable contre un paiement raisonnable indiqué de façon précise par écrit à la personne qui fait ce paiement;
(d) is required to be included in computing the income of an employee of the person or would be so required but for subparagraph 6(6)(a)(ii);[5] or	d) le montant doit être inclus dans le calcul du revenu d'un employé de la personne, compte non tenu du sous-alinéa 6(6)a)(ii);5
(e) is incurred by the person for food, beverages or entertainment generally available to all individuals employed by the person at a particular place of business of the person and consumed or enjoyed by such individuals. ...	e) le montant est engagé par la personne pour des aliments, des boissons ou des divertissements pris par des particuliers employés par la personne à un lieu d'affaires de celle-ci, and offerts, de façon générale, à tous ces particuliers. . . .
(4) Interpretation. For the purposes of this section, (a) no amount paid or payable for travel on an airplane, train or bus shall be considered to be in respect of food, beverages or entertainment consumed or enjoyed while travelling thereon; and (b) "entertainment" includes amusement and recreation.	(4) Interprétation. Pour l'application du présent article: a) aucun montant payé ou payable pour un voyage à bord d'un avion, d'un train ou d'un autobus ne peut être considéré comme payé ou payable pour des aliments, des boissons ou des divertissements pris pendant le voyage ; b) sont assimilés à des divertissements les loisirs et les amusements.

[Emphasis added.]

[22]     The paragraph of the Act that is particularly problematic here is paragraph 67.1(2)(e). It is helpful to make a historical analysis of the manifold amendments made to this paragraph. First, we note that section 67.1 was added to the Act by S.C. 1988, c. 55, s. 46, following the 1987 tax reform. The initial paragraph 67.1(2)(e) (the 1988 wording) read as follows:

(e) is incurred by the person for food, beverages or entertainment generally available to all employees of the person at a particular location.

e) le montant est engagé par la personne pour des aliments, des boissons et des divertissements qui sont offerts, de façon générale, à tous les employés de la personne à un endroit donné.

[Emphasis added.]

[23]     Next, this paragraph was amended by S.C. 1991, c. 49, s. 43. The new paragraph 67.1(2)(e) (the 1991 wording) read as follows:

(e) is incurred by the person for food, beverages or entertainment generally available to all individuals employed by the person at a particular place of business of the person and consumed or enjoyed by such individuals.

e) le montant est engagé par la personne pour des aliments, des boissons ou des divertissements pris par des particuliers employés par la personne au lieu même de son entreprise, et offerts, de façon générale, à tous ces particuliers.

[Emphasis added to new or amended wording in comparison with the previous wording.]

The 1991 wording was applicable to taxation years ending after July 13, 1990. By including the French word "même" in the expression "au lieu de son entreprise", the legislative drafter suggested that the food had to be consumed at the place where the business was located, whereas the most likely meaning of the English version of the Act was that the food had to be available to all individuals employed at a particular place of business. In all likelihood, it was to correct that situation that paragraph 67.1(2)(e) was once again amended (the 1994 wording), and this was done by S.C. 1994, c. 7, sch. II, s. 43, retroactively applicable to taxation years ending after July 13, 1990, that is, having the same period of applicability as the 1991 amendment.

(e) is incurred by the person for food, beverages or entertainment generally available to all individuals employed by the person at a particular place of business of the person and consumed or enjoyed by such individuals.

e) le montant est engagé par la personne pour des aliments, des boissons ou des divertissements pris par des particuliers employés par la personne à un lieu d'affaires de celle-ci, et offerts, de façon générale, à tous ces particuliers.

[Emphasis added to new or amended wording.]

Thus the word "même" was removed, and the French expression "lieu ... de son entreprise" was replaced with "lieu d'affaires".

[24]     The two most recent amendments were made by the following statutory provisions: S.C. 1999, c. 22, s. 20, which added a new paragraph 67.1(2)(e) and replaced the former paragraph 67.1(2)(e) with paragraph 67.1(2)(f) (the 1999 wording) and by S.C. 2002, c. 9, s. 26, which added paragraph 67.1(2)(e.1) to the Act. These two amendments are respectively reproduced:

(e) is an amount that (i) is not paid or payable in respect of a conference, convention, seminar or similar event, (ii) would, but for subparagraph 6(6)(a)(i), be required to be included in computing any taxpayer's income for a taxation year because of the application of section 6 in respect of food or beverages consumed or entertainment enjoyed by the taxpayer or a person with whom the taxpayer does not deal at arm's length, and (iii) is paid or payable in respect of the taxpayer's duties performed at a work site in Canada that is (A) outside any urban area, as defined by the last Census Dictionary published by Statistics Canada before the year, that has a population of at least 40,000 individuals as determined in the last census published by Statistics Canada before the year, and (B) at least 30 kilometres from the nearest point on the boundary of the nearest such urban area; or (f) is in respect of one of six or fewer special events held in a calendar year at which the food, beverages or entertainment is generally available to all individuals employed by the person at a particular place of business of the person and consumed or enjoyed by those individuals.

e) le montant, à la fois: (i) n'est pas payé ou payable relativement à une conférence, à un congrès, à un colloque ou à un événement semblable, (ii) serait à inclure, si ce n'était le sous-alinéa 6(6)a)(i), dans le calcul du revenu d'un contribuable pour une année d'imposition en raison de l'application de l'article 6 relativement aux aliments, boissons ou divertissements pris par le contribuable ou par une personne avec laquelle il a un lien de dépendance, (iii) est payé ou payable au titre du travail accompli par le contribuable sur un chantier qui est situé au Canada et, à la fois: (A) à l'extérieur d'une région urbaine, au sens du dernier dictionnaire du recensement publié par Statistique Canada avant l'année, qui compte une population d'au moins 40 000 personnes selon le dernier recensement publié par Statistique Canada avant l'année, (B) à au moins 30 kilomètres du point le plus rapproché de la limite de la région urbaine la plus proche visée à la division (A); f) le montant se rapporte à l'un d'un maximum de six événements spéciaux tenus au cours d'une année civile et à l'occasion desquels des aliments, des boissons ou des divertissements sont offerts, de façon générale, à l'ensemble des employés de la personne affectés à un lieu d'affaires donné de celle-ci et pris par ces employés.

[Emphasis added to new wording of paragraph 67.1(2)(f) in comparison with former wording of paragraph 67.1(2)(e).]

(e.1) is an amount that (i) is not paid or payable in respect of entertainment or of a conference, convention, seminar or similar event, (ii) would, if this Act were read without reference to subparagraph 6(6)(a)(i), be required to be included in computing a taxpayer's income for a taxation year because of the application of section 6 in respect of food or beverages consumed by the taxpayer or by a person with whom the taxpayer does not deal at arm's length, (iii) is paid or payable in respect of the taxpayer's duties performed at a site in Canada at which the person carries on a construction activity or at a construction work camp referred to in subparagraph (iv) in respect of the site, and (iv) is paid or payable for food or beverages provided at a construction work camp, at which the taxpayer is lodged, that was constructed or installed at or near the site to provide board and lodging to employees while they are engaged in construction services at the site; or ...

e.1) le montant, à la fois: (i) n'est pas payé ou payable relativement à des divertissements ou à une conférence, à un congrès, à un colloque ou à un événement semblable, (ii) serait à inclure, si ce n'était le sous-alinéa 6(6)a)(i), dans le calcul du revenu d'un contribuable pour une année d'imposition en raison de l'application de l'article 6 relativement aux aliments ou boissons pris par le contribuable ou par une personne avec laquelle il a un lien de dépendance, (iii) est payé ou payable au titre du travail accompli par le contribuable sur un chantier au Canada où la personne exerce une activité de construction ou dans un campement de travailleurs de la construction mentionné au sous-alinéa (iv) relatif au chantier, (iv) est payé ou payable pour des aliments ou des boissons fournis dans un campement de travailleurs de la construction, où le contribuable est logé, qui a été construit ou installé sur le chantier, ou près de celui-ci, en vue de fournir des repas et un logement aux employés pendant qu'ils exécutent des services de construction sur le chantier; ...

The 1999 version is manifestly clearer than the previous ones. For example, in the 1999 French version, the use of the expression "affectés à " now makes clear that it is the employees who must be located at the person's place of business not the food that must be consumed there.

Positions of the parties

[25]     At the hearing, counsel for the parties asked the Court for leave to submit at a later date written arguments stating their respective positions on the applicability of section 67.1 of the Act. In her written argument, counsel for the respondent argues that the interpretation by Judge Lamarre Proulx in Les Structures G. B. Ltée (supra), not the interpretation in Racco (supra), should be relied on. She concludes that GMR's place of business was located at St-Romuald and that the places of business of GMR's clients where GMR carried out its contracts did not constitute places of business for GMR. She argues that this issue was not raised in Racco since the parties admitted at the outset that "[e]ach Regional Job Location constituted a particular place of business of the Appellant for purposes of paragraph 67.1(2)(e)[6] of the Act"[7] and therefore Mogan J.T.C.C. was not called upon to determine whether the regional job location constituted a particular place of business of the taxpayer corporation.

[26]     Lastly, counsel for the respondent notes that [translation] "Subsection 67.1(2) of the Act was amended following the decision by Lamarre Proulx J.T.C.C. in order to include, among the exceptions, amounts paid for food in respect of the taxpayer's duties performed at a work site in Canada that is outside any urban area with a population of at least 40,000 individuals and at least 30 kilometres from the nearest such urban area."[8] She adds: [translation] "Nothing in the evidence establishes that the work was performed at a work site that is outside any urban area with a population of at least 40,000 individuals and at least 30 kilometres from the nearest such urban area."[9]

[27]     At page 4 of his written argument, counsel for the appellant argues that GMR has met all the conditions set out in paragraph 67.1(2)(e) by establishing the following facts:

[translation]

1.          The appellant company specializes in the installation, construction and maintenance of service stations and reservoirs and in the installation and maintenance of petroleum equipment;

2.          The appellant company's activities cover a large territory in all parts of the province of Quebec;

3.          The appellant company's head office is located in St-Romuald;

4.          The appellant company's duties are performed and its contracts carried out elsewhere than at its head office;

5.          The meal allowances paid to employees were paid in relation to duties performed and contracts carried out elsewhere than at the appellant company's head office, that is, in locations and at sites located in all parts of the province of Quebec; and

6.          The appellant company was required to pay employees these meal allowances because it was subject to the construction order governing the installation of petroleum equipment ....

Counsel for the appellant then adds:

[translation]

Since the nature of the appellant company's operations necessarily implies that its employees must perform their duties at the locations and sites of the contracts, that is, elsewhere than at the appellant company's head office, we consider that, as in Racco Industrial Roofing ltd (hereinafter "Racco"), each regional job location constitutes a particular place of business for the purposes of paragraph 67.1(2)(e) of the Act. Indeed, paragraph 67.1(2)(e) provides that the amount is paid ... for food ... generally available to all individuals employed by the person at a particular place of business of the person and consumed by such individuals. Paragraph 67.1(2)(e) provides that the amount must be paid, not for food consumed at the place of business (that is, the head office) of the appellant company but, rather, for food consumed at a particular place of business of the appellant company.

Counsel for the appellant continues:[10]

[translation]

Paragraph 67.1(2)(e) of the Act does not require that all the appellant company's employees, regardless of their duties, be eligible for reimbursement of these expenses. Paragraph 67.1(2)(e) merely provides that the amount shall be paid for food ... consumed by individuals at a particular place of business of their employer to the extent that the food is generally available to all individuals employed by the appellant company at the particular place of business. Thus the conditions are met if, generally, all the employees working at a particular regional job location are eligible for reimbursement of these expenses.

Interpretation Bulletin IT-518R, entitled "Food, Beverages and Entertainment Expenses", reads as follows at paragraph 11:

"One example of a location which would generally be considered "a particular place of business" is a customer's premises which are located well outside the municipality where the employer's operations are usually centred. Also, a site that qualifies as a "special work site" for the purposes of subparagraph 6(6)(a)(i), can generally be considered a "particular place of business". As a result, food, beverages and entertainment as described in 9 above, that are available to all of that employer's employees working at such a place of business, would not be subject to the 50% limitation."

Counsel for the appellant concludes:[11]

[translation]

Lastly, to the extent that doubt subsists concerning the interpretation of paragraph 67.1(2)(e) of the Act, the appellant company claims that this doubt should be resolved in favour of the taxpayer corporation, in accordance with the analysis proposed by the Supreme Court of Canada in Corporation Notre-Dame de Bon-Secours v. Communauté urbaine de Québec (95 DTC 5017, at page 5023).

Conclusion

[28]     The main difficulty raised in determining the applicability of paragraph 67.1 is the scope to be given to the expression "place of business" ("lieu d'affaires"). The Act does not define the expression "place of business" for the purposes of its application. Essentially, this expression can have two meanings: a broad meaning, according to which it means any location where a taxpayer operates a business; and a narrow meaning, according to which it means a place where a person owns or rents premises where employees and clients of the person's business can come. Counsel for the respondent has claimed that GMR has only one place of business, in St-Romuald, whereas counsel for the appellant has claimed that GMR has a place of business at each client's location where it performs its duties.

[29]     Interestingly, the expression "place of business" is found in many provisions of the Act, particularly subsection 230(1), which requires every person carrying on a business to keep records and books of account at its place of business. This expression is also found in section 8 dealing with the deduction of expenses incurred by employees, specifically in paragraph 8(1)(f) dealing with sales expenses. One condition employees must meet in order to deduct these expenses is to be required to carry on the duties of their employment "away from the employer's place of business".

[30]     I consider that, for the purposes of those two sections, the narrow meaning of the expression "place of business" must be used. Indeed, it would be surprising for a construction contractor with a head office to state that it met the condition set out in subsection 230(1) by keeping its records in its truck at the various locations where it carried out its construction contracts, rather than at its premises where its employees and clients came. Taxpayers are expected to keep their records at a location that the Minister's auditors can readily reach in order to examine the records. As well, if the broad meaning of the expression "place of business" were used in applying paragraph 8(1)(f) of the Act, commission salespersons could not meet the condition of being required to carry on the duties of their employment "away from the employer's place of business", if all the locations where salespersons travelled to sell the employer's products (locations where salespersons carried on activities relating to the employer's business) were "places of business" of the employer.

[31]     The expression "place of business" is also found in paragraph 20(1)(ee) of the Act, which authorizes deduction of the connection costs of public utilities at the place of business. In The Queen v. Guaranteed Homes Ltd., 78 DTC 6510 ([1978] CTC 636), Smith D.J.T.C.C. was called upon to determine the scope of the expression "place of business"[12] for the purposes of paragraph 20(1)(ee). At page 6515 DTC (CTC, at page 642), Smith D.J.T.C.C. writes:

... For example, if a construction firm is working on a contract to build a house on a lot owned by the person for whom it is being built, the firm may be said to be carrying on its business of housebuilding on that lot, but it cannot be said to be doing so at its place of business.[13]

[32]     If the principle of uniformity of expression[14] were applied to the expressions "place of business" and "lieu d'affaires" used in paragraph 67.1(2)(e) of the Act, the narrow meaning of these expressions would have to be used. That said, we must not limit ourselves to this principle; we must also ask ourselves which of the two meanings is the most appropriate for the purposes of section 67.1 of the Act, in light of its object, its context, and the intention of Parliament in adopting and subsequently amending it. This point was made by the Supreme Court of Canada in Québec (Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours, [1994] S.C.J. No. 78 (Q.L.); [1994] 3 S.C.R. 3. At paragraph 25 (Q.L.) Gonthier J. summarizes the principles of interpretation of tax legislation as follows:

...

The rules formulated in the preceding pages, some of which were relied on recently in Symes v. Canada, [1993] 4 S.C.R. 695, may be summarized as follows:

- The interpretation of tax legislation should follow the ordinary rules of interpretation;

- A legislative provision should be given a strict or liberal interpretation depending on the purpose underlying it, and that purpose must be identified in light of the context of the statute, its objective and the legislative intent: this is the teleological approach;

- The teleological approach will favour the taxpayer or the tax department depending solely on the legislative provision in question, and not on the existence of predetermined presumptions;

- Substance should be given precedence over form to the extent that this is consistent with the wording and objective of the statute;

- Only a reasonable doubt, not resolved by the ordinary rules of interpretation, will be settled by recourse to the residual presumption in favour of the taxpayer.

[Emphasis added.]

I also note the comments by Gonthier J. concerning the last principle stated in this summary, a principle also cited by counsel for the appellant. Gonthier J. first writes as follows, at paragraph 22:

In light of this passage there is no longer any doubt that the interpretation of tax legislation should be subject to the ordinary rules of construction. At page 87 of his text Construction of Statutes (2nd ed. 1983), Driedger fittingly summarizes the basic principles:    "... the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament". The first consideration should therefore be to determine the purpose of the legislation, whether as a whole or as expressed in a particular provision. The following passage from Vivien Morgan's article "Stubart: What the Courts Did Next" (1987), 35 Can. Tax J. 155, at pp. 169-70, adequately summarizes my conclusion:

There has been one distinct change [after Stubart], however, in the resolution of ambiguities. In the past, resort was often made to the maxims that an ambiguity in a taxing provision is resolved in the taxpayer's favour and that an ambiguity in an exempting provision is resolved in the Crown's favour. Now an ambiguity is usually resolved openly by reference to legislative intent.

[Emphasis added.]

Gonthier J. then continues as follows, at paragraph 25:

Two comments should be made to give Estey J.'s observations their full meaning: first, recourse to the presumption in the taxpayer's favour is indicated when a court is compelled to choose between two valid interpretations, and second, this presumption is clearly residual and should play an exceptional part in the interpretation of tax legislation....

[33]     The intention of Parliament can be determined not only by analysing the wording of the provision but also by carefully taking into account the Minister of Finance's explanatory notes that accompany amendments to the Act when they are tabled in Parliament.[15]

[34]     A careful reading of section 67.1 of the Act shows that, since 1988 and particularly when computing business income, taxpayers may no longer deduct 100 per cent of the amount paid or payable for food, beverages or entertainment.[16] Contrary to what is suggested by the marginal note[17] in the French version, "Frais de représentation", nothing in subsection 67.1(1) of the Act indicates that the expenses involved are limited to food expenses that constitute entertainment expenses. On examining the exceptions set out in subsection 67.1(2) of the Act and the rule of interpretation set out in 67.1(4) of the Act, we must conclude that the general rule set out in subsection 67.1(1) (the general rule) is that, during the non-statute-barred taxation years at issue here, a taxpayer could deduct only 50 per cent of food expenses, regardless of whether they constituted entertainment expenses. Thus, the general rule is not limited to what are commonly referred to as "business meals".

[35]     In order to support and illustrate this conclusion, let us analyse the exception set out in paragraph 67.1(2)(d) of the Act. The general rule does not apply to an employer if the food expenses constitute a taxable benefit in the hands of employees, or would do so but for subparagraph 6(6)(a)(ii) of the Act.[18] This subparagraph refers to the benefit constituted by board provided to employees working at a "remote location", that is, a location at which, because of its remoteness from any established community, employees could not reasonably be expected to establish and maintain self-contained domestic establishments. In those circumstances, the benefit need not be included in employees' employment income, and the employer may deduct 100 per cent of food expenses it incurs for employees.

[36]     The analysis of the wording of paragraph 67.1(2)(d) of the Act shows that this paragraph refers solely to employees working at a "remote location" and not, during the non-statute-barred taxation years at issue,[19] to employees working at a "special work site" referred to in subparagraph 6(6)(a)(i) of the Act, that is, a location at which the duties performed by employees were of a temporary nature, if the employees maintained at another location self-contained domestic establishments as their principal places of residence. Consequently, during the non-statute-barred taxation years, when employees worked at a special work site of their employer, the exception set out in paragraph 67.1(2)(d) was not applicable and, unless the other exceptions set out in section 67.1 were applicable, the employer could deduct only 50 per cent of the expense for food provided to employees. For example, the expense for food consumed during a trip by bus, train or airplane[20] in order to travel to the "special work site" would not be subject to the general rule but that exception applies only to the expense for food consumed during the trip; it does not allow the employer to deduct 100 per cent of the expense for food consumed by its employees at the "special work site".

[37]     We may wonder why Parliament made an exception for food expenses at remote locations but not at special work sites. Could paragraph 67.1(2)(e) of the Act be applicable to special work sites? In my opinion, if Parliament had intended to allow an employer to deduct 100 per cent of expenses for food consumed by its employees at a special work site, it would not have limited the exception set out in paragraph 67.1(2)(d) to subparagraph 6(6)(a)(ii) but would simply have referred to paragraph 6(6)(a). Why would Parliament allow under paragraph 67.1(2)(e) what it denied under paragraph 67.1(2)(d)? It could be argued that a distinction needs to be made: in order to benefit from the exception for food consumed at a special work site, the food must be provided to all individuals employed at that site. Although this interpretation is possible, I do not consider it convincing. Generally speaking, an employer that provides board to its employees assigned to a "remote location" or a "special work site" provides board to all its employees. It is reasonable to consider that Parliament intended to refer only to board provided to employees working at "remote locations" and to subject expenses for food provided at special work sites to the general rule. Thus this conclusion, too, argues in favour of using the narrow meaning of the expression "place of business" used in paragraph 67.1(2)(e).

[38]     If, subsequent to this analysis of paragraph 67.1(2)(e) of the Act, we had the slightest doubt about the scope of the expression "place of business" contained therein, that doubt would vanish on consultation of the explanatory notes published by the Minister of Finance when the 1987 tax reform was made public, as well as the explanatory notes accompanying the bills to add section 67.1 in 1988 and to make the subsequent amendments to this section. In my opinion, these explanatory notes shed a great deal of light on this issue. In particular, the 1987 Supplementary Information Relating to Tax Reform Measures reads as follows:

Currently, a taxpayer may deduct reasonable expenses for meals and entertainment incurred for business purposes. The present law effectively allows a deduction for some part of expenses that are personal in nature since business meals and entertainment necessarily involve an element of personal consumption.

The White Paper proposed to limit the deduction for these expenses to 80 per cent of their cost. The 80-per-cent limitation would apply to all business meals, including food and beverages, as well as to the cost of meals while travelling or attending a seminar, conference, convention or similar function. As well it would apply to tickets to an entertainment or sporting event, gratuities and cover charges, room rentals to provide entertainment, and the cost of private boxes at sports facilities. Where a taxpayer is reimbursed for the cost of a business meal or entertainment, the 80-per-cent limitation would apply to the person making the reimbursement.

The 80-per-cent limitation would not apply to

·         the cost to a restaurant, airline or hotel of providing meals to customers in the ordinary course of business;

·         meals or entertainment expenses relating to an event intended primarily to benefit a registered charity;

·         the cost of meals or entertainment that is included as a taxable benefit to the employee or where the employer is reimbursed for the cost;

·         the cost of meals and recreation provided by an employer for the general benefit of all employees. Executive dining rooms and similar facilities, however, will be subject to the 80-per-cent limitation.

The above rules, which apply to both corporations and individuals, would come into effect for expenses incurred after 1987.

The restriction proposed received general support. It was also noted that similar, and in some cases more severe, restrictions apply in other countries. However, the Commons and Senate committees recommended that these expenses be deductible in full for persons in travel status.

The government gave careful consideration to these suggestions but rejected the notion that out-of-town meals and entertainment should be excluded from the restriction, since they too involve an element of personal consumption. The government intends to proceed with the 80-per-cent limitation on business meals and entertainment expenses as proposed in the White Paper.

[Emphasis added.]

[39]     The 1988 explanatory notes accompanying the bill that added section 67.1 to the Act include explanations for the exceptions made to the general rule set out in section 67.1 and, in particular, an explanation for the more restrictive exception set out in paragraph 67.1(2)(e). This explanation reads as follows:

Where the amount is incurred to provide food, beverages or entertainment to all employees at a particular location. This provision will exempt costs incurred for a Christmas party or similar event to which all employees at a particular location have access.

[Emphasis added.]

[40]     When paragraph 67.1(2)(e) was amended in 1991, the following explanatory note was released:

Paragraph 67.1(2)(e) of the Act provides an exemption from the restriction on the deductibility of food, beverages and entertainment expenses where an amount in respect of such expenses is incurred to provide food, beverages or entertainment to all employees at a particular location. This paragraph is intended to exclude from the application of subsection 67.1(2) costs incurred in respect of events to which all employees at a particular location have access, such as a firm party.

This paragraph is amended to clarify that, for this exemption to apply, the food, beverages or entertainment must be generally available to all employees at a particular location of the employer and consumed or enjoyed by such employees.

[Emphasis added.]

[41]     In October 1998, when the new amendments replacing paragraph 61.1(2)(e) with paragraph 67.1(2)(f) were made public, the Minister of Finance provided the following explanations:

New paragraph 67.1(2)(f) is an amended version of existing paragraph 67.1(2)(e). As indicated in the explanatory notes issued comtemporaneously with the introduction of section 67.1, paragraph 67.1(2)(e) was intended to allow for the full deductibility of meal and entertainment expenses associated with special events such as "a Christmas party or similar event to which all employees at a particular location have access". This paragraph has, however, been interpreted to apply more broadly than this. Accordingly, paragraph 67.1(2)(f), which replaces the original paragraph 67.1(2)(e) limits the exemption for food, beverages or entertainment generally available to all employees at a place of business to such expenses incurred in respect of 6 or fewer special events held in a calendar year.

[Emphasis added.]

[42]     In my opinion, these explanatory notes argue in favour of using the narrow meaning of the expression "place of business"("lieu d'affaires") for the purposes of paragraph 67.1(2)(e). In particular, these explanatory notes do not state that paragraph 67.1(2)(e) allows full deduction of food expenses if the food is provided to all employees assigned to a "special work site". The example given is still that of a party or similar event to which all employees assigned to a place of business are invited. Consequently, clients' places of business located outside Québec at which GMR carried out construction work do not constitute GMR's places of business for the purposes of section 67.1 of the Act. As Smith D.J.T.C.C. acknowledged in Guaranteed Homes Ltd. (supra), although a construction company does business on a client's premises, the client's place of business is not the construction company's "place of business".

[43]     During the non-statute-barred taxation years, GMR's only place of business was in St-Romuald. Consequently, GMR does not meet all the conditions for the exception set out in paragraph 67.1(2)(e) of the Act to be applicable. Indeed, since only GMR's St-Romuald employees who worked outside the Québec area were eligible for meal allowances, GMR cannot be said to have incurred expenses for meals made generally available to all individuals employed by it at its place of business in St-Romuald. Obviously, it cannot be argued that food provided to all employees but under certain conditions constitutes valid availability for the purposes of this paragraph since an employer could, for example, provide food to all its employees who met with clients at restaurants in order to maintain good relations with them: those meals would be "business meals" clearly referred to in section 67.1 of the Act. That interpretation would obviously run counter to the intention of Parliament.

[44]     I consider that there is another, if less obvious, reason to find that GMR is not entitled to the benefit of the exception set out in paragraph 67.1(2)(e). What GMR made available to its employees was not food but rather an allowance in reimbursement of their meal expenses. Thus, in my opinion, GMR cannot be said to have made "food ... generally available to all individuals employed by [it ...]" that was "consumed ... by such individuals". In Racco (supra), my colleague Mogan J.T.C.C. addressed this issue. He acknowledged that there may be two possible interpretations of paragraph 67.1(2)(e) of the Act: a liberal interpretation, according to which this paragraph is applicable regardless of whether the employer provides food itself or reimburses its employees for food expenses; and a strict interpretation, according to which this paragraph is applicable only if food is provided by the employer. In support of the strict interpretation, Mogan J.T.C.C. noted the difference between the wording of subsection 67.1(1) and the wording of paragraph 67.1(2)(e). The English version of subsection 67.1(1) refers to any amount paid "in respect of the human consumption of food", which indicates that the general rule has a broad meaning, referring both to amounts paid directly for food and to allowances paid to employees in reimbursement of food expenses. Paragraph 67.1(2)(e) refers to amounts "incurred ... for food", which confirms that it has a narrow meaning, referring only to direct expenses for food.

[45]     On the basis of the French version of section 67.1, my colleague Mogan J.T.C.C. found in favour of the broad interpretation since the same French word "pour" was used to translate both the English expression "in respect of" in subsection 67.1(1) and the English word "for" in paragraph 67.1(2)(e). In my opinion, the strict interpretation should be used instead because it better reflects the intention of Parliament, as is shown by the explanatory notes quoted above.[21] The English version in my view better reflects the intention of Parliament: what must be offered to all individuals employed at an entity's particular place of business and consumed by them is food, not food allowances. Even if I relied on a different interpretation than that of Mogan J.T.C.C., the same four examples illustrating the scope of paragraph 67.1(2)(e) given in paragraph 7 of the reasons by Mogan J.T.C.C. can be used: baseball games, picnics, Christmas parties, and cafeteria services. Indeed, these examples illustrate instances in which the employer makes food directly and generally available to its employees.

[46]     For all these reasons, the appeal by GMR for the 1997 taxation year is dismissed. All the other appeals are allowed. The assessments for the 1993 and 1994 taxation years are vacated. The assessments for the 1992, 1995 and 1996 taxation years are referred back to the Minister for reconsideration and reassessment on the basis that:

(i) for the 1992 taxation year, GMR is entitled to a deduction in the amount of $70,999.80, and the penalty assessed under subsection 163(2) of the Act is applicable only to the underestimated income in the amount of $10,978.20; and

(ii) for the 1995 and 1996 taxation years:

(a) the amount of the expenses in respect of the cheques issued to Mr. Tremblay, deduction of which was disallowed, is $5,625 (instead of $7,500) for the 1995 taxation year and $5,925 (instead of $11,850) for the 1996 taxation year, and no other penalty regarding these amounts may be assessed under subsection 163(2) of the Act;

(b) GMR is entitled to the deduction in the amount of $4,187 in computing its business income for the 1996 taxation year; and

(c) with respect to meal allowances, GMR is not entitled to an amount higher than the amount that it was allowed by the Minister.

GMR is entitled to 75 per cent of its costs.

Signed at Ottawa, Canada, this 27th day of March 2003.

"Pierre Archambault"

J.T.C.C.

Translation certified true

on this 11^th day of February 2004.

Sophie Debbané, Revisor

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